Political Economy After the Crisis

Michael WoolcockWeek 4

February 20, 2014

Overview

• My week• Four questions on growth, institutions, the crisis,

and economics (social science):– Why do we care about economic growth?– Why do institutions matter for growth?– What does the crisis reveal (again) about institutions?– What do these lessons imply for economics, for social

science?

1. Why do we care about economic growth?• It’s directly necessary for promoting things we care about

– Poverty (Kraay 2012), health*, employment, etc• It’s indirectly necessary for promoting other things we care about

– Generates tax venues for the arts, museums, Social Security, etc• It’s insufficient for promoting still other things we care about

– E.g., gender equality, social inclusion, product safety• It can actively undermine yet other things we care about

– The environment, community cohesion, health*, equality• We’ve measured it for a long time, and it enables interesting and

important analyses to be done (across time, between countries, within countries)– But see Jerven (2013) Poor Numbers

• Because (hopefully) it promotes broader conversations about what an economy is for, how to improve it, for whom, on what basis, etc

2. Why do institutions matter for growth?

• Establish conditions under which scale and sophistication of production, distribution, exchange takes place– Especially as it pertains to risk (insurance, social protection), finance, contracts

(impersonal, intertemporal agreements)• (Less directly, by creating and protecting skills, technology)• Manage distributional conflicts that growth (or collapse) itself generates

– Ensure legitimacy of change process, for ‘winners’ and ‘losers’• Create power, and power must be regulated; by bodies with

– Credible, comprehensive information– Diverse, professional expertise– Durable political independence

• What particular institutions “look like” (form) matters much less than what they actually “do” (function)– Capability to implement is key (and implementation is really hard)– Acquired collectively, over time (decades)

3. What does the crisis reveal (yet again) about ‘institutions’?

1. That they are wondrous but fragile political creations, both responding to and creating ‘incentives’

Comparatively Domestically Internationally

“Free markets”; “Good government”?

Social theory points beyond the narrower (if more technical) analyses of game theory -- “how the players play particular games” -- to “why those games, and not others, arise in the first place, why some players, and not others, get to play, how rules of engagement shift . . . and how players acquire the resources -- both tangible and intangible -- with which to play.” Xavier de Souza Briggs (2008: 22) Democracy as Problem Solving

Sidebar: Some lessons from sports

3. What does the crisis reveal (yet again) about ‘institutions’?

2. That we still don’t really understand them3. That dominant paradigms for understanding

them are remarkably impervious– Just how bad does a crisis have to be before key

assumptions (presumptions) are revisited?• John Maynard Keynes:

– “When the facts change, I change my mind. What do you do, sir?”– “The market can stay irrational longer than you can stay solvent.”

4. What do these lessons imply for economics, for social science?

• That economics is necessary but insufficient for understanding how particular institutions work, how they can be designed, improved, assessed, held accountable (cf. North)

• That economists, like everyone else, can be technically competent and yet subject to biases, fads, group-think, ‘incentives’, pressure– Thus, like everyone else, need countervailing pressure– Especially so, because their actions are highly consequential

• That ideology should be taken seriously (because one can’t be “post-ideological”) and lightly (because it is a poor guide to understanding, solving complex problems)– E.g., “Free markets” are self-correcting

• That ancient, hard-won lessons must be heeded– Quis custodiet ipsos custodes?– "We tend to meet any new situation by reorganizing, and what a wonderful method

it can be for creating the illusion of progress.“ Gaius Petronius Arbiter (c. 27 – 66 AD), courtier to Nero