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March 19, 2013

'Economists and the Theory of Politics'

Henry Farrell at Crooked Timber (I shortened the excerpt):
Economists and the theory of politics: It’s been interesting to follow the progress of Daron Acemoglu and James Robinson over the last few years ... to a set of vigorous arguments about the pernicious consequences of inequality. ... 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 ... that economic advice will ignore politics at its peril... 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. ... 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.
No disagreement here. The interaction between economic policy and the institutional/political environment it operates in doesn't get enough attention.

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