THE BLOG
03/07/2011 10:21 pm ET Updated May 25, 2011

Do Ideas Matter in Economic Policy, or Just Special Interests?

It's a depressing thought, familiar to everyone who has ever argued with anyone else about economics: do ideas about what's true and false, right and wrong, in economics even matter for policy-making in Washington? Or is everything just sewn up by the power of special interests before anyone even starts to think?

To take one currently important example, some people believe that free-trade economics is irrelevant, and that free trade is American policy simply because big corporations and other vested interests have the political muscle to impose it.

I actually believe this is false, which gives me hope for this country.

For a start, without economics, vested interests can't tell whether free trade benefits them or not, just as a company can't know whether or not it is profitable without resort to accounting principles. Vested interests can indeed see money piling up in their bank accounts under free trade. But is this more or less money than what they would have gotten without free trade? Without economics, they can't tell.

When a policy has complex effects, it is not obvious who wins and loses from it -- even to the winners and losers themselves, and especially in the long run. They have to analyze trade policy to know this, and one can't analyze any economic policy without theories about how the economy works. This is why the British economist John Maynard Keynes (1883-1946), arguably the greatest economist of the 20th century, wrote that:

The ideas of economists and philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist...I am sure the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas...But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Furthermore, vested interests are not infinitely powerful. They have to persuade the rest of the country, especially Congress, to go along with the policies they want. Despite political corruption, all the money in the world couldn't bribe Congress to pass a law requiring people to roller-skate to work; legislation always requires some non-laughable justification.

This is why lobbying successfully for free trade requires credible economic ideas that support it.

To give another example, the famous liberal economist and New York Times columnist Paul Krugman, winner of the 2008 Nobel Prize for his work on trade (although rather timid in applying his own insights to critiquing present U.S trade policy), wrote of his own stint in government:

What was more surprising was the way that even strong political considerations could sometimes be held at bay when a proposal seemed clearly without a good analytical foundation. I know of one corporation that had a demand widely supported by other businesses and highly placed friends in the government, yet got nowhere for more than a year, largely because the company's arguments were so easily torn apart by government economists. In the end the corporation hired some high-quality economists to help produce a well-argued report, and for that or other reasons finally got some action.

So even if free trade economics is largely a bundle of rationalizations, these are still rationalizations the system needs in order to function. It follows that if opponents of free trade can debunk these rationalizations, these opponents can deprive free traders of camouflage, credibility, and self-confidence they can ill afford to lose.

This is why it is so important to keep relentlessly chipping away at the myth that free trade has been proven by economic science to be the best policy. It hasn't, and the reasons why are not that hard to understand, if one will only make the effort to investigate.