Who is a first-best economist?

by on August 6, 2007 at 2:53 pm in Economics | Permalink

Dani Rodrik, who has become one of the very best econ bloggers, writes:

Among commentators in the blogosphere, I think Gary Becker, Tyler Cowen, Greg Mankiw, and Brad De Long (more often than not) are first-best economists.

(That's not "best economists," by the way...)  What does this mean?

The gut instinct…is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic.  The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best.  No matter how technical, complex, and full of surprises these economists’ own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.

The second group — "second best" economists — is Akerlof, Stiglitz, Shiller, Krugman, and Rodrik himself; I believe you know their approach.

I think of myself as a better-than-first-best economist.  On average market solutions have positive Pareto-relevant externalities, if only through supplying experimentation and strengthening social norms in favor of commerce.  That’s true even for the market in thumbtacks, if you consider it as feeding into a broader social stream.  Externalities are virtually everywhere and often I prefer to think in terms of Hayek’s theory of spontaneous order.  Where markets should be allowed to operate, markets are usually too weak in their reach and scope.  Yes there is a continuum of social returns but only rarely are we close to an optimum. 

But I don’t mean this as a plea for laissez-faire.  Governments must produce public goods, maintain social order, and of course support markets.  At the margin, those activities, such as imposing accountability under the law, are also largely underprovided.  For the appropriate selection of policies, government is also better-than-first-best, despite its apparent static inefficiencies.

An oversimplified version of my view is that anything good is underprovided at the margin.  This follows from a belief in strong network and peer effects, and a belief in the relevance of basic sociology.

I favor much less government than Akerlof or Stiglitz or Rodrik himself; yes I view them as "second best" when it comes to government just as they are second best when it comes to markets.  But I’m often 4th or 5th best when it comes to what government does.

Who’s really the utopian?  And how did government ever work itself up to that number two?

1 Tom Kelly August 6, 2007 at 3:01 pm

I don’t know that I’m getting what you’re meaning here by first best, but the one economist in the blogosphere who is my personal first best is Don Boudreaux.

2 mickslam August 6, 2007 at 3:37 pm

You should expand this post or write a few more on this. This framework is hugely important and taken for granted by Economists and all but invisible to laymen.

You could call “first-besters” idealists, and “second-besters” the yeah-buts, and it might be more clear as to what the difference between the two groups is.

“I think of myself as a better-than-first-best economist. ” I would suspect that Rodrick thinks of himself the same way, as a better than second-best economist. That is, the gains to be realized from intelligent regulations also have positive Pareto-relevant externalities. He must, btw, or he couldn’t truly be a “second-bester”.

Also, I think this a the difference between you and Alex by the way, is that you recognize that the guy in the other side of the argument might have a genuine and well reasoned approach to the argument, while Alex takes a more cynical view.

3 Biomed Tim August 6, 2007 at 3:45 pm

Tom Kelly,

If you follow the link and actually read Dani’s piece, you’ll see an explanation of first-best economics vs. second-best.

It’s definitely worth a read. For what it’s worth, I think Boudreaux would fall into the first-best camp, according to Rodrik’s definition.

4 JH August 6, 2007 at 4:19 pm

When is an economist really allowed to be knee-jerk?

What I mean is that the typical economist doesn’t speak outside of their expertise, and rarely gets called to do so. In class, they stick with the text. In research, they stick to their research. In the blogosphere, they rarely give the end-all ruling on any matter. In this blog, Cowen ends by asking a few questions.

So is Rodrik really griping about? That economists give conflicting quotes when reporters ask them for comment?

5 shawn August 6, 2007 at 5:21 pm

unarmed…thanks for the explanation; that helped me understand the issue.

6 robertdfeinman August 6, 2007 at 9:37 pm

Not only do economists disagree, but each of them knows that he is above average.

7 Lee A. Arnold August 7, 2007 at 12:59 am

“I think of myself as a better-than-first-best economist.  On average market solutions have positive Pareto-relevant externalities, if only through supplying experimentation and strengthening social norms in favor of commerce…”

–Please help me to understand this paragraph, because I don’t understand how you figure that this trumps Lipsey and Lancaster. Unless, with Hayek’s spontaneous order, you are discarding equilibrium. Are you suggesting something like a systems-science syllogism, rather than a proof?

8 KIO August 7, 2007 at 5:52 am

There is an important difference between economists and (hard) scientists. The “best economists”
are those who can explain everything using simple theories and logic. The best scientists are usually those
who found a problem, which they failed to completely resolve and opened an extensive field for further
study. In that sense, economists are priests who have answer to any question in the world. And scientists are losers with so many unresolved problems.

Logically, the “best economists” are top priests with the “better-than-first-best economist” touching the steps of the Lord (of economic religion).

A tricky thing about such a religion explaining everything is that it actually explains nothing.

9 Scott Wood August 7, 2007 at 11:55 pm

How would you relate what you have to say to Demsetz’ comparative institutions concept?

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13 Rajiv Sethi March 16, 2010 at 8:45 am

Interesting post. A couple of months ago Sam Bowles addressed the interaction between markets and norms in his Castle lectures at Yale. His perspective is different but he’s asking the same question. I can’t find the text of the lectures online (they’ll be published as a book eventually) but here’s a brief summary:


May be of interest.

14 Chris J March 16, 2010 at 2:00 pm

Best econ blog on the web: Worthwhile Canadian Initiative: http://worthwhile.typepad.com/

Good nuts and bolts discussions of Canadian/US/international issues for the interested amateur (me) or a pro.

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