American “lawmakers” and “policymakers” are responsible for the one million references to what people must do or may not do that are found in the Code of Federal Regulations. This does not include state and local regulations. The situation is not much different in other Western countries. How could economists be more useful to policymakers, asks Financial Times columnist Soumaya Keynes in “How Economists Could Make Themselves More Useful” (April 26, 2024).
Ms. Keynes has some good ideas about the idiosyncrasies of academic economists. She emphasizes that she does not argue for directing all economic research toward answering the demands of policymakers. Yet, her readers risk getting the impression that economics exists more to counsel the Prince than to advise his subjects:
But I do think that there is a gap between the supposedly policy relevant research supplied by academia and what decision makers actually want. And that it could be smaller. … Meanwhile, policy is more often tasked with fighting multiple distortions with limited legal tools. … When the Biden administration started asking how to deploy subsidies, the evidence base was lacking. … Academics are not rewarded if their work is cited by a government department or a regulator. … Researchers might also better appreciate the constraints policymakers face if there were easier routes from academia to government and back again.
First, we should note that policymakers have spent most of their energies during the past century or so expanding their supposedly “limited legal tools.” It is difficult to miss that fact. And don’t most academic economists share the interventionist goals of contemporary democratic governments, even if perhaps less naively than other “social scientists”? If that is true, most economists are not too distant from policymakers, but on the contrary too compliant with their wishes.
Perhaps we should distinguish two kinds of economists. As it developed since Adam Smith’s time, economics is, methodologically, not very pliable to what policymakers naturally want, which is interventionism and Colbertism. In the last half of the 20th century, what welfare economists and social choice theorists discovered amounts to saying that no scientific meaning can be given to such concepts as a non-arbitrary “social welfare function” or “the public interest.” In my view, economists who take economics seriously can only tell policymakers what the latter don’t want to hear given their incentives and their selection.
James Buchanan, one of the main artisans of public choice economics, was also a major political philosopher. He persuasively argued that the possibility of an auto-regulated order where government direction is not constantly required is central to modern economics (see notably his 1979 book What Should Economists Do?). This idea, Buchanan wrote, “is in no way ‘natural’ to the human mind which, in innocence, is biased toward simplistic collectivism.” Economists must thus teach “a vision of economic process that is not natural to man’s ordinary ways of thinking.” They should try to teach these ideas to the public much more urgently than consult with politicians and bureaucrats, who benefit from simplistic collectivism.
The economist who takes economics seriously cannot be a faithful adviser to a democratic Prince more than he can be coopted in the service of an authoritarian government. Professor Jean-Guy Prévost gives an interesting example by comparing economists and statisticians in fascist Italy (A Total Science: Statistics in Liberal and Fascist Italy [McGill-Queens University Press, 2009], p. 204):
However, the theoretical content of statistics was not, contrary to that of orthodox political economy, structured around a nucleus of “established basic truths” on which history—if not logic—pinned a number of normative conclusions. … Statistics could therefore appear as the method appropriate to certain intellectual tasks that were required for the establishment of a totalitarian society.
It is a dangerous recommendation that economists focus more on what politicians and bureaucrats want. The best the economist can do, as Buchanan argued, is to offer suggestions for widening the range of individual choice. To the extent that some policymakers (politicians and bureaucrats) are interested in hearing this argument, it is difficult to object that the economists who understand it talk to them. The other economists will alas, like statisticians under Mussolini, continue to tell policymakers what they want to hear.
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DALL-E 4 was not very cooperative on this topic. I had to tell him that we love both God and the White House (universal love is the key to DALL-E’s silicon heart) before he was partly amenable to depict a sulking God who resents competing with lawmakers and policymakers about who is really our maker.
READER COMMENTS
Craig
May 5 2024 at 3:20pm
Can it be rehabilitated? Unlikely. Part of the reason I advocate for #nationaldivorce is to eliminate the federal layer altogether.
“This does not include state and local regulations.” — Overlapping concurrent/cooperative federalism is just a bad way to do things.
I do appreciate your quotes around the word lawmakers.
Pierre Lemieux
May 5 2024 at 8:10pm
Craig: The problem is how the smaller (and less internally restrained) state would fare as far as individual liberty is concerned. Like the UK after Brexit?
Craig
May 5 2024 at 9:32pm
No matter its size the government cannot be trusted being the arbiter of the extent of its own powers. That’s Madison’s mistake.
