A political decision is the outcome of two forces:

2. A political decision is the outcome of two forces: • Conflicts of interests = How outcomes affect the utility of various groups • The debate = How policy decisions affect outcomes • If everybody knows the right model, no disagreement about the latter • In practice, beliefs about how the economy works differ, and how they differ influences decisions

3. Some examples • How big is the Keynesian multiplier? • Is unemployment classical or Keynesian? • Does work sharing work? • What is the cost elasticity of labor demand? • What is the effect of the net returns to education on the incentives to acquire skills?

4. Relevant questions are: • How are beliefs determined? • Can interest groups manipulate beliefs? • How do beliefs co-evolve with policy? • Does the economy have the ability to « learn » the true parameters over time?

5. The role of the intellectual • That the debate affects outcome illustrates the role of the intellectuals • Thus, how the intellectual professions are selected and trained has policy consequences • This is the topic of this talk

6. “In every country that has moved toward socialism, the phase of the development in which socialism becomes a determining influence on politics has been preceded for many years by a period during which socialist ideals governed the thinking of the more active intellectuals.(...) Experience suggests that, once this phase has been reached, it is merely a question of time until the views now held by the intellectuals become the governing force of politics.(...)”

7. “Though nobody will regret that education has ceased to be a privilege of the propertied classes, the fact that the propertied classes are no longer the best educated and the fact that the large number of people who owe their position solely to their general education do not possess that experience of the working of the economic system which the administration of property gives, are important for understanding the role of the intellectual.”

8. “Professor Schumpeter (...) has not unfairly stressed that it is the absence of direct responsibility for practical affairs and the consequent absence of first-hand knowledge of them which distinguishes the typical intellectual from other people who also wield the power of the spoken and written word”

9. “(...)for the exceptionally able man who accepts the present order of society, a multitude of other avenues to influence and power are open, while to the disaffected and dissatisfied an intellectual career is the most promising path to both infl uence and the power to contribute to the achievement of his ideals.”

10. “It is neither selfish interests nor evil intentions but mostly honest convictions and good intentions which determine the intellectuals' views. In fact, it is necessary to recognise that on the whole the typical intellectual is today more likely to be a socialist the more he is guided by good will and intelligence, and that on the plane of purely intellectual argument he will generally be able to make out a better case than the majority of his opponents within his class.”

11. “If we still think him wrong, we must recognise that it may be genuine error which leads the well meaning and intelligent people who occupy those key positions in our society to spread views which to us appear a threat to our civilisation. Yet (...) the representatives of the existing order (...) tend to regard the socialist intellectuals as nothing more than a pernicious bunch of highbrow radicals(...)”

12. A case study: France • Mistrust of the market economy plays a role as an obstacle to reform • Opinions are more hostile in a profession which plays a key role in beliefs: teachers • Accordingly, a large majority of the young prefer to work in the non-market sector

16. Occupational choice and belief formation • People learn about the economy through parental transmission and experience • They also learn through the school system • We assume that the latter reflects the beliefs of the teachers rather than those of the constituency • Teachers are imperfect agents

17. Occupational choice • People elect between a market sector and a nonmarket sector (= teaching) • They are more willing to go to the latter, the poorer their perception of the market economy • This generates a bias in the beliefs of the teachers • Furthermore, teachers have no market experience and do not learn

18. The model • OLG • The size of each cohort = 1. • t: people inherit priors from parents and school • t+: Occupational choice, market vs. teaching • t+1: work, produce children, transmit beliefs.

19. Market risk • Teaching pays a wage ω • Market pays w = productivity • But in the market I am employed with probability 1-s • And I do not know s • s = sH : market economy is bad • s = sL : market economy is good • k draws -

20. The returns to each occupation • Utility is given by V = E(w) – e • In the private sector, e = 0 →V = (1 – s)w • In the public sector, e = eT ~ Φ() →V = ω - eT - -

21. The career decision

22. The supply of teachers

23. Beliefs and occupational choice • More pessimistic people gain more from being civil servants • The supply of civil servants goes up with p, for any ω • Note that pessimism benefits public finances

24. Social entropy

25. The role of social entropy • Social entropy tells us how biased the teachers will be relative to the rest of the population • It is correlated with, but different from, occupational mobility • Under low entropy, teachers are more pessimistic

26. Belief transmission • θ = Heritability

27. Bayesian updating • For each draw, posterior evolves as if employed, and if unemployed:

28. The evolution of posteriors

29. The self-selection effect • The children of the unlucky become teachers • Thus, teachers are more pessimistic than average • And they have a disproportionate weight in the formation of next generation’s prior • This slows (speeds) convergence if market economy is good (bad)

30. Convergence

31. Convergence under bias

41. Convergence toward the wrong model • Under zero entropy, only dynasties with a worse experience than the teacher’s beliefs will switch from market to teaching • Thus, teachers’ beliefs can only become more pessimistic over time • Consequently, the economy cannot converge to the truth • The teachers drag it to p=1 (Prop. 3)

43. The insulation effect • The children of teachers get no draw from the market • Yields a critical mass of people next period at least as pessimistic as the teachers • But the effect of insulation per se seems quantitatively small

45. Policy, institutions and learning • Clearly, the distribution of beliefs affects policies and institutions • Conversely, institutions affect learning and beliefs • Teacher recruitment (σ) • Weight of education (θ) • Market turbulence (k)

46. A case for mutual reinforcement • Learning slower in a sluggish market (k small) • Pessimism and insider political power favors employment protection • Employment protection in turn makes the market more sluggish

47. How to model it? • Assume people vote on employment protection after the first draw • EP reduces k and increases relative weight of current labor market situation • Assume EP costly in terms of wages • Then WTP of insiders for reducing k is greater, the greater their pessimism

48. The effect of k on utility

50. A simple case: k=1,2 • Insiders prefer rigidity iff • Defines critical belief given by