Ideas Matter

Intellectuals who in Europe extol competition, descry big government, defend free trade, and criticize state subsidies are felt to be a nuisance: if one wants to be accepted as a thoughtful and agreeable companion one has to defend the national film industry in France or praise Mittbestimmung in Germany or love the euro in Brussels. Equally in the United States, one should not oppose lifting the debt ceiling every so many years to pay public salaries and veterans’ pensions, on pain of being classified as some kind of Mad Hatter at an Alice in Wonderland Tea Party. As Friedrich A. Hayek said in an essay I will return to:1

There can be few more thankless tasks at present than the essential one of developing the philosophical foundations on which the further development of a free society must be based. (“The Intellectuals and Socialism,” page 191)

The mystery is why those of us who defend the free market, the rule of law, private property, and the rights of minorities go on with our efforts when we seem to be so ineffectual? Milton Friedman used to say that the influence of pro-market economists on political decisions was only seen in times of crisis. For years, proposals of reform went unheeded. But when a crisis struck, politicians started looking around desperately for some kind of solution to the problems that baffled them. There was the opportunity to influence economic policy and break through the wall of interests.2

So the first question for anybody who believes in the importance of ideas is why our beliefs and proposals seem to have so little influence on governments, politicians, civil servants, lobbyists and trade representatives. We do not even seem to have business people on our side: speak to them of creating a pro-market intellectual climate of opinion and a quizzical look comes over their faces. Politicians are afraid they will lose votes if they apply the policies we recommend. Civil servants prefer their complicated interventions to making a clean sweep of gratuitous regulation. The egregious example is international trade: the overwhelming majority of economists defend free trade but protectionism in one form or another seems to be here to stay. A first question, then, is what keeps us going if a wall of interests thwarts all our efforts? How often will we have to trumpet our way round Jericho?

The second question is why ordinary voters close their minds to considering the long term progress of society and only care about how moves towards freer markets affect their immediate interests. Should one assume that they are ruled exclusively by their pocket-books? One of the main contributions of economics as a social science is the mileage one gets from explaining individual actions by personal interests. In the field of politics, public choice theory has clarified many questions starting from the assumption that voters try to maximize a narrow view of their utility, and so do politicians and civil servants, all under the constraint of their costs in terms of jobs, taxes, chances of re-election and bureau size.

There is a third and deeper question which may undercut the economist’s pretense to authority. Are we not members of the species homo oeconomicus? Remember the famous passage by Adam Smith in The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities but of their advantages. [Book I, Chapter 2, paragraph 2]

Do we serve our intellectual fare out of a regard to anything but our personal interest? The question is not an easy one to answer. There may be “a tension between doing well and doing good”.3 Of course, scientific economists try to prosper by their pen. Those who have no faith in the market, having been trained to think and to calculate, cannot understand why nobody offers them the possibility of ruling society or at least ruling the rulers. This leads some intellectuals to react in two ways: subservience to the powers that be or unrequited discontent. Many will tell the powerful only what they want to hear. Most will want to nibble and cavil at the market system. Are we of that crowd?

In sum and as regards the importance and influence of liberal4ideas on public policy, there are three questions to be answered.5 One, why do our ideas have so little influence on political practice; two, whether it is true that revealed preferences show ordinary people only too ready to consider their personal interests only; and three, whether we economists are so keen on truth as we pretend to be and are not in fact ruled by our personal interests just like anyone else.

Originality in the search for truth

Let me start with the last of our three questions. There is little doubt that even the most incorruptible of us ‘scribblers’ (as John Maynard Keynes called us) is moved by the wish to prosper in his career and obtain the favor of his peers and the learned public. This may explain our eagerness to stake precedence in scientific discoveries. Even so philosophical a character as Adam Smith felt he had to write a note in 1755 in which he claimed with “honest and indignant warmth” his exclusive right to “his leading principles, both political and literary”.6

