Intro. [Recording date: August 20, 2019.]
Russ Roberts: My guest is Dani Rodrik.... He first appeared on EconTalk in 2011, when we talked about globalization. Our topic for today is a recent piece he wrote for the Boston Review with Suresh Naidu and Gabriel Zucman entitled "Economics After Neoliberalism."... Let's start off with the definition. Neoliberalism means different things, I think, to different people. It's a term that's come into more use recently. What do you mean by the term.
Dani Rodrik: Let me say first that I am a little bit uneasy using the term 'neoliberalism.' It's something that, it's a term that I have tried not to use. Sometimes I've used the term 'market fundamentalism' instead of 'neoliberalism.' But it's come into such general use, and I think it does capture something real, so I did along with my co-authors end up making it the centerpiece of this piece in the Boston Review. What I mean by neoliberalism is really mostly a frame of mind that places the independent functioning of markets and private incentives and pricing incentives at the center of things. And I think in the process downgrades certain other values, like equity and the social contract, and certain restraints on private enterprise that are often required to achieve economic ends that are more compatible with social goals.
Russ Roberts: And--the term 'market fundamentalism'--I would call myself, I think I'd have to admit to being a market fundamentalist. Talk about that a little bit more, what you see as the essence of that viewpoint and what you think the weaknesses are.
Dani Rodrik: I think it probably will make sense to talk about this in a particular context and then to make it more concrete. But I think I would draw the distinction along the following lines: That, there is a view that places markets as, in some sense, being prior to social and political arrangements. And I think that views markets as essentially being created independently, endogenously, on their own; and that they can be sustained and they can operate in a self-sustaining kind of way. And that social and political restraints or regulatory restraints on the operation of markets is a natural sort of distortion of the way that society ought to organize itself. So that that's the position I attribute to market fundamentalists in the way that I've seen it work in the policy domains that I follow most closely--which is, you know, trade and industrial policy, and financial globalization. And it is an alternative view which sees markets to be always the product of social and political arrangements, and therefore, you know, depend inherently on social organization; and in that view markets can be constructed in a number of very different ways, and serving the, you know, very different types of ends; and some are more equitable and more in line with social values than other forms of organizing those markets. And in that view, the question about regulating and stabilizing and legitimizing markets is an ongoing process that requires thinking and rethinking on the part of society, where, you know, there is a rejection of the primacy of markets as self-creating, self-sustaining forms of social organization. Again, I apologize for being sort of abstract; but you're leading me down that path.
Russ Roberts: That's okay.
Dani Rodrik: It may be more, it might be more productive talking about specific domains.
Russ Roberts: Yeah; we'll get to that. Ironically, you know, I agree with half of that. At least half. Which is, I agree that markets are not self-creating. Some kinds of markets are, presumably. The Smithian propensity to truck, barter, and exchange is there. But what I think we would call a market in a modern economy--and I want to be clear I do not mean a farmer's market or a stock exchange, although they are examples that are related to what we are talking about. But, certainly, markets that function well require culture. They require property rights of certain kinds. They require adjudication for disagreements. Some of those could be provided privately but perhaps are best provided by the state. I think the challenge is--I think the more important difference isn't--it's the self-regulating part and whether they should be steered: whether markets perennially or often or even occasionally produce outcomes that could be improved by various policy interventions. And those are--you know, I think we'll get into some of those. That's my level of abstraction. Which I think also is not so informative until we get a little more detail.
Russ Roberts: But, before we get there, I want to read a quote from your essay. You write
The tools of economics are critical to developing a policy framework for what we call "inclusive prosperity." While prosperity is the traditional concern of economists, the modifier "inclusive" demands both that we consider the whole distribution of outcomes, not simply the average (the "middle class"), and that we consider human prosperity broadly, including non-pecuniary sources of well-being, from health to climate change to political rights.
Expand on that quote, what you mean by that.
Dani Rodrik: There are, I guess, two key ideas there, at least. One is that we do value the tools of economic analysis. We think that the, um, the habits of thinking like an economist, of making sure that we work within well-articulated, internally consistent frameworks or, you know, what we might call economic models, and that we pay attention at questions of empirical inference and developing useful evidence--that those are critical as tools. So that's Idea Number One. The second idea is that we can no longer simply focus on what we called in that passage 'the average,' or growth rates, or GDP per capita [Gross Domestic Product per capita], nor focus on the, on economic outcomes. So, we need to look at what's happening across the entire distribution of income. And we also need to look at other indicators, like, you know, social or health indicators as well as indicators of political inclusion--political access--as well. So, I would say that those are the two ideas in that passage.
