From Washington to Rome, technocrats are rescuing economies

Privatisation in Russia was endorsed by technocrats. It led to the rise of Vladimir Putin.

We are living in the age of the technocrats. In business, Big Data, and the Big Brains who can parse it, rule. In government, the technocrats are on top, too. From Washington to Frankfurt to Rome, technocrats have stepped in where politicians feared to tread, rescuing economies, or at least propping them up, in the process. Technocrats are in vogue in the intelligentsia, too. And the familiar pleas for common sense and a centrist approach, free from the taint of ideology, usually boil down to a call to put the technocrats in charge. Technocrats have a lot to recommend them.

We do live in the age of Big Data, and ignoring it is a sure path to bankruptcy or humiliation. But particularly in the wake of 2008, a crisis that technocrats both helped cause and failed to predict, there are also sound reasons not to rely mechanically on technocratic solutions. That's why it is worth reading a new paper by Daron Acemoglu of the MIT and James Robinson of Harvard University.

In their seminal 2012 book Why Nations Fail Acemoglu and Robinson offered a powerful new framework for understanding why some societies thrive and others decline - those based on inclusive growth succeed, while those where growth is extractive wither.

Hubris of economists

Their new study, "Economics Versus Politics: Pitfalls of Policy Advice", will be published later this year in the Journal of Economic Perspectives and is available now in draft form as a National Bureau of Economic Research working paper. It tackles an essential subject: the limits of technocratic thinking as a basis for policy. Their critique is not the standard technocrat's lament that wise policy is, alas, politically impossible to implement.

Instead, their concern is that policy which is eminently sensible in theory can fail in practice because of its unintended political consequences. In particular, they believe we need to be cautious about "good" economic policies that have the side effect of either reinforcing already dominant groups or weakening already frail ones. "You should apply double caution when it comes to policies which will strengthen already powerfulgroups," Acemoglu told me. "The central starting point is a certain suspicion of elites. You really cannot trust the elites when they are totally in charge of policy."

An example discussed in the paper, and an issue on which Acemoglu changed his own mind in the course of writing it, is the role of trade unions. "My view for a long time was that labour organisations had become rent-seeking," he said, using the economics term for groups that specialise in getting a bigger share of the pie rather than making it grow overall. "Now, my view is that, even though we are not transitioning from dictatorship to democracy, you need some labour organisations as a counterweight to business lobbying."

Two other important examples the study dissects are financial deregulation in the US and privatisation in post-Soviet Russia. In both cases, economic reforms that made a lot of sense in the abstract and in terms of economic efficiency had the unintended consequence of strengthening already powerful political interests. As the powerful often do, they overplayed their hand. The result was a political spiral which in the US helped set off the 2008 crisis and in Russia led to the rise of Vladimir Putin and his authoritarian regime.

This paper reminds us of something important. In both US and Russia, the reforms which strengthened powerful vested interests didn't begin as a cunning plot by a wealthy cabal. Instead, they were endorsed and advocated by the technocrats, who believed they were acting in the common good. "What our paper is targeted at is, there is a certain hubristic attitude among economists - we are the queen of the social sciences because we use numbers and data," said Acemoglu, who is a professor in MIT's department of economics. "But that can ignore the implications of political power." This the big takeaway from the Acemoglu and Robinson paper: there is no such thing as pure policy, and we should check our pockets and lock our doors when someone tells us otherwise.

Chrystia Freeland is a Reuters columnist. Any opinions expressed are her own.

Source: http://www.rediff.com/business/report/column-from-us-to-rome-technocrats-are-rescuing-economies/20130528.htm

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