Economists and the theory of politics

by Henry on March 19, 2013

It’s been interesting to follow the progress of Daron Acemoglu and James Robinson over the last few years, from what I suspect (but don’t know – happy to be corrected) was a right-leaning centrism to a set of vigorous arguments about the pernicious consequences of inequality. This is perhaps comparable to Keynes, who was never a full-on lefty, but instead a liberal interested in saving capitalism from itself. Now, via JW Mason on Twitter, I see they have a new paper arguing that economists need what some of us would call a theory of politics, and that if they developed one, they’d see why unions were often well worth any deadweight cost.

In this essay, we argue not only that economic advice will ignore politics at its peril but also that there are systematic forces that sometimes turn good economics into bad
politics, with the latter unfortunately often trumping the economic good. Of course, we are not claiming that economic advice should shy away from identifying market failures
and creative solutions to them, nor are we suggesting a blanket bias away from good economic policy. Rather, our argument is that economic analysis needs to identify, theoretically and empirically, conditions under which politics and economics run into conflict, and then evaluate policy proposals taking this conflict and the potential backlashes it creates into account.
Our basic argument is simple: the extant political equilibrium may not be independent of the market failure; indeed it may critically rest upon it. Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system. Historically, unions have played a key role in the creation of democracy in many parts of the world, particularly in Western Europe; they have founded, funded and supported political parties, such as the Labour Party in Britain or the Social Democratic parties of Scandinavia, which have had large impacts on public policy and on the extent of taxation and income redistribution, often balancing the political power of established business interests and political elites.
Because the higher wages that unions generate for their members are one of the main reasons why people join unions, reducing their market power is likely to foster de-unionization. But this may, by further strengthening groups and interests that were already dominant in society, also change the political equilibrium in a direction involving greater efficiency losses. This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its impact on future political equilibria. To understand whether it is likely to do so, one must look at the political consequences of a policy: it is not sufficient to just focus on the economic costs and benefits.

It would be nice to see more economists starting to think about the world in this way. It would be even nicer to see this paper having some influence on the numerous technocratic pundits who have unconsciously absorbed economists’ way of thinking about policy problems.

{ 98 comments }

1

shah8 03.19.13 at 7:54 pm

Economists aren’t ever going to think that way. Not the way their bread is buttered. If they did, they’ll enjoy renumeration on the order of Ostrom, and not Larry Summers.

I do wish economic bloggers thought more along these lines. They’re doing it for free, after all. I thought Isabella Kaminska’s post-scarcity has always been far too absent of political considerations. I mean, you can see how it playing right now when it comes to Cyrus gas reserves visávis unprofitable gas-burning electrical generation in Germany and elsewheres in Europe where the presumed customers are. Or how it is in the US South where many “managerial” jobs are mostly a social title in the face of little economic activity separate from Federal fiscal transfer programs or industries paying very poor wages per productivity. Surplus and artificial scarcity being used as weapons in cold or hot class conflict, things like that. Or just imagining lack of scarcity in any sort of realistic human society.

2

Memory 03.19.13 at 8:25 pm

John Kenneth Galbraith, “American Capitalism: The Theory of Countervailing Power.” (1980). There; if an economist needs a theory of politics and can’t be bothered to read anyone without a Ph.D. in Economics, they can start here. If they want to stretch their wings and read a theory of politics written by an actual political science, there are many good syllabi available… maybe Lukes and Gaventa if you are too delicate to handle your Marxism uncut

3

Patrick 03.19.13 at 8:56 pm

Economists already have a theory of politics: “Public Choice Theory” Not sure it worked out the way that Acemoglu and Robinson had hoped.

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Chris 03.19.13 at 9:32 pm

It seems that, on some level, the authors have rediscovered the Theory of the Second Best, which, if memory serves, says that if you have a market out of the ideal state achieved by meeting all the requirements of “perfect competition,” you don’t necessarily get closer to that great state by fixing only some of the departures; you can actually make the end result worse by making some things better. Here they are saying that (perhaps mediated by the political system), correcting market failure in one market within the macroeconomy can make things worse, overall, because of other failures in other markets in the marcroeconomy, that you don’t fix. Fair enough point. I wonder if anybody has tried to generalize the Theory of the Second Best (which relates to individual markets, IIRC) to macroeconomics?

5

david 03.19.13 at 9:56 pm

Note the “Rents and the Natural State” section. It doesn’t say, straightforwardly, that rents are good. It says that elites need to receive rent. The powerful need to be paid off to buy into the status quo. The powerful don’t have to be organized unions!

6

Matthew Yglesias 03.19.13 at 10:55 pm

It would be even nicer to see this paper having some influence on the numerous technocratic pundits who have unconsciously absorbed economists’ way of thinking about policy problems.

Since I take myself to be one of the main targets of that aside, I think this is a bit of a tricky issue from the standpoint of democratic legitimacy and transparency. Should I, as a technocratic pundit, pretend to believe that certain economically inefficient arrangements are in fact economically efficient because false public belief in their economic efficiency would bolster support for pro-union legislation that would bolster the political coalition in favor of generous Social Security benefits? I certainly support generous Social Security benefits and freely acknowledge that unions are *the* key institution fighting for them in congress.

7

nvalvo 03.19.13 at 11:06 pm

Well, no, Matt. But acknowledgment of the embeddedness of economic arrangements within political/cultural phenomena is a good place to start.

Acemoglu/Robinson’s project is laudable. The predictable consequences of proposed policy changes seem worth consideration, even if such consideration may threaten the sanctity of the fact/value distinction.

8

shah8 03.19.13 at 11:21 pm

Man, Matt, I never get particularly outraged at what you think…

What gets me ranty are people like Noah Smith. And I certainly don’t read Ezra Klein or Kevin Drum anymore for greater offenses than you’ve ever said…

If you don’t believe me…take:
http://www.theatlantic.com/business/archive/2013/03/how-to-fix-americas-wealth-inequality-teach-americans-to-be-cheap/273940/

http://noahpinionblog.blogspot.com/2013/03/how-poor-can-and-should-save-money.html

Of course, there was his wierd rebuttal to your post about the left and wages, but anyways…
Noah Smith essentially starts from the unstated position that everyone acts under a broadly similar political and economic pressure that’s broadly utilitarian. More votes for Mr. Politician, and more rents for Mr. Banker and Mr. Industrialist so forth and on. However, politics and political economics just isn’t that simple. There are broad constituencies in most societies that favor repression of some members of their societies, even at their own cost, just because it makes them feel better about their own prospect. There are social and legal norms that allows predatory activities by entrenched interest–think of redlining, automatic higher interest rates just for being who you are, unequal access to redistribution schemes and explicit, costly efforts to deny access to public, nonexcludable goods like public security. A very big proportion of poor people are poor because other people MAKE them poor (or believe they don’t deserve protection from predation) and thinks it’s a good idea that this should be so. Yet, Noah Smith thinks that poverty can even be eased, let alone but cut material with a variety of Sunsteinian “nudges” that have no chance of working, especially if any gains are visible to non-poor people. Which is one major reason why lower class people do not participate in many financially enhancing activities if that should increase transparency.

As you can see, if you want to be an obnoxious notable, Mr. Yglesias, you’ll have to work harder at being obnoxious.

9

Jerry Vinokurov 03.19.13 at 11:24 pm

Should I, as a technocratic pundit, pretend to believe that certain economically inefficient arrangements are in fact economically efficient because false public belief in their economic efficiency would bolster support for pro-union legislation that would bolster the political coalition in favor of generous Social Security benefits?

At the very least, you as a technocratic pundit ought to provide an account of just what is it that constitutes economic inefficiency and, moreover, why we should buy that economic efficiency or lack thereof has normative force. You might also want to try answering (with not many apologies to Alisdair MacIntyre) the question, “Whose efficiency? Which rationality?”