Russ Roberts: And I agree with that, actually, completely, especially that latter point about averages. And I would say it a little differently, and I'm curious if you would agree with this: That our focus as economists on measurability and the inevitable narrowing of focus to something like an average, which is--or a growth rate--what I increasingly think of as scalar, the math concept--it's just a number. Right? In fact, we are interested in a matrix. We are interested in a whole range of outcomes. And some of the elements of that matrix we may not be able to measure. Dignity. A sense of flourishing. Pride. Responsibility. A sense of agency and independence and autonomy. Those are things that economists ignore, because we can't quantify them even when we go to a richer multivariate approach. Or at least we struggle to. Do you think that that has hampered our appeal--certainly to the Left, which is part of your essay's focus, was to [?] on the Left to be more open to economics as a potential tool for improving the world? And, I think both the Left and the Right have focused too highly on what's measurable, and we've missed out on a lot of important human factors.
Dani Rodrik: No, I agree completely with that. I think that--and I would say that it's not just, you know, a loss of relevance and legitimacy vis-à-vis the Left; but I think increasingly we are seeing the same on the Right, too: that there is a--
Russ Roberts: Absolutely.
Dani Rodrik: and there isn't--that many of those values that you've listed, which I agree are completely important, are things that are very important to the Right. And things like, you know, the importance of community and, you know, self-worth and dignity, and uh, so alike. So, it is a--it is true--I don't think it is, so it is true that this has happened in economics. And it's part of the problem that we try to correct. It is, um, it is not necessarily, again, I would say, it is not necessarily inherent to the practice of economics, insofar as, you know, these are all things that are, in principle, can be studied and analyzed within pools[?] of economics. They are less directly measurable. You are right. Although, there is a movement, as you know, within economics, to, uh, um, to use to a much greater degree, um, self-assessments and that surveys [?] being--
Russ Roberts: Sure--
Dani Rodrik: and where you can track these kinds of things and do some empirical measurement. But it is harder. But, I mean, the cornerstone idea in microeconomics of utility--I mean, it's not measurable. And so, you know, and yet, it's yet at the cornerstone of all microeconomics. It is the case that, you know, the emphasis on increasingly on the empirical methods has, you know, has forced us to look at things that are more directly quantifiable. But, again, it's something that I think can be rectified. But, I agree in general with what you said, that this has been part of our problem.
Russ Roberts: I want to try to focus that point a little more sharply and see what you think. The focus on inequality, which is based on a measurement of income, which is typically imperfect--certainly comparisons of income over time are challenging because of changes in prices and quality of goods, but we do the best we can. And we are actually trying to measure something that we understand, I think, that we're trying to gather. But, as a result of that focus, I think those non-quantifiable, immeasurable, variables, at least in an objective way--certainly yes, we're trying to subjectively measure things like happiness, and I find that kind of sterile, to be honest; but we don't need to talk about that. But, to talk a little bit more richly: If we think about industrial policy or trade policy, with respect to the poorest Americans, say, the bottom 20%. And my argument is that if we only focus on the impact on their incomes, we are missing something important. And I think what economists presume is that incomes are correlated with wellbeing--of course. That's part of utility theory, for sure. It's in our blood. But I think it misses--I think the flourishing, dignity aspect of life, which I think we'd all agree is important, is not perfectly correlated with income. Certainly not, you know, various things that would substitute government payments for earned income are not going to have the same impact on wellbeing, correctly defined. Do you--is that a worry? Do you think that's a legitimate concern?
Dani Rodrik: Absolutely. I agree completely with that. I mean, I think that's why--I mean, it's precisely because I think this is extremely, it's very correct. I mean, my most recent work on industrial policy in the context of advanced countries or in the United States has focused on what we've called good jobs. I mean, the notion of a good job is a very--it's an all concept. But I used to think that industrial policy should really focus on simply on increasing productivity--on, you know, increasing economic opportunity in the sense of increasing, enhancing the overall productivity of the economy. And I've increasingly become convinced that that, especially in the advanced countries, it misses out on the need to provide sort of well-meaning satisfactory work opportunities for the bulk of the labor force. And that's because, just as you said: It's much more than income. And that's one of the reasons that I think people who advocate UBI [Universal Basic Income], they can miss the boat on this.
Russ Roberts: Universal Basic Income.
Dani Rodrik: Right. That it's really, you know, it's only part of it. It's really about income. You can't obviously completely forget about income. But, you know, for people to live, you know, meaningful lives, to feel that they are members of the community in which they are contributing and communities giving them something back in return--I think having satisfactory, you know, jobs, is extremely important. Now, it may be that over time the nature and the meaning of what is a satisfactory job is going to change. And it doesn't have to be, necessarily, you know, 9-5, 5 days a week, kind of a traditional job that we've had. But, I think this is one of the most important sources of wellbeing for people. And that goes significantly beyond income.
