Dani Rodrik's weblog

Follow my commentary

Even though I post here occasionally, my regular monthly pieces are published on the Project Syndicate website and you can read them here. For a full list of my opinion pieces, go here. My research papers and books are here and here, respectively. Finally, if you want to follow me in the news, check out here.   

IEA World Congress 2021

A few words on the International Economics’ Association online World Congress, July 2-6, on the theme “Equity, Sustainability and Prosperity in a Fractured World.” Here is the home of the World Congress where you will find details on all the info below, registration links, and more https://ieawc2021.org/

The IEA World Congress is co-sponsored by the Indonesian government and was originally scheduled to take place in Bali, Indonesia in July 2020. Due to the pandemic, we had to postpone it and it is now being held online, along with recorded sessions. Full online program is here https://ieawc2021.org/wp-content/uploads/2021/06/Congress_IEA_virtual_2021_programme-finalv9.pdf

Plenary speakers and panelists for the IEA World Congress include Sri Mulyani Indrawati, Mari Pangestu, Penny Goldberg, Rohini Pande, Eric Maskin, and Torsten Persson, and Joe Stiglitz. See full list of plenary and panel speakers here https://ieawc2021.org/programme/plenary-sessions/

We have in addition a large number of online paper sessions, among others on Politics and Identity, the State and Innovation, the Great Recession, Asia’s Economic Rise, Poverty and Inequality in Africa, Gender and Economics, History, Gender and Conflict, and many others. Full program here https://ieawc2021.org/wp-content/uploads/2021/06/Congress_IEA_virtual_2021_programme-finalv9.pdf

A few special sessions: Panel on “What Should an Economist Know?”, the Stiglitz Essay Prize award ceremony, the Amartya Sen Prize Award ceremony, HDR 2020 on Human Development and the Anthropocene, panel on “Translating Evidence into Action.” See times and registration links at https://ieawc2021.org/wp-content/uploads/2021/06/Congress_IEA_virtual_2021_programme-finalv9.pdf

In addition to live sessions, we have a large number of recorded paper sessions, where authors present 15 minute videos summarizing their research. Full list and videos are here https://ieawc2021.org/recorded-sessions/. For the full list of papers accepted to the World Congress by the Program Committee see https://ieawc2021.org/contributed-papers/

Finally, a big thank you to the Program Committee that made the IEA World Congress possible https://ieawc2021.org/programme-committee/ as well as to the outgoing IEA President Kaushik Basu!

I am thrilled and honored to be starting my term as President of the IEA at the end of the Congress.

Economics' race (and other) problems

There’s been much discussion in recent days about Economics’ race problem. Some of what has come out is quite disturbing. I have not said much, but I have listened and thought. Here are a few reflections I want to add.

It doesn’t surprise me that the field, as a whole, reflects the ingrained attitudes and practices of the society of which it is part. But there are some features of the discipline that magnify and aggravate the problem.

First, Economics is clubby. While good research does get recognized, the ability to produce good research depends on the networks one has access to. If you don’t start with those networks in place – a Ph.D. from a top department, a well-recognized advisor -- you start with a significant handicap that is difficult to overcome.

Second, the field is very hierarchical. This means that even if you are in the right networks, you feel you are constantly being evaluated and ranked. Partly as a result, even top economists are a weirdly insecure bunch. This self-absorption reduces the generosity and mentoring that junior members of the profession receive.

Third, and let’s be honest, there are too many jerks in the discipline. Reputation hangs on your publications, and if you are doing well there relative to your peer group – which could be the profession as a whole or simply your own department – you can get away with a lot of awful personal behavior.   

Take all these together – the clubbiness, hierarchy, and jerk quotient – it is not surprising that so many people in the discipline, especially people of color and women, feel slighted and discriminated against. The only way things can change is by discussing these problems openly and instilling new norms of behavior, which is why the ongoing discussion is so important.

We all have responsibilities here--but change must start with senior scholars. I am grateful to all those who have spoken out – sometimes at some risk to their career – and made us all so much more conscious of the urgency of the task.      

Announcing the US-China Trade Policy Working Group

Concerned about where the US-China trade relationship is going, we recently formed a “US-China Trade Policy Working Group.” Yang Yao, Jeff Lehman and I are co-conveners. Other members are Meredith Crowley, Robert Howse, Jiandong Ju, Feng Lu, Justin Yifu Lin, Eric Maskin, and Rob Staiger. We released our statement today.

The statement is signed by 27 additional economists and legal scholars, including Philippe Aghion, Kaushik Basu, Robert Engle, Gang Fan, Robert Frank, Gene Grossman, Gordon Hanson, Ann Harrison, Kala Krishna, Ned Phelps, Alvaro Santos, Greg Shaffer, Anne-Marie Slaughter, Mike Spence, Joe Stiglitz, Michael Trebilcock, David Trubek. That is 5 Nobelists in all, in case you are counting!

The basic idea is that we need a different narrative about how the two nations can resolve their differences. Neither convergence nor decoupling will work. We propose a middle path between these extremes that prohibits explicitly beggar-thy-neighbor policies but is otherwise permissive of policies that may create cross-border spillovers.

Under our guidelines, engaging in monopoly conduct, predatory pricing, or rent-shifting on world markets would be expressly prohibited while policies that protect domestic economic arrangements (e.g., industrial policies or social safeguards) would be allowed (unless they fall in the previous category).

We argue that nations are entitled to engage in trade policies that protect their economic models. But they are not allowed engage in policies designed to make other countries change their systems (trade wars) or that benefit them only through the adverse effects they have on others (BTNs).  

While we provide a new conceptual vocabulary for the two countries to address their differences, we do not prejudge the outcomes on any specific dispute. That is for the countries to figure out, using the approach we propose. See full statement here. A Bloomberg news piece about our effort is here.

Some (very brief) words for graduates

I was asked to provide in less than 3 minutes some inspirational and aspirational comments to graduates at the University of York this month, on the occasion of being awarded an honorary degree from the University. This is what I intended to say, though I think I forgot to include some of it when I rose up to make my remarks.

As graduates, you are part of a small minority of the world’s population whose lives will be shaped by decisions you make, individually and collectively, instead of decisions made for you.

What can an economist like me advise you? As economists, our advice has not always been, shall we say, problem-free. As a great economist once said, god created economists to make astrologers look good. I can only offer a few principles I’ve tried to live by.

Question the truth; but don’t give up the search for it. Be a skeptic, not a cynic. 

Seek wisdom; shun cleverness. It’s the first that will get you where you want to go. 

Learn from history and respect tradition. But use them to grow your imagination and expand the range of the feasible in the present and future.

Be suspicious of conventional wisdom. By the time an idea becomes conventional wisdom, it is almost always wrong, because so many of the caveats and limitations have been shoved aside. 

Always ask for a second opinion. And never take what an economist says, about these or anything else, as the final word. 

Congratulations. 

Economics for Inclusive Prosperity (EfIP)

We launched today a new initiative for academic economists that we hope will make the discipline of Economics more relevant to today’s pressing policy problems. The initiative consists of a network called Economics for Inclusive Prosperity (EfIP) with an initial set of 10 policy briefs. The briefs open with an introductory statement of our philosophy and go on to specific policy recommendations for finance, trade, labor markets, social policy, technology policy, and political institutions. The network is co-directed by Suresh Naidu, Gabriel Zucman, and me, and has 11 additional founding members. We hope to expand the group and we will add more policy briefs in the months ahead.

As we state in our introduction, we believe

mainstream economics – the kind of economics that is practiced in the leading academic centers of the country – is indispensable for generating useful policy ideas. Much of this work is already being done. In our daily grind as professional economists, we see a lot of policy ideas being discussed in seminar rooms, policy forums, and social media. There is considerable ferment