Tag: Dani Rodrik

Twenty-First Century American Nationalism Needs to Be Profoundly Cosmopoiltan

Posted on by Brad DeLong

It’s disturbing. As we face the probable abrogation of NAFTA, possible trade wars with China, Germany, and others, and the total cluster* that is the Trump administration’s policies (if any) toward NATO and Russia, a number of really smart and really well-intentioned people are, I think, making rhetorical–and in some cases substantive–errors that are degrading the quality of the debate and increasing the chances of bad outcomes. And they are doing it while trying to be forces for good, light, human betterment, truth, justice, and the American way…

So let me do some boundary policing here. Let me ask people–all of whom are wiser than I am, or if not wiser smarter, or if not smarter more knowledgeable–to think about whether they really hold the positions they set forward, and think about whether they have set them forward in a way most calculated to guard against destructive misinterpretation. Today: Dani Rodrik. And–hopefully–more tomorrow…

Let me start with Dani Rodrik.

We find Rodrik beating his breast about how “Cosmopolitans often come across like the character from Fyodor Dostoyevsky’s The Brothers Karamazov who discovers that the more he loves humanity in general, the less he loves people in particular…. The best way to serve global interests is to live up to our responsibilities within the political institutions that matter: those that exist…” In today’s political context, that will be read as: “only weenies care about the impacts of policies on people outside national borders, and any consideration of those impacts has no place in any political debate.” In today’s political context, that will be read as: “the well-being of Mexicans and the stability of Mexico must have a zero–nay, a negative–weight in the U.S. discussion about whether to abrogate NAFTA.”

But the major reason to do NAFTA is and always was that it is an important and a big good deal for Mexico. Having a good relationship–i.e., being in a positive-sum gift-exchange relationship–with the country on our southern border is a matter of elementary prudence in international relations. And doing what we can easily and cheaply to increase the chances that the country on our southern border is stable and prosperous is elementary prudence as well.

NAFTA is close to rounding error in terms of its effects on the U.S.–not one of the thirty most important things the U.S. government could do for good or ill for the U.S. economy. It has small net benefits, yes. It had some costs for groups that had flourished under the umbrella of the pre-1993 barriers to imports from Mexico, yes. Those costs should have been better cushioned–and would have been had not Americans voted for Gingrich as House Speaker and Dole as Senate Majority Leader in 1994–yes. But those costs are now sunk, and those firms and sectors have adjusted and moved on. Abrogating NAFTA would impose a new and different set of costs, and would have no net positive benefits as an upside, yes.

But NAFTA is, substantively, not worth committing political capital to attack or to defend if one is required to limit one’s view to its direct effects on the U.S. The rational strategy, therefore, if one is forced to look at the direct effects in the U.S. and at the U.S. only is to let the point go and keep your powder dry for more important struggles, rather than wasting energy and stressing political alliances.

That’s where Dani’s rhetoric takes us.

And that is, I think, very wrong. The indirect and long-run benefits for the U.S. in living in a more peaceful, more stable, and more prosperous world are large and mighty. NAFTA is and was worth doing for the reason that it is and was a stone placed in that still-unfinished arch. But to point that out is to be a rootless cosmopolite–the thing that Dani wants to rule out as a political position. And if one has to argue that abrogating NAFTA is “poor domestic governance” in terms of its direct effects on the U.S. economy–well, that is a very heavy lift indeed…

At the end of the 1910s, the Republicans turned isolationist: America was protected from Europe and Asia by two oceans, and did not need to engage with and spend treasure and blood trying to make the rest of the world better. At the start of the 1940s, the Democrats–led by the great Franklin Delano Roosevelt–undid that isolationist turn. The world and the United States are vastly better off as a result. The true American nationalism is to recognize the importance for American prosperity, peace, and security of being a good neighbor and a benevolent hegemon. Dani Rodrik’s rhetoric says: “the more he loves [global] humanity in general, the less he loves [American] people in particular…. The best way to serve global interests is to live up to our responsibilities within the political institutions that matter: those that exist.” But that denial of global interdependence serves even the narrowest of the long-run interests of the American people ill.

The right pose–substantive and rhetorical–is to recognize that, just as since 1620 the good American nationalism has always held that people anywhere can elect to become Americans by joining our utopian project here at home, so in the twentieth and twenty-first centuries that good American nationalism is one that puts global prosperity and being a good neighbor and benevolent hegemon first.

Dani Rodrik: Global Citizens, National Shirkers: “Real citizenship entails interacting and deliberating with other citizens in a shared political community…

…Global citizens do not have similar rights or responsibilities. No one is accountable to them, and there is no one to whom they must justify themselves…. Political representatives are elected to advance the interests of the people who put them in office. National governments are meant to look out for national interests, and rightly so….

But what happens when the welfare of local residents comes into conflict with the wellbeing of foreigners – as it often does? Isn’t disregard of their compatriots in such situations precisely what gives so-called cosmopolitan elites their bad name?… Countries should maintain open economic borders, sound prudential regulation and full-employment policies… because they serve to enlarge the domestic economic pie…. Policy failures… reflect poor domestic governance…. Hiding behind cosmopolitanism… is a poor substitute for winning policy battles on their merits….

Cosmopolitans often come across like the character from Fyodor Dostoyevsky’s The Brothers Karamazov who discovers that the more he loves humanity in general, the less he loves people in particular…. We have to live in the world we have, with all its political divisions, and not the world we wish we had. The best way to serve global interests is to live up to our responsibilities within the political institutions that matter: those that exist.

