Paradigms and Paradox: The Politics of Economic
Ideas in Two Moments of Crisis
MARK BLYTH*
This article argues that there is a paradox at the heart of Hall’s “Policy
Paradigms” framework stemming from the desire to see both state and
society as generative of social learning while employing two different logics
to explain how such learning takes place: what I term the “Bayesian” and
“constructivist” versions of the policy paradigms causal story. This creates
a paradox as both logics cannot be simultaneously true. However, it is a
generative paradox insofar as the power of the policy paradigms framework
emerges, in part, from this attempt to straddle these distinct positions,
producing an argument that is greater than the sum of its parts. In the
second part of the article, I discuss the recent global financial crisis, an area
where we should see third-order change, but we do no not. That we do not
strengthens the case for the constructivist causal story.
Introduction
Peter A. Hall’s “Policy Paradigms, Social Learning, and the State” (Hall
1993) ranks alongside of his work on the Varieties of Capitalism (Hall 2001),
and his earlier work on institutions (1986), as a defining contribution to
the fields of comparative politics and comparative political economy. Part
of what makes it so influential is the elegance of the model developed in
the piece: three levels of change, simple and complex learning, and state
and society both involved as codetermining actors. What I suggest in this
article is however that another part of its influence rests upon a paradoxical tension within the article. This paradox stems from the desire to see
both state and society as generative of social learning while employing
two different logics to explain how such learning takes place: what I term
the “Bayesian” and “constructivist” versions of the policy paradigms
causal story. Far from constituting a weakness, I argue that the power of
the policy paradigms framework rests in part on this attempt to straddle
these ontologically distinct positions, thereby producing an argument that
is greater than the sum of its parts. To be clear, I am not arguing that the
article was a success because it was flawed. Rather, it was successful so
precisely because in attempting to bridge these two positions, it pushed far
*Brown University
Governance: An International Journal of Policy, Administration, and Institutions, Vol. ••, No. ••,
•• 2012 (pp. ••–••).
© 2012 Wiley Periodicals, Inc.
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beyond existing scholarship, encouraging scholars of quite different analytic persuasions to take seriously the politics of economic ideas.
To demonstrate this, I discuss the importance of the concept of “authority” in the original piece, how it differentiates the “constructivist” version
of the policy paradigms’ causal story from the “Bayesian” version, and
how it also helps, at specific moments, to act as the conceptual bridge
between these two positions. To further develop these arguments, in the
second part of the article, I take a policy paradigms approach to the recent
global financial crisis, an area where we should see third-order change, at
least as seen from the Bayesian version of the policy paradigms framework, but we do no not. That we do not adds weight to Hall’s constructivist version of the framework while telling us something of interest
about paradigm shifts in general and the notion of incommensurate
knowledge in particular. Both of these themes link back to the article’s
discussion of authority, which I return to in conclusion.
Policy Paradigms, Social Learning, and the State
Hall begins his article with a perennial question. “[T]o suggest that policymakers respond . . . to the ‘national interest’ leaves us wondering how
that national interest came to be defined” (Hall 1993, 275). One area of
promise for Hall in terms of answering this question was “the concept of
policymaking as social learning . . . [where] . . . policymaking is a form
of collective puzzlement on societies behalf” (Hall 1993, 276). Accepting
that such learning occurs, Hall wanted to know whether it takes place in
the insulated confines of a bureaucratic elite, as the literature on the East
Asian miracle seemed to suggest, or was it “a process . . . intimately
affected by societal development” (Hall 1993, 276)? That is, was it the state,
or society, or both, that learned?
To answer this, Hall defined social learning as “a deliberate attempt to
adjust the goals or techniques of policy in response to past experience and
new information” (Hall 1993, 278). This formulation of social learning
lends itself to what I shall term the “Bayesian” version of the policy
paradigms causal story (Stone 1988), where “learning as rational updating” among policymakers is deployed to explain how, in response to
cumulative external stimuli, policymakers shift from changing policy settings, to changing policy instruments, to eventually resetting policy goals,
resulting in Hall’s famous three orders of change (Hall 1993, 279).
Yet Hall is careful not to reduce his version of “social” learning to
Bayesian learning: an additive function of policy errors that begin with
settings, moves to instruments, and then leads to goals as a function of
environmental pressures. Social learning cannot simply be cumulative
Bayesian error because, as Hall’s prior work on institutions had already
shown, the context of economic policymaking is crucially important in
driving policy content (Hall 1986). What counts as “error” must therefore
be institutionally mediated because the institutional context gives rise to
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
3
“a framework of ideas and standards that specifies . . . the very nature of
the problems they are meant to be addressing . . . a policy paradigm” (Hall
1993, 279).
Accepting both processes as being simultaneously at play creates a
paradox however. First of all, both processes matter, and both processes
occur. Policies fail because they do not serve the purpose for which they
are designed. However, they also fail because they are “seen” to fail, or
because failure is constructed despite the evidence (Hay 1996).1 Paradigms, as Hall argues, shift for reasons both sociological and scientific,
and so the question becomes when, and under what conditions, the
“sociological” trumps the “scientific,” and vice versa. Both sides matter,
but as we shall see shortly, they cannot both matter at the same time. This,
I maintain, is the policy paradigms paradox.
