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A political decision is the outcome
of two forces:
• Conflicts of interests = How outcomes
affect the utility of various groups
• The debate = How policy decisions affect
outcomes
• If everybody knows the right model, no
disagreement about the latter
• In practice, beliefs about how the economy
works differ, and how they differ influences
decisions
Some examples
•
•
•
•
How big is the Keynesian multiplier?
Is unemployment classical or Keynesian?
Does work sharing work?
What is the cost elasticity of labor
demand?
• What is the effect of the net returns to
education on the incentives to acquire
skills?
Relevant questions are:
•
•
•
•
How are beliefs determined?
Can interest groups manipulate beliefs?
How do beliefs co-evolve with policy?
Does the economy have the ability to
« learn » the true parameters over time?
The role of the intellectual
• That the debate affects outcome illustrates
the role of the intellectuals
• Thus, how the intellectual professions are
selected and trained has policy
consequences
• This is the topic of this talk
“In every country that has moved toward
socialism, the phase of the development in
which socialism becomes a determining
influence on politics has been preceded for
many years by a period during which
socialist ideals governed the thinking of the
more active intellectuals.(...) Experience
suggests that, once this phase has been
reached, it is merely a question of time until
the views now held by the intellectuals
become the governing force of politics.(...)”
“Though nobody will regret that education has
ceased to be a privilege of the propertied
classes, the fact that the propertied classes
are no longer the best educated and the fact
that the large number of people who owe
their position solely to their general education
do not possess that experience of the
working of the economic system which the
administration of property gives, are
important for understanding the role of the
intellectual.”
“Professor Schumpeter (...) has not unfairly
stressed that it is the absence of direct
responsibility for practical affairs and the
consequent absence of first-hand knowledge
of them which distinguishes the typical
intellectual from other people who also wield
the power of the spoken and written word”
“(...)for the exceptionally able man who
accepts the present order of society, a
multitude of other avenues to influence
and power are open, while to the
disaffected and dissatisfied an intellectual
career is the most promising path to both
infl uence and the power to contribute to
the achievement of his ideals.”
“It is neither selfish interests nor evil
intentions but mostly honest convictions and
good intentions which determine the
intellectuals' views. In fact, it is necessary to
recognise that on the whole the typical
intellectual is today more likely to be a
socialist the more he is guided by good will
and intelligence, and that on the plane of
purely intellectual argument he will generally
be able to make out a better case than the
majority of his opponents within his class.”
“If we still think him wrong, we must recognise
that it may be genuine error which leads the
well meaning and intelligent people who
occupy those key positions in our society to
spread views which to us appear a threat to
our civilisation. Yet (...) the representatives of
the existing order (...) tend to regard the
socialist intellectuals as nothing more than a
pernicious bunch of highbrow radicals(...)”
A case study: France
• Mistrust of the market economy plays a
role as an obstacle to reform
• Opinions are more hostile in a profession
which plays a key role in beliefs: teachers
• Accordingly, a large majority of the young
prefer to work in the non-market sector
- Arlette LAGUILLER
8
- Olivier BESANCENOT
2
- Robert HUE
3
- Jean-Pierre CHEVÈNEMENT
16
- Lionel jospin
29
- Noël MAMère
14
- François bayrou
3
- Jacques chirac
23
- Alain madelin
2
- Charles pasqua
0
- Jean-Marie le pen
0
- Bruno mégret
0
TOTA
L non
Non,
probable
ment
pas
Non,
certaine
ment
pas
Déjà
dans
la
foncti
on
publiq
ue
(%)
(%)
(%)
(%)
(%)
(%)
(%)
33
37
28
19
9
2
-
100
55
21
34
44
28
16
1
-
100
La fonction publique d’Etat
52
25
27
47
26
21
1
-
100
La
fonction
hospitalière
48
22
26
51
25
26
1
-
100
TOTA
L oui
Oui,
certaine
ment
Oui,
probable
ment
(%)
(%)
La fonction publique en
général
70
La
fonction
territoriale
publique
publique
Ns
p
TOTA
L
Occupational choice and belief
formation
• People learn about the economy through
parental transmission and experience
• They also learn through the school system
• We assume that the latter reflects the
beliefs of the teachers rather than those of
the constituency
– Teachers are imperfect agents
Occupational choice
• People elect between a market sector and
a nonmarket sector (= teaching)
• They are more willing to go to the latter,
the poorer their perception of the market
economy
• This generates a bias in the beliefs of the
teachers
• Furthermore, teachers have no market
experience and do not learn
The model
• OLG
• The size of each cohort = 1.
