Power and legitimacy

Paul Tucker’s book Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State is a significant contribution to the literature about the trade-off between participatory democratic influence over policy decisions and the technical complexity of much policy and regulatory activity. The focus is on central banking, not surprisingly given the author’s long experience at the Bank of England. However, the book also dips into competition policy. This is my territory, having spent 8 years on the Competition Commission. I’m not entirely convinced by the argument here.

Tucker’s conclusion is that when politicians delegate policy decisions to independent, technocratic bodies, they need to do so in accordance with some key ‘principles of delegation’. To date, they have not done so, and hence the crisis of legitimacy, at least as far as it applies to economic institutions. There are five design principles: there should be a clear statement of the body’s purposes, objectives and powers, to stop mission creep; its operating procedures should be set out; so should its operating principles – how will it go about conducting its delegated policies; there should be sufficient transparency that the institution can be monitored and held to accunt by elected politicians; and there should be some rules for how it can respond to emergencies.

These seem on the face of it perfectly reasonable. But pause on the third – central banks and independent competition authorities should have the way they implement policy set out for them. Thus, Tucker argues, a competition authority’s remit might be set in broad terms as ensuring markets are competitive, or ensuring there is no abuse of dominance; but it should not be left to the competition authorities themselves to turn this into operational rules. He notes that there have been significant changes in competition policy in the US and EU over time, shifting from the older institutionalist tradition to a focus on consumer welfare. As the book notes, this reflected developments in economic theory, adding: “The significance of these momentous changes is not whether they were grounded in good economics but that each occurred without any amendments to the governing legislation.” Thus, “This gives us a glimpse of why the public might not be clear about the pupose and objectives of antitrust regimes.”

Like a number of commentators on competition policy recently, Tucker believes – wrongly  – that the ‘Chicago School’ approach of using a consumer welfare criteria means competition authorities can only look at prices. On the contrary, although that has been the practice (because measuring prices is easier), they can take into account other aspects of economic welfare such as quality or range, or incentives to invest and innovate – this is set out in the CMA’s guidance documents, for instance. In the world of zero priced digital goods, that is exactly what they should do.

But that’s by the by. My hesitation about this principle is that the alternative – having operating rules set by elected politicians – would in reality defeat the purpose of giving economic regulators their independence. For what would stop legislators deciding that the economy is best served by preserving jobs at incumbent firms because they have the biggest economies of scale? This would be the pre-independence world of ministers deciding all mergers on public interest grounds. The time inconsistency problem common to so many regulatory contexts would return with a vengeance if legislatures can change the operating rules whenever they choose. Better to have these rules set by the technical experts, after wide public consultation. Sure, ideologies and tides in the realm of ideas would influence them, but less, it seems to me, than in the counterfactual world. Anyway, are elected politicians so respected now that they would reinject legitimacy back into economic governance? Opinion polling suggests they are among the groups the public trusts least.

Unelected Power engages an essential debate, however. There is a crisis of legitimacy in the western democracies. With QE, central banks have launched a radical change of policy with huge distributional consequences. The book has four sections: welfare, values, incentives and power are their headings. Although it touches on all the economic regulators, it is mainly about central banking, and on this is it authoritative. It will be an essential read for everybody involved in monetary policy, or researching it. It has a long bibliography; Tucker refers to legal and political science literatures as well as economics. One flaw is that it is heavy going in parts, surprsingly because he is a compelling speaker. Nevertheless, this is an important book.

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Marketcraft

Marketcraft: How Governments Make Markets Work by Steven Vogel is a nice overview of the inextricable links between ‘state’ and ‘market’. It would be great to put to rest the concept (still reflected in verbal usage) of government and market as opposites, and the book offers the concept of ‘marketcraft’ as a device to make the point. Markets always require a framework of government action to function at all.

