Ideas, and Frameworks, and Policies! Oh, my!

|Peter Boettke|

For years I have been trying to teach students -- from Econ 101 to PhD students -- that there is a simple linear relationship in the real world of political economy that goes:

Bad Ideas ---> Bad Policies ---> Bad Outcomes

Political economy ain't rocket science.  But it is a discipline that forces one to focus on ideas and the implementation of those ideas in public policies.  Ideas -- some deeply rooted in philosophy, others focused on more technical propositions about the way the world works -- are weaved together to form more or less coherent frameworks.  Those frameworks then suggest solutions to pressing problems (perceived or real) in the economy that in the vast majority of intellectual frameworks guides government action.  Bad root ideas become coherent but incorrect frameworks, and the solutions offered therefore are the wrong ones for the problems identified.

Given this argument, the challenge I have is to explain the persistence of bad ideas in the realm of competitive politics.  The bad outcomes means that there are proverbial $20 bills lying all over the sidewalks of the political economy space.  Why aren't they being picked up?

One of the great strengths of the market economy is the feedback provided by the buying, and abstaining from buying, behavior of the customer.  If the Ford Edsel is introduced and the consumer does not buy, then Ford shuts down production and reallocates resources to the production and distribution of a car that better satisfies the demands of the consumer.  But the feedback mechanism in the supply and demand of public policies is not as forceful as in the market.  Both the demand side and the supply side of politics has distortions that prevent the easy elimination of the $20 bills.

But the "Bad Outcomes" are not trivial when it comes to policy errors.  In the 20th century, policy errors led to not only undue suffering by citizens, but in the most extreme forces of policy error the death of millions.  In the 21st century, policy errors have threatened security and the very financial stability of the global economy.  Why such persistence?

In part, I want to contend, because the debates over policies are confused.  In the narrative I would tell for post-1980 economics and economic policy, I'd stress the decline of Keynesian ideas within the economics profession, but the persistence of Keynesian ideas, frameworks and policies (and the institutions that Keynesian economics ushered in during the post-WWII period) in public policy.

Yes, the post-1980 world was one of the ascendency of "relatively" free markets combined with some deregulation, privatization, and open trade.  But these policies were always chosen within a broader framework of Keynesian political economy and instituted by Keynesian policy institutions.  What we experienced in the UK and the US in the post-1980 world was one of "conservative" Keynesianism, rather than "liberal" Keynesianism, but what we didn't experience was free market economics.  In addition, the collapse of communism and the opening of the economies of India, China, and Latin America (and lesser extent Africa) to global trade also reinforced the marginal shift toward "relatively" freer markets and thus the improvements in human well-being.

In short, I am suggesting that there has been a disjoint between the rhetoric and reality of post-1980 political economy.  And, I believe this disjoint continues to plague our current policy discourse post-2008. Consider carefully these two recent commentaries by two very significant economic thinkers: Joe Stiglitz and Ken Rogoff.  

Stiglitz's article is entitled "A Contagion of Bad Ideas" and the narrative he tells about how in response to the failure of free market policies we needed to respond with a Keynesian stimulus, but that the Keynesian stimulus ballooned budgets, which have now resulted in massive spending cuts.  In Stiglitz's analysis will result in wasted resources and undue suffering that will persist for years to come.  Again, his framework is coherent, but is it the right framework?  It is internally consistent, but is it consistent with the reality it purports to address?

Rogoff's article is entitled "The Second Great Contraction", and it continues the theme from his book with Carmen Reinhart, This Time is Different.  The bottom line, the post-2008 situation is not defined by a recession in need of a correction, but instead by a global financial system that is so far over-leveraged that drastic steps at de-leveraging will be required for many years -- default and inflation being among the primary tools.  I think Ken Rogoff is a brilliant man, but I honestly cannot buy the cavalier way he talks about 4-6% inflation for several years to set the situation right.  The costs of inflation, I believe, are being way underestimated by him and others when they make such suggestions.  Again, Rogoff's framework is coherent, but is it the right framework?  It is internally consistent, but is it consistent with the reality it purports to address?

