Markets, Power, and Economic Policy

May 13th, 2013 at 8:36 am

Here’s an interesting piece worth slogging through on ways in which policy changes implied by traditional economic analysis can skew power in ways that make a lot of people a lot worse off.  The prose is a bit dense and opaque, but the point and the many historical examples are interesting and convincing.

The authors—Acemoglu and Robinson—are the same duo behind “Why Nations Fail,” a similar foray into the way policy choices can lead to starkly different outcomes, based on whether the political economy supports “inclusive” or “extractive” institutions.

The point of their new article comes down to this: When economic “rents” or market failures provide economic benefits to weaker groups—those with less stature or power in society—efforts to eradicate such “inefficiencies” may further empower dominant elites in ways that are counterproductive for the larger society.

For example, policy makers often argue that unions, minimum wages, or financial regulation create inefficiencies that reduce growth, jobs, investment, business formation, yada-yada, bark-bark-woof-woof.  A&R cook up a simple “two-period” model where such “efficiency gains” now lead to power imbalances later that reduce aggregate social welfare (the best outcomes for the most people).

Take unions, for example.  It’s simple to show using econ 101 concepts that unions distort the price of labor, by raising their members’ wages above the market equilibrium.  And there’s little worse in the firmament of basic economic theory than distorting price signals.  So when you “fix it” by whacking the union, equilibrium is restored.

A&R argue that by eradicating union “rents,” you risk further skewing bargaining power away from the working class towards those who already have disproportionate power and income and influence.  The outcome is a further disconnect between economic growth and the living standards of broad swaths of working families, aka income/wage/wealth/power inequality.

It’s a resonant argument for sure, but it also has kind of an emperor-has-no-clothes-on feel in the following sense.  A fair bit of this type of critique is engendered by the fundamental incompleteness of the basic economic model.  That is, the classical model itself ignores issues of bargaining power, distribution, and multiple equilibria.  Thus, when theorists introduce reality back into the model as in pieces like this—they’ve even got same math in there!—it can seem kind of strange to those who never bought the inherent limits of the model in the first place.

The insight that the basic model itself is woefully incomplete can thus free one up from a lot of work proving that—guess what!—raising the minimum wage or regulating financial markets can actually help (and getting rid of them can actually hurt)!

At the same time, we should be grateful that folks like A&R, well-placed academics, are engaged in that work (same with Joe Stiglitz, who has made a long career out of reintroducing reality back into economic models).

The classical economic model interacts with wealth concentration and money in politics in ways that block progressive policy.  The model is constantly used by economists and think tanks funded by the disproportionately wealthy and powerful to protect their status and block the policy agenda that would threaten it.  Any academic work that pushes back on that pernicious dynamic is welcomed.

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3 comments in reply to "Markets, Power, and Economic Policy"

  1. Sandwichman says:

    As Dean pointed out the other day, “As a general rule economists are not very good at economics.” Sure, it’s always nice that more realistic models confirm the insight that the basic model is “inadeguate” (I would say systematically biased). But will the so-called economists who want biased results pay any attention? Of course not. This is like a study showing that three card monte is a con. Three card monte dealers are not going to change their game.

    If one were cynical, one might even suspect that one of the reasons history of economic thought has been shoved out of the curriculum in economics departments is that the influential model-mongers think it is a waste of time to slogging through the extensive critical literature documenting the limits of the basic model. Could this have to do with the historical accident that economic thought emerged as an enlightenment discourse under the patronage of aristocrats?

    • jonas says:

      Remember that ‘history of thought’ is now the province of austrian ‘economists’ mostly interested in libeling Keynes and others…

  2. Perplexed says:

    Wow! Just like their book, an incredibly insightful analysis of historical political and economic interaction. As it appears that the “science” of economics is only peripherally interested in the study and implications of rents, maybe what’s needed is a separate science to measure and study this incredibly important area as its first priority. Dean Baker has been “pounding his fist” for years now about differential application of “free market” reforms that pit U.S. manufacturing workers against those of other countries while sparing the rents of the protected elite occupations from international competition. Its only by understanding these interactions that we can understand how critically important protecting true representative democracy from the crony capitalism enabled by our campaign finance system is.

