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Left VS Right: the economic perspective
Posted by: Jon Henke on Friday, December 14, 2007

Greg Mankiw offers an interesting list of the different economic perspectives of the Left and the Right:

  • The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy.

    The left
    sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.


  • The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations.

    The left sees externalities as more pervasive.


  • The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration.

    The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.


  • The right sees people as largely rational, doing the best the can given the constraints they face.

    The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.


  • The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst.

    The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.


  • There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it?


John Irons at ArgMax offers a competing list of his own characterizations of the Right. They are, I think, obstructively cynical...but interesting, nonetheless.
 
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The right sees externalities as an occasional market failure that calls for government intervention
That only goes for that part of the right that never has heard of the Coase theorem


Btw, there one more item that should be on the list: The time frames in which right and left are thinking:

The right tends to think in the long term, for markets need time to work. You simply don’t get instant results, and if you believe in markets your thinking will reflect that. You’ll also tend to think that problems will work themselves out over time, provided government doesn’t get in the way.

The left may claim to think in the long term, but at least as far as economics is concerned, they are pretty much obliged to think in the here and now, for otherwise, their belief in the  
Written By: Ralf Goergens
URL: http://www.Chicagoboyz.net
Sorry, I messed up a link in the comment above, so please delete it, here it is done correctly:
The right sees externalities as an occasional market failure that calls for government intervention
That only goes for that part of the right that never has heard of the Coase theorem


Btw, there one more item that should be on the list: The time frames in which right and left are thinking:

The right tends to think in the long term, for markets need time to work. You simply don’t get instant results, and if you believe in markets your thinking will reflect that. You’ll also tend to think that problems will work themselves out over time, provided government doesn’t get in the way.

The left may claim to think in the long term, but at least as far as economics is concerned, they are pretty much obliged to think in the here and now, for otherwise, their belief in the Fixed Quantity of Wealth Fallacy becomes even more patently absurd than it already is: Wealth increases over time, so if you insist in your conviction that wealth is fixed, you will put on a big pair of blinders, ignore the future and maintain that only the government, and never the market, can fix poverty, unemplyoment, illiteracy etc., etc.
 
Written By: Ralf Goergens
URL: http://www.Chicagoboyz.net
I can distill it down to a purer essence than this.

The right thinks that they are pretty smart, and so is everyone else.

The left thinks that they are pretty smart, but most people are pretty stupid.
 
Written By: Phelps
URL: http://phelps.donotremove.net
Ralf, the biggest complaint political scientists have with economists is that when they think in the long term they ignore real short term political consequences that can stifle any reform effort and create chaos and change before markets worked. Thus a political scientist might pragmatically support a slower embrace of market reforms than an economist, even if they agree on how the theory should work in the long run. Politics may not allow the long run to be achieved!

In general the list is interesting...reality is somewhere in the middle on these various perspectives, and very few people are probably all on one side or all on the other.

Also, consider other possibilities. I agree with the left that people make systemic errors and usually do not act rationally — look at the stock market bubble followed by the housing bubble, or the building on flood plains. I disagree with the left that government is there to protect people from that, though there might be a role for government. I generally agree with the post above this that government inefficiencies are so common, that giving government power wouldn’t solve the systemic problem, but have unintended consequences that could be much worse. But that doesn’t mean some creative way other than intrusive taxation or government regulation could be found. I agree with the left that externalities are common, and that large corporate actors have the power to subvert markets — I’m constantly amazed at how libertarians can be accurate in seeing the dangers of concentration of power in one kind of corporate organization — a government — but not in powerful connections between business and finance (with the line between them and government often blurry — big money is as comfortable with Hillary as it is with Rudy).

So again, I think the left makes accurate observations about the situation, but I agree with the Right (as much as those terms make sense) that the standard response of the Left — use government to fix it — is inadequate and likely counter productive.

In short, reality probably requires one to think creatively about these issues, and not choose up sides of ’left and right,’ and be pragmatic, taking politics into account as, it matters. A populist can rile up a public against even very rational reforms if the short term pain is too great, or people can welcome back authoritarians (such as in Russia) if short term chaos creates insecurity. Pragmatic appraisals of reality rather than ideology should guide economic choice. Pragmatic application of economic theory, rather than dogma, should guide policy.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Quick Example of what I just said: India under Nehru. Few people would say his economic policies were best for growth and the development of prosperity. The "Hindu growth rate" of 4% was small for the region (esp. given the population growth). Yet the ability to keep the masses of impoverished people happy through government transfers allowed India to develop a stable democracy that now is starting to embrace reforms. So was Nehru right after all? Or will the huge bureaucracy that remains in the wake of those policies ultimately stifle change?
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Not bad.

I wonder how working in politics is affecting your supposed view of:

The right sees people as largely rational...,

Some days are harder to believe that then others, eh?
 
Written By: glasnost
URL: http://
"I agree with the left that people make systemic errors and usually do not act rationally"

They’re right, of course; or at least it’s usually not possible to see that people are acting rationally (their premises are either wrong or not visible to you).

What leftists seem to miss is that people in governments and/or positions of policy-setting are no different from people in general.
 
