George Stigler vindicated: Learning the Wealth of Nations

Tyler Cowen has drawn attention to a 2011 paper on policy learning in the 1970s and 80s by Francisco J. Buera, Alexander Monge-Narajo, and Giorgio E. Primiceri was published in Econometrica in 2011. Their paper found that:

1. Policymakers have priors about how good the market economy is, and they revise those views — and thus revise policy — as they observe their own growth results and those of their neighbors.

2. A simple learning model predicts about 97% of the policy choices observed in the data.  The model accounts for more than 77% of the observed policy switches over a three-year time window.

3. Evolving beliefs — and not just the fixed demographic characteristics of countries — are critical for understanding policy decisions.

4. It was probably the growth collapse of the late 1970s for interventionist countries which led to a greater reliance on markets.

5. Adjustment toward better-performing policies is often quite slow.  In part this is because policymakers attribute the superior performance of other countries to heterogeneity rather than policy per se.

This record of politicians learning from failure and success at home and abroad is a vindication of George Stigler’s views of the relative unimportance of economists in influencing public policy.

There was no neoliberal conspiracy that captured the hearts and minds of politicians through mass hypnosis in the 1970s and 1980s as both the Left over Left and the Twitter Left like to suggest

The policies of Friedman had to wait, as George Stigler predicted, for a market to develop among interest groups and the voting public. Once that market developed, Milton Friedman, FA Hayek and others looked like leaders of an opinion.

A few years earlier, Friedman and Hayek were just angry men in the wilderness.

The reason for this sudden change in their public profile and purported influence on the shape the course of public policy in th 1970s and 1980s onwards was political parties were yet to conclude that the existing policy regime had failed irretrievably, and that the successes of neighbours on economic reform might be worth imitating locally.

Once politicians, the voting public and interest groups concluded that new solutions are needed, just as Stigler predicted, the ideas for reform been around for a long time came to the front.

via http://marginalrevolution.com/marginalrevolution/2014/11/learning-the-wealth-of-nations.html

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