Role of economists in Policy-Making – idealistic economist vs cynical economist

Lars Calmfors of Stockholm University has this interesting take on the topic.

The role that research and researchers should play for economic policy-making is an important topic which probably all applied economists have reflected a lot on. It is very difficult to come up with some general theory and to make broad generalisations. It is much easier to try to draw conclusions if one can make explicit references to particular episodes. This is the approach here, where I draw on my personal experiences.

I shall focus on two issues:

1. The roles of value judgements and economic analysis in policy-making and the contribution researchers can make to hold them apart.

2. The possibilities of finding institutional frameworks for the proper integration of economic research in policy making.

He talks about two kinds of economists. First believes politicians are eager to get all relevant economic know-how before making a decision. Second believes politicans look at that eco research selectively and highlight that research which justifies their policies.

There seem to exist two polar views about the relationship between economic research and economic policy.

The first can be labelled the idealistic economist’s view. It is the one that most researchers start out their careers with. According to that view, policy is conducted by well-intending politicians, who try to maximise a well-defined social preference function. Therefore they are eager to get all the relevant knowledge about the economic relationships they can from researchers. Researchers in turn deliver the knowledge demanded and manage perfectly to separate their own value judgements from the analysis.

The polar view is the cynical economist’s view. It maintains that politicians have no genuine interest in research. Politicians act as representatives of various interests and/or try to strike a balance between their preferences and the desire to get re-elected. All they want are research results supporting the policies they have already decided. So, they systematically refer to such results and try to discredit other research. The use of research results is just one of many means a politician can use to further his or her political aims. If so, research had better be selfcontained within academia and we should not really try to disseminate research to politicians, as they will anyway misuse it. 

There is a parallel to the cynical economist’s view on the part of politicians: there is also a cynical politician’s view of economic research. According to that, economics is not really a science. Instead, economic research is just a way of finding “scientific” motivations for economists’ ideological prejudices. To the extent that politicians hold such views, it is likely to lead precisely to the selective use of research results that the cynical economist fears and thus serves to underpin that view of the behaviour of politicians.

Which view, the idealistic economist’s or the cynical economist’s is more correct? The truth is, of course, somewhere in between. But, unfortunately, I believe the cynical economist is more often right than the idealistic one.

Then he looks at few case studies exploring above distinction of economid advise:

  • Swedish decision not to join the Euro – This was a case where idealistic economist’s view was given and was true. Camlfors himself chaired the committee which looked at whether Sweden should join the EMU? The report said Sweden should not join in 1999 as it was recovering from the Nordic region crisis. It could join later as economy recovers. The analysis was far from easy. Committee felt if they give proper conclusions then it might become political. If they do not, it might not be read and generate the needed debate. In the end, they decided to take the report as a pedagogy on how should we be thinking about this issue.
  • Finland decision to join the Euro: This Clamfors feels was closer to the cynical economist’s view. The politicians felt Finland would gain from joining EMU because of geopolitical reasons. So politicians overplayed the gains from EMU and downplayed the risks. Really interesting stuff this…
  • Labor market reforms in Sweden – Labor market has always been a very important issue in Sweden. Here Calmfors points to several cases on how cynical economists were stronger. All Political parties would keep high employment as their target. Economists said structural labor reforms would be needed but those reforms were not carried out. Moreover there were policies which did not work but were not scrapped. So economists said lower unemp. benefits and introduction of employment tax credit would raise employment. But this did not find favor with politicians.

Really useful stuff from Calmfors. One can immediately think about several economic policies going around India and the world. He is absolutely right- most often it is the case of cynical economist.

What are the alternatives?

In my view, proper institutions are key to making sure economic analysis is duly considered in economic policy-making. An important question is to what extent one should tie academic researchers to ministries, government agencies and so on as in-house policy advisers and to what extent one should set up independent bodies of economic researchers that provide a transparent research input into the policy process. I shall choose three Swedish institutions as examples:

  • The Economic Council
  • The Institute for Labour Market Policy Evaluation (IFAU)
  • The Fiscal Policy Council

Economic Council has not really been a success as it tried to integrate eco research into political decisions. It was neither here nor there. The other two have been better set-ups as they are independent bodies. The broad conclusions are:

  • A primary role of economic researchers in policy making is to help draw a clear line between value judgements and economic analysis. 
  • Proper institutions are key to making sure that economic research influences policymaking in an appropriate way. In-house policy advising by economic researchers often fails, because researchers are too uncompetitive in the political infighting inside the government administration.
  • This is a strong argument for establishing independent bodies for public evaluation of policy by researchers who then influence policy not directly, but indirectly via the public debate.
  • Independent outside institutions can gain credibility by sticking strictly to positive
    analysis and abstaining from policy recommendations. But making policy
    recommendations, also when value judgements are involved, is often desirable,
    because researchers are better than politicians at explaining when they build only on pure analysis and when they also add value judgements to the analysis.
  • In fact, I believe it to be a very important task of researchers to provide pedagogical examples in the public debate of how one combines analysis and value judgements to reach a policy conclusion. Many economists are afraid to do this. I think we should be more courageous.  

Great reading.

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One Response to “Role of economists in Policy-Making – idealistic economist vs cynical economist”

  1. Korley Says:

    Discuss the role of economics in decision making

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