Can behavioral economists improve economic rationality?

Behavioral economists recognize that we are all subject to the cognitive biases they have observed and studied in laboratory experiments. Yet the leading behavioral economists exhibit far more interest in applying those biases to market decisions than to political decision-, and see irrational decisions making as another example of market failure which justifies correction by some form of government action. We treat this as a justification for comparing the distortions of cognitive biases on market decisions with the distortions of those biases on political decisions. We also make a distinction between the rationality of individual decisions and the collective rationality of those decisions, and question Thaler’s argument that people fail to learn much from the mistakes they make in markets. We conclude that behavioral economists would do more to increase economic rationality by making the case for eliminating government policies that are clearly economically irrational and destructive. Eliminating such policies would not necessarily increase the individual rationality of political or market decisions, but it would increase the collective rationality of both.     

ECONOMIC THEORY AND POLICY ANALYSIS: CONCEPTUAL GUIDELINES FOR PUBLIC POLICY-MAKERS

Abstract: Traditionally public policy analysis has been able to employ the conceptual framework offered by the theory of market failure in order to evaluate the efficiency of market outcomes. However, until fairly recently, no corresponding analytical structure existed which could facilitate the examination of the efficiency and equity characteristics of government or non-market outcomes. Quite apart from public choice theory, an embryonic normative theory of government failure has now been developed which can act as a conceptual analogue to the market failure paradigm. At present, three theories of government failure coexist in the literature: Wolf's theory of non-market failure; Le Grand's theory of government failure; and Vining and Weimer's theory of govern- ment production failure. These models form the basis for a more universal theory of government failure. Nevertheless, in its current state of development this seminal literature can still assist in rational public policy design subject to certain caveats. Foremost amongst these is the need for policy analysts to augment the efficiency and equity criteria with some additional broader normative measures, and the necessity for care to be taken in the use of allocative efficiency as a benchmark in non-market circumstances.     

Public choice and public policy: The vulnerability of economic advice to the interpretation of politicians

The confidence with which politicians defend their policies is in marked contrast to the qualifications which academic researchers attach to their results. The difference is indicative of a failure of the political market, whereby politicians have an incentive to select policies for electoral and ideological reasons and to minimise any uncertainty associated with policy effectiveness. In this scenario dissension between economists is of value if it alerts individuals to the sensitivity of policy answers to the framework in which they are derived. Moreover, with government failure, public choice analysts are faced with the problem of how best to amend policy advice in order to allow for potential distortion at the hands of politicians.The authors are Senior Lecturers in Economics and Members of the Centre for Fiscal Studies, University of Bath. They wish to acknowledge the very helpful comments of Professors Gordon Tullock, Harry Collins and an anonymous referee. Any errors that might remain are, of course, the sole responsibility of the authors.     

Local Government Failure in Australia? An Empirical Analysis of New South Wales

The complexities of contemporary local governance in Australia and other advanced democracies provide social scientists with significant theoretical and empirical challenges. Drawing on recent developments, including public choice theory, economists have sought to develop taxonomic systems of government failure specifically tailored to local government circumstances. This paper seeks to extend the Dollery and Wallis (2001b) taxonomy of local government failure by invoking Olson's (1965) concept of political entrepreneurship. The paper then attempts to determine the empirical validity of the augmented taxonomy by examining it in the context of NSW local government.     

Market failure,government failure,and the private supply of public goods: The case of climate-controlled walkway networks

Two opposing models of public-goods undersupply are those of “market failure” and “government failure”. Empirical work on the relative explanatory power of these two frameworks has been limited by the scarcity of acceptable data. The case of climate-controlled walkways in major urban cores is a rare instance where such difficulties can be overcome. We investigate the supply of CCWs in 55 large city-cores in North America. We find that (1) CCW networks are well-supplied by market forces, when (2) such forces are not frustrated by government policy. We also find evidence that (3) rules-based regimes dominate discretion-based regimes. These results are consistent with the position that the “government-failure” paradigm is a viable alternative to the traditional “market failure” paradigm.     

