Taking information seriously in economic policy

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_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

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Economists and experts

There was another favourable review of Bill Easterly’s in The Observer yesterday – it doesn’t seem to be online, but here is the FT’s from a few weeks ago.

[amazon_image id=”0465031250″ link=”true” target=”_blank” size=”medium” ]The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor[/amazon_image]

I will read it soon. Meanwhile, it reminded me of a passage in Jeremy Adelman’s fabulous biography of Albert Hirschman, . Hirschman was working in Colombia in the early 1950s on a World Bank project, one of its first big country ‘surveys’, led by Lauchlin Currie.  Currie was allowed to turn a survey into a general development ‘master plan’, “Laying the tracks for a problem regarding the place of local knowledge in the business of economic missionizing.” Adelman writes that the plan was, “Coded in the scientific rhetoric of economic missionaries.” Hirschman clashed with Currie in terms of both personalities and ideas. The hallmark of Hirschman’s approach to economic development was exactly the importance of the specifics and local knowledge.

[amazon_image id=”0691163499″ link=”true” target=”_blank” size=”medium” ]Worldly Philosopher: The Odyssey of Albert O. Hirschman[/amazon_image]

I don’t know whether Easterly’s book cites Hirschman, or , who had somewhat similar views and insisted on the importance of historical specificities, but it sounds like their approaches are in sympathy.

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Reasons to be cheerful – even if American

A few days ago I reviewed Josef Joffe’s new book, . It’s partly a history of declinism in the US and partly an argument about the near future based on a compare and contrast between the US and (mainly) China. The new insight I took from it was about the way the threat of decline is used as a promise of political redemption in election campaigns.

In a mildly random way, I followed it up with Charles Kenny’s . I thoroughly enjoyed his previous book, , a cheerful survey of the many ways and many places things (life expectancy, incomes, access to technologies, women’s emancipation….) have improved in many countries in recent decades. There is a similar chapter in the new book, and it made for equally uplifting reading.

[amazon_image id=”0465064736″ link=”true” target=”_blank” size=”medium” ]Upside of Down[/amazon_image]

One of the most telling sections looks at the Democratic Republic of Congo. As Kenny reminds us, it was the setting for Conrad’s , having suffered the depredations of Belgian colonial rule (now there’s a real example of decline from imperial might!). DRC suffered through Mobutu’s rule and a decade-long civil war that killed millions of people. Rape was rife, HIV infection ran amok. This is not a good news story. Even in DRC, though, infant and maternal mortality rates of declined, as has the prevalence of HIV. Two-thirds of children have been vaccinated against diptheria, pertussis and tetanus, and about 40% with symptoms of malaria or pneumonia get medication. School enrollment has risen to match the 1980s level in Kuwait or Honduras. All this on public spending on health and education of $9 per person per year.

The rest of the book moves from the evidence of progress around the world to consider its implications, especially for “us” in the old west. Kenny wants to persuade others that the march of progress is a positive sum game, not least because of the self-fulfilling nature of global economic relations – the belief that flows of goods, capital and people are mutually beneficial is part of what makes them so. I for one agree that we need to think about the global economy in this dynamic, interlinked, increasing returns, non-linear manner, where the choice is broadly speaking between joint contraction and joint expansion over time. So it wasn’t hard for the book to persuade me that western economies will benefit from growth in emerging markets or BRICs, or of the “Folly of Fortress Thinking”, to cite one chapter title. No doubt other readers will be nore inclined to stick with the global race metaphor, where your country is a winner or loser.

I had the most doubts about the chapter on the environmental impact of global growth. The conclusion is upbeat: “With bold but plausible and affordable action, the planet can enjoy continued global growth, convergence in living standards, and two billion more people, all while preserving the global commons.” The chapter ticks off one by one potential environmental limits, and some are less worrying than others. The depletion of minerals for instance, or the scope for agricultural productivity gains and cutting meat consumption. But, thinking back to Mark Lynas’s , I think Kenny skates over the question of water too quickly, and is just a bit too cheerful about climate change risks. Of all the environmental questions economics needs to address, the interaction between energy and growth is surely the key one. One aspect of this chapter I did enjoy, though, was the mischievous characterisation of environmentalists: “Once you’ve convinced yourself that the world is on an inevitable course to disaster if … India builds another car factory, then the only logical thing to do … is to sit back, put your TOMS-shod feet up on the couch, and drink microbrewed herbal tea until civilisation collapses.” Fun – but maybe too dismissive of some genuine concern.

