Economic thinking and political institutions: why the three Cs are important…
Everyone aside from the hardcore ideologues, knows that the state is good at certain things, bad at certain things. Politics is a repeated game; partly on whether the government has a comparative advantage on suiting the electorates’ preferences on the election’s issues. Indeed, elections are just a social aggregation rule to aggregate preferences, albeit in an ineffective manner as shown by Arrow’s impossibility theorem, the Gibbard-Satterthwaite theorem, Condorcet theorems, etc. Everyone knows that Pareto optimality is just the fantasy baseline upon which we judge things from. Economic policy in general, is about the distance from Pareto optimality (and also very importantly, distribution, and distributional implications are not equivalent to optimality here – a subject for another post). Indeed, whichever “ideology” is optimal, will also forever be subject to a repeated game over an infinite period too. Hence, on the surface, this theorising is somewhat orthogonal to the tangible, somewhat incremental, policy differences that can be enacted today…
In particular, in the application of the American vaccination progress, Operation Warp was good at authorising some vaccines swiftly. Plus state investment into pharmaceuticals (and its ‘R&D equivalent’ too), paying high in advance for vaccinations, was good.
However, regulations on vaccine approval, dosing, intellectual property, etc, could do with a rethink. We already had the vaccines largely developed at the beginning of the pandemic. Is the welfare cost of the resulting deaths, lockdowns, and so on, really a sufficiently good price to pay relative to the benefits of a swifter approval process, hence distribution, of these remarkably safe vaccines? Plus in large part, it is private businesses behind the supply chains. Incentives for profit maximisation also drove the development of the vaccines.
Standard economic theory is, regrettably, out of vogue today. From so-called “Econ 101ism”, its challenges from the post-Keynesian heterodox resurgence online (fuelling the MMT debates), to the relentless critique of DSGE (with heterogeneity, frictions, or not – the critiques often focused on the microfoundations approach in itself), it is indeed unfashionable to argue in favour of standard theory. However, a lesson that will always stick with me, is to think in terms of interior solutions. Convexities in technology, (quasi)cocavities in utility, continuity, are taught as the standard basis point from which we view the world for a reason. I deplore the fact that, most of the political debates today, revolve entirely around corner solutions, that are special cases for a reason. Most political discussions are entirely centred around one “ism” after another. No wonder the game is repeated!
As such, I would like to pay tribute to the three Cs: continuity, convexity, and concavity. For economics is not just a set of theorems, predictions, statements, etc. It is a toolbox to organise your thinking. A toolbox, that, the more you ponder over it, the more radical, revolutionary; the more it challenges entrenched, establishment interests, ideologies, it appears!