However, one should remark that the interest in claiming to be the first in a field of research is ancillary to the discovery of truth. Originality of ideas matters because truth matters—on the understanding that truth in science is unattainable and functions as a regulating ideal.7 In some cases dedication to truth goes well beyond personal interest. At the risk of his peace, Galileo insisted in showing the moons of Jupiter through his new glass to skeptical cardinals of the Church, because he wanted to show them that those moons were truly there. A less dramatic instance of an intellectual not obeying his narrow self-interest is shown in F. A. Hayek’s preface to The Road to Serfdom. Let me quote him in full.8

I am as certain as anyone can be that the beliefs set out in it are not determined by my personal interests. I can discover no reason why the kind of society which seems to me desirable should offer greater advantages to me than to the great majority of the people of this country. In fact, I am always told by my socialist colleagues that as an economist I should occupy a much more important position in the kind of society to which I am opposed—provided, of course, that I could bring myself to accept their views.

At bottom, what has moved these and many other scientists and economists is not so much a hankering after fame or a wish for martyrdom but a commitment to work well done and error undone.

Whence the power of rhetoric

It is a matter of observation that interests clothe their pleas in the language of ethics or patriotism to win over voters. If you propose a new tariff it has to be in the name of jobs for the unemployed. State education will be funded to increase equality of opportunity. Higher pensions will be proposed to save pensioners from poverty. Health insurance will be imposed in the name of fairness. When you double taxes on the rich it will be for equality or justice—rarely will a Chancellor say directly that he will “tax the rich until their pips squeak”.9 Scribblers who blatantly teach their political pupils the art of deceit would have incurred the wrath that Socrates directed at the sophists.

In countries with a strong tradition of respect for freedom, ordinary people may be mistaken in their demands, but they are on the side of the angels. In an uncharacteristically disorganized paper, Karl Popper10 tried to define the limitations of public opinion:

[It] is very powerful. It may change governments, even non-democratic governments. Liberals ought to regards any such power with some degree of suspicion.

Public opinion, then, should not be implicitly trusted, for “truth is never manifest”, not even to ordinary men and women in the street. Still it has to be respected. In countries with proper values,

… it is not so much the truth of an assertion or the wisdom of a proposal that is likely to win for a policy the support of public opinion, as is the feeling that injustice is being done which can and must be rectified. (Popper, page 349)

Public opinion is characterized by “moral sensitivity”. On condition that ordinary people do not countenance their lower political passions,

… in spite of the limited information at their disposal, many simple men are often wiser than their governments; and if not wiser, then inspired by better or more generous intentions. (page 348)

So there may be occasions when cynicism is counterproductive and when for some unaccountable reason the rhetoric of truth and justice is de rigueur if one wants to make any headway in open political disputes.

Ideas and interests

John Maynard Keynes has been endlessly quoted on the influence of ideas in society.

[The] ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.

This pronouncement is too imprecise to be really useful and the explanation which followed was characteristically frivolous.

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.11

I can agree, as will be seen, with his conclusion that “the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas”. But by speaking of ‘voices in the air’ and ‘madmen in authority’, he is doing little favor to himself and the influence he would exert on generations of intellectuals and politicians. Also, I wonder if it is at all useful to think of politicians as mad, even when speaking of the bloodiest dictator, be he a Lenin, a Hitler or a Stalin: such men do what they think is best for themselves, given their views on how the world functions. Assuming their madness, one is deprived of the possibility of understanding their motives and devising ways to stop them in good time.

Joseph Schumpeter wrote about the role of intellectuals in capitalist society in even harsher terms than Keynes. He did so in a chapter in Capitalism, Socialism, and Democracy on “The sociology of the intellectual”. We can expect intellectuals to form “groups to whose interest it is to work up and organize resentment, to nurse it, to voice it and to lead it”. They are, he says, what the Duke of Wellington called “the scribbling set”—a curious coincidence of Keynes and Schumpeter using the same turn of phrase when speaking of intellectuals. These intellectuals write and speak without direct responsibility for practical affairs. The intellectual, Schumpeter could say as World War II was ending, has the paperback, the mass-circulation newspaper, and “now, the radio” at his disposal. The finishing touch of his portrait of the scribbler was to see him as the product of an undue expansion of higher education: it created the large group of “unemployed or unsatisfactorily employed or unemployable” graduates, who “swell the host of intellectuals […] in a thoroughly discontented frame of mind”. And, adds Schumpeter, “this hostility increases, instead of diminishing with every achievement of capitalist evolution”.12

