Sunday, September 26, 2021

Definitions in social sciences

The e-book “The Economy” of the CORE Project (which I’m using in my classes) has an interesting discussion about definitions in social sciences in its first unit.

For example, ‘Capitalism’ refers not to a specific economic system, but to a class of systems sharing some characteristics. How the institutions of capitalism—private property, markets, and firms—combine with each other and with families, governments, and other institutions differs greatly across countries. “Just as ice and steam are both ‘water’ (defined chemically as a compound of two hydrogen atoms bonded with one oxygen atom), China and the US are both capitalist economies. But they differ in the extent to which the government influences economic affairs, and in many other ways."

One might think that humans are too complex. But I guess that if other animals had evolved an ability to use definitions to try to explain what happens to them, they would have run into similar problems. But as far as I know (non-human animals always surprise you), they have not. They have evolved other equally intriguing and very complex abilities, such as flying or having a radar system.

“Some people might say that ‘ice is not really water’, and object that the definition is not the ‘true meaning’ of the word. But debates about the ‘true’ meaning (especially when referring to complex abstract ideas like capitalism, or democracy) forget why definitions are valuable. Think of the definition of water, or of capitalism, not as capturing some true meaning—but rather as a device that is valuable because it makes it easier to communicate.” And ask questions about the world.

"The Economy" adds that “definitions in the social sciences often cannot be as precise as they are in the natural sciences. Unlike water, we cannot identify a capitalist economic system using easy-to-measure physical characteristics.”

And later on, “We should be sceptical when anyone claims that something complex (capitalism) ‘causes’ something else (increased living standards, technological improvement, a networked world, or environmental challenges).”

An economy is made up of the interactions of millions of people. We cannot measure and understand them all, and it is rarely possible to gather evidence by conducting experiments. But the things we observe in the world can help us investigate causes and effects (and just describe!) through a variety of techniques -always with great caution.

The same that happens with “capitalism,” happens with democracy, socialism, freedom, federalism…

Sunday, September 12, 2021

"It's the politics, stupid"

 It is well-known that political strategist James Carville said in 1992 in the context of a political campaign that “it’s the economics, stupid.” The idea was that if you keep the attention of the voters focused on the economy, that may win an election, at least then. The political solution was to focus on the economy.

However, for many contemporary problems, it’s the opposite; the economic solution is better politics. For example, the solutions to address climate change are well-known, but there are incredible political obstacles to get to them, most notably international coordination, but also others.

The economist Jan Eeckhout has written an excellent book on the macroeconomic and distributive implications of market power, which I recommend (“The Profit Paradox”). The book has been deservedly praised in many places.  I will focus my comments here on chapter 12 of the book, which proposes policies and changes to alleviate market power. One of the proposals is to create a centralized independent Federal Competition Authority in the US, with a much larger budget that the current agencies have. The emphasis of the author is on the importance that it should be an independent institution, like the Federal Reserve or other Central Banks.

Independent regulatory agencies have advantages and disadvantages when they face simple tasks for which there are no major distributive problems, but only a problem of expertise or commitment. Independent Central Banks are now accepted in most democracies, but they are not uncontroversial, for example as a result of their passivity and blindness before the 2008 global financial crisis.

I am not sure that you can or should totally separate politics from policy (as suggested by the author) in democracies, but there is a great sentence in "The Profit Paradox" about which I totally agree: "If markets were totally free, everything would be stolen." It’s true, markets must be regulated and must be complemented and sometimes replaced by public policies to deliver public goods, correct externalities and market power and redistribute resources. Of course, this can be done in many different ways.

For a book that has as its strongest point that market power has important distributive implications, the idea of a strong independent federal competition authority  has the problem that delegating into independent agencies is not the best idea precisely when problems are distributive, because there will be no consensus on which is the appropriate policy.

Some of the best central bankers themselves are also politicians. Some become politicians after being central bankers like Janet Yellen or Mario Draghi. Some are politicians before being central bankers, like Christine Lagarde. I believe that they are aware that some problems must be fixed by politics. 

The main argument of Eeckhout is that a strong independent agency is needed to confront lobbying by large corporations, because the latter use their extraordinary profits to buy the political process. Which is true. But there also examples of captured independent regulators, and there are many other policy areas for which there is massive lobbying, like in those policies where externalities should be corrected, or in taxation. If we had to expand the institution of independent agencies to all those areas where there is lobbying, almost all government agencies would be independent, and democracies would lose all meaning.

As the author acknowledges, “this is all very idealistic, and it would take a lot of political will to implement.” The need for international coordination makes political leadership even more necessary, ”a project as big as putting a man on the moon or as urgent as the Manhattan Project.”

Do we need to keep money out of politics? Yes, and there are many proposals around to go into this direction.  Do we need to keep politics out of the economy? Certainly not in a democracy. Some of the countries with the best economic indicators in all fronts, Scandinavian countries, have achieved their status by the political action of trade unions and political parties. Then the solution is to reform politics, not to eliminate it.

Distributive problems and multidimensionality make Independence more problematic than for consensual unidimensional issues. With more that one dimension, the control of the agent (the regulator) by society becomes more difficult, like in any principal-agent problem. This is also putting pressure into the Independence of central bankers after the global financial crisis, where the dimensionality of the central banker's task has increased.

The birth of the antitrust movement in the US was political. As mentioned in the book, it was the decision of President Theodore Rosevelt to create the first strong federal antitrust policy, and it was because of the mobilization of several groups in the so-called Progressive Era. More recently, it has been Biden and the Democratic Party, and especially Senator Elizabeth Warren, to put the issue back into the political agenda.

The successful antitrust policy of the European Union is led by a political commissioner with a strong institutional framework that is the result of a political equilibrium.

Historians like Snyder or Applebaum have recently warned about the challenges that democracies face in many societies, including Europe and the USA. Applebaum recently said in an interview in a Spanish newspaper that “for democracy to work, much more participation is required. We should join political parties or pressure groups.” The pressure from the powerful do not come only from lobbying, but also from disrupting the political process through populism or social media strategies.

There is room for independent agencies but there should be a debate about their scope and role. The World Health Organization is important, but more so is the G-20 to reach an agreement to distribute vaccines all over the world.

There are no shortcuts to a better politics. Resistances to policies that benefit the majority are defeated by democratic mobilization and political participation.