Russ Roberts: So, so far, Dani, we're having a love-fest here of agreement. Which is fun. I like that. Um, and I think that's great. I'm going to push down a little narrower still and find a disagreement. I think we're close. So, the question is how, what do you do about this? This realization? Or, how do you implement a richer vision of policy? Certainly in your essay you have a number of examples. Interested readers can go look at them. And I'll also mention that there's a whole bunch of responses to your essay, that people from the Left and the Right, interventionist and more free market respondents--very interesting online colloquium. But, let's take the out-of-work, manufacturing worker in West Virginia or Ohio, that we're all increasingly talking about, because those folks are not leaving. Many of them are not leaving. Some are, of course. Some are leaving to where they can do better economically. But many of them stay behind, either for reasons for reasons where we talked about with Chris Arnade in his book Dignity either because it's home--they just feel comfortable there, they just don't want to leave, possibly the opportunity is relieving or difficult to access because of higher rents in cities and metropolitan areas where the jobs are. Possibly because the people have limited skills. Some of these are personal choices. Many of them are not. They are just the way the world is--in the current framework, in the current framework that you don't like. What should we do for that worker? What should we do either in terms of industrial policy, trade policy, or social welfare policy, to a safety net of some kind to help that person who is struggling for reasons that aren't their fault?
Dani Rodrik: Yeah, I mean it's a variety of policies. One is that I think there is a lot to be said for improving both the safety nets that exist and for improving the set of policies that increase mobility, giving people the opportunity to move to other places, even though as you say there will always be attractions to remaining home. I'm not an expert on either those broader safety nets and welfare policies or the policies that would increase mobility. Then I think the third bucket is going to be that, just as you say, that there are always going to be places where there are not enough good jobs, and the challenge there is going to be: Is there anything that we can do for such places? I think we have, you know, some experience with respect to what can work. Somehow, some communities are able to develop the kind of, on the one hand, the sort of public-spirited private action on the part of either community leaders or civil society organizations to organize certain efforts, and then to complement it with sort of public action on the part of state or local agencies, you know, that are willing to come in and not necessarily subsidize or spend public resources, but simply act as a coordinating agency for these kinds of efforts, where you are trying to bring a number of features together. You are trying to generate a vision for that community can really find itself; maybe it was a manufacturing community in the past but manufacturing isn't coming back. Maybe the future is going to be for that community to redefine itself as a tourism destination or for it to rebrand itself in a different way. You need to invest in skills, and that's going to require some action to organize the training. And you need to bring the technological and marketing and business capacity of, you know, the successful firms in or near that region to sort of engage and somehow to [?] kind of fashion to, you know, the nascent entrepreneurs or the nascent firms that could employ that. So, what we've discussed in this paper with Chuck Sabel called "Building a Good Jobs Economy" is a kind of a collaborative, dynamic set of activities that doesn't start from the premise that we know what the problem is and therefore you just can solve the problem through some application of Pigovian subsidy, but that you are involved in a kind of a fact-finding or discovery, information discovery kind of a mission of figuring out what can work, what doesn't work, and monitoring and revising these collaborative strategies over time. You know, when things work, it only really I think works out as a result of this kind of a process. So, it's a very different type of, you know, industrial policy. Again, I don't even necessarily like to call it 'industrial policy' because it may not be in the service of manufacturing industry. It could be simply to provide, you know, service-type jobs. But it is a kind of collaborative activity where state agencies are playing an important role.
Russ Roberts: And what evidence do we have that state agencies are good at that? I mean, when I listen to your very nice-sounding description of collaboration--that's usually--that's--we can talk about a family. A family, a very small group, that struggles over some issue in the house. We can get together, we can talk it out, we could work it out. Come up with some ideas. We might do some trial-and-error and then we might choose as a group--and even though some members of the group might have more power in voting than others, like the parents--you know, we do the best we could. Or, a group of siblings dealing with a challenge with an older parent. But, when you have a community, a city, something of tens of thousands of people, or even thousands, how does that work? Doesn't it require a political entrepreneur? A visionary at some level, to try some of these interventions or innovations that would help people cope with economic change?
