Political economy

I have a new essay on economic policy and political economy that I want to quote in a second. The piece is an attempt to write something in response to several questions that keep coming up for me. And those questions began for me, in part, from a few different sources that didn’t make it into the piece. So let me start with those.

Here’s Joseph Stiglitz in an essay for the volume “New Perspectives on Regulation” published in 2009:

Previously the presumption that markets were efficient was widespread, with the corollary that only under exceptional circumstances (such as monopoly and massive pollution) were there failures that warranted intervention. Now, among mainstream economists, there is no presumption that markets are efficient.

This has certainly been my experience talking to lots of mainstream economists over the years. There is absolutely no presumption that markets are perfectly competitive when left to their own devices.

Here is a 2019 piece from political scientist Henry Farrell on the excellent blog Crooked Timber, writing about left-leaning neoliberalism:

Two questions follow (for me, anyway). One is for the neoliberal leftists, as a part of a broader left coalition. When and to what extent will their preferred approach to delivering policy clash with, or undermine, the necessary conditions for achieving collective action and making the policy sustainable? If they are pushing for market means towards social democratic ends, that is fine and good – markets can indeed sometimes be the best way to deliver those ends, and few of us would want to be completely without them (including Marxists like Sam Gindin. But one key lesson of the last couple of decades is that market provision of benefits makes it harder to build and sustain coalitions – private gain and public solidarity are at best uncomfortable bedfellows. Figuring out the political tradeoffs – when market means are worthwhile even when they make collective action tougher, or where non-market means might be better for sustainability reasons, even when markets are more efficient – is going to be hard, and we need to start building shared language and concepts to make it easier to resolve the inevitable disputes.

It is not a coincidence that Farrell was also the person who sent me back to Mancur Olson.

Then there’s this line from Brad Delong in Concrete Economics: He describes the New Deal, admiringly, as “pragmatic experimentalism.”

Last but not least is the book Democracy for Realists which argues, more or less, that democracy is under-theorized.

Two questions from all the scattered links above:

1. What does good policymaking look like when you grant that market failures are ubiquitous?
2. What does good policymaking look like once you take political economy seriously?

That’s what my new essay for the Stigler Center/Promarket is about. The title is “Biden’s Second-Best Economic Agenda.” Here are a couple bits of it:

In the wake of the Trump presidency and the pandemic, the Biden administration is keenly aware that policies that seem optimal when considered on their own might in practice not be optimal at all. Concerns about efficiency have taken a backseat while concerns over political economy have grown…

If the case for some of these policies is not efficiency or innovation but political economy, it’s reasonable to ask for a more-detailed justification on those grounds. If we’re going to rely less on economic theory, let’s at least have more political science in its place…

Without a better theory of political economy concerns, the theory of the second-best can become a shield for defending almost any policy…

Still, the fact remains that the Biden administration was able to accomplish through industrial policy what the Obama administration couldn’t get done with a carbon price… Last year, the US finally passed a climate bill on the scale of the climate challenge. The second-best approach sure looks better than doing nothing.