Tuesday, July 19, 2005

Economists and Optimal Policy

Henry poses an interesting question in this post: what is the effect on the political outlook of economists of solving for the optimal policy all the time? I have the opposite answer than Henry. He seems to think it makes them trust government to much, which is odd, considering that economists are famous for their libertarian instincts. Rather, I think, it makes them skeptical of any policy that emerges from the political process because it diverges from that optimal policy they've solved for in their models. They'd love to endorse a policy, but can't because it's not perfectly optimal. This has an especially pernicious effect on the free trade debate. Free trade is a Pareto potential improvement only if we get compensation for workers (a kind of social safety net for displaced workers; I'll use safety net in that sense for the rest of the post). Yet economists will happily endorse free trade measures that don't include those compensatory payments (even Cafta) and will never argue loudly for that compensation, because of fear that these compensatory measures will be corrupted in the political process. In Saving Capitalism From The Capitalists, the authors come to the point where they say a social safety net is required to make capitalism stable. Yet then they proceed to heap scorn on any past attempts to install a social safety net (say, the New Deal) as having been hopelessly corrupted by the process of politics. Leaving the reader confused: we need a social safety net, but we'll never get an optimal one, so...And the authors are Chicago School par excellence so probably don't endorse all that fuzzy liberal stuff. While solving for optimal policy might lead you to endorse crazy authoritarian planning schemes, the more likely outcome is that you reject the necessity of compromise and corruption in the political process and end up rejecting all government policy. It's not that economists should be more aware of the political process to prevent them from being all fuzzy headed and utopian, but to prevent them from becoming cynical and rejecting the utility of all policy. Even if it's not optimal, it can still be good enough.

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