Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 3 July 2013

The knowledge transmission mechanism

In a comment on my last post, Joseph Grossman asks “If the vast majority grasp and support the basic shape of the [fiscal] stimulus solution, and if we live in democracies, isn't it time to shift the analysis to expose the exact and precise mechanisms by which our electoral systems are failing miserably?” This is the question which, since 2010, I have asked myself almost every day. The question becomes even more relevant as the intellectual case for austerity crumbles, but the policy continues, and in some cases even appears to gain ground. There may be some answers that are specific to austerity: see Paul Krugman here or myself here. But in this post I want to use this example to look at the question of the transmission of economic ideas more generally. So let’s break the question down.

First, do the vast majority of economists agree? In the case of fiscal policy, I think the honest answer here is: majority, probably yes, vast, almost certainly no. For example, in this survey the vast majority did agree that the 2009 US stimulus did reduce unemployment. It would be very surprising if this were not the case - after all this is what we teach first year economics students, and it would be a very strange discipline indeed that taught its students something it also thought was wrong. (For this reason, I would love to know the results of a similar survey of German economists.)

Yet on the question of whether it was a good policy (benefits exceeded costs), only 46% agreed, and a large 40% were uncertain or did not answer. That is not a vast majority. I don’t think there is a single reason why so many economists are equivocal. Some worry about government debt levels, others have a deep distrust of government, still others have faith that this is better done by monetary policy, despite the ZLB. I suspect those numbers would be more favourable if the survey was restricted to macroeconomists, but there would still be a significant number who would be unsure.

However, what the majority - vast or not - of economists think would be irrelevant if no one listened to them. The transmission mechanism from economists to economic policy works along many channels. It may be direct. It may be mediated through the civil service. It may work through economists influencing popular opinion, which then influences policymakers. I think the last of these is the least important. In part this is because most people do not have the time and inclination to interest themselves in what economists think: I was going to say regrettably, and I am heartened and encouraged by those who do take an interest, but I doubt if it is reasonable to expect most people to try and find out directly what the arguments are on economic issues.

That is not to say that people do not have opinions. What this does mean is that their opinions come not directly from what economists think, but from how the media discuss economic issues. One way this could work is that people in the media consult enough economists to find out what the key issues are and what the balance of opinion is, and report that to the public. While some of this goes on, to suggest this is how the media generally works would be naive. To see why it is naive, it is useful to look at direct links between policymakers and economists.

Again, a naive view here is that politicians do what the ‘ideal’ media would do. But nearly all economic issues involve winners and losers, either directly or indirectly. Most politicians support the interests of particular groups. So politicians will select to talk to those economists who support policies that favour those interests. They will have little regard to whether those economists are in the majority or not. A classic example is the Laffer curve. Hardly any economists believe that tax cuts increase tax revenues, yet the Republican Party looked to the few who did, and it became a party line. (Paul Krugman, in his first book, talked about the ‘policy entrepreneurs’ who intermediated this process. Nowadays we have think tanks: some good, some propaganda factories.)

Now if we had a media that faithfully reported what the majority of economists thought, and questioned politicians on this basis, then this kind of self selection by politicians would happen a lot less, because it would run the risk of being exposed. This clearly does not happen, as Stevenson and Wolfers lament here. There seem to me to be three main reasons.

1) Those in the media react to incentives and pressure, like anyone else. So when Stephanie Flanders made the obviously correct comment that growth in UK employment despite sluggish output might not be good news because it meant productivity growth was low, she was jumped on by Conservative politicians shouting bias. Did the BBC ignore these complaints and tell the politicians to get real - like hell they did. Yet if someone in the media writes something that does not make sense in terms of what academic economists understand, do the massed ranks of professors stand up and loudly complain? It was a rhetorical question. Occasionally groups of economists write letters, although these are pretty ineffective, either because they get ridiculed, or because it provokes an apparently equivalent letter from the ‘other side’. (See Alan Manning here.) Which brings us to ...

2) For sections of the media that do have an interest in truth rather than propaganda, the perception of being unbiased is terribly important. So when an economic issue that is politically divisive comes up, the natural response is to report ‘both sides’. This is the origin of the ‘opinions on shape of the earth differ’ jibe first suggested by Krugman and immortalised by DeLong (e.g. an early example here). It is much more difficult, and risky, for the media to report which side is in the majority among the experts. So the public just end up thinking that economists disagree all the time, even when they do not.

3) A large section of the media in most countries is politically controlled. Just as it is unnecessary to own the majority of shares to control a company, it is not necessary to control all the media to have a pervasive and defining influence. Of course obtaining ‘control of the means of information’ costs money, so it is not something that ‘both sides do’ in equal measure. The fact that this political influence works more through TV in the US and through newspapers in the UK is an interesting difference, but that it works through some means is not an accident, but an entirely predictable feature of our modern democracy. What I find interesting is that many people, including some academics, appear to deny its importance.