Dani Rodrik: Yes. I mean, I think, you know, it typically does. And sometimes those are people who come from the private sector. Sometimes it is people who are taking leadership role in a local economic development agency or a local workforce development program that's funded through public money. So, you do need these individuals to get these things started. At some level you need--and here we're getting into things that are really hard for an economist to talk about--which is, that my interpretation of where these things work is that, you know, you need the beginnings of some kind of social capital. You need some kind of [?] leadership to get it started. But I think to some extent, and that's where I'd like to be an optimist, that some of the social capital can also be built as you go. So that, rather than take it for granted and say that, you know, some communities will never have this because the social capital doesn't exist, I do rather like to think that part of it is, yes, you will need these leaders to get things started but a lot of the trust and cooperation that you need can be built on the go. And, does this happen, and is there any evidence that the state can play a role in this? Yes; I think the answer is Yes. The United States has very extensive history, just to talk about at the Federal level, of conducting industrial policy in areas where it has been absolutely critical for national security. So, you know, the agencies like DARPA [Defense Advanced Research Projects Agency]. You have sort of very related activities around the Department of Energy, which for all practical purposes is industrial policy. And then, interestingly, the operate along very much, you know, similar kind of principles--the state is very much the leader. The state does spend the money and the resources. Although, the key thing is not the money or the subsidy or the resources. It's really the ability to get these activities going and to establish a framework for ongoing collaboration between businesses and universities and innovators and small- and medium-sized firms. And, as I said, this is also more recently has worked with the manufacturing institutes that were set up under the Obama Administration. And so, in terms of whether has this worked in the past, are there examples? The answer is Yes. Where I think we have not used this accumulated experience and this sort of inventory of models of collaborative industrial policy, is we have not deployed these kinds of arrangements in the area of good jobs--in the area of focusing on jobs per se. They've been focused on issues on sort of green technologies or in defense-related technologies or in advanced manufacturing with respect to innovation. And I think, given where we are today in the U.S. economy, that we need to use the same toolkit for, in the domain for good jobs, and in geographical areas that they are feeling left behind.
Russ Roberts: A lot of that, the way you described it at least, is already in place. Obviously, localities that struggle economically desperately try to bring jobs. They often do that in a really bad way--they subsidize--they give away money to employers who come, at a high cost often per job. Not productive. They reward their friends--
Dani Rodrik: I agree. I agree; and I think that's exactly what we should stay away from. I think that's [?]--one element which is already in place which we could build on at the local level is a range of workforce development programs, basically skill [?] and increasing the skills of young school-leavers or young students.
Russ Roberts: Those don't have a very good track record.
Dani Rodrik: No--they do, actually. There's a number of randomized evaluations that have been taken, that have been undertaken, of these kinds of programs. And they do work. So, there is a fair amount of evidence on that.
Russ Roberts: You'll send me some links and we'll put those up for listeners. Go ahead.
Dani Rodrik: Yeah. Absolutely. There is a good recent piece that did that. The area which doesn't work--and I completely agree and I think that's where we need to get away from--is this, the typical way in which a local community will try to do this is, as you say, by subsidizing inward investments. So, putting up these, sort of, we've seen this of course, you know, the major disappointments recently in Wisconsin with Foxconn, more recently with Amazon. And these don't work, because they are exactly the wrong approach compared to what I was describing before, which is that these tax incentive programs are essentially, they are all based on the idea that you can ex ante contractually identify and resolve enough of the uncertainty, that you can all put it into a full contract ex ante, where everybody knows what they are getting up front. And what both Foxconn and the Amazon cases show is that in fact there is so much uncertainty about markets and consumer preferences and technologies that, you know, before the ink is dry that there are things that contribute to the unraveling of these contracts. And then, you have no--then they become political scandals and there is really no way of actually renegotiating these, because they weren't supposed to be renegotiated in the first place. Whereas, the right approach is what I was outlining before, which is to start from the premise that in fact a lot of this is going to evolve over time, because there's so much information elicitation that has to happen over time.
Russ Roberts: I'm talking with Dani Rodrik of Harvard University; I want to thank Plantronics for providing his headset, the Blackwire 5220, as part of our efforts here to improve audio quality, which is challenging, given that my guest is far away. And, I'm trying to do an increasing number of interviews face to face; but for anybody who is at a distance, I'm trying to improve that quality, and I hope that is working for listeners out there.
Russ Roberts: So, all of that's nice, but it strikes me that, at the Federal level--like, when you described this collaborative process idea--you know, that's a more, what we might call a decentralized or bottom-up--still government because it might be done at the local level; but the local level, you could argue has more information. Doing it at the national level, Federal level, strikes me as a pretty blunt instrument. Green--you said we've tried some, DARPA, national defense, energy, environmental green programming, programs of subsidization--those are not well-targeted. They might be a good idea in certain settings: some of those programs might have been a good idea. Some of them, presumably not, by the nature of the world. But, it strikes me that that's a really challenging way to help an out-of-work manufacturing worker in, um, Ohio or West Virginia, wherever. Wisconsin. I want to talk about a more difficult issue, at least for me--maybe not for you--which is: What level of protectionism, what level of local-focused subsidy from the Federal government would you be supportive of to keep those jobs, say, in place to begin with? And would you favor anything to bring them back?
Dani Rodrik: I don't think the jobs are really coming back. I mean, the manufacturing jobs that were lost to China or to Mexico are, for the most part I don't think they are coming back, because, just the technology, the nature of the technology has changed so much that even if there is significant re-shoring that takes place, it's going to show up in output but not in employment. So, that's a fact that we need to--so, there's no going back. Now, if I were to re-live that period and you were asking me the question from the vantage point of, let's say, the late 1990s or the 2000s, and what role might trade protectionism play--I assume that's really the question you want me to answer.
