Introduction to “Entangled Political Economy”

This volume celebrates and explores Richard E. Wagner’s vision of entangled political economy. Wagner says political economy, “denotes an entangled network of enterprises that are constituted under different institutional arrangements that generate a continually evolving admixture of cooperation and conflict” (2010, p. 160). Just as two distant particles may be “entangled” in quantum physics such that the properties of one depends instantaneously on the properties of the other, the behavior of “private” and “public” entities are “entangled” such that the nature of each depends on the behavior of the other.

For example, Bloom (2009) finds that firms may respond to political uncertainty by “inaction in hiring and investment.” It is costly to expand or contract your business, and uncertainty dampens firm responses to apparent profit opportunities. Firms “only hire and invest when business conditions are sufficiently good, and only fire and disinvest when they are sufficiently bad. When uncertainty is higher, these thresholds move out: units become more cautious in responding to business conditions” (2009, p. 638). If the firm’s degree of uncertainty depends on policy, then the actions of political authorities alter the sensitivity of private enterprises to profit and loss signals. Similarly, I have argued (Koppl, 2002) that the informational efficiency of financial markets depends in part on whether monetary policy is rule-based or discretionary. The dependency goes both ways. Smith, Wagner, and Yandle (2011) point to the radical change in central bank practices in the United States in response to the 2008 financial crisis. The prospective failure of some large “private” institutions led to “unconventional monetary policy.” Regulatory capture illustrates how entanglement is a two-way street. The nature of the regulatory agency is influenced by the rent-seeking activities of the private actors. At the same time the existence of a “public” regulatory body, which may be no less zealous in the pursuit of its rents, influences the nature of the “private” enterprises in its purview.