The Sociological and the Scientific: Authority and Paradox
When discussing Kuhn’s original model and its application to policy, Hall
likens first- and second-order change, in policy settings and policy instruments, respectively, to Kuhn’s “normal science.” If doing “normal
science” means “business as usual” in policy work, then as Hall puts it,
“first and second order changes in policy do not automatically lead to third
order changes” (Hall 1993, 279; italics added).2 Given this, the additiveerror mechanism underlying the Bayesian version of events cannot
produce third-order paradigm changes because, by that logic, it is by
increments that error first swamps the settings, then the instruments, and
then finally the policy goals themselves.
This conception of “normal science” as first- and second-order change
makes third-order change something quite different in kind, thereby
granting what goes on at that level considerable autonomy. Hall confirms
this autonomy when he further argues that paradigms are “never fully
commensurable in scientific or technical terms” (Hall 1993, 280) and from
this makes three propositions. First, that “the process whereby one policy
paradigm comes to replace another is likely to be more sociological than
scientific” (Hall 1993). Second, that “issues of authority are likely to be
central to the process of paradigm change” (Hall 1993). Third, that
“instances of policy experimentation policy failure are likely to play a key
role in the movement from one paradigm to another . . . [because] . . . if the
paradigm is genuinely incapable of dealing with anomalous developments, these experiments will result in policy failures that gradually undermine the authority of the existing paradigm and its advocates even
further” (Hall 1993; italics added).
Let us stop for a moment and take stock of where the argument is at this
point in the article. Starting from the premise that, in terms of “orders”
1 + 2 ⫽ > 3rd order change, as per above, the first two propositions just
delineated are consonant with this line of thought. Here, paradigm change
is autonomous from “normal science” (levels 1 and 2). Yet statement 3
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seems to collapse the levels together, with “anomalous developments”
and “experiments” undermining the paradigm from within such that
1 + 2 ⱖ 3. Thus, we have two rival causal stories but, and this is crucial,
that alone does not produce a paradox.
Rather, what links these rival causal stories and stops them falling into
paradox is the concept of “authority.” Specifically, Bayesian learning does
not “hollow out” the existing paradigm, like acid eating away at a cavity.
Rather, events identified as anomalies can either add to, or subtract from,
the “authority” of those arguing for political power. Agency, via contests
of authority, is the key move in this part piece, but it is a move that the
article fails to sustain consistently throughout. Instead, as the article
progresses, the autonomy of third-order change, where these authority
contests take place, is compromised, and the model increasingly relies
upon empirical anomalies overwhelming first, policy settings, then instruments, and finally, like tooth decay, the paradigm itself, producing paradox.3 To see this, we need move to the empirical sections of the article.
Authority and Incommensurate Knowledge: The British Case
Hall first discusses the Heath (1970–1974) and Wilson/Callaghan (1974–
1979) government’s responses to the economic difficulties of the period as
examples of first- and second-order change. Essentially, both governments
stayed within the same Keynesian framework and altered settings, most
notably those concerning competition and credit controls and public
spending limit rules (Hall 1993, 281–282). Indeed, as Hall puts it, these
“normal science” events sit well with “the image of social learning presented by state centric theorists” (Hall 1993, 283). Yet what does not sit
well with the image of such theorists however is what happens next under
Thatcher between 1979 and 1989 where “there was a radical shift in the
hierarchy of goals guiding policy, the instruments relied upon to effect
policy, and the settings of those instruments” (Hall 1993, 284). So what
caused such a shift, a shift that once again seems to speak to the autonomy
of the third level?
Here Hall invokes the empirical, specifically “economic developments
. . . rising rates of inflation . . . stagnating levels of growth and employment
. . . anomalies in the Khunian sense, which called into question the
adequacy of Keynesian analyses” (Hall 1993, 284–285). These anomalies,
along with prior “policy failures . . . stretch[ed] the intellectual coherence
of the [Keynesian] paradigm . . . to the point of breaking” (Hall 1993).
However, if this is the case, then what we have are external “facts” rather
crudely imposing themselves upon a recalcitrant state that eventually gets
the message and switches models: “Bayes rules”—in both sense of the
word. Yet such a position gives short shrift to the constructivist partnerlogik that views these events through the politics of incommensurate
knowledge claims and authority contests.
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
5
First of all, in any complex system with hidden generators and uncertain payoffs (like a modern economy), failure has to be interpreted as
failure. A 4% inflation rate in 1960 was evidence of the economy doing
well. A similar inflation in early to mid-1990s had Alan Greenspan declaring U.S. unemployment as being “too low.” Second, although learning is
most certainly about cognition, politics is not just about who thinks, it is
also about recognition: who gets to (authoritatively) speak. This is why
authority is the real conceptual lynchpin of the piece, for as Hall notes
next, these experiments and anomalies cost “Keynesian doctrine . . . credibility in the eyes of politicians, officials and the public . . . [and] . . . as a
result of these developments, the locus of authority over macroeconomic
issues began to shift” (Hall 1993, 285). Yet, despite this invocation of
authority and the autonomy of third-order change, it still seems to be the
case that the empirics are ultimately driving the authority contest. In short,
Keynesianism did not fit the facts, monetarism did, and that is why it won
the day. After all, if it is the “fact” that the predictions of the Keynesians at
Cambridge were wrong that matters (Hall 1993, 286), then the empirical
anomalies are driving the agents’ interpretations, and the authority
contest is simply where this plays out on the basis of commonly acknowledged facts.