Russ Roberts: Either one. I mean, I think there's a--a lot of people think--I don't, but a lot of people think that putting tariffs on Chinese goods as Trump has been doing is going to bring jobs back to the United States, raise incomes in certain sectors. Which I think is potentially true. I think the cost is too high, but reasonable people could argue otherwise. Not on the grounds that he uses, in my view: I think he's got the structure wrong. But the argument that protectionism or keeping out Chinese jobs or making them more expensive could increase U.S., say, manufacturing, I think is true. I just don't think it's a good idea. So, I wouldn't rule that out, from your perspective, at least as I understood it in the article.
Dani Rodrik: As I said, you know, when you talk about trying to create good jobs and improving incomes overall, and life chances, I would my first, second, and third priority on the kind of domestic programs that we've been talking about, because that's really where the action is. Now, where would I stand on trade policy? I'm not a fundamentalist on the question of free trade. And I think that there might be circumstances when, you know, your domestic programs are falling short; and that you need to establish some space for protecting some of employment in particular regions that might be adversely affected. And, I wouldn't be doctrinaire in saying that kind of protection sometimes can be warranted in order to protect jobs that might be economically inefficient but then has the other benefits of people creating people's--people employed--and creating sort of the vitality of these communities sustained. And, again, it's not my first, second, and third option; but I can see how it could play a role. And let me give you an example of when this did happen and I think was generally successful. Prior to the creation of the World Trade Organization [WTO], world trade rules were much more flexible, as you know, so that countries could resort to protectionism much more easily. And there were two significant instances when the United States availed itself of this flexibility to increase protectionism significantly. And, in doing so, I think managed to buy some time, without giving the world trade regime significant--without significantly hampering world trade or undermining the world trade regime. But I think with hindsight those were instances where the trading of some gains from trade against upholding social contract and social stability paid off. And those two instances I have in mind is first, in the 1970s, the Multifiber Arrangement [MFA], which was a way of rich countries like the United States imposing higher import barriers--tariffs and in particular quantitative restrictions, quotas--on low-cost textiles from what were then called newly-industrializing countries. And then, in the 1980s, the use of Voluntary Export Restraints, mainly against Japan, in steel, in autos, and other areas. These were examples of economically inefficient policies which economists roundly condemned, but which I think with hindsight look a lot better than they did at the time. Neither did significant damage to the world trade regime, as I said. In fact, they were, to use the term of a political science colleague of mine, they were 'system maintenance': they weren't norm-breaking but actually system maintenance departures from the rules. So, in other words, they actually reinforced the system acting as sort of a safety valve or escape valve to let some of the pressure escape. What we lost, I think, after the 2000s, was that kind of flexibility. So, I don't think the United States would have been significantly worse off in the 2000s if it had occasionally protected certain communities or certain sectors. And, if as a result of this, we would not have gotten this much worse and much more senseless nativist protectionist trade backlash that is being led now today by President Trump. So I think these are the questions that we need to ask ourselves. I don't know that we will ever know the counterfactual, whether in fact I am right that if the United States in the 2000s had the kind of flexibility that it had in the 1970s and 1980s, and to be in what you would call more protectionist, whether in fact would have been better off and had a sounder trade regime today. And that we would have less room for a nativist waving a protectionist flag coming to office or not. So, we don't know. But I'm saying that after the 1980s, what we got was, you know, hyper-globalization. What Reagan did was to protect, to increase protection; but at the end we didn't undermine the open trade regime.
Russ Roberts: And, with Reagan, you are referring to the Voluntary Export Restraints--
Dani Rodrik: Exactly--
Russ Roberts: which is a euphemism for the threat of quotas. But, we asked Japan, the United States asked Japan, Reagan asked Japan to restrict "voluntarily." Then of course the result of that was to move a lot of--every Japanese automaker moved a factory to the United States. Nissan is in Sparta, Tennessee; Honda is in Ohio; and I think Toyota is in Kentucky. So, they found non-union places to put factories that--I don't know, maybe those were good for the skillset of workers there who otherwise would have struggled. But--
Dani Rodrik: But the genius of the Voluntary Export Restraints was--I mean, I'm not--you know, as long as we are creating good jobs, I don't care whether they are union jobs or not, although I favor unions because I do think workers should be organized and have means for collectively bargaining against, with management. But the genius of the Voluntary Export Restraints was precisely how they distributed this cost of the adjustment, because they said, 'You know, look: We need some space for our domestic labor markets, our domestic industries; but we understand that your enterprises are going to suffer a cost. So, why don't you keep some of the rents, and some of the benefits?' and therefore allowed Japan to administer these export restraints, as you said. And then Japan kept those rents. It was the same, by the way, in the MFA--that, the quotas under the Multifiber Arrangement were administered by the exporting countries. So, you know, this was an understanding, that both sides got something out of it, albeit at the usual cost of higher consumer prices. Yeah--I think these are--again, with hindsight, these bargains don't look nearly as bad as they did at the time. Because they maintained the system.
