Choice Under Uncertainty: Policy Selection

By Ian

Edmund S. Phelps of Columbia writes in the Bangkok Post:

There is a movement in medicine to require that applications for licences to sell a new drug be evidence-based. By contrast, trained economists view their discipline as having already achieved this scientific standard. After all, they express their ideas with mathematics and arrive at quantitative estimates of implied relationships from empirical data.

But economics is not evidence-based in selecting its theoretical paradigms. Economic policy initiatives are often taken without all the empirical pre-testing that could have been done.

I'd suggest extending it even further. A good deal of all policy is put into place without sound evidence to suggest that it really might work. I think it comes from a tendency to believe (rightly or wrongly) that some initiative is "unique", or at least very unlike anything that has gone on in the past. Further, explaining that generazliations from a similar, though not perfectly analagous, policy enacted elsewhere are applicable despite cosmetic differences would be, for most people, less thrilling than whatever's on CSPAN-3 at 4am.

I've remained rather agnostic on the whole Social Security reform debate because I've heard a good deal of sound arguments from both the pro- and anti- camps. I have to balance my own preference for returning decision making back to the individual with the reality that making personal accounts "add-ons" is really just another expansion of a system I have grave concerns about already. That said, neither side is swaying me with actual evidence supporting its theoretical arguments (or refuting the other side's).

My suspicion is that this is where status quo bias in most policy decisions gains a good deal of strength. No matter how messed up a system or program is now, the chance that it could be made even worse will bring out in force those people for whom things are "not too bad". It's hard to get people into the streets when a lot of the beneficiaries of a change either don't understand the change, aren't convinced of the change, or, frankly, don't exist yet. Why, to some people, are future benefits of intangibles enough to cover the present costs of things like war when the potential, tangible future economic growth of generations is not enough to restrain economic interference and protectionism?

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