It is notable then that Hall resists this reduction, noting that “macroeconomic issues became the subject of an intense public debate” involving
everyone from the financial press to new research institutes, in a “societal
debate that soon became bound up with electoral competition” (Hall 1993,
288). However, he also argues that “policy failures . . . culminating in the
collapse of incomes policy in 1979” (Hall 1993, 287) drove the electoral
contest, where once again, the empirical (Bayesian) story seems to be
driving the (constructivist) sociological one. For if the empirics are driving
the paradigm shift, then a paradigm shift is simply social learning that has
moved up a scale. Indeed, by this point in the article, Hall does not think
it inappropriate to think of third order change as social learning, despite
the earlier injunction that it is not the same thing, because the agents
involved “seeking solutions to Britain’s economic problems . . . [since] . . .
powering and puzzling often go together” (Hall 1993, 289).
And yet, as we go further into the conclusion, the constructivist story,
despite the evidence marshaled relying on empirical failure is what Hall
decides to stress. Perhaps the most oft-quoted section of the article pushes
in this direction:
Politicians, officials, the spokesmen for social interests, and policy experts all
operate within the terms of political discourse that are operative within the
nation at a given time, and the terms of political discourse generally have a
specific configuration that lends representative legitimacy to some social interests more than others . . . and defines the context in which many issues will be
understood (Hall 1993, 289).
Going still further, Hall argues that “the struggle for advantage within the
prevailing discourse and for leverage with which to alter the terms of
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political discourse is a perennial feature of politics” (Hall 1993, 290).
However, if this is what we are arguing, then we seem to tack back to the
original position of autonomy for the third level, whose dynamics are
produced by a set of factors neither reducible to nor engendered by levels
1 and 2: the experiments and anomalies that they offer up. Emblematic of
this, right at the end of the piece, Hall argues that Heath “had nothing to
fall back on” because the old paradigm had failed. However, Thatcher had
“monetarist arguments” that allowed her to resist societal pressures (Hall
1993). But is not this using the Bayesian logic to explain Heath and the
constructivist logic to explain Thatcher? This is becoming more paradoxical, despite the work that authority is doing in the piece to stop a paradox
appearing.
In sum, it is actually not so clear what really drives paradigm shifts. Is
it cumulative anomalies in a Bayesian process (1 + 2 ⱖ 3), or interpretations and authority contests as a constructivist process (1 + 2 ⫽ > 3)? The
original article seems to argue that both positions are correct, and on one
level that is obviously true insofar as facts, and their interpretations, both
matter. So why then do I insist on a paradox being present in the article?
My answer hinges upon the work done in the piece by the concepts of
authority, incommensurability, and truth. Truth plays, in this context, two
separate roles: one of sociological convention and one of empirical “fact.”
Truth, Authority, and Incommensurate Knowledge
To be wholly accurate, the paradox generated here between these two
causal stories is not really Hall’s; it is Thomas Kuhn’s (1962). It comes with
the borrowing. That Hall’s usage of paradigm moves between Bayesian
and constructivist readings echoes identical tensions within Kuhn’s original exposition.4 The Bayesian reading of Kuhn, like Hall, stresses the
succession of paradigms as a function of empirical anomalies that accumulate until the paradigm collapses and another one takes its place. The
constructivist reading of Kuhn, which Hall also uses, stresses the succession of paradigms as a political struggle where notions of what constitutes
“anomaly” and “failure” are underdetermined by evidence due to the
incommensurability of truth claims. Incommensurability is key, for both
Hall and Kuhn, but Hall, unlike Kuhn, underplays it, which generates the
paradox. Incommensurability refers to situations where, as Kuhn puts it:
Parties to . . . debates inevitably see differently certain of the experimental or
observational situations to which both have recourse. Since the vocabularies in
which they discuss such situations consist, however, of predominantly the same
terms, they must be attaching some of those terms to nature differently. As a
result, the superiority of one theory to another is something that cannot be
proved in debate. Instead . . . each party must try to, by persuasion, convert the
other. (Kuhn 1962/1996: 198)
Incommensurability means that for something to be true, it has meaning
insofar as it is conventionally (i.e., consensually and contextually),
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
7
and not simply empirically, based.5 Truth is a series of intersubjectively
held conventions regarding “the way the world works” among a given
community at a given moment.6 Facts, let alone events, are not transcendentally true in themselves. Instead, they are true in terms of the theory
within which they are embedded and they are “true” if the majority, or the
most powerful members of a group or society, consent to that truth.
Accepting this conventionalist notion of truth, the fulcrum of Kuhn’s
incommensurability thesis, requires us to accept that placing empirical
anomalies in tandem with an incommensurability thesis must create a
paradox if one tries to accept both notions simultaneously. They both
cannot be simultaneously true statements, for the existence of one position
negates the other.
The Bayesian version of events maintains that there are transcendent,
objective, and empirical standards through which observations of events
and other “facts” can be judged. As such, the “fact” that by historic standards, the economic performance of the latter part of the 1970s was poor,
necessitated that one policy paradigm—Keynesianism—failed, while
another—monetarism—succeeded. In this case, the relativism inherent in
incommensuration thesis disappears. One paradigm succeeds because,
empirical failure being sufficient, the sociopolitical and discursive elements central to the constructivist account carry little causal weight. Yet if
paradigms are incommensurate bodies of knowledge, and Keynesianism
and monetarism are indeed that (Blyth 2002), then empirical failure cannot
be a sufficient criterion of “truth” because one person’s proof is another’s
irrelevance.7
Hall seems to suggest that empirical failure was a necessary, but sociological and discursive factors were the sufficient conditions for change. Yet
these two theses do not sit easily together in an additive relationship with
one another. Either the incommensurability thesis is in the driver’s seat or
empirical failure is. They both cannot be driving change at the same time.
