Losing to Dani Rodrik
By Arnold Kling
After reading his book One Economics, Many Recipes, I keep imagining myself debating Dani Rodrik…and losing.
Kling: I favor limited government.
Rodrik: I favor right-sized, adaptive government. Government must select policies and regulations that take into account local history and conditions. Government must experiment and correct its own mistakes.
Kling: Adaptive government is an oxymoron. In reality, you never observe adaptive government.
Rodrik: The same could be said of limited government.
He says on p. 2:
All this diverse experience with growth [some countries fast, others intermittent, others not at all] has happened in an era of rapid globalization, during which countries have become increasingly open to forces emanating outside their borders. The fact that they have responded so differently is evidence enough–if any is needed–that national policy choices are the ultimate determinant of economic growth.
Does that mean that if we studied countries (I have India in mind) and found enormous variations in growth across regions or social groupings that national policy choices may not be the dominant factor, that we must look to cultural determinants?
On p. 5:
economists are an arrogant bunch, with very little to be arrogant about. I hope the reader will agree that the essays in this book are different
I do agree. Reading this book is nothing like listening to, say, Joseph Stiglitz. Stiglitz without arrogance would be like Hamlet without the prince.
In the vast majority of cases…the “shocks” (policy or otherwise) that produced growth spurts were apparently quite mild…not much reform was actually taking place…Apparently, small changes in the background environment can yield a significant increase in economic activity.
It is nonetheless true that the implementation of the market failure approach requires a reasonably competent and noncorrupt government. For every South Korea, there are many Zaires where policy activism is an excuse for politicians to steal and plunder.
economic history in today’s rich countries can be interpreted as an ongoing process of learning how to render capitalism more productive by [implementing] meritocratic public bureaucracies, independent judiciaries, central banking, stabilizing fiscal policy, antitrust and regulation, financial supervision, social insurance, political democracy. Just as it is silly to think of these as the prerequisites of economic growth…it is equally silly not to recognize that such institutions eventually become necessary
The central economic paradox of our time is that “development” is working while “development policy” is not.
the right way of thinking of industrial policy is as a discovery process–one where firms and the government learn about underlying costs and opportunities and engage in strategic coordination.
You thought I was exaggerating when when I wrote “industrial policy with an Austrian slant”?
A first-best policy in the wrong institutional setting will do considerably less good than a second-best policy in an appropriate institutional setting.
It’s probably hard to get the meaning of this quote when I take it out of context. But it reminds me of my view of corporate strategies and corporate re-organization. I would rather see a second-best strategy or a sub-optimal organization chart (they’re all sub-optimal, really, due to trade-offs) implemented in a way that compensates for its flaws than a first-best strategy or org chart that is implemented less carefully.
There is no shortage of arguments against industrial policy…[e.g.] Developing countries lack the competent bureaucracies to render it effective…[but] The standard market-oriented package hardly economizes on bureaucratic competence
I don’t have any representative quotes from chapter five, on building institutions for growth, but it is an important chapter. We free-market types tend to complain that anti-market types take capitalist prosperity for granted and harp on its failures. Rodrik probably would say that we in turn take good government for granted and harp on its failures.
Much of this chapter continues what I call his “Austrian slant” on government. He criticizes “one size fits all” blueprints for government institutions. In contrast, he argues for government evolution that is based on “local knowledge,” “tacit knowledge,” and the like.
The latter part of the chapter degenerates into the presentation of some very ill-fitting cross-country linear relationships, purportedly showing things like a significant relationship between, say, democracy and economic growth. In order to appreciate this section, you have to approve of this methodology, and I don’t.
The misleadingly-titled chapter 6 has a neat, short critique of some papers where economists used instrumental variables and then interpreted the instruments as causal variables. To really appreciate it, you have to (a) understand his point (which I do) and (b) have some investment in the papers that he criticizes (which I don’t).
The latter part of the book is on globalization. Rodrik does some barrel-fishing by pointing out the empirical contradictions to Thomas Friedman’s “the world is flat” claim.
He then claims that there is an impossible trilemma for international political economy: international economic integration, the nation-state, and mass politics. He argues that we can have any two, but not all three. For example, if you want to have participatory politics and economic integration, then you have to give up the nation-state and instead have global federalism. The way I would put this is that in order to have economic integration, we have to Lose the we.
The potential benefits and pitfalls of global federalism are worth thinking about. I think that Rodrik has barely begun to scratch the surface on that one.
Overall, what strikes me after reading the book is how similar Rodrik and I are in terms of outlook and temperament, and yet how differently we seem to come down on important issues. I circle back to my concern that I might not be able to emerge from a debate with Rodrik with an unchanged mind.