Tuesday, May 23, 2017

Independent regulators and the evolution of economic thought

Independent regulatory agencies first emerged in the USA in the Progressive Era, as a result of the replacement of litigation by regulation. Like other reforms in the same period, this one was meant to reduce the power of Robber Barons and achieve efficiency gains. The damages produced to the public interest by large corporations were too heavy to be left to litigation that was easy to capture by large interests. More or less at the same time, economic theory developed models of normative welfare economics, where benevolent planners were supposed to fix market imperfections, that is cases where markets are not guaranteed to deliver efficiency. An analogy to traditional welfare economics was the public interest theory of regulation. This traditional normative theory in economics in general was criticized by the public choice school of Buchanan, Tullock and Niskanen, under the reasonable argument that it was inconsistent to assume that market agents were selfish and instead planners had the interests of overall society in mind. The analog of this theory in regulation was the capture theory of Stigler and other scholars of the Chicago School. The first criticisms of independent regulatory agencies were inspired at least in part by this school of thought. In the recent past, like in general economics, there is some consensus that neither the public interest theory nor the capture theory completely explain the facts, and that is why we have seen the development of the new economic theory of regulation (Laffont and Tirole and authors in the same tradition) and new institutional theories of regulation (Williamson and Spiller among others). But since departures from efficiency can hardly be explained only by information asymmetries or transaction costs, behavioral economics in general and in regulation in particular have contributed even more recently to explain phenomena that were difficult to capture only under the assumption that everybody is rational. And I will suggest in a presentation in Corsica this week (hopefully the slides will be available soon and the updated paper in a few weeks) that it would be inconsistent to asume that only market agents, and not policy makers, are affected by bounded rationality.

Sunday, May 21, 2017

Friends and politics

The president of the Spanish Second Republic (1931-1936) Manuel Azaña famously said that politicians should behave as if they had no friends. To Mr. Azaña, friends and politics were incompatible. The fact is, though, that politics is a very social experience. Those that are not willing to afford the luxury of being apolitical, share experiences with others through their life time. For some people, politics is a sporadic experience, perhaps an intermittent one, limited to voting when there are elections, and not even always. In the other extreme, there are professional career politicians who spend their adult lives in a professional public or political job (actually, in many of them). The attention is focused on many of them, for which their life is more complicated than lay citizens are prepared to accept. But in between the passive citizens and the career politicians, there are millions who are active in politics: members of political parties, activists in politicized organizations like unions or associations, journalists, and these days also just normal people with an account in Twitter, in Facebook or with a blog. What happens when you have shared experiences with people who have become your close friends from these experiences and all of a sudden you disagree on substantial issues? I remember that something like this happened to Stefan Zweig as he explains in "The World of Yesterday." Many of his friends who had shared with him a political and intellectual dialogue in a cosmopolitan Europe, suddenly became fascinated by nationalism in the first world war. I have to confess that something similar, at a much more modest scale, has happened to me. Friends with whom I shared many political experiences in my youth, with whom I campaigned in support of the left and the center-left and a federal and united Europe, suddenly have embraced nationalism, and in particular the campaign for the secession of Catalonia that has been ongoing since 2012. Has the same happened to people in the USA, the UK, and France, with other national-populisms? Some of my friends have attained positions of relevance in the media and have political jobs around the pro-secession majority that controls the Catalan government. Sometimes I feel anger. At other times, I feel a desire to respond to them with irony or sarcasm (I happen to know where they come from ideologically). Mostly, I feel personal pain and sadness. Can we still be friends? Political positions should not affect personal relationships in theory. But our friendship was born from politics. We were trained in values that I thought were common to us: fraternity, solidarity, internationalism. Is all that gone?

