Economics versus Politics: Pitfalls of Policy Advice

The standard approach to policy-making and advice in economics implicitly or explicitly ignores politics and political economy, and maintains that if possible, any market failure should be rapidly removed. This essay explains why this conclusion may be incorrect; because it ignores politics, this approach is oblivious to the impact of the removal of market failures on future political equilibria and economic efficiency, which can be deleterious. We first outline a simple framework for the study of the impact of current economic policies on future political equilibria and indirectly on future economic outcomes. We then illustrate the mechanisms through which such impacts might operate using a series of examples. The main message is that sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria

Technical Change and the Wage Structure During the Second Industrial Revolution: Evidence from the Merchant Marine, 1865-1912*

ABSTRACT Using a large, individual-level wage data set, we examine the impact of a major technological innovation-the steam engine-on skill demand and the wage structure in the merchant shipping industry. We find that the technical change created a new demand for skilled workers, the engineers, while destroying demand for workers with skills relevant only to sail. It had a deskilling effect on production work-able-bodied seamen (essentially, artisans) were replaced by unskilled engine room operatives. On the other hand, mates and able-bodied seamen employed on steam earned a premium relative to their counterparts on sail. A wholesale switch from sail to steam would increase the 90/10 wage ratio by 40%, with most of the rise in inequality coming from the creation of the engineer occupation