Why Economists Don’t Write More Papers on Political Finance

Lambert here: See Outis Philalithopoulos on “academic choice theory,” Naked Capitalism 2011 (!).

By Thorsten Beck, Professor of Banking and Finance, The Business School (formerly Cass); Director, Florence School of Banking and Finance, Orkun Saka, Assistant Professor of Finance at University of Sussex; Visiting Fellow at LSE and Research Associate at Systemic Risk Centre. Originally published at VoxEU.

Despite the commonly held views of economists on regulatory capture, our profession has been much more hesitant in recognising similar conflicts of interests that may exist in economics research. This column reports on the related discussions and research presented at the second London Political Finance (POLFIN) workshop, including work on the interaction between political power and corporate favouritism, the influence of partisanship on international capital flows, and political polarisation in financial news as well as in corporate boards. It lays out some of the important takeaways and suggests directions for further research that can shed light on the remaining issues.

Since Stigler’s (1971) seminal work, economists have explicitly recognised the possibility that regulatory agencies may be captured by those whom they are supposed regulate. That is, those public sector employees who are ideally expected to do gatekeeping against the private companies in order to uphold the public interest may have legitimate economic incentives to act against such expectations, leading to pervasive conflicts of interest in regulation. Despite the now widely held consensus view among economists that public gatekeeping activity may end up serving private interests, our profession has been much more hesitant in recognising similar conflicts of interests that may exist in economics research and bias the scientific process towards powerful institutions with monopolistic access to confidential datasets and high-end job market prospects (Zingales 2013, Fabo et al. 2021).

Building on these issues during the 2nd London Political Finance (POLFIN) Workshop, Renee Adams (2021) delivered an insightful keynote speech based on her past experiences as a young economist at the Federal Reserve Bank of New York. Through an autoethnographical lens, she reflected on her correspondence with one of the top journals in finance while she was trying to publish a paper on the potential governance failures in the way that Fed regulated its member banks. Despite her serious attempts to target the concerns of the referees, it seemed that the gatekeepers – some of whom were seemingly well-connected to the Fed – were less than willing to accept the implications that her research could have had on the Bank and its top management. Disheartened by the potential conflicts of interest on the part of the ‘gatekeepers’, she left the project behind as a working paper. Unfortunately, this early experience went a long way to answer the question she posed in the beginning of her speech: “Why haven’t I written more papers about political finance?”.

Apart from its memorable keynote speech and the following fruitful discussion (which can still be watched offline; see the references for the link), this year’s POLFIN workshop brought together a set of high-quality research projects on this rather niche theme. Below we describe a short summary for a few of these papers and comment on the avenues that would benefit most from further research in the future.

Politics and Finance

In “Power, Scrutiny, and Congressmen’s Favoritism for Friends’ Firms”, Kieu-Trang Nguyen and co-authors question the standard wisdom that “power tends to corrupt and absolute power corrupts absolutely” (Do et al. 2020). Rather, using a Regression Discontinuity Design of close Congress elections in the US, they find evidence that a politician’s win reduces the stock value of his or her former classmates’ firms by 2.8%. This adverse effect is most prominent among younger candidates, when career concerns are arguably strongest. They explain this result by politicians reducing quid-pro-quo favours towards connected firms to preserve their career prospects when attaining higher-powered positions. While certainly a surprising result, this clearly underlines the need for further research on the role of scrutiny in restraining favouritism in politics.

In “Does Political Partisanship Cross Borders? Evidence from International Capital Flows”, Larissa Schäfer and co-authors gauge whether partisan perception shapes the flow of international capital (Kempf et al. 2021). Using data on syndicated loans and equity market funds, they show that the ideological alignment or distance of individual investors/lenders in the US (based on political contributions by banks and voter registration for fund managers) to foreign governments affects their capital allocation around the world. In particular, considering investment in the same country around the same foreign elections, the authors show that US banks reduce lending after an increase in the ideological gap between their own (Republican or Democratic) political stance and the political stance of the new foreign government and charge higher interests (while they do not face higher default). In a similar fashion, US mutual funds decrease portfolio allocation, again with no difference in performance. The authors also confirm the results for non-US investors (Canada and UK), even though this is done with less granular data. These quite striking results negate the old notion that partisan politics would stop at the water’s edge and invite further research on how political connections (and/or shared affiliations) across countries may end up influencing and potentially distorting private actors’ investment behaviour.