Hayek is, I feel, somewhat richer and more interesting than Schumpeter or Keynes on the social role of ‘intellectuals’ (for good or for bad). As Wayne Leighton and Edward López point out in their fascinating new book, Madmen, Intellectuals, and Academic Scribblers13, Hayek distinguishes three different groups of people when he studies the influence of ideas: these are first discovered by the real scholars or experts; then, twisted and warped, they are diffused by the ‘intellectuals’; finally, they are applied (properly or not) by businessmen and politicians. Two essays of Hayek’s touch on this question: “The Intellectuals and Socialism” and “The Transmission of the Ideals of Economic Freedom”14. The first of these is downbeat and pessimistic. He there separates the contribution of the original thinker or the true expert from that of the ‘intellectual’, whose usual inclination towards socialism or protectionism he laments. The typical intellectual need be neither an original thinker nor a scholar or expert in a particular field of thought: “he need not possess special knowledge of anything in particular, nor need he even be particularly intelligent, to perform his role as intermediary in the spreading of ideas”. (“The Intellectuals and Socialism,” page 179) With few exceptions, these vulgarizers follow the latest intellectual fashion, for instance, the fashion of equality, which sets beyond criticism any measure promoting it. Further, Hayek complains that practical men will listen to little else.

[T]he main task of those who believe in the basic principles of the capitalist system must frequently be to defend this system against the capitalists. (page 192)

Though one must remember that that this essay was written in 1949, when liberal ideas were at low ebb, its tone may strike one as despairing in excess. The second essay is more hopeful. In it Hayek traces the story of the survival of liberal ideas in Europe in the interwar years and during and after World War II—surprisingly in Germany under Hitler or by thinkers having fled the Nazi and Communist menace for England or the United States. For those of us who are familiar with the history of the Mont Pèlerin Society, Hayek is in fact recounting what led him to found the Society in 1947 and how he helped rescue a distinguished band of original thinkers and specialists from loneliness and how successful that group was in passing on the torch of freedom to younger generations. On reading the list of some of its founders,15 one may think that these scholars did win some of the battles of ideas and thus have had more influence than could be foreseen in 1947.16

Modeling the influence of ideas

Professor Dani Rodrik of Princeton’s Institute for Advanced Studies has just published an essay in the Journal of Economic Perspectives (2014) whose title concerns precisely the problem in hand: “When Ideas Trump Interests”17. He makes two crucial points: (1) that ideas and ideologies seem to be absent from current political economy models; and (2) that ideas observably influence policy decisions much more than is believed. What is usually forgotten, he adds, is that the pursuit of interests is mediated by the views held by the different actors on: (a) what they are maximizing; (b) their beliefs on how the world and society function; and (c) what means they have to achieve their ends. All three are relevant for us scribblers because on all three can we say something with effect.

As to the (a) aims to be maximized, we should analyze those other objects of political endeavor beside pecuniary interest, such as honor, glory, reputation, respect, wealth, power, durability in office, and the good of the country. They can be especially relevant in political economy. Rodrik adds a telling phrase: “… this is a point that should not be controversial in an age of suicide bombings”. (Rodrik, page 191)

Of greater importance or perhaps more susceptible to influence by applied economists are the other two. As regards (b) the beliefs, wrong views about the functioning of society harbored by the powerful are difficult to unmake, since reality and the models thereof are ambiguous: Rodrik underlines the conflicting interpretations of the 2007-2010 Great Recession by new-Keynesians and Austrian Schoolmen, with no clear way to decide between them: the first demanding more regulation, the latter blaming public interventionism. However, from time to time the consequences of interested action are so clearly counterproductive that critics may finally be heard by the powerful. An outstanding instance is how ‘stagflation’ in the 1970s contributed to the demise of folk-Keynesianism at the hand of the ‘monetarists’. Another has been the effect on hard-left economists of the evidence of the true nature of the Soviet empire after the Berlin Wall was pulled down.