Will either this book or Joffe’s persuade Americans and other westerners not to be pessimistic? Doubtful. The emotional power of the narrative, and perhaps its political usefulness as Joffe argues, will sustain the declinists. I’m sure people will read  but often to argue with it – the narrative of Anglo-Saxon cheerfulness when the dynamism in the world has moved to Asia has an uphill struggle.

 

 

 

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Essays by the worldly philosopher

 edited by his prize-winning biographer Jeremy Adelman ( is a collection of essays well worth reading by anbody who, like me, was not very familiar with Hirschman’s work. The book is divided into three sections covering Hirschman’s work on development economics, essays on market societies, and essays on democracy including his thinking on political rhetoric.

[amazon_image id=”0691159904″ link=”true” target=”_blank” size=”medium” ]The Essential Hirschman[/amazon_image]

I particularly like the combination of economic analysis (rarely expressed mathematically, but nonetheless rigorous) with an awareness of the difficulties of implementation, of political constraints, and of the role of the emotions in people’s decisions. For example, the first essay, ‘Political Economics and Possibilism’, looks specifically at the role of optimism and political leadership in bringing about change, and the scope for the same economic policies to have vastly different outcomes depending on political characteristics of the society in which they are introduced. For example, trade-offs that are possible in a relatively homogeneous society may not be feasible in one divided on religious or ethnic grounds, of might even lead to civil war. As Adelman puts it in his excellent introduction, “It is rare to find a writer in our times so at ease with the modern tools of the social scientist and yet so concerned with the complexity of the human condition that he or she can bring to life the frictions and tensions that come from looking at our world at the junctions of political, economic and emotional life.”

Hirschman, it is evident from this book and Adelman’s superb biography, Worldly Philosopher, was increasingly out of tune with the economics of his times. The subject became increasingly abstract and generalised, and inclined to require mathematical rigour everywhere. Hirschman was focused on the specifics of each situation. In ‘Search for Paradigms’, he argues that the highly analytical, paradigm-seeking frame of mind led either to undue conservatism about the prospects for things to improve, or its opposite, a revolutionary bias. In the essay on possibilism, he wrote: “Most social scientists conceive it as their exclusive task to discover and stress regularities, stable relationships and uniform sequences. This is obviously an essential search, one in which no thinking person can refrain from participating. But in social sciences there is a special room for the opposite type of endeavour: to underline the multiplicity and creative disorder of the human adventure, to bring out the uniqueness of a certain occurrence, and to perceive a new way of turning a historical corner.” And it is this last that makes him such an optimistic, encouraging thinker too.

I least enjoyed, however, a couple of the essays on development, which may well be because I am entirely unfamiliar with his theory of linkages – these essays didn’t mean much to me out of context. Still, even in those, the emphasis on tensions and conflicts as motors of change, and the inevitable messiness of the process, is clear.

The book also has a nice evaluation of Hirschman by Emma Rothschild and Amartya Sen as an afterword. They say his work cannot be neatly mapped onto any of the normal distinctions we tend to make, between orthodox and heterodox, between theoretical and empirical, between state and market – “he aspired to both and embraced the conflict between them,” they conclude. It is well worth reading some of Hirschman’s classic books such as  of course, but this book of essays is a terrific overview of his work.

 

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Beware economists bearing PhDs

A footnote on Joe Studwell’s . He writes:

“At the industrial policy-making level, what stands out with the benefit of hindsight is that there was almost no role played in Japan, Korea or Taiwan by economists. Meiji Japan blazed its trail by following the Prussian, and early American, model which rejected the classical economics that began with Adam Smith and David Ricardo. … There was a strong prejudice against the theoretical approach associated with modern economics and in favour of practical problem-solving.”

Studwell goes on to say that at the height of its 1960s triumphs, MITI had just 2 PhD economists (although I’d note that far fewer economists bothered with PhDs in those days). Taiwan’s equivalent bureaucrats were all engineers. The intellectual tradition on which North East Asian industrial policy was based runs from  and  and includes, in the 1960s, Walt Rostow’s influential .

There were other development economists who focused on the specific and the practical rather than the general and theoretical – in their different ways  and  – but they were a minority until recently. It’s interesting to see the intellectual tide turning, with the backlash ranging from the emphasis on randomised control trials to Dani Rodrik’s wholly sensible caution in his 2005 paper Why We Learn nothing from regressing economic growth on policies (download pdf from his home page or here). Here Muryat Iyigun ponders the intellectual tyranny of generalisable results when case studies can be so valuable as evidence.

[amazon_image id=”1846682428″ link=”true” target=”_blank” size=”medium” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_image]

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