The BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Management has gone in this fifteenth edition to Timothy J. Besley (London School of Economics), Torsten Persson (Institute of International Economic Studies, Stockholm University) and Guido Tabellini (Bocconi University,) for “illuminating the connections between the economic and political worlds” and “transforming the field of political economy,” in the words of the committee’s citation.
The three awardees, together with the late Alberto Alesina (Harvard University), have employed both theoretical and empirical tools to examine “how political institutions and processes shape economic policies and outcomes on one hand, and how economic factors shape political institutions on the other,” contributing decisively to shape the field of modern political economy.
The jury agreed that the work of Professors Besley, Persson and Tabellini, “has enriched economics by drawing important connections between the economy and politics,” and “has spawned a flourishing literature in several areas of the social sciences.”
An evidence-based field of study
The organization of states and their institutional structures in relation to the socioeconomic realities of their citizens has been an object of study since at least the mid-18th century.
In recent decades, with a much greater abundance of information, the two main innovations introduced by the new political economy modeled by the three awardees are the use of empirical evidence and the techniques and tools of modern economic science. Their research, which has been widely cited by social scientists of every branch, country, and school of thought, forms the core of a whole new field of study — Modern Political Economy.
For Mónica Martínez Bravo, a professor in the Centre for Monetary and Financial Studies (CEMFI), the awardees’ work stands out in this thriving field “for leading and lighting the way for other researchers to follow, proposing, and developing new aspects and approaches to unravel the linkages between politics and economics. Beyond simply seeking to understand the sociopolitical context for public policymaking, they model the behavior of agents – citizens, institutions, and organizations. And then they develop empirical tests to find whether these theories are supported by the facts.”
Guido Tabellini (Bocconi University) - BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Management - BBVA Foundation
There is a broadening consensus around both the importance of institutional quality for economic development, and the potentially damaging effects of inequality on economic growth. In the last 15 years these ideas have found their way into the reports of multilateral organizations like the World Bank. These ideas evidence the influence of the modern political economy, elaborated by the awardees in a series of publications outstanding in their scope, quality, and impact.
The first wave of the new political economy
Tabellini and Persson's personal motivations coincided in the same way as their academic careers, with stays at the University of California at Los Angeles (UCLA) in 1989-1990. Both believed that traditional analysis was limited to looking in only one direction: the consequences of public policies on the real economy. But it was necessary to go a step further: how are economic policies themselves shaped? How are they chosen and how do they relate to the institutional environment in which they are formed? According to Professor Persson, “In the first wave of the political economy revolution, the punchline was that it was political and economic forces together that determined which policies got enacted in a given country.”
Timothy J. Besley (London School of Economics), BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Management - BBVA Foundation
The result of their exchanges was the 1990 book Macroeconomic Policy, Credibility and Politics, which Persson views as the cornerstone of modern political economy, followed by talks at congresses and in lecture halls where they continued to work up their ideas. In the year 2000 they published Political Economics. Explaining Economic Policy, now a standard in its field. Five years later, they published The Economic Effects of Constitutions, where they used long time series data from several countries to study the linkages between certain characteristics of constitutional structures of states and economic policymaking such as the tax system, income redistribution mechanisms or the supply of goods and services.
From theory to empirical evidence
At these early stages the field advanced in parallel with economics as a whole: from theory to empirical inquiry. “Many assumptions of the rational expectations theory are not applicable in real circumstances,” Tabellini points out. “So, in political economics, a lot of attention is now going to how beliefs and opinions are formed. And to do that we need to exploit insights from psychology and sociology, to understand how our value systems largely influence behaviors like, for instance, the way we vote.”
In parallel, Timothy Besley had embarked on his own line of research at Princeton University, informed in part by Persson and Tabellini’s work as the LSE professor recalls: “In my early work I studied the impact of having term limits on politicians. In some countries, politicians have to retire, so U.S. presidents, for instance, can only serve two terms and then they have to leave. So [with Anne Case] we looked at the impact of term limits on incentives and found that when a politician is subject to a term limit, they’re clearly not going to be thinking beyond the end of their time in office.” One consequence of this attitude was that public spending and debt rose at a higher rate.
Torsten Persson (Institute of International Economic Studies, Stockholm University) - BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Management - BBVA Foundation
Three pillars of prosperity
Shortly after, the three awardees formed an interdisciplinary research group that would meet two or three times a year, and professors Besley and Persson began work on their co-publications. Among the most far-reaching was their book Pillars of Prosperity (2011) examining the determinants and consequences of what they called State Capacity. The three pillars referred to are, in Besley’s words: “firstly, the power to raise taxes; secondly, the ability to make and enforce laws; and, thirdly, the state’s capacity to spend wisely on things that make their citizens’ lives better, be it health systems, education systems or infrastructure.”.
These three pillars, his research finds, are closely interrelated: “If you’re going to make your citizens’ lives better by providing healthcare, for instance, you need to build collective capacity. And that links to the power to raise taxes, because citizens are only willing to be taxed if the revenues are used wisely, to create, say, improvements in their lives.” Not only interrelated, then, but mutually reinforcing. “It’s not God-given that you can tax the population,” Professor Persson adds. “You need to build institutions to have a well-working tax system. You can’t just decide to do it. It requires purposeful action to finance the state. So we studied under what circumstances a state would have appropriate motives to invest in its development.”