5 Feb 2013

MIAS -- the review

Madmen, Intellectuals, and Academic Scribblers: The Economic Engine of Political Change fulfills two important functions. First, it delivers a clear and concise overview of political economy, i.e., how politics and economic interact. Second, it provides a simple, but accurate description of how bad polices get put into place, why they persist and how -- perhaps -- to change those policies. Both aspects appealed to me as an entrepreneur of ideas because they helped me understand a topic that I work with everyday and gave me some hints on how to structure my work (e.g., this blog) to be more effective.

In the words of Leighton and Lopez (the authors):
Our understanding of political change is as follows: Incentives are shaped by the rules of the game, which economists call institutions, and these institutions in turn are shaped by the ideas in a society. In other words, ideas matter...[and] political change happens when entrepreneurs exploit loose spots in the structure of ideas, institutions and incentives [preface]
From this statement, you can understand how ideas affect institutions that modify the incentives that economists talk so much about. This structure implies that you need to change institutions to change incentives and that it takes ideas to change institutions. If, for example, we want to reduce the industrial agricultural output of corn in the US -- an output that produces water pollution, depletes aquifers, distorts our food choices, and so on -- then we need to change the incentives that farmers face. The biggest incentives are in the form of crop insurance, guaranteed demand for corn-ethanol, and subsidies and guaranteed prices for corn. Those incentives are driven by institutions crafted in Congress and implemented by the USDA, and those institutions are built on the idea that we need cheap corn, should reduce our dependence on foreign oil, and need to protect farmers from risks for which no market instruments exist. Those ideas reflect the conventional wisdom promulgated by agribusiness firms, lobbyists, politicians campaigning in Iowa, and other special interests. Those ideas fail to mention the negative impacts of Big Corn at the same time as they fail to mention alternative ideas that could deliver the food, security and income goals outlined above. In other words, we will not see an end to the biased incentives and the resulting perverse outcomes until we can engage and win in a war of ideas.[1]

So that's the context for this book, which I recommend as a text for ANY policy class and for ALL students of law, economics and politics.[2]

The 200 page book is divided into seven chapters:
  1. Ideas and the Rules of Politics
  2. The Never-Ending Quest for Good Government
  3. Economists Join the Battle of Political Ideas
  4. Public Choice: How We Choose Bad Policies and Get Stuck with Them, or Not
  5. How Ideas Matter for Political Change
  6. Four Stories of Political Change
  7. What's to Be Done? Assembling the Wisdom
In these chapters L&L note that change in outcomes will result when incentives change, that incentives are the result of institutions (the informal norms and formal rules in society) and that institutions will change when new ideas come along. This chain is yanked when intellectuals translate and transmit the ideas of academic scribblers into a form that madmen (politicians, bureaucrats, and the others who control change) can then use.

L&L are not naive to the difficulty in causing change. Their book describes the steps necessary for change, but these steps are not sufficient. Ideas can be shot down at any stage. What's required -- often -- is a crisis that creates an opportunity for a policy entrepreneur to implement an idea that's been around for awhile.

To do this, they set up the gears of the machine in Chapters 1 and 2, then move on to the role of economists (as idea generators) in Chapter 3. There, they make the important distinction between economists who want to "tune the machine of humanity" and economists who want to "facilitate the chaotic exchanges of people" (see note 2 below). I am definitely in the latter category, and L&L do an excellent job at contrasting the two approaches and how the former is beloved of mathematicians and control freaks and the latter of liberals (i.e., libertarians) who want to defend the rights of individuals against misplaced control and unexpected developments. As one example, they discuss "externalities" (the positive or negative side effects of actions that affect others), and how their existence does not automatically imply a need to make policies to internalize them. L&L, in other words, explain how theory (ideas) does not always translate in to reality.[3] Their discussion of that failure (Chapter 4) should be required reading for ALL voters (and politicians).

L&L do a great job answering a question that vexes me, i.e., why do we get stuck with policies that we KNOW are bad? Sugar subsidies, corn ethanol, subsidized flood insurance, etc.? Well, they cite Tullock's work on rent seeking and note that the value of a gift from the government (a subsidy) quickly gets capitalized into the value of goods (e.g., sugar plantation). This short term jump in value then establishes a new baseline that the owner -- or NEW owner -- will take as a right to be defended at all costs.[4] L&L then pose the obvious question (How then do we EVER get changes in bad policies?) and answer it with "an idea, an opportunity and a madman." They then give three examples of changes in Chapter 6 (auctioning spectrum licenses, airline deregulation, and welfare reform). They also discuss a failure to reform after the financial crisis, but I am not sure that example (or lack thereof) works so well.

They conclude with a Chapter 7 devoted to the role of political entrepreneurs who will succeed when they can take an idea (from a scribbler or the public) and translate it into terms that public and the madmen (who may or may not listen to the public) can understand and use. That dynamic feedback is necessary since some ideas fail because they are not presented in familiar or attractive terms.[5]

They recommend that political entrepreneurs focus on their comparative advantage, have a deep knowledge of the market, look for the greatest return on invested time, and get lucky :)

...and that's what I am trying to do!

Bottom Line: I give this book FIVE STARS and recommend it to people who want to understand, improve or work within the policy process, social scientists [sic], and people who work in or with government. It will save you from banging your head on the wall (excessively), and I definitely plan to REREAD this book if/when I take aguanomics on the road and run for political office (long run plans :)

[1] I gave a talk on water auctions several years ago at the USDA Economic Research Service a few years ago. I was LITERALLY shouted down when I brought up corn ethanol, so we need to remember that those most able to debate ideas may be too myopic or corrupt to do so. Industry's influence on research at "aggie" schools recommends the same caveats.

[2] I suggest it as a complement to Worldly Philosophers and TANSTAAFL. L&L use an interesting technique of relating ideas via their proponents (esp. chapter 3), which may be too "personal" or oversimplified for some readers. That said, I think that economists are increasingly divided into the (majority) school of Pigou-Keynes-Samuelson that believes in "fine tuning the machine" and the Hayek-Coase-Buchanan school that seeks to build institutions that are robust to human frailty and fallibility. I am in the latter, and just heard this excellent podcast discussing the academic and social impacts of pretending that men are machines that can be manipulated.

[3] Gasoline taxes are often justified as the response to a "negative externality" of pollution from cars, but the money from those taxes rarely (never?) goes to people who suffer from pollution. So is it really a tax on an externality or is it just a way of raising money?

[4] This is also the main point of prospect theory (Kahnemann review to come), where people put far more weight on a loss of $10 than on a gain of $10.

[5] That's why I say that the benefit of higher prices is reliable water or that farmers who participate in all-in-auctions can only gain from their water rights, not lose. I haven't overturned the status quo, yet, but I'm making progress :)