It isn’t as if economists believe there is such as thing as the abstract ‘free’ market – ‘free’ from government ‘interference’. As Vogel very fairly notes (while regretting the use of a competitive equilibrium as a benchmark in any way at all), not only behavioural economics but also institutional economics, market design – and he could have added industrial organisation/competition economics, labour economics, health economics and all the other applied fields – have the market as an embedded institution at their core. Competition economists like me, for instance, know that it takes sustained attention from the institutions of the state to keep a market competitive.

The book – a short one drawing on previous work – compares and contrasts the liberal makrket economy of the US with the co-ordinated market economy of Japan; although Vogel is critical of the ‘varieties of capitalism‘ approach, arguing that it overstates the differences. Liberal market economies are only differently co-ordinated, he believes. There is a tension in the argument, for Vogel argues that the US should become more like Japan while also arguing that Japan’s attempt to become more like the US has failed because it did not take account of the social norms, conventions and culture in which the economy was embedded. (To be fair, he acknowledges wholesal change in the Japanese direction would not be possible.)

Somewhat ironically, Vogel reflects on the same tension in Karl Polanyi’s The Great Transformation, noting that it both asserts that ‘the market’ becomes a separate sphere from society, commodifying a growing territory of life, and that the self-regulating free market is a myth because markets are always socially embedded.

Although the argument the book makes isn’t dramatically new, and I for one need no persuasion about having to think of markets as institutions which can be shaped and designed for better or worse, there are some nice insights. I liked the section on the language we use to perpetuate the ‘free market’ chimera: governments make ‘interventions’ rather than just ‘acting’; we speak of ‘redistribution’ rather than ‘distribution’. It was also a welcome surprise that the book doesn’t set out the usual straw man version of economics. The term ‘marketcraft’ (as an analogue to statecraft) is also very nice. Governments are always ‘intervening’ in markets even if unintentionally. For sure government failure is a real thing, yet there’s no way we can live collectively without collective actions. We call that government.

 

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Straight talk from Dani Rodrik

The legion fans of Dani Rodrik will love his new book, Straight Talk on Trade. I’m one of them, and massively respect him for warning all the rest of us economists about the political economy consequences of globalisation long before these became obvious. As he writes in the last chapter of this new book, looking at recent voting trends in many countries,  “It is dawning on economists and policymakers that they severely underestimated the political fragility of the current form of globalization…. This backlash was predictable.” He has the sombre pleasure of having predicted this for a couple of decades now.

Regular readers will find many of the thoughts in Straight Talk familiar from previous books such as The Globalization Paradox and Economics Rules, and from papers such as Rodrik’s work on ‘premature deindustrialization‘. The new book updates the issues for the present context of the political success of anti-globalizers, nationalists, statists. It argues that there is little evidence of a major retreat from economic integration, and that the rhetoric and headline measures are a useful safety valve. “What looked to contemporaries like damaging protectionism was in fact a way of letting off steam to prevent an excessive build up of political pressure. … [W]e need to place the requirements of liberal democracy ahead of those of international trade and investing.”

I’m in two minds about this line of argument. It is undeniably true that the dogma of globalization gave cover to a lot of toxic practices, from financialization and speculation to multinational tax avoidance. However, I fear the protectionist, nationalist rhetoric will create its own reality – I found the argument in The Weaponization of Trade by Jack and Rebecca Harding persausive on this. Nor am I as sure about the ‘continued resilience of the nation state’ – and see its potential fracture as a dangerous moment.

On the questions of domestic economic policy and industrial policy, though, I’m 100% with Rodrik’s argument. He points out that the policies labelled ‘structural reform’ (econ jargon for politically very difficult measures) “were only loosely correlated with turning points in economic performance.” There are no silver bullets. Rather, growth take-offs “were associated with a targeted removal ofkey obstacles to growth rather than broad liberalization and economy-wide reforms.” Measures need to be targeted, and political capital and administrative resource needs to be focused on areas where there will be an early return. “In economies that suffer from multiple distortions, small changes can make a big difference.” The best policy advice is to experiment, and try local institutional innovations.

