A Parting Thought: Market v. Political Entrepreneurship

by on December 23, 2012 at 5:50 pm in Economics | Permalink

Thanks again to Alex and Tyler for having me as a guest blogger this week. It has been a pleasure sharing thoughts with you about ideas, fashion, and politics.

My last nugget for the week is about how market and political entrepreneurs learn differently from failure. Market entrepreneurs learn from the relentless forces of profit and loss. They even host conferences and websites where they speak openly about their failures. In part because political entrepreneurs lack the same signals of profit and loss, this type of learning does not happen to the same extent in political markets. My co-author Wayne has further analysis on our blog.

Enrique December 23, 2012 at 6:25 pm

From a Popperian perspective, politicians are not really all that different from businessmen and entrepreneurs: entrepreneurs must “test” their ideas and projects through economic markets, while politicians must “test” their ideas and proposals through political markets–and in both cases the (private) cost of failure is high

Thor December 23, 2012 at 7:05 pm

I like the analogy, but I am not sure the cost of failure for politicians is high. They kick the can of problems down the road, it seems to me. Possibly what you say is more true of Senators — don’t Senators have more political longevity than Congressmen? (When I think of Senators I think of aged, multi-term types.)

Ray Lopez December 23, 2012 at 6:32 pm

Hola Ed, your evil twin Ray here. I think this ‘win-win’, ‘learn from failure’ mentality is a North American phenomena perhaps. Outside the USA there’s a projection of either “we never lose” bravado, or “if I win, you must lose zero sum game”, no? Admitting failure is only done to blame somebody in government who did not help you. Perhaps it’s because venture capital outside the USA is more rare, and one depends more on banks, which don’t like to hear about failure. Or perhaps it’s just the way the cultures are in non-US places: saving face is important. My specific countries in mind: Korea, Mexico, Greece, Philippines, Malaysia and Thailand. Ciao!

Ed Lopez December 24, 2012 at 8:53 am

Ray,
I think the admission of failure aspect among market entrepremeurs could very well be a cultural one, and if so it would not be surprising to learn that it is more prevalent in the United States and Canada. That being said, profits and losses and markets are universal. Cronyism and other forms of protection can insulate certain entrepreneurs from profit and loss, of course. But if your business goes under, or you need to go crawling to the legislature for a bailout, there is no question, you don’t have to admit failure because it is there for the world to see. By comparison, failure among political entrepreneurs is much more in a grey area.

Ray Lopez December 24, 2012 at 11:38 am

Well thanks for that distinction Prof. Lopez. Trouble with your website: lots of questions but I don’t see answers. Where’s the link to the white papers? “How can political entrepreneurs learn from the mistakes of the past? How can we improve the chances for reform?” – not sure what your premise is–‘mistakes’ / ‘reform’? I guess I’m not in synch with your priors. To me, there are two theories of being a politician: one is that they represent their constituents, the other that they are statesmen that represent ‘higher interests’, sort of like the supposed division between the US House and US Senate, respectively. So for the former, a ‘mistake’ would be ‘solved’ by running again for reelection–after the voters see your name repeatedly and presumably like your platform, you win reelection. Just look at the incumbents in the DC area–they win reelections about 90% of the time once they learn how to get in. As for the latter, ‘reform’, which I guess goes to the ‘statesmen, higher interests’ aspect,one needs to define what is ‘reform’? One man’s oppressive government is another man’s wonderful welfare state. The fact that the state has been expanding from under 10% of GDP in 1900, around 10% in 1929, and close to 40% (counting deficits) today, without a major revolution, shows me the people love their welfare state–so give it to them good and hard (‘Democracy is the theory that the common people know what they want, and deserve to get it good and hard.’ –H. L. Mencken) Typical of civilizations that have a surplus IMO, if you look at history (Hydraulic / axial civilizations vs Bushmen of the Kalahari for example). BTW that’s fine with me–I don’t pay US taxes since I’m offshore and keep my earnings under USD 90k/yr. Goodbye!

Joe Smith December 23, 2012 at 6:39 pm

Political entrepreneurs learn as well as the underlying system permits. The political product is more complex and the payoff far more complex than in a business. The parties at the senior levels are very active in trying to identify that set of policies which will attract swing voters. If not for such entrepreneurship, national elections would not be as finely balanced as they are.

The problem you are really up against is that the pay-off matrix too frequently rewards lying and pandering.

Ed Lopez December 24, 2012 at 8:58 am

I’ll RJ agree with this comment. While politics is exchange, the medium of exchange is not a unit of account like the dollar is in market exchange. When individual trades are not be nominated in a common unit of account, neither are profits and losses of entrepreneurship. If we were to lift all campaign finance restrictions, as well as all laws against bribing legislators, we would have a much easier time observing political exchange. It remains an open question to what extent we would have other problems though.

RR December 24, 2012 at 1:45 am

If political entrepreneurs do not learn , would not the same party/individuals always be in power ? Perhaps its considered OK for business to admit its mistakes , but not yet in the case of politics. ( “My dad didn’t really want to be President.”)

Ed Lopez December 24, 2012 at 9:06 am

Elections are every 2, 4, or 6 years. And there are high barriers to entry. Profit and loss in markets is continuous. As a market entrepreneur, if your consumers do not like your product or your price, they leave you immediately. Not so in politics, where incumbent advantage is high, and voter memory is short. Gordon Tullock’s work covers most of this ground.

prior_approval December 24, 2012 at 4:57 am

‘In part because political entrepreneurs lack the same signals of profit and loss, this type of learning does not happen to the same extent in political markets.’

