Tag: Dani Rodrik

Must-read: Dani Rodrik: “The Evolution of Work”

Posted on by Brad DeLong

Must-Read: Dani Rodrik: The Evolution of Work: “Thanks to the Industrial Revolution, new technologies in cotton textiles, iron and steel, and transportation delivered steadily rising levels of labor productivity for the first time in history….

…First in Britain in the mid-eighteenth century, and then in Western Europe and North America, men and women flocked from the countryside to towns to satisfy factories’ growing demand for labor. But, for decades, workers gained few of the benefits of rising productivity. They worked long hours in stifling conditions, lived in overcrowded and unsanitary housing, and experienced little growth in earnings. Some indicators, such as workers’ average height, suggest that standards of living may have even declined for a while. Eventually, capitalism transformed itself and its gains began to be shared more widely… partly because wages naturally began to rise as the surplus of rural workers dried up. But, equally important, workers organized themselves to defend their interests. Fearing revolution, the industrialists compromised. Civil and political rights were extended to the working class….

The post-industrial economy opened up a new chasm in the labor market, between those with stable, high-paid, and fulfilling services jobs and those with fleeting, low-paid, and unsatisfying jobs. Two factors determined the share… the education and skill level of the workforce, and the degree of institutionalization of labor markets in services…. There is both good and bad news for the future of work in developing countries. Thanks to social policy and labor rights, workers can become full stakeholders in the economy much earlier in the process of development. At the same time, the traditional engine of economic development–industrialization–is likely to operate at much lower capacity. The resulting combination of high public expectations and low income-producing capacity will be a major challenge for developing economies everywhere.

Must-read: Dani Rodrik: “From Welfare State to Innovation State”

Posted on by Brad DeLong

Must-Read: Dani Rodrik: From Welfare State to Innovation State: “A specter is haunting the world economy – the specter of job-killing technology…

…When the new industrial working class began to organize, governments defused the threat of revolution from below that Karl Marx had prophesied by expanding political and social rights, regulating markets, erecting a welfare state that provided extensive transfers and social insurance, and smoothing the ups and downs of the macroeconomy. In effect, they reinvented capitalism to make it more inclusive and to give workers a stake in the system. Today’s technological revolutions call for a similarly comprehensive reinvention…. The bulk of these new technologies… entail the replacement of low- and medium-skilled workers with machines operated by a much smaller number of highly skilled workers…. Skill and capital-intensive technologies are the leading culprit behind the rise in inequality since the late 1970s. By all indications, this trend is likely to continue…. It doesn’t have to be this way. With some creative thinking and institutional engineering, we can save capitalism from itself – once again….

Achieving the socially desirable level of innovative effort… requires either foolhardy entrepreneurs… or a sufficient supply of risk capital. Financial markets in the advanced economies provide risk capital…. But there is no reason why the state should not be playing this role on an even larger scale…. As Mariana Mazzucato has pointed out, the state already plays a significant role in funding new technologies…. Designing the right institutions for public venture capital can be difficult. But central banks offer a model of how such funds might operate independently of day-to-day political pressure….

The welfare state was the innovation that democratized – and thereby stabilized – capitalism in the twentieth century. The twenty-first century requires an analogous shift to the ‘innovation state.’ The welfare state’s Achilles’ heel was that it required a high level of taxation without stimulating a compensating investment in innovative capacity. An innovation state, established along the lines sketched above, would reconcile equity with the incentives that such investment requires.

Must-Read: Dani Rodrik: When Economics Works and When it Doesn’t

Posted on by Brad DeLong

Must-Read: I wonder: There is an awful lot of bad right-wing economics. There is much less bad left-wing economics. But if the left wing were stronger as a political movement–as strong as the right wing–would there be as much bad left- as right-wing economics. I suspect not, but that is merely a guess. But if it is a correct guess, the next question is: “Why?”