第三部门的治理：失灵与补救

二十世纪八十年代，伴随着全球化公民社会的兴起，第三部门作为一种新的治理力量和范式追入到学术领域，第三部门以志愿的方式提供公共物品，实现公共利益和公共价值，相对于政府的层级控制和市场的私益属性，更适应于后工业化社会的需要，本文要探讨的是，第三部门作为政府和市场的替代性模式，是否也存在着治理失败的可能性，以及第三部门的治理失灵因何存在“可补救性”的问题。     

Why do analysts use structured analytic techniques? An in-depth study of an American intelligence agency

This article presents findings from the first publicly available survey generalizable to an intelligence agency to explore why analysts use structured analytic techniques (SATs). Mandated by the Intelligence Reform and Terrorism Prevention Act (2004), SATs are simple methodologies supposed to make analysis more transparent and, hopefully, valid. Despite the US government’s investment in training thousands of analysts, there is no solid evidence on how often or why analysts actually use SATs. A survey of 80 analysts and nine follow-up interviews at the State Department’s Bureau of Intelligence and Research reveals a simple, but important, truth: implementing the techniques requires training and compelling evidence they will improve analysis. Other factors, most notably the amount of time pressure an analyst experiences, were not significantly related with the use of the techniques despite anecdotal accounts and conjecture from the literature. Future research should examine other intelligence agencies to cross-validate these findings. If these findings hold in other cases, intelligence agencies should focus on reforming and incorporating evidence into the training process.     

Professional styles in government: Touchstones for the new policy scientist

New kinds of policy analysts and policy scientists are being trained in university graduate programs but the outlines of this new profession remain fuzzy. A comparative analysis of other professionals in government advisory roles may provide touchstones by which to develop the new profession. The article reports interviews with urban planners, lawyers, economists and political scientists about their experience in government. Propositions are developed about characteristic modes of thought and problem-solving styles of each profession and conclusions drawn about the relative effectiveness of each set of professional skills in a policymaking process. It is then suggested that the new policy scientist profession should develop some of the positive skills of the other fields in order to enhance effectiveness.     

Beyond the Social Market: Rethinking Capitalism and Public Policy

Despite its worthy motives, social market philosophy provides neither a useful analytical framework for understanding modern capitalism, nor the policy tools to address our present economic and social predicament. The concept of ‘market failure’, with its underlying assumption of market equilibrium, does not capture the systemically adverse outcomes of collective market forces. A more sophisticated understanding of capitalist economies, and the societies in which they exist, would recognise that the market economy is a dynamic but not self‐regulating system. It is embedded in, and impacts on, four other economies – of the natural environment, of family and care, of voluntary association, and of the public sector – which operate under different motivations and allocative principles. The role of government is central, to balance the values created by different kinds of institutions and to constrain the dynamic impacts of market forces. A number of policy conclusions are offered arising from this framework.     

Missing the Wake-up Call: Why Intelligence Failures Rarely Inspire Improved Performance

After major intelligence failures it is often asked why intelligence and security officials failed to heed the many ‘wake-up calls’ that had been provided by earlier failures and surprises. This article addresses this question by examining intelligence failures as ‘focusing events’, which is a concept used in the literature on government policy making to explain how disasters and crises can stimulate policy change and help organizations and decision-makers learn. It argues that in order for an intelligence failure such as a major terrorist attack to inspire improved intelligence performance – to be a true wake-up call – that failure must not only act as a focusing event to bring more attention to the threat, but it must also lead to increased intelligence collection and greater receptivity toward intelligence on the part of decision-makers.     

A new typology for R&D laboratories: Implications for policy analysts

Science policy analysts have traditionally classified R&D laboratories as government, private, or university. The authors argue that this view is outmoded and provides little help in understanding the rapidly changing environment of R&D laboratories. They provide and test an alternative scheme designed to cope with “sector blurring” and the intermingling of market and political influences on R&D laboratories. The authors also discuss implications of their scheme for a variety of contemporary science policy issues.     

When the Interest Rate on the National Debt Is a Policy Variable (and “Printing Money” Does Not Apply)

Modern Monetary Theory (MMT) argues that the interest rate on the national debt for a monetary sovereign is a policy variable, not subject to whether bond markets “accept” or “reject” it. This paper defines measures of the components of the standard analysis of fiscal sustainability. It then methodically describes the Federal Reserve's operations relevant for understanding why interest rates on government debt in the United States have been and continue to be driven by monetary policy. A corollary that emerges—“printing money,” as economists usually understand it—is not applicable and has never been advocated by MMT.     

