Friday, January 8, 2010

Five Second Nobel ... Frisch 2

In the second half of his Nobel lecture, Ragnar Frisch turns to the subject of econometric planning and lays out what I think is a rather unique vision of how economists could improve the policy process. I make some comments at the end about why we don't see this system in practice and a danger I would see if we did.
My purpose is to make economic planning at a high aspiration level one of the pillars of a living democracy ... living in the sense of actually engaging as many as possible of the citizens to take an active part in the affairs of the small community where they are living, and ... the nation as a whole.
I should note that I see nothing in the remainder of his talk that would actually promote this ideal, but this is his ideal.

The first step in his proposed process involves the economist sitting in his [or her] office formulating the complex system of dynamic equations that describe the macroeconomy and its behavior and making "a tentative opinion" about the preferences of the major political parties/actors.

Then the economist is to interview the primary decision makers. The purpose is to get at the decision makers' indifference curve over outcomes, and he stresses that this is not a social welfare function in any sense of the word. He provides as an example identifying the politician's preferences over the Philips curve trade off between inflation and unemployment.

He has some interesting things to say about the interview process itself:

It is well known that people will not always behave in an actual situation exactly in the way they said in an interview question that they would behave in such and such a situation. But still, I think, it remains that valuable information may be obtained through interview questions, provided the questions are wisely formulated in a conversational manner, and not simply carried out by some youngster in the opinion poll trade. I have worked out a rather elaborate technique for such conversational interviews to be carried out by the econometric experts. And I have had the good fortune to test this out in conversations with high-ranking politicians both in developing countries and in industrially developed countries. I have found that it is surprising how far one can reach in this field when the conversation is wisely steered.

Essential points in this connection are: (I) To use the free form - the Santa Claus form - of the preference function. (II) To assure that the interviewed person rids his mind completely of any preconceived (and in many cases erroneous) ideas he might have on the nature of the core, and hence rid his mind of whether it is actually possible to realize the alternatives involved in the interview questions. (III) To assure that the interviewed person has rid his mind completely of any possibility of trading in the market any of the alternative situations which are hypothetically offered to him in the interview questions.
After this extensive interview,
What we have to do as econometricians is to apply this very system for the formalization of the preferences to go with our models [and] add the formalization of the preferences in ... quantitative form ... . From this will come out a solution, in the form of an optimal development path for the economy. Optimality being defined through the preferences of this party and in the preference formalization which the expert has now reached.
This is then an iterative process between econometrician and politician - revising outcomes and policies until the econometrician is fairly certain that he has identified precisely what the politicians want and the policies that could enact it. This process is then repeated "separately for each political party" to facilitate their own discussions to reach a political compromise.
The top political authority ... ought to concentrate most of its time and efforts on a discussion of this compromise on the formulation of the system of preferences, instead of using practically all of its time on discussing one by one the specific economic measures that might have been proposed, and for each of these measures deciding whether to accept it or not. In the way suggested the parliament would concentrate its time and energies on the most important things, on the really vital issues. If this were done, many details could safely be left to the experts. Big issues would of course finally be checked through one by one Parliament decisions.
There are two things I would like to comment on. The first deals with why we really don't see this in practice (to the best of my knowledge - please correct me if I'm wrong). This lecture was given in 1969, arguably the zenith of economist's hubristic belief that we could model and plan an entire economy and had everything solved. The 1970s were a great humbling agent for many of us. I doubt many in the profession honestly feel they could precisely plan all the outcomes of the society in the manner envisioned. A second reason we don't see this is that it would completely alter the political landscape. We would not need citizen participation beyond voting for the right head-of-party. It doesn't matter who you vote for as junior senator because that person's preferences aren't being included and may not be involved in this grand political bargain. Obama, Reid, Pelosi, and Kaine ARE the Democrats and Boehner, McConnell, and Steele ARE the Republicans. No need to talk to anyone else: no one else's opinions go in. It's therefore in the interests of far too many politicos to make sure that doesn't happen that it won't.

The second comment has to do with what it means to present a policy menu. In describing the back and forth process, Frisch says that "the expert will understand more or less precisely what sort of changes are needed in the formulation of the preference function in order to produce a solution that comes closer to what the politicians now say they want." The good side of this is the notion that economics tries to portray itself as a positive science: y will happen if you do x; if you want y to happen, do x, but I'm not telling you you ought to do x. You tell me where you want to go, I'll drive you there.

There's a slightly darker side to this as well. Apostle and education administrator Boyd K. Packer described a scene when he visited a city council attorney's office. The attorney "pointed to a wall with law books and said, 'Gentlemen, they are just like a violin. I can play any tune on them you are willing to pay for.' I thought there was something not right about that." There is a very real sense that we can do the same thing with our data sets, making them tell any story and sing any song we choose by selectively presenting the right statistics, models, and regressions. We need to be explicit about normative assumptions

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