10

Ben 03.19.13 at 11:28 pm

It seems pretty bizarre to ask whether one should engage in Straussian lies in response to an argument about how restricting analysis to economic factors ignores political economic dynamics that can render that analysis moot.

11

turbo 03.19.13 at 11:47 pm

Yglesias thinks he’s a technocratic pundit?

12

Dylan Matthews 03.19.13 at 11:59 pm

acknowledgment of the embeddedness of economic arrangements within political/cultural phenomena is a good place to start.

People say this stuff all the time and I genuinely don’t know what the normative takeaway is supposed to be. Suppose an argument over, say, tax structure. I (or some other “technocratic pundit”) say, “Maybe we should tax consumption rather than income” or, equivalently, “maybe we should get rid of the capital gains tax or at least maintain a strong preference for capital income.”

There are a lot of worthwhile rebuttals to this. You could argue that the models that put this out rely on assumptions you find untenable. You could do a regression that, while not proving anything causal, at least casts doubt over whether a shift toward consumption taxation improves things on the margin. You could argue that even if consumption taxation is better for growth, growth is not morally valuable, or perhaps even is morally pernicious. You could make the Straussian argument that people like taxing capital gains and it’s worth pretending it’s a good idea to harness that populist energy toward other means of soaking the rich. All of that is relevant to the argument and moves the conversation forward.

But when people reply with hand-wavey stuff about how embedded our economic relations are, I genuinely don’t know how to respond. Yeah, sure, our economic relations are embedded in societal structures. I don’t think anyone denies that. But given the societal structures we’ve got, either the theories being evaluated are right or they’re not. Their embeddedness is neither here nor there unless you have some means of effecting a Polanyian Great Transformation thorugh policy measures.

13

Kevin Drum 03.20.13 at 12:54 am

Just out of curiosity, shah8, which offense of mine was the one that finally broke the camel’s back?

14

shah8 03.20.13 at 1:18 am

Actually, I can’t say–I’ve never been a reader of Mother Jones Online, and it’s been years since your blog went black. I just get snippets of your worst hits when cited at other places. Ezra is pretty easy though–taking Ryan way to seriously in the beginning and a general feeling that he’s been absorbed into the Washington Borg ever since his freewheelin’ days at Pandagon receded along with the hairline. I like Khimm, I suppose, and who can fail to love Brad Plumer? Ah, for the days of too many Brads…

I was young, once, and the Internets were free…

15

Kindred Winecoff 03.20.13 at 1:19 am

I haven’t read the paper yet, but I’ve also followed the Acemoglu/Robinson transition with interest: it’s similar to the one I made, as an undergraduate, which is why I choose to pursue a PhD in political science rather than economics. It is nice to see prominent economists now saying, point blank, that any political program which emerges from a technocratic view of economics is at best a waste of time.

So the point, Matt, is to not be a technocratic pundit. Because that’s a waste of time. Since there’s no thing as a technocracy this also resolves your quandary regarding “democratic legitimacy and transparency”. Pretending that some technocracy exists which does not exist does not serve democratic legitimacy and transparency. So what you do, to take your example, is write:

“No one in the world is concerned about efficiency as a policy goal at all. Therefore, I’m not going to write about this issue as if people are concerned about efficiency. I’m going to write about it as things are: unions want to secure rents, and in order to do so they need to build a broad enough political coalition to make keeping those rents possible. So they support and defend Social Security, because there is a really big political coalition that benefits from Social Security.

“The US Chamber of Commerce also wants to secure rents. To get them they have to break the union’s political coalition. So they attack Social Security on “free market” grounds by continuing to advocate for private retirement accounts, promote “workplace competition” which would destroy unions, and oppose all regulations (except the ones that provide barriers to entry for new competitors).

“Neither of these programs are efficient. Neither of them even pretends to be. So I won’t either: One of these programs will become policy. The voters will elect representatives who are then lobbied heavily by these groups, and that will determine which policy program is chosen. Once that happens one group will benefit and the other will suffer. Voters should understand what they’re really voting for.”

There’s your transparency. There’s your appeal to democracy. You could even add that your own personal preference is for more generous Social Security, so even though you know the unions are trying to secure rents you’re going to support them anyway. Encourage your own readers to make up their own mind about which outcome they prefer.

You actually do this a lot, which I why I keep reading you. But not always. Here’s an example of the latter. Yesterday you wrote on Twitter that Turkey should buy recognition for N Cyprus with bailout funds. Dsquared said that’d get you punched in the face if you said that in Nicosia. You said that’s why you said it on Twitter and not in Nicosia. Okay. But then, today, you wrote a post at Slate saying the same thing! Without even mentioning that raising the issue in Nicosia would get you punched in the face! So now your readers must think that there’s an entirely reasonable win-win technocratic way out of this mess: just have Turkey pay for it. But that is not a reasonable win-win technocratic way out of this mess. It’s an absurd way. So absurd that if you said it in Nicosia you’d get punched in the face. You say it won’t happen… but you say the reason for that is that it’s “much too sensible”. But that’s not the reason. The reason is that the technocratic Benevolent Social Planner, whose perspective you’ve adopted in that post, does not exist. And if she did she’d be assassinated.

You don’t have to write that way if you don’t want to.

16

Nick Jenkins 03.20.13 at 1:34 am

While practicable in Northern European economies (the experience of unions in relation to productivity in Southern Europe is an unhappy one), union political power plays out differently in an economy the size of the US. German unions could never get rid of cheaper, more efficiently produced foreign imports by simply banning them or applying prohibitive tariffs; in a polity the size of the US, however, unions can and have done exactly that.

Union politics, at the national level in the US, do not lead to more efficient allocative outcomes, but merely to protectionism and autarky. If an economy is large and self-sufficient enough on its own, it is also too large as a polity for union politics. Union power, but only for exporting economies.

17

Harold 03.20.13 at 1:42 am

Humanity trumps “efficiency”. Dickens said it and it is still true.

18

rf 03.20.13 at 1:54 am

The argument that Slate is staffed by technocrats has always been questionable

19

FredR 03.20.13 at 2:19 am

Vilfredo Pareto moved, in a similar way, from economist to sociologist (although the content of his politics/policy ideas, of course, was very different).

20

Cranky Observer 03.20.13 at 2:25 am

= = = But when people reply with hand-wavey stuff about how embedded our economic relations are, I genuinely don’t know how to respond. Yeah, sure, our economic relations are embedded in societal structures. I don’t think anyone denies that. But given the societal structures we’ve got, either the theories being evaluated are right or they’re not. = = =

Whilst I, in turn, am stonkered by responses such as this. In the 1930s the United States came very close to another civil war, possibly including a Communist revolution and/or fascist counter-revolution, as a result of (1) excess of greed (2) some bad luck (3) followed by horrifyingly bad economic policy which along with being incompetent was specifically designed to protect the 1%/5% of the day. We were saved from ourselves by WWII and massive stimulus. In order to fight WWII the 1%/5% needed (a) the enthusiastic cooperation of the working masses (b) the fighting strength of the working masses.

So, WWII over, the boys and girls home from overseas, many of the women back from the factory – and everyone in agreement that “this land was made for you and me”, not just for the 1%/5%. So policies are put in place, including the end to brutal suppression of unions and reasonable tax rates on the 1%/5%, to ensure that we have a society that everyone who contributes to can share in.

Naturally, just as in Mark Twain’s day the 1%/5% don’t like that, so they hire Lee Atwater, Ronald Reagan, Charles Peters, Karl Rove, and the like to put the nation – and in particular its economy – back where they’d like it to be. With the results we now know: massive concentration of wealth to the 1%/5%, ongoing financial crises, refusal of any political party to regulate Wall Street, long-term middle class unemployment, dismantling of reasonable and necessary regulation of the “free market”, and huge amounts of suffering and uncertainty by anyone who doesn’t have at least $5 million in the bank. Return to the Gilded Age, except instead of Andrew Carnegie at least building productive steel mills the modern-day equivalent is Mitt Romney looting them, and no Teddy Roosevelt in sight.

