Economics versus Politics: Pitfalls of Policy Advice

T he fundamental approach to policy prescription in economics derives from the recognition that the presence of market failures—like externalities, public goods, monopoly, and imperfect competition—creates room for well-designed public interventions to improve social welfare. This tradition, already clear in Pigou (1912), was elaborated by Samuelson (1947), and still provides the basis of most policy advice provided by economists. For example, the fi rst development economists in the 1950s used market-failure–inspired ideas as the intellectual basis for the need for government intervention to promote development in poor countries (Killick 1978). Though belief in the ability of the government or the effectiveness of aid has waxed and waned, current approaches to development problems have much in common with this early tradition, even if they have become more sophisticated—in recognizing second-best issues, for instance, by incorporating informational frictions explicitly in policy design (for example, Townsend 2011); in highlighting the specifi city of the appropriate policy depending on context (for example, Rodrik 2007); and in emphasizing the role of rigorous empirical methods in determining which sorts of interventions can be effective (for example, Banerjee and Dufl o 2011). But in all of these approaches, politics is largely absent from the scene. This neglect of politics is often justifi ed—implicitly or explicitly—in one of three ways. The fi rst is to maintain that politicians are basically interested, or induced to be interested, in promoting social welfare, for example, because socially Economics versus Politics: Pitfalls of Policy Advice