Written By: William Tanksley
URL: http://

What leftists seem to miss is that people in governments and/or positions of policy-setting are no different from people in general.
Actually, both sides often miss that (which is why I think either ’side’ is probably wrong — the reality is in the pragmatic middle). People who think big government is dangerous need to recognize that big money with power is a similar danger. The only real solution is to try to keep power accountable and as decentralized as possible.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
I fixed it. Thanks for bringing it to my attention.
 
Written By: Jon Henke
URL: http://www.QandO.net
Scott:
Ralf, the biggest complaint political scientists have with economists is that when they think in the long term they ignore real short term political consequences that can stifle any reform effort and create chaos and change before markets worked. Thus a political scientist might pragmatically support a slower embrace of market reforms than an economist, even if they agree on how the theory should work in the long run. Politics may not allow the long run to be achieved!
Incremental reforms can be counted on to fail, while a bold ones at least have a chance to succeed. If you reform in small steps, you are still going to have the immense market distortions as before, and enemies of reform will blame them on your reforms and probably get away with it.

If at all possible, reforms have to be rammed through in one big push and the opposition crushed the way Thatcher did to the trade unions.

Your example of India isn’t exactly what I had in mind, for India wasn’t a Wesern-style democracy then. And if the Soviet Union stil existed, the Indian reforms wouldn’t hav happened since India based a lot of their economic policies
on the Soviet example.
 
Written By: Ralf Goergens
URL: www.Chicagoboyz.net
Ralf, I think it’s a bit different in terms of India and the USSR. I think if you look at the elements of globalization — technical change, internationalization of capital, and expansion of world trade, things started to change dramatically in the early to mid-eighties. Indian reforms started under Rajiv Gandhi, while the Soviet Union still existed, the eighties were when India began to make its transition from import substitution to export led growth. The Soviet Union was failing by the seventies, and its inability to compete in a globalizing world economy led to its doom. Note other countries or single party systems that fell at around the same time: LDP dominance in Japan (they still rule, but their tight grip on power was checked), DC dominance in Italy (the Italian system collapsed in the early 90s), the PRI in Mexico, the nationalists in South Africa, and of course most of the Communist world. China started reforms a bit earlier, but their change corresponded to this era.

In my opinion, structural changes in the world economy are weakening sovereignty and forcing states to adjust their economic policies if they want to stay competitive. The political issue is how can you: a) do this without creating instability (e.g., strikes in France, or political backlashes) and b) do this while not simply shifting economic and political power to a small class of corporate elites, able to exercise power while avoiding the oversight that was inherent in the era of sovereignty. Most telling of the dangers is the credit market, which with globalization became much less regulated and more interconnected. This sets up a potential global crisis, which we may in fact be entering now with the credit woes.

Finally, the US is going to ultimately have to come to grips with the fact that a 6% current accounts deficit is unsustainable, and that the dollar is overvalued. That adjustment has already started, but if the dollar gets down (as I suspect it will) to $2 for 1 Euro, the world economy will have to rebalance. All of this will have political ramifications, and economic theory needs to take into account political reactions, be they rational or irrational, if this can be done stabily. Thatcher could make her changes in 1979 because the old system had ceased to function and Britain had even fallen behind Italy in European economic performance. But earlier Conservatives could not make changes. The political landscape is important in determining what economic policies can work, it seems.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Ok, Scott, I’ll ammend it to ’that the Soviet Union had to be a demonstrable failure before India gave up on emulating them".

Holding back on reforms will also create instability, because then you won’t be able to keep up with those countries that go ahead with their own reforms at a faster speed. Competitiveness relative to those countries wil decline, and the price for that will be at least as high as that caused by rapid reforms. Besides, those protesting about instability will usually be relatively priviledged, such as French public service workers, as well as employees of failing big companies. The Employees of basically more competitive smaller private businesses have a lower profile, so they get no such consideration when the big companies I mentioned gain an unfair advantage by public subsidies.

Yes, the dollar is going to decline further. The problem is that this means even higher iflation for the US, since imports will become even more expensive; even countries whose currencies have appreciated in respect to the dollar have thie problem, and this has to go even more so for the US. At the same time it seems that official inflation numbers understate the problem. At some point, the money supply will have to be tightened.

Also, all those countries holding large dollar reserves are getting nervous, for those become increasingly devalued as the dollar keeps declining in respect to other currencies. I am not sure I want to know where all this is going.
 
Written By: Ralf Goergens
URL: www.Chicagoboyz.net
I guess I’d say that reforms have to be taken with political circumstances taken into account. For India, I believe Nehru’s original policies had less to do with copying the Soviets (Indira moved more in that direction), but on keeping stability and trying to set up an independent economy. But since 1985 there has been such a dramatic increase in global capital and trade (globalization), the need for reform has increased, so I think your points is stronger now than they would have been a half century ago. You can’t isolate your economy any more without paying a tremendous cost.

I agree about the dollar — the US went from a current accounts surplus to a deficit in the mid-eighties (I believe), and a stable level of debt of around 30% of GDP suddenly zoomed to 70% by the end of the decade. It’s stayed there, and the US managed to go from a boom caused by deficit spending (the 80s) to one sustained by a stock bubble (the 90s) and then a real estate bubble and home equity loans to maintain consumer spending (the 00s). Now it doesn’t look like there is another way to avoid dealing with the problem; the world economy has to rebalance, and I’m not sure how this will play itself out.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm

 
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