The news of the death of Ronald Coase sent me to his key papers, of course (all listed here), but also to a collection of essays I hadn’t read before, Essays on Economics and Economists. He makes some very interesting points about the role of economics in public policy, expanding on the question of how limited government intervention to correct market failures ought to be. Essentially, Coase argued that this is an empirical question. The existence of significant transactions costs means market arrangements can lead to inefficient outcomes, but government interventions are often flawed too. He approves of George Stigler’s work on the political ‘market’, with the firms affected by regulations likely to be the highest ‘bidders’, therefore able to shape regulation in their own interests. (If this seems cynical, think about banking regulation.)

Essays on Economics and Economists

In ‘Economists and Public Policy’, Coase turns to economists: “The problem is that economists seem willing to give advice on questions about which we know very little and on which our judgements are likely to be fallible, while what we have to say that is important and true is quite simple – so simple that little or no economics is required to understand it.” However, the simple truths are highly unwelcome. The essay goes on to discuss the political and popular resistance to economic arguments against, say, price controls after a bad harvest. “History indicates that these are simple truths which people find it easy to reject or ignore.” The essay is not entirely pessimistic – Coase believed that when the counter-productive effects of policies became too large, the policies would be reversed.

Coase is also trenchant on the character of economics. It is clear he disapproved of the ‘imperialism’ of economics, the Chicago-originated move into subject areas such as family life, previously the terrain of other social sciences. He cannot have been a fan of Freakonomics. However, he is pretty scathing, in the essay ‘Economics and Contiguous Disciplines’, about the failure of other social sciences to raise their game in their techniques and attention to evidence – he sees as particular strengths of economics the recognition of general equilibrium effects (everything is connected) and the relevance of economic incentives in other decisions, too often simply denied by other social scientists. Finally, the essay argues that economists need to study contiguous social sciences, “because it is necessary if they are to understand the working of the economic system itself.” He concluded: “We may expect the scope of economics to be permanently enlarged to include studies in other social sciences. But the purpose will be to enable us to understand better the working of the economic system.” His own work, of course, laid the foundations for institutional economics.

There are a couple of interesting essays on Marshall in the book too. Coase likes Marshall’s insistence on the need for both theory and evidence, deductive and inductive reasoning in economics. He obviously found modern economics far too much on the theoretical, deductive (or reductive) side.

I also happened to read this weekend Jamie Whyte’s pamphlet for the Institute of Economic Affairs, Quack Policy: Abusing Science in the Cause of Paternalism. There was a brief to-do online about this, with critics noting that it was hardly surprising the free-market IEA had published a pamphlet arguing against government interventions, and how could anyone argue against evidence-based policy? Whyte wrote some years ago an excellent and funny book, Bad Thoughts: A Guide to Clear Thinking, about the absence of logic and sense in much public debate. The pamphlet looks at several different areas of policy and asks about the standards of evidence underpinning them. It’s obvious where it’s coming from, but it makes a number of sound points.

QUACK SCIENCE & PUBLIC POLICY

The first two examples are health-related: proposals for minimum alcohol pricing and the ban on ‘passive’ smoking. Any health-related subjects are awash with political correctness and the abuse of statistics; medical people are strongly resistant to the relevance of any economic considerations at all, which one might take more seriously if they were more statistically-adept. In these two chapters Whyte argues that:

(a) a cost-benefit analysis must take account of the costs of outlawing something, and this is rarely done in health matters – NICE guidelines seemingly explicitly rule out consumer welfare considerations (p35);

(b) the incremental risks of the target behaviour are such that these costs can be very small (although he seems to me to underestimate them in the alcohol example); and

(c) the policies ought not to be economically perverse.

Actually, I think he misses the strongest case against a minimum alcohol price, which is that it increases the profits of big retailers by enforcing the kind of retail price maintenance long outlawed by competition authorities. If the government decides alcohol should be dearer, it should raise the rate of duty. This would not, however, be so pleasing to the sellers of alcohol as taxpayers would then benefit, not retailers – see Coase’s essay, above.

Whyte has a chapter on global warming that goes through the debate about how much we should weigh future against current welfare, including the likelihood that future generations will be richer, and that technological progress will occur, in trying to calculate the costs and benefits of action against global warming. (I think he’s sceptical about whether it’s occurring but that isn’t the main point here.) This is the same debate that occurred among economists like Partha Dasgupta, William Nordhaus and Nick Stern when the Stern Review was published. It’s a perfectly respectable argument to set out. Then he turns to what he describes as ‘happiness engineering’, where my sympathies are with him entirely. Government attempts to make people ‘happier’ are either obvious – ensure there are plenty of jobs, keep inflation modest – or intrusively paternalistic.

There’s a final chapter, which is too cursory, about the problem of using ‘scientific authority’ as the basis for public policy. “Experts are natural supporters of policies that draw on their expertise and thus naturally inclined to overstate the credibility and importance of their ideas,” he writes. Of course. But is not using expertise really better? Of course we would like policy to be genuinely evidence-based, and it is difficult to assess the epistemological status of proclaimed expertise. However, Coase’s pragmatism is more attractive than Whyte’s all-out scepticism, for all that Quack Policy flags up some good reasons for concern about how ‘evidence’ is used in actual policy-making.

This was a theme of another book I read recently, Government Failure versus Market Failure by Clifford Winston, which in this post I compared and contrasted with Hirschman’s writing on The Rhetoric of Reaction. How you devise and implement welfare-enhancing, effective government policies in complex societies with a wide range of interests bearing on politicians – it’s what we’re all about as economists (and other social scientists).

A new book reviewed by Peter Wilby in The Guardian this weekend looks highly relevant too: The Blunders of Our Governments by Anthony King and Ivor Crewe.

The Blunders of Our Governments

I’m sceptical about a lot of government interventions and also sceptical about leaving everything to the mythical market; it seems the only evidence-based possibility. We should demonstrate due humility by avoiding overclaiming either way.