Mark Thoma sends us to Dani Rodrik: When Economics Works and When it Doesn’t: “If we take as our central model one under which the efficient markets hypothesis is correct…

…in the run-up to the financial crisis… the steady increase in house prices or the growth of the shadow banking system… wouldn’t have bothered you at all. You’d tell a story about how wonderful financial liberalisation and innovation are…. But if you took the same [set of] facts, and applied the kind of models that people who had been looking at sovereign debt crises in emerging markets had been developing… you’d get a very different kind of story. I wish we’d put greater weight on stories of the second kind rather than the first. We’d have been better off if we’d done so…

Must-Read: David Leonhardt: ‘Chicagonomics’ and ‘Economics Rules’

Posted on by Brad DeLong

Must-Read: David Leonhardt: ‘Chicagonomics’ and ‘Economics Rules’: “Adam Smith’s modern reputation is a caricature…

…He was a giant of the Enlightenment in large part because he was a careful and nuanced thinker. He certainly believed that a market economy was a powerful force for good…. Yet he did not have a religious faith in the market…. Lanny Ebenstein’s mission, in ‘Chicagonomics,’ is to rescue not only Smith from his caricature but also some of Smith’s modern-day acolytes: the economists who built the so-called Chicago school of economics…. Ebenstein argues that the message of the Chicago school has nonetheless been perverted in recent years. Many members of the Chicago school subscribed to ‘classical liberalism,’ in Ebenstein’s preferred term, rather than ‘contemporary libertarianism.’…

Dani Rodrik… has written a much less political book than Ebenstein has, titled ‘Economics Rules,’ in which he sets out to explain the discipline to outsiders (and does a nice job)…. Rodrik has diagnosed the central mistake… [of] contemporary libertarians have made… conflat[ing] ideas that often make sense with those that always make sense. Some of this confusion is deliberate… act[ing] as a kind of lobbyist working on behalf of the affluent…

Must-Read: Steve Pearstein: The Value and Limits of Economic Models

Posted on by Brad DeLong

Must-Read: Let me agree with Steve Perlstein here: the economics that the very sharp Dani Rodrik praises is not the strongest current, outside of our liberal-arts non-business school ivory towers, and not always even in them.

Steven Pearlstein: The Value and Limits of Economic Models: “The alleged failings of economics are now widely understood…

…except perhaps by economists themselves. You hear that economics is ideology masquerading as hard science. That it has become overly theoretical and mathematical, based on false or oversimplified assumptions about the ways real people behave. That it systematically misunderstands the past and fails to anticipate the future. That it celebrates selfishness and greed and values only efficiency, ignoring fairness, social cohesion and our sense of what it is to be human. In his latest book, ‘Economics Rules,’ Dani Rodrik tries to bridge the gap between his discipline and its skeptics….

What economists forget, Rodrik says–or even worse, what they never are taught–is that the answer to most important questions is “It depends.” What’s right for one country at one time may not be right for another country or another time. Context matters. And because context matters, he argues that too much of the focus in economics has been on developing all-encompassing models and grand theories that can be applied to every context, and too little on expanding the inventory of more narrowly focused models and developing the art of knowing which ones to use….

Rodrik no doubt set out to offer an evenhanded view of modern economics, [but] in the end he winds up delivering a fairly devastating critique. “The discipline hobbles from one set of preferred models to another, driven less by evidence than by fads and ideology,” he writes. He despairs that his profession has become one that values “smarts over judgment,” has disdain for other disciplines and is content to produce mathematically elegant research papers that few outside the guild will ever use or understand. The standard economics course offered to undergraduates, he rightly complains, winds up presenting nothing more than “a paean to markets” rather than a “richer paradigm of human behavior.” Rodrik’s plea is for economics to be practiced with a bit more humility both by those who extol free markets and those who would tame them. Economics, he argues, is less a hard science capable of producing provable truths than a set of intuitions disciplined by logic and data and grounded in experience and common sense…

Must-Read: Dani Rodrik: The Mirage of Structural Reform

Posted on by Brad DeLong

Must-Read: If you set out to take Vienna, take Vienna. If you want to balance the foreign exchange account, give people incentives to boost exports and cut back imports. Any economy that might suddenly need to balance its foreign exchange account needs to have a flexible currency–or partners who are willing to take steps to do the job themselves. Greece lacks both.