This is perhaps why Hall recategorizes third-order change as social learning at the end of the article when earlier he had it as being different
in kind. Yet, if social learning must carry this conceptual weight, it too
falls over the incommensurability issue. Were these economic “lessons”
commensurable among different groups? Why was one interpretation
accepted as authoritative? The answer to that leads us back to the notion of
empirical proofs and demonstrations, but this, as we saw, bespeaks commensurate notions of what counts as success and failure across groups.
Like one of Ted Heath’s famous yachts, we seem to be stuck on a logical
sandbank waiting for the tide of events to lift us off.
For Hall, that something is social learning, seen in his claim that “the
critical actors in this process inside both the state and society were not
simply seeking to advance their own interests. They were also seeking
solutions to “Britain’s economic problems” (Hall 1993, 289). However,
solving Britain’s economic problems” stresses the neutral “problemsolving” nature of paradigmatic succession and makes political conflict
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over paradigms a derivative of empirical failure. After all, “Britain’s economic problems” were themselves based upon incommensurate interpretations. Who was to blame? Were trade unions part of the solution, or part
of the problem? Or was the situation as Bacon and Eltis famously described
it at the time, due to “too few producers?” (Bacon and Eltis 1978). “Britain’s economic problems” were an inherently political construct. If one
takes incommensurability seriously as a feature of paradigms, as Hall
does, then we must acknowledge that these so-called “natural experiments” neither conclusively proved nor disproved monetarism and/or
Keynesianism.8 Indeed, the claim that the late 1970s constituted such a
natural experiment was itself, from the constructivist standpoint, a vital
political move. Empirical failure was underdetermined by evidence and
overdetermined by theory. Kuhn is again helpful here.
Proof in an economic theory is not like proof in mathematics.9 In mathematics, “premises and rules of inference are stipulated from the start. If
there is disagreement about conclusions, the parties to the ensuing debate
can retrace their steps one by one, checking against each prior stipulation.
At the end of that process one or the other must concede that he has made
a mistake, violated a previously accepted rule” (Kuhn 1962/1996, 199).
The problem with economic theory is that interparadigmatic choice
between theories is not possible as the rules differ between paradigms.
Thus, rational expectations theorists, real business cycle theorists, postKeynesians, and Austrians can all explain, in terms of their own theories,
what caused, for example, the 2008 global financial crisis. However, they
are all incommensurate explanations. If so, then we must admit that the
choice between these theories is not “as much sociological as scientific,” as
Hall maintains. It is actually far more sociological, value driven, and
deeply political, than we often admit.10
Hall recognizes this when he argues that “organized interests . . .
acquire power in part by trying to influence the political discourse of the
day” (Hall 1993, 290; italics added). However, given the problems of
embracing relativism and conceptual absolutism simultaneously (Putnam
1981, 103–126), one could equally argue that discursive change is the
necessary and sufficient condition for declaring authoritatively that an
event has a given political meaning. Consequently, it is through this
mechanism that actors construct and contest which empirical anomalies
matter and which ones do not. Governments may both “power and
puzzle,” but successful ones authoritatively dictate what a puzzle is and
how power should be applied to solve it. These issues can be seen most
clearly in Table 1.
The top left quadrant of Table 1 is where the Bayesian causal story
works best. Insulated technocrats adjust settings and instruments, and the
economy, as Keynes hoped, becomes dentistry: technical and apolitical.
The top right quadrant is where society gets involved, but society here
simply acts as a feedback mechanism to the technocracy by reacting to
transparent shifts in the economy according to their budget lines and
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
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TABLE 1
The Policy Paradigm’s Paradox
Bayesian world of
commensurate
knowledge
Constructivist world of
incommensurate
knowledge
Location of Learning
Location of Learning
State
Society
Technical-rational
policymaking (1, 2)
Facts > Ideas
Material interests of
groups (1, 2)
Politics of ideas
Discursive struggle
primary (3)
Politics of ideas
Discursive struggle
primary (3)
given interests. Both quadrants are worlds of first- and second-order
change. Politics appears more strongly when we arrive in the bottom left
quadrant. Here, state elites argue with each other from incommensurate
premises. Rival camps with different distributional preferences emerge,
and the settings and instruments themselves become objects of struggle.
However, it is a constructivist politics that really drives events in the
fourth quadrant where, rather than acting as a feedback mechanism for
the technocracy, the public gets involved discursively, contesting the very
boundaries of politics and policymaking itself.
There are then, to reiterate, two rival causal stories at play at the same
time in the article. The first is 1 + 2 ⫽ > 3, where we stay in the top two
quadrants, and third-order change retains its own autonomy as a source of
crisis and change, and another 1 + 2 ⱖ 3, where we start in one, move to
two, and then as the crisis cannot be contained in either quadrant, it
spreads to the lower quadrants, eating away the paradigm as a whole like
so much sociological tooth decay. Two stories, two plausible accounts that
together constitute one paradox as both accounts cannot be simultaneously true. So how can we adjudicate between these accounts if neither
natural experiments nor social learning can clarify the issue? To answer
this, I turn to the recent financial crisis, which should have, by the Bayesian logic, brought about a paradigm shift (empirical disconfirmation of
theory), but it did not. I argue that the fact that it did not lead to a
paradigm shift is best explained by the constructivist logic of Hall’s piece,
especially when, once again, one pays close attention to the concepts of
authority and incommensurability in the original article.