But as far as you are concerned the _reason_ why the average tax rate for the top 1% was 45% in 1960 and 20% today (if that, given massively increased loopholes) isn’ t something we are allowed to discuss? It is just a given, and our only role as members of the polity it to debate with Matthew Yglesias whether setting the rate at 20% instead of 19% so those on Social Security constitutes “taking rents” and “decreasing efficiency”?

Got it.

Cranky Observer

21

P O'Neill 03.20.13 at 2:50 am

@15

Wouldn’t a meta-Matt Y analysis of that Matt Y Slate article point out that the logic of Turkey paying Cyprus to renounce a claim on TRNC is true whether or not Cyprus is bankrupt and therefore that the deal should have happened in, er, 1974?

22

Antti Nannimus 03.20.13 at 3:04 am

Hi Cranky,

Yes, we got it. Nicely summarized! We got it good and hard, goddamn it.

Have a nice day,
Antti

23

Paul 03.20.13 at 3:10 am

So economists have completely forgotten that their discipline was once known as Political Economy? And don’t realize that, even now, every political idea, strategy, policy has its roots in some economic model, flawed though it may be? How else do you explain tax cuts for the rich as a strategy? It’s economic theory made political reality. What about the Keynesian model of stimulating an economy through direct investment? Same thing, except that it works to the benefit of those who need help.

24

Kindred Winecoff 03.20.13 at 3:29 am

@21

Surely. But now it’s confession time: political science is in many respects no better. The dominant strand of conflict studies starts from the assumption that conflict is, wait for it, inefficient. Therefore, there is always a negotiated settlement that both sides prefer to peace, given complete information and no dynamic consistency problems. Very faux-Coasian. Ie, the Cyprus payment should’ve just happened in 1973 and then we could have avoided the war and thus the need for recognition of the North.

Hell, Turkey’d probably be in the EU already and suffering from a debt crisis of their own.

It’s the same fallacy that Acemoglu and Robinson are (belatedly) writing against.

25

Hector_St_Clare 03.20.13 at 3:30 am

Re: Should I, as a technocratic pundit, pretend to believe that certain economically inefficient arrangements are in fact economically efficient because false public belief in their economic efficiency would bolster support for pro-union legislation that would bolster the political coalition in favor of generous Social Security benefits?

This is a mighty wordy way of saying, “I don’t like manufacturing workers, they make me uncomfortoble and don’t hang out at the same cocktail parties I do, so I’m going to take there jobs and give them to a damned robot.”

26

JW Mason 03.20.13 at 4:40 am

MY asks:

Should I, as a technocratic pundit, pretend to believe that certain economically inefficient arrangements are in fact economically efficient because false public belief in their economic efficiency would bolster support for pro-union legislation that would bolster the political coalition in favor of generous Social Security benefits?

It’s about the space of possibilities.

Maybe your first best world is one in which we organize production for maximum efficiency, and then redistribute the product afterward to satisfy equity concerns. So you write about policy in a way that advances one or both of these goals.

But now suppose, on the basis of arguments like A & R here, you decide that this isn’t how the real world works. Suppose you decide that redistribution — and policy in general — responds to power, which in turn depends in large part on the organization of production. So there aren’t two separate knobs labeled “efficiency” and “distribution”, there’s only one knob, which affects both at once.

You seem to be saying that intellectual honesty requires you to pretend that efficiency and distribution are independent, even when you know that’s not the case. Or that you have a duty to pretend that policy is made by a benevolent dictator, rather than arising from a political process composed of conflicting interests. And for some reason, you’re suggesting that acknowledging the reality of politics is the Straussian lie, while writing on the assumption of a benevolent, disinterested policy process you know doesn’t exist, is not.

It seems to me that you think it would be somehow dishonest if you were to let your positive political assessment of the political role of unions shape your writing about, say, teachers unions and education policy. But why is that? Again, maybe your first-best world is a well-funded public school system where decisions about classroom teaching are made by a centralized body of experts, without constraints imposed by the interests of incumbent teachers as represented by unions. But suppose you also recognize that without the teachers’ unions, schools will not be well-funded. Then your first-best world is unachievable. If the only actual possibilities are the second-best worlds of well-funded schools with rigid teacher protections, and poorly funded schools with classroom flexibility, and you think the former is preferable, there’s nothing dishonest about writing in support of it, even if that means talking less about the costs of union rules than you would in your first-best world.

OK, so concretely, what are you supposed to do?

I’m not saying you should distort or slant your stuff to make it more favorable to unions. Absolutely not. But there’s another set of choices you make, about what to write about, and that is always informed by politics. I’m sure there are all kinds of proposals you wholeheartedly support, but you don’t write about because they are too far outside the space of political possibilities. So this is just the same thing on a meta level. If technocracy just isn’t possible, there’s no sense in writing as if it were.

To the extent you take arguments like A & R seriously, you would have to ask, when deciding what to write about each day, both “does this story make the case for good policy” and “does it help build a political movement that can implement the policy?” I don’t see this as being any kind of tradeoff with doing good writing. I think you would only be more interesting if you looked for stories that were not only true and important, but helped build the labor movement and other kinds of countervailing power. It would give you a better standard for “does this matter,” which, again, is orthogonal to “is this true”.

27

Lee A. Arnold 03.20.13 at 4:52 am

I think this should be a part of Institutional Economics. Institutions are social preferences, and social preferences are decided by politics.

Institutions are the regularized contexts that rule transactions. Institutions reduce transaction costs by providing regularity and redress. Thus institutions are fundamental parts of so-called “economic freedom”. They save both space and time. This is true even of institutions such as welfare and entitlements.

The reduction of transaction costs is one of the two main sources of efficiency in economics. The other source is the transaction itself: the trade between comparative advantages. Technological innovation could be considered a third source of efficiency, except that technological innovations usually introduce efficiency by reducing some sort of transaction cost or physical-translation cost.

An institution is more or less identical to the context of a relationship. If you are in love, that relationship has a set of rules. All transactions of any sort whatsoever are ruled by contexts/institutions, even when the context is only “the market”. Many of these contexts are essentially social decisions, social preferences Thus, institutions/contexts/preferences are more or less identical. Preferences/institutions are not merely exogenous to the transactions/relationships under them, they are the contexts that rule those transactions.

Any change in institutions will change the nature of the reduction of transaction costs in the transactions which they rule. The business of changing preferences is politics in the larger culture.

The great error of the constitution of economics, up to the present, is in its tendency to study only the single institution of market price transactions. After that, the next error is to suppose that market transactions must predominate the larger, complex web of relationships of which they are a part, or else “freedom” is not served. (Thus we worry about things like “interest rates”, as if they cannot be properly ameliorated by additional or secondary means, such as financial repression by the central bank.)

What really counts, what should be studied first, is the social preference of the whole. Then backwards from there, to look at the most efficient and transparent institutions to help formulate it. And only then proceed to examine whether and how price transactions are encumbered. In this sense, economics is secondary or tertiary to politics.

28

turbo 03.20.13 at 5:05 am

@18 There’s an argument that Slate has technocrats writing for it?

Maybe ‘technocrat’ is being used in some special sense in this discussion, something that means nothing at all like ‘a person who could actually carry out technocratic tasks’.

I mean: Brad DeLong is a technocratic pundit, in the sense that he can and sometimes does work as a technocrat. Basically, his blog is one long plea for an appointment, which is sort of sad, but perfectly appropriate: he would slip into an appointment as if it were a jacuzzi. He really can do the technical work of managing economic affairs from a governmental position.

