Monthly Archives: November 2017

Straight talk from Dani Rodrik

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The legion fans of Dani Rodrik will love his new book, Straight Talk on Trade. I’m one of them, and massively respect him for warning all the rest of us economists about the political economy consequences of globalisation long before these became obvious. As he writes in the last chapter of this new book, looking at recent voting trends in many countries,  “It is dawning on economists and policymakers that they severely underestimated the political fragility of the current form of globalization…. This backlash was predictable.” He has the sombre pleasure of having predicted this for a couple of decades now.

Regular readers will find many of the thoughts in Straight Talk familiar from previous books such as The Globalization Paradox and Economics Rules, and from papers such as Rodrik’s work on ‘premature deindustrialization‘. The new book updates the issues for the present context of the political success of anti-globalizers, nationalists, statists. It argues that there is little evidence of a major retreat from economic integration, and that the rhetoric and headline measures are a useful safety valve. “What looked to contemporaries like damaging protectionism was in fact a way of letting off steam to prevent an excessive build up of political pressure. … [W]e need to place the requirements of liberal democracy ahead of those of international trade and investing.”

I’m in two minds about this line of argument. It is undeniably true that the dogma of globalization gave cover to a lot of toxic practices, from financialization and speculation to multinational tax avoidance. However, I fear the protectionist, nationalist rhetoric will create its own reality – I found the argument in The Weaponization of Trade by Jack and Rebecca Harding persausive on this. Nor am I as sure about the ‘continued resilience of the nation state’ – and see its potential fracture as a dangerous moment.

On the questions of domestic economic policy and industrial policy, though, I’m 100% with Rodrik’s argument. He points out that the policies labelled ‘structural reform’ (econ jargon for politically very difficult measures) “were only loosely correlated with turning points in economic performance.” There are no silver bullets. Rather, growth take-offs “were associated with a targeted removal ofkey obstacles to growth rather than broad liberalization and economy-wide reforms.” Measures need to be targeted, and political capital and administrative resource needs to be focused on areas where there will be an early return. “In economies that suffer from multiple distortions, small changes can make a big difference.” The best policy advice is to experiment, and try local institutional innovations.

Reflecting on the lessons of past growth take-offs and failures leads into a section on the role of economics and economists – some of this familiar from Economics Rules. Economists must pay more attention to politics if they are giving policy advice, he argues, and in particular to the scope for political innovations – ideas that can durably relax political constraints and enable measures that make people better off without threatening political upheaval. Or in other words, enable the capture of efficiency gains while more or less protecting the economic rents of existing elites. Rodrik draws an interesting parallel with technological innovations, and the role of policy entrepreneurship, learning by doing, learning by experimentation, copying, serendipity and not forgetting the role of crises. “Taking ideas seriously renders the notion of interests slippy and ephemeral. Interests are not as fixed as other economists, such as Daron Acemoglu, suggest. People may need a new idea to appreciate their interests in a different, more accurate, light. “Raising the profile of ideas would also help alleviate the tension that exists today between political economy on the one hand, and normative economics and policyy analysis on the other.”

Looking at the current political context, some new ideas are surely needed, especially when it comes to global trade and investment. Rodrik has written elsehere about the need for New Rules for the Global Economy, and argues again here that the conventional policy suggestions will fail.

Straight Talk ends on a potentially optimistic note, however: “If one lesson of history is the danger of globalization running amok, another is the malleability of capitalism.  … It was not tinkering and minor modification of existing policies that produced these achievements [the New Deal, Bretton Woods], but rather radical institutional engineering.” If big, bold ideas can be implemented, the liberal democratic order may be reinvigorated. Looking at the present crop of politicians, this is only a slightly comforting thought, but I for one will take that sliver of comfort.

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So much to read

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There are lots of books in my in-pile, and I’ve had a very busy autumn (not least writing a book). But the Spring 2018 catalogue from Princeton University Press arrived and there are tons of absolutely enticing new titles forthcoming. Given my interests, The Tyranny of Metrics by Jerry Muller is a must-read.

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Radical Markets by Eric Posner & Glen Weyl looks intriguing – the argument is that inequality can be diminished and growth enhanced by a radical extension of the scope of markets. Talk about contrarian, in the current climate.

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Daniel Cohen’s The Infinite Desire for Growth is out in English, looking at what growth has been about historically and what future progress will look like.

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I’m super-eager to read Michael Best’s How Growth Really Happens, as a huge fan of his The New Competitive Advantage. The blurb says it combines the experience of hundreds of factory visits, economic thought from Babbage to the modern day, and historical episodes of econmoic transformation.

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Paul Tucker, formerly of the Bank of England and now at the Harvard Kennedy School, has written Unelected Power, about the role of central bankers and other technocrats in modern economic government.

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This is just the first few pages! Further in is The Republic of Beliefs by Kaushik Basu. Love his papers on this territory.

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Dani Rodrik’s Straight Talk on Trade features too, published earlier this month – I’ve finished reading this and will write my review soon.