Why We Were All Keynesians for about 12 Months
Nassim Taleb (2010) gives us a troika of reasons for the 2008 crisis:
increases in the role of hidden (tail) risks of low-probability events at the
same time as we understand them less, asymmetric and flawed incentives
that favored risk hiding in the tails, and increased promotion of methods
that helped to hide tail risks. In other words, we do not understand risk,
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MARK BLYTH
especially where it can hurt us the most, while our methods for estimating
it actually amplify it, and there are incentives to hide all this because of the
asymmetry of the payoffs and the convexity of the costs involved.
However, if this is the case, why is the neoclassical economics establishment still standing when it specialized in producing technologies of risk
calculation and elaborate theories of why such events should never in fact
occur? Indeed, if the crisis constituted, according to the Bayesian logic, a
giant (and hugely expensive—$4 trillion and counting) natural experiment on the robustness of neoclassical economics ideas, why then has
there been no “paradigm shift” in economics, despite the demonstrable
disconfirmation of 30 years of theory? Indeed, if there was ever a perfect
case for a “paradigm shift” in Bayesian term surely this was it? Yet why has
a paradigm shift not happened? That it has not demonstrates the power of
the constructivist logic of paradigm shifts.
Paradigms Lost: The World before the Crisis
After Keynes came, the rational expectations revolution, where the
myopic agents of Keynesianism, and even the adaptive agents of Friedman’s monetarism, were replaced by rational agents who invested in
being correct as failure was unnecessarily expensive.11 And if all agents
did this, then over time the proportion of agents in a population optimizing would increase such that the market would be “efficient” insofar as
anyone in the market could only do as well as anyone else in the market,
at least in the absence of private information.12 Several consequences fell
from this.
First, the efficient markets hypothesis became more than a hypothesis:
It came to be regarded as a state-space description of actually existing
markets. It described a world where price embodies all the relevant information in the market (the price is always right) and no one can beat the
market with the same information as everyone else (there is no free lunch).
Building upon this, the so-called “second fundamental theorem” followed, that optimizing agents trading in such an environment will drive
prices into equilibrium such that the financial assets they hold correspond
completely to the real (fundamental) values of the assets that they denote.
Third, the “policy irrelevance proposition” (aka Ricardian equivalence)
reigns supreme. That is, if the government tries to beat the market with the
same information as the market, then it cannot do so, as rational agents
will discount the event before it occurs. Trying to be smarter than the
market on the part of the government will simply cause the very disturbances that the government is ostensibly trying to eliminate. Add to this
set of ideas the decades-old microfoundations critique, where “truths”
about macro-aggregates must be reducible to “truths” about individuals’
consumption and production choices, and something quite amazing
happens: macroeconomics “ceases to be.” And if there is no macro—only
the aggregation of by-definition efficient market choices that states can
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
11
only “get in the way” of—then there are no fallacies of composition either.
What is true about the whole must be reducible to the sum (or division) of
its parts.
In such a world, “governing the market” devolves to ensuing adequate
transparency and information so that individual market participants can
insure against risks with appropriate hedging strategies, and where the
ability to shape market outcomes is taken out of the hands of elected
politicians and given to unelected bankers in the name of time consistency.
In such a world, the only regulatory problem worth worrying about is
moral hazard. Although individual market participants may make mistakes, by definition, the market does not, so if market agents get into
trouble, you need to let them fail. Bailouts will only lead to more bailouts
and rob the market of its efficiency. Finally, if you want to model all this,
you can have a macro model. Its called dynamic stochastic general equilibrium modeling where a “representative agent” can be modeled in a
series of simulations optimizing under a series of tax and consumption
constraints such that micro choices sum to macro outcomes despite the
rather obvious fact that the economy is not an agent and it does not
optimize (Solow 2010). Unsurprisingly, such “rigorous” models proved
very popular with central banks before the crisis.
And Then Came the Crisis
The story of the 2008 crisis has many permutations and possible villains,
but the simplest way to think about it is that every bond salesman and
stock analyst suddenly had to become a credit and counterparty analyst on
every trade, with the result that the system as a whole ground to a halt.13
Quite why this happened to these efficient markets was, in terms of the
existing paradigm, a rather large anomaly. The information flows that
supposedly created transparency and enabled proper risk management
proved to be less than flowing and transparency enhancing. The claim that
the financial assets traded represented asset price fundamentals was,
when the bubble was exposed as a bubble, out by orders of magnitude.
Agents’ rational expectations failed them as their “irrational exuberance”
on the upside gave way to runaway pessimism and asset fire sales on the
downside. Focusing only on the micro and the denial of the macro led to
systemic risk blindness arising out of the network externalities of different
agents taking similar positions in similar asset classes. Viewing moral
hazard as the only problem led to the decision to let Lehman Brothers fail,
with the result that everyone got a lesson in systemic risk via credit default
swaps (fallacies of composition) all at once as the markets seized up.
All in all, after riding up and down three global asset bubbles in
equities (1987–2001), real estate (1997–2006), and then commodities (2006–
2007), while insisting that we lived in a period of “great moderation,” the
efficient market required a multitrillion dollar bailout from the “irrelevant” state that now has to be paid back by those most disconnected from
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the boom through the austerity policies of governments (Blyth Forthcoming). In short, according to the Beyesian logic, if you ever wanted an
empirical disconfirmation of a social science theory, here it is; and it only
cost (to date) $4 trillion to run the experiment.