Could either Stiglitz or Rogoff make their respective arguments if they saw money as non-neutral, if they saw the capital structure in the economy as consisting of heterogeneous good with multi-specific uses, if they saw the market as a process of ongoing entrepreneurial discovery, learning and adjustment guided by signals and incentives?  I often ask my students to think of the capital structure as made up of lego pieces rather than play-doh, and to think about the costliness of mistakes in the construction.  Errors with lego constructions require pulling apart piece by piece, carefully setting aside to not lose a piece, and rebuilding piece by piece; errors with play-doh require smashing and remolding with your hands in one-step.  One is very costly, the other minimally so.  But my lego versus play-doh is just an analogy, not analysis.

At the risk of de-legitimation, I think a major problem with the conventionalist methodology of model and measure in economics is that it blurred some of the major lessons from logic and critical reasoning.  Formal modeling was supposed to eliminate confusion in though by making assumptions explicit, and thus eliminating the confusion that results in literary exercises when the same words are used to mean different things, or different words are used to mean the same thing.  But as formal tractability became a criteria in theory choice, models became mere instruments.  We built toy economies, populated by robot agents.  Realism of assumptions was jettisoned.  We built coherent frameworks, but sacrificed correspondence to the world we originally wanted to study.  Rather than worry about the distinction between validity and soundness, and between good and bad arguments, as matters of critical reasoning; the procedure of testing models against the data would eliminate weak reasoning.  It wasn't a matter of philosophic argument, it was a matter of scientific testing.

The post-2008 debates highlight how little we have progressed since 1930 as a discipline.  There are $20 bills lying all over the sidewalks.  And if we despair over the hopelessness of politics, we must remember Frank Knight's words: "To say a situation is hopeless is to say it is ideal."  Obviously, our situation is not ideal, so that must mean it isn't hopeless.  Right ideas forged into the right framework can, and will, produce the right public policies that can scoop up those $20 bills and improve the lives of billions of people.  But I don't think we get there again until we eschew our preoccupation with toy economies populated by robot actors, and instead work on developing an economics based on the realism of assumptions, populated by capable but fallible human actors, who interact within specified institutional environments that structure incentives, produce a flow of information, and provide disciplinary feedback.

We need ideas, frameworks and policies, but lets make sure they are:

Good ideas --> Good Policies --> Good Outcomes

Political economy ain't rocket science, but it matters a heck of lot more whether we get it right or wrong.  As Ludwig von Mises put it:

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

 

Comments

[Jerry O'Driscoll]

In his otherwise excellent post, Pete leaves out the power nexus. What he calls bad ideas often lead to policies that enhance the power of political leaders. The political market is working.

The push for inflation as a solution to deleveraging is particularly dangerous. To me, it is clearly "offically sanctioned." It is the preferred solution of the Obama administration. Likewise the VAT, which you'll be hearing more about.

I just hope that our side is up to the task of countering this dangerous nonesense.

[McKinney]

Nice analysis of the current situation!

“…work on developing an economics based on the realism of assumptions, populated by capable but fallible human actors…”

That is the crux. How do we know if our assumptions are realistic? The problem goes much deeper than economics. It goes to the assumptions about human nature. Most people assume that humans are born innocent and turn to evil only because of oppression. Poverty is the greatest oppressor (see Hayek’s “Counter-Revolution”)

If true, that means that all we have to do is eliminate oppression and humanity will return to its natural state of innocence.

That was Marx and Lenin’s grand scheme. The USSR was more of an experiment in changing human nature than one in economics. The prospect of changing human nature is too great and grand to let mere economics get in the way.

And if all humans are fallible, then we have no hope of changing the human condition. Many scientists look to ET to rescue us for just that reason. But the answer of socialism is that the natural sciences can show us the way if we only let them.

Or a Keynes said to Hayek after his “Road to Serfdom”, we only need to have the right kind of people in charge.

The problem is the lure of utopia from a perfected human nature.

[Troy Camplin]

There is no better demonstration of the imperfection of man than the fact that we are always seeking after perfection.

And, being imperfect, how could or would we know what perfection looked like?

This is why utopia is not an option.

[McKinney]

Troy, as you may have noticed, the left thinks all of us are imperfect except for a small elite. That's why we need to turn over complete control of our lives to them.

