It seems that finally the democratic institutions of Canada and the EU will sign a free-trade agreement that will allow us to increase our exchanges wuth the great North American country. A free trade agreement that has conditions that makes it acceptable for local communities is a big achievement these days that globalization and openness are questioned by national populism. Trade agreements must be accompanied by mechanisms of adjustment and conditions that make sure that labour and environmental standards are not lowered. This particular agreement is especially good news because it will allow us Europeans to be in closer contact with a large democratic, federal aggregate that should be an example for all of us for its openness to foreign ideas, immigrants and refugees. This agreement and agreements like this would be much more difficult if Donald Trump were to win the US presidential election (or Marine Le Pen the French election). It is true that the Democrats in the US and social democrats in Europe have also shown increased reluctance to accept trade agreements, but the opposition has always been conditioned, and still today President Obama is in the forefront of efforts to reach agreements that are acceptable. International trade is one of the factors that has facilitaded economic growth in the last decades. It may also be a source of uncertainty and decline if conditions and adjustment mechanisms are not attached to it. That is why a reasonable position is to say yes with conditions to free trade agreements. And a special yes to an agreement with a federal democracy, Canada, from which we have so much to learn.
In a recent post about what the left could do to recapture working class voters that are now captured by national populism, Dani Rodrik stresses the importance of ideas and narratives more than concrete policies. He links to two recent papers of himself on these issues. The two papers are very interesting and open new avenues for research. They touch on the old topic of the role of ideas as worldviews, but also on the topic of how identities can be made salient to convince for example the poor to vote for the rich that share the same identity. This topic was also addresed previously by John Roemer and somehow also by Branko Milanovic, which is why it is surprising that their work is not mentioned in the references. What Rodrik does is adding behavioral issues that have to do with the endogeneity of preferences, something also mentioned by Samuel Bowles in his recent work. A very simplified way to describe what Rodrik does in these articles is "Roemer+behavioral political economy," or adding psychology to the re-invention of the wheel. Something the reader interested in identities might suggest to Rodrik is to apply to himself his idea that his approach can be used to build bridges between normative and positive economics. For example, his recent view that we should stop globalization and focus on the nation-state perhaps can be qualified by thinking about the impact on preferences of making salient that frontiers are again important. But overall the articles are interesting and important and point to directions that deserve to be followed. Rodrik finishes his post on these issues with these words: "Progressives need to shape the narrative that structures voters’ interests. They need to be able to appeal to identities beyond race and gender – occupation, social class, income status, and patriotism. They need to convince the electorate that it is their interests they have at heart – not those of bankers or of large corporations. They need to forge a story line that will shape a package of policy proposals into a politically appealing whole. Progressives need not give up on the white, male working class. But they need to understand that politics is as much about redefining perceptions of interests as it is about responding to those interests."
I spent two and a half years in London with a EU postdoctoral fellowship. I had a labour contract like the ones I've had in Spain. As a European worker, I had the same rights as everybody else. In London and other places in the UK there were and there are still hundreds, probably thousands of academics from other European countries. If those in favor of Brexit prevail and achieve something resembling a hard Brexit, that will no longer be possible. That will be very negative for all. It will be a big loss for all of us, European academics, because we will cease to enjoy the freedom that has always been the norm in British universities. And it will also be very negative for these universities and for British society at large. The history of institutions like the London School of Economics, Oxford or Cambridge would be very different without the presence and contribution of academics from all over Europe. As Martin Paul said after the referendum "Brexit will limit the mobility of researchers, educators and students. The UK will join the ranks of other countries such as Switzerland, the US or Russia. This also may not be a huge problem. What I am more concerned about is that the common European academic landscape is coming under threat. Up until now, it always felt that the EU was our “academic homeland”. It didn’t matter where you come from; it’s been a united Europe for our world. I predict that a referendum under British academics would have resulted in a big win for the anti-Brexit forces. But others have dominated the vote and I am concerned that it could be just the beginning: other countries may follow."
Legal scholars Kovacic (former chairman of the US federal Trade Commission) and Hyman have a series of articles on the determinants of regulatory agency structure. Their insights are of interest to those interested in the structure of human organizations in general. To form a new public agency, they argue that one must answer five
basic institutional questions: (1) what will be the agency’s substantive
mandate; (2) where will the agency reside within the existing framework of
government entities; (3) how broad will the agency’s jurisdiction be (e.g., the
entire economy, or only selected sectors); (4) how may the agency execute its
duties (e.g., by gathering data, issuing reports, filing cases, promulgating
rules, educating businesses and consumers, conducting administrative
adjudication); and (5) how should the agency be governed (e.g., by a
multi-member board, or by one chief executive)? Four basic processes serve to allocate regulatory
tasks to public agencies. The first is direct assignment by statute. A second source of regulatory authority is accident or fortuity.A third process
expansion into an unoccupied policy domain. The fourth way to allocate regulatory
tasks is divestiture or
dissolutionby statute. Seven criteria help understand the specific structural form of regulatory institutions in a given jurisdiction:
on the regulatory ecosystem.
The authors argue that the most important of these criteria are the political implications, which they illustrate looking at the creation and evolution of antitrust and consumer protection agencies in the US. Being more familiar with the experience of sectoral regulators in Europe and Latin America, I agree.
