Wednesday, May 30, 2007

Revising homo economicus from within

If you believe that the homo economicus caricature is just too obscure and dismal, you are probably right: people cooperate much more than what a simple PD game predicts...  But before you run away searching for an "heterodox answer", you should probably read two nice papers by Samuel Bowles and Herbert Gintis on the compelling evidence for "other-regarding, process-regarding, and endogenous preferences" sorts of behavior.
Homo Economicus and Zoon Politikon: Behavioral Game Theory and Political Behavior
Oxford Handbook of Contextual Political Analysis, 2006
The Evolutionary Basis of Collective Action
Oxford Handbook of Political Economy2006
By the way, this is Gintis on the false promise of post-autistic / heterodox economics:
"In June 2000, several Parisian economics students circulated a petition calling for the reform of their economics curriculum. Their complaint was the inability of the neoclassical economics they were studying to satisfy their need for a deep understanding of the operation of real-life economies. They called for a reform of the university curriculum that would tolerate analytical diversity and foster critical dialogue across contrasting approaches to economics. (...) This reform movement has grown in Europe, under the rubric of "post-autistic economics."

(...) the post-autistic economics critique is incapable of leading to positive change in how economics is done and taught. The central critique is that neoclassical economics does not describe real-world economies, and must be replaced by or supplemented with other approaches. This is just wrong. While the elementary courses are far from the real world, advanced courses in such areas as labor, international finance, macroeconomic policy, economic development, law and economics, environmental economics, and so on, are quite real-world. If an undergraduate students left with a degree in economics that allowed them to understand The Economist and the Journal of Economic Perspectives, the level of economic awareness in the world would be considerably higher. If the undergraduate curriculum does not bring students to this level, the curriculum is, to my mind, faulty. Perhaps less stress on arcane theories that are relevant only to professional economists should be replaced by a more historical, institutional, and hands-on approach to microeconomic and macroeconomic issues. But, this is a critique of pedagogy, not of economic theory.

Neoclassical theory has displaced other approaches around the world because it is currently the only promising approach to economics. Marxism, Keynesianism, Institutionalism, Syndicalism, Austrian economics, and the like developed strongly for a while and then foundered. They certainly do not present analytically interesting alternatives to neoclassical economics. It is not an accident that all over the world, including India, Japan, China, and many countries in Latin America, the reform of higher education has involved the introduction of modern neoclassical economic theory. With all its flaws, it is the only credible starting point for serious economic analysis.

Neoclassical economics has profound problems, but they can only be addressed from within, not by embracing any "heterodox" alternative that I know of. The pleas for democracy, toleration, and pluralism by the "heterodox" is simply an admission that they can't win the intellectual battle by having better theories, only by having more troups. "

Tuesday, May 29, 2007

Direct democray and conservative policy

Some uncommon(?) wisdom from John Matsusaka (USC), author of For the Many or the Few: The Initiative, Public Policy, and American Democracy (U. Chicago Press, 2004). 

Direct Democracy and Social Issues
John Matsusaka
Entrydate:  2007-05-29 18:49:17
Keywords:   Direct democracy, initiative, social issues, representation

Abstract:   This paper explores the connection between the initiative process--the most potent form of direct democracy--and social issues by examining laws on seven social issues in all 50 American states. Initiative states are 18 percent more likely than noninitiative states to choose a conservative than a liberal policy on the median issue after controlling for public opinion, demographic, and regional variables. The conservative shift is majoritarian: initiative states are 8 percent more likely than noninitiative states to choose laws that reflect the majority's preference. The initiative effect does not appear to depend on the institutional features that scholars and reformers often discuss.

Direct Democracy and Public Employees
John Matsusaka
Entrydate: 2007-05-29 18:51:41
Keywords:   Direct democracy, public employees, initiative, patronage, interest groups

Abstract:   In the public sector, employment may be inefficiently high because of patronage, and wages may be inefficiently high because of the strength of public employee interest groups. This paper explores whether the initiative process, a direct democracy institution of growing importance, can control these political economy problems, as proponents and some research suggests. Based on a sample of 500+ cities in 2000, I find that when public employees are allowed to bargain collectively, driving up wages, the initiative appears to cut wages by about 5 percent but has no measurable effect on employment. When public employees are not allowed to bargain collectively and patronage is a problem, initiatives appear to cut employment but not wages.

