Sunday, July 24, 2016
Are three trilemmas possible at the same time?
In his last book, "The Moral Economy," Samuel Bowles argues that a key objective of public policies should be to produce good people. That is, acknowledging the endogeneity of people's preferences, policies and institutions should be designed with the realistic objective of influencing social norms and values. The main message of the book is very similar to the one I read just before (by coincidence), "The Good, the Bad and the Economy," written a few years ago by Louis Putterman. Another similarity is that Bowles also systematically uses results from economic and social experiments to show that humans are not the self-interested caricatures of economics textbooks, but individuals that care about others and experience emotions. The new book addresses the issue of the separability between economic incentives and intrinsic preferences, which is an implicit assumption of much traditional work in public economics. It convincingly shows that economic incentives may crowd out (or crowd in) intrinsic motivations and therefore must be used with care. Towards the end of the book, there are nice examples of how this can be done. The author of "The Moral Economy" argues that the whole literature on optimal incentives in economics ("mechanism design") can also be interpreted as an extension of the laissez-faire view that markets can deliver efficiency under some conditions. When these conditions are not met, "mechanism design" used to promise that "principals" can set up incentives that harness the self-interest of individuals to obtain an efficient outcome. More recently, however, Bowles argues that mechanism designers have reached the conclusion that it is impossible to perfectly combine Pareto efficiency (the precise efficiency standard favoured by welfare economics) with both voluntary participation and preference neutrality (can I call this the Bowles' trilemma?). That is, if you do not want to coerce individuals to participate in relations that do not make them better-off, it is going to be very difficult to achieve full efficiency if individuals do not have pro-social preferences. Trilemmas have become fashionable ways to describe tensions in economic policies and institutions. A while ago, Branko Milanovic was very kind to elaborate on the answer to a question I posed to him on the compatibility of his trilemma with the famous one proposed by Rodrik. Now I wonder if the Milanovic and Rodrik's trilemmas can be combined with Bowles' trilemma. If they cannot, we would have a trilemma's trilemma. But there is no "Trillas tri-trilemma": I believe they are not incompatible. If globalization cannot be stopped, the nation-state and democracy will have an uneasy coexistence (that's something we are witnessing every day, especially in Europe, but not only): that's the message from Rodrik. And migration restrictions can hardly coexist with huge inequalities between countries: that's the message from Milanovic. After reading Bowles, I would add that if we want to keep basic individual freedoms (voluntary participation, for example migration) and aspire to some global social good (for example, efficiency), a key policy ingredient should be to try to influence individual preferences. What about that as a program for a realistic global federalism that acknowledges the difficulties of combining universal preferences with the day to day experiences and reference points of working people? The last paragraphs of the book could be an introduction to the next one by Sam Bowles. He writes about the difficulties of addressing the global scale problems of our knowledge intensive societies with the economic tools of the past: "I do not know whether an approach to constitutions, incentives, and sanctions adequate to this challenge can be developed. But we have little choice but to try." I couln't agree more.