Of all the work of Oliver Hart and Bengt Holmstrom there are two articles that I have discussed with my students and mentioned in my own work and classes, and that I think are especially relevant. One is the article by Hart (co-auhtored with Shleifer and Vishny) on prisons, and the other is Holmstrom's article on the firm as a subeconomy. The first is an application of Hart's theory of incomplete contracts to the problem of privatizing prisons. The theory of property rights with incomplete contracts argues that, when a contract that contemplates all possible contingencies cannot be written or enforced, then the allocation of property rights is a crucial ingredient of the provision of incentives. Property rights confer residual rights of control, which are accompanied by rents when the parties bargain if unforeseen contingencies arise. Then if quality is difficult to measure and therefore cannot by specified in the contract, then the party with the residual control rights will economize on quality if this is costly to provide. This is very dangerous in sectors where quality is important, like prisons. In general, property rights should be allocated, if the objective is to maximize social welfare, to the party that can do more to promote the social good when unforeseen contingencies arise. For example, in some firms where the protection of the rents from talent is important, talented professionals should have the residual control rights (law firms?). If no private party can be found that promotes dimensions that are socially valuable but not contractible, then things should remain in the public sector and rely on intrinsic incentives or external monitoring. In the article by Holsmtrom on the firm as a subeconomy, he argues that efficient managers are those that internalize externalities, and efficient firms are those that better coordinate the complementarities of the different units, or that best alleviate the negative externalities that may arise between these units of the firm. Shopping malls or sports leagues are good examples of firms that operate like sub-economies. It is nothing more than a formalization of the old idea by Ronald Coase that firms are just one type of hierarchy that are better than market-based transactions when they minimize all costs, including transaction costs. These are all very important aspects in modern economics, which illustrate that this branch of social sciences is much more than supply and demand.
Avner Offer has a recent book that I am about to read about the conservative origins of the Economics Nobel Prize. He has summarized his arguments in a recent article in The Guardian. After this book and article were published, this year's Economics Nobel Prize has been awarded to Oliver Hart and Bengt Holmstrom (two immigrants in the US, as most Nobel prize winners of all disciplines are). Their theories of property rights and incentives are certainly not the Bible of social democracy, but should be an ingredient of any modern version of it. For example, Hart's insight that quality issues are not automatically well dealt with in a privatization has been influential in reversing the trend towards prison privatization in several countries, including the United States. And Bengt Holmstrom contributed to a very interesting report a few years ago about "The Nordic Model." In this report, the authors, including Holmstrom, wrote very much in defense of the great achievements of Scandinavian social democracy, and presented a number of proposals to update the model to keep its essential features in the face of globalization. Prof. Holmstrom wrote the parts on the need to improve the productivity of the public sector, and how carefully thought incentives and public private partnerships could contribute to this objective. I don't know if the current Nobel committee leans more towards social democracy or otherwise, but it clearly likes research on incentives, as Holmstrom and Hart are just the last in a list that includes Mirrlees, Hurwicz, Tirole and others. Perhaps in the future they can also have a look at theories and empirical evidence that looks at intrinsic and non-monetary incentives and how institutions shape and provide context to performance-based incentive contracts. Then they would have to give the Nobel probably to some really left wing economist and Avner Offer would have to write a new book.
After the Brexit referendum and the one in Colombia, both of which instead of contributing to finish a period of uncertainty have contributed to exacerbate it, most observers are seriously questioning that referendums are the best way of solving complex democratic problems. Today the New York Times has a very good piece, based on scholarly research, about "why referendums aren't as democratic as they seem." According to Amanda Taub and Max Fisher, the last round of referendums, "though voters upended their governments’ plans, eroded their own rights and ignited political crises, they all accomplished one thing: They demonstrated why many political scientists consider referendums messy and dangerous." Referendums are almost never a good idea, says a political scientist, are divisive and create instability. The issues are typically not discussed in a rational way, but "politicians or other powerful actors will often reframe the referendum into simplistic, straightforward narratives. The result is that votes become less about the actual policy question than about contests between abstract values, or between which narrative voters find more appealing." The real will of the people has little to do with what emerges from a referendum: "National referendums can also be extremely volatile, driven by factors unrelated to the issue’s merits and outside anyone’s control. Opinion polls are often misleading because people do not form their opinions until immediately before the vote. Tellingly, they often abandon those views just as quickly. Professor Marsh of Trinity College Dublin said he had found, in some cases, that “most people can’t remember any arguments for — this is about a week later — they can’t remember any arguments against, and they’re not really quite sure why they voted yes or no.” The fans of the referendum should surrender. They won't.
Donald Trump, Marine Le Pen, Nigel Farage and the rest of national-populists that proliferate these days (including Catalan and Spanish nationalists) in many countries of the developed world, are not fascists like Hitler or Musolini. First, it is important to acknowledge that degrees of evil are relevant, otherwise we would be trivializing the worst of our past. Second, the context is different. There are aspects in common with the 1930, like a big financial crisis that has as political consequence political fractionalization and division. But the current leaders of national populism do not advocate for military rule or extermination. They speak in the name of democracy. Many of them are racists, or at least find it very easy to find scapegoats in neighbours or people from specific national, ethnic or religious groups. At most, they want to deport them. Bad enough, no doubt. What is very specific of these new political forces is the opportunism they use in manipulating the mechanisms of democracy. They use referendums as a tool not so much to decide much, but as a propaganda instrument, like today is being used in Hungary. Not all referendums are bad, sometimes they may be used to ratify broad agreements and serve a goal of fraternity and reconciliation (fingers crossed in Colombia, also today). Of course, they pick those aspects of democracy that better serve their purpose of exciting our worse tribal instincts. They could pick other aspects, like respect for human rights, deliberative mechanisms and the use of reason. If we are to defeat them, we must show that the mechanisms they do not like are the ones that will better bring us hope and a better world.