However, the immediate possibility for political economists of the reformist kind to influence reality is (c), to supply new ideas and methods that will help society sidestep seemingly insurmountable obstacles to reaching the economic possibility frontier. Their function would be to explain and correct inefficient policy options. This is what Rodrik calls “ideas as policy innovation”, which he sees as parallel to technological innovations routinely included in microeconomic models. “New ideas about what can be done—innovative policies—can unlock what otherwise might seem like the iron grip of vested interests.” (page 194)

Even attaining ends that favor some without harming the rest can encounter resistance in a world where people care about unequal distribution. And when there are losers, there may be no fiscal instrument at hand to compensate them. At worst, in a democracy, the case for reform must be so convincing that force can be applied legally. I am thinking of Lady Thatcher’s trade union reform and her fight with the coal miners. The better way is political entrepreneurship. Leighton and López give a number of instances when ingenious reforms helped break the deadlock: Ronald Coase’s 1959 piece which led the FCC to auction spectrum license from 1994; President Carter’s airline deregulation in 1995, under the inspiration of Alfred Kahn; or Clinton’s 1996 Workfare Act, pushed by Newt Gingrich.

Think tanks

In the history of the diffusion of ideas the ‘think tank’ is a new development. It has come to complete the work of the university departments, of quasi-universities like the Hoover Institution or the National Bureau of Economic Research (NBER), of the unaffiliated essayist, the specialized review or magazine, the research department of a central or private bank, the aides of members of Congress, or the study groups of political parties. Whatever the political affiliation of the think tank, if any, its business is institutional innovation, i.e., presenting new practical ideas to make social and economic change possible by taking a shortcut round the thicket of entrenched interests. I remember Edwin Feulner, the successful begetter of the Heritage Foundation, explaining the need for organizers to apply the lessons of the great thinkers in practice—he compared them with engineers applying scientific theories. Think tanks are ideas factories whose inputs are the thoughts of economists and political philosophers and whose outputs are new ingenious devices to sidestep obstacles. The reason for the success and spread of the think tank is that wealth enhancing policies often need the right vehicle to get an effective coalition on board.

The voice of the people

The worst case is when the rent-profiting elites feel they may be in danger of losing power if the economy is made more efficient. Here Rodrik reminds us of two different effects: “the goose that lays the golden eggs effect” and the “the replacement effect”. The first one alludes to a situation when the elites are happy with the country undergoing a period of growth, for that allows them to extract more for themselves.

Elites behave here like Mancur Olson’s (1993) “stationary bandits,” brigands who stay long enough with the farmers from whom they steal that they have an incentive to encourage a degree of prosperity. (Rodrik, page 198)

The “replacement effect” has been analyzed in Acemoglu and Robinson18. Elites fear that making the ruled more prosperous will make them restive and so makes them resist innovation and progress, as they did in pre-revolutionary France or in Metternich’s Austria.

The ‘replacement’ issue may solved by a revolution. There are many instances in history when the scribblers prepared or started one, as in America in 1776 or in France in 1789, with harsh results in the short run but a clear improvement in economic productivity thereafter.19. There also are instances when the revolution made matters much worse, as happened in Russia after 1917. The pen can be mightier than we think!

As Rodrik underlines, the right sort of institutions to help with the undoing of special interests are mainly to be found in democracies, with the rivalry of political parties, the possibility of exercising opposition, the organization of trade unions, and the existence of an independent judiciary. (page 198) These encompassing institutions have helped to overcome the obstacles built by ancien régime ruling elites.

However, democracy does not guarantee that new coalitions of rent-seekers are not formed. One must not assume that majorities will not abuse their powers or indeed that those majorities will not go down dead ends. And the worst kind of political failure comes from voters who, by ignoring opportunity costs, contrive to disappoint their own expectations.