Such a thing is not possible for Yglesias. At all. He has no technical expertise of any kind. I guess he goes into detail sometimes at his blog. Is that the idea? A technocratic pundit is one who has more than the average amount of detail on his blog?

29

Lee A. Arnold 03.20.13 at 5:15 am

The assertion that “generous Social Security benefits” is economically inefficient is not proven. You would be required to calculate the hysteresis effects of reduced aggregate demand upon capital investment and innovations, if there were no Social Security. Meanwhile the sources of economic efficiency are not only the advantages to trade, there is also the reduction of trade costs. So you would have to tally-up all the reductions to trade costs in everyone’s lives due to the fact that the existence of the institution of Social Security allows greater risk-taking in investments, both for prospective retirees and their less-burdened children. You would also have to calculate the financial costs and political costs of an alternative government strategy for dealing with destitute retirees, including expansion of those roles in economic downturns. And you must include the costs of a large bureaucracy for means-testing and policing the moral hazards. These are not merely difficult calculations to perform, I imagine that they are realistically impossible calculations.

30

Lee A. Arnold 03.20.13 at 5:18 am

#28: “Basically, his [Brad DeLong's] blog is one long plea for an appointment”

Not with what he has been writing recently, it isn’t. Anybody with a functioning brain won’t be invited to Wash D.C. for about another hundred years.

31

Chris Mealy 03.20.13 at 6:30 am

Should I, as a technocratic pundit, pretend to believe that certain economically inefficient arrangements are in fact economically efficient because false public belief in their economic efficiency …

I’d settle for you cooling it with the occupational licensing already. Leave it to Cato Institute or whatever.

32

Bruce Wilder 03.20.13 at 9:01 am

Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances . . .

Observing employers exploiting monopsony power to repress wages, how many economists would advocate doing anything to strengthen the bargaining power of employees? And, how many (Greg Mankiw — I looking at you) would devote themselves, say, to often absurd rationalizations for why a minimum wage “hurts” minimum wage workers? How many would come up with rationalizations, say, against effective policies to reduce high, long-term unemployment rate? (Can we say, “recalculation”? “structural” unemployment?) How many would argue tendentiously for cutting tax rates on corporate income or capital gains?

I don’t have any trouble believing that “most economists faced with a trade union” (of which, they were not themselves, members, of course) would advocate against the union. But, it strains credibility for Daron Acemoglu and James Robinson to argue that “most economists” would be arguing against trade unions, because of their professional naïveté about politics, rather than, say, their political cynicism and personal corruption.

33

Zopolan 03.20.13 at 10:12 am

Chris said: “I wonder if anybody has tried to generalize the Theory of the Second Best (which relates to individual markets, IIRC) to macroeconomics?”

The Theory of Second Best (of Lipsey and Lancaster) relates to any kind of aggregation and to general equilibrium, as long as all relevant constraints are in the model.

34

Henry 03.20.13 at 12:27 pm

Since I take myself to be one of the main targets of that aside, I think this is a bit of a tricky issue from the standpoint of democratic legitimacy and transparency.

Actually, no. I had guessed on the basis of past experience that there was a high likelihood that you would take this post as a specific and personal attack, and had hence deliberately inserted the word ‘numerous’ to make it clear that I was talking about a general trend rather than a specific individual. But since you have chosen to take it personally, would you mind either finding some textual basis to support your suggestion that I am asking you to

pretend to believe that certain economically inefficient arrangements are in fact economically efficient because false public belief in their economic efficiency would bolster support for pro-union legislation that would bolster the political coalition in favor of generous Social Security benefits?

or, if you can’t find such evidence, withdrawing the suggestion? It’s not only tendentious, but somewhat offensive to insinuate that the post is asking you, or people like you, to be actively dishonest (as well as intellectually contorted, for some of the reasons that JW Mason outlines above).

35

Barry 03.20.13 at 1:22 pm

“Such a thing is not possible for Yglesias. At all. He has no technical expertise of any kind. I guess he goes into detail sometimes at his blog. Is that the idea? A technocratic pundit is one who has more than the average amount of detail on his blog?”

These days, a ‘technocratic pundit’ is somebody who (a) can and will do high school math, (b) remembers yesterday, and (c) isn’t a total wh*re.

36

Freddie deBoer 03.20.13 at 1:26 pm

I think a broader example of a policy plan without a political plan is just this whole notion of trading deregulation for a more redistributive social state. Republicans are a naturally anti-regulation constituency, and the corporate money wants deregulation, so when more economically laissez-faire Democrats are willing to deregulate, it happens. Meanwhile, Republicans are a naturally anti-redistribution constituency, and the corporate money is at best apathetic and at worst resistant to redistribution, so when the same more Democrats push for more redistribution, nothing happens. That’s been a pretty consistent dynamic for a long while. PPACA is a major exception, and one I’m quite happy about, but as we know it took massive giveaways to the health insurance companies, a Herculean effort, and a unique political moment.

Secondly, there’s just the question of priorities. Take the focus on barber licensure. You can only become obsessed with barber licensing if you are living in a dreamy theoretical world. Our financial sector is a rapacious monster that destroyed our economy and has captured a vast amount of all of the wealth of the last decade, leaving terribly little for the rest of us. The median barber in the United States, meanwhile, makes something like $25k a year. I simply do not understand the human intelligence that feels the best priority is to go after the barbers rather than the bankers. It’s inexplicable.

37

William Timberman 03.20.13 at 2:15 pm

It may be obtuse of me, but I’ve long thought that the primacy of the political over the economic was established some 150 years ago — and I’m not talking just about Marx and the God That Failed, which all our model modern technocrats still make smug references to whenever they need to flatter someone with the power to fund their projects. I’m talking about the widespread and long-term resistance to the commodification of labor, which has been called everything from Class War (when people who work for a living were desperate) to the Labor Struggle (when those same people were forced by circumstance to be polite.)

Where did that resistance go? How is it that MY (or numerous technocratic pundits, if you prefer) is so proud of ignoring the fact that it ever existed? Ask Bruce Wilder. He knows.

38

Harold 03.20.13 at 2:40 pm

MY: “I am asked to pretend that decency and morality are economically efficient? Heaven forfend I would sully myself by deserting my principles! No, I will courageously support evil, even at the high cost of sacrificing . . . other people!”

39

Wonks Anonymous 03.20.13 at 2:52 pm

Cranky Observer, I’ve sometimes come across the claim that the U.S was close to civil war in the 30s, and it always struck me as strange. The U.S never had anything comparable to the fascist movements elected elsewhere (this seems to have been generally true of the Anglosphere, or even predominately Protestant countries), and even the Communist party was quite minor. The two-party system is quite well entrenched, and when Republicans lost office it meant they were replaced by Democrats rather than some third party.

40

Mao Cheng Ji 03.20.13 at 3:08 pm

Capitalism is (or used to be, anyway) a progressive economic system; it introduces innovations, improves productivity. But it’ll only do it under certain conditions. One is competition, and the other one, just as important, is upward pressure on wages. If the choice is between a costly automation and using nearly free and unlimited manual labor in a third world country (or in any country, for that matter), – from capital’s point of view it’s a no-brainer. So, what exactly is this ‘efficiency’ they speak of? What’s efficient for capital, or what’s efficient for the rest of us? Because these are different things, often the opposite.

41

Harold 03.20.13 at 3:10 pm

Let us reject the slop and slush of humanist sentimentality (“an old bitch gone in the teeth”) as we pledge ourselves to the lofty banner of Efficiency, bravely waving in the blinding light of Truth.

42

Steve LaBonne 03.20.13 at 3:13 pm

MY is actually a typocratic pundit.

43

Harold 03.20.13 at 3:18 pm

“Science would tend to support democracy, as it supports redundancy rather than ‘efficiency’ in systems.” –Exactly so. But who cares about science when we have “TRUTH”?