A brief summary of Matsusaka's work is available here:  "Direct Democracy Works" Journal of Economic Perspectives, Spring 2005. [PDF]

Sunday, May 20, 2007

World income distribution, poverty, and inequality

La semana pasada discutimos, en mi clase de economía política, temas de pobreza y desigualdad a nivel global y cross-country.  Estos son algunos de los  materiales
Syllabus y powerpoints de un curso corto sobre "Inequality, Poverty and Income Distribution" impartido por Frank Cowell, director of the Distributional Analysis Research Programme at the London School of Economics, and editor of Economica.
Esther Duflo, del Poverty Action Lab de MIT, quiere salvar al mundo con ayuda del método científico y los diseños experimentales.  Veanla responder la pregunta: Fighting Poverty: What Works?  (35min video). No dejen de ver los ambiciosos projectos del centro.
Conozcan a Jeffrey D. Sachs, Director of The Earth Institute, Professor of Sustainable Development, Health Policy and Management at Columbia University, and fomer Director of the UN Millennium Project. He is author of The End of Poverty: Economic Possibilities for Our Time.

Saturday, May 12, 2007

Special Interests and The Myth of the Rational Voter

This is Bryan Caplan on his latest book, The Myth of the Rational Voter, on The Wall Street Journal:

Special-Interest Secret

May 12, 2007; Page A11
Mr. Caplan, an associate professor of economics at George Mason University, is the author of "The Myth of the Rational Voter: Why Democracies Choose Bad Policies" (Princeton University Press, 2007).

Behind every policy that does more harm than good, there's a special interest that favors it anyway. The steel tariff was bad for consumers, steel-using industries and foreign steel producers, but the steel lobby still pushed for it. Farm subsidies are bad for both taxpayers and unsubsidized farmers, but in 2002 the American farm lobby got a 70% increase in government support. The minimum wage is bad for consumers, employers and low-skill workers who get priced out of their jobs, but unions are hard at work to raise it again.

When special interests talk, politicians listen and the rest of us suffer. But why do politicians listen? Social scientists' favorite explanation is that special interests pay close attention to their pet issues and the rest of us do not. So when politicians decide where to stand, the safer path is to satisfy knowledgeable insiders at the expense of the oblivious public.

This explanation is appealing, but it neglects one glaring fact. "Special-interest" legislation is popular.

Keeping foreign products out is popular. Since 1976, the Worldviews survey has always found that Americans who "sympathize more with those who want to eliminate tariffs" are seriously outnumbered by "those who think such tariffs are necessary." Handouts for farmers are popular. A 2004 PIPA-Knowledge Networks Poll found that 58% agree that "government needs to subsidize farming to make sure there will always be a good supply of food." In 2006, the Pew Research Center found that over 80% of Americans want to raise the minimum wage. It is safe to assume, then, that few people want to abolish it. These results are not isolated. It is hard to find any "special interest" policies that most Americans oppose.

Clearly, there is something very wrong with the view that the steel industry, farm lobby and labor unions thwart the will of the majority. The public does not pay close attention to politics, but that hardly seems to be the problem. The policies that prevail are basically the policies that the public approves.

No wonder special interests so often get their way. They do not have to force their policies down the public's throat, or sneak them through Congress unnoticed. To succeed, special interests only need to persuade politicians to swim with the current of public opinion.

Why would the majority favor policies that hurt the majority? There is a good reason. The majority favors these policies because the average person underestimates the social benefits of the free market, especially for international and labor markets. In a phrase, the public suffers from anti-market bias.

