In his New York Times column today, David Brooks analogizes the government's proper role in the economy to an administration's actual role in a modern U.S. university:

[G]overnment will be a bit like the administration of a university. A university president is nominally the head of the institutions. He or she lives in the big house. But everybody knows a university president is a powerful stagehand.

The professors, the researchers, the tutors, the coaches and the students are the real guts of a university. They handle the substance of what gets done. The administrators play vital but secondary roles. They build the settings. They raise money. They recruit and do marketing. They help students who are stumbling.

The administrators couldn't possibly understand or control the work in the physics or history departments. They just try to gather talent, set guidelines and create an atmosphere where brilliance can happen.

Mulling it over, this is a better analogy than even Brooks indicates. The administration/everyone else dynamic at a university also captures the feelings that often predominate debates about the role of government in society.

To be specific:

1) Most faculty and students do their damndest to simply ignore the fact that a university administration actually exists.

2) Most faculty and students cultivate an active ignorance about things like budgets, revenues, etc.

3) The only time any university administration is popular is when it has resources to dole out;

4) Any time the administration interferes with what faculty, students, etc. want to do it provokes fierce resentment -- unless the faculty/student is in trouble, in which case the hope is that the administration will make it all better.

5) Trying to change any aspect of university governance is, I suspect, even more difficult than trying to get a law passed through Congress.

6) Paying customers rack up massive debts and inevitably feel like they're not getting close to their money's worth, even though the data suggests that the pecuniary rewards from going to college are pretty significant.

7) Even if administrators lack local knowledge about the research going on in their schools, they're nevertheless sure that they completely understand the research.

8) Even though administrators come from the faculty, approximately 99.8 percent of all faculty are completely ill-suited for administrative responsibilities.

Brooks uses this analogy because of his argument for how the global economy will function in this century:

In this century, economic competition between countries is less like the competition between armies or sports teams (with hermetically sealed units bashing or racing against each other). It's more like the competition between elite universities, who vie for prestige in a networked search for knowledge. It's less: "We will crush you with our efficiency and might." It's more: "We have the best talent and the best values, so if you want to make the most of your own capacities, you'll come join us."

The new sort of competition is all about charisma. It's about gathering talent in one spot (in the information economy, geography matters more than ever because people are most creative when they collaborate face to face). This concentration of talent then attracts more talent, which creates more collaboration, which multiplies everybody's skills, which attracts more talent and so on.

Well.... economic competition among countries has been something of a misnomer since the start of the Industrial Revolution. It's mattered only in the sense that geopolitical competition exists. To put this into concrete terms, from a strictly economic perspective China's massive growth is an unalloyed good for Americans, because it means a future growth market for U.S. goods and services. It good becomes slightly less pure only when people start worrying about a) whether China will convert its growing wealth into power; and b) whether Chinese power will advance interests that conflict with the United States.

More importantly, however, there's a way in which Brooks' model is the great power equivalent of the Dubai model of economic growth -- and as I noted earlier this month, a world in which everyone races after the Dubai model is a world of massive overinvestment and inadequate demand. Like the dollar auction game, a few countries might win, but most will lose in pursuing this strategy.

Readers are warmly encouraged to provide more ways in which the administration/university relationship is akin to the government/economy relationship.

My National Interest review of finance books has provoked a few blog responses.  Actually, it's one paragraph in particular of that review that's sparked some discussion: 

[John] Quiggin thinks he’s only writing [in Zombie Economics] about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. All intellectual movements start with trenchant ways of understanding the world. As these ideas gain currency, they are used to explain more and more disparate phenomena, until the explanation starts to lose its predictive power. As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies. Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form. Quiggin demonstrates with great clarity how this happened to the Chicago school of economics. How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling.

Now, this point is not original to me -- this was a combination of Thomas Kuhn's Structure of Scientificd Revolutions, with a dash of Alan Blinder's Hard Heads, Soft Hearts.   But it's prompted something of a blog kerfuffle. 

Tyler Cowen agrees with me.  Quiggin himself* thinks I'm too slanted in my take, though in a follow-up post he allows that, "there are some zombie ideas on the Keynesian side of the fence as well."  