A Plea for Some Sympathy for Repentant Left Neoliberals…

Posted on by Brad DeLong
1848

As always, when the extremely sharp Danny Rodrick stuffs a book-length argument into an 800-word op-ed column, phrases acti as gestures toward what are properly chapter-long arguments. So there is lots to talk about.

Must-Read: Dani Rodrik: The Abdication of the Left: “This backlash was predictable…

…Hyper-globalization in trade and finance, intended to create seamlessly integrated world markets, tore domestic societies apart. The bigger surprise is the decidedly right-wing tilt the political reaction has taken. In Europe, it is predominantly nationalists and nativist populists that have risen to prominence, with the left advancing only in a few places such as Greece and Spain…. As an emerging new establishment consensus grudgingly concedes, globalization accentuates class divisions between those who have the skills and resources to take advantage of global markets and those who don’t. Income and class cleavages, in contrast to identity cleavages based on race, ethnicity, or religion, have traditionally strengthened the political left. So why has the left been unable to mount a significant political challenge to globalization?

I think that this paragraph above is largely wrong.

As the very sharp Patrick Iber tweeted somewhere, the usual response to economic distress in democracies with broad franchises is: “Throw the bastards out!” Consider the Great Depression: Labour collapses in Britain in 1931. The Republicans collapse in the U.S. in 1932. And in Germany… shudder. And it is now 1 2/3 centuries since Alexis de Tocqueville wrote:

Alexis de Tocqueville: Recollections: “I woke very early in the morning…

…I heard a sharp, metallic sound, which shook the window-panes and immediately died out amid the silence of Paris. ‘What is that?’ I asked. My wife replied, ‘It is the cannon; I have heard it for over an hour, but would not wake you, for I knew you would want your strength during the day.’ I dressed hurriedly….

Thousands of men were hastening to our aid from every part of France, and entering the city by all the roads not commanded by the insurgents. Thanks to the railroads, some had already come from fifty leagues’ distance, although the fighting had only begun the night before. On the next and the subsequent days, they came from distances of a hundred and two hundred leagues. These men belonged indiscriminately to every class of society; among them were many peasants, many shopkeepers, many landlords and nobles, all mingled together in the same ranks. They were armed in an irregular and insufficient manner, but they rushed into Paris with unequalled ardour: a spectacle as strange and unprecedented in our revolutionary annals as that offered by the insurrection itself. It was evident from that moment that we should end by gaining the day, for the insurgents received no reinforcements, whereas we had all France for reserves.

On the Place Louis XV, I met, surrounded by the armed inhabitants of his canton, my kinsman Lepelletier d’Aunay, who was Vice-President of the Chamber of Deputies during the last days of the Monarchy. He wore neither uniform nor musket, but only a little silver-hilted sword which he had slung at his side over his coat by a narrow white linen bandolier. I was touched to tears on seeing this venerable white-haired man thus accoutred. ‘Won’t you come and dine with us this evening?’ ‘No, no,’ he replied; ‘what would these good folk who are with me, and who know that I have more to lose than they by the victory of the insurrection—what would they say if they saw me leaving them to take it easy? No, I will share their repast and sleep here at their bivouac. The only thing I would beg you is, if possible, to hurry the despatch of the provision of bread promised us, for we have had no food since morning’…

It was in June 1849 that the depression-driven insurrection of the urban craftworker proletariat of Paris was suppressed—bloodily suppressed—by a largely spontaneous mass mobilization of those of the Ile de France who thought that they had something to lose from further revolution. They might see what little property they had confiscated and redistributed to the unemployed slackers of the city—to the urban “dangerous classes”. They might be taxed to pay for the reopening of the National Workshops that were to provide a guarantee of employment for those who could not find other jobs. They might see worse—their friends arrested for insufficient enthusiasm for revolution, or their priests and their hope of heaven taken away. For all these reasons they shifted rightward, voted for a firm nationalist authoritarian hand on the government, and voted for Louis Bonaparte first as President of the Second French Republic and then as Emperor Napoleon III of the Second French Empire.

The belief that economic distress leads democratic politics to shift left is, I think, in general wrong. It leads democratic politics to shift away from the establishment, whatever the establishment is. It can move left—as in FDR’s America and in France with Leon Blum and the Front Populaire. It can move right—as in France in 1849 and in the early stages of the Great Depression, as in Britain in 1931 and 2010, as in the U.S. in 2010, and as in, ahem, Germany…

Dani continues:

One answer is that immigration has overshadowed other globalization ‘shocks.’… Latin American democracies provide a telling contrast. These countries experienced globalization mostly as a trade and foreign-investment shock, rather than as an immigration shock. Globalization became synonymous with so-called Washington Consensus policies and financial opening. Immigration from the Middle East or Africa remained limited and had little political salience. So the populist backlash in Latin America—in Brazil, Bolivia, Ecuador, and, most disastrously, Venezuela – took a left-wing form…

Well, no: as I said, a form that was primarily antiestablishment. In Latin America, the establishment had bought into the relatively center-right Washington Consensus. In Europe, the establishment had bought into the relatively center-left continent-wide social market. Only where, as Dani says, the European establishment comes to be perceived as centered around Berlin’s ordoliberalism rather than around Brussel’s social market is their space for distress to push politics left.