Economists have spent centuries explaining how markets channel greedy intentions into socially desirable results; how trade is mutually beneficial both within and between countries; how using price controls to redistribute income inflicts a lot of collateral damage. These are the lessons of every economics textbook. Contrary to the stereotype that they can't agree, economists across the political spectrum, from Paul Krugman to Greg Mankiw, see eye to eye on these basic lessons.

Unfortunately, most people resist even the most basic lessons of economics. As every introductory teacher of the subject knows, students are not blank slates. On the first day of class, they arrive with strong -- and usually misguided -- beliefs about economics. Convincing students to rethink their anti-market views is no easy task.

The principles of economics are intellectually compelling; but emotionally, they fall flat. It feels better to believe that greedy intentions imply bad consequences, that foreigners destroy our prosperity and that price controls are a harmless way to transfer income. Given these economic prejudices, we should expect policies like steel tariffs, farm subsidies and the minimum wage to be popular.

None of this means that special interests don't matter, but it does put their activities in a new light. Special interests do not have to sneak behind the majority's back; they just need to ask for the right favor in the right way. The steel lobby could have demanded a big handout from the federal government. But that would have struck many voters as welfare for the rich; steel-makers can't expect the same treatment as farmers, can they? Instead, the steel lobby took the crowd-pleasing route of blaming foreigners and asking for tariffs. Tariffs were less direct than a naked subsidy from Washington, but they enriched the steel industry without alienating the majority.

If special-interest legislation were fundamentally unpopular, public relations campaigns would be futile. They would serve only to warn taxpayers about plans to pick their pockets. Since the public shares interest groups' critique of the free market, however, there is room for persuasion. Left to its own devices, the public is unlikely to spontaneously fret about the plight of the steel industry. But a good public relations campaign can -- and often does -- change the public's mind. Once the public actively supports an interest group, even politicians who would prefer to leave the market alone find it awkward to block government intervention.

In many cases, though, a public relations campaign is overkill. Special interests can make money by maneuvering around the indifference of the majority. Even though most people are protectionists, for example, they are fuzzy about specifics. Which industries need protection? How much? Should we use tariffs, quotas or what? To most citizens, these are mere details; within broad limits, they will accept whatever happens. As far as special interests are concerned, however, these details mean the difference between feast and famine. When it is time to determine details, special interests have a lot of influence -- in large part because no one else cares enough to quibble.

In a monarchy, no one likes to blame the king for bad decisions. So instead of blaming the king himself, critics point their fingers at his wicked, incompetent and corrupt advisers. While this is a good way to keep your head, it is hard to take seriously. Kings often make bad decisions; and in any case, if his advisers are hurting the country, isn't it the king's fault for listening to them?

In a democracy, similarly, no one likes to blame the majority for bad decisions. So instead of blaming the majority, critics point their fingers at special interests. But this too is hard to take seriously. The majority often makes bad decisions; and in any case, if special interests are hurting the country, isn't it the majority's fault for listening to them?

We often ponder special-interest politics in order to solve a mystery: "Why aren't policies better?" Realizing how many bad policies are here by popular demand turns this question upside down. The real mystery is not why policies aren't better. The real mystery of politics is why policies aren't a lot worse.

Tuesday, May 08, 2007

Unions: heroes or a XXth century bubble?

An Alternative Theory of Unions
by Paul Graham

"People who worry about the increasing gap between rich and poor generally look back on the mid twentieth century as a golden age. In those days we had a large number of high-paying union manufacturing jobs that boosted the median income.

...In a rapidly growing market, you don't worry too much about efficiency. It's more important to grow fast. If there's some mundane problem getting in your way, and there's a simple solution that's somewhat expensive, just take it and get on with more important things.

...Difficult though it may be to imagine now, manufacturing was a growth industry in the mid twentieth century. This was an era when small firms making everything from cars to candy were getting consolidated into a new kind of corporation with national reach and huge economies of scale. You had to grow fast or die. Workers were for these companies what servers are for an Internet startup. A reliable supply was more important than low cost.

If you looked in the head of a 1950s auto executive, the attitude must have been: sure, give 'em whatever they ask for, so long as the new model isn't delayed.