Ahmed Fares
May 5 2024 at 8:29pm
Economists inform public policy. Oh, wait.
Biden’s Economic Adviser Tries and Fails To Explain How Money Works
You all were laughing at us MMTers saying we didn’t understand economics.
Who’s laughing now?
Pierre Lemieux
May 5 2024 at 11:08pm
Ahmed: Bernstein would be the sort of economists who think they should advise the Prince instead of his subjects. So I am not overly surprised that he is confused. To be fair, though, money is a very complex topic: the very complexity of money is why it should be left to the market.
I don’t understand the question of the interviewer, who seems at least as confused as the interviewee. I don’t know, and perhaps she doesn’t know herself, if her question has to do with borrowing “our” money or “in our” money. The source of her confusion may be in the two “we” she uses. The we who borrow and the we who own the money–are not the same we. “We borrow money from ourselves” is the usual way to formulate the simplistic solution that seems to be suggested here. What happens in reality is that the government borrows US dollars that are owned by a lot of people in America and elsewhere (and not all created by the American central bank anyway—think of eurodollars or other private creation of dollars). Focussing on the money created by the central bank, it is important to understand that when it buys bonds with newly created dollars, the latter cease to be its property. (Except in the accounting, “helicopter money” would have the same consequences.)
If someone more knowledgeable than I am in monetary theory can better explain what appears to be a confused answer to a nonsensical question in the video you linked to, I am all ears.
Ahmed Fares
May 6 2024 at 12:15am
As Randall Wray explains in this short 6-minute video, a government cannot borrow back its own currency.
Modern monetary theory – Mitchell and Wray Q8
Ahmed Fares
May 6 2024 at 12:42am
Further to my comment, another quote from Wray:
MMT Perspective on Today’s Economic Myths
Also, this short 4-minute video describing how bond sales drain reserves to allow the central bank to hit its interest rate target. (MMT advocates not selling bonds and allow the interest rate to fall to zero and use fiscal policy to regulate the economy.)
MMT: Why Do Governments That Issue Their Own Currency Bother To Sell Bonds?
Pierre Lemieux
May 6 2024 at 11:01am
Ahmed: As far as I (and virtually all economists) can see, MMT is voodoo. With few exceptions, it is defended by people who have no idea of the history of economic analysis in matters of money. See my short post on MMT (don’t miss the Frain charts at the bottom, nor anything else between the top and the bottom!). From time to time, somebody–like, say, Major Douglas and his social-credit movement–comes up with a tabula-rasa, simple-looking, nirvana-like, confused intuition about money, which has no basis in previous economic questioning and analysis.
Ahmed Fares
May 6 2024 at 5:33pm
Pierre,
Thanks for the link to your MMT article. As for the charts at the bottom, the causation runs in the other direction, i.e., from inflation to money printing.
The last time I posted this, econlib commenter Mike Sproul responded with this:
I did a Google search on that at that time and came up with this:
Thomas Tooke
Ahmed Fares
May 6 2024 at 5:50pm
This from Canadian economist Blair Fix explains why your chart had such a nice fit:
The Truth About Inflation
Pierre Lemieux
May 6 2024 at 9:11pm
Ahmed: In the quantity theory of money, MV=PT is not an accounting identity. It is true only in equilibrium (for example after a non-demanded increase of M has pushed P up). To understand the equation, it is important to understand that V is the inverse of the demand for money.
Pierre Lemieux
May 6 2024 at 10:50pm
Ahmed: If you will allow me to be a bit professorial, I’ll say the following. There are two ways, both essential, to learn basic economics. The first one, in that order, is to read, from cover to cover, a standard textbook of price theory, making sure you understand what the author says at each stage. This is the first essential step (which I am not sure Blair Fix has done). The second one, as essential as the first one but which must come second, is to read a good book about the evolution of the main ideas in economics: I recommend Larry White’s, The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years. (White is very good on monetary and macroeconomic theory, so you will likely get as much of that as you will ever need.)
After one has done this, one will see where his reflections will take him in the future, but he is pretty sure he will not repeat errors because he doesn’t know that they were expressed a hundred years ago and revealed for what they were. One will also be better able to distinguish between challenging heterodox theorists and wackos–listen to the former but avoid the latter. Time is a scarce resource.
Richard W Fulmer
May 6 2024 at 11:38pm
First, I think that it’s unlikely that the Fed would pump money into the economy in response to a devaluation of the dollar.