Tuesday, May 16, 2017

Politics after Piketty

At the library of IESE in Barcelona I found the newly released book "After Piketty. The Agenda for Economics and Inequality," edited by Heather Boushey, Bradford Delong and Marshall Steinbaum. It is a long book with contributions from many authors that discuss the relevance of the famous book written by Thomas Piketty, "Capital in the XXIst Century." I had time to get an idea of the content of the different contributions, and if I am not wrong there is only one that addresses somehow in depth the policy proposals of the book (contained in its last part), namely the creation of a global tax on capital in the long run, but a European version in the short run, accompanied by a democratization of the Euro-zone and the abandonment of the nation-state, at least on Europe, as the locus of the social contract. Only the chapter written by Elisabeth Jacobs addresses the political challenges to introduce such policy innovations. But she ends up suggesting something that seems to come from her narrow (though interesting) research agenda, namely the need to expand the political rights of the poor in the USA, and presumably other democracies. Her criticism that politics is everywhere and at the same time nowhere in Piketty's book is in my view correct. It is not clear what is the political mechanism that will make possible to overcome the political inequalitites that give rise to (or are complementary of) the current income inequalities. But I miss in Jacobs chapter, as in all other chapters (after a superficial look), an analysis of the comments made by Piketty about the nation-state and the need to make progress towards new forms of international federalism. Perhaps it is an inconvenient topic in some places (or perhaps I'm too obsessed by the issue), but one without which I am afraid that the Piketty agenda will make no progress.

Sunday, May 14, 2017

From engineers to gardeners

There is a nice video explaining that one of the desirable features of the XXIst century economist should be changing our frame of mind from that of an engineer to that of a gardener. In a social reality characterized by complexity, attempts to design reality as if you designed a bridge are doomed to fail. It has much more promise to behave like a gardener: just try things, plant seeds, and help those plants that look more promising. In evolutionary game theory, players do not choose strategies, but they are of one type or another by genetics or socialization. Types that are fitter expand and types that are less successful decline in the overall population. Sometimes in a long run equilibrium only one type survives, put polyarchic equilibria with a diversity of types are also possible. What is then the role of the free will and collective action? Individuals willing to have an influence on reality should also be gardeners: they should try new types, introduce mutations, set up new games. Similarly in politics. In democracy, there is little that one individual or even a group of individuals can do to change or improve things. There are many unintended consequences. But it makes sense to pay attention to new ways of doing things: some of them will fail, others will succeed. Long periods of stability will be followed but short periods of big change (these are called punctuated equilibria in the analysis of complex systems), but this does not mean that one individual can predict and much less shape a sudden change. The result of big changes when they happen can be influenced by small steps taken in periods of stability. These ideas could perhaps be adapted to the attempts of a changing (declining?) left to influence the direction of Europe in the next few years. Those organizations that will prevail and be more successful will be those that are fitter to achieve the objectives of the left, which are the same as ever: equality, justice, freedom, solidarity, welfare... Adaptation to the environment is a desirable characteristic for a plant that any gardener should take into account. And today's social environment has as key ingredients integrated economies, globabilization and technological change. Those that adapt better to this reality will be better at achieving those objectives. Being reactive and short-termist may fool some into believing that they shape events, but what matters and can make a (small) difference is planting seeds for the long run.

Wednesday, May 10, 2017

Why it matters that it doesn't matter who will replace Luis Enrique

In the next few weeks FC Barcelona officials will announce who will replace Luis Enrique Martínez as manager (head coach) of the soccer team, after he said recently that he would step down next season. Should fans be worried about this announcement? In other words, does it matter who will replace Luis Enrique? The best experts in the economics of soccer say no. Economist Stefan Szymanski usually argues that the identity of the manager does not significantly affect the performance of teams. Teams change their managers over time, but each team stays more or less constant in the rankings, basically depending on resources and fan base. Changes around the mean can be attributed more to randomness than to managers. It is just that managers provide a convenient narrative. When a manager is fired after a streak of bad results, the performance in the subsequent games is not statistically different to the performance of teams that experience a similar bad streak but that do not fire the manager. Of course some managers are better than others, but the difference does not have a significant statistical impact. It is just that as soccer consumers we also consume celebrity managers and managerial narratives. Last summer the narrative in England was that the English Premier League would be a big fight between the two biggest celebrity managers of the time, Guardiola and Mourinho. We all know now just some games before the end of the season, that the greatest national league in Europe will be won by Antonio Conte's Chelsea, and that the second will most probably be Pochettino's Tottenham. These two managers have a lower profile than Pep and the special one, but their teams have done better. Perhaps Guardiola and Mourinho achieved the status of celebrity managers because one of them managed the best set of players in history in Barcelona, and the other had access to the largest pay check in history when Abramovich arrived at Chelsea. Manchester City and Manchester United will not finish the season very differently from where they finished last season under much less glamorous managers. That includes performance in all competitions, with ManU perhaps replacing a victory in the FA Cup with a victory in the Europa League (to be seen). Whoever replaces Luis Enrique will have access to broadly the same set of players, the same amount of resources and the same fan base. Most probably Barça will be one of the two teams contesting the Spanish league and one of the best six to eight teams in Europe, as it has happened in last 30 years or so. Does it matter that this does not matter? Yes it does, because it shows the fallacy of great men. No doubt Obama is better than Trump and Macron better than Trump and Le Pen and Hollande, but leaders are endogenous, they are produced by social processes rather than being the engineers of these.

