Rodrik's "first-best economists" are the same people as the "classical" economists Keynes assaults in the introduction to the General Theory:
...The postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.Seventy-one years later, we're still fighting the same battles. Why do so many economists and students of economics take such a naive, knee-jerk "free market" view? Again, Keynes has an answer (from ch. 3 of the General Theory):
The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.I think Rodrik and Keynes have it about right, though some say that there are actually three kinds of economists: those who can count, and those who cannot.
3 comments:
All things (esp. constraints) considered, everything must be optimal. Optimality, however, is a mathematical condition; it doesn't dictate whether one must like it or hate it.
I think what meddles the mind of economists is the label "best". From a positivist perspective, it is meaningless to consider "first-best" or "second-best" because there is only one meaningful equilibrium and there are nothing to compare. (Of course, there are models with multiple equilibria and they are excluded in this discussion.)
This does not mean that there is no point to discuss whether things can be improved or not by being activist (e.g. government intervention, social movement, etc.)
I think there are generally two problems with the "first-best" economists. 1. They mentally link "being mathematically optimal" as "being the best of all possible worlds." 2. This is tied with (1), any activist move is adding constraint, so mathematically things will be sub-optimal.
While the "second-best" economists are right to point out market imperfection, etc. Their argument does not post a challenge to "first-best"'s mentality.
Clearly, I can't end centuries-long discussions in one comment. What I think one should consider seriously is whether we have enough understanding of the constaints--how many of them is of the nature? how many of them is artificial? and how many of them is beyond the scope of economics and that other social sciences actually have studied them better (e.g. preference)?
Hmmm... that's a good point about the rhetoric when we use words like "optimality". A more neutral description would be "the solution to the math problem of --". I'd interpret Rodrik as suggesting our 'first best' friends are solving the wrong math problem (e.g. they are ignoring relevant constraints), but I think you are raising some more fundamental doubts about our methodology.
I hope my skepticism is healthy.
You are right that Rodrik think the "first-best" have considered irrelevant contraints. However, if one maintain "optimal=best", then even if the contraints are correctly specified, the optimal (and the real-world) condition is still the "first-best," just that not as good as the one perceived before. This is the reason why I think we should not think of the world "best."
In a single-equilibrium model, there is one optimality to describe the reality. And there are zillions conceivable optimal conditions when we change the contraints. Yet, these zillion contraints are irrelevant because there can be only one set of constraints that is appropraite to describe the world.
I think this is the weakness of economics. First of all, from a philosophical perspective, it is almost impossible to describe the totality of the reality (or constraints).
Secondly, that we like to quantify limit the number of constraints we can use. E.g. China has more bamboo than the U.S., can you set up a constraint that the U.S. has more oak then bamboo?
Thirdly, given our taste of mathmetical model, some numbers cannot be easily fit into the models. Dutch is the tallest people. Obviously, Chinese is not. It is conceivable that the cost of building can be different (high ceiling versus low ceiling). Can a model factor these number in?
Fourth, revealed preference is a lazy theory. It simply says we give up. But clearly preference changes can have impact to the economy. For instance, smoking-ban. I don't know much about this, but sociologists, for a good or a bad reason, may have realized the trend earlier than economists. Not that their methodology is better, just that studying and monitoring prefrence is one of their job.
To conclude, there are a lot of things can't fit into our model, or we just don't concern them in our model. That's open skeptism to our models, esp. from non-economists. By not addressing these loopholes, we are the only people to be blamed.
Adam Smith doesn't talk about optimality or "first-best". He observed, and he analyzed. If he write today, do you think his paper will be accepted by Econometrica?
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