Tuesday, September 16, 2014
12

Ideas over Interests

CAMBRIDGE – The most widely held theory of politics is also the simplest: the powerful get what they want. Financial regulation is driven by the interests of banks, health policy by the interests of insurance companies, and tax policy by the interests of the rich. Those who can influence government the most – through their control of resources, information, access, or sheer threat of violence – eventually get their way.

It’s the same globally. Foreign policy is determined, it is said, first and foremost by national interests – not affinities with other nations or concern for the global community. International agreements are impossible unless they are aligned with the interests of the United States and, increasingly, other rising major powers. In authoritarian regimes, policies are the direct expression of the interests of the ruler and his cronies.

It is a compelling narrative, one with which we can readily explain how politics so often generates perverse outcomes. Whether in democracies, dictatorships, or in the international arena, those outcomes reflect the ability of narrow, special interests to achieve results that harm the majority.

Yet this explanation is far from complete, and often misleading. Interests are not fixed or predetermined. They are themselves shaped by ideas – beliefs about who we are, what we are trying to achieve, and how the world works. Our perceptions of self-interest are always filtered through the lens of ideas.

Consider a struggling firm that is trying to improve its competitive position. One strategy is to lay off some workers and outsource production to cheaper locations in Asia. Alternatively, the firm can invest in skills training and build a more productive workforce with greater loyalty and hence lower turnover costs. It can compete on price or on quality.

The mere fact that the firm’s owners are self-interested tells us little about which of these strategies will be followed. What ultimately determines the firm’s choice is a whole series of subjective evaluations of the likelihood of different scenarios, alongside a calculation of their costs and benefits.

Similarly, imagine that you are a despotic ruler in a poor country. What is the best way to maintain your power and pre-empt domestic and foreign threats? Do you build a strong, export-oriented economy? Or do you turn inward and reward your military friends and other cronies, at the expense of almost everyone else? Authoritarian rulers in East Asia embraced the first strategy; their counterparts in the Middle East opted for the second. They had different conceptions of where their interest lay.

Or consider China’s role in the global economy. As the People’s Republic becomes a major power, its leaders will have to decide what kind of international system they want. Perhaps they will choose to build on and strengthen the existing multilateral regime, which has served them well in the past. But perhaps they will prefer bilateral, ad hoc relations that allow them to extract greater advantage in their transactions with individual countries. We cannot predict the shape that the world economy will take just from observing that China and its interests will loom larger.

We could multiply such examples endlessly. Are German Chancellor Angela Merkel’s domestic political fortunes best served by stuffing austerity down Greece’s throat, at the cost of another debt restructuring down the line, or by easing up on its conditions, which might give Greece a chance to grow out of its debt burden? Are US interests at the World Bank best served by directly nominating an American, or by cooperating with other countries to select the most suitable candidate, American or not?

The fact that we debate such questions passionately suggests that we all have varying conceptions of where self-interest lies. Our interests are in fact hostage to our ideas.

So, where do those ideas come from? Policymakers, like all of us, are slaves to fashion. Their perspectives on what is feasible and desirable are shaped by the zeitgeist, the “ideas in the air.” This means that economists and other thought leaders can exert much influence – for good or ill.

John Maynard Keynes once famously said that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.” He probably didn’t put it nearly strongly enough. The ideas that have produced, for example, the unbridled liberalization and financial excess of the last few decades have emanated from economists who are (for the most part) very much alive.

In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks. It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense. But this argument conveniently overlooks the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.

Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned. With influence must come accountability.

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  1. CommentedCarol Maczinsky

    The argument is like throwing merde at shit. Just because some Americans don't get the difference between pro-business and pro-market does not mean these beliefs are universally shared. Corruption comes from an inprudent mind. If you embrace the idea that indecency is acceptable and pander to power instead virtues, your nation will suffer the consequences. Corruption may be helpful for economical development but it is an insults the principle of merits.

  2. CommentedMichael Zanette

    I always loved this quote from The General Theory:

    The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

  3. CommentedPaul A. Myers

    Economists' ideas are held accountable in the open marketplace of ideas. One only has to look at the comment sections in the New York Times, the Financial Times, and Project Syndicate to see that.

    However, in Congress, big money and powerful interests shape legislation late at night behind closed doors in important committee rooms, often simply ratifying decisions made in other rooms, over drinks at campaign fund raisers, etc. In the formal halls of power, how much real accountability is there?

    Today, the Congress has about an 11 percent approval rating, which implies 89 percent is somewhere else. I would say that the ratio of 11 to 89 is the relative power ratio between special economic interests and representative democratic interests coming from the broad base of voters. Let's simplify: 9 to 1 in favor of powerful special interests versus the people. Some pollster should go out and ask the American people if 9 to 1 seems like the right ratio. Care to guess where the majority will come down?