[Zac Gochenour]

The "linear relationship" could also be viewed as working in the other direction, as argued in Bryan Caplan's "The Idea Trap: The Political Economy of Growth Divergence." http://econfaculty.gmu.edu/bcaplan/pdfs/ideatrap.pdf

It's clear that outcomes, policies, and ideas all reinforce each other. It's a self-sustaining system. One solution is to have a policy-selection mechanism that is based more on the selection of positive outcomes, perhaps http://hanson.gmu.edu/futarchy.html ?

[MrChadRobinson]

Beyond frameworks we are also dealing with ideologies. Republicans have adopted a tax cut ideology, not a comprehensive fiscal/tax policy. Rather than recognizing that tax cuts do not yield greater revenues any more (we're on the lower bound of the Laffer Curve), that our current tax rates do not collect the revenue needed to fund the programs we have enacted (as our deficits prove) and the non-military discretionary spending cannot resolve our long-term deficit issues, they dig in and remain intransigent. Similarly, in terms of economic policies, I believe many adopt a single school of thought, be it monetarism or Keynesianism, and refuse to deviate from the principles of those philosophies, even when the data suggest a different policy course. Basically, the normative determinations have been set in stone, thus preventing policymakers from acknowledging the alternatives that might prove more effective in a given circumstance.

[Don Kirk]

An impartial observer of economic discourse would note that 'Bad Ideas, Bad Policies, Bad Outcomes' just as easily describes Keynesian thinking as it does Hayekian thinking; their critiques of the other are mirror reflections of each's "framework."

The 'frameworks' are opposing ideologies, and as Arendt noted, ideologies--like theologies--are merely ideas treated as if they are fact. We humans love the storyteller, and the skill of the storyteller weaving his tale we easily make into myth. We then adopt our favorite myths to become part of our identity, and any threat to our myth-made identity we attack and even kill.

Austrians need to break the ideo/theological myth-made cycle for the grounds to their theory. So do Keynesians. Neither is philosophy; both are ideo/theological myth, and how does that help the public arrive at informed decisions if their choices are merely opposing ideologies; ideas, not facts?

For Keynesians, the "multiplier" is myth-math. If it were scientific, it would work every time and be entirely predictable. That it is not is a glaring sign that we are listening to the tall tale of a myth-maker, our favorite storyteller.

For Hayekians, the "free market" is their favorite myth. So appealing. So sensible. So caressing of a certain bias, so complimentary of a certain identity. But it is a myth nonetheless, for at least four hundred years. If the 'free market' were science, it would work every time and be entirely predictable, which it obviously is not. Just as socialists always argue that if only we tried 'true' socialism next time it would work, so free marketers still argue that if only we would give the free market a 'true' try, all would be golden and prosperous forever.

If Austrians/Virginians/Chicagoans/UCLAians want their theories to carry the day, they need to stop imitating the Keynesian ideological approach and instead adopt the philosophical approach, which is to say, practice the mild skepticism of science. Busting myths is the goal of philosophy, and busting our personal best-believed best-honored myths is the goal of the best introspective philosopher.

It is not enough to argue against another's ideology if all you have as an alternative is another ideology. Hence, the wide disdain by the uninformed public for unverifiable unpredictable claims stated as if they were facts. We already have plenty of priests. What we need are genuine facts, and all of those lie outside ideo/theology.

[Richard Schulman]

By way of follow-up to Jerry O'Driscoll's important comment ("I just hope that our side is up to the task of countering this dangerous nonsense"), does anyone know which economists are advising the leading Republican presidential candidates (Perry, Bachmann, Paul, Romney)?

[Guillermo Barba]

One necessary condition for demonstrating the advantages of a free market process is to show, in everyday language, that it tends to achieve an emergent order that produces more wealth, correction of mistakes, less abuse of power, more freedom, stability, and prosperity than interventions by the omniscient and benevolent enlightened and anointed few.

[Moran31Lilian]

If you're in not good state and have no cash to get out from that point, you would need to take the credit loans. Because it would aid you emphatically. I take credit loan every single year and feel great because of it.

