What can economics contribute to public policy?

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I’ve been thinking about what would be covered in my ideal course on economics for public policy. What would really shape economics students into well-informed citizens about government decisions, and useful recruits into the public policy world, while satisfying their evident appetite to engage with the big issues of the day? Behind this lies the broader question of what economic analysis can contribute to public policy, something I’ve been mulling over for a bit via some lectures (the Tanner lectures in Oxford in 2012 and the Pro Bono Economics lecture in 2013).

If you look around at the public policy economics courses and reading lists available online, universities typically either approach the subject from the perspective of the theory of public goods, public choice theory and transactions cost/institutional economics. Or they take a topics approach so cover, say, education fees and vouchers, valuing the environment, competition policy etc. This is necessarily context-specific, so the readings are about individual countries. Finally, there’s the traditional public finance focus, tax, spending, the welfare state. My undergraduate option a million years ago was in this tradition – our textbook was Musgrave and Musgrave’s Public Finance in Theory and Practice. It’s rather interesting to see that there are completely distinct approaches.

The most-used texts (in the UK) seem to be:

The Economics of the Welfare State - Nicholas Barr

The Economics of the Public Sector – Joseph Stiglitz

The Economics of Social Problems – Julian LeGrand, Carol Propper and Sarah Smith

I have on my shelf Lee Friedman’s The Microeconomics of Public Policy Analysis, which I like, although it’s US-centric. Jonathan Gruber’s Public Finance & Public Policy has been recommended to me, but it’s a silly price.

There are obviously some classics too, at least for the first approach, such as Tullock’s The Calculus of Consent, Olson’s Logic of Collective Action, Ostrom’s Governing the Commons, Schelling’s Micromotives and Macrobehaviour (one of my all-time favourite books).

My thoughts are still unformed, so I’d be interested to know what other people would recommend.

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The hollow economy

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Looking for the next small (pre-party) book, I picked up G.D.H. Cole’s little 1938 Pelican Persons and Periods (I have a 1945 edition). It’s a collection of essays by the economist and leading Fabian intellectual on Daniel Defoe (somebody who would now be considered a leading economic journalist, a Martin Wolf of his day, as well as a famous novelist) and his times.

There are some amusing parallels with modern debates about the state of the nation. In Defoe’s writings, and evidently in 1938 too, people bemoaned the dominance of London. “In 18th century England all roads, by land or by water, seemed to lead to London. …. London was, in Defoe’s day, the only town in England that could be reckoned large. … No wonder London seemed to Defoe and his contemporaries a prodigious place. overshadowing the whole country with the multitude and wealth of its consuming public.”

The following chapter is about ‘Roads, rivers and canals.’ In the 18th century, as now, travellers constantly complained about the state of the transport network, although the roads were being improved. “The trouble was not that the roads were getting worse but that they were being called upon to carry a quite unprecedentedly heavy volume of traffic.” Cole argues that the 19th century development of the canals, launched by the Duke of Bridgewater, and then railways, changed the location of people and activity: “In effect, with the advent of the canals, England ceased to be hollow.” The era of the great manufacturing cities of the north and Midlands followed.

Lessons here for our current ‘hollow’ economy? For a rebalanced economy, where the new infrastructure goes will be important.

Mediums, messages and impostures

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It was Friday evening and I was on my way out to a party (a rarity in my quiet life), with a small clutch bag instead of my usual giant work bag. So my book to read on the Tube had to be correspondingly small. I grabbed the smallest visible on my shelf at eye level. It was McCluhan by Jonathan Miller, a 1971 book in the Fontana Modern Masters series edited by Frank Kermode. I saw that I’d bought it second hand in Edinburgh in 1987. Fine for a short journey.

To my shame (or so I thought), I’ve never read anything by McLuhan. It has always looked almost unreadable, but surely a well-educated person should have dipped into his work? Nor for that matter had I any memory of reading this little book by Jonathan Miller, picked up during the Festival one year. By the time I’d whipped through it yesterday evening, I was pleased not to have bothered. For Miller’s brief introduction ends:

“For the purpose of discussion I have deliberately adopted a hostile tone, partly I must admit because I am in almost complete disagreement with the main body of McLuhan’s ideas.”