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Reading the Festival of Economics

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Last week was the 6th Festival of Economics, which I curate and the outstanding Festival of Ideas team, Andrew, Zoe and Amy organize. There’s a Storify of some of the sessions by the Economics Network. As ever, we had some terrific authors speaking either at the Festival or in the preceding few days, so here is a list of their recent books.

Eric Beinhocker The Origin of Wealth

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Robert Peston WTF

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Michael Lewis The Undoing Project

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Gordon Brown My Life, Our Times

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Dave Birch Before Babylon, Beyond Bitcoin

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Gloria Origgi Reputation: What it Is and Why It Matters

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Jean Tirole Economics for the Common Good

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Jonathan Haskel Capitalism Without Capital: The Rise of the Intangible Economy

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Martin Sandbu Europe’s Orphan

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& my own GDP: A Brief But Affectionate History

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Greetings from the multiverse

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It has been a week of mad travel so although I haven’t posted much, at least I’ve had plenty of time to read. One of the books was, well, extraordinary. In a really good way, although I have no idea what to make of it in terms of substance. It’s The Beginning of Infinity: Explanations that Transform the World by David Deutsch. He’s a computational physicist so it is very much not an economics book, but Deutsch is bravely going far beyond the boundaries of his own discipline, something to be applauded given the height of the silo walls in the academic world.

His argument is that there is such a thing as progress, which began with the Enlightenment (the British rather than the romantic Continental variant), and that humans are rather special. The engine of progress is not empiricism, nor accurate prediction, but rather the ability to conjecture and see whether conjectures are consistent with what else we’ve learnt about reality, rejecting them if not. The scientific method consists not in careful observation followed by theorising, but the creative development of theories or hypotheses which then have to be confronted with observations, with robust mechanisms of rejection. So all this is somewhat contrarian, even I know, but it also seems pretty persuasive. Even the parts about how unlikely and therefore central to progress humans are in the universe.

Ah yes, the universe. One of the most gripping sections of the book is its explanation of quantum mechanics. I’ve never pretended to understand at all what this implies about the nature of reality. I still don’t, but Deutsch does nevertheless give one of the clearest explanations I’ve come across. To which the only reaction is awe at the sheer weirdness of the multiverse and therefore everyday life. I don’t think being on an overnight flight had much to do with my reaction. This is seriously weird.

It is all very enjoyable, including wonderful factoids and expressive comparisons along the way. That Oxfordshire is really a bleak deathtrap without so many human innovations to sustain life. That it is easy to confuse mathematical abstractions with physical facts (eg that the angles of a triange add to 180 degrees – only in maths, not on the ground). (By the way, economics is riddled with this kind of error; I give you ‘capital’ or ‘goods’.) That an American born today has more chance of being killed by an asteroid than of dying in a plane crash.

The one section I didn’t much appreciate tries to explain social choice theory. Even given that I know a lot more about this than about quantum physics, and other readers will know more about other subjects covered here, from evolutionary biology to astrophysics to philosophy, this is not a criticism – this is the inevitable downside of inter-disciplinarity. But we need more of this.

After I read the book (first published in 2011), I looked at some reviews. Most reviewers enjoyed it too, even though, as the New York Times review pointed out, “The chutzpah of this guy is beyond belief.” But concludes, “He is exactly who he is, and he is well worth getting to know, and we are very lucky indeed to have him.” So I wasn’t deranged by aircraft fumes; this is a book worth reading.

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Social limits to growth

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In preparing for an event tomorrow celebrating the 40th anniversary of the publication of Fred Hirsch’s The Social Limits to Growth, I’ve naturally been re-reading the book. It’s full of comments that leap out from the page, such as this: “The extent of interdependence of many forms of consumption in advanced, urbanized societies has brought increasing recognition that to give effect to public choice among the available economic alternatives represents a still unresolved intellectual and administrative problem, rather than requiring merely the sweeping away of impediments to the working of the market mechanism.” And, “To see total economic advance as individual advance writ large is to set up expectations that cannot be fulfilled, ever.”

These comments reminded me very much of Will Baumol’s long overlooked book (his PhD thesis!), Welfare Economics and the Theory of the State, which I read quite recently. Part of his argument is that interdependence is far more extensive than in textbook world. The changes in the character of the economy since 1977 have made this ever more true. Hirsch is of course famous for the concept of positional goods, where there are negative consumption externalities – I am worse off if you have the status symbol and I don’t. Some of this has been absorbed in modern signalling models. However, positive consumption externalities – network effects, direct and indirect – are now becoming widespread too.

The conventional matrix of goods (according to whether they are easy or hard to exclude and rivalrous in consumption or not) needs extending:

—————————-Easy to exclude                        Hard to exclude

Rivalrous+neg externality      Positional                           Commons good

Rivalrous                               Private good                      Commons good

Non-rivalrous                         Club good                         Public good

Non-rival+pos externality       Network club                     Network commons

In only one of these boxes does the standard ‘free market’ presumption apply.

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