Political Economy After the Crisis

1. Political Economy After the Crisis Michael Woolcock Week 4 February 20, 2014

2. Overview • My week • Four questions on growth, institutions, the crisis, and economics (social science): • Why do we care about economic growth? • Why do institutions matter for growth? • What does the crisis reveal (again) about institutions? • What do these lessons imply for economics, for social science?

3. 1. Why do we care about economic growth? • It’s directly necessary for promoting things we care about • Poverty (Kraay 2012), health*, employment, etc • It’s indirectly necessary for promoting other things we care about • Generates tax venues for the arts, museums, Social Security, etc • It’s insufficient for promoting still other things we care about • E.g., gender equality, social inclusion, product safety • It can actively undermine yet other things we care about • The environment, community cohesion, health*, equality • We’ve measured it for a long time, and it enables interesting and important analyses to be done (across time, between countries, within countries) • But see Jerven (2013) Poor Numbers • Because (hopefully) it promotes broader conversations about what an economy is for, how to improve it, for whom, on what basis, etc

4. 2. Why do institutions matter for growth? • Establish conditions under which scale and sophistication of production, distribution, exchange takes place • Especially as it pertains to risk (insurance, social protection), finance, contracts (impersonal, intertemporal agreements) • (Less directly, by creating and protecting skills, technology) • Manage distributional conflicts that growth (or collapse) itself generates • Ensure legitimacy of change process, for ‘winners’ and ‘losers’ • Create power, and power must be regulated; by bodies with • Credible, comprehensive information • Diverse, professional expertise • Durable political independence • What particular institutions “look like” (form) matters much less than what they actually “do” (function) • Capability to implement is key (and implementation is really hard) • Acquired collectively, over time (decades)

5. 3. What does the crisis reveal (yet again) about ‘institutions’? • That they are wondrous but fragile political creations, both responding to and creating ‘incentives’ Comparatively Domestically Internationally

6. “Free markets”; “Good government”?

7. Sidebar: Some lessons from sports Social theory points beyond the narrower (if more technical) analyses of game theory -- “how the players play particular games” -- to “why those games, and not others, arise in the first place, why some players, and not others, get to play, how rules of engagement shift . . . and how players acquire the resources -- both tangible and intangible -- with which to play.” Xavier de Souza Briggs (2008: 22) Democracy as Problem Solving

8. 3. What does the crisis reveal (yet again) about ‘institutions’? • That we still don’t really understand them • That dominant paradigms for understanding them are remarkably impervious • Just how bad does a crisis have to be before key assumptions (presumptions) are revisited? • John Maynard Keynes: • “When the facts change, I change my mind. What do you do, sir?” • “The market can stay irrational longer than you can stay solvent.”

9. 4. What do these lessons imply for economics, for social science? • That economics is necessary but insufficient for understanding how particular institutions work, how they can be designed, improved, assessed, held accountable (cf. North) • That economists, like everyone else, can be technically competent and yet subject to biases, fads, group-think, ‘incentives’, pressure • Thus, like everyone else, need countervailing pressure • Especially so, because their actions are highly consequential • That ideology should be taken seriously (because one can’t be “post-ideological”) and lightly (because it is a poor guide to understanding, solving complex problems) • E.g., “Free markets” are self-correcting • That ancient, hard-won lessons must be heeded • Quiscustodietipsoscustodes? • "We tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress.“ Gaius Petronius Arbiter (c. 27 – 66 AD), courtier to Nero