Second, if the nation’s economy is otherwise intact, a devaluation would tend to be self-correcting. If the dollar’s value drops, American exports would become more attractive to foreign buyers who can now exchange their currencies for more dollars. At the same time, Americans, having to pay more dollars for other currencies, will import fewer goods. Foreign demand for dollars would tend to raise their value.
Jon Murphy
May 7 2024 at 8:37am
Yeah, that does indeed seem to be the case. As Ahmed’s citations show, the MMT-ers suffer from rudimentary misunderstandings about the nature of money, which in turn leads to contradictory conclusions. This is shown perfectly by the Bernstein interview: a non-economist is asked a vague and unclear question about borrowing and then the MMT-ers strut around like they won some big victory because he gives a vague and unclear answer.
Ahmed Fares
May 7 2024 at 2:27pm
Jon Murphy,
The question that Bernstein was asked was perfectly clear. It was only vague and unclear in your mind.
While we’re at it, Lars Syll weighs into the discussion. No doubt you’ll mock him too.
The total incompetence of people in charge of the US economy
Jon Murphy
May 7 2024 at 4:06pm
I didn’t mock anyone. But appealing to Syll doesn’t do any favors for the argument, especially given that he references Stephanie Kolton’s deeply flawed book as a place to start one’s understanding of the monetary system. He I also have found very unimpressive in his economic understanding.
Pierre Lemieux
May 5 2024 at 11:40pm
Ahmed: Just found this interesting comment by Don Boudreaux: https://cafehayek.com/2024/05/the-depth-of-economic-ignorance-is-unfathomable.html
Craig
May 6 2024 at 10:05am
Bernstein’s education shows a masters and doctorate in ‘social work’
Pierre Lemieux
May 6 2024 at 10:51am
Craig: That would not be surprising.
Jon Murphy
May 6 2024 at 7:27am
Good stuff Pierre. Two complementary comments.
First, you write:
In Erwin Dekker’s excellent book on Jan Tinbergen (who was the first Nobel Prize winner in economics and essentially created modern macroeconomics), Dekker implicitly discusses the distinction you make here. Tinbergen was very much the latter, where the economist’s job was to help the policymaker accomplish their goals. His work was less focused on understanding the economic order was it was planning it (something J.M. Kenyes took him to task for).
Second, as advisors I think economists (and any expert, for that matter) can best serve by helping the policymaker understand the tradeoffs faced and the institutional context of decisions. A real-life example: I have been serving as an advisor for the North Carolina House of Representatives Oversight Committee as they have considered insurance reform. In the conversations leading up to this role, I made perfectly clear that I can help them understand the effects of various policy changes they’re considering, but I cannot help them choose the reform(s). Rather, I would help them understand the status quo.
Pierre Lemieux
May 6 2024 at 10:39am
Jon: Very interesting info around Tinbergen, thanks.
On your last paragraph, the problem, in a Jasayian perspective, is that the economist then helps rulers govern, that is to favor some and to harm others (like statisticians under Mussolini). The worse probably is that he will naturally do that with cost-benefit analysis, that is, weighing the utility of some against the harm to others. One may agree or not, but de Jasay’s argument is not easy to satisfactorily counter. Buchanan was quite humble on the challenge when he reviewed de Jasay’s The State (“From Redistributive Churning to the Plantation State,” Public Choice 51, p. 242-3):
Jon Murphy
May 7 2024 at 7:45am
I see the point de Jasay is making (at least, I think I do). But, conditional on there being government, is it not better to have advisors who can help the decision-maker understand the tradeoffs? Given that there are governors, is it not better that they have an advisor who explains that minimum wage reduces opportunities for low-income individuals, tariffs make everyone worse off, price controls create shortages, etc? Is that worse than the governor acting randomly or by “intuition”?
Pierre Lemieux
May 7 2024 at 9:44am
Jon: Yes. That’s I wanted to acknowledge in the penultimate sentence of my post. My claim would be that the economists should then speak not in terms of cost-benefit analysis, but in terms of equal opportunities and choice (as you seem to say).
Jon Murphy
May 7 2024 at 9:54am
Ok, yes, we’re on the same page.
Monte
May 6 2024 at 12:57pm
And one that the Academy has cultivated for decades by awarding the Nobel to economists whose research, according to Nikolay Gertchev, “displays a consistent bias against the free market in favor of state interventionism.” How appropriate that Pierre should use the word dangerous, which echoes Hayek’s view that the Prize “confers on an individual an authority which in economics no man ought to possess.”