People who think the labor movement was the creation of heroic union organizers have a problem to explain: why are unions shrinking now? The best they can do is fall back on the default explanation of people living in fallen civilizations. Our ancestors were giants. The workers of the early twentieth century must have had a moral courage that's lacking today.

In fact there's a simpler explanation. The early twentieth century was just a fast-growing startup overpaying for infrastructure. And we in the present are not a fallen people, who have abandoned whatever mysterious high-minded principles produced the high-paying union job. We simply live in a time when the fast-growing companies overspend on different things. "

Saturday, May 05, 2007

Growth in Latin America: abandon all hope?

Crises and Growth: A Latin American Perspective
Sebastian Edwards
NBER Working Paper No. 13019 , April 2007

In this paper I use historical data to analyze the relationship between crises and growth in Latin America. I calculate by how much the region's GDP per capita has been reduced as a consequence of the recurrence of external crises. I also analyze the determinants of major balance of payments crises. The main conclusion is that it is unlikely that Latin America will, on average, experience a major improvement in long run growth in the future. It is possible that some countries will make progress in catching up with the advanced nations. This, however, will not be the norm; most Latin American countries are likely to fall further behind in relation to the Asian countries and other emerging nations. Not everything, however, is grim. My analysis also suggests that fewer Latin America countries will be subject to the type of catastrophic crises that affected the region in the past. Latin America's future will be one of 'No crises and modest growth.' "

Colonial institutions matter, Brazilian style

Rent Seeking and the Unveiling of ‘De Facto’ Institutions: Development and Colonial Heritage within Brazil
Joana Naritomi, Rodrigo R. Soares, Juliano J. Assunção
March 2007

This paper analyzes the roots and implications of variations in de facto institutions, within a
constant de jure institutional setting. We explore the role of rent-seeking episodes in colonial
Brazil as determinants of the quality of current local institutions, and argue that this variation
reveals a de facto dimension of institutional quality. We show that municipalities with origins
tracing back to the sugar-cane colonial cycle – characterized by a polarized and oligarchic
socioeconomic structure – display today more inequality in the distribution of land.
Municipalities with origins tracing back to the gold colonial cycle – characterized by an overbureaucratic
and heavily intervening presence of the Portuguese state – display today worse
governance practices and less access to justice. Using variables created from the rent-seeking
colonial episodes as instruments to current institutions, we show that local governance and
access to justice are significantly related to long-term development across Brazilian

Friday, May 04, 2007

Trade policy

Dani Rodrik and Tyler Cowen debate about trade policy desirability...
Should economists be debating politics?
Question for Dani Rodrik
The devil is in the details.  Here is Rodrik again:

"is there any chance that we could actually move in the direction that I would like to see (which is not necessarily and always the unconditional free trade direction) without doing more damage than good?

The fact that we do not live in autarky is prima facie evidence that we are not at a corner solution where the political-economy equilibrium is concerned. That means that even relatively small changes in institutional design—with corresponding changes in incentives for political agents—can have important implications for the outputs of the political game. We actually have some control over how the political game is to be played, and therefore over the amount of rent-seeking that will be generated in equilibrium.

Here is one example where this generally works to our advantage. To prevent congressional log-rolling in tariff setting, we allow Congress to delegate the details of trade policy negotiations to the President (in the form of trade negotiating authority), with Congress limited to an up-or-down vote on the entire package. It is generally agreed that this delivers better trade policy than in the absence of delegation.

And here is another example where it works to our disadvantage (and does so again by design). Anti-dumping proceedings are explicitly designed to favor import-competing firms and to provide protection where none is really needed on sound economic grounds. That is because the government is instructed to determine whether firms are “injured,” but not whether the imposition of duties would engender greater hurt elsewhere. Their outcomes would be significantly different if we allowed beneficiaries of trade (consumers and downstream firms) to have standing in these proceedings."

Finally, Rodrik gives me a nice quote of the day:

"Scratch any strongly-held view about free trade, and you will find (typically) unexamined political assumptions underneath."