44

Øystein 03.20.13 at 3:22 pm

Although economists most often emphasize the inefficiency of unions, A&R’s statement that “Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the union’s ability to exercise this monopoly power” is a bit of a straw man, as economists have also looked at the benefits of collective bargaining and often support a minimum wage.

I believe that part of the problem is that economists are often asked (or are only confident) to pronounce on short-term consequences, whereas long-term consequences are important, too.

45

Jerry Vinokurov 03.20.13 at 3:27 pm

So: an explicit acknowledgement from respected economists that economic systems exhibit strong non-linearities that couple (via political decisions, but also via other mechanisms as well) individual efficiency maximization problems to each other. Or in other words, catching up with what physicists have known for a long time.

46

Marshall 03.20.13 at 3:28 pm

Just noticed Yglesias’ comment above. To answer: telling your readers that since the Walrasian competitive equilibrium is not an empirically good model for most any market, nor for all markets considered together, and hence that the First Welfare Theorem and all the baggage associated with it is not empirically valid does not constitute lying to your readers. In fact it would be doing them the service of informed commentary. What it would mean is giving up the social links with the libertarian movement that you seem to find very valuable, as well as the intellectual satisfaction you seem to take from “speaking uncomfortable truths” to liberals, even when they’re not actually, you know, true.

47

Fergus 03.20.13 at 5:25 pm

JW Mason @ 26 nails it.

I think other people are maybe slightly misreading the most important here, which is not really that economists/economics bloggers promote economically efficient policies when in fact those aren’t the ideal/preferable policies from a moral or political-philosophy standpoint. (17, 25, 38, 41 make this case, and maybe others.) Nor is it that what economists/bloggers say are efficient policies aren’t in fact, because the models are flawed. (@ 46)

Those are both good points, but as I take it the A&R/Henry point is that even if you grant that these policies are both efficient and desirable — whether because you’re generally convinced that’s true (probably closer to A&R) or just for the sake of argument (somewhat closer to Henry?) — you might not want to pursue them, because of the effects they have on the feasibility of other policies. And that’s much more incisive as a point. As JW says,

maybe your first-best world is a well-funded public school system where decisions about classroom teaching are made by a centralized body of experts, without constraints imposed by the interests of incumbent teachers as represented by unions. But suppose you also recognize that without the teachers’ unions, schools will not be well-funded. Then your first-best world is unachievable. If the only actual possibilities are the second-best worlds of well-funded schools with rigid teacher protections, and poorly funded schools with classroom flexibility, and you think the former is preferable, there’s nothing dishonest about writing in support of it, even if that means talking less about the costs of union rules than you would in your first-best world.

What I’d say here is that while writing explaining how the first-best is unattainable, and you prefer one of various second-best alternatives, is a good thing and an improvement on totally naively talking about first-best possibilities – might there be some space for commentary which tries to make that first-best world possible? I’m hesitant about saying this, because I don’t know exactly what that would look like. And it’d be, again, naive to think that just writing about how great the first-best world would be is a way of creating a political coalition behind it or developing a “theory of politics” to shepherd it through the process. But I’d like to think there’s some way you can bring those first-best options into feasibility, and if economists/bloggers want to do that then that’s all fine with me.

(As an aside, having read the three original posts on this, I think the “theory of politics” terminology is a bit confusing and it might be more helpfully described as a political strategy, or something along those lines. But everyone seems okay with it, so maybe I’m overly sensitive…)

48

Bruce Wilder 03.20.13 at 5:27 pm

Øystein @ 44

Some economists have. And, a lot of economists have attacked them for doing so. The saga of Card and Krueger and the minimum wage illustrates the problem. And, the consequence is that Dylan Matthews (see his comment earlier in this thread) reports in the Washington Post reports that opinions of labor economists on the shape of the earth differ.
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/four-things-to-know-about-obamas-minimum-wage-increase/

49

Bruce Wilder 03.20.13 at 5:50 pm

Daron Acemoglu and James Robinson, in the article cited in the OP, and in their other recent work, can be viewed as making an end run around the received wisdom of conventional economics, to do better economics. The pivot is the insight that economic rents are critical, and the essential material basis for (political) organizing.

They give the example of a labor union as bait: a lamb tied to a stake, waiting for a mangy old lion to attack. The lamb looks defenseless and the union looks superfluous. The key point of analysis in choosing a union as an example is that a labor union looks unnecessary to the organization of production. Production would still be organized, even if there were no labor union.

Production would still be organized.

How would production be organized? By a market in our market economy? Have you ever seen production organized by a market? No? Me, neither. Doesn’t stop economists from babbling on, incoherently, about market failures.

Production would be organized by a corporate bureaucracy, a formal hierarchy, which is to say, a political organization. And, economic rents would be the foundation of that organization, economic rents from dedicated capital investment, scale economies, monopoly, and, yes, Virginia, government rule-making.

It is a neat trick, to make “rent-seeking” a pejorative, always implying that policy could use “competition” to eliminate the rents, and use that to rationalize policy that results in massive private enterprises, whose political power threatens to overwhelm governments and peoples, worldwide. And, that’s how the likes of Larry Summers earns the big bucks, while being a pompous ass and, on the surface, a serial failure and rank incompetent.

50

SamChevre 03.20.13 at 5:55 pm

You can only become obsessed with barber licensing if you are living in a dreamy theoretical world

In my observation, it’s at least as easy to be concerned about occupational licensing because one of your friends can’t get 80% of the jobs he’d be qualified for because of a 10-year-old drug possession conviction.

51

adam.smith 03.20.13 at 7:42 pm

To add a new angle to this – while not 100% certain, I’m pretty sure that the main target of the AR paper is actually their Cambridge neighbor Dani Rodrik, who has been writing about how he thinks political economy is unnecessary for quite some time.
(I think this was the first statement: http://rodrik.typepad.com/dani_rodriks_weblog/2008/01/why-i-dont-do-p.html here’s the latest: http://www.project-syndicate.org/commentary/how-economists-killed-policy-analysis-by-dani-rodrik ).
That’s interesting mainly because Rodrik is one of the most prominent left-ish economists, very much pro-union (he signed a petition by economists in favor of the EFCA, e.g.). So the political divide here is a lot trickier.

52

Henry 03.20.13 at 8:53 pm

Matthew responds by making the generic claim that unions are in decline and that no-one seems to have much of an idea how to revive them. This looks to me to be irrelevant to the Acemoglu and Robinson paper’s actual point, which is rather obviously not ‘we need to figure out how to revive unions ASAP’ and rather obviously is ‘when economists fail to take account of the possible political implications of their recommendations, these recommendations will often be lousy.’ On the arguments that people actually have been making, I’d again like to invite Matthew either to provide some evidence to support his insinuation that I’m asking him to be dishonest towards his readers, or to withdraw the suggestion. I’m unhappy that this has become so personalized, but am equally unwilling to stop blogging about what I think are an important set of issues, simply because Matthew has a specifically neuralgic tendency to interpret these posts as attacks on him rather than attempts to identify a more general tendency.

53

Metatone 03.20.13 at 10:45 pm

I’m glad A&R are evolving. Their paper on innovation was a really good example of a paper written around an underlying, but unacknowledged political theory – and was all the more disappointing because of it.

54

mdc 03.20.13 at 10:53 pm

@ JW 26:

The point about teachers’ unions is a really good one, and one I recall *almost* reading in an Yglesias post– to the effect that unions were “special interest groups which tended to promote more egalitarian educational outcomes” or some such.

55

Freddie deBoer 03.21.13 at 12:20 am

Yglesias is like a lot of people I know: a bright guy who is frequently made stupid by his petty resentments.

56

LFC 03.21.13 at 1:20 am

Off topic, but since few will see it on my blog I’m taking the liberty to mention this here: Yglesias says inthis post that Norman Angell predicted in ‘The Great Illusion’ (1911) “that a general European war would be averted.”

