Dani Rodrik thinks that while we can, we don’t. Rodrik on economists’ foray into the world of political economy:
Frustrated by the reality that much of our advice went unheeded (so many free-market solutions still waiting to be taken up!), we turned our analytical toolkit on the behavior of politicians and bureaucrats themselves. We began to examine political behavior using the same conceptual framework that we use for consumer and producer decisions in a market economy. Politicians became income-maximizing suppliers of policy favors; citizens became rent-seeking lobbies and special interests; and political systems became marketplaces in which votes and political influence are traded for economic benefits.
Thus was born the field of rational-choice political economy, and a style of theorizing that many political scientists readily emulated. The apparent payoff was that we could now explain why politicians did so many things that violated economic rationality. Indeed, there was no economic malfunction that the two words “vested interests” could not account for.
While using rational choice and optimizing behavior to model politicians decision-making processes seems like a noble application of economic modeling, there are pitfalls that, by Rodrik’s estimation, economists are failing to avoid:
But there was a deep paradox in all of this. The more we claimed to be explaining, the less room was left for improving matters. If politicians’ behavior is determined by the vested interests to which they are beholden, economists’ advocacy of policy reforms is bound to fall on deaf ears. The more complete our social science, the more irrelevant our policy analysis.
This is where the analogy between human sciences and natural sciences breaks down. Consider the relationship between science and engineering. As scientists’ understanding of the physical laws of nature grows more sophisticated, engineers can build better bridges and buildings. Improvements in natural science enhance, rather than impede, our ability to shape our physical environment.
The relationship between political economy and policy analysis is not at all like this. By endogenizing politicians’ behavior, political economy disempowers policy analysts. It is as if physicists came up with theories that explained not only natural phenomena, but also determined which bridges and buildings engineers would build. There would then scarcely be any need for engineering schools.
If it seems to you that something is wrong with this, you are on to something. In reality, our contemporary frameworks for political economy are replete with unstated assumptions about the system of ideas underlying the operation of political systems. Make those assumptions explicit, and the decisive role of vested interests evaporates. Policy design, political leadership, and human agency come back to life.
In other words, if economists want to use their models to propose implementable policy changes, they need to more fully consider the role of vested interests and ideas in political decision making. To Rodrik, this includes incorporating politicians’ idea of their own personal goals, be they “money, honor, status, longevity in power, or simply a place in history”; “political actors’ views about how the world works”; and “the strategies that political actors believe they can pursue.”
Overall, I agree with Rodrik’s perspective. Political economy has the potential to yield fruitful analysis from economists, but the rational choice models he depicts won’t cut it. A more complete model of decision making in political economy will be necessary – one that far more accurately reflects reality.
(HT: Miles Kimball)