Then, I think, Dani firmly grasps the correct thread:

A greater weakness of the left [is] the absence of a clear program to refashion capitalism and globalization for the twenty-first century…. The left has failed to come up with ideas that are economically sound and politically popular, beyond ameliorative policies such as income transfers. Economists and technocrats on the left bear a large part of the blame. Instead of contributing to such a program, they abdicated too easily to market fundamentalism and bought in to its central tenets.

In retrospect, who can disagree? We misjudged the proper balance between state and market, between command-and-control and market-incentive roads to social democratic ends.

But then I must, again, dissent in part. Dani:

Worse still, [Economists and technocrats on the left] led the hyper-globalization movement at crucial junctures. The enthroning of free capital mobility—especially of the short-term kind—as a policy norm by the European Union, the Organization for Economic Cooperation and Development, and the IMF was arguably the most fateful decision for the global economy in recent decades. As Harvard Business School professor Rawi Abdelal has shown, this effort was spearheaded in the late 1980s and early 1990s not by free-market ideologues, but by French technocrats such as Jacques Delors (at the European Commission) and Henri Chavranski (at the OECD), who were closely associated with the Socialist Party in France. Similarly, in the US, it was technocrats associated with the more Keynesian Democratic Party, such as Lawrence Summers, who led the charge for financial deregulation. France’s Socialist technocrats appear to have concluded from the failed Mitterrand experiment with Keynesianism in the early 1980s that domestic economic management was no longer possible, and that there was no real alternative to financial globalization. The best that could be done was to enact Europe-wide and global rules, instead of allowing powerful countries like Germany or the US to impose their own.

And here I whimper.

Financial globalization was intended to take down barriers to capital inflows erected by rent-seekers in developing countries, and so speed growth in economies that had been starved of capital while also equalizing incomes. Financial deregulation was supposed to break up the cozy investment banking and other oligarchies of Wall Street and diminish their private-sector tax on the American economy. Financial deregulation was supposed to provide the poorer half of America with the access to fairly priced credit that it lacked and with the opportunity to invest in assets that would yield equity-class returns, which it also lacked. And, in a world in which central banks had the powers and the will to successfully stabilize aggregate demand, there seemed little downside to letting people who could not put together a 20% down payment buy a house, to forcing Morgan Stanley and Goldman Sachs to deal with competition from Citigroup and Bank of America, and to allow entrepreneurs in Mexico to raise funds not just from a cozy oligarchy of Mexico City banks but on the global capital market.

And France’s socialist technocrats were right: in highly-open economies the task of managing aggregate demand has to be a global, or at least a North Atlantic-wide, or at least a continent-wide exercise. In a good world, large exchange rate changes should only take place in response to persistent fundamental disequilibria rather than being used as first-line tools for demand management.

It all did go horribly wrong. But the restriction of the ECB to an inflation-control mandate alone was never a policy plank of the left—and all on the left assumed that the technocrats of the ECB were not stupid enough to take the single mandate as more than cheap talk to reassure bond markets in good times. And the decision by money-center banks to use derivative markets not to diversify but to concentrate housing-price risk on their own balance sheets did not happen on our watch.

And then I must dissent again. Dani’s penultimate paragraph is, I think, much too optimistic:

The good news is that the intellectual vacuum on the left is being filled, and there is no longer any reason to believe in the tyranny of ‘no alternatives.’ Politicians on the left have less and less reason not to draw on ‘respectable’ academic firepower in economics…. Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation; Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left.

Here I agree, rather, with something Keynes wrote in 1933:

John Maynard Keynes (1933): On Trotsky: “We lack more than usual a coherent scheme of progress, a tangible ideal…

…All the political parties alike have their origins in past ideas and not in new ideas and none more conspicuously so than the Marxists…. No one has a gospel. The next move is with the head…

The problem is that our current policy agenda is too much “do it again!”, where “it” is “Keynesianism, social democracy, the welfare state.” And I believe we need more I think Dani gets it right when he notes:

The right thrives on deepening divisions in society—‘us’ versus ‘them’—while the left, when successful, overcomes these cleavages through reforms that bridge them…

But when he says:

Earlier waves of reforms from the left—Keynesianism, social democracy, the welfare state—both saved capitalism from itself and effectively rendered themselves superfluous…

he is both right and wrong: the earlier waves did save capitalism from itself, but they only rendered themselves apparently superfluous during the Years of Global Convergence and the Years of the Great Moderation. They are not superfluous. We need them. And we need more. For Dani is right to close:

Absent such a response again, the field will be left wide open for populists and far-right groups, who will lead the world—as they always have—to deeper division and more frequent conflict.

Must-Read: Dani Rodrik: The Abdication of the Left

Posted on by Brad DeLong

Must-Read: Dani Rodrik is very sharp indeed. But I think that this is mostly wrong. However, it remains a must-read:

Dani Rodrik: The Abdication of the Left: “This backlash was predictable…

…Hyper-globalization in trade and finance, intended to create seamlessly integrated world markets, tore domestic societies apart. The bigger surprise is the decidedly right-wing tilt the political reaction has taken. In Europe, it is predominantly nationalists and nativist populists that have risen to prominence…. As an emerging new establishment consensus grudgingly concedes, globalization accentuates class divisions between those who have the skills and resources to take advantage of global markets and those who don’t. Income and class cleavages, in contrast to identity cleavages based on race, ethnicity, or religion, have traditionally strengthened the political left. So why has the left been unable to mount a significant political challenge to globalization?

One answer is that immigration has overshadowed other globalization ‘shocks.’… Latin American democracies provide a telling contrast. These countries experienced globalization mostly as a trade and foreign-investment shock, rather than as an immigration shock. Globalization became synonymous with so-called Washington Consensus policies and financial opening…. So the populist backlash in Latin America – in Brazil, Bolivia, Ecuador, and, most disastrously, Venezuela – took a left-wing form….