Many people make this mistake. Angell did not predict that.

Ok, back to unions.

57

adam.smith 03.21.13 at 5:52 am

I’d also dispute the idea that A&R have “evolved” – it’s certainly possible that their politics have become more left-wing – though their basic workhorse model (that became the Economic Origins… book) always had as an implication that inequality hurts democracy. But while I’m sure their thinking evolved, the idea that paying attention to future political equilibria matters has been a constant feature of their work, e.g. from the abstract of their 2000 QJE paper:

http://qje.oxfordjournals.org/content/115/4/1167.full.pdf (gated)

So my simple point would be – no, this isn’t some surprising endpoint of a development, but is in line with the stuff A&R have been doing for ~15 years now.
My larger point would be that while it’s nice to see economists pay attention to politics, I don’t think there’s any reason to declare victory. The types of hyper-rational-choice PE that are acceptable in economics are quite limiting. Patrick above is completely right pointing to “Public Choice” in that context (and that’s, I believe, the reason for Rodrik’s skepticism towards the project).

58

Fergus 03.21.13 at 3:33 pm

As a follow-up to my earlier comment – the heart of the Acemoglu/Robinson argument is this (pp3-4 of the paper):

To assist in clarifying these ideas and to organize the discussion of mechanisms in the next section, consider a two-period model. Suppose an economic policy has to be chosen in both periods and there are no economic linkages between these two periods. In addition suppose that in the …first period politicians have some freedom of choice over policy— — in some sense there is a “window of policy opportunity ”so that policy is not completely determined by vested interests or some political calculations. This policy choice might also be influenced by advice from economists, for example, aimed at correcting a market failure. In the second period, policies will be determined in a political equilibrium.
Let us first focus on the world of “economics without politics”, where there is no
political (as well as economic) linkage between the two periods. In such a world, the first-period policy choice can be made without any concern for the political equilibrium in the second period. However, the reality is that policy choices in the fi…rst period often strengthen some groups and weaken others, and thus will likely affect the political equilibrium in the second period. In turn, the political equilibrium will determine the choices made in the second period. Therefore, the objective of the welfare maximizing policy maker, and the advice given by economists, should not just be to solve market failures today, but should take into account the later political ramifications of this …first period choice.

Obviously this is stylised, but I wonder – this framework assumes that period one policy is to some extent free, that is, not determined by political considerations alone. The latter-period policy is just a function of the balance of political power. But how does that difference come to be? Why is there more freedom to choose policies, independent of the “political equilibrium”, in the first period than in the second?

To put it another way, the most-discussed example here has been about unions: the weakening of unions meant there was no effective political coalition to oppose excessive deregulation and compensation in the financial sector. In this story the deregulation which occurs is something of a fait-accompli once unions are weakened — that’s just the way the balance of power comes out. But why weren’t the policy decisions which made unions weak also unavoidable in their time?

Some of the cases A&R talk about get around this problem because the stylised first-period is a disruptive one – Australia and Somalia after the discovery of natural resources; Russia after the Soviet collapse – so maybe we can figure the balance of power isn’t as well-developed, and thus isn’t determinative of policy initially (but becomes so later).

I think this plays into what I said earlier which is that it’s possible to move the unachievable first-best options into the realm of achievability: that is, the A&R ‘political equilibrium’ doesn’t exclusively determine what happens subsequently. Policy choice is always at least somewhat free, which is how the freedom which leads to do things like weakening unions arises in the first place. And if the political economy constraints aren’t totally binding then advocating for first-best solutions might have some kind of place. (Though still, as I said, probably not in the naive advocacy way which is mostly the status quo.)

59

the third Lars 03.21.13 at 5:57 pm

#39~Smedley Butler testified before congress regarding a potential military putsch in the 1930’s…

60

Henry 03.21.13 at 6:26 pm

I’ve invited Matthew twice to either provide some backup for his rather obnoxious insinuation or to withdraw it. I presume from his continued silence that he is declining this invitation. Presumably, either he thinks that he’s right to suggest this, but is unable or chooses not to provide any evidence to support it, or he accepts he is wrong, but is unwilling to publicly admit it. So it goes.

61

shah8 03.21.13 at 8:52 pm

Oh, come off it. Yglesias tweaked your nose using his typical contrarian bull and went giggling to his yoga instructor to have his prana fine-tuned.

The basis of his snark, I think, revolves around the implicitly rather non-inclusive use of “economist”, as if heterodox economists doesn’t matter. The rest is past history or bad blood of whatever it is that got nuttin’ to do with me.

62

adam.smith 03.21.13 at 9:24 pm

like shah8 I’m baffled by Henry’s derailing of his own thread.
MY asked a rhetorical question (or call it snark if you want) to make a point. It wasn’t a terribly good point, but I have no idea how you’d not recognize what is obviously a rhetorical device and not an “insinuation”. Every 10 minutes something more offensive is posted on a CT thread. geez.

63

Harold 03.21.13 at 9:30 pm

All MY’s posts are just a hilarious put on.

64

MPAVictoria 03.21.13 at 10:09 pm

MY only ever posts once in any thread and almost never replies to comments. It is his M.O.

65

Ciaran 03.21.13 at 11:22 pm

Matt never seems to have much of a response to criticism either way , I’m starting to conclude that he may be a bit of a spoofer.

66

Harold 03.22.13 at 3:22 am

Being a libertarian means never having to say you’re sorry.

67

turbo 03.22.13 at 4:14 am

And, thus, at last, the area of his techical expertise is discovered.

When the spoof factory needs needs spiffing up or the government needs spoof controls, Yglesias is your man.

68

Mao Cheng Ji 03.22.13 at 8:17 am

From what I’ve read, he seems to be just a harmless monetarist crank.

69

Henry 03.22.13 at 2:44 pm

MY can be very smart indeed when he wants to be. He also can be incredibly obtuse when he wants to be. You can take my comment above as suggesting that after a couple of years of trying to take seriously MY responses, which range the limited gamut between the obtuse and the moderately offensive, but never actually converge on anything resembling a serious reply, I’m tired, bored, and not particularly interested in playing the game any more.

70

William Berry 03.22.13 at 3:49 pm

Kindred Winecoff @15:

Late in the thread, I know, but great comment— observations I heartily endorse.

But, here’s the thing: Agreed that there is no technocracy, as such, but there are hordes of wannabes (MY is one of them) who flatter themselves that they are members of one.

The harm they do to our economic and political discourse— and, to the real-world manifestations of that discourse— is considerable. That these would-be technocrats are generally taken as being of the left only makes things worse.

71

Harold 03.22.13 at 3:54 pm

“unions want to secure rents” is quite a gross simplification (distortion, even) of what unions do. I’d say it is a lie.

72

William Berry 03.22.13 at 4:57 pm

Harold @71:

Agreed. I have been a union activist and local officer for many years (thirty years and counting) and I can attest that, yes, the USW wants dues money, but that money, substantially, is spent the way I think it should be— for organizing, for political action, and for local service, including, especially, arbitration.

Extraction of rents— well, some high-ranking officers draw pretty decent salaries, but so what? I doubt if Leo Gerrard (sp?) comes close to the salary of the 500th ranked corporate CEO in the country.

73

adam.smith 03.22.13 at 5:15 pm

I think that’s a misunderstanding on the meaning of how economists use the word “rent”. In economics, a rent is income above the allocation in a perfectly competitive market*. If a union collectively bargains for a higher wage than workers would be able to obtain bargaining individually, the difference between the two is, in technical terms, a “rent”.
Rent has somehow become a bad word – probably because of the “rent-seeking” literature of the 1980s – but by itself it’s non-normative (my landlords want to secure a “rent”, too, that doesn’t make it illegitimate for them to ask for the monthly check).
A union that is not securing a rent for its members is failing them.