Dani Rodrik: The Mirage of Structural Reform: “If structural reforms have not paid off in Greece…

…it is not because Greek governments have slacked off…. Instead, the current disappointment arises from the very logic of structural reform: most of the benefits come much later, not when a country really needs them. There is an alternative strategy…. A selective approach that targets the ‘binding constraints’…. So, which binding constraints in the Greek economy should be targeted? The biggest bang for the reform buck would be obtained from increasing the profitability of tradables–spurring investment and entrepreneurship in export activities, both existing and new. Of course, Greece lacks the most direct instrument for achieving this–currency depreciation…. But… tax incentives to special zones to targeted infrastructure projects… an institution close to the prime minister that is tasked with fostering a dialogue with potential investors… [with] authority to remove the obstacles it identifies, rather than having its proposals languish in various ministries. Such obstacles are typically highly specific–a zoning regulation here, a training program there–and are unlikely to be well targeted by broad structural reforms…

Must-Read: Dani Rodrik: Trade within versus Between Nations

Posted on by Brad DeLong

Must-Read: Dani Rodrik: Trade within versus Between Nations: “The proper response to the question ‘is free trade good?’…

…is, as always, ‘it depends.’… Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous… particularly in the developing world…. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up…. But it does mean that a knee-jerk free trader response is faith-based…. OK then, what about trade restrictions within nations? If I am a skeptic on free trade between nations, should I not be a skeptic on trade within a nation as well?

No…. The set of circumstances under which free trade within a nation may be undesirable is substantially smaller than the set of circumstances under which free trade between nations is undesirable…. Consider a case where a region loses out from trade within a nation–say because it de-industrializes rapidly and ends up specializing in technologically non-dynamic primary activities…. The workers in that region can migrate…. There is an overarching state that will engage in transfer payments and other policies that aid the lagging region. The region will have political representatives…. A third–particularly important–feature is that a nation shares a common set of regulations (in labor, product, and capital markets). Changes in inter-regional trade patterns are unlikely to be the result of what many people feel are ‘unfair trade practices’ or ‘tilted playing fields.’… The boundaries of a nation are defined by shared sense of collective purpose, as embodied, in part, in that nation’s common laws and regulations and in its instruments of solidarity…. So the national market and the international market are different….

A libertarian might view much of the regulatory apparatus of the nation-state as superfluous at best and detrimental at worst. For me, the apparatus is what makes capitalism feasible and sustainable at the national level–and problematic at the global level.

Albert Hirschman’s linkages, economic growth, and convergence yet again…

Posted on by Brad DeLong

When you think about it, broadly speaking, the question of why we have seen such huge rises in the real wages of labor–of bare, unskilled labor not boosted by expensive and lengthy investments in upgrading what it can do–is somewhat puzzling.

We can see why overall productivity-per-worker has increased. We have piled up more and more machines to work with per worker, more and more structures to work in per worker, and develop more and more intellectual blueprints for how to do things. But why should any of these accumulated factors of production be strong complements for simple human labor?

Karl Marx thought that they would not: he thought that what more accumulation of capital would do would be to raise average production-per-worker while also putting strong downward pressure on the wages and incomes of labor, enriching only those with property. Yet the long sweep of history since the early 18th century invention of the steam engine sees the most extraordinary rise in the wages of simple, unskilled labor.

There are, again broadly speaking, two suggested answers:

The first is that the accumulated intellectual property of humanity since the invention of language is a highly productive resource. Nobody can claim an income from it by virtue of ownership. Therefore that part of productivity due to this key factor of production is shared out among all the other factors. And, via supply and demand, a large chunk of that is shared to labor.