Russ Roberts: Well, but one of the reasons that they "looked bad" at the time, were, people like me and other market fundamentalists like myself, we said, 'These are costly.' We might have been wrong, of course, about that. It's--I don't think anyone thought they would be, you know, destructive to the future economy of the United States, but we did argue at the time that they would raise prices--as you say. They would encourage cronyism, which I think has been the case. I think we have a problem there with--those restrictions that you're saying weren't as costly as we thought--of course, they weren't put in place because somebody thought it was good for policy overall. They thought it was good for particular geographic areas that had political representation that was powerful enough to get them for those groups but not for others. And that's led to a more complicated set of encouragements, incentives, that I'm deeply unhappy and concerned about in all kinds of industries. The risk of these kinds of industrial policy interventions, whether it's protectionism or subsidies, is always that very bad decisions get made for what seem to be good reasons, and are difficult to stop in a republic like ours with few constitutional constraints. Increasingly few.
Dani Rodrik: Well, even though these are cases where precisely they were used for temporarily and then they were removed.
Russ Roberts: That's a good point.
Dani Rodrik: Now--and where we failed is that, you know, we didn't take the underlying logic--again, I want to reiterate that I'm not suggesting these as examples of first-best responses. These would not be anywhere near the top of my list of how to deal with social or labor market problems. But, as poorly designed as they were, I think they served an essential function that we need to think about how to have a mechanism for. So, I think there are ways of creating trade rules that are sensitive to this need, that have fewer costs than straightforward trade protectionism would do, would create. But I think, going back to where we started from, I think one thing that neoliberalism or market fundamentalism did was to blind to the need for those kinds of escape valves or safety valves.
Russ Roberts: So, let's go look at that a little more deeply. I think--it's a horrible policy in effect; in theory it was pretty good--but, one of the things we had over this time period was something called Trade Adjustment Assistance that was kind of, I would say, an economist's dream policy. It's idea is: 'Well, the overall pie is going to get bigger from allowing trade; but particular people are going to be hurt. So we'll try to redistribute the net gains so that they are shared more widely.' For reasons I don't fully understand because I'm not an expert on that program, there's universal agreement that it has not helped very many people--for reasons I don't fully understand. But, that sort of textbook idea did not function as it might have, for whatever reason. So, I want to talk about a different approach and a different framework for thinking about this. It seems to me that a lot of what we're talking about, and this comes up a lot on EconTalk, is that, you know, creative destruction has 'creative' in it and it has 'destruction.' And, the destruction part is difficult. It has a human cost. It can not just mean lower incomes for people who are temporarily out of work; it can mean a loss of dignity, an increase in despair, an increase in drug addiction, political responses that are very costly, etc., etc. I would argue, and I'm curious to get your reaction, that the fundamental problem we have in the United States is not that we have too much market fundamentalism, or too little--this debate that we are implicitly having around your article. I would argue that the fundamental problems that make creative destruction less effective than it was in the past--so, part of it is, is that the speed has accelerated. The way I interpret your point about the 2000s to the present is that, it's one thing to allow the Japanese to bring in a lot of cars or poor countries to sell clothes here, but China as a rather, an enormous industrial juggernaut, had such a high impact on certain sectors that we needed a safety valve. We needed to slow that down. Instead we accelerated it, let it happen very quickly. The cost was very large. The adjustments didn't take place. So, one argument is that, 'Let's make it easier for the adjustments to take place.' And I would suggest that the single biggest challenge there is we have an education system--there's some cultural challenges that maybe we'll get to--but in terms of policy, we have an educational system that is a failure, for many, many people, in the K-12 [Kindergarten through 12th grade] time. And as a result, the ability of people to move and find new opportunities, given that their currents skills, very specialized skills, are, say, out of demand--say, you are a machinist or someone working in manufacturing. Without those other skills, you are going to have a hard time. And we're going to--and your view, your world, it seems to me, pushes toward a less dynamic economy. And it may be. I might concede that in a fast-changing world we might want to slow things down. But we don't have a knob that says, 'Let's go to 7/8ths speed.' We have very blunt instruments. And I'd rather see us try to fix things at a fundamental level that make it hard for people to rearrange, change the--I would list, the three obvious things are: better education system, better housing and zoning policies to make it more affordable to live in America's cities, and less licensing. Those are all--those are the opposite of market fundamentalism. They are all non-Neoliberal. They are all interventionist, progressive problems to me caused by too much government, not enough trust in markets. What's your reaction?
