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The role of ideas in political economy

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Abstract

The Austrian School of economics has gradually developed a coherent and unitary theory of social-political change melding together four elements: (1) praxeology as a universal and culture-invariant account of how a given structure of incentives generates outcomes, (2) ideas as a distinct realm from incentives and subjected to cultural evolution, (3) social and political entrepreneurs as self-interested drivers of institutional change constrained by knowledge problems, and (4) institutions understood as a complex mesh of formal rules and private governance mechanisms. The paper discusses the key elements of this theory and highlights the connections to public choice (especially the Virginia School) and new institutional economics (especially the Bloomington School). Two practical applications are explored: understanding the relative importance of intellectuals, public opinion, and rent-seeking in determining policies in advanced democracies; and the role of social entrepreneurship in development economics.

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Notes

  1. For example, the high re-election rate in the U.S. House of Representatives, which is now around 95 % (Friedman and Holden 2009), reveals this preference. Short-term “run with the money” behavior seems quite rare, perhaps because large gains from rent-seeking can actually only be made by developing a long-term trust relation with rent-seekers, which in turn requires winning re-elections. Paradoxically, in order to have substantial gains from rent-seeking a politician needs to satisfy voters as a precondition.

  2. Hayek (1962, 1983) adopted a similar view; see Cosmides and Tooby (2006) and López and Leighton (2012: pp. 123–6) for a modern perspective.

  3. See Buchanan (1999 [1967]) for a critique, arguing that democracy should be understood purely from a conflict resolution perspective.

  4. The argument has been famously popularized by Dawkins (1989).

  5. Shermur (1996: p. 110) emphasizes the other side of the “evolutionary contractarianism” coin, namely that rational reform and “the critical appraisal of undesigned institutions” can only be done piecemeal. Hayek has arguably focused more on the Shermur side of the coin, rather than on the Sugden side, because his main target were the socialist “rational constructivists”. But one should be aware that the Shermur and Sugden points imply one another.

  6. The attempt to provide a purely mathematical account of the emergence of common knowledge does not fair very well because the conditions under which Aumann’s theorem holds are not generally fulfilled in practice (Samuelson 2004). Hence, the need to develop the theory of social entrepreneurship.

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Acknowledgments

I thank Paul Dragos Aligica, Peter Boettke, David Levy, Jeremy Shearmur and Virgil Storr for useful discussions about social functionalism, “institutional stickiness”, “comparative cultural advantage”, the meaning of polycentricity, and problems with Hayekian cultural evolution, and to Anthony Evans, Benjamin Powell, Edward Stringham, Richard Wagner, and an anonymous reviewer for feed-back on previous versions of the paper. I am also grateful for the financial support provided by the Mercatus Center.

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    Vlad Tarko

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Tarko, V. The role of ideas in political economy. Rev Austrian Econ 28, 17–39 (2015). https://doi.org/10.1007/s11138-013-0246-4

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