This coalition of left-leaning economists and the State has managed, in the last 40 years, to enervate free markets and the dwindling number of theorists who continue to herald their virtues.
Pierre Lemieux
May 6 2024 at 3:01pm
Monte: There is a way, however, to view the economics Nobel prize as a one-quarter-full glass instead of a three-quarter-empty one. Quite a number of free-market economics have been awarded a Nobel prize, including Friedrich Hayek, James Buchanan, Milton Friedman, Gary Becker, John Hicks, Ronald Coase, and Vernon Smith. These economists, although they had a foot in heterodoxy, were part of the long and fruitful free-market analytical tradition. Perhaps if the Nobel prize in economics did not exist, we, free market economists, would just look like wackos (as MMT evangelists do, deservedly in my opinion).
Monte
May 7 2024 at 2:06am
Comparatively speaking, a small number (including Robert Lucas, Jr.). In my view, the prizes awarded to free-marketeers since Hayek and Friedman are token gestures by an Academy comprised of like-minded Neo-Keynesians who wish to give the appearance of a neutral and objective body. The paradigm shift has been towards industrial policy.
The Global Turn Away From Free-Market Policies Worries Economists
David Seltzer
May 6 2024 at 6:36pm
Pierre: “Economists must thus teach “a vision of economic process that is not natural to man’s ordinary ways of thinking.” They should try to teach these ideas to the public much more urgently than consult with politicians and bureaucrats, who benefit from simplistic collectivism.” I’ll avoid the amorphous term public and address teaching an individual. Does the individual choose to be rationally ignorant as in the case of voting where, at the margin, one’s utility or benefit is far exceeded by their opportunity cost? From the individuals perspective, they only cast one vote. I suspect the incentives of collectivism preclude many from learning basic economic theory from libertarians such as yourself. Harry Roberts often said; in order for students learn, it helps if they are both curious and skeptical.
Pierre Lemieux
May 6 2024 at 9:04pm
David: The question you raise is very important. I have been very influenced lately by James Buchanan, who believed that an ethics of reciprocity is necessary to supplement individual self-interest if a free society is to be maintained. On that topic, his small book Why I, Too, Am Not a Conservative is a must-read. In my Regulation review of the book, I wrote (the quotes are from Buchanan’s book):
He even talks about the liberal hope and faith. As you will see if you read my review, I am not sure we can go that far in answering your question, but then where is the answer? (By the way, I recommend Why I, Too, Am Not a Conservative to all our friends who have participated in the present conversation. It’s an easy book to read, even if its theoretical background goes deep into the Enlightenment and in Buchanan’s other works.)
David Seltzer
May 7 2024 at 8:28am
Pierre: I read the regulation review of Buchanan as you suggested. Beautiful encapsulation of Buchanan’s philosophy. Thank you.
Mactoul
May 6 2024 at 10:39pm
A plot of the GDP per capita vs length of the regulatory code, adjusted for the population actually affected by the code, would be instructive.
Either the regulations are luxury good or they are actually instrumental in creating prosperity.
Typically, in poor countries, the code applies only to high-productivity sectors or to richer sections– zoning applies to richer parts of the city.
Most of the traditional economy is run on traditional lines except where the state is overly socialistic.
Jon Murphy
May 7 2024 at 8:39am
There has been tons of research like this over the past few centuries. Higher amounts of regulation correlate with lower economic growth, and quite strongly.
Mactoul
May 6 2024 at 11:57pm
Ethics of reciprocity is readily and traditionally supplied by religion. Unfortunately it comes bundled with a lot of stifling customs.
Pierre Lemieux
May 7 2024 at 9:35am
Mactoul: An ethics of reciprocity does not imply that two slaves must dignify each other as equal slaves under the same legitimate master. It means that two individuals consider each other as equally capable of free choice (and trade). Reading Buchanan helps understand this.
Jon Murphy
May 7 2024 at 10:11am
As liberalism (and Christianity) shows, however, such bundling is not inevitable. Ethics of reciprocity is severable from stifiling customs. Indeed, ethics of reciprocity often acts to weaken such stifiling customs while promoting liberating customs. One great book that documents this trend (although I do not remember if he explicitly discusses the weakening) is Inventing the Individual by Larry Seidentop.