I develop a model of ideologies as collectively sustained (yet individually rational) distortions in beliefs concerning the proper scope of governments versus markets. In processing and interpreting signals of the efficacy of public and market provision of education, health insurance, pensions, etc., individuals optimally trade off the value of remaining hopeful about their future prospects (or their children's) versus the costs of misinformed decisions. Because these future outcomes also depend on whether other citizens respond to unpleasant facts with realism or denial, endogenous social cognitions emerge. Thus, an equilibrium in which people acknowledge the limitations of interventionism coexists with one in which they remain obstinately blind to them, embracing a statist ideology and voting for an excessively large government. Conversely, an equilibrium associated with appropriate public responses to market failures coexists with one dominated by a laissez-faire ideology and blind faith in the invisible hand. With public-sector capital, this interplay of beliefs and institutions leads to history-dependent dynamics. The model also explains why societies find it desirable to set up constitutional protections for dissenting views, even when ex-post everyone would prefer to ignore unwelcome news.
This paper formed the basis for my Joseph Schumpeter lecture, given at the 22d Annual Congress of the European Economic association in Budapest, August 2007. I am particularly grateful to Jean Tirole, as the paper builds on much of our earlier joint work. I am also grateful for helpful comments to Daron Acemoglu, Rafael Di Tella, Xavier Gabaix, Mohammad Yildiz, Jean-Charles Rochet, Tom Romer, Karl Schlag, and Glen Weyl. Rainer Schwabe provided superb research assistance. Support from the Canadian Institute for Advanced Research is gratefully acknowledged. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
R. Bénabou, “Ideology,” Journal of the European Economic Association, 6(2-3), (2008), pp. 321352.