Sincerely: do you believe your discipline has earned a status as a decider of policy? Which successes would you point to in order to highlight this? And how have non-economists fared in the policy arena compared to you?
Justin Wolfers recently tweeted to the effect that although economics is not perfect, it is the best existing way to formulate policy. Yichuan Wang has also defended economist’s record in the real world. Bryan Caplan has notoriously argued that voters do not know enough economics and therefore cannot be trusted with policy. In general, economists are always willing to trot out policy prescriptions – often at the end of mathematical papers that are largely incomprehensible to the public – on the grounds that they are scientifically determined solutions to social and economic problems. But does economist’s record formulating policies justify this? I’m skeptical: as far as I’m aware, economist’s record shows few successes, many failures, and a lot of ambiguity.
Generally, economist’s favorite policies actually don’t have much evidence behind them. ‘Free trade’ deals have ambiguous effects on growth. The issue of whether the minimum wage produces unemployment is famously controversial, with any of the effects predicted being undeniably small. Estimates of the Keynesian multiplier also vary widely, and are generally easy to predict based on the political biases of who is doing the estimation. There is also a surprising lack of evidence to support the contention that fiscal stimulus alone can ‘kick start’ a flailing economy. Sure: the New Deal created growth, but it didn’t end the Great Depression. Japan has had a lot of monetary and fiscal stimulus but has remained in a ‘lost decade‘. Countries that have used stimulus and done well in the recent crisis generally had strong institutions and financial sectors (Sweden, Germany) or are simply at an earlier stage of development and therefore their growth is far more resilient (China). What’s more, you get as many arguments against stimulus coming from economists as you do for it, so even if it were the case that stimulus were the ‘right’ policy, the discipline hasn’t been a beacon of scientific truth concerning the matter.
What’s more, there are many examples of economist’s chosen policies clearly failing when applied to the real world. Milton Friedman’s quantity-targeting monetarism failed in 3 different countries in the 1980s. The Black-Scholes formula for pricing financial assets is infamous for its complete inability to do its job properly, and has caused chaos wherever it has been used. The ‘Great Moderation’ was built on inflation targeting and financial deregulation, both of which were pushed by vocal economists, and it culminated in the 2008 financial crisis (no, the two were not unrelated). The IMF’s ‘structural adjustment programs’ – such as those used in the ‘transition’ of the former communist countries, and in sub-Saharan Africa, engineered largely by well known economists like Jeffrey Sachs – were notorious disasters. It’s true that Africa’s economic performance has been better in recent years, but this has less to do with the influence of economists and more to do with commodity booms and a decrease in conflict.
The one major example of macroeconomic success was in the post-World War 2, Bretton-Woods era. The ideas put in place – pioneered by economists John Maynard Keynes and Harry Dexter White – revolved around trade management and stable exchange rates. However, these ideas were quite far from the mainstream and are endorsed by few today; the discipline believes it has moved past them. What’s more, these ‘social democratic’ policies were erected largely because of popular support after the devastation of the depression-war period. In fact, the major aim of Bretton-Woods was to prevent another world war from happening. The whole thing was a more of a social movement based on political dynamics than an example of technocratic economists coming along and working their magic.
However, perhaps there are a few examples of this occurring elsewhere. One of economist’s go-to examples is auctioning off wireless spectrums. However, the evidence on this is actually somewhat mixed. In the UK and US, many of firms who’ve won the auctions have been incapable of utilising the spectrums they have bought and have had to sell them back to the regulatory bodies. Furthermore, since different companies often have to cooperate to prevent disturbances, fierce competition can undermine this process and engineers can be necessary to plan and coordinate things. To be sure, I don’t claim to have a definitive answer to this problem, as it is complex, but it seems that economists don’t have such an answer, either.
Now, there is one clear example of economist’s toolkit resulting in real world success: recent Nobel Memorial Prize winner Al Roth, whose work on ‘matching’ in kidney markets, schools and more has produced admirable results. It makes sense that this kind of thing would be an example where economics ‘works’: after all, in such situations choices are clear, there are not too many actors and institutional variables, and people have access to all of the information they need. However, this is the only obvious example I can think of.
What about non-economist’s record with policy? Well, developed countries rose to prominence before economics as a separate discipline really existed. And, as Ha-Joon Chang has pointed out, recently industrialised/industrialising countries such as South Korea, Japan and China have largely relied on bureaucrats and lawyers to form policy (and my sources tell me that the economists in China are inclined towards Sraffian economics). Different countries have benefited from highly disparate approaches to policy: in keeping with their history, culture and existing institutions, but without much consideration of ‘economic logic’. To be sure, there are examples of both good and bad policies coming out of the democratic process, but the bad is certainly not worse than economist’s record, and it least it’s accountable to the people it affects. (Incidentally, public choice theory is not a sound argument against democracy, and even if it were, it would also be an argument against economists).
This is only a brief, cursory overview, but even so we should have expected better examples of economist’s successes. and far fewer, less catastrophic failures. In my opinion, if there is a role for economists in advising policy, it’s on small, micro-issues like Al Roth’s auctions, or on specific empirical matters. However, once we get more complex, economist’s pet policies seem to be at best neutral, and they have no empirical reason to prefer their choices to those of the electorate.