I have become a bit obsessed by all this as a result of the widespread adoption of austerity policies, and their remarkable persistence despite apparent failure. It is interesting to try and assess how important each element is: for example would it make much difference if the vast majority of economists thought fiscal stimulus was both effective and a good policy? One way to judge this is to look to other areas where science and politics clash, like climate change, or even badgers (on rereading, one of my better posts). It is an issue that scientists in general have become increasingly concerned about: the introduction to this collection of essays from the American Academy covers many of the points raised here, and more. However there is a tendency to revert to the old line that academics must communicate more and better, and glide over some of the structural weaknesses in the transmission mechanism that mean it would make little difference if they did.

My own current view is that these structural weaknesses are to a large extent inherent in liberal democratic societies, where restrictions on what money can do are very limited. That has led me to be much more favourably disposed to the delegation of economic decisions, even though this appears less democratic, and can be seen as representing arrogance and self-interest by the academic community. Yet the problem is real enough. And it is personal: when you study, teach and research in a subject where some of its most basic findings - understood for more than half a century- can be brushed aside so easily, and millions of people are worse off as a result, you have to ask yourself what the point is.


  1. Important view.

    I feel that might exist higher frames...

    Keep on teach us!

    Thank you!

  2. Simon Wren-Lewis wrote: "A classic example is the Laffer curve. Hardly any economists believe that tax cuts increase tax revenues, yet the Republican Party looked to the few who did, and it became a party line."

    Laffer comes up time and time again on right-wing blogs. I would be grateful for links to authoritative peer-reviewed articles that show tax cuts do not lead to increased tax revenues.

    1. Ha! You thought there for a minute that you could persuade right-wing bloggers if only you had the data. Facts will never overcome greed and mean-spiritedness. Figure out how the bastards can get rich by doing the right thing or forget it.

  3. Krugman blog July 9, 2012, 'Sinners, Repent!' has the overview of those two economic petitions (160 vs 100) in Germany on the banking union.

    Let me be blunt now, as someone with a history degree: I think economists over the last generation have binged on intertemporal maximisation, and only now have you come to see the space this has given to demagogues speaking in economistic language.

    This is why I like Robert Shiller's work so much, as he has been firing out questionnaires on the hunt for predictable patterns of irrationality for decades, and then trying (and failing) to get policy makers to patch them up.

    If you look at how Gove has been roughed up by the History Establishment for trying to bring in biography by the back door, then perhaps if the Economics bodies had stamped down immediately on 'the economy in like a household budget' (from Thatcher, via Xenophon) or 'the economy is like a business' (18th France origin), then maybe this mess would have been mollified far sooner and you would not be collectively wading through a great morass of ignorant similes.

  4. If you havenot got a clue which sport you are playing the chance of winning a game are around zero.

    I one time made a list with several points what is wrong in your communication strategy. They might have been a bit (or more) sarcastic, but that doesnot make them less true. You simply do hardly anything right on that point (and you are by far not the worst in your field or science and similar in general).

  5. I wonder if the answer is to look at Peter Mandelson in the FT today describing why he supported HS2.
    "In 2010, when the then Labour government decided to back HS2...We were focusing on the coming electoral battle, not on the detailed facts and figures"

    The only explanation I can find is that people don't trust politicians to spend public money (let's not even mention the expenses scandal).

  6. If you donot fit economic decisionmaking into the bigger picture of political decisionmaking ((re-) distribution, social prioritysetting etc.) delegation of economic decisions will never happen. You start at the wrong point.

    Look at this crisis and the austerity debate. Simply before the question stimulus or not are a few other ones. Countries have not one unbalance they have in general several ones (not all the same btw). Some of these things bite each other. At the end of the day the question is which unbalance will first be restored (if they bite). A political choice. A process the economic community simply doesnot seem to grasp. As several of them seem to have missed things like being overindebted playing a role or the legal limitations (say in the EZ) being relevant.

    Another point is by bringing constantly politics into the discussion (in several ways) you make the chance that it will be seen as a political issue higher. You need to get all political issues out of the decisionmaking and the presentation thereof, especially the one to the general public, to have a chance on that. Which is practically impossible. Nearly always there is some sort of redistribution of wealth or income between different groups. Macro the thing will add up but on a personal level not. Subsequently politics start to become into play.

    Basically it looks to me that the more decisionmaking you want to delegate, the less political that decisionmaking must be. And political in the way that eg there is eg no redistribution also on a personal level. Well maybe only a marginal one or for very small and irrelevant groups.
    From another angle govermentspending for a certain individual and governmentrevenue from that individual do not match in general. And so does extra spending or extra revenue (both also as negatives).