In “Political Polarization in Financial News”, Ryan Israelsen and co-authors find strong evidence of political polarization in corporate financial news (Goldman et al. 2020). Comparing the coverage in the Wall Street Journal to that in the New York Times over 30 years on the largest 100 companies, they document that newspapers are more likely to cover and write positively about politically aligned firms (as measured by campaign contributions by employees and corporate political action committees to Democratic and Republican Party candidates). For example, an article in the WSJ about a firm that donated only to Republican Party candidates in the previous election cycle uses 20% more positive words than an article in the NYT, while an article in the WSJ about a firm that donated only to Democratic Party candidates uses 10% fewer positive words compared to the NYT. And this different reporting also has implications for investment and trading. Specifically, there is more trading on days where there is more politics-induced disagreement in the reporting on a specific firm. Finally, matching granular data on individual investor trades from a retail brokerage database to newspaper circulation data based on the zip code location of the investors, the authors find that when news about a stock appears in the newspaper an individual investor is more likely to read, the investor trades more and in the same direction as other investors who read the same paper. This study, alongside other recent work showing how individuals may create their own reality bubbles based on the very same facts (Alesina et al. 2020), brings a new perspective to the micro-foundations of information asymmetries in financial markets and invites further thinking on what makes such subjective perceptions of the same financial reality survive in the long term.

Last, but not least, in “The Political Polarization of U.S. Firms”, Elisabeth Kempf and co-authors illustrate that executive teams in US firms are becoming increasingly politically homogenous, based on voter registration records for top executives of S&P 1500 firms between 2008 and 2018 (Fos et al. 2021). This trend seems to be driven by politically misaligned executives being more likely to leave, especially between 2015 and 2017 while the effect is stronger in states where there is no legal prohibition of political discrimination, in firms with lower institutional ownership and those led by CEOs with longer tenure. The authors also show that differences in executives’ political views manifest in differences in beliefs about the company’s future stock price performance after political events, such as the surprise win by Donald Trump in 2016, with Democratic executives having a significantly higher likelihood of selling the firm’s share than Republican executives of the same firm after this specific event.


The diversity of the research topics presented at the POLFIN workshop was more than representative of that of the field; however, none of the papers puts the mirror back to the face of our own profession (with a key exception of a recently published paper by Fabo et al. 2021). Going back to Renee’s keynote speech, there is certainly a bias in our academic community to ‘not rock the boat’ and a risk of getting too close to authorities such as central banks that provide us with data and consultancies. The good news is that unlike ten years ago, this is now being openly discussed; the bad news is that we have only taken the first (baby) step in addressing this problem. There is need for a much broader discussion on the biases current institutional setting in economics/finance may inflict upon the scientific output including the lack of diversity in journal editorial boards and concentration of the gatekeeping power in a few hands (Angus et al. 2021).

References available at the original.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Chris Herbert

    One of the first insights I got when I began studying Modern Monetary Theory was that the mainstream macro was obviously a narrative that protects the donor class, the wealthy. It is clearly an ideologically biased macro. Not a true academic work. MMT, on the other hand, appears to be value free in explaining the finances of modern monetary sovereign nations. The framework works well no matter the values imposed.

    1. Altandmain

      Yep – the whole Chicago School of Economics and the “freshwater” economics is a lie that is designed to protect the class interests oligarchs.

      There’s no other way around it. They picked that ideology because it gave them the cover to dismantle the New Deal and the post-WW2 Keynesian economics system. So too did the inflation in the 1970s – they used that as cover to impose their vision class warfare.

