Bad economic outcomes make people more receptive to bad economic ideas, which produce worse outcomes, so a country can be caught in a self-reinforcing decline.
Caplan's mechanism runs through voter opinion: growth makes electorates more tolerant of markets and openness, stagnation makes them more receptive to protection and inflation, and those policies deepen the stagnation. The trap is that the moment good ideas are most needed is the moment they are least saleable.
In practice
- A firm in decline becomes less willing to fund the change that would arrest it, and calls the refusal prudence.
- A department whose budget was cut for underperformance now performs worse, which justifies the next cut.
- Possible explanations
- The explanation runs through voter opinion: growth makes electorates more tolerant of markets and openness, while stagnation makes them more receptive to protection and inflationary policy, which then produces more stagnation.
- In its favour
- It was proposed with supporting cross-country survey evidence linking economic conditions to expressed economic beliefs, and the feedback it describes is specific.
- Against it
- The direction of causation is the pivot and it is contested, since bad policy produces bad outcomes as readily as bad outcomes produce bad policy, and countries have escaped the supposed trap often enough to question its grip.
- Standing
- Proposed with supporting cross-country survey evidence and contested on the direction of causation, which is the pivot of the argument.
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money