Friday, February 7, 2014

When Ideas Trump Vested Interests

This is a 20 page article written by Dani Rodrik which has just been published by The Journal Of Economic Perspectives.  It argues that vested interests play an obviously important role in political economy.  Any account of political economy would be vacuous without accounting for the role of vested interests.  However, as important as vested interest groups are in political economy, outcomes are not ultimately determined by vested interests.  Ideas play a very important role in determining outcomes: they can trump invested interests because the choices that vested interests make rely upon a set of ideas.  They have to determine the preferences that they choose to maximize.  In addition to purely economic interests they may to prefer to maximize glory, honor, respect, and good of country among a set of ideas that are socially constructed.  For example elites have different ideas about how the world works.  Some believe that government should respond to recession by stimulating the economy and reducing unemployment.  Others may be concerned about giving the state more power and authority in the economy and they may prefer higher levels of unemployment because it depresses wages and increases profits.  Each group will ignore outcomes that challenge their idea about how the world works.

Rodrik uses ideas from political science and from his experiences as a developmental economist in which he has witnessed the interplay between vested interests which have had to make political choices that might alter the balance of power in their countries.  Ideas and events can alter the preferences held by elites and encourage policy innovation.  Ideas are also important in legitimizing social arrangements.  For example, changes in the regulation of banking could not have occurred in the absence of the neoliberal ideal that deregulation of banking would be good for Main Street as well as for bankers.  The financial crisis raised questions about the neoliberal ideal that legitimized the behavior of bankers.  Defenders of the neoliberal ideal developed an alternative explanation for the causes of the financial crisis.  They argue that government caused the financial crisis by encouraging banks to lower their underwriting requirements in order expand home ownership opportunities to those with low incomes.  This demonstrates the importance of ideas.  Did government deregulation of banking contribute to financial crisis, or was government interference in the banking market the cause of the crisis? Over time the battle over ideas shape our economic and social outcomes.  According to Rodrik human behavior is driven by abstract ideas or loyalties that cannot be reduced economic ends.  His article illustrates how the interplay of ideas can lead to anomalous outcomes. 

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