      It is not that we do not know what needs to be done. It is overcoming the very rich and the institutions that they control like the media that will be the big bottleneck. The upper middle class too is also a big barrier since they are economically conservative.

  2. Steve Ruis

    I think you can put much of this at the feet (footer?) of the Powell memo, at least in the US. Powell went to great lengths to convince the business community to get over their distaste for politics and to enter the fray. Prior to that, CEOs tended to think they were “above” such things. Powell was quite successful in his work and was rewarded with a SCOTUS seat.

    1. HotFlash

      Powell was quite successful in his work and was rewarded with a SCOTUS seat.

      Per Huffpo: In 1969, he declined a nomination to the Supreme Court offered by President Nixon, preferring to remain in legal practice, through which he reportedly had amassed a personal fortune.

      1. Jonhoops

        Lewis Franklin Powell Jr. (September 19, 1907 – August 25, 1998) was an American lawyer and jurist who served as an Associate Justice of the Supreme Court of the United States from 1971 to 1987. Powell compiled a generally conservative and business-aligned record on the Court

  3. ChrisRUEcon

    #OMG … how did I ever miss that Outis post?! LOL … absolute beaut!

    Major Digression Alert
    When I’m walk dreaming sometimes, I’ll think about how (mainstream) economists try so hard to bend Economics into a hard science. I was having such a moment yesterday, as I was recalling some literature I’d read about antiprotons and anti-gravity. CERN is scheduled to finish some experiments – this year hopefully – on finally determining whether anti-matter experiences antigravity! Some deetz here (via CERN), for the interested. In any case, as I went through a shallow rabbit hole of related physics papers, I invariably ran into some equations – you know the sort – Plank’s this, quark spin that et al. And then it struck me: I’ve seen equations that look similar in Economics! And further, I realized that to every economist who has physics/math penis envy, that is a goal of sorts: i.e. if one were put two equations up on slide projector, one having to do with anti-matter gravity, and one having to do with say, how to ascertain what the minimum wage should be given various inputs, both equations would evoke the same sense of dread … LOL … #MissionAccomplished

    So, back to the point … mainstream Economics is as much about obfuscation, as it is about explanation, sadly. The desire to hide behind non-factual models and outdated, often fallacious assumptions while suppressing those who articulate anything to the contrary is the stuff of stand up comedy in heterodox circles:

    Heterodox Economist Professor: Why is the mainstream called a stream?
    Student: Why, professor?
    Heterodox Economist Professor: Because it’s so shallow.

    What’s funnier is that all the jockeying, obsequiousness and gatekeeping is evidence that perhaps the much vaunted “rational agent” is truly a thing. Further, it stands to reason that when mainstreamers try to shoe-horn rational homo-economicus everywhere it doesn’t belong, they are actually projecting.

    1. Mikel

      A debate you may be interested in:

      Proposition Team – Lord Robert Skidelsky & Dr. Ha-Joon Chang
      Opposition Team – Prof. Steve Pisckhe & Prof. Francesco Caselli
      Chair – Professor James Foreman-Peck

      The LSE is currently the only institution to have a separate EH department. We want to encourage students and academics alike to rethink the methodologies used to explain how our world works.

      Do we use the theoretical and econometrical method to create models with assumptions to distil the complexities of human nature and produce measurable results? Or do we use the historical process of considering all factors to provide a more holistic explanation? More importantly, which method should be adopted to better understand increasingly complex economic phenomena in the future?

      We are striving to provide our students breadth that exceeds their current theoretical studies….”

        1. ChrisRUEcon

          Follow up:

          Wow … 1:22 in and Skidelsky drops the hammer early: Maths is concerned with two things: firstly, things that are necessarily true – i.e. it’s a branch of logic; and secondly, propositions that can be proven. Economists, he suggests, lean heavily into the second aspect of Maths.

