23 November 2015

Mads Vestergaard attended the Conference of the International Network for Economic Method in Cape Town

Mads Vestergaard, researcher in political opinion and bubble formation at CIBS, participated in the International Network for Economic Method's annual conference and YSIs workshop. In this connection he received a 800$ travel stipend from Institute of New Economic Thinking, Young Scholar Initiative (YSI)

Yesterday he presented his model of political bubbles at the conference

Read his abstract below

The Economy of Politics and the Political Environment of Economics

The aim of this paper is 1) to introduce a new interdisciplinary research approach to bubble phenomena initiated by the recently founded Center for Information and Bubble Studies (CIBS), University of Copenhagen. 2) To present a model for describing ‘political bubbles’ applying theories of bubbles from economics to politics and public opinion formation on ‘the market of opinions’.  Finally 3) analyze the case of Denmark’s recent labour market reforms as an example of an opinion bubble emerging in a political environment hospitable to bubbles.

Political Bubbles - the Economy of Politics and the Political Environment of Economics

Bubble Studies

Bubbles - in finance and other markets - may be analyzed as information control problems among deliberating agents who are collectively susceptible to socio-psychological features like group-thinking and lemming effects, which together with determinate market conditions make for bubble‐hospitable environments. Methodologically this calls for integration of philosophy, economics, social psychology and behavioural science to form a novel interdisciplinary platform for analyzing and resolving often destabilizing bubble‐phenomena of human and market interaction.

Political Bubbles

A bubble is considered to have emerged when assets trade at prices far exceeding their fundamental value. Such phenomena are typically associated with situations in finance where stock, real estate and other financial products are chased by so much liquidity to the point of “irrational exuberance”. The financial bubbles appearing in markets are often politically stimulated. Political opinions or cases may however themselves bubble. A political bubble describes a situation where a political opinion or case is overheated beyond its fundamental value. The fundamental value of a political case may be measured by its ability to exemplify a general issue and the fundamental value of a political opinion may be defined as consisting of a relation between ends, means and proportionality.  

A Political Bubble: The case of ‘Lazy Robert’ and inefficient unemployment policies

The recent reforms of Denmark’s unemployment and welfare benefit system following the overheated debate on the case ‘Lazy Robert’ (See ‘Danes Rethink a Welfare State Ample to a Fault’, The New York Times, April 20, 2013) is an example of a political bubble. Political stakeholders speculated in opinions with a high level of social and media transmission far exceeding their fundamental political value of the case in question. The facts were lost in the process and the resulting policies which impaired the living standards of welfare and unemployment benefits recipients - thus increasing inequality - did not cash in the expected political return of investment: bringing unemployment down.

The Political Environment of Economics

Political bubbles are building blocks of post-factual democracy where facts and valid arguments are substituted for opportune political narratives. A consequence is that in bubble‐hospitable environments there is a high risk that economic models are not being held accountable and revised when their predictions fail to converge with the facts. This, the paper finally argues, is the case in Denmark where the models predicting the effect of the labour market policies seems to be politically immunized to falsification and the test of reality.