[Richard Ebeling]

Many years ago, Oskar Morgenstern emphasized in his book, "The Limits of Economics" (1937), that "Economic policy consists in all those actions and measures which aim . . . at bestowing advantages . . . on a chosen group or economic subjects or entrepreneurs, and of which the motive primarily in this this social effect."

Indeed, what would be the point of any government interventions in the market, if not to deflect the market from the course and pattern that it would have taken on if "left alone"?

This is why the "political nexus" that Jerry O'Driscoll referred to is so important in thinking about and understanding the logic of what actually goes on in the political arena. This is what makes Public Choice theory so realistically crucial for understanding the political policies processes.

Much of the core message of the Public Choice approch was understood by the older economists. Pareto in the 1890s, for instance, had a clear understandingof the "concentration of benefits and the diffusion of burdens" that creates a bias toward more government spending and regulation.

Philip Wicksteed picked up this theme in his "The Common Sense of Political Economy" (1910), but added to it the reminder that while each of use is a consumer of many goods, we are the producer usually of only one or a small number of goods.

Unless we succeed in earning income and profits in our producer role in the division of labor, we will not have the financial wherewithal to purchase all the things we desire in our consumer role.

Hence, people always have a tendency for a bias in favor of their activities as a producer over our interests as a consumer -- even if the cumulative affect of producer-oriented interventions is to diminish or slow down improvements in our standards of living in our common roles as consumers of all that is produced.

Another element to this analysis concerns the fiscal side of government activities and interventions.

On this theme, an unfortunately neglected essay by Joseph A. Schumpeter is his 1918 piece on "The Crisis of the Tax State." He draws our attention to the importance of "fiscal history" and a "fiscal sociology," if we are to understand what is at work in the interaction between government and society (the market).

He says, in part:

"The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which its results are put . . .

"The spirit of a people, its cultural level, its social structure, the deeds its policies may prepare -- all this and more is written in its fiscal history, stripped of phrases. He who knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else . . .

"The public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life . . .

"In the bourgeois society everyone works and saves for himself and his family, and perhaps for some ends he has chosen himself. The driving force is individual interest -- understood in a very wide sense and by no means synonymous with an economic hedonistic individual egoism. In this world the state lives as an economic parasite . . .

"The tax state must not demand from the people so much that they lose financial interest in production or at any rate cease to use their best energies for it . . . There is a limit to the taxation of entrepreneurial profit beyond which tax pressure cannot go without first damaging and then destroying the tax object . . .

"The fiscal capacity of the state has its limits . . . If the will of the people demands higher and higher public expenditure, if more and more means are used for purposes for which private individuals have not produced them, if more and more power stands behind this will, and if finally all parts of the people are gripped by entirely new ideas about private property and the forms of life -- them the tax state will have run its course . . .

"Without doubt, the tax state can collapse."

(Joseph A. Schumpeter, 'The Crisis of the Tax State' [1918], reprinted in Richard Swedberg, ed., "The Economics and Sociology of Capitalism" [Princeton University Press, 1991], 99-140.)

These aspects of the economic policy problems we face -- besides those insightfully discussed by Pete, above -- cannot be ignored.

Richard Ebeling

[Dan]

I return to Mencken: "Explanations exist; they have existed for all time; there is always a well-known solution to every human problem — neat, plausible, and wrong."
"The Divine Afflatus" in New York Evening Mail (16 November 1917); later published in Prejudices: Second Series (1920) and A Mencken Chrestomathy (1949)

The problem is that they are plausible (coherent) and they fit the goals of the pol.

[Troy Camplin]

Well, Don Kirk, you are hardly immune from the mythologizing you claim for Keynesians and Hayekians. For example, you argue that if each were right, they would be perfectly predictable. The only way you could argue that is if you bought the myth that every science was properly understood as physics -- and 19th century physics, at that! But in fact both Keynesians and Hayekians are in agreement on one thing: the economy is a complex system that is deeply, inherently unpredictable. I think Hayekians take this to its logical conclusion (and Lachmannians perhaps even more so) more so than do Keynesians -- thus the differences in policy recommendations -- but the bottom line is that neither do what you want them to do, because they do not conceive of the economy as being a simple, manipulable, predictable system. And the reason they do not do so is that the economy absolutely is not that kind of system. Not even remotely.