Dani Rodrik: Well, I mean, I wouldn't argue against education. I think, you know, it's important. But I don't think it's going to be the full solution. I think the United States can do much better in education. Again, this is an area, that's not an area of my expertise, and to a relative outsider--you know, I've lived in the United States most of my life, but, I mean, I look at the United States in many ways with an outsider's set of lens. The failure of education in the United States is something that I still have a hard time understanding. Yes, by all means. But I think we'd be making a mistake to think that education is the solution to these problems, in the sense that education--you know, is always the answer; and it's always the answer for the future. It's rarely going to be the answer to your current labor market problems. You know, my colleague, Ricardo Hausmann, I like to quote him on this, always says that 'You need to create jobs for the labor force you have, not the labor force you wish you had.' And I think, let's, by all means try to soften this tradeoff in the future, through better education; but you need to grapple with the labor force you have currently. And education is of limited help for that. So, the other thing I would say is we need to think about not just education in the sense of learning in school. We need to think about a broader sort of human-capital/productivity nexus. And in that way, what I'm suggesting and what I was talking about earlier in terms of thinking about industrial policy for good jobs--it's not really about slowing change at all. It's really about increasing the pace of change, increasing the pace of technological innovation from the frontier firms and the high productivity firms to the rest. And that's also increasing human capital, it's increasing the on-the-job skills and performance of the labor force that you have. So, when you look at it in that broader perspective--part of this agenda of creating, you know, sort of increasing good jobs through this collaborative industrial policy practices, is precisely to increase productivity and its dissemination in a broader way. And that's going to show up in more productive workers, more productive jobs. So, in that sense it's entirely within that agenda. And let me say one thing about compensation and safety nets. Again, it's true that the United States does a very bad job there as well. I think the reason that Trade Adjustment Assistance doesn't work is not a big mystery. I think there is good economic and political reasons why they fail. I think compensation works well only when it is baked into the original social contract, if you will. So, I think where Trade Adjustment Assistance has worked well is in Europe, where in fact there is no separate Trade Adjustment Assistance. It's all baked into the social welfare policies, the extensive social welfare state there. So, there it doesn't matter where you are losing your job, whether it is for trade or some other reason. You have recourse traditionally to a very generous safety net. That's one reason why in Europe you have not had this political backlash against trade from low-cost countries. So, trade with China or trade with North Africa is not a politically salient issue there. I think, in part, I would argue, because the safety nets and compensation there is so much better than in the United States. And there, again, it's not--I don't think it's something that necessarily slows down change. I think it's--it often makes people more willing to take on risk, and in that way actually accelerates change.
Russ Roberts: Do you think Europe has as dynamic and innovative an economy as the United States? I don't think they do. I think part of the reason is it's very expensive to hire a worker, and hard to fire them. And, there's a high unemployment rate. And, we're headed in that direction--even faster, if you were in charge. Are you worried about that? And are you worried about that or do you think I'm misstating the reality of the European system?
Dani Rodrik: Well, I think you are misstating what's a very, very, very differentiated picture. I think countries like Finland and Sweden have the best innovation systems in the world, that works for the population at large, compared to the United States. I'm not--you know, I don't want to be defending everything that happens in Europe against United States. But in certain ways Europe has done a much better jobs of dealing with trade-displaced workers than the United States. Which was my limited point. And, we can discuss other aspects of Europe. But I think we need to make, we need to be clear that Europe is a very, very differentiated place, where some places are indeed, you know, doing much, much better in terms of the overall sort of non--you know, hard-to-quantify measures of human dignity and self-worth that we were talking about before.
Russ Roberts: Yeah. No, it's a big challenge, how to think about that carefully, obviously. Because, people on my side point out that Scandinavia has a large safety net, but government regulation perhaps is not as--well, it's certainly not--they're not Socialist in the industrial policy sense. And, they are small. And they are homogeneous. Is that relevant? We don't--I don't know. But that's a point that we would also want to keep in mind.
Dani Rodrik: Yeah. I mean--that's why, these comparisons really don't get us anywhere, because I think there are so many things when you look at these societies that are part of an entirely different system that has complementary elements. So, the United States is never going to be a Sweden or a Denmark, and I think that comparison is really not very helpful, other than to score some rhetorical points. [?]
Russ Roberts: Which both sides are capable of.
Dani Rodrik: No, no, I meant exactly--I meant both sides. So, I think the question is always to think about thinking at the margin of where you are, and we are talking mostly about the United States and what you think is feasible at the margin, with the experience of other countries like Scandinavia or Asia, you know, sort of presenting a sort of opportunity, a mind-opening opportunity. They are existence proofs that there are different models that are available; that there is not a single path. And that it doesn't mean that you should just simply copy what's there. It should just mean that you should perhaps be a little bit bolder in thinking about sort of how much progress you can make in redesigning institutional arrangements. And there I would submit, I think, the big difference between a market fundamentalist and people like me, is really--in the end it boils down to a kind of, I think, a temperamental difference: That market fundamentalists believe that the chances that you could make government and public action a force for good is very limited; and the people like me believing that in fact the government can be a force for the good.