  4. CommentedKevin Remillard

    Economist’s ideas affect thinking and private sector executives embrace or refute ideas depending upon their interests. Organized special political interests are another indeed. Free market mortgage ideas are disciplined while idealistic undisciplined interests will be taken advantage of.

  5. CommentedProcyon Mukherjee

    Ideas will continue to shape the world regardless of whether they stem from self-interests or from altruism. In other times we have seen pre-ponderance of the latter, current times see the former in over-abundance. In corporate life as well, times have changed and ideas follow interest, numbers are established without the final analysis is done, in fact analyses are made to prove a point already made in advance.

    Between rational inattention to these things and irrational attention, there is still hope that true leadership will not cease to influence and change the world for the better; interests will remain and is important for progress.

    Procyon Mukherjee

  6. CommentedVineet Bewtra

    Agreed, but surely also vice versa - ideas are also (consciously or subconsciously) influenced by interests. Concur that analyses based on 'static' interest group concepts should be viewed as archaic.

  7. CommentedJohnny Houdini

    If this IDEA really is new to mainstream economists' thinking the discipline still has a long way to go. One doesn't have to be a genius to see that economics needs to reevaluate its position within the social sciences. The ignorance of the economists' caste has finally exposed it as the naked emperor of social sciences. It is time to acknowledge the interdependence of discplines and analytically dissolve their boundaries. To hear a renowned economist state the importance IDEAS to the discipline as something new, is like hearing a political scientist acknowledging the analytical value of a supply and demand curve, outdated if not embarrassing!
    Sincerly
    Your political scientist

  8. Commentedabilio rguez

    This seems to me as a kind of new-keynesenian-hegelianism. And I desagree. It would be also possibly to argue, in a marxist fashion, that are material relations what shape social consciousness. Yet this is not my point, but to argue that "the most widely held theory of politics" is true. Whatever ideas have the powerfull in their mind, that rules. let's call this «political kaleckianism».

  9. CommentedZsolt Hermann

    Very interesting overview article describing the different scenarios all over the world.
    If we want to go a bit deeper into the root of these scenarios we can see we all act by a simple program: maximum pleasure/profit for ourselves with minimum investment. This basic program acts placed into the different local, cultural environments we are operating in.
    The reason today we enter into a crisis and why this basic program, that served us well before seems to be destructive is, that we evolved into a very intricate, closed, integral, interdependent system.
    Our previous selfish, many times exploitative attitude in this global Matrix is causing harm every time we do something with the old method.
    Using a biological example, we always existed as "cancer cels" always self calculating, trying to obtain everything for ourselves, way above our necessities. But previously we did it in a relatively "loose" system, where there was the possibility for expansion, adjustment, or organization along smaller communities, sort of "side by side".
    Today in our interconnected system it is not possible any more.
    It is as if we have to re-engineer these cancer cells into "normal" cells, that can operate in order to sustain the whole organism above themselves.
    If we understand that a single cell or even a single organ has no chance of surviving in our new system, we might be able to do the necessary adjustments.

  10. CommentedA. T.

    Instead of abstracting interests into ideas, interests can be made even less abstract. Ultimately, interests are something that only human beings can have. Banks do not have interests – their managers or shareholders do. And when it comes to human interests, there are only two (though they do compete against one another) – the pursuit of glory and the avoidance of hassle. Pretty much all events can be explained by a set of powerful individuals trying to find some balance between the two.

  11. CommentedPedro Sellers

    Excellent article Dani. I´d like to add two quotes:

    1) Chesterton: "Men have always one of two things: either a complete and conscious philosophy or the unconscious acceptance of the broken bits of some incomplete and shattered and often discredited philosophy."

    2) Obama: "We reject as false the choice between our interests and our ideals."

    Regards.


  12. CommentedEdoardo Traversa

    I fully agree with the view that political and economical decisions are mostly taken on the basis of representations of the reality that are part of a Zeitgeist which may vary with time and space.
    I would also add that these economic ideas which are part of the Zeitgeist do not necessarily come from economists. There is a very interesting communication between all fields of human knowledge and expression, which sometimes converges to give both a scientifil and moral foundation to the most questionable ideas.
    It can be observed not only looking at the developments of social sciences, arts and literature, but also at the findings in the area of physics, biology and other experimenatl sciences. Every empirical finding depends on what the researcher wanted to find, which is often influenced by the Zeitgeist. Fro example, it would hardly come to mind to a 19th century-biologist to try to find empirical support that nature is not ordered according eternal laws and is not necessarily evolving in a positive acception. This would not have been...politically correct.
    However, it is true that economists have played a very dominant role in shaping the Zeitgest of the last decades. It is probably because they enjoy (or enjoyed) a status similar to the oracles in the Roman times.
    Thank you for the inspiring article!

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