Henry Farrell in particular takes me to task: 

I don’t buy Dan’s arguments here. As with most stage theories (not only Marx, but also Kuhn), the mechanisms of institutional reproduction and change in his account are sorely underspecified. ‘Contradictions accumulate’ isn’t a much more helpful empirical claim than ‘shit happens.’ To really understand what is happening, you need a proper theory of the underlying conditions for ideational retention and reproduction. Why do some ideas decay into self-parody, while others do not? After all – not all ideas decay (or at least: not all ideas decay at the same rate). Some economic ideas have continued for centuries (the limited liability corporation), while others have disappeared completely, while others yet have disappeared and reappeared. We don’t know why – but if we want to make the kinds of claim that Dan is making, we need to know why, or at the least, have some rough idea. Otherwise, what we have is at best a sometimes-observed empirical regularity melded to a smidgen of intuition, which is not enough (in my book at least) to dismiss a counter-claim (that one particular idea may have a longer shelf life than previous versions) out of hand.

I'm not sure that the idea of the limited liability corporation falls into the same category as ideas like Keynesianism or the Chicago school of economics.  The former is an institutional innovation that was designed to solve a well-defined problem limited in scope; the latter set of ideas address a fuzzier but more intellectually ambitious domain of how a national economy functions.  Still, Farrell makes a interesting observation.   

This is a blog and not an academic journal, so I'm not going to be able to satisfy all of Henry's criteria, but here goes: 

First, I do wonder if ideas in political economy function a bit like self-similarity in a Mandlebrot set, in that different sets of ideas have different lifespans but nevertheless follow roughly the same arc.  It is possible that some ideas that appear to persist indefinitely are merely slower-moving in their half-life than the macroeconomic paradigms that Quiggin discussed in Zombie Economics.  Now, that's just intuition -- I have no idea if it's true.  But I think it's an interesting intuition. 

Now, Farrell wants "a proper theory of the underlying conditions for ideational retention and reproduction."  OK, if I were to sketch this out, I'd assume that the demand for ideas comes from living in a causally complex world in which intellectuals and policymakers want cognitive road maps to provide some clarity about what to do and what to say.  I'd further assume that the political and social world in which we live is in a constant state of change, making it difficult to develop "timeless" theories of political economy. 

With those assumptions, I'd postulate the following: 

First, ideas in political economy are more likely to survive birth pangs when:

A)  The theory's predicted effects appear to hold -- not necessarily via causal mechanisms internal to the theory, but the outcome is nevertheless consistent with the theoretial predictions.

B)  The theory yields policy implications favorable to at least one important interest group.  In other words, there's a political incentive for at least one power bloc to support this particular model. 

Second, the longer the predicted effects of the theory appear to hold up, the more entrenched the idea becomes in intellectual and policy discourse.  There are path dependent effects to ideas.  The ones with longer pedigrees will have greater ideational power -- even if the initial conditions that led to the original theory no longer apply. 

Third, the longer that a particular idea appears to explain its particular domain, the greater the incentive for intellectuals to engage in ideational arbitrage and apply the idea to more disparate phenomena.  Indeed, Quiggin's book demonstrates this trend within the Chicago School, in which ideas that seemed to hold up pretty well in microeconomic price theory get applied to a whole range of other range of economic behavior. 

Fourth, the longer a theory stays in circulation and the more cultural cachet it acquires, the greater the incentive for political institutions to appropriate the idea -- and in the process, adjust the content of the idea to fit their own preferences. 

Fifth, the longer a theory stays in circulation, the more likely that propagandists will simplify the content and causal mechanisms of the idea.  This allows for a greater spread of the model beyond intellectuals to more powerful actors:  policymakers with actual line authority, journalists who write about said policymakers, etc. 

Sixth, the longer a theory stays in circulation, the greater the likelihood of underlying conditions in the real world shifting to the point where the original model's empirical claims do not hold up.  This will necessarily require the development of auxiliary hypotheses that might contradict some of the original arguments made in the paradigm. 

The third through sixth postulates increase the likelihood that, over time, an idea's explanatory power will erode to the point when new challengers can potentially overtake it. 

Now, a fully-fleshed theory of ideational change would need to state the conditions under which these dynamics are likely to be more or less powerful.  Some theorie, for example, might develop expectations and behaviors that reinforce the original hypotheses.  These theories would be expected to last longer.  That said, I will leave this part of the model to the commenters. 

