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Orphan Ideas

CHICAGO – Since the United States Supreme Court’s “Citizens United” decision, which prohibited the government from restricting independent political expenditures by corporations and unions, concern about business interests’ influence over US elections has been growing. But political contributions are only one reason why business interests have so much power. When it comes to lobbying, money is not everything: ideas play a big role, too. Unfortunately, rather than leveling the playing field, the battle of ideas may skew US politics even further in favor of big business.

The importance of ideas can be seen from the simplest things. Congressional bills aimed at benefiting powerful constituencies are generally given appealing (and misleading) names. For example, a tax holiday to repatriate foreign earnings was called the “American Job Creation Act.” It is easier to sell a bill that (allegedly) benefits everyone in society, not just a small group of its most privileged members.

More importantly, the lobbying of the quasi-governmental mortgage lenders Fannie Mae and Freddie Mac would not have been so successful without the idea of the “ownership society.” How could anyone oppose turning every American into an owner? It is precisely the appeal of such ideas that can make them so dangerous politically.

If ideas are like weapons in lobbying, it is important to appreciate the possible distortions in the market for their creation and diffusion. New ideas are like new drugs. While some pharmacologists dedicate their lives to searching for the cure for cancer, regardless of any monetary incentives, many are driven by the hope of securing a lucrative patent.

Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account profitability. That is why we have so-called “orphan drugs,” from which not enough money can be made because they cure rare diseases or diseases (like malaria) that affect people who cannot afford to pay for them.

The process of creating new economic ideas (or new evidence about old ideas) is not that different. Researchers do not get patents, but they get citations, recognition, and promotions. While some researchers dedicate their lives to the search for truth, regardless of any personal gain, many are driven by the hope of academic stardom and the money that comes with it.

Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account the demand for ideas. And, if funding is not a major issue, the mechanism of amplification of an idea (and thus its ultimate diffusion) nonetheless depends upon how appealing it is to some lobbying effort.

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Consider a great researcher in my field, Michael Jensen. In 1990, he co-wrote a paper about executive pay, arguing that it was not sufficiently linked to performance. Although the authors used an untenable benchmark to determine that the sensitivity of pay to performance was too low, the article was published in a top economic journal, prominently discussed in the Harvard Business Review, and is one of the most cited papers in economics. Fifteen years later, Jensen wrote a paper about the costs of excessive sensitivity of pay to performance. The paper was published in a minor journal and is not very well cited. Why?

Business loved the first paper, because it shifted the conversation from how much executives were paid (a very controversial topic) to how they should be paid (a more technical and less contentious issue). And, since companies cannot make executives pay out of their pockets for bad performance, the shift in focus ended up justifying an increase in pay. There was no similar love for the second paper, which languishes almost unknown, despite its important insights. Jensen, a researcher of the highest integrity and fame, is free to write on both sides of this issue. But the two papers’ asymmetric citation payoff is a warning for young scholars: if they want to get ahead professionally, the position that they should take is clear.

From venture capital to telecommunications, from the construction industry to teachers’ unions, there is plenty of demand for evidence that celebrates the benefits of these industries and justifies (implicitly or explicitly) government subsidies to them. There is no equally organized and active demand for evidence that all of these subsidies are distortionary, waste money, and make companies less rather than more competitive.

Here is perhaps the biggest orphan idea: pro-market does not necessarily mean pro-business. A pro-business agenda aims at maximizing the profits of existing firms; a pro-market agenda, by contrast, seeks to encourage the best business conditions for everyone. Who benefits from evidence that an industry is too concentrated, its profit margins are too high, and consumers are being ripped off?

As with malaria drugs, millions of people would benefit from such an idea, but their ability to pay is limited. And, sure enough, in most of what we economists write – and, more important, in what we teach in business schools – it is hard to tell the difference between being pro-market and being pro-business. The battle against crony capitalism starts in the classroom, and we professors are inevitably implicated. If we are not part of the solution, we are part of the problem.

Copyright: Project-syndicate.org 2012

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