Monday, May 8, 2017

Beneath the paving stones, Europe (but not Juncker)

Daniel Cohn-Bendit, the German revolutionary that led the May 68 revolution in Paris and who became the leader of the Euopean greens some years later, was one of the supporters of the new pro-European French President, Emmanuel Macron. The European left will have to decide whether it chooses the direction of Cohn-Bendit, and Varoufakis, and many others, or the direction of the national-trostkists, Jean-Luc Mélenchon (a europhobic) and Jeremy Corbin (a eurosceptic). That is, we have to decide whether to choose Europe as the natural space of a new social contract, or we remain fatally embraced to the myth of the nation-state. Of course, many will be tempted to run away from Europe if we are once and again exposed to the unbearable lightness of the European Commision's president, Jean-Claude Juncker. Last week in Florence he made some stupid remarks about how the English language will lose importance in Europe. He made these remarks in an event I believe (beacuse I've been there before) co-organized by the European University Institute, a European institution that does all its academic work in English in the middle of Italy (I did my PhD there), thanks to which it manages to attract some of the best scholars trained in the best American universities. He made those stupid remarks just days before that France elected a president who probably speaks better English than the US president, Donald Trump, as a twit pointed out. If this is the attitude that will preside the Brexit negotiations, Juncker will not have the support of the millions of anglophiles that populate Europe (myself included), or of the millions of europhiles still present in the United Kingdom. The English language is an asset for all of us, it is our lingua franca and will continue to be if Europe is to say anything in a globalized world.

Saturday, May 6, 2017

Patriotic solidarity is an oxymoron

In her debate with Emmanuel Macron, National Front French presidential candidate Marine Le Pen argued that without clear borders, solidarity was impossible and would be diluted. This unethical vision is linked to the idea that some human beings are more worthy of solidarity than others. This is the same notion behind any nationalist movement, and it is based on the premise that our people are more important (and better) than the rest of the world. But universal human values are totally in contradicion with the idea that some humans (especially those living in rich nations) have priority over others. Beyond this ethical argument, there is also a very practical argument against patriotic solidarity, and it is based on the fact that most of the problems of the people that deserve more solidarity in the rich countries cannot be solved in the context of a nation-state with closed borders. The increasing concentration of wealth at the international level, the existence of tax havens, the mobility of capital and tax competition, the social problems associated to refugees and climate change, all these are international or global problems can only be addressed at a transnational level. Le Pen, Trump and other xenophobic nationalists, and also those in the far left (like Mélenchon) that cannot make up their minds between proto-fascism and pro-European candidates, all these try to sell the idea that the forces of globalization can be stopped. I always ask this to my students, especially those to which I teach an introduction to economics in the degree of sociology: do you believe that globalization can be stopped? None of them believes so, and they are the kind of people that could do it perhaps (the kind of people -strong, young, probably radical and educated- who could perhaps stop globalization). No, globalization will not be stopped, at most perhaps it can be de-accelerated, but I am not even sure about this. If it cannot be stopped, it must be governed. Re-distributive, even pre-distributive policies, must be designed and implemented at a supranational level, and therefore political action must be more and more international. One of the unintended consequences of the Le Pen danger in France has been the activation of a European demos opposed to her and supportive of a better, united, democratic Europe. A pro-European left is a redundancy (the left cannot be anti-European), patriotic solidarity is an oxymoron.