In other words, you have bought into a myth that has mostly been disproven even by mainline economics. Time to update your science.

[Richard Schulman]

To begin to answer my own question, since no one else has: I couldn't find information regarding Bachmann's, Perry's, or Paul's economic advisers. The latter, as is well known, has had a longstanding close relationship with the Mises Institute.

There is specific information on Romney's economic advisors:

"Romney has already begun assembling a team of economic policy advisers, including: N. Gregory Mankiw, who was chairman of President George W. Bush’s Council of Economic Advisers; Glenn Hubbard, who preceded Mankiw on the council and currently is dean of the Columbia University Graduate School of Business; and former Missouri senator Jim Talent." (Philip Rucker, "Campaigning in N.H., Romney focuses on economy but avoids specifics," Washington Post, July 15, 2011)

Mankiw wants a "Pigovian tax" on energy to save the planet from anthropomorphic global warming.

The current post on his blog reads:

"Alan Krueger to chair CEA. Congratulations, Alan. An excellent choice by President Obama."

Krueger's research has "proven" that minimum wages don't increase unemployment.

Mankiw also has written favorably about the Fed pursuing a negative interest rate policy:

http://www.nytimes.com/2009/04/19/business/economy/19view.html

I hope Governor Romney can get some better advice from his other two advisors, Glenn Hubbard and Jim Talent, and that the other Republican candidates get better advisors than Mankiw.

[ferragamo mens shoes]

Perhaps you would choose, and that the other Republican candidates get better advisors than Mankiw.

[Richard Schulman]

Lackluster Republican presidential candidate Jon Huntsman has discovered the best of all methods for getting back in the race: proposing an excellent economic growth program. According to an editorial in today's Wall St. Journal (9/2/2011), Huntsman's program:

"...lowers all tax rates on individuals and businesses. Mr. Huntsman would create three personal income tax rates—8%, 14% and 23%—and pay for this in a "revenue-neutral" way by eliminating "all deductions and credits." This tracks with the proposals of the bipartisan Bowles-Simpson commission and others for a flatter, more efficient tax system.

That means economically inefficient tax carve outs for mortgage interest, municipal bonds, child credits and green energy subsidies would at last be closed. The double tax on capital gains and dividends would be expunged as would the Alternative Minimum Tax. The corporate tax rate falls to 25% from 35%, and American businesses would be taxed on a territorial system to encourage firms to return capital parked in overseas operations.

Mr. Huntsman would repeal two of President Obama's most economically debilitating creations, ObamaCare and the Dodd-Frank financial regulation law. Mr. Huntsman has it right when he says, "Dodd-Frank perpetuates 'too big to fail' by codifying a regime that incentivizes firms to become too big to fail." He'd also repeal a Bush-era regulatory mistake, the Sarbanes-Oxley accounting rules, which have added millions of dollars of costs to businesses with little positive effect.

Mr. Huntsman says he'd also bring to heel the hyper-regulators at the Environmental Protection Agency, Food and Drug Administration and the National Labor Relations Board, all of which are suppressing job-creation. The Huntsman energy policy promises to block impediments to producing oil in the Gulf of Mexico and Alaska (see editorial above), while encouraging the safe deployment of fracking for natural gas in the states. Mr. Huntsman dabbled with green energy subsidies as Governor when those were the political fashion, but perhaps he's learned watching the failures of the last two years...."

[hvac parts]

Mr. Huntsman would repeal two of President Obama's most economically debilitating creations, ObamaCare and the Dodd-Frank financial regulation law. Mr. Huntsman has it right when he says, "Dodd-Frank perpetuates 'too big to fail' by codifying a regime that incentivizes firms to become too big to fail." He'd also

[womens jackets]

Mr. Huntsman would repeal two of President Obama's most economically debilitating creations, ObamaCare and the Dodd-Frank financial regulation law. Mr. Huntsman has it right when he says, "Dodd-Frank perpetuates 'too big to fail' by codifying a regime that incentivizes firms to become too big to fail." He'd also