“Selling out” and the sociology of knowledge

Personal experience suggests that it is a great oversimplification to assume that those analysts or scientists who work on government sponsored contracts are forced by their personal economic and power interests to make their work conform to the ideology of the military-industrial establishment. The sociology of knowledge on which this assumption is based must be supplemented by a culturology of knowledge. In terms of the latter an important obstacle to good policy analysis for government comes from the fact that most analysts are heavily influenced by a rather narrow academic and intellectual subculture that makes it difficult for them to understand with sufficient balance the problems that face decisionmakers in the real world.     

Labour market regulation and subjective well-being in low-income countries

A growing literature suggests social democratic policies, as exemplified by the welfare state and active labour market policies, promote higher levels of life satisfaction compared to the neoliberal agenda of austerity, smaller government and more ‘flexible’ labour markets. In this article, this inquiry is extended to low-income countries. A theoretical argument is developed for why labour market regulation (LMR) (rather than social welfare spending or the general size of government) is a more appropriate locus of attention outside of the industrial democracies. The relationship between LMR and several measures of well-being is then empirically evaluated, finding robust evidence that people live more satisfying lives in countries that more stringently regulate their labour market. Moreover, it is found that positive benefits of LMR on well-being are the largest among individuals with lower incomes. The implications for public policy and the study of human well-being are discussed.     

Learning from Second‐Hand Experience: Methodology for Extrapolation‐Oriented Case Research

Critics of public management reform complain that governments copy legitimated foreign practices. Recent work by Eugene Bardach helps to explain why: neither government analysts nor academic researchers possess an adequate methodology to examine practices in source sites, with a view toward adaptation in target sites. Rather than complain, Bardach takes steps to develop such a methodology, drawing analogies with reverse engineering. This article offers specific guidance about how researchers can effectively investigate practices in source sites to prepare the ground for disciplined and ingenious extrapolation of practices from source to target sites. The resulting translation is illustrated by an extrapolation‐oriented case study.     

Bugs,predations or manipulations? Incompatible epistemic regimes of high-frequency trading

Abstract

Calls for greater transparency as well as corporate and individual accountability have emerged in response to the recent turbulence in financial markets. In the field of high-frequency trading (HFT), suggested solutions have involved a call for increased market information, for example, or better access to the inner workings of algorithmic trading systems. Through a combination of fieldwork conducted in HFT firms and discourse analysis, I show that the problem may not always stem from a lack of information. Instead, my comparative analysis of different market actors (regulators, market analysts and traders) shows that the diverse and complex ways in which they access and construct knowledge out of information in fact lead to what I call different epistemic regimes. An understanding of how epistemic regimes work will enable us to explain not only why the same market event can be viewed as very different things – as market manipulation, predation or error – but also why it is so difficult to arrive at a unified theory or view of HFT. The comparative perspective introduced by the idea of epistemic regimes might also serve as a starting point for the development of a cultural approach to the study of financial markets.     

The technocratic tendencies of economists in government bureaucracy

Economists are by many accounts the most influential group of experts in contemporary political decision-making. While the literature on the power of economists mostly focuses on the policy ideas of economic experts, some recent studies suggest that economists also hold particular technocratic ideas about the policy process. The article systematically tests this argument. Focusing on economists within government bureaucracy, the study is based on a quantitative analysis of a large-scale survey of Norwegian ministerial civil servants. It finds that economists are more likely to hold technocratic role perceptions than officials with other educational backgrounds only if they work in the finance ministry or in higher administrative grades. The findings contribute to scholarship on the political sway of economists and to debates about technocracy and the technocratic views of civil servants.     

Foreign advisors and capacity building: The case of Kenya

Approximately 100,000 foreign advisors work in the public sectors of Sub-Saharan African countries at an annual cost of more than $4 billion. The numbers, range of services, and costs of such advisors increased during the 1980s while at the same time donors launched new efforts to build professional capacity in the African civil service. Based on a study of advisors and their counterpart economists in Kenya's Ministry of Planning and National Development, this article addresses three important questions: what are the functions carried out by advisors in the development ministries?; why is it so difficult to retain skilled professionals in the civil service?; and how does the provision of advisors affect the retention of skilled government officers?     

Beyond market failure and government failure

Public Choice - Criticisms of market outcomes often rest upon a notion of ‘market failure,’ meaning that the market has failed to align incentives and knowledge to produce an optimal...