    Anyway seen the things that are very relevant but are often 'assumed away' by the so called experts I sincerely doubt if economists would be better qualified to make the decisions than politicians. My personal opinion is that both look crap. Politicians wait till things escalate and are most of the time incoherent in their decisionmaking. Economist simply miss half of the relevant issues and weighted sometimes even more.

  7. On a political level imho the problem is that today's politicians simply are not credible enough, seen as representing their voters and are also seen as not sufficient competent by nearly all.

    Credible/representing. Well basically this is best illustrated with the rise of populist parties. Large groups of people are fed up with traditional parties.
    If you take Holland as an example. Because small parties can rise easily and get into Parliament and the population is relatively very well educated. Well from recent post it looks like populists are at 40-45% of the vote (and seats). While it looks like a traditional business oriented (cut the welfarestate) political party is still missing. Add that to above percentage and you have half the population. And Holland traditionally has a very high turn out compared to say the US btw. Hard to see this potential being less in say Germany or the UK. And probably even higher in the South.

    In the eyes of many, traditional politics has screwed up big time. The voter doubts the competence that much that he is apparently prepared in rapidly growing numbers to vote for one man parties.

    Look at the people in charge (from the other angle). Pathetic with which candidates and 'leaders' parties and countries come up.
    No larger company would appoint Cameron as CEO and Osborne as CFO simply because of the lack of relevant management experience. And Cameron looks by far the best PM material to the UK's population. And seen the competition: Ed, Nick and Farage he probably is.
    Same stuff with the leader of the free world.

    It looks like the system hardly is looking for the best people for the job. These ones are apparently not interested anyway. It is more a negative choice: the least bad.

    In a nutshell you have a system that comes up with crap 'leaders'/decisionmakers. And possibly partly as a comnsequence thereof it is rapidly losing it legitimacy and the binding with the electorate.

    I would say that it would probably be better to work on that (iso delegation). Likely more realistic. Doubtful if that is possible anyway.

    Anyway the way it is going now it won't be long and we see somewhere in Europe a populist at the helm as a consequence of the failing political system. As that is what it is.
    Back to the issue: but you are not going to solve that by delegation.

  8. The problem is the same one it has always been: break the power of the feudal lords, of the monied elites, of the sociopaths climbing to the top of the business world over a heap of bodies, of the self-interested demagogues, of the warlords....

    The problem is one of achieving a political system which gets competent people into power. Which is an age-old problem. But we certainly don't have such a system now; we have failed political systems which are putting grossly incompetent people into power.

    Given this, the reaction of the "masses" will be to try pretty much anything to get rid of the disasters they have for "leaders". Unfortunately, you *can* go from bad to worse, as Zaire/Congo has discovered repeatedly.

    This means the only thing to do for people who want a competent result. is to organize a coherent opposition, and expect to be fought tooth-and-nail by the existing powers. Something like, say, the Bolshevik Party in 1910s Russia is the best example I can think of. :shrug: We live in interesting times.

  9. This article was good for me, especially because you pointed to an old article of why Market Monetarists believe that monetary policy helps despite ZLB.

    Could you please point me any response of your that actually addresses Nick's comments? Namely - why should government resort itself to buy labor, bridges and other things when interest rate signaling hit ZLB - instead of assets that do not have the same redistribution/supply side effect (like purchasing gold)?

    If fiscal stimulus (AKA government permanently purchasing labor financed by deficit) is effective "today" to increase demand, why monetary policy (AKA government permanently purchasing government debt and/or gold or whatever valuable asset) is not effective?

    Can you explain how exactly does ZLB interfere with government ability to purchase assets with newly printed money therefore increasing inflation and AD today?

    1. Because when not up against the ZLB, monetary policy lowers the interest rate; with a lower interest rate, the private sector can borrow more cheaply to spend and reinvest (spending = economic growth). However, borrowing doesn't get cheaper than free and if the private sector wont spend when money is free (because they don't see demand for what will be produced by their spending) the government has to step in and spend (again--spending = economic growth). While government spending is presumed to be less efficient that private sector spending, it is better than having workers sit on the sidelines and produce nothing. Buying gold doesn'e emply people where roads and bridges do.

    2. Anon: Just two points, first Nick and other Market Monetarist strongly oppose conflation of "monetary policy" with "manipulating nominal interest rates"

      Second point concerns your what you call "interest rate". Even in this post: Simon claims that output depends on REAL interest rates. While central bank cannot lower nominal interest rates below 0% it certainly can lower real interest rates below 0. How? Inflation can be created by printing money.


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