Russ Roberts: Yeah; I'm not as optimistic about that as you are. I think that's one clear difference. I like your point about different institutional arrangements. I think the challenge is how to think about them: How do we judge them? How do we judge their viability in a different context? How do we judge their longer-term consequences? So, for example, you and I are both old enough to remember the 1980s. And, you were talking about the U.S.-Japan trade relationship. At that time, a lot of people who were not market fundamentalists argued that we should be emulating the Japanese institutional arrangement of government-business cooperation. The market fundamentalists said that's a bad idea. At the time, it looked like the interventionists--the cooperative, collaborative folks--had an argument on their side that Japan was thriving, doing very well with this much different relationship between business and government. You could debate whether it would work well in the United States, as well as it worked in Japan. But I think the more important point--or, not more important, but the one that's on my side, so I subjectively judge as more important; I apologize for that--but the other point was that that relationship didn't turn out to be as productive as it looked at the time from the outside. I think many would have now judged that as a very flawed system. So, I think some of the things that look they're working well in Europe, maybe won't be so sustainable. We saw that in Scandinavia. I think over a period of time they pulled back from their interventionist path and became more capitalist. At the time. That might not have been--their earlier policy might not have been sustainable. They're more nimble than we are. They try lots of different stuff, which I envy that at the governmental level. I wish we had the ability to put more stuff in place and get rid of it. We struggle with that, I think in the United States. But I do think that you have to be careful when you look at those, the variety of relationships--of institutional arrangements--because some of them turn out not to be sustainable.
Dani Rodrik: I think the people who were arguing that the United States should emulate Japan were still here and there. As silly as the people who argue that the United States should emulate Chinese-style state capitalism today. But I also think that their silliness is matched by those who would argue that there's absolutely nothing you can learn by those other experiences. And that the United States is so [?] generous, that there's absolutely nothing to learn from those instances.
Russ Roberts: Fair enough. Let's close by by talking about the future a little bit. We've talked about China policy in the past. We've had a number guests on this program recently talking about concerns about Chinese technology and how it might be used in authoritarian ways. I'm thinking about Amy Webb's episode on her book The Big Nine. What should be our stance vis-a-vis China? How nuanced should we--how much should we deviate from trade, free trade, and issues related to national security? Do you have any thoughts on that?
Dani Rodrik: Yes. In fact, I'm actually just working with a group of economists and lawyers, both from United States and China, to try to craft a middle path between two equally undesirable positions that dominate the conversation on U.S.-China today in Washington at least. One is the view that, essentially, China, is violating the rules of the game and not living by the commitments it made in the WTO. And therefore that the only feasible path forward is for China to go back and live by the rules of the international trade regime. And then, we are back on the deep integration path and everything else will be fine. The other view is one that is sort of dominated by people in the national security world, but which also finds resonance in people who want to argue for a trade war with China. And that's the view that China is a genuine threat for the United States and the only possible path forward is to seriously and critically disengage from China, in the hope that such a disengagement will not just protect the United States, but also push China down. So, I think we need a midway path between that sort of deep integration as viewed on the one hand, and the disengagement view on the other. I think that path would go something like the following. It would be--it's what I've called in different places a peaceful economic co-existence between the two countries. And, the analog is precisely the Cold War period, where once the Soviet Union and the United States understood that they could not dislodge each other, that the United States would never have a communist revolution and that the Soviet government was, therefore--would not be removed--then there was the acceptance that each regime had rights to its own system of government and that the systems would be different. And it produced--you know, it may not have been a pretty picture, but at least it prevented nuclear war, which is the most important thing. I think the analog for our day is for us to understand that China and the United States have different economic systems; that China will maintain this economic system which has paid off handsomely for its its citizens; and that this is not going to convert to a U.S.-type model. And that, China should be relatively free to employ its own trade and industrial policies to diversify and increase and upgrade its economy. And by the same token, that the United States has its own social contract, has its labor markets to worry about and has the integrity of its technological innovation system that it has to worry about; that it needs a similar policy space within which it operates. So, we limit the the international bargaining to those areas, where there are genuine begger-thy-neighbor concerns, or what are their genuine global commons concerns. But other than that, essentially it's a kind of accepting the co-existence of these two economic systems. I think that's the only way forward in terms of diminishing at least economic tension and ending the trade war between the two countries. Now, all of this is really just all about the economic domain. There is a perhaps bigger question as to whether the two countries can co-exist strategically and politically and militarily. But as I said, it's a separate question altogether.
Russ Roberts: My guest today has been Dani Rodrik. Dani, thanks for being part of EconTalk.
Dani Rodrik: Nice to talk to you Russ. Thanks for having me.