Political Failure by Agreement

The evident preference for the welfare state shown by a majority of voters in democracies poses a substantive problem for defenders of democracy. Political representatives are caught in a prisoners’ dilemma: they dare not reduce or abandon unsustainable entitlements for fear of handing government to their rivals and seeing them undo their reforms when they are in power. To escape the dilemma, an agreement might be reached to change the Constitution, as the result of a sort of repeated prisoners’ dilemma, after the players have been dealt harsh lessons by reality. These reforms can be formal, such as changes in the electoral system, or substantial, such as forbidding budget deficits and setting a maximum to public spending. Electoral arrangements do make a difference, as in Switzerland where decentralization and referenda have on the whole resulted in less intrusive public policies. But would people in other nations when they saw their entitlements constrained vote for such a liberal Constitution or once approved, refrain from watering it down? The preference for the welfare state is ingrained even in Switzerland. And not even Lady Thatcher dared touch Britain’s National Health Service when she was Prime Minister. The Great Recession has led to some cuts being imposed in western countries but they have been justified by the need to ‘make the welfare state sustainable’ and the general feeling is that the cuts are provisional. As Gerhard Wegner20 says, this is “Political failure by agreement”.

Abstract reasoning by itself will not move or convince the majority who, even in the United States, show a preference for welfare policies. Imposing free market rules over an unwilling people would be liberal paternalism—a contradiction in terms. People have to be convinced that there is a better way before we can expect a change in social policies. Here is an opportunity for helping ideas prevail over interests.To find ways out of this kind of deadlock, Wegner draws an interesting distinction between preferences, which change very slowly if at all, and choices, which will be constrained by the experience of unexpected consequences. In a democracy, many people will harbor preferences for an expansive state. Thus conservative clerics and sentimental socialists will say that the market is ruled by money, that it treats human beings as merchandise and it therefore is immoral. But these and other preferences may turn out to impose huge costs when applied. In few words, the welfare state may prove inimical to growth. In that case, voters may not be able to choose the policies they prefer because they do not work. The role of us dealers in ideas, then, is to discover and denounce the contradictions of collectivist arrangements, explain how things would work if left to the free market, and suggest ways to move from constructivism to spontaneous order.

Unfortunately these kinds of lessons take time to be learnt. As Hayek stressed, we live in a radically uncertain world. Societies and their institutions will evolve in unpredictable ways. Hence, the effects of public interventions and the consequences of freeing markets may not be foreseeable in detail. In that case, “citizens will not instantaneously become confronted with the loss of private autonomy which results the enlargement of public activities”.21Scholars will only be able to describe in general terms what will happen if an economy is planned or if the welfare state continues to expand. It took from 1920 to 1989 for the failure of central planning to become evident.22 And the effect of the welfare state on civilization, forewarned by Hayek in 1944, is still not fully deployed.

Though the great scholars may have warned of the consequences of contradictory or unworkable preferences, a task is now laid out for us the intermediaries in the application of ideas: to discover and suggest ways to move society nearer an economic optimum. We can criticize ideologies by pointing out the opportunity costs of political preferences and propose alternative solutions to actual failures of the political market.

Political innovators may even have an effect on the basic political preferences of citizens.

An additional part of political learning concerns the revision of preferences after individuals as political agents ascertain that policies have failed to put their preferences into practice. (Wegner, page 74)

In that way, democracy can be bettered and liberalism learnt.

In conclusion

We dealers in the ideas of liberty and the free market must not quite despair. There are reasons why we may think that interests have the upper hand: economists appear to be governed by personal interest; ordinary people, especially when they vote, seem to think only of their personal interests; and when we look at politics it seems that liberal thinkers and intellectuals wield very little influence.

Despite this pessimistic view of the usefulness of our work we can go much further than Keynes did with his famous phrase, “madmen in authority hear the voices of some academic scribbler in the air”. What scholars say may be nearer the truth than well intentioned people imagine; interests are not so easy to define. Politicians and voters are often unsure of what they are maximizing. Their ideas about how the world functions may be wrong. They must discover what means they have to further their interests. On all these points the help of thinkers and intellectuals is needed and could be for good.

The defenders of the ideas of liberty and free markets then have two different roles to play. Scholars and specialists will review and criticize ideologies in general terms. Given the point from where the founders in Mont Pèlerin started in 1947, we should stop being despondent about the effect of our philosophy on present day society. But social life is shot through with uncertainty: to be able to speak to citizens who unknowingly vote against their interests we must study the unintended consequences of political decisions and propose alternative solutions and institutions. With this kind of detailed work we shall be able to go on working for the good of our fellow men.