Rodrik and Economic Policy Reform
By Bryan Caplan
I cherish my negative inspirations – the thinkers who clearly and cogently champion positions I think are completely wrong. So I’m pleased to see that one of my favorite negative inspirations, Dani Rodrik, has taken to the blogosphere.
I keep returning to Rodrik’s “Understanding Economic Policy Reform,” (available on Jstor) published in the Journal of Economic Literature back in 1996. In this article, he tries to explain why economic policy reform is unpopular. Short-run costs, long-run gains? Rodrik’s not buying it – reforms are often slow in coming even when the gains kick in almost instantly: “Once one makes allowance for the likelihood that the counterfactual – no reform – produces even worse results in the short run, the consequences of reform look pretty good.” Makes sense to me.
So what made “Understanding Economic Policy Reform” one of my negative inspirations?
The answer is that Rodrik refused, as a matter of methodological principle, to consider the possibility that voters are economic illiterates who systematically underestimate the benefits of reform: “The bad news is that the habit of attributing myopia or irrationality to political actors — whether explicitly or, more often, implicitly — persists.” After ruling the biased voter explanation out of court, he explores a long list of internally consistent but highly implausible theories to explain why bad policies persist.
I take Rodrik to task for this in “Rational Irrationality and the Microfoundations of Political Failure” (Public Choice 107(3/4), June 2001, pp.311-331):
[T]he naive theory that many practical reformers stand by is more plausible: Voters are largely irrational, or “myopic.” They systematically underestimate the benefits of reform; they oppose better policies not from complicated strategic calculations, but because they don’t understand what works…
For example, during economic crises the public frequently misunderstands the connection between inflation, rapid monetary growth, and government policy. Though the government is to blame, it may be the emerging capitalist class that receives the blame: “Keynes also stressed the particular insidiousness of the confusion over the causes of inflation. He said that inflation heightens society’s antipathy to those who make profits in the turbulent market conditions. Businessmen are converted in the public’s mind into ‘profiteers.'” (Sachs 1994, p.507) This mistaken positive theory of inflation tends to increase support for price controls, wage controls, and other counter-productive measures…
Or as I explain in my book:
Why wrack your brain to explain why rational voters would do something that appears irrational, when you already know that voter irrationality is common?
P.S. Welcome to the blogosphere, Dani. Negative or positive, you remain an inspiration. 🙂