So why then did the paradigm shift that seemed to happen, when we all
became Keynesians for about eight months from October 2008 to June
2009 and rediscovered compensatory finance and stimulus policy, fail so
completely, in a political sense, to transform and replace the discredited
paradigm? Arguably, the Keynesian policy worked economically, but
despite this “fact,” the postcrisis consensus on fiscal policy is the Toronto
G20’s “growth friendly fiscal consolidation.” That is, cutting your way to
growth in a rerun of the 1930s. Not only has the neoclassical paradigm not
been undermined, it has, despite first-, second-, and third-order failures in
settings, instruments, and goals, been reinforced by a classical austeritypolitics backstop. I argue that five factors, in increasing order of importance, both explain this outcome and serve as useful data for our
discussion of the role played by the two causal logics that constitute the
policy paradigm’s paradox.
Five Reasons and Yet No Funeral
The first reason is time. Simply put, by the time this article is published, it
will be a mere four years on from the crisis of 2008 (at the time of writing),
and it is far from clear that we will be out of the economic woods by 2012.
There may be a quick recovery that rehabilitates the orthodox theory, as
practitioners of austerity politics such as the European Central Bank (ECB)
and the German government seem to hope. There may be a slow and
sluggish recovery, which those in favor of sustained stimulus argue. Or
there may be a secondary collapse and further banking crises stemming
from the flawed policy responses of the first crisis and/or the death of the
underlying model of finance-driven capital (Haldane 2010). The point is,
however, if it is too early to tell, then it is too early to expect the accumulated wisdom of an entire generation to be trashed and replaced. Time is
the friend of paradigm maintenance irrespective of evidence. Humans get
“stuck in the idea,” as they say in finance, as path dependence is fundamentally a cognitive phenomenon (Blyth 2001).
A second concern is the expectation that paradigm shifts are “all or
nothing” affairs—that one fails and another enters after waiting in the
wings. However, it is entirely possible that the dominant paradigm is seen
to fail and that nothing in particular comes along to replace it, so complete
was its initial victory. Take the so-called “Washington Consensus” on
development and growth from the mid-1990s (Babb 2010), for example.
Arguably, the rise of the BRIC nations (Brazil, Russia, India, and China)
plus the global financial crisis put paid to that model. Yet it is not as if the
“Beijing Consensus” has popped up to replace it (Ferchen 2010). The same
thing is just as likely here.14
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
13
The third reason is possibly the most important, and yet perhaps the
most mundane. The essence of the problem is well captured by John
Cassidy at the end of his book How Markets Fail (Cassidy 2009, 346). He
notes how even after the crisis Greg Mankiw, author of a best-selling
economics textbook, argued in a New York Times column that “despite the
enormity of events, the principles of economics are largely unchanged.
Students still need to learn about the gains from trade, supply and
demand, the efficiency properties of market outcomes and so on.” Cassidy
notes wryly, “[N]ote the phrase ‘the efficiency properties of markets.’
What do you suppose that refers to?” Cassidy points to the meltdown of
the markets. However, I suggest it points to something else: disciplinary
incentives.
Economics is today one of the most popular and fastest growing majors
on U.S. college campuses. Students see that incomes in the financial sector
dwarf those in other fields, and if an economics degree is seen as a ticket
to the ball, then there will be real demand for courses, irrespective of their
content. Inside the academy, the costs of being wrong, in terms of external
validity in the world, are negligible. Tenure is tenure and error is error; let
us not confuse the two. Hedge funds run by economists blow up: Tenured
economists who run hedge funds do not. Promotion depends upon tenure
and that depends upon acceptance of the reigning paradigm that all the
people reading your tenure file created. As such, adding incrementally to
the existing corpus of knowledge rather than nailing contrarian theses to
the disciplinary door is the way to succeed. Despite the crisis, the economics of the world and the economics of the classroom can be kept as separate
bodies of knowledge, and rather than this undermining a paradigm, such
incommensuration within a field of knowledge can serve to reinforce it. If
the crisis of 2008 did indeed constitute an “experiment” on these ideas,
then the classroom version of events remains curiously unaffected.
A fourth reason builds upon these prior observations by linking Hall’s
concepts of the locus of authority in paradigmatic struggles to questions of
empirical evidence. There is plenty of evidence that stimulus packages
worked and the bigger the package, the better the outcome.15 After 30
years of dominance by a paradigm that denies the possibility of this being
true, although it was fine to throw some money at a problem when it
threatened the global payments system and the solvency of major core
banks, the response soon came back from the global centers of economic
authority, “let’s not chuck the neoclassical baby out with the EMH bathwater. Too many careers and institutions are at stake!”16
Consider the inflation-phobic ECB’s sclerotic response to the crisis,
fretting over “inflation risks” in the middle of a deflation, and its continuing determination not to create a eurobond despite the fact that not doing
so could well lead to the collapse of the euro.17 The ECB’s behavior is a
singular testimony to the power of ideas determining outcomes. Recall the
“new” International Monetary Fund (IMF), which had for so long championed belt tightening for developing states in moments of crisis, and yet
14
MARK BLYTH
which turned on the money pumps for the developed world at the first
hint of trouble, reverted to type and called for “sensible fiscal consolidation” after a mere year of compensation. Remember how the British Conservative party, which sat at the time of their election on a public debt ratio
close to the Maastricht criteria, used the crisis of the financial sector to de
facto privatize British universities and make exceptional cuts in the
welfare state and public employment. Yet what is driving the United
Kingdom’s bond yield is its ability to print its way out of trouble in
extremis, not its fiscal probity. Again, it is the perception of the facts that
matters. In each of these instances, a crisis of finance was deftly constructed as a crisis of the profligate state despite the inequity of the put
(who pays) and the inanity of the analysis (who is to blame).