Oh please, let’s quote a certain governor, who after receiving one of the only two signals that counts in an election (in his case, losing) is quoted as saying ‘After the election, aide Seymore Trammell recalled Wallace saying, “Seymore, you know why I lost that governor’s race?… I was outniggered by John Patterson. And I’ll tell you here and now, I will never be outniggered again.’

And then we see how another political entrepreneur adapted to a changing political market, again using the only measure that counts – winning elections.

‘Atwater: You start out in 1954 by saying, “Nigger, nigger, nigger.” By 1968 you can’t say “nigger” — that hurts you. Backfires. So you say stuff like forced busing, states’ rights and all that stuff. You’re getting so abstract now [that] you’re talking about cutting taxes, and all these things you’re talking about are totally economic things and a byproduct of them is [that] blacks get hurt worse than whites. And subconsciously maybe that is part of it. I’m not saying that. But I’m saying that if it is getting that abstract, and that coded, that we are doing away with the racial problem one way or the other. You follow me — because obviously sitting around saying, “We want to cut this,” is much more abstract than even the busing thing, and a hell of a lot more abstract than “Nigger, nigger.”‘

Sounds like a man that understood how a marketplace works pretty well, actually – and it describes much of the current contour of the political landscape where the sourthern strategy was applied.

Ray Lopez December 24, 2012 at 6:12 am

Isn’t that the second time in a month you’ve used that colorful quote, no pun? Happy Holidays PA.

prior_approval December 24, 2012 at 7:10 am

I use it constantly here, actually, because it is a truly illustrative example of political entrepreneurship – where the party which destroyed slavery in the U.S. managed to switch places with the party that defended slavery in the South in a generation, managing to overcome such market hurdles as states full of yellow dog Democrats –

‘Yellow Dog Democrats was a political term applied to voters in the Southern United States who voted solely for Democratic candidates, with the term commencing in the late 19th century. Due to Republican president Abraham Lincoln’s leading the Union against the Confederacy, these voters would allegedly “vote for a yellow dog before they would vote for any Republican”.

http://en.wikipedia.org/wiki/Yellow_dog_Democrat

The proper term is now outdated, due to the apparently successful political entrepreneurship of a certain group of Republicans overcoming a number of hurdles in their drive for success. Of course, those Republicans also managed to beat out (and essentially eliminate) more traditional Republicans, whether of the New England or Rockefeller stripe. This too is measurable, after all.

It is silly to suggest that political entrepreneurship is somehow not subject to the equivalent of ‘market forces’ – successful political strategies win. Direct political mailings in the late 70s come to mind – Richard Viguerie being a fine example – http://en.wikipedia.org/wiki/Richard_Viguerie (Though in keeping with the theme of another post, Viguerie was probably not a good source to donate to – ‘In 1977, Viguerie worked on a project to raise money for Sun Myung Moon’s Children’s Relief Fund, which reportedly only received 6.3% of the $1,508,256 raised. $920,000 went to Viguerie according to New York State charity auditors.’)

Of course, some political entrepreneurs are much slower, and their total success is harder to measure. Like that of this project –

‘Republican media strategist Roger Ailes launched Fox News Channel in 1996, ostensibly as a “fair and balanced” counterpoint to what he regarded as the liberal establishment media. But according to a remarkable document buried deep within the Richard Nixon Presidential Library, the intellectual forerunner for Fox News was a nakedly partisan 1970 plot by Ailes and other Nixon aides to circumvent the “prejudices of network news” and deliver “pro-administration” stories to heartland television viewers.’

http://gawker.com/5814150

steve December 24, 2012 at 9:33 am

Ed- It seems pretty clear that politicians watch polls. They also appear to read the newspapers and watch TV for responses to their product. It looks to me as though this is pretty relentless with our 24/7 news cycle. It is also pretty clear that they target their message in different ways to different communities, as much as the media will let them, which is quite a bit. All in all, I think political entrepreneurs are probably about as responsive as those for large corporations. Sure, they can misread their polls, but so does business (New Coke).

I guess political entrepreneurs actually have a more difficult job as they have to try to match up local preferences to maintain local sales, while trying to integrate into the national market, which is changing in ways they may have minimal ability to control or predict, and which may need a totally different product than you have been selling to the locals.

Steve

Sebastian h December 24, 2012 at 2:01 pm

Political restraints are often not connected to reality and their constraints are often misascribed to other issues. It isn’t that politicians are NEVER tested, it is that they tested much less frequency and can get away with their mistaken choices for decades instead of a year or two. Idiotic corn policy couldn’t persist so long in a market.

David Zetland December 24, 2012 at 9:31 pm

Great posts! I’m going to your blog!

mulp December 25, 2012 at 8:10 pm

The best example of a political innovation failure that is never admitted, but gets constantly repeated, and backed even more feverishly by a huge number of politicians and political-economists:

Tax cuts…

result in higher rates of creating jobs (the job creation rate for the 21st century are the worst in US history as best as I can tell during a time of ever declining taxes)

result in greater wealth for everyone (trickle down)

more liberty (with the lowest tax rates and tax burden in more than half a century, the past decade has been called a decade of government oppression and loss of liberty)

smaller government (over the past three decades, the screams over the enormous size of government have increased as taxes have been cut)

Tax cuts as a political innovation has even begun to stink from the standpoint of being a free lunch election promise that will win the election.

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