Arnold Kling  

Online Seminar

ESPNomics... Opportunism...

As part of an online seminar, Adam Przeworski writes,

When in 1993 Limongi and I reviewed studies of the effect of political regimes on economic growth, we found that the results perfectly fitted the ideological climate of the period when they were published: before 1982 none found that democracies promoted growth, after 1982 none found that dictatorships did.

This is from Henry Farrell's seminar on Dani Rodrik's book. The quote confirms my bias that econometrics is not robust relative to confirmation bias.

In his response (see the link to Przeworski and scroll down), Rodrik writes,

Mark Thoma makes a number of interesting suggestions, in particular on what it takes to transform growth accelerations into sustained growth. He posits that maybe the transition has to do with a "process of clearing out unproductive, unprofitable firms ... [as] an essential part of getting to the second stage and that this process must begin fairly early in the development process ..." Perhaps. One can make his point more broadly not just about firms but all pre-existing institutions. At some point, inherited institutions can become dysfunctional-even if they served to ignite growth (think of China's property regime or Germany's welfare state). Figuring when you want to get out, while things are still going relatively well, is a complicated dynamic programming problem.

...I am happy that Daniel Drezner liked parts of the book. As for the other parts, I wonder if his complaints are not the result of his having read them a bit too quickly. One complaint is that "It's far from clear whether the political organizations that Rodrik is counting on are up to the task." This is odd in light of the amount of attention I devote to how the requisite organizational arrangements can be designed...

The last sentences in each of the last two paragraphs are indicative of what bothers me about the outlook of Rodrik and a number of other seminar participants. For all of the emphasis on pragmatism and humility, there is lurking within most of them an inner elitist who thinks in terms of solving dynamic programming problems and believes that "the requisite organizational arrangements can be designed."

Why are we assuming that the best way for an economist to help an underdeveloped country is to give policy advice to the government? What about giving advice to ordinary citizens?

Why would not our best contribution to an underdeveloped country be to start a business in that country? If we think that we are not competent to start businesses, then why do we think we are competent to initiate policies?

Those are my subversive thoughts.

Comments and Sharing

COMMENTS (8 to date)
James writes:

"Why would not our best contribution to an underdeveloped country be to start a business in that country? If we think that we are not competent to start businesses, then why do we think we are competent to initiate policies?"

Arnold, I completely agree with you here. This is why I have chosen to pursue a business career instead of going to graduate school for economics. I can't stand the all talk and no action mentality of most economists.

Mason writes:

"If we think that we are not competent to start businesses, then why do we think we are competent to initiate policies?"

These are different skills.

Economists don't start businesses because they don't have the skills/mindset to do so. They advise because (1) they have the skills/mindset to do so and/or (2) the cost of failure in an advisory position is much lower.

Personally I think it's more of 1 than 2. Entrepreneurs are just very different from economists.

Relative to economists entrepreneurs are:

Even more overconfident – they actually pony up

Better sales people – goes back to being more confident

Harder working – how many hours does an entrepreneur put in the first 5 years? Is that rational? How many economists put in that much time?

Greater risk takers - they don’t spend as long gathering data before taking action and the action they take is much bolder.

I can tell you the proper way to lift 200lbs without hurting yourself, but I can’t lift it myself. An economist’s advice can be valuable even if they can’t implement it themselves.

Additionally, not only can their advice be valuable it probably is because people keep paying for.

Buzzcut writes:

I think that advice from Western economists to developing countries is "Hansonian".

You know, Robin Hanson has a thesis that much healthcare is not only wasteful, but detrimental to health. He thinks that indiscriminately and randomly cutting healthcare by 50% will not hurt overall health outcomes, and may even result in better health outcomes.

Foreign aid is certainly an area that has negative correlations to growth. More aid/ less growth.

There's probably a correlation between economic advice and growth, and it is negative.

So give less economic advice, and let the coutries just figure it out for themselves.

Punditus Maximus writes:

Um, I'm an economist and not an entrepreneur because my health is compatible with being an economist and not an entrepreneur. Also, the job is really quite different.

If my health improves or I develop a sudden joy in making hire/fire decisions, I may switch over. I currently like math and teaching more, though.

shayne writes:

Arnold, I concur with your "subversive thoughts" and I thank you for them.

Your "If we think that we are not competent to start businesses, then why do we think we are competent to initiate policies?" question is probably the most rational, relevant and important question in economics.

I'm not convinced that economists are all talk and no action. Most problematic is that too many economists are lots of talk focused solely on justifying public policy based action. They seem to find out too late that they picked the wrong social science. Poli Sci is down the hall.

Angry at the Margin writes:

What's wrong with dynamic programming?

As for that other stab... so infantile! It's just another variety of "my father can beat up your father". -- Starting a business doesn't "beat" offering advise. It's different.

Managing businesses, investment and gathering capital are different (not better) activities than using a highly-rigorous theoretical framework and empirical tools to ask and answer abstract questions, with a high degree of generality.

William Newman writes:

What about what I might call the Hernando de Soto approach? If you can see why it's impractical to start a business, documenting it seems to me to be a reasonably constructive response.

This seems a lot more broadly applicable than de Soto. E.g., what was Milton Friedman supposed to do about mandatory licensure in medicine? A thesis/book on its effects seems reasonable to me; I don't see a business opportunity.

It does seem to be fairly common for anti-market policy proposals to be subject to the criticism that the argument for their effectiveness implies a private arbitrage opportunity. Then, if the policy advocate believes the argument, why not take advantage of his clear vision of the private arbitrage opportunity? Or at least profit indirectly by advising private people who execute the idea? E.g., given the idea that the problem in an underdeveloped country is a simple shortage of capital which should be solved by forcible transfer of capital into the country, what about the arbitrage opportunity to invest one's own capital where it's in such high demand?

Various refinements of this can arise as followup questions: "OK, so you won't take advantage of the arbitrage opportunity because you can see that it has been eliminated by limitations on things like freedom of contract or security of property. That sounds plausible, but then is there some reason you don't want to restore them so that private actors can take care of the problem?" Infant industry arguments for tariffs always seemed like that to me: either the bond market has been trashed somehow (unpredictable inflation could work nicely), or public policymakers are consistently shrewder than any private investors, or (in the 20th century) perhaps there are some downsides to the way you've formulated your antitrust policies; otherwise, the argument for the tariff policy seems to presuppose a private arbitrage opportunity.

Should economists start businesses in Zimbabwe instead of just whining about the policies there?

Punditus Maximus writes:

I finally figured out what about this was bothering me -- it's the idea that every skillset is roughly the same. It's saying that every quartermaster, no matter how talented, is doing nothing for a military effort because he or she is not on the front lines. But not only are these vastly different skillsets, but the folks on the front lines really need competent quartermasters to have a chance of succeeding!

It's a repudiation of specialization as a concept, a fundamentally un-economic approach.

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