The book traces McLuhan’s ideas – to the extent Miller acknowledges them to be coherent – to Catholic theology and a specific 1930s tradition in criticism. Miller acknowledges that he was excited to first read McLuhan’s The Gutenberg Galaxy, and that as a result he did start to notice print – and later the telephone and TV – as a thing in itself, to understand that the medium puts some constraints on the delivery of the message. But he concludes:

“Not that I remember a single observation that I now hold to be true, nor indeed a single theory that even begins to hold water. … Perhaps McLuhan has accomplished the greatest paradox of all, creating the possibility of truth by shocking us all with a gigantic system of lies.”

What editorial mischief led Frank Kermode to decide that Miller was the right many to write a short overview of McLuhan’s work? It reminded my of a Julie Burchill review of a Jeanette Winterson novel, some years ago; the sub had given it the headline: “My enemy has written a bad book.”

On reflection, maybe I need to read something by McLuhan after all. He sounds, from this short book, like the original intellectual imposter (cf Intellectual Impostures). Yet He made Jonathan Miller so very, very angry that one senses behind the dismissive conclusions a fear about what has been unleashed by McLuhan’s unmooring of meaning by this kind of cultural criticism.

Unicorns, plumbing and organisations

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Some things that are on the surface very dull turn out to be the most important and interesting. I’m fascinated by the plumbing and wiring aspects of the economy, rather than the abstract theory. Macroeconomics is about dragons and unicorns, very glamorous. But I’m more interested in statistics – what are we measuring, and what are we causing to happen, when we look at GDP growth, or inflation? And in the literal wiring – where is the internet and who owns the cables? And in organisations too – when we say ‘the banks’ or ‘firms’, who do we mean and why do they do what they do?

So after reading the excellent The Metropolitan Revolution by Bruce Katz and Jennifer Bradley, I looked up an organisational technique they mention called appreciative inquiry. It notes that efforts to change something or bring something about, the initial question is often: “what’s the problem we’re trying to solve?” What if you start by asking: “what can we do and what do we want?”

Sometimes problems need solving, but I like the way appreciative inquiry seems to build in the kind of relationship and coalition building actually needed to achieve anything in a complicated organisational context. It looks worth finding out more about it, and thinking about this approach (alongside the excellent The Org by Ray Fisman and Tim Sullivan, which is a brilliant overview of the role of asymmetric information, principal-agent problems and other economic tools play in understanding organisations). Wikipedia lists some journal articles – I’d be very grateful if anyone knows of a beginner’s guide to appreciative inquiry.

Globalisation and legitimacy

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It has always been a bit depressing reading about trade negotiations, which have long been a battleground between competing interests – nation against nation, industry lobbies against the general interest, developing against rich world. Mutual gains from trade, anyone? The World Trade Organisation has been a particular focus of suspicion on the part of people who are anti-capitalism or anti-corporate. Most economists note that no country has ever developed out of poverty without opening up to trade, although of course views differ about how to do so, with some liking the idea of protecting certain industries.

I think these arguments are almost always wrong – the extremely rare potential exceptions involve very large economies of scale where the global market can only support a very few  competing firms (aerospace?) and culturally important goods or services where replacement of domestic by global goods could have adverse non-economic externalities (French movies?).

There are claims that the successful Asian economies only developed because they protected their new industries but this misreads the character of state intervention. Joe Studwell’s excellent book How Asia Works shows that the success stories in the region provided production subsidies and infrastructure but made very sure domestic ‘champions’ were exposed to the full blast of international competition.

Still, the economic arguments don’t explain why it’s so hard to get a trade deal. In theory the WTO is a better forum than its predecessor, the GATT talks, because it is rules-based and puts every member on an equal footing. Yet there have always been suspicions about its legitimacy as a place where all countries get a fair deal. It is one element of the wider shortcomings of global economic governance. Jim O’Neill’s new book in the Perspectives series, The BRIC Road to Growth, calls for urgent reforms of the governance institutions. The ones we have can’t respond quickly to events, and don’t reflect the shift of economic gravity that has already occurred and will continue. These are linked: effectiveness is rooted in legitimacy. Whatever the outcome of the talks in Bali, the wider global governance problem just won’t go away.