The second is that there is indeed a property of the unskilled human that makes its labor a very strong complement with other factors of production. That property is this: our machines are dumb, while we are smart. Human brain fits in a breadbox, draws 50 W of power, and is an essential cybernetic control mechanism for practically everything we wish to have done, to organize, or even to keep track of. The strong and essential complementarity of our dumb machines and our smart brains is the circumstance that has driven a huge increase in labor productivity in manufacturing. And, by supply and demand, that increase has then been distributed to labor at large.

Both have surely been at work together.

But to the extent that the second has carried the load, the rise of the robots—the decline in the share of and indeed the need for human labor in manufacturing—poses grave economic problems for the future of humanity, and poses them most immediately for emerging market economies.

So let me give the mic to smart young whippersnapper Noah Smith, playing variations on a theme by Dani Rodrik:

Noah Smith: Will the World Ever Boom Again?: “Let’s step back and take a look at global economic development…

…Since the Industrial Revolution… Europe, North America and East Asia raced ahead… maintained their lead… confound[ing] the predictions of… converg[ance]. Only since the 1980s has the rest of the world been catching up…. But can it last? The main engine of global growth since 2000 has been the rapid industrialization of China… the most stupendous modernization in history, moving hundreds of millions of farmers from rural areas to cities. That in turn powered the growth of resource-exporting countries such as Brazil, Russia and many developing nations that sold their oil, metals and other resources to the new workshop of the world.  The problem is that China’s recent slowdown from 10 percent annual growth to about 7 percent is only the beginning….

But… what if China is the last country to follow the tried-and-true path of industrialization? There is really only one time-tested way for a country to get rich. It moves farmers to factories and import foreign manufacturing technology… the so-called dual-sector model of economic development pioneered by economist W. Arthur Lewis. So far, no country has reached high levels of income by moving farmers to service jobs en masse…. Poor nations are very good at copying manufacturing technologies from rich countries. But [not] in services…. Manufacturing technologies are embodied in the products themselves and in the machines… used to make the products…. Manufacturing is shrinking… all across the globe, even in China… a victim of its own success…. If manufacturing becomes a niche activity, the world’s poor countries could be in trouble…

By “a niche activity” I read “does not employ a lot of workers”–the value added of manufacturing is likely to still be very high and growing, certainly in real terms, just as the value of agricultural production is very high and growing today. But little of that value flows to unskilled labor. Rather, it flows to capital, engineering, design, and branding.

Noah’s points about economic development are, I think, completely correct.

The point is, however, one of very long standing. The mandarins of 18th-century Augustine Age Whitehall had a plan for the colony that was to become the United States. They were to focus on their current comparative advantages: produce, I’m slave plantations and elsewhere, the natural Reese source intensive primary products that the first British Empire wanted in exchange for the manufactured goods and transportation services the first British Empire provided that made it so relatively ridge for its time.

Alexander Hamilton had a very different idea. Hamilton believed very strongly that the US government needed to focus on building up manufacturing, channels through which savings be invested in industry, and exports different from those of America’s resource-based comparative advantage. The consequence would be the creation of engineering communities of technological competence which would then spread knowledge of how to be productive throughout the country. Ever since, every country that has successfully followed the Hamiltonian path–that is kept its manufacturing- and export-subsidization policies focused on boosting those firms that do actually succeed in making products foreigners are willing to buy and not havens for rent-seekers–have succeeded first in escaping poverty and second in escaping the middle-income trap.

The worry is the China will turn out to be the last economy able to take this road–that after China manufacturing will be simply too small and require too little labor as computers substitute for brains as cybernetic control mechanisms to be an engine of economy-wide growth. And the fear is that a country like India that tries to take the services-export route will find that competence in service exports does not more than competence in natural-resource exports to produce the engineering communities of technological competence which generate the economy-wide spillovers needed for modern economic growth that achieves the world technological and productivity frontier.

Very interesting times. Very interesting puzzles.