Wednesday, July 19, 2006

Economic analysis and political feasibility

It seems to me that economists are increasingly being called on to answer the world's problems. Can economists do more to make the world a better place? Does pressure from the public and government cause economists to over-promise and under-deliver?

I found three economists who explored this subject in 1972: Milton Friedman (“Have Monetary Policies Failed?”), John Gurley (“Have Fiscal and Monetary Policies Failed?”), and Arthur Okun (“Have Fiscal/Monetary Policies Failed?”). The trio hold distinctly different viewpoints.

Economic policies are tools used to meet the needs of the U.S. government's capitalist agenda, says Gurley. When the government is behind the wheel, capitalist objectives guide policy decisions, and “...other claims...are judged by the extent to which they are compatible with private profit making.” Gurley implies that as long as the government has control over economic policy, such policies will never be used with the direct attempt to improve social welfare, the environment, or anything else beyond corporate profits.

Okun agrees that the government chooses policies based on their ability to raise corporate profits. That is precisely the point, says Okun. Social welfare is not an ultimate objective to such policies. It is only through the regulation of aggregate demand that fiscal-monetary policy contributes to social welfare. Furthermore, Okun lamely adds that profits can never solve our “...lofty principles of equality....”

Neither Gurley nor Okun are ecstatic about the record left by fiscal-monetary policy. Okun believes that the policies are not fulfilling the needs of the government, while Gurley contends that these policies meet the needs of few else, save private firms.

Okun might say that it is not applicable to argue about a gap between social welfare and capitalistic objectives, but he admits that there is a “persistent gap between economic analysis and political feasibility.” Friedman would likely agree with Okun's latter point. He expresses that economists should work within their capabilities and ignore the pressures put on them by politicians.

Not only does Friedman admit that the government is a negative prescence hovering over monetary policy, but he concludes that it may be for good reason that the government's prescence exists. Partly due to political pressure, economists consistently over-promise and under-deliver, hurting the economy and the profession of economics. He implies that this is a cause and effect of political pressure. A vicious cycle, perhaps.

Friedman states that, like the pressure that exists from the government, pressure from the public might also exist for good reason. Again, economists spread false expectations; they over-promise and under-deliver. Friedman's advice to economists is that they should be honest about their capabilities and ignore the pressures from the government and the public that lead them to trumpet over-optimistic forecasts.

A counter-argument to Friedman's comment would be to say that pressure encourages responsibility. Surely Gurley would have thought so when he wrote his paper.

So, should economic policy be driven by more than just profits? Should economics be more than a quantitative science? We seem as indecisive as we were 34 years ago.

There are some good comments on this subject over at Economists' View.

2 comments:

BSF said...

Don't overlook the distinction between profit and rent. The Smithian position would be that making profit is fine so long as it's done in a competitive market, i.e. by making stuff people want to buy and selling it at a price they are willing to pay. A lot of government policy (from governments of all stripes) has been aimed at creating economic rent (not economic profits,) or rent seeking opportunities, for favoured groups. That's bad, from a Wealth of Nations point of view. I try to convince intro econ students that there's a difference between being pro-market and being pro-business. I'm not sure how well I succeed.
Welcome to Canadian econoblogging.

Brian Ferguson

true dough said...

Prof Ferguson,

Thanks for your comment. You're quite right. I believe that in my haste I've misrepresented Gurley especially.
My revision: Gurley's 1972 paper (which you seem to be familiar with), criticizes the US Administration for creating a “pro-business” arena. On the domestic level, rent-seeking behaviour is mistakenly assumed to work in favour of the greater public, according to Gurley. However, public-interest is secondary to the Administration's protectionist policies over US corporations and, more specifically, US corporate profits. Gurley skeptically states that, “Everything done is advertised as being in the national interest or even in the interest of the very class that is being hurt.” Subsidies, union demands and other 'unnatural' pressures only win over the Administration if the opportunity cost to corporate profit is too great to bare.
Gurley's paper makes it unclear whether he takes the Smithian approach (that the most efficient economy allows capital to take a 'natural' direction). He seems to be saying, “down with pro-business power”....and then fails to say yay or nay over market power. Still, his fist seems to pump to the beat of the greater public good, even at the expense of corporate profit.

I'm sure this is more than you need to read. But I felt that a clarification was in order.