What’s at stake in the hunt for a new political economy?

The links between knowledge, institutions and policy outcomes are the keys to building democratic approaches to political economy

Stephanie Mudge

Among the lessons we should take from the financial crisis is that it is very dangerous to build our understanding of economic questions on a narrow basis. In an earlier post on SPERI Comment, Professors Hay and Payne argued that political economy can serve as a bridge between political science and economics, re-fusing the study of two artificially separated things in order to work towards new policy alternatives in these uncertain times.

I couldn’t agree more, but of course the task is great.  Understanding what’s at stake is central to that task.  Why, exactly, should social scientists, politicians, officials, and all those who are concerned about the future of society, broaden our thinking about how economies work, and how they interact with politics? This is the question I’ll address here.

What’s at stake should be articulated in terms of both analytical and practical concerns.  The analytical question is how we go about studying economic, and therefore political, phenomena. This links up with an important practical question: what kinds of knowledge, and by extension what kinds of people, should be involved in debates over policy and government in democratic societies? These issues are complicated, but they offer a fairly simple, general answer to the question of what’s at stake: sustainable economic growth in service of a more fundamental aim, which is to build healthy, and truly democratic, political institutions, capable of coping with the many risks societies confront.

I’ll start with analytical considerations.  If we want to understand how economies work, do we start with a conceptual abstraction—say, an idealised market—and then set about analysing it according to logical assumptions? Or do we start with specific instances of markets in history—such as financial derivatives exchanges, the growth of which were an important development in the lead-up to the recent financial crisis—and attempt to track the untidy historical processes by which they emerge and develop, perhaps as a first step towards setting up testable hypotheses?

The advantage of the former is that right away we can set up a nice, clean, logical analysis, with a pretty good chance of reaching firm conclusions and definite policy implications.  The disadvantage, of course, is that if we get the assumptions wrong—or if history moves in a direction that renders assumptions wrong —the policies that we pursue on the basis of our nice, clear analyses are not policies suited to the world we’re actually in.  This is an important part of what happened in the case of failures to impose much in the way of regulatory oversight of financial derivatives exchanges in the US, which were thought to work according to the natural laws of a perfectly efficient market.

An analytical route that starts with markets in history is, on the other hand, messy, unpredictable, and may or may not produce definite conclusions and policy implications.  Yet it is also less likely to produce fundamental misunderstandings of the world as it is.  Perhaps if policies had been made based on a more historical understanding of financial derivatives exchanges—say, one that took into account the very insightful work of Donald Mackenzie and Yuval Millo who have documented the ways in which the Chicago Board Options Exchange (CBOE) was linked not only to politics but also to economic theory (and theorists), such that the CBOE was built and rebuilt  in order to conform to the very theories that purported merely to describe how it works—regulatory officials might have seen financial markets as human institutions instead of free-standing utopias, and perhaps would have taken a second look at what was happening inside of them.

I realise it’s not as simple as this, but I do think this is a case in which epistemological choices had very real consequences.  And I want to be clear here that I am not talking about the tired distinction between ‘quantitative’ and ‘qualitative’ methods, nor the distinction between deductive and inductive analysis.  The best social science discards the first divide altogether and transforms the second into two parts of a single approach.

Rather, I am distinguishing between social analysis grounded in history versus social science that is not, and arguing for the former.  This is not just a matter of arbitrary preference or the quirky politics of academics and intellectuals; it is a matter of recognising that social science is not divorced from the making of policies that affect us all.  By extension, the assertion that social scientific work should be historically grounded is paramount to arguing that we should be doing social science that helps rather than hurts.

These arguments overlap, inevitably, with deep practical and political problems that need to be considered.  These include both the nature of expertise itself, and the links between expertise and politics.  Who among us (and I don’t just mean social scientists) possesses the ‘right’ expertise for understanding today’s most pressing policy questions?  And how can we make sure that those with political power will hear them?

The first question, regarding the ‘right’ expertise, is one that cannot and should not be answered in any definitive way.  Part of arguing that social science can’t afford to ignore history is recognising that debates over a new political economy need to overcome arbitrary disciplinary boundaries.  These boundaries need to be bridged in a productive way —a task that requires self-conscious efforts to create a dialogue across disciplinary specialisations, as well as the deep cultural, political, and epistemological differences that often underlie them.

This still leaves open a second question, however: that of channels of communication between the settings in which social knowledge is produced, and the settings where policy agendas are defined and political decisions made.  This question is more difficult, because it gets into the nature of democracy itself: keeping politics open to new perspectives and ways of thinking, regardless of the source, is linked to the question of the health, functioning and legitimacy of democratic institutions.  And here, lately, a lot of the news is bad.

As we can see from the recent events in Cyprus, or Italy’s difficulties in forming a government, not to mention the rise of extremist, populist, and anti-establishment movements in many parts of the world (on both left and right) alongside an alarming trend toward substituting appointees for elected leadership, democratic institutions are not faring well in the post-crisis age.  All of this is a stark reminder that what’s at stake is not only bridging disciplinary divides, but also reasserting the general principle that policy choices of all sorts need to be made through open, democratic processes and not in spite of them.