Learning the Wealth of Nations

This paper I had neglected, now it is time to remedy that.  The authors are Francisco J. Buera, Alexander Monge-Narajo, and Giorgio E. Primiceri, and it was published in Econometrica 2011:

We study the evolution of market-oriented policies over time and across countries. We consider a model in which own and neighbors’ past experiences influence policy choices through their effect on policymakers’ beliefs. We estimate the model using a large panel of countries and find that it fits a large fraction of the policy choices observed in the postwar data, including the slow adoption of liberal policies. Our model also predicts that there would be reversals to state intervention if nowadays the world was hit by a shock of the size of the Great Depression.

I don’t find that abstract so informative, this paper has a few main results:

1. Policymakers have priors about how good the market economy is, and they revise those views — and thus revise policy — as they observe their own growth results and those of their neighbors.  Success for market economies tends to breed greater reliance on markets.

2. A simple learning model predicts about 97% of the policy choices observed in the data.  Perhaps more importantly, the model accounts for more than 77% of the observed policy switches over a three-year time window.

3. Evolving beliefs — and not just the fixed demographic characteristics of countries — are critical for understanding policy decisions.

4. It was probably the growth collapse of the late 1970s for interventionist countries which led to a greater reliance on markets.

5. Adjustment toward better-performing policies is often quite slow.  In part this is because policymakers attribute the superior performance of other countries to heterogeneity rather than policy per se.

6. A global Great Depression would lead to a significant switch back to state interventionism.

7. If I understand the model correctly (and I am making a bit of a leap in interpretation here), it implies a Chinese growth slowdown will lead to greater state intervention in China, not greater liberalization.

The pointer to this paper is from Luis Garicano.

Comments

@6:

Great Depression (Recession)
The name given to any recent economic crisis which seems to have been unusually deep and long. To date there have been three crises named “Great”:
1. The Great Depression of 1873: in the aftermath of this crisis, communism became popular as the way to end capitalist chaos and install a new order.
2. The Great Depression of the early 1930’s: in the aftermath of this crisis, National Socialism arose in Germany as the way to end capitalist chaos and install a new order.
3. The Great Recession starting in 2008: after the previous two bad experiences, the word “recession” was used rather than “depression”. Its aftermath is not quite clear yet, but certain fairly loud voices are demanding an end to capitalist chaos and the beginning of a new order.

You really aren't very bright, are you?

The sad part is that in all 3 cases the problems could have been avoided with better monetary policy.

Communists and Fascists around the world should be grateful to incompetent central bankers.

Haven't read the paper yet, but point 7 seems oddly out of place. China is much poorer than those neighbors which are most similar in terms of culture, and much less market-oriented. Why would a growth slowdown in China make China move their policy farther away from South Korea and closer to North Korea?

Your summary reminds me of my reading of Karl Polanyi. In reading The Great Transformation, I remember thinking of the 1970s and 80s policy changes as a response to government intervention and thus could be the final part of a 'triple movement' - the consequence of the regulatory policies constituting the 'double movement'. It strikes me that policy settings could fluctuate between interventionism and liberalisation and constitute a 'continuous movement' between two broad states of policy settings.

Tyler, who read the paper to you? You obviously can't read it yourself, given your poor understanding of economics and absolute lack of mathematical knowledge, so somebody had to help you. I doubt any GMU grad student could help either, nor most of the faculty, so who was it? The public wants to know.

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