Saturday, March 13, 2010


One of the best descriptions of the difference between liberal and conservative economists I've read was, I think, by Dani Rodrik,* who lumped them into groups of people who think we operate in a first best world and people who think we operate in a second best world. First best world economists instinctively think that any additional distortion to the magic free market (higher taxes, regulation, etc.) causes increased economic inefficiency (conservative economists), while second best world economists (liberals) recognize that for various reasons there are lots of distortions from efficiency already, and so the overall impact of further ones is, without knowing much else, ambiguous and potentially overall positive. You can politically be a liberal and still be conservative first best world economist, which is how I'd describe the majority of members of the profession.

It isn't that economists are unfamiliar with Lipsey-Lancaster, it's that they don't spend enough time thinking about its implictions on an ongoing basis.

*yes, Dani Rodrik.