Aaron Steelman

English

Research Papers in Economics

E
conomics has made substantial progress since Adam
Smith published The Wealth of Nations in 1776. Our
understanding of how the economy works has
improved greatly, as have the tools used to analyze it.
But has this technical progress led to better policymak-
ing? It depends on your time horizon. Economic policy, on
the whole, has not been on a steady ascent. There have been
significant zigs and zags along the way. The United States
started off with a largely free trade program, but at times
adopted protectionist measures that harmed material
progress and our relations with foreign allies. Currently, the
nation’s trade policy is relatively liberal, though there are
certainly areas where improvement could be made. 
The same is true with freedom of
contract. Between the end of the
Civil War and the New Deal few 
barriers existed. During the 1930s,
however, several measures were
adopted that limited the ability 
of employers and employees to 
contract freely, from minimum wage
laws to maximum hour statutes.
Many of those policies remain on the
books, though other regulations that
were subsequently adopted — such
as wage ceilings — have thankfully been lifted.
Monetary policy also has gone through its period of ups
and downs since the founding of the Federal Reserve
System in 1913. Mishandling of the money supply was
arguably the principal cause of the Great Depression.
During the 1950s and 1960s, under the direction of William
McChesney Martin, Jr., the Fed adopted sounder policies,
only to see inflation become both high and variable during
the 1970s. It has been a long and arduous climb back to
price stability since Paul Volcker assumed the chairmanship
of the Fed in 1979 — and the fight against inflation will
require continued vigilance.
These are but three examples. One could give many
more. The point is: The record is mixed. In some cases, eco-
nomic principles with a long pedigree — such as open trade
policies improve well-being — have been abandoned. In
other cases, as the economics profession has made advances
— for instance, as the state of monetary economics has
improved — so have policymakers. The transmission of
ideas, then, from economists to the public and its political
representatives is by no means perfect.
What does this portend for future economic research?
First, we should not discount those examples where good
economics has helped inform good policy. But we also
should not forget those examples where good economics
has been willfully ignored. Policymakers, on the whole, are
charged with acting in the national interest. But each 
policymaker has an incentive to act in his own narrow 
interest. Often this results in the advocacy of policies that
will benefit his home district or state — even if they will be
costly to the general population.
Economists should keep that in mind when they are asked
to assume the role of adviser. The tools of modern economics
can sometimes help reveal cases that might be viewed as
exceptions to the rule. For instance, in theory there is such a
thing as an “optimal tariff,” which can improve a nation’s 
welfare. However, in practice, efforts to adopt such a tariff
could lend cover to policies that are
blatantly protectionist. Similarly, one
can model cases where the use of 
eminent domain for narrow 
commercial purposes, such as the
building of a shopping mall where
housing used to stand, could be 
beneficial. But one ought to 
expect those cases to be rare. More
important, one should fear that the
power to seize property will be used
more frequently than the model 
suggests — in other words, abused.
This is not to say that economists should censor 
themselves. Quite the opposite. They should go wherever
their research takes them.
When it comes to the implementation of public policy,
though, they should take a more cautious or prudential
approach. As economist James Buchanan of George Mason
University argued in his 1986 Nobel Prize lecture,
“Economists should cease proffering policy advice as if they
were employed by a benevolent despot, and they should
look to the structure within which political decisions 
are made.” 
One way for economists to look at this is through the
familiar lens of rules versus discretion. It may be possible to
imagine situations where deviating from a well-considered
policy rule would be welfare-enhancing, but such action
would still be unwise. The goal should be to move from a
system of ad hoc decisionmaking toward one in which
sound economic principles are applied across a broad set of
policy questions, something akin to what Buchanan and his
colleagues call constitutional political economy. This might
mean foregoing some marginal improvements, but it’s also
likely to mean fewer big mistakes. I think most people
would agree that’s a trade-off worth making.     RF
BY AARON STEELMAN
OPINION
The Economist as Policy Adviser
It may be possible to imagine
situations where deviating
from a well-considered 
policy rule would be welfare-
enhancing, but such action
would still be unwise.
56 Region Focus • spring 2006

Opinion : the economist as policy advisor

http://www.richmondfed.org/publications/research/region_focus/2006/spring/pdf/opinion.pdf

Opinion : the economist as policy advisor

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Research Papers in Economics