*definitions may vary & often involve opportunity costs, but I think this is a good description of the standard view.

74

Harold 03.22.13 at 5:41 pm

Safety regulations, working conditions are “rent”???

75

Rich Puchalsky 03.22.13 at 5:52 pm

Let me guess: CEO payment packages are never “rent”, and instead are the allocation of a perfectly competitive market, because after all the CEO is bargaining individually.

Oops, I see that William Berry wrote the same thing above. Still, it’s a pretty good trick that all of management pay is optimal as opposed to those moocher unions.

76

Harold 03.22.13 at 5:59 pm

And the great thing about being a libertarian is that it is all a big joke (on anyone who takes them seriously).

77

Steve LaBonne 03.22.13 at 6:22 pm

Matt never seems to have much of a response to criticism either way , I’m starting to conclude that he may be a bit of a spoofer.

Nah, he’s not that clever. Just a garden variety bullshitter. He’s basically on a neoliberal analogue of wingnut welfare.

78

William Berry 03.22.13 at 6:32 pm

I guess the thread is pretty much dead, but yeah, I guess the “rents” that unions “extract” are, indeed, that difference they negotiate between rank exploitation on the one hand, and a livable wage and reasonable working conditions on the other.

Whatever.

79

William Berry 03.22.13 at 6:35 pm

Oh, and maybe I should should have signed that “karl.marx”!

80

adam.smith 03.22.13 at 6:40 pm

Rich – do yourself a favor. Before you say these self-righteous, smug things, spend 2 secs. on google: http://www.nber.org/papers/w9068 “This paper develops an account of the role and significance of managerial power and rent extraction in executive compensation.” This is as mainstream econ as it gets and it’s a pretty common – probably the default view among economists. But I’m sure you prefer to live in your neat, little, epistemically closed world.

@Harold – a) no one said unions _only_ want to secure rents, but you can’t actually be denying that they’re fighting for higher wages for their members? I’d say that’s one of the main ways in which unions are important to reign in inequality. (and I, at least, would say that’s a good thing). b) whether safety regulations are “rents” in the technical sense is probably a matter of debate. If they are general, legal requirements (as they most commonly are) it probably doesn’t make much sense to think of them that way. If they’re specific to union workplaces, yes, they’re probably non-monetary rents. (and again that doesn’t make them bad in any way).

81

Barry 03.22.13 at 7:00 pm

Harold 03.22.13 at 5:41 pm

” Safety regulations, working conditions are “rent”???”

From the viewpoint of right-wing economists, anything beyond a bowl of rice and a place to sleep under your workstation at night is ‘rent’.

For employees, that it.

82

Barry 03.22.13 at 7:01 pm

adam.smith, the flaw is that by the economists definition of ‘rent’, *everybody* wants to secure rents. It doesn’t say anything about unions that it doesn’t say about the speaker of that statement.

83

Magpie 03.22.13 at 7:08 pm

@Henry F,

Hopefully of interest:

Overdetermination avant la lettre?
http://anticap.wordpress.com/2013/03/22/overdetermination-avant-la-lettre/

84

jb 03.22.13 at 7:19 pm

I think there is a difference between how things are actually discussed among economists, and how they are represented by economics popularizers. For whatever reason, the economists who are most right-wing, and thus use “rent” as a pejorative in certain circumstances, (labor unions), seem to be more influential in the political discussion that those who are not. (At least in the US).

This may be creating the confusion here.

85

turbo 03.22.13 at 8:20 pm

You know what’s a big source of economic rent? Goverment chartering of corporations.

You think you get economic rent where there’s collective bargaining? Sure. On both sides, sparky.

I’ll give up unions when you give up corporations. Draw when yer ready.

86

adam.smith 03.22.13 at 8:26 pm

Barry – but that was exactly the point of Kindred’s post at #15: Every economic interest groups tries to capture rents. (“The Chamber of Commerce also wants to secure rents…”). How useful the very broad category of “rents” is may be another discussion. I don’t use it in my work, but I think it’s important to understand what economists and political economists like Kindred who use economic terminology mean by it.

jb – I think that’s correct, yes. The original “rent-seeking” literature (not co-incidentally also the literature that Rodrik names in his attack on political economy) has a strong normative undercurrent, especially from its libertarian fans.

87

Rich Puchalsky 03.22.13 at 9:49 pm

“Rich – do yourself a favor. Before you say these self-righteous, smug things, spend 2 secs. on google:”

Did you bother to spend 2 seconds reading the second sentence of the abstract of the paper that you linked to?

“This paper develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic re-search on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach [...]“

In other words, that very paper says that the optimal contracting approach has dominated academic research on the subject — and no, the managerial power approach is not “probably the default view among economists”, by your own cite.

“But I’m sure you prefer to live in your neat, little, epistemically closed world.”

Oh, how cutting! Is epistemic closure, like, when you don’t read your own citation? Because that seems very bad.

88

rf 03.22.13 at 9:55 pm

Epistemic closure is when you get hired by a magazine full of contrarians to write contrarian articles for your contrarian readers

89

adam.smith 03.22.13 at 10:06 pm

the paper is from 2002… it was published even then by the clearinghouse of mainstream economics and since then this view has become increasingly popular. Bebchuck is a huge deal in law&economics and the corporate governance literature. It’s certainly possible that there are still many economists holding an optimal contracting view of compensation, but I’d doubt it

Epistemic closure: Someone posted something directly contradicting one of my sweeping statements ( “CEO compensations are ‘never’ rent”?). Let’s look in that paper to see if I can find something to attack him!

Critical open-mindedness: Hmm – that does seem to directly contradict what I said. Maybe I should reconsider. Maybe there are a fair number of mainstream economists who do study CEO compensations critically. Thank you poster for bringing my attention to this – I still don’t believe this is the default view in economics – see the abstract of the paper – but this is interesting.

90

jb 03.22.13 at 10:32 pm

I’m kind of torn here.

On the one hand adam.smith is clearly right when he points out that many economists do criticize CEO pay, and consider it a form of rent.

On the other hand, I have trouble believing that this is the prevailing view. My perception may be distorted however, simply because those who are critical are not likely to be widely known among the general public.

Additionally, I think it is hard to deny that many economists do have quite right-wing views, especially among the law and economics set. Certain assumptions, such as “perfect information” and “homo economicus” tend to lead to that. You also get issues, such as the funding of certain think tanks and institutions by business interests that push them in that direction.

Paul Krugman once said somewhere that because the free market works much better than you would expect for many things, it is natural for people to assume it must work well for everything, and that certain economists fall prey to that. I think that is probably true.

91

shah8 03.22.13 at 10:57 pm

Good to see that the ten-reply Yglesias Hate is over…

Now, I went through the trouble of critically reading the actual paper and I want to make some general comments about both the paper and Henry’s post.

1) Unions get too much uncritical love from some people here, and Acemoglu et al’s paper tends to reinforce that. Unions are not forces for liberalism more than any other social group within society. Some unions, like the AMA, are rather pernicious entities. In the sense that unions ever had been liberal forces for good, radical social politics were embedded within the broader activity for securing rents for their members. Most unions in history are mostly interested in toadying up the powers that be, and only resort to radical politics after being repeatedly slammed with a two-by-four by the elites. Those unions had to rally support for their higher wages from the public at large, and if one reads one’s labor history, union leaders really didn’t want to do that, for both good and bad reasons. The decline of union pretty much has to do with Taft-Hartley, inclusion into the normative political network that insists that radical political alliances be disavowed. Unions, in a sense, has never been dependent on us bougie folks like us being nice to them, and we’d probably find lots of reasons to dislike unions with the lower classes firmly holding their backs.