A fifth and final reason links back to our prior discussion of processes
of change being more sociological than scientific, thus determining who
gets to speak authoritatively. In Hall’s case of the United Kingdom in the
1970s, the locus of authority, who gets to speak concerning how the world
works, were the Treasury and the Cambridge Keynesians. Surrounding
them, shooting arrows of dissent like so many Hollywood Indians in a
Western movie, were a panoply of organizations: British and American
think tanks, the British Conservative party, the financial press, the City of
London, all pushing against the dominant paradigm. One locus of authority, many challengers, each “failure” amplified and distributed, discrediting the source, leaving the old guard outgunned and outflanked.
Now compare this with the politics of the 2008 crisis. Saving the global
payments system from itself was self-interestedly essential, and so the
unreconstructed brute Keynesianism of output gaps and stimulus became
wedded to an enormous redistribution of wealth from taxpayers to
rentiers as financial bailouts became the order of the day. However, once
the system was stabilized, this time around, the Indians were few and the
Cowboys were many and distributed. Thirty years of spectacular returns
and pseudo-stability (Taleb and Blyth 2011) had convinced every recognized authority, from the Organisation of Economic Co-operation and
Development to the ECB, from the Bank of International Settlements to the
IMF, from the Swedish Riksbank to the U.S. Federal Reserve, that markets
were rational, prices were right, and their policies were optimal. Given
this, those invested in selling “the Great Moderation,” those whose identities were bound up with these ideas and their instantiation, could hardly
be expected to turn around and tear it all down so easily, no matter the
weight of the evidence. This time around, with so many distributed yet
mutually supportive authorities invested in “paradigm maintenance”
(Wade 1996), the forces for paradigm change had to spread their fire over
such a wide area that their effect was dissipated. This time around, and
with apologies to Milton, there was no paradigm lost.
In short, it is politics, not economics, and it is authority, not facts, that
matter for both paradigm maintenance and change. The third order is
autonomous, and it is the incommensurate nature of rival claims that
1
bs_bs_query
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
15
matters most of all. Time elapsed, expectations of too rapid change,
captive demand, guaranteed supply, career path dependence, and distributed networks of authority all play their part, but the singular lesson of the
recent crisis for the policy paradigms model is that the sociological can
trump the scientific precisely because the locus authority did not shift
despite the facts. Mere facts will (sometimes) not be allowed to get in the
way of a good ideology. Being seen to fail, Obama’s stimulus, for example,
can trump actual failure, such as Eurozone austerity packages. In such a
world, the “truth” about the crisis and the ideas that made it possible
really does depend upon what the most powerful members of a group (or
society) consent to believe.
The struggle over paradigms can therefore be independent of changes
in levels 1 and 2 as changes in levels 1 and 2 must be mediated, not just
through the dominant paradigm of the day, but through the multiple
institutional locations whose claims to authority rest upon the maintenance of that paradigm. The struggle over the third level is a struggle over
the meaning of anomalies, not their existence. Incommensurability
ensures that meaning is always contestable, whereas the distributional
fallout from paradigm shifts makes sure that there are plenty of incentives
to both oppose and support such shifts. Authority, in such instances,
matters perhaps most of all.
Conclusions: Paradox and Paradigms
Ronen Mandelkern has suggested to me that the paradox I identify in the
foregoing might be thought of as two different mechanisms that work
sequentially during the process of a paradigm shift. The Bayesian mechanism leads to the rejection of the existing paradigm, whereas the constructivist mechanism leads the adoption of a new one.18 As he put it,
The Bayesian logic may be applied in order to refute a certain paradigm, or to
put it more simply, to know (or to think that we know) that it is wrong. But an
exclusively Bayesian logic cannot enable the ‘selection’ of a new paradigm
among several possible alternatives. If this is so . . . the rise of a new dominant
paradigm must rest on ‘extra-scientific,’ in other words, constructivist
mechanisms.19
Mandelkern may be correct insofar as such a move may both resolve the
paradox as it exists in the article and provide us with a fruitful new
addition to our arsenal of explanations. However, accepting this formulation reduces the question of incommensuration to a question of
sequence, the question of knowledge and authority to a question of function and timing, so I am resistant to doing so. Indeed, to the extent that
there is a paradox in the original article, I am glad that it is there because
it is a generative rather than a general paradox. The article is enhanced by its
presence, and as such it demands acknowledgment rather than resolution.20 Moreover, I am perfectly willing to admit that such a paradox may
16
MARK BLYTH
only exist if one embraces a conventionalist notion of truth and an incommensurate view of knowledge, as I do.21 Regardless, if what I have said
here has minimum plausibility, then it may give us a way of appreciating
the power of the original analysis and pushing it still further forward.
Political science as a field that has, in my estimation, been marked by
three great punctuations (Blyth 2006). The last of these came during the
1970s when modernization theory was seen to have failed and comparative politics specialists fell into, broadly speaking, competing economic
and sociological camps. The economic branch became rational choice
theory and the sociologists became state theorists, at least in the United
States. Hall’s original article begins by engaging with this “state theory,”
where states are actors with autonomy and capacity, but to really get at the
nitty-gritty of things, you had to go down to the level of institutions, to
how the state was put together, and here Hall’s Governing the Economy
(1986) became the touchstone for many U.S.-based scholars. But Hall, I
think, must have sensed, if not a paradox, then at least a tension in his own
work, at that time. He had just published a very convincing institutional
account of why the United Kingdom could not change, right in the middle
of the premiership of the one prime minister who was systematically
changing almost everything. Clearly, ideas were central to this struggle, as
anyone who studied British politics in this period can attest, but there lay
the risk.
