Posted by Carla Sateriale
Vito Tanzi was director of the IMF Fiscal Affairs Department for 20 years, from 1981 to 2000. Since then he has served as Senior Associate at the Carnegie Endowment for International Peace, Undersecretary for Economy and Finance in the Italian government, and consultant and scholar to various international institutions and research institutes. Since his retirement from the Fund he has authored 11 books. Last week Mr. Tanzi’s latest book, Government versus Markets: The Changing Economic Role of the State, was presented at IMF headquarters in Washington. FAD research assistant Carla Sateriale interviewed Mr. Tanzi on his new publication.
What inspired you to write this new book, Government versus Markets, at this point in your career?
I’ve had at least three, maybe four careers throughout my life, which have shaped my perspective. I started in academia—studying at Harvard, and then teaching at American University and George Washington University. I spent 27 years at the Fund, then two years as a minister in the Italian government, and then several more years as a researcher and scholar at the Carnegie Endowment and at the Inter-American Development Bank. Finally, I decided to do what I had always wanted—have a period of my life with no formal commitments. I wanted to allocate all my time to reading, research, and writing. In many ways it has been the most productive period of my life. I have been able to publish five books between last year and now. Two of them in particular, The Charm of Latin America and Russian Bears and Somali Sharks, allowed me to weave together my perspectives on economics with my concrete experiences. Government Versus Markets gave me the opportunity to combine my observations on fiscal policy and regulation with my interest in the historical evolution of the role of the state.The book discusses the impact of political philosophies and institutional environment on the role of the state’s interventions in markets, and specifically on the choice between fiscal policy versus regulation. It examines how the role of government has evolved, as well as the choice of instrument—both across borders and throughout the past several centuries. My next book, which I hope to complete soon, is about the unification of Italy. I’m a bibliophile, so I buy tons of books, which creates problems for my house—there are stacks of books all over. But it allows me to economize on time, since I don’t have to spend time at libraries!
Governments vs. Markets combines a number of different perspectives on the question of the economic role of the state: historical, theoretic, and empirical. What prompted you to take this kind of hybrid approach?
I’ve had two main obsessions which have guided my career path—one is that whatever I do, I tend to get bored after a few months. At one point, I was very much interested in the shadow economy, underground economics. I wrote one of the earliest papers on the subject, which is still frequently cited! At another point I was interested in the impact of inflation on tax systems. I wrote a book and several papers on the topic. For a while I developed a similar interest in corruption, which I also wrote several papers about. The second thing that I became keenly aware of was how economics was becoming far too specialized. I know somebody, who, for the better part of 30 or 35 years, has been working only on one issue—the economics of multiple shifts in enterprises. I cannot imagine working on one issue for 35 years!
You are known in the literature for the Tanzi Effect. What’s the secret for getting one’s name attached to an economic phenomenon?
The Tanzi Effect was actually described in two of my papers—the first which described the impact of inflation on revenue, and another which extrapolated this effect to the problem it creates when inflation is intentionally implemented to provide resources for investment. However, getting one’s name on a concept is by no means a guarantee! Take, for example, the Laffer curve. Laffer became very famous for his idea that when tax rates are pushed above a certain level, revenue comes down. But I can point you to books written in the 1850s by Italian economists, who present his exact ideas, but in one clear paragraph! Similarly, there was an equation which appeared in a paper that I wrote in 1980 for the American Economic Review. The paper was edited by John Taylor, who later wrote a paper, which established the Taylor Rule, using this equation (which to be fair was not formulated exactly the same way I had written it). So, it’s a bit of a haphazard affair. I’m sorry, but I do not know the secret either! By the way, I had no role in naming the Tanzi effect, and would like to thank the first person who did!
Do you think universities promote econometric research too much, i.e., try to put a “technical coating” on old ideas and masquerade them as new?
Progress has to come also from the technical level, and clearly you need people with technical skills—people who will study the trees. But if you keep your eyes too focused on the bark, you can easily miss the forest. The incentives today are all in the realm of the technical world. If you want to make a career, you have go to a good university. You must become trained in technical skills because that’s how people think. And so the most capable people go into that type of work. But you need other kinds of people—those who can think on a grand scale, like Keynes or Adam Smith. To me, economics has become too narrowly focused, and its rich links to history and sociology have become lost. When I read some of the literature from 150 years ago, I don’t believe it is dated at all. I am convinced that we need to pay more attention to history in economics.
Is there any one economic thinker that all public economists should read?
There were people who never lost sight of society at large. Both Keynes and Milton Friedman based their economic views on their direct observations. Now we have reached the stage where it is believed that, if something doesn’t work in theory, why should we pay attention to the practical side? I have always tried to tie my economics less to the technical papers I read, and more to my own direct observations. Not to say that one should exclude the other, but both should be important. I think that macroeconomics should still come more from what you see when you look around you than from purely theoretical papers.