*As an aside, I find it fascinating that, of all my book reviews, it's the ones when I provide a largely favorable review with a soupcon of criticism that provokes the author (click here for one past example).  I've also written some not-so-nice book reviews in my day -- but never heard a peep from those authors. 

I've been having some fun at economists' expense as of late, but it's mostly been a form of friendly teasing.  The neoclassical economic framework provides some serious leverage to understanding how the world works.  It remains an incomplete approach to political analysis, however. 

Take, for example, Daron Acemoglu's Esquire essay on the importance of governance to economic development, which is abstracted from his latest project with Jim Robinson.  Acemoglu is a top-flight political economist -- which is why I found the following passages so strange:

Nations are not like children — they are not born rich or poor. Their governments make them that way....

Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments....

If we know why nations are poor, the resulting question is what can we do to help them. Our ability to impose institutions from the outside is limited, as the recent U. S. experiences in Afghanistan and Iraq demonstrate. But we are not helpless, and in many instances, there is a lot to be done. Even the most repressed citizens of the world will stand up to tyrants when given the opportunity. We saw this recently in Iran and a few years ago in Ukraine during the Orange Revolution.

The U. S. must not take a passive role in encouraging these types of movements. Our foreign policy should encourage them by punishing repressive regimes through trade embargoes and diplomacy. The days of supporting dictators because they bolster America's short-term foreign-policy goals, like our implicit support of Muhammad Zia-ul-Haq in Pakistan starting in the 1970s, and our illicit deals with Mobutu's kleptocratic regime in the Congo from 1965 to 1997, must end. Because the long-term consequences — entire nations of impoverished citizens, malnourished and hungry children, restive, discontented youngsters ripe to be drawn toward terrorism — are too costly. Today that means pushing countries such as Pakistan, Georgia, Saudi Arabia, Nigeria, and countless others in Africa toward greater transparency, more openness, and greater democracy, regardless of whether they are our short-term allies in the war on terror (emphasis added).

Look, I'm a relative optimist when it comes to sanctioning Iran, and maybe I'm reacting to one sentence of lazy prose, but this kind of policy prescription is... er.... how to put this delicately... not the brightest idea. 

First, Acemoglu might have noticed that the use of material incentives for democracy promotion has has been a pretty important component of U.S. foreign policy for, oh, the past 15 years or so.  It pretty much hit its apotheosis with George W. Bush's second inaugual Address.  Last I checked, the results of this effort have been somewhat meager.

Second, doubling down on sanctions poses two serious problems.  There's a "black knight" problem.  China will be delighted to expand their trade and investment links with countries like Saudi Arabia if we choose to place democracy promotion uber alles.  Unilateral or even Western economic pressure will be imited.  Unless the targeted country already has a vibrant democratic opposition, sanctions will not create one.  Oh, and one other thing -- sanctions also create incentives for massive amounts of black market activity.  Those are usually the incentives that the elites in targeted regimes respond to -- not the pressure of sanctions. 

Third, the policy externalities of sanctions aren't limited to corrupting the targeted regime -- the effects spill over into neighboring governments.  So, consider the Democratic Republic of Congo again.  If comprehensive sanctions are in place, how many sanctions-busters would emerge in the nine bordering states?  How would government performance in those countries be affected? 

I'm not against democracy promotion by any stretch of the imagination, and I agree that institutions are really important for development.  That said, Acemoglu hasn't really thought through this  policy proposal. 

I had way too much fun delivering my latest commentary for Marketplace, on how economists can go suck it have encountered some setbacks this year compared to political scientists:

For decades, there was a clear but unspoken pecking order in the social sciences. Economists were royalty, and every other discipline was part of the peasantry. Economists were treated as real scholars, with their very own Nobel Prize and everything.

Political scientists, on the other hand, were mocked for having the word "science" in the title. The old joke goes that an economist who switches to studying political science raises the average intelligence of both disciplines. It's not true, but the perception is powerful. Powerful enough for Sen. Tom Coburn to have tried scrapping National Science Foundation funding for "poli sci" earlier this year.

Coburn's effort failed, however, and for good reason -- 2009 was a banner year for political scientists, and a not-so-banner year for economists.

You can listen to the whole thing by clicking here. 

It's not an entirely fair commentary to either profession -- you try capturing the subtle interplay of these disciplines in under 350 words.  But damn, it was fun to say out loud.