Economists as Advisers to Politicians and to Society

Abstract

ECONOMISTS usually analyze and discuss unemployment with a cool detachment, having little personal fear of su€ering any. Therefore it is surprising to read O'Flaherty and Bhagwati (1997) raise the specter that newly ourishing research on political economy and the positive theory of economic policy will put normative economic policy advisers out of work. If a political ``game'' produces policies as preordained equilibria, they argue, there are no degrees of freedom for normative intervention. Therefore there is no room for a policymaker to make any choices, and no scope for an economist to give advice about policy choices. They call this the ``determinacy paradox,'' by analogy with famous philosophical paradoxes to do with free will versus determinism, like Newcomb's Paradox. Note the nature and the sweeping extent of their claim: they are not saying that in a politicized world economic advisers will give biased or bad advice, but that all normative advice will be impossible as a matter of pure logical necessity. They do ®nd a niche ± advice directed at society as a whole and for the long run rather than at the policy-makers of the day, in the tradition of Adam Smith, Marx, and Keynes ± which they claim economists can continue to occupy. I will argue that O'Flaherty and Bhagwati's interpretation of determinism of the political process is incorrect. Economists who want to give normative advice to politicians will continue to ®nd enough opportunities. This work may not be as elevated as writing for the ages, but it is more relevant for the vast majority of the profession, and more likely to have some immediate impact. But to achieve this aim, the advice must be based on reasoning that includes the political process; it must use game theory and political analysis as well as conventional economic analysis. O'Flaherty and Bhagwati make their argument for the ``determinacy paradox'' with number of analogies, of which the one they use frequently is that in a fully determined world, one has no freedom to choose what one will eat for breakfast. In my view that is a false parallel and a false paradox. The parallel is false because the economic world is large enough and competitive enough that any one person's choice of breakfast food makes a negligible di€erence to the market outcomes, whereas in the political world many players are large enough for their actions to make a di€erence. The paradox is false because a game yields an equilibrium outcome only when all players choose their equilibrium strategies. Far from removing the freedom of choice, game theory burdens ECONOMICS AND POLITICS 0954-1985