The enthroning of free capital mobility – especially of the short-term kind – as a policy norm by the European Union, the Organization for Economic Cooperation and Development, and the IMF was arguably the most fateful decision for the global economy in recent decades. As Harvard Business School professor Rawi Abdelal has shown, this effort was spearheaded in the late 1980s and early 1990s not by free-market ideologues, but by French technocrats such as Jacques Delors (at the European Commission) and Henri Chavranski (at the OECD), who were closely associated with the Socialist Party in France. Similarly, in the US, it was technocrats associated with the more Keynesian Democratic Party, such as Lawrence Summers, who led the charge for financial deregulation….

A crucial difference between the right and the left is that the right thrives on deepening divisions in society – ‘us’ versus ‘them’ – while the left, when successful, overcomes these cleavages through reforms that bridge them. Hence the paradox that earlier waves of reforms from the left – Keynesianism, social democracy, the welfare state – both saved capitalism from itself and effectively rendered themselves superfluous. Absent such a response again, the field will be left wide open for populists and far-right groups, who will lead the world – as they always have – to deeper division and more frequent conflict.

Must-Read: Dani Rodrik: Brexit and the Globalization Trilemma

Posted on by Brad DeLong

Must-Read: Time to fly my Neoliberal Freak Flag again!

I see this very differently than the extremely-sharp leader of the Seventh Social-Democratic International Dani Rodrik does. The Greek and the Spanish electorates vote loudly that they want to stay in the EU and even in the Eurozone at all costs, rather than threaten to exercise their exit option. The German electorate votes loudly that they want fiscal austerity at all costs. The policies are a result of those–democratic–decisions. The problem is not that Europe has too little democracy. The problem is that it has the wrong kind. Issues of fiscal stance are technocratic issues of economic governance in order to balance aggregate demand with potential output–to make the demand for safe, liquid, stores of value at full employment equal to the supply of such assets provided by governments with the exorbitant privilege of issuing reserve currencies and whatever other actors (if any) maintain credibility as safe borrowers. They are not properly what Angela Merkel and company have turned them into: things for the Germany electorate to vote on as it participates in what Dani Rodrik rightly calls a morality play about prudence and fecklessness. The monetary issue of whether to stay in the Eurozone or to pursue adjustment-through-depreciation is also a technocratic issue of economic governance in order to maximize speed and minimize the pain of structural adjustment. It is not properly what it has become: a thing for the Greek and Spanish electorates to vote on in a different morality play, one of whether the Mediterranean is or is not a full part of “Europe”.

Harry Dexter White and John Maynard Keynes were good democrats. Neither would say that Europe’s economic problems now are the result of a deficiency of democracy. They would say that it is the fault of their IMF–that their IMF should have blown the whistle, declared a fundamental disequilibrium, and required one of:

  1. the shrinkage of the eurozone and the depreciation of the peso and the drachma back in 2010
  2. a wipeout of Greek and Spanish external debts, and a fiscal transfer program from the German government to Greece and Spain and to German banks if German authorities wished to avoid such a shrinking of the eurozone.

We did not have such an IMF back in 2010. But that we did not have such an IMF is not the result of a deficiency of democracy in Europe.

Or so I think: I could be wrong here.

Dani:

Dani Rodrik: Brexit and the Globalization Trilemma: “My personal hope is that Britain will choose to remain in the EU…

…without Britain the EU will likely become less democratic and more wrong-headed…. Exit poses significant economic risk to Britain…. But there are also serious questions posed about the nature of democracy and self-government in the EU as presently constituted. Ambrose Evans-Pritchard (AEP) has now written a remarkable piece that… has little in common with the jingoistic and nativist tone of the Brexit campaign….

Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error…. We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court (ECJ) that claims sweeping supremacy, with no right of appeal….

The trouble is that the EU is more of a technocracy than a democracy (AEP calls it a nomenklatura). An obvious alternative to Brexit would be to construct a full-fledged European democracy…. But as AEP says,

I do not think this is remotely possible, or would be desirable if it were, but it is not on offer anyway. Six years into the eurozone crisis there is no a flicker of fiscal union: no eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heels….

Democracy is compatible with deep economic integration only if democracy is appropriately transnationalized as well…. The tension that arises between democracy and globalization is not straightforwardly a consequence of the fact that the latter constrains national sovereignty…. External constraints… can enhance rather than limit democracy. But there are also many circumstances under which external rules do not satisfy the conditions of democratic delegation…. It is clear that the EU rules needed to underpin a single European market have extended significantly beyond what can be supported by democratic legitimacy. Whether Britain’s opt out remains effective or not, the political trilemma is at work….

When I was asked to contribute to a special millennial issue of the Journal of Economic Perspectives… I viewed the EU as the only part of the world economy that could successfully combine hyperglobalization (‘the single market’) with democracy through the creation of a European demos and polity…. I now have to admit that I was wrong in this view (or hope, perhaps). The manner in which Germany and Angela Merkel, in particular, reacted to the crisis in Greece and other indebted countries buried any chance of a democratic Europe…. She treated it as a morality play, pitting responsible northerners against lazy, profligate southerners, and to be dealt with by European technocrats accountable to no one serving up disastrous economic remedies…. My generation of Turks looked at the European Union as an example to emulate and a beacon of democracy. It saddens me greatly that it has now come to stand for a style of rule-making and governance so antithetical to democracy that even informed and reasonable observers like AEP view departure from it as the only option for repairing democracy.

