Wednesday, February 8, 2012

Fiscal Psychology and Political Economy

This article is a great example of why economics was originally called political-economy and how the psychology of governments as agents in the global marketplace is poorly understood. It is poorly understood because of the multitude of interests at play in any governmental decision and the array of policy options. Economics has so far devoted most of it's energy concerning this topic towards the latter problem. We have developed powerful tools and institutions for evaluating policy options. However we have accomplished very little in understanding what effects the actual decision making process.
The real lesson to economics from the euro crisis playing out in Greece and other European nations is that the ability to rationally/efficiently make decisions may be more important to an economic system then what specific policy option they pick.

5 comments:

Anonymous said...

That differentiating the concept of policy options and what are the effects of these polices is an interesting topic; it is necessary to further talk about this issue. What the government should do probably not only to pick up one policy through the existing policy/economic tools, but also to develop more effective and efficient economic tools. Granted, the process of making new policies is difficult and it is hard to evaluate a policy in a short time. To conclude, no pain no gain.

Anonymous said...

I believe that one of the problems of the European Union is that it doesn't have a unified fiscal policy along with its monetary system. Can this be maintained over time, despite the struggles between national interests? Personally, I think that more regulations will have to be made to survive the crisis. But, the real question is: will the changes fix the cause of the problem?

Anthony H. said...

The mix between Politics and Economics is like Romeo and Juliet, it's meant to happen. Building off Stephanie's point, the US has a complicated relationship between the economy and Congress/Federal Reserve. Could you image trying have an effectively monetary policy for an economy of 27 states, all with different governments and different interests? But there is a trade off between that and the fact that the Euro has helped build East European economies and made business and traveling much easier. Therefore, which one would European countries want, a tied together Europe that will suffer at the cost of a few nations or a free trading economy due a currency?

Sijia He said...

I believe so that the politics and economics are inseparable. One state's economic achievement could decide its international political power by using the money to develop army, education and technology. On the other hand, one state's political situation could strongly influence its economic developing speed.

Kim Eckart said...

I agree that politics and economics can never be separated fully and to that extent I agree with Stephanie that there need to be some more regulations in place. I'm concerned that with all of the focus on Greece, some of the other struggling countries such as Portugal and Ireland will not receive the attention they need and we will see a repeat of the Greek economic crisis in the coming months.