To tell the story he wanted to Hall had to “bring ideas back in,” but
doing so, at the very moment when the rational choice offensive was at its
height, was a tricky proposition. So what he managed to do was truly
creative. He squared a circle. He created a clear and simple transposable
framework for the study of ideas that, although it rested upon a paradox,
was truly generative. It enabled Hall to bring ideas into historical institutionalism without dissolving the institutions in the ideas. More importantly perhaps, it offered everyone interested in these questions, and the
moment was indeed ripe for such a move, a menu of options: Social
learning was based in society and/or the state; it was both Bayesian
and/or constructivist; ideas were central to political change, even discourse was in there, but idealism, let alone a postmodernism, was avoided.
The politics of interest were central to the entire enterprise, whereas the
invocation of authority meant that interests were never simply reducible
to the brute and material.
I submit that Hall’s policy paradigms article ultimately rests upon a
paradox, but it does not demand that you take sides. It simply suggested,
implicitly, that there were sides you could choose to take. It allowed a
generation of graduate students, who are now middle-aged professors, to
talk about ideas and learning, and even the social construction of interests.
It gave scholars not just an opening, but also a framework to use, revise,
critique, extend, and build upon. To be clear in closing, I am not saying
that to be influential, you have to be wrong. I am not making such a
disingenuous clam. What I am arguing, however, is that if you take the
POLICY PARADIGMS IN TWO MOMENTS OF CRISIS
17
incommensurable knowledge claims at the heart of the policy paradigms
causal story seriously, then a paradox appears that is both generative and
progressive: the two incommensurate causal stories of paradigmatic
change. Indeed, it is largely because of this ambition to “bridge the
unbridgeable” that Hall’s policy paradigms framework engendered a
whole subfield of study: the politics of economic ideas.
Acknowledgments
I wish to thank Vivien Schmidt, Sebastian Roy, Ronen Mandelkern, two
anonymous reviewers for Governance, and all of the participants at the
February 11, 2011 workshop on policy paradigms, Suffolk Law School,
Boston, MA, for comments on this article. Usual disclaimers apply.
Notes
1.
For example, successive waves of antidrug policy in the United States, the
current U.K. debt “crisis,” etc. serve as relevant examples.
2. My italics. Or as he puts it later in the article regarding the British case “first
and second order change . . . did not cumulate into third order changes”
(Hall 1993, 291).
3. I borrow the concept of “authority contests” from Leonard Seabrooke’s
concept of “legitimacy contests.” See Seabrooke (2006).
4. According to some sources, there are between 21 and 26 different usages of
the word paradigm in The Structure of Scientific Revolutions. For the purposes
at hand, I narrow this down to 2.
5. There is of course a whole literature on how this works empirically in
modern sociology beginning with Latour and Boltansky et al.
6. For an excellent example of this phenomenon, see the discussion of how
capital controls are viewed by credit rating agencies shifts over time in
Abdelal (2006).
7. Witness the everlasting “deficits don’t matter,” “yes they do,” “spending is
right,” and “debt is the problem” dialogue of the deaf that the current crisis
has sadly only exacerbated.
8. The standard story on this stresses the 1968 Friedman and 1973 FriedmanPhelps refutation of the Phillip’s curve and its subsequent empirical breakdown. However, this so-called breakdown of the original Philips curve did
not mark some kind of Lakatosian “critical experiment” that adjudicated in
favor of Monetarism as the better theory. First, there is nothing particularly
Keynesian about the plotted statistical association itself. Second, it is perfectly possible to posit the emergence of a positively sloped Philips curve
out of the short-run curves of the 1970s that would, if one wanted to, explain
the slump of the 70s in orthodox Keynesian terms. Indeed Milton Friedman has admitted as much. See Milton Friedman Monetarist Economics
(London: Institute of Economic Affairs 1991), pp. 87–111, especially pp.
96–102. Third, the U.K. long-run Philips Curve 1992–2007 was not vertical; it
was horizontal.
9. In economics (and in political science), there is a tendency for analysts to
submit mathematical proof (derivations of assumptions) as evidence and
proof of contentions. A mathematical proof is not the same thing as proof of
18
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
MARK BLYTH
a contention being true, that is, believed as meeting a standard of external
evidence. Discussions of the uses of formal models would be clearer if their
proponents kept this in mind.
I have yet to meet a left-wing monetarist or a right-wing Keynesian, and I
have been looking for years.
For good surveys of these developments, see Fox (2009) and Cassidy (2009).
Which when revealed would be traded away anyway.
I thank Daniel Davies for this version of events.
A related argument is that “there is no new paradigm with which to replace
neoclassical economics.” This is incorrect. The “missing” new paradigm is
precisely that which was rediscovered in the crisis, Keynesian macroeconomics, within which finance plays a much restricted role. This perhaps
explains its sudden unpopularity once the finance knew that the bailout was
unconditional on substantive reform.
See, for just one example, http://www.voxeu.org/index.php?q=node/4227.
One could see this as a fall back upon “material interests,” yet I would resist
such an explanation. That finance thinks such policies are in their interest
despite those same ideas causing their predicament speaks firmly to the
power of ideas. I thank Vivien Schmidt for this observation.
See
http://crookedtimber.org/2011/01/18/the-end-game-for-the-eurogerman-rules-and-bondholder-revolts/.
Ronen Mandelkern, personal communication with author, April 10, 2011.
See footnote 20.
I thank Sebastian Roy for this observation.
In my defense, I would argue that if you are not taking such a stance you are
not making a Kuhnian argument. Again, I thank Sebastian Roy for clarifying
this point for me.
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