Must-Read: Dani Rodrik: Innovation Is Not Enough

Posted on by Brad DeLong

Must-Read: Dani Rodrik: Innovation Is Not Enough: “Who can seriously doubt that innovation is progressing rapidly?…

…Technological diffusion can be constrained on both the demand and supply sides of the economy…. In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing, and retail goods [where] technological innovation has had comparatively little impact to date…. The two sectors in the United States that have experienced the most rapid productivity growth since 2005 are the ICT… and media… with a combined GDP share of less than 10%…. Techno-optimists… look at such numbers as an opportunity: There remain vast productivity gains to be had from the adoption of new technologies in the lagging sectors. The pessimists, on the other hand, think that such gaps may be a structural, lasting feature of today’s economies…. On the supply side… when the technology requires high skills… its adoption and diffusion will tend to widen the gap between the earnings of low- and high-skill workers. Economic growth will be accompanied by rising inequality, as it was in the 1990s.

The supply-side problem faced by developing countries is more debilitating. The labor force is predominantly low-skilled. Historically, this has not been a handicap for late industrializers, so long as manufacturing consisted of labor-intensive assembly operations such as garments and automobiles. Peasants could be transformed into factory workers virtually overnight, implying significant productivity gains for the economy. Manufacturing was traditionally a rapid escalator to higher income levels. But once manufacturing operations become robotized and require high skills, the supply-side constraints begin to bite. Effectively, developing countries lose their comparative advantage vis-à-vis the rich countries. We see the consequences in the ‘premature deindustrialization’ of the developing world today. In a world of premature deindustrialization, achieving economy-wide productivity growth becomes that much harder for low-income countries. It is not clear whether there are effective substitutes for industrialization…

Populist Backlash and Political Economy

Posted on by Brad DeLong

Live from High Above the Former Iron Curtain: The very sharp Dani Rodrik:

Dani Rodrik: The Politics of Anger: “Perhaps the only surprising thing about the populist backlash that has overwhelmed the politics of many advanced democracies…

…is that it has taken so long…. Politicians’ unwillingness to offer remedies for the insecurities and inequalities of our hyper-globalized age… create[s] political space for demagogues with easy solutions… Ross Perot… Patrick Buchanan… Donald Trump, Marine Le Pen, and sundry others…. [In] the first era of globalization… mainstream political actors had to downplay social reform and national identity because they gave priority to international economic ties. The response… [was] fatal…. Socialists and communists chose social reform, while fascists chose national assertion. Both paths led away from globalization to economic closure (and far worse). Today’s backlash most likely will not go quite so far….

Still, the conflicts between a hyper-globalized economy and social cohesion are real, and mainstream political elites ignore them at their peril…. The internationalization of markets for goods, services, and capital drives a wedge between the cosmopolitan, professional, skilled groups that are able to take advantage of it and the rest of society… an identity cleavage, revolving around nationhood, ethnicity, or religion, and an income cleavage, revolving around social class. Populists derive their appeal from one or the other…. You can barely make ends meet? It is the Chinese who have been stealing your jobs. Upset by crime? It is the Mexicans…. Terrorism? Why, Muslims…. Political corruption? What do you expect… [from] big banks?… Establishment politicians are compromised… by their central narrative… [of] helplessness… [which] puts the blame… on technological forces… and globalization… as inexorable…. Mainstream politicians… [must] offer serious solutions…. The New Deal, the welfare state, and controlled globalization (under the Bretton Woods regime)… gave market-oriented societies a new lease on life… not tinkering and minor modification of existing policies that produced these achievements, but radical institutional engineering…

I find it alarming that here we are, more than one a half decades into the twenty-first century, and the wisdom and true knowledge that is state-of-the-art as far as political economy is concerned is still to be found in the writings of John Maynard Keynes and Karl Polanyi…

(1) Keynes taught that rich, free, capitalist societies could not survive without full employment–without giving everyone a useful, dignified, and prosperous economic role in society:

Inflation is unjust and Deflation is inexpedient…. It is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned. The Individualist Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual entrepreneur, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one. For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of… matters… settled by natural causes… the resultant of the separate action of many individuals acting independently, or require a Revolution to change them…

(2) Keynes taught that rich, free, capitalist societies could not survive without promising stability in the rules-of-the-game–that the wealth and income you earned by following the rules would be yours, and not taken away by sinister economic processes you could not understand that did things like, for example, debauch the currency:

The problem of the re-inauguration of the perpetual circle of production and exchange in foreign trade leads me to a necessary digression on the currency situation of Europe. Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens… not only confiscate, but… confiscate arbitrarily…. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution…. The real value of the currency fluctuates wildly from month to month, [and] all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. In the latter stages of [World War I] all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design…

(3) Keynes taught that proper government policy could attain those two ends–full employment and price stability–with only minor tinkering and adjustment to make sure that the automobile that was the economy actually would start when you turned the key: all that was required was proper monetary policy, with (probably) a somewhat comprehensive socialization of public and private investment:

The foregoing theory is moderately conservative in its implications…. The State will have to exercise a guiding influence on the propensity to consume… through… taxation… fixing the rate of interest, and… other ways…. It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism…

(4) Keynes taught that if those conditions were satisfied, the task of guiding economic destinies could be confidently and safely left to a sober bourgeoisie interested in accumulation:

If we have dealt otherwise with the problem of thrift, there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively… no more reason to socialise economic life than there was before… no reason to suppose that the existing system seriously misemploys the factors of production which are in use…. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires…. There will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.

Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency–the advantages of decentralisation and of the play of self-interest… even greater, perhaps, than the nineteenth century supposed…. Above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.

Whilst, therefore, the enlargement of… government… in… adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it… as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative…

(5) whose efforts would redound to the benefit of all:

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(6) and that there was little need to fear an extravagant plutocracy of aristocratic parasites:

There is, however, a second, much more fundamental inference from our argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.

There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto; and, so far as one can guess at the schedules of the marginal efficiency of capital corresponding to increasing amounts of capital, the rate of interest is likely to fall steadily, if it should be practicable to maintain conditions of more or less continuous full employment unless, indeed, there is an excessive change in the aggregate propensity to consume (including the State).

I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward…

(7) Rather, instead, in a century or so, the economic problem would be largely solved:

I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not-if we look into the future-the permanent problem of the human race.

Why, you may ask, is this so startling? It is startling because-if, instead of looking into the future, we look into the past-we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race-not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms. Thus we have been expressly evolved by nature-with all our impulses and deepest instincts-for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose. Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades…. Thus for the first time since his creation man will be faced with his real, his permanent problem-how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well…. I feel sure that with a little more experience we shall use the new-found bounty of nature quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs….

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession -as distinguished from the love of money as a means to the enjoyments and realities of life -will be recognised for what it is, a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard….

We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight…

Polanyi’s teaching was less hopeful, less practical, and less visionary–and not quite parallel to Keynes’s. It was that there were three things, land, labor, and finance, that should not be turned into “commodities” and thus subjected to allocation by the laws of the self-regulating market economy. And, Polanyi argued, if they were turned into “commodities” and thus subjected to allocation by the laws of the self-regulating market economy, the result would be disastrous:

Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance…

(1) Finance could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for what were essentially Keynesian reasons–the system could not be stable:

The market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts were in primitive society…

And:

Even capitalist business itself had to be sheltered from the unrestricted working of the market mechanism. This should dispose of the suspicion which the very term “man” and “nature” sometimes awaken in sophisticated minds, who tend to denounce all talk about protecting labor and land as the product of antiquated ideas if not as a mere camouflaging of vested interests. Actually, in the case of productive enterprise as in that of man and nature the peril was real and objective.

The need for protection arose on account of the manner in which the supply of money was organized under a market system. Modern central banking, in effect, was essentially a device developed for the purpose of offering protection without which the market would have destroyed its own children, the business enterprises of all kinds…. If profits depend upon prices, then the monetary arrangements upon which prices depend must be vital to the functioning of any system motivated by profits…. If the price level was falling for monetary reasons over a considerable time, business would be in danger of liquidation accompanied by the dissolution of productive organization and massive destruction of capital. Not low prices, but falling prices were the trouble. Hume became the founder of the quantity theory of money with his discovery that business remains unaffected if the amount of money is halved since prices will simply adjust to half their former level. He forgot that business might be destroyed in the process….

(2) Land could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for essentially sociological reasons: where people lived determined who they were, and a self-regulating market that told people they could no longer afford to live in the community where they thought they belonged would trigger such a strong sense of communal injustice to spark the chaos of revolution:

Commercialization of the soil was only another name for the liquidation of feudalism which started in Western urban centers as well as in England in the fourteenth century and was concluded some five hundred years later in the course of the European revolutions, when the remnants of villeinage were abolished. To detach man from the soil meant the dissolution of the body economic into its elements so that each element could fit into that part of the system where it was most useful….

Some of this was achieved by individual force and violence, some by revolution from above or below, some by war and conquest, some by legislative action, some by administrative pressure, some by spontaneous small-scale action of private persons over long stretches of time. Whether the dislocation was swiftly healed or whether it caused an open wound in the body social depended primarily on the measures taken to regulate the process….

The inertia of the common law was now deliberately enhanced by statutes expressly passed in order to protect the habitations and occupations of the rural classes against the effects of freedom of contract. A comprehensive effort was launched to ensure some degree of health and salubrity in the housing of the poor, providing them with allotments, giving them a chance to escape from the slums and to breathe the fresh air of nature, the “gentleman’s park.” Wretched Irish tenants and London slum-dwellers were rescued from the grip of the laws of the market by legislative acts designed to protect their habitation against the juggernaut, improvement. On the Continent it was mainly statute law and administrative action that saved the tenant, the peasant, the agricultural laborer from the most violent effects of urbanization. Prussian conservatives such as Rodbertus, whose Junker socialism influenced Marx, were blood brothers to the Tory-Democrats of England…

(3) Labor could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for the same essentially psychological reasons for which Keynes condemned inflation: a self-regulating market that told people they could no longer afford to practice the occupations they thought were theirs belonged would trigger such a strong sense of personal injustice–the same injustice Keynes saw as produced by wealth-confiscation-via-inflation–that it, too, would spark the chaos of revolution:

To allow the market mechanism to be the sole director of the fate of human beings… would result in the demolition of society. For the alleged commodity “labor power” cannot be shoved about, used indiscriminately, or even left unused without affecting the human being who happens to be [its] bearer…. In disposing of a man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to the tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure [and] social dislocation…

Polanyi calls the fixing of these problems generated by utopian and impractical attempts to turn over all authority to a self-regulating market by the name “socialism”:

Socialism is, essentially, the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society. It is the solution natural to industrial workers who see no reason why production should not be regulated directly and why markets should be more than a useful but subordinate trait in a free society. From the point of view of the community as a whole, socialism is merely the continuation of that endeavor to make society a distinctively human relationship of persons…

For both Keynes and Polanyi, social insurance in the form of progressive taxes, a universal basic income, and government provision of public goods plus private necessities would help, but that would not be enough to do the job. Also essential are: first, useful employment and the resulting honorable and dignified role in society; second, justice in the sense that playing by the rules of the economic game calls forth the expected rewards; and, third, communal stability in the sense that should people’s lives be transformed in place, community, and occupation it is by being pulled out of old ruts by brilliant opportunities locating in other places, living in other communities, and practicing other occupations–not being pushed out by regional or sectoral economic collapse, or perhaps by having one’s community transformed too rapidly around one.

There is a pronounced particularistic-cosmopolitan tension here. We economists do not like it at all when the opportunities for upward mobility for those who chose to be born in the wrong country or to the wrong parents are hobbled by restrictions on migration and trade. We economists do not like those who try to mobilize particularistic and nationalistic energies to the service of what look like negative-sum policies. This has been true for a long time. We economists, after all, looked at American labor’s early-1990s opposition to NAFTA’s hoped-for expansion of economic opportunity in NAFTA–the opposition that arose not because people thought NAFTA would be bad but because they thought it would be good for the working class of Mexico–and felt the same disgust then as Dani Rodrik does now when he looks at today’s “Donald Trump, Marine Le Pen, and sundry others…” But Dani Rodrik wisely warns us Rootless Cosmopolites that we dare not come down entirely on the cosmopolitan side. Let me repeat him:

Establishment politicians are compromised… by their central narrative… [of] helplessness… [which] puts the blame… on technological forces… and globalization… as inexorable…. Mainstream politicians… [must] offer serious solutions… not tinkering and minor modification… but radical institutional engineering…

But what engineering? To create what institutions?

  • Patrick Iber and Mike Konczal: Karl Polanyi for President
  • John Maynard Keynes (1919): The Economic Consequences of the Peace
  • John Maynard Keynes (1924): A Tract on Monetary Reform
  • Karl Polanyi: [The Great Transformation
  • Dani Rodrik: The Politics of Anger](https://www.project-syndicate.org/commentary/the-politics-of-anger-by-dani-rodrik-2016-03)

Must-read: Dani Rodrik: “More on the Political Trilemma of the Global Economy”

Posted on by Brad DeLong

Must-Read: I find myself more on Martin Sandbu’s side than that of the very-sharp Dani Rodrik in this debate. This is largely, I think, because Dani remains at too abstract a level. The commitment of foreign trading partners to “openness”, whatever that turns out to mean in practice, enlarges domestic political and economic opportunities in some directions. But one’s own government’s reciprocal commitment to “openness”, whatever that turns out to mean in practice, restricts domestic political and economic opportunities in different directions. How much should a government and a people value the gains in the first set of directions? How much should a government and a people regret the loss in the second set?

These are questions that must be answered pragmatically. The devil is in the details. And ideologies–either Friedmanesque rants that globalization is always good or Trumpist rants that “we” are always outmaneuvred in trade deals by shifty foreigners–seem to me profoundly unhelpful here. And so the word “globalization” becomes an obstacle rather than an aid to thought…

Dani Rodrik: More on the Political Trilemma of the Global Economy: “Here are [Martin] Sandbu’s main points and my take on them…

…”if economic integration limits a national democracy’s room for manoeuvre, does it limit a national dictatorship’s opportunities any less?” I think Sandbu’s point is true for some dictatorships, but not all. Today the prevailing worry of progressives is that an oligarchy of financiers, investors, and skilled professionals has captured the polity and is using globalization as a way of imposing its policy priorities. What globalization does for these groups is actually to expand their political opportunities, rather than constrain them…. [In] a democracy… the electorate can decide on their own path… even when it may conflict what a narrowly based, internationally mobile elite want–and that is what hyper-globalization restricts….

“We should beware of conflating economic integration with technocracy.”… In practice, globalization is used to impose a particular technocratic set of rules serving the interests of particular groups. That it need not do so is a valid point for globalization in general, as long as don’t take it as far as hyper-globalization….

“Is [there] necessarily a loss of democracy when the rules are set internationally while most democratic institutions remain nationally rooted[?]… Negotiating rules together is an exercise of national self-determination, not its abrogation.”… As long as we are not trying to eliminate every transaction cost to international trade and investment, there are multiple models of globalization… leaving plenty of space for countries to devise their own social and economic arrangements….

The fact that an international rule is negotiated and accepted by a democratically elected government does not inherently make that rule democratically legitimate…. There are many ways in which globalization actually harms rather than enhances the quality of democratic deliberation. For example, preferential or multilateral trade agreements are often simply voted up or down in national parliaments with little discussion, simply because they are international agreements. Globalization-enhancing global rules and democracy-enhancing global rules may have some overlap; but they are not one and the same thing…. International commitments can be used to tie the hands of governments in both democratically legitimate and illegitimate ways…. The constraints really bind in the presence of a hyper-globalization/deep-integration model (a la Eurozone)…

Must-read: Dani Rodrik: “The Trade Numbers Game”

Posted on by Brad DeLong

Must-Read: I had thought that we understood rather well why freer trade created substantial winners and losers–that the shifts in the prices of goods from moves to freer trade caused magnified shifts in the rewards to factors that were used intensively in the production of such goods. And the consequences for the overall level of employment seem, to me at least, to be limited to the era of “Depression Economics” that we entered in 2007 and from which we have not emerged: NAFTA did not raise unemployment in the United States.