Reflecting on the lessons of past growth take-offs and failures leads into a section on the role of economics and economists – some of this familiar from Economics Rules. Economists must pay more attention to politics if they are giving policy advice, he argues, and in particular to the scope for political innovations – ideas that can durably relax political constraints and enable measures that make people better off without threatening political upheaval. Or in other words, enable the capture of efficiency gains while more or less protecting the economic rents of existing elites. Rodrik draws an interesting parallel with technological innovations, and the role of policy entrepreneurship, learning by doing, learning by experimentation, copying, serendipity and not forgetting the role of crises. “Taking ideas seriously renders the notion of interests slippy and ephemeral. Interests are not as fixed as other economists, such as Daron Acemoglu, suggest. People may need a new idea to appreciate their interests in a different, more accurate, light. “Raising the profile of ideas would also help alleviate the tension that exists today between political economy on the one hand, and normative economics and policyy analysis on the other.”

Looking at the current political context, some new ideas are surely needed, especially when it comes to global trade and investment. Rodrik has written elsehere about the need for New Rules for the Global Economy, and argues again here that the conventional policy suggestions will fail.

Straight Talk ends on a potentially optimistic note, however: “If one lesson of history is the danger of globalization running amok, another is the malleability of capitalism.  … It was not tinkering and minor modification of existing policies that produced these achievements [the New Deal, Bretton Woods], but rather radical institutional engineering.” If big, bold ideas can be implemented, the liberal democratic order may be reinvigorated. Looking at the present crop of politicians, this is only a slightly comforting thought, but I for one will take that sliver of comfort.

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True wealth

Klaxon: this week sees the publication of National Wealth: What is Missing, Why It Matters, edited by Kirk Hamilton and Cameron Hepburn. The book is a collection based on the Wealth Project, itself a follow up to work by the World Bank on measurement for sustainability. As sustainability inevitably involves thinking about the future, there is a need to measure an economy’s stocks of different kinds of capital assets rather than current income or consumption flows (which is what our GDP lens does).

I have a chapter in the book about the political economy of moving to a new framework of economic indicators from the current system of national accounts. This is a shift analogous to changing a global technical standard, in which enough key participants have to make the move to tip everyone else into following suit. I conclude, though, that for this to come about there has to be enough consensus about what new standard to move to, which is still a work in progress. There’s a proliferation of dashboards and alternative indices. We need just one framework to get the shift.

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Knowledge as a public good – honest!

Yesterday was the meeting of the European Advisory Board of Princeton University Press, of which I’m a member along with some very distinguished people from other disciplines. It’s always inspiring to see the Press – my own publisher – making such a success (in terms of numbers of books sold, revenues and global reach) of high quality, peer reviewed books with an emphasis on accessibility to non-academic readers. (In fact, on the tube on the way there as I stood looking around the carriage, there were at least half a dozen people within sight reading books. I think physical books are baaaack bigtime, and the figures seem to agree.)

We had a discussion about the obvious: what do Brexit/Trump/dislike of facts and experts imply both for universities and for a scholarly press? David Runciman made the point that we academics see ourselves as producers of knowledge, a public good in a knowledge economy. The votes suggest half the public doesn’t agree, whether they are right or wrong.

He also strongly criticised the ‘impact agenda’ which is now part of the Research Excellence Framework. I somewhat disagree with this, as it seems entirely healthy for academics to have to think about the outside world and how their work meshes with it. I do agree with David’s point that the way ‘impact’ is interpreted in practice favours the London universities, Oxford and Cambridge, as people are often expected to demonstrate their ‘impact’ through contacts with “elite networks of influence” (in his words). In the UK, they are massively London-centric. However, if so many citizens fail to see any positive spillovers from academic work – knowledge production – it’s all the more important to think about how to improve and demonstrate impact in ways that don’t centre on influencing Whitehall and Westminster.

An eminent political scientist, David said the book he was turning to to understand political trends is Democracy for Realists. I must add it to the ‘to read’ pile.41pmvn6eael

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