Lawrence H. White’s 2012 book The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years focuses on the major intellectual debates of the 20th century, particularly the conflict between socialism and capitalism as competing political-economic systems for organizing society.
The central questions explored in this book are whether and how ideas influence policy changes. Both Keynes’s ‘academic scribblers’ and Hayek’s ‘intellectuals’ are portrayed as shaping the thinking of those in positions of authority. Hayek’s theory of the production of ideas is most clearly illustrated by the triangle shown below.
From David M. Hart
However, ideas are continually produced and remain ever-present. Consider, for example, protectionism, one of the oldest debates in economics. The Mercantilists of Western Europe believed that restricting imports and increasing exports would make a nation wealthier. Adam Smith challenged this view, arguing that a nation’s wealth lies not in the accumulation of bullion, but in the goods produced for consumption by its people. Although there is near-unanimous agreement among economists that free trade is beneficial, protectionist policies continue to persist.
Pareto argued against Hayek and Keynes:
politically dominant interests in a society, calculating what best serves their well-being given the socio-political environment, determine both the economic policies that its government chooses and the economic theories that its mainstream academicians adopt (White 2012, p. 5).
Simply, political influences and socio-economic interests determine which ideas are produced, and once produced, which ideas are picked up for policy is a function of political entrepreneurship.
How, then, should the role of ideas in economic policy be understood? Lawrence H. White’s book, The Clash of Economic Ideas, along with Wayne Leighton and Edward Lopez’s Madmen, Intellectuals, and Academic Scribblers, provide valuable starting points. Academic scribblers, intellectuals, and political actors each play distinct roles in the process. Two cases help to illustrate this dynamic.
While tariffs persist in the world, they have greatly reduced today since post-WWII. In India, there were some trade controls as a result of war-controls but during the Second Five-Year Plan (1956-61) the controls were increased as a result of a balance of payments crisis affecting India’s foreign exchange situation. Economist Douglas Irwin has a cool piece, “Changing the Trade and Development Consensus,” where he traces the ideas of economists Raúl Prebisch, Gunnar Myrdal, W. Arthur Lewis, Albert Hirschman, and Ragnar Nurkse who were critical of free trade.
And a later generation of economists, Ian Little, Anne Krueger, Jagdish Bhagwati, and Bela Balassa, who “concluded that import controls were a poor way of addressing balance-of-payments problems, that devaluations would in fact help stimulate exports and increase much-needed foreign exchange earnings, and that tariffs were a better policy instrument than quantitative restrictions or administrative controls in regulating imports” (Irwin, 2024). Physical controls would go on to morph into financial controls (tariffs), which would gradually reduce. In India, Bhagwati’s co-authors, Padma Desai and T.N. Srinivasan would also have a great impact on trade policies.
Second, inflation-targeting in India. While in some recent posts I have been critical about the particular structure of monetary policy in India, I consider its current inflation-targeting objective a great improvement over previous approaches. Ex-RBI governor Shaktikanta, in a 2020 lecture gave a clear overview of Seven ages of India’s monetary policy:
- 1935 to 1949: Initial Phase (maintaining exchange rate parity with sterling)
- 1949 to 1969: Monetary Policy in sync with the Five-Year Plans (do whatever is required for the Five-Year plans)
- 1969 to 1985: Credit Planning (with bank nationalization, credit rationing became the attention)
- 1985 to 1998: Monetary Targeting (targeting a monetary aggregate, with a greater recognition that meeting the fiscal demands has inflationary consequences, based on the recommendations of the Sukhamoy Chakravarty committee)
- 1998 to 2015: Multiple Indicators Approach (liberalisation of the economy since the early 1990s and financial innovations began to undermine the efficacy of the prevalent monetary targeting framework, the goal of monetary policy was unclear)
- 2013–2016: Preconditions Set for Inflation Targeting
- 2016 onwards: Flexible Inflation Targeting
While the Urjit Patel committee report of 2014 is given the credit of introducing inflation targeting in India, the idea goes farther back in time. Within Indian policy thinking, we can first trace the idea to a 2000 report of an advisory group in RBI consisting of M. Narasimham and S.S. Tarapore. The idea was echoed in a 2002 Y.V. Reddy Committee report, the 2007 Percy Mistry Committee report, and the 2008 Raghuram Rajan Committee report, before finally being accepted in 2016.
Ajay Shah, who was involved at least 2 of the committees above (Percy Mistry committee and Raghuram Rajan committee) recounts a cool anecdote on the happenings behind-the-scenes. K.P. Krishnan and Shah had pitched this idea to P. Chidambaram in 2012-2013 when he was the Finance Minister. And when Chidambaram’s successor from a new government, Arun Jaitley came in, he understood the importance of the idea, and then put things into motion.
Ideas have an influence. And we need to think more about the role of political entrepreneurs in influencing policy through ideas.