    On a related note, I watched the Up with Steve Kornacki Show over the weekend and noticed again all of the quizzical looks and head scratching when trying to understand how the “conservatives” or “right wing Republicans,” or “Tea Partiers” think these problems could possibly be solved if they aren’t “willing to compromise and work towards solutions.” How would they govern if given the chance? I couldn’t help but wonder if all of our emphasis on STEM education hasn’t completely displaced other, equally important subjects. I found myself wondering if its really possible that our media pundits, our politicians, and our advisers to the POTUS don’t even know who the Anarchists (particularly the late 19th, early 20th century Russian Anarchists) were? What their ideologies were (and still are)? Is it possible that our President and other members of Congress have been “negotiating” for years now without knowing what drives those on the other side of the table? The more I thought about, the more it seemed like the only plausible explanation. How could it be that none of their political opponents have ever brought it up? No one in the media has questioned the links? Does no one understand that the philosophy of the Libertarians is the philosophy of the Anarchists (with a couple of relatively minor changes e.g. they’re now in favor of inherited wealth)? Have the Libertarians really succeeded in providing a “Trojan Horse” to conceal the identity of the Anarchists inside and no one notices? Have the media and opposing candidates not explained to voters that they are voting for Anarchists because they don’t understand Anarchism? Do they no longer even know any historians knowledgeable of the subject they might be able to ask?

    Do people really believe that Ayn Rand being born in St. Petersburg in 1905 and living there until the Revolution in 1917, and rise of Russian Anarchism to its peak before the revolution are just coincidental unconnected events? Do people really not understand that when Libertarians speak of “liberty” it has quite a different meaning than what most of us understand as “democratic liberties?” When Anarchists (or Libertarians or whatever you “re-brand” them as) speak of liberty they mean liberty from democracy (or socialism, or monarchy, or dictatorship, or communism), or any other form of government. They have no ideas of “how to govern” because the primary foundational belief is that the solution is NOT to govern! Democracy and Anarchism are incompatible philosophies as each precludes the possibility of the other. If you understand 20th Century Russian Anarchism, the mystery of the Republican negotiating strategy evaporates. The remaining mystery is how do you get a degree in journalism without knowing anything about what is relatively recent history?

    Read this for quick primer on what underlies Rand’s mythical world under the philosophies of Anarchism:

    And read this for a quick summary of some of the “flavors” of Russian Anarchism (from the Black Banner (Chernoye Znamya) group to the non-violent, non-resistant Tolstoyism.

    While Ayn Rand might provide some entertaining fiction, if you really want to understand the Paul Ryan’s, Eric Cantor’s, Ron & Rand Paul’s, and Mitch McConnell’s of the world, you need to understand Bakunin, Tolstoy, Znamya, Bakunin, Kropotkin, Proudhon, Malatesta and Reclus Do you really think Greenspan’s “shock” when he discovered that financial markets really do need to be regulated was a result of his extensive training in economics? And if you want to understand either McConnell’s legislative strategy or Paul Ryan’s budget calculations, you need to understand Machiavelli as well.

    Under the ruse of the “Randian” philosophy, Anarchism in the U.S. has already had much greater political success and impact than it ever did in Russia. “Shrinking government,” “drowning the government,” and “starving the beast” are all Anarchist objectives. Greenspan was the chairman of the FED, McConnell, Ryan, Cantor, and both Pauls are elected members of Congress, Mitt Romney came dangerously close to being elected President. Isn’t it about time we at least brought this out into the open so Americans can decide if what they really want is Anarchism? Would Americans really be voting for “Tea Party Conservatives” if they understood that they were voting for Anarchy INSTEAD of Democracy? Maybe it should be a conscious choice instead of a deception? Our ability to govern democratically has been brought to a practical standstill; is it just a coincidence that this is the primary objective of Anarchists? If you believe that, you don’t understand what you’re up against.

    The history of ideas didn’t start with with the settlement of Jamestown, and its not limited to the U.S. borders. We really need to get off the island once in a while.