Economics, Dogma and Ideology

My recent essay on Keynesianism vs Monetarism raised the issue of ideological beliefs amongst economists. It is hard to avoid associating yourself with a particular school of economics or certain ideology. But, if we become too attached to a set of beliefs it can cloud our judgement. What happens is we start to look for evidence to support our preconceived ideas, rather than looking at evidence and deciding what they point to.

For example, if we take an issue such as privatisation, people may have a preference either supportive or critical. But, the truth is the desirability of privatisation isn't so clear cut. In the UK, the privatisation of industries such as telecoms, electricity and gas were relatively successful (although some are still critical). There was an increase in efficiency, and in some industries there were lower prices. However, just because privatisation can increase efficiency in certain UK industries doesn't mean privatisation is always desirable. The last privatisation policy was for British Rail. This was a more difficult industry to privatise because:
  • Railways are a natural monopoly making competition very difficult. Privatisation effectively creates a private monopoly.
  • Railways are a loss making industry, but with positive externalities for society. (less congestion e.t.c) Therefore, a socially efficient outcome requires government subsidy and not market forces.
  • The success of privatisation often depends on the regulatory framework which is implemented. Most UK industries privatised struggled to increase competition, therefore, the government needed a regulatory framework to avoid abuse of private monopolies. Ironically, the success of privatisation often depends on the regulatory framework set up by the government.
There are undoubtedly theoretical benefits of privatisation, and the IMF often want developing countries to undertake a policy of privatisation. However, exporting privatisation is not so as simple. It depends on the industries privatised, it depends how privatisation is managed, is there sufficient regulatory framework for the creation of private monopolies?

Ideology of Government Intervention

Another divisive issue is the extent of government intervention. Some will say government's are always inefficient and there should be minimal government spending. Others may feel government intervention is the solution to most problems. But, to make a sweeping judgement that government intervention is always inefficient, is as foolhardy as to say that government intervention always improves economic welfare. The desirability of government intervention depends on many factors:
  • What area is the government spending. Is it an industry with positive externalities underconsumed in a free market?
  • Is it a public good not provided in the free market.
  • How effectively are the government bodies monitored for quality and efficiency of spending?
  • What are the levels of corruption in society?
  • Is the government spending subject to any discipline of the market?
  • Is the spending targeted at worthwhile areas or due to political pressure of powerful lobby groups? EU spending on the Common Agricultural Policy was a triumph of political pressures over economic common sense. But, that doesn't mean agricultural subsidies have to always lead to inefficiency.
One of the great challenges for economics is to move political debates on from gross oversimplifications and ideological disputes. Issues cannot be solved with a blanket ideology of government's are bad, government's are good.
Perma Link | By: T Pettinger | Monday, July 21, 2008
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2 Comments:

Blogger Fredrik said...

"One of the great challenges for economics is to move political debates on from gross oversimplifications and ideological disputes. Issues cannot be solved with a blanket ideology of government's are bad, government's are good."

True!!!

July 26, 2009 7:35 PM  
Anonymous Anonymous said...

Well said.

February 8, 2010 10:44 PM  

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