So I find myself failing to grasp large pieces of the very sharp Dani Rodrik’s argument here:

Dani Rodrik: The Trade Numbers Game: “The Trans-Pacific Partnership (TPP)… is the latest battleground in the decades-long confrontation…

…between proponents and opponents of trade agreements…. The pact’s advocates have marshaled quantitative models that make the agreement look like a no-brainer…. There is no disagreement between the models on the trade effects…. The differences arise largely from contrasting assumptions about how economies respond to changes in trade volumes sparked by liberalization. Petri and Plummer assume that labor markets are sufficiently flexible that job losses in adversely affected parts of the economy are necessarily offset by job gains elsewhere…. Capaldo and his collaborators offer a starkly different outlook: a competitive race to the bottom in labor markets…. The Petri-Plummer model is squarely rooted in decades of academic trade modeling…. By contrast, the Capaldo framework lacks sectoral and country detail; its behavioral assumptions remain opaque; and its extreme Keynesian assumptions sit uneasily with its medium-term perspective….

Economists do not fully understand why expanded trade has produced the negative consequences for wages and employment that it has. We do not yet have a good alternative framework to the kind that trade advocates use. But we should not act as if reality has not severely tarnished our cherished standard model….

The uncertainties do not end with macroeconomic interactions. The Petri-Plummer study predicts that the bulk of the economic benefits of the TPP will come from reductions in non-tariff barriers (such as regulatory barriers on imported services) and lower obstacles to foreign investment. But the modeling of these effects is an order of magnitude more difficult than in the case of tariff reductions…

Must-read: Noah Smith: “Book Review: ‘Economics Rules'”

Posted on by Brad DeLong

Must-Read: Noah Smith: Book Review: “Economics Rules”: “I love a good book about econ philosophy-of-science…

Economic Rules: The Rights and Wrongs of the Dismal Science, by Dani Rodrik, is my favorite book in this vein to come out in quite some time…. I do have one big problem: the first two chapters. These chapters consist entirely of Rodrik’s very general thoughts on economic models, and what they should and shouldn’t be used for. The problem with these early chapters is the audience. Economists will already have heard most or all of these philosophical ideas. Non-economists, in contrast, will probably not understand…. These early chapters… fall into an uncanny valley, too old-hat for economists but too inside-baseball for non-economists.  So I fear that many readers may get turned off early….

Rodrik really shines when he talks about his own field, development econ. He gives a vivid recounting of the Washington Consensus – why it was adopted, why it went wrong, and how the mistakes could have been avoided. The story of the Washington Consensus provides the perfect backdrop for Rodrik’s ideas about what economists and models should do. The episode demonstrates why it’s important for policy advisors to look at a bunch of alternative models, and use personal judgment to choose which ones to use as analogies for reality. It is the perfect example of the ‘models as fables, economists as doctors’ worldview that Rodrik is trying to lay out. In fact, I wish more of the book had been about trade and development….

I find myself pretty much in agreement…. It’s very difficult to sum them all up (so go read the book), but here’s a few that really stood out: Rodrik notes that economists tend to present a much more simplistic, pro-market stance to the public than they show in their research and behind closed doors…. Rodrik strongly criticizes the New Classical and RBC macro theorists…. Rodrik tries to counter the criticism that economists ignore things like norms. In doing so, he basically says ‘The evidence shows that norms often matter, and economists pay attention to the evidence.’… This is a great book, and a quick read. Get it and read it if you haven’t.

Must-read: Dani Rodrik: “The Return of Public Investment”

Posted on by Brad DeLong

Dani Rodrik: The Return of Public Investment: “If one looks at the countries that, despite strengthening global economic headwinds, are still growing very rapidly…

…one will find public investment is doing a lot of the work. In Africa, Ethiopia is the most astounding success story of the last decade…. The country is resource-poor and did not benefit from commodity booms, unlike many of its continental peers. Nor did economic liberalization and structural reforms of the type typically recommended by the World Bank and other donors play much of a role. Rapid growth was the result, instead, of a massive increase in public investment…. The Ethiopian government went on a spending spree, building roads, railways, power plants, and an agricultural extension system that significantly enhanced productivity in rural areas, where most of the poor reside. Expenditures were financed partly by foreign aid and partly by heterodox policies (such as financial repression) that channeled private saving to the government. In India, rapid growth is also underpinned by a substantial increase in investment, which now stands at around one-third of GDP…. These days, it is public infrastructure investment that helps maintain India’s growth momentum…. Bolivia is one of the rare mineral exporters that has managed to avoid others’ fate in the current commodity-price downturn…. Much of that has to do with public investment, which President Evo Morales regards as the engine of the Bolivian economy….

Today it may be the advanced economies of North America and Western Europe that stand to gain the most from ramping up domestic public investment. In the aftermath of the great recession, there are many ways in which these economies could put additional public spending to good use…. Such arguments are typically countered in policy debates by objections related to fiscal balance and macroeconomic stability. But… public investment serves to accumulate assets, rather than consume them. So long as the return on those assets exceeds the cost of funds, public investment in fact strengthens the government’s balance sheet…. Ethiopia, India, or Bolivia… are examples that other countries, including developed ones, should watch closely as they search for viable growth strategies in an increasingly hostile global economic environment.