Classical Liberalism as a Realistic Ideal

With Mark Pennington of King's College on problematic idealism, "market failures" and their "corrections" and the importance of crossdisciplinary study of PPE.

Professor Pennington, your book on the Robust Political Economy teaches us the virtue of realistic economic analysis - people are far from omniscient, they typically follow their self-interests rather than common good, and at times they act irrationally. Isn't this realism though a major obstacle for economic or political theorizing? Can we say anything meaningful about any guiding principles of such a messy world?

I don't think realism is an obstacle to saying something meaningful or substantive about economic or political institutions. On the contrary, the real obstacle is an overly idealised form of theorising which assumes away some of the most fundamental aspects of the human condition. In ideal conditions there would be little reason to favour one institution over another. If we assume full information equilibrium in economics for example then both free markets and socialism would be equally 'efficient'. Likewise, if we assume 'full motivational compliance' in political philosophy justice would be achievable under any regime type ranging from libertarianism through to communism. The reason we need to choose between institutions whether on efficiency or justice based grounds is because the world is populated by non-ideal actors - otherwise known as human beings - and different institutions may be more or less well placed to cope with the frictions that these agents generate. This doesn't imply discarding idealism - understood as an account of institutions that might improve on the status quo. Rather, it involves formulating our ideals through a combination of theoretical speculation and empirical observation of how different regimes address 'knowledge problems' and 'incentive compatibility problems'. I think it is through this type of approach that we can say that classical liberalism though difficult to achieve politically, is nonetheless a 'realistic ideal' that we have reason to value, whereas socialism is not.

For years economics has been successful in purging comparative institutional analysis away from its operational toolkit. You want it back, so that we could once again talk more about more relevant things in a less precise way. Is it a fair summary of your approach?

Yes, I think that is a fair summary - though I wouldn't say that I am advocating a lack of precision - at least not in terms of the style of argument. What the Robust Political Economy approach demands is that when economists describe something as a 'market failure' they give very precise reasons why government action will 'improve' on the market outcome. More often than not economists recommending 'corrective interventions' fail to do this - they simply assume that if markets 'fail' on some dimension that government can and will correct for the failure concerned. That doesn't sound like precision to me.

Do you believe in any possible co-existence of purely technical and institutional analysis? Can professor Stiglitz and his followers ever incorporate the teaching of Coase or Hayek into their own approach? Is there a room for some sort of great synthesis; or is it more likely to have fruitful debates between the two; or are we talking about two incompatible and distinct visions of economic science where a debate leads nowhere?

I think technical and institutional work can be combined successfully. Stiglitz for example has done great technical work on information asymmetries in markets - work which raises real institutional questions about the type of regime that might best address these problems. Unfortunately, Stiglitz doesn't offer us any tools to answer those institutional questions because he falls into the trap of identifying a possible source of 'market failure' and then simply assuming that information asymmetries won't also affect the government regulatory process he recommends to combat these failures. In principle though I think it is possible to do comparative institutional work that examines how different 'real world' arrangements cope with the abstract problems identified by 'technical' theory. This is precisely what the best work in the Coasean tradition does - though unfortunately there hasn't really been enough of that work yet to generate sufficient impact.

The world of application of political economy is very rich. Could you give us some concrete applications when these conflicting visions determine our understanding of what correct policies might look like.

Yes. Take education policies. A standard 'market failure' argument against consumer/parental choice is that owing to information asymmetries parents will be unable to tell how much value teachers are adding to their child's education relative to those aspects of the child's performance that are related to innate abilities of one kind or another. In my view however if discerning educational value is as difficult as these theories suggest there is absolutely no reason to suppose that bureaucratic regulation will perform any better. If parents cannot discern who is best placed to educate their child then why should educational planners be thought capable of judging the education for whole swathes of children and why should parents be thought to have the information needed to vote for appropriate politicians who will appoint such regulators in the first place?

Your activities at King's College and research focus of your department are rather unique in the UK context. In what way and to what extend? How does the PPE program fits into this debate about the nature of political economy?

The department is unique - it is the only Department of Political Economy in the UK. It is also unique in its interdisciplinary focus. The department is informed by the central idea that the best economic theory must be sensitive to insights from the ethical and institution sensitive perspectives often found in political theory and political science. Similarly, the best political theory and political science is that which is informed by an understanding of the coordination problems highlighted by economics. We are striving to offer programs and both undergraduate and at postgraduate levels that reflect this interdisciplinary approach and we are very open to partnering with other institutions - such as CEVRO - that share this vision.

What is your current research agenda and what shall we expect from your department?

My future research projects will include a book on the ethics of environmental markets and also I hope a suite of papers exploring the implications of Elinor Ostrom's ideas for contemporary political theory. Here at King's we will be joined in the Fall/Autumn by a new colleague Samuel De Canio currently based at Yale whose work embodies the interdisciplinary perspective we want to advance. In the next few weeks we will be making a further five new faculty appointments - two at chair level and 3 at entry lecturer level. These are very exciting times for us.

Mark Pennington, professor of Public Policy and Political Economy & Director of the MA Political Economy Programme at King's College London. Mark's research interests lie at the intersection of politics, philosophy and economics with an emphasis on the implications of bounded rationality and imperfect knowledge for institutional design. He has a particular interest in the works of Hayek, public choice theory and related elements of the classical liberal tradition. His latest book is called Robust Political Economy: Classical Liberalism and the Future of Public Policy, Cheltenham: Edward Elgar (2011). In April 2016, Mark Pennington delivers an annual Friedrich Wieser Memorial Lecture at the Prague Conference on Political Economy organized by CEVRO Institute.