          ;-) … already evident where he’s going here!

          Thanks again!


    2. kirk seidenbecker

      Relatively famous quote from Alfred Marshall –

      “[I had] a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules – (1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). This last I did often.”

    3. skippy

      With the added bonus of transferring metaphors from maths and physics upon humans or other natural systems eg. your now a widget or cog in some econ engineers deduction.

  4. diptherio

    using a Regression Discontinuity Design of close Congress elections in the US, they find evidence that a politician’s win reduces the stock value of his or her former classmates’ firms by 2.8%

    Does this not strike anyone else as spurious correlation?

      1. diptherio

        Having watched the whole thing, I highly recommended it. I wish it had a transcript, but I think even for those allergic to video, it’s worth a listen (at 1.25X speed, if you’re pressed for time) for the quality of the content. I would say it ranks up there with Roemer and Ackerloff’s classic “Looting” paper for providing a window into the seedy underbelly of how our financial system functions.

  5. Jeremy Grimm

    I think the question raised by the title of this post is best encapsulated by the old saw: “Who pays the piper calls the tune.” Of course the next question which this post does not raise or address might be: How was the piper made so dependent on outside coin? I think that is a different story about how the Education Industrial Complex was built. Besides, the topic titled “Political Finance” by this post seems to have long belonged to Sociology [e.g. G. William Domhoff or C. Wright Mills]. The post might do better to ask why economists do not write more papers on Political Economics.

    The second half of this post appears to verge in a skew direction with its discussion of “Politics and Finance”. That the Times leans democratic party and the Wall Street Journal leans republican could probably be discovered from examining who owns each paper and their affiliations in the Corporate networks of the Power Elite. That expectations for the fortunes of companies should follow political lines — the political polarization of US firms — is a complicated way of noticing that some in the Corporate Power Elite possess divided often competing interests in extracting their shares of Government favors and largess. Following campaign contributions, revolving doors, and other forms of graft might be a more direct way to discover and characterize those competing interests. I suspect similar considerations apply in how politics “shapes the flow of international capital”. The divided Corporate Power Elites have competing interests in extracting wealth from other nations. Elucidating the nature of the competing interests of the Corporate Power Elites seems to me, to have far greater explanatory power than observations of party affiliations.

    1. diptherio

      Watch Adams’ keynote that I linked to above, I think you will find it much more to your liking than the other presentations from the workshop. And the summary presented here does not at all do justice to the tale she tells.

      1. Jeremy Grimm

        I took a look at the youtube link you provided. Thanks for the link. The audio on my computer — an old AMD gamer running Linux — was impacted by recent updates. I did scan some of the slides in Adam’s presentation but they did not grab me. A quick look at the papers she has published revealed nothing that grabbed me. Sorry.

      1. Jeremy Grimm

        I looked over the paper you referenced. I am not sure what audience it was targeted at. If it was an audience of economists, I suppose the paper offers an indirect measure of how much of the free trade Koolaide they drank. A little experience following NAFTA was more enough training on the ‘benefits’ of free trade. I saw some of the benefits first hand in the US heartlands.

  6. none

    I think Yanis Varoufakis wrote about this phenomenon in his book “Economic Indeterminacy” and elsewhere. I don’t have a copy nearby though.

  7. marku52

    “The only reason to sturdy economics is to avoid being deceived by economists”

    Joan Robinson

  8. kirk seidenbecker

    Economics was originally called Political Economy – that this article omits this simple fact is a testament to how corrupt the field is…. back in its heyday, classical political economy was so much of a threat to the vested interests, the ‘marginal revolution’ and compartmentalization was (and still is) its counterpoint…. the labor theory of value was replaced by subjective marginal utility, for example…

    Michael Hudson’s “J is for Junk Economics” is a nice launchpad to wading through all the bs jargon that is used by the ‘mainstream’ today. Also, NC had linked to this great article a couple of weeks ago by James K. Galbraith –


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