Should Economists Pay More Attention to Politics?

Economists often ignore politics when analyzing policy issues or view politics as a problem to overcome rather than as fundamental. When evaluating a carbon tax, for example, I try to tote up its potential environmental benefits, its hit to consumers and producers, what happens to the revenues, etc. I might also ponder what policy tweaks could facilitate a political coalition willing to enact such a tax. But I don’t typically worry about how a carbon tax would change the balance of power among coal, oil, nuclear, natural gas, and nuclear interests or between energy consumers and producers.

In the latest Journal of Economic Perspectives, Daron Acemoglu and James Robinson argue that this approach is short sighted, sometimes dangerously so. They argue that economic policy analysts should evaluate how policy decisions might change the future balance of political power and, thereby, the efficiency and fairness of future economic decisions:

There is a broad—even if not always explicitly articulated—consensus amongst economists that, if possible, public policy should always seek ways of reducing or removing market failures and policy distortions. In this essay, we have argued that this conclusion is often incorrect because it ignores politics. In fact, the extant political equilibrium may crucially depend on the presence of the market failure. Economic reforms implemented without an understanding of their political consequences, rather than promoting economic efficiency, can significantly reduce it.

Our argument is related to but different from the classical second-best caveat of Lancaster and Lipsey (1956) for two reasons. First, it is not the interaction of several market failures but the implications of current policy reforms on future political equilibria that are at the heart of our argument. Second, though much work still remains to be done in clarifying the linkages between economic policies and future political equilibria, our approach does not simply point out that any economic reform might adversely affect future political equilibria. Rather, building on basic political economy insights, it highlights that one should be particularly careful about the political impacts of economic reforms that change the distribution of income or rents in society in a direction benefiting already powerful groups. In such cases, well-intentioned economic policies might tilt the balance of political power even further in favor of dominant groups, creating significant adverse consequences for future political equilibria.

Our argument is that economic policy should not just focus on removing market failures and correcting distortions but, particularly when it will affect the distribution of income and rents in society in a direction that further strengthens already dominant groups, its implications for future political equilibria should be factored in. It thus calls for a different framework, explicitly based in political economy, for the analysis of economic policy. Much of the conceptual, theoretical, and empirical foundations of such a framework remain areas for future work.

They offer several examples, including the allocation of natural resource rights (an Australian approach promoted democracy, while one in Sierra Leone did not) and financial and banking regulation / deregulation in the United States.

Well worth a read.

6 thoughts on “Should Economists Pay More Attention to Politics?”

  1. of course they should pay attention to politics… The legacy of a theorem & assumption based scenario-building clubbed with the current trend of considering only the mathematical & econometric models as having scientific/ academic rigor i feel made economists predominantly quants… with very less patience and sensitivity towards the uncertainties that can be explained only qualitatively and never numerically……

    Guess some of the lost ART needs to put back in the SCIENCE of Economics 🙂

  2. Seems to me the proper roles of economists regarding public policy are to:

    – Advise/educate policy-makers and the public on what the “optimal” policy is (per whatever function for utility is being maximized) if political constraints (current and anticipated/possible future) did not exist or were diminished to some particular point(s) in terms of gap vs. no political constraints at all.

    – Advise/educate optimal policy within such political constraints (even though that adds another huge layer of complexity, and one outside the expertise of economists lacking expertise in political-economy. (Of course, economists can collaborate with political scientists as needed.)

    I’m reminded of the chapter on “Economics and History” in Will & Ariel Durant’s The Lessons of History (1968) which concludes:

    We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution. In this view all economic history is the slow heartbeat of the social organism, a vast systole and diastole of concentrating wealth and compulsive recirculation.

    And in the chapter on “Socialism and History” they observe trends at the time of the Soviet Union “now restoring individualistic motives” within its system, and “Year by year the role of Western governments in the economy rises, the share of the private sector declines” as high taxation, particularly on the upper classes, funds a welfare state, concluding:

    The fear of capitalism has compelled socialism to widen freedom, and the fear of socialism has compelled capitalism to increase equality.

    I think a concept related to the quotes above from both chapters is that even if some economic policies (or lack thereof) is theoretically “optimal” in some sense, implementing or moving toward such policies and their results can not only bump up against a political constraint, but can also create a political backlash that moves policies in the opposite direction, at least for some time.

    http://books.google.com/books?id=LWNQ2_4wkocC&pg=PT61&lpg=PT61&dq=%E2%80%9CWe+conclude+that+the+concentration+of+wealth+is+natural+and+inevitable,+and+is+periodically+alleviated+by+violent+or+peaceable+partial+redistribution.+In+this+view+all+economic+history+is+the+slow+heartbeat+of+the+social+organism,+a+vast+systole+and+diastole+of+concentrating+wealth+and+compulsive+recirculation.%E2%80%9D&source=bl&ots=JHE2PnNHol&sig=UO19UYJ3RS4e8Qca8d4Oq-crPf4&hl=en&sa=X&ei=KMOOUbOxEsXb0wGFiIDICw&ved=0CE0Q6AEwBQ

  3. ‘The fear of capitalism has compelled socialism to widen freedom, and the fear of socialism has compelled capitalism to increase equality.’

    Wow, talk about intellectual confusion! Socialism, by definition, is a diminution of freedom. One might argue it has its benefits, but to say that it is the opposite of what it is, that’s pretty silly.

    Not to mention that in truly socialist societies there was a huge gap between the masses and the elites.

    1. Patrick,
      I think you are misreading the first clause. The authors aren’t saying that socialism had widened freedom vs. non-socialism. Rather, they are saying that, due to fear of capitalism, socialist states had widened freedom vs. their prior, (even) less free condition. In other words, they moved from socialism with even less freedom to socialism with some degree more freedom than before.

      Their clear premise is that socialism by nature is indeed a diminution of freedom, as you put it, not the opposite, as you seem to think they are saying.

      1. Yes, saying that in the face of capitalism’s ability to increase standards of living, socialists were compelled to abandon their more drastic infringements on people’s freedom, isn’t quite as mellifluous.

Comments are closed.