• t: people inherit priors from parents and
school
• t+: Occupational choice, market vs.
teaching
• t+1: work, produce children, transmit
beliefs.
Market risk
• Teaching pays a wage ω
- = productivity
• Market pays w
• But in the market I am employed with
probability 1-s
• And I do not know s
• s = sH : market economy is bad
• s = sL : market economy is good
• k draws
The returns to each occupation
• Utility is given by V = E(w) – e
• In the private sector, e = 0
→V = (1 – s)w
• In the public sector, e = eT ~ Φ()
→V = ω - eT
The career decision
The supply of teachers
Beliefs and occupational choice
• More pessimistic people gain more from
being civil servants
• The supply of civil servants goes up with
p, for any ω
• Note that pessimism benefits public
finances
Social entropy
The role of social entropy
• Social entropy tells us how biased the
teachers will be relative to the rest of the
population
• It is correlated with, but different from,
occupational mobility
– Under low entropy, teachers are more
pessimistic
Belief transmission
•θ = Heritability
Bayesian updating
• For each draw, posterior evolves as
if employed, and if unemployed:
The evolution of posteriors
The self-selection effect
• The children of the unlucky become
teachers
• Thus, teachers are more pessimistic than
average
• And they have a disproportionate weight in
the formation of next generation’s prior
• This slows (speeds) convergence if market
economy is good (bad)
Convergence
Convergence under bias
Convergence toward the wrong
model
• Under zero entropy, only dynasties with a
worse experience than the teacher’s
beliefs will switch from market to teaching
• Thus, teachers’ beliefs can only become
more pessimistic over time
• Consequently, the economy cannot
converge to the truth
• The teachers drag it to p=1 (Prop. 3)
Figure 4: The zero entropy case
1,2
1
Mean p
0,8
theta = 0.1
theta = 0.4
theta = 0.8
0,6
0,4
0,2
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Period
The insulation effect
• The children of teachers get no draw from
the market
• Yields a critical mass of people next period
at least as pessimistic as the teachers
• But the effect of insulation per se seems
quantitatively small
Figure 5: the insulation effect
0,7
0,6
0,5
0,4
Insulation
No insulation
0,3
0,2
0,1
0
1
4
7
10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85
Policy, institutions and learning
• Clearly, the distribution of beliefs affects
policies and institutions
• Conversely, institutions affect learning and
beliefs
– Teacher recruitment (σ)
– Weight of education (θ)
– Market turbulence (k)
A case for mutual reinforcement
• Learning slower in a sluggish market (k
small)
• Pessimism and insider political power
favors employment protection
• Employment protection in turn makes the
market more sluggish
How to model it?
• Assume people vote on employment
protection after the first draw
• EP reduces k and increases relative
weight of current labor market situation
• Assume EP costly in terms of wages
• Then WTP of insiders for reducing k is
greater, the greater their pessimism
The effect of k on utility
A simple case: k=1,2
• Insiders prefer rigidity iff
• Defines critical belief given by
Rigidity/Slow learning arises
because of
• High weight of education
• Low entropy
• Pessimistic initial conditions (aggregate
shocks)
• First two features are arguably relevant in
French case
Conclusion
• This model captures some of the intuitions
of Hayek
• It may potentially explain differences in
attitudes wrt market economy across
countries
• But not all intellectual professions are in
the protected sector
• We also need to explain the relative
leftwingness of journalists/Hollywood