2) The paper doesn’t spend very much time at all on unions, and what time it does spend on unions, it repeatedly associates them with “economic inefficiency”, which is a claim I find very dubious. In this sense, I think Yglesias was firmly in the right, however obnoxiously snarky he was, and I think Henry should have caught this. Of course, we all know it’s about his pet issues like taxi cab medallions and barbershop accreditations. Since you actually can use standard economic techniques to show bad effect, the snark has some merit. Here’s the thing, if you actually measured whether unions maximized output qualitatively and quantitative, with the lowest cost of inputs, relative to society as a whole, rather than owners or politicals, standard econometrics are almost certainly going to show that unions are “economically efficient”. Organizations without power to directly seize rents (say, state oil workers unions, doctors, policemen, jailers, longshoremen) generally have to pay their way, because other social actors would successfully demonize them and otherwise play politics to seize their rents.

3) As I’ve said before at the top of the thread, there are plenty of economists out there who use their powers for good. What is the problem, and what Acemoglu et al doesn’t really want to admit, is that economists and economic institution often give bad faith advice according to their own profits or according to geopolitical concerns. That economist propagate state propaganda to justify bad economic policies whether that be neoliberal or commie state capitalism create the worst of all worlds way too often, you know, nuns out the helo cargo bays.

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adam.smith 03.22.13 at 11:03 pm

Look, I don’t have a survey of economists to prove this. The ones I know aren’t particularly right-wing and the right-wing ones tend to have a Luigi Zingales-type libertarianist streak that has all types of unsavory sides, but also doesn’t make them particularly sympathetic to CEOs
If you google scholar “executive compensation” and look for papers published since 2000, the list of most cited papers is dominated by Bebchuk & co-authors: http://scholar.google.com/scholar?q=executive+compensation&btnG=&hl=en&as_sdt=0%2C6&as_ylo=2000&as_yhi=2013
That’s not true if you do the same for “ceo pay” which is dominated by non-rent explanations:
http://scholar.google.com/scholar?q=CEO+pay&btnG=&hl=en&as_sdt=0%2C6&as_ylo=2000&as_yhi=2013
but if you look more closely at the papers, they just claim that rents aren’t _the_ main factor. E.g. the Gabaix and Landier QJE paper says “These forces [what they refer to as "skimming"] have almost certainly been at work, and they play an important role in our understanding of the cross-section.” And even Kevin Murphy – the most ardent markets-are-always-right U Chicago economist (reluctantly) concedes that there is some rent seeking going on, although I think “CEO pay is market pay” would generally be a fair summary of his work. Most economists I know consider him a radical. And while economists are rarely far-left and more likely to be right-wing than other social scientists, the predominant view is still a left-leaning (at least in the US context) centrism. Democrats outnumber Republicans 3:1 http://www.insidehighered.com/news/2005/12/21/politics
And in a survey of a pretty representative sample of superstar economists, a large plurality favors a minimum wage increase: http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_br0IEq5a9E77NMV

Point being isn’t that there is nothing to criticize about economics – I think there is plenty – but that simplistic views of the evil “economists” as exemplified here by Rich are wrong (and make you look foolish) and more importantly prevent you from learning things from economists (remember that e.g. the inequality data that gave rise to the “99%” slogan was constructed by mainstream economists).

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adam.smith 03.23.13 at 6:27 am

actually I did find a survey:
http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_4I1jDcO1jZiW7Vq
a plurality of economists agrees (and hardly anyone disagrees) that CEOs are getting paid more than the marginal productivity. That isn’t quite necessarily make it a rent, but it’s pretty close.

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Brad DeLong 03.23.13 at 11:53 am

Re: 28: “turbo 03.20.13 at 5:05 am: @18 There’s an argument that Slate has technocrats writing for it? Maybe ‘technocrat’ is being used in some special sense in this discussion, something that means nothing at all like ‘a person who could actually carry out technocratic tasks’. I mean: Brad DeLong is a technocratic pundit, in the sense that he can and sometimes does work as a technocrat. Basically, his blog is one long plea for an appointment…”

This is now my benchmark for how totally and completely wrong commenters on Crooked Timber can be…

Brad DeLong

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Hidari 03.23.13 at 1:13 pm

I don`t know if this is strictly relevant to the OP but some of the links might be…..

Why has mainstream neoclassical economics traditionally had little to say about the causes and effects of inequality? This is the question raised in an interesting new paper by Brendan Markey-Towler and John Foster.

They suggest that the blindness is inherent in the very structure of the discipline. If you think of representative agents maximizing utility in a competitive environment, inequality has nowhere to come from unless you impose it ad hoc, say in the form of “skilled” and “unskilled” workers.

But there’s an alternative, they say. If we think of the economy as a complex (pdf) adaptive system – as writers such as Eric Beinhocker, Cars Hommes and Brian Arthur suggest – then inequality becomes a central feature. This is partly because such evolutionary processes inherently generate winners and losers, and partly because they ditch representative agents and so introduce lumpy granularity. Markey-Towler and Foster write:

Inequality is a phenomenon that should arise naturally in a complex, networked economy as value‐generating connections (transactions, business relationships etc.) are formed, consolidated and broken. Concentrations of market power, skill differentials, luck and rent‐seeking can all be dealt with in such an analytical framework.

This is a point touched on by Ben Fine in a paper (pdf) claiming economics is unfit for purpose.He cites some econophysics research which shows a few dozen multinationals control the world’s economy.

If you think that’s a bit Bilderbergian, consider this new paper by Pablo Torija. He shows how, since the 1980s, western politicians have stopped maximizing the well-being of the median voter, and have instead served the richest few per cent.

If the economy is an adaptive ecosystem, it is one in which a few predators are winning at the expense of the prey.`

Links to papers available from here

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2013/03/inequality-evolution-complexity.html

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Rich Puchalsky 03.23.13 at 3:18 pm

“Point being isn’t that there is nothing to criticize about economics – I think there is plenty – but that simplistic views of the evil “economists” as exemplified here by Rich are wrong (and make you look foolish) and more importantly prevent you from learning things from economists “

I think the problem here has to do with your imagination, not what I wrote. I never wrote anything about evil “economists”, within scare quotes or not. Here’s the comment that you disliked so much again:

“Let me guess: CEO payment packages are never “rent”, and instead are the allocation of a perfectly competitive market, because after all the CEO is bargaining individually.

Oops, I see that William Berry wrote the same thing above. Still, it’s a pretty good trick that all of management pay is optimal as opposed to those moocher unions.”

And once again — if you actually read those citations that you’re tossing around, you’ll see that the concept of rent is featured in the 2002 Bebchuk, Fried, and Walter paper, but not in most of the other abstracts that are the top hits in your Google Scholar searches. And if you look at the participant responses to the survey that you cited, you’ll see that only one of them (unless i missed one) mentions “rent” in their comments on their answers to that first question, and that the survey itself isn’t phrased using the word “rent” in the question. Why do you think this might be?

All right, I’ll answer my own question: it’s because “rent” is inherently a strained and kind of stupid concept through which to study these questions. Why did Bebchuk mention it so prominently in 2002? Because of the rent-seeking literature that equated non-rent-seeking to virtue, and which is still one of the more popularized economic views. But once that salvo had been fired, talking about CEO compensation as “rent” became increasingly more pointless, analytically, because — even more so than with workers — the marginal optimal market valuation of a CEO’s contribution to a firm is difficult to quantify.

And yes, some of my work is for left-leaning economists. No one needs to characterize economists as evil in order to make fun of a concept whose history in the public arena has been far more harmful than not.

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In the sky 03.25.13 at 3:07 pm

Thank you, adam.smith, for your patience in demonstrating that economists are not the ideologues that we are portrayed to be. (See the first post, for example.)

Alas, I think your time is wasted.

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Harold 03.26.13 at 4:55 pm

Why on earth would anyone seek to imply that economists are evil?

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