The dog ate my homework

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The new book by Richard Layard and co-author David Clark arrived in the post yesterday, [amazon_link id=”1846146054″ target=”_blank” ]Thrive: The Power of Evidence Based Psychological Therapies[/amazon_link]. It continues Professor Layard’s campaign for greater provision of mental health treatment – David Clark is a Professor of Psychology. The first half of the book covers the human and economic cost of mental illness, the second half is about which therapies are effective. I think I’m persuaded without reading it, but will do so to see whether it addresses the question of why governments so often treat mental health services as a low priority and what might change that.

A confession, though: the dog caught this one coming through the letter box and it has teeth marks right through it. I expect there was a lot of barking too – my apologies to the postman.

The dog ate my homework

Cautious giant leaps

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The argument of [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often and How It Can Do Better[/amazon_link] by Peter Schuck is set out wonderfully succinctly in the title, and the book does an excellent job of telling half of the story about the role of governments and markets in delivering economic outcomes.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

The chapters cover a range of reasons for ‘government failure’. To list them, they are: incentives not aligned with the policy’s aims; non-rational choice; lack of information; lack of flexibility in delivering outcomes when circumstances change or things don’t work out; lack of government credibility so essential co-operation is not forthcoming; mismanagement including fraud and abuse. Schuck argues that these barriers to policy success have a “deep, structural, endemic nature.”

The book has many examples of policy failure – it’s an American and to be honest far less amusing version of [amazon_link id=”1780744056″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe. It’s hard to argue with the examples. This book cites also Clifford Winston’s [amazon_link id=”B00D0DIABU” target=”_blank” ]Government Failure versus Market Failure[/amazon_link], which has many more. indeed, there have been loads of policy failures, in all kinds of places and contexts.

An aspect of the argument here that I strongly agree with is the failure of policy analysts to build themselves into their ‘impact analysis’ or whatever framework they use for assessing the likely success of the initiative. In other words, the incentives the policy will create for the people affected to change their behaviour are hardly ever incorporated. Economists often think of themselves as being ‘outside’ the society, in a benign deus ex machina role.Yet all policies alter people’s behaviour and have many side-effects.

Schuck’s book does end with a chapter on policy successes – in fact it finds nine, including Airline Deregulation in 1978, the 1975 Earned Income Tax Credit, the food stamp program, the interstate highway system and the 1965 Voting Rights Act. However, it concludes: “It is hard to know for sure why these (and other) policies have succeeded when so many others have failed. Low costs, simple implementation, strong public good characteristics, and replacing far worse policies are all given as potential explanations. However, Schuck also concludes: “To succeed, the programs needed to engage the actors’ self-interest; they did not need to create new values or transform behaviors.” But he believes that the ‘low hanging fruit’ has gone.

Hence his main recommendation – be cautious. “Realistic meliorism” – make things a little bit better but keep your ambitions modest. The policy ‘doing better’ bit of the book’s title is doing far less.

I’m all for realism. There’s a missing half of the story here, though, which is how government actions unavoidably shape markets, so that to argue ‘don’t do much and just leave it to the market’ is in itself a policy. Collective choices are inevitable and government is how we make those choices. [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often[/amazon_link] should be read alongside Colander and Kuper’s  recent book [amazon_link id=”0691152098″ target=”_blank” ]Complexity and the Art of Public Policy,[/amazon_link] which is about policy as determining the structure of a complex, and uncontrollable (in the old-fashioned policy sense) economy and society.

That approach is hard to get right too, but as it’s impossible not to have a structure within which markets operate, because here we are at a point in history where we have actually existing markets, it surely makes sense for governments to think about that structure. And while caution, in the face of the record of policies ranging from the inept to the horribly counter-productive, is surely sensible, thinking about structure does not automatically point to incrementalism.  Sometimes a cautious giant leap might be just the thing.

Foucault – heavy going and light relief

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[amazon_link id=”140398655X” target=”_blank” ]The Birth of Biopolitics[/amazon_link] by Michel Foucault has been rather heavy going. I can get through two or three of the essays each time. It’s obviously going to be worth going on, though. The early section on Germany is intriguing. The book argues that its post-war reconstruction in the absence of a functioning state made economic order – on a “neoliberal” model – absolutely fundamental to what Foucault calls its “governmentality” or how people are governed. Often it’s said that the pre-war hyperinflation accounts for Germany’s particular economic obsessions, but there is surely something in the post-war disorder too that explains the particularities of the German economic model – and its inflexibility, if it’s indeed so existential for the state.

[amazon_image id=”140398655X” link=”true” target=”_blank” size=”medium” ]The Birth of Biopolitics: Lectures at the Collège de France, 1978-1979: Lectures at the College De France, 1978-1979 (Michel Foucault: Lectures at the Collège de France)[/amazon_image]

Anyway, all the good stuff on economics itself is yet to come. Meanwhile, I was tickled by this picture which appeared on Twitter of the use of Foucault to advertise polo neck jumpers.

Stylish?

The case for militantly moderate incrementalism

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I’ve started on [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often (and how it can do better)[/amazon_link] by Peter Schuck.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

He argues for ‘melioristic realism’ – modest practical improvements in outcomes – which are nevertheless ‘militantly moderate’ given the usual assumption in much policy debate that change must be sweeping and radical. “Policy makers have at best severely limited knowledge of the opaque, complex, social world that they seek to change, and meager tools for changing it.” There is a ‘remorseless’ law of unintended consequences. Incrementalism is therefore the only wise and honourable approach, Schuck argues. Indeed, it’s the only approach that increasingly cynical and distrustful voters will now accept, he thinks.

The book describes what he calls ‘moral hazard’, which is far wider than the usual definition of risk-taking behaviour in financial or insurance markets induced by the fact that somebody else bears the cost. Schuck extends it to all kinds of behaviour whose cost is partly borne by somebody else (i.e. taxpayers) – hence also welfare “dependency”, or crop subsidies, or corporate welfare dependency in sectors such as aerospace and defence sector.

I’ll review it properly when I’ve finished. It’s a US-focused book – here is the Boston Globe and an article by Peter Schuck on the Huffington Post site.

Taking information seriously in economic policy

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Earlier this month I wrote about Joe Stiglitz’s Jean-Jacques Laffont speech at the Tiger Forum, which was based on his new book with Bruce Greenwald, [amazon_link id=”0231152140″ target=”_blank” ]Creating A Learning Society: a new approach to growth, development and social progress[/amazon_link].

[amazon_image id=”0231152140″ link=”true” target=”_blank” size=”medium” ]Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Kenneth Arrow Lecture Series) (Kenneth J. Arrow Lecture Series)[/amazon_image]

Stiglitz won his Nobel Prize for his massively important work on asymmetric and missing information – how this shapes institutional structures, including markets. His Nobel Lecture is well worth the read.

This book builds on the information-based approach, and links it to other work on endogenous growth theory, which sees the process of growth as a cumulative process in which knowledge builds on earlier knowledge. This makes ideas (including those formalized as ‘intellectual property’) and people (to whom ideas are attached) the key to economic development. Stiglitz and Greenwald introduce industrial policy to endogenous growth models. They cover, among other areas, trade policy, intellectual property regimes, industrial strategy, and competition policy. It’s a somewhat technical book – there are quite a few equations and models at I would say advanced undergraduate level –  although one could skip those bits and still follow the argument.

I agree with the authors’ motivation for this book. They write: “Everyone today speaks of the innovation economy or the knowledge economy, and there have been important advances in the analysis of, say, patents and patent races, and network externalities, to take but two examples. But the full implications …. for the neoclassical model have still not been taken on board. And the implications for policy have been even less absorbed into mainstream thinking.” They go on to point out that it is 40 years since Stiglitz’s work on information questioned fundamentally standard economics results such as the existence of equilibrium, or the uniqueness of equlibrium, but little has changed in the standard approach. I doubt that any ‘mainstream’ economist would challenge the importance of the results on asymmetric information, non-linearities in growth and so on, so it is a puzzle that so few have taken the implications seriously. No doubt the answer lies in the sociology of the profession and academic incentive structures. My sense is that this is now changing.

This book takes the implications of information externalities forward into specific policy areas. It argues that not only can we not presume that a market economy is efficient, but also that industrial and trade policies can demonstrably increase social welfare. “Learning externalities are pervasive and it is a mistake not to take them into account.”

While not agreeing with every specific policy prescription they make, information, knowledge, learning – whatever you want to call it – definitely does change the prism for assessing structural economic policies. Maybe Prof Stiglitz will next write the popular book that makes this shift in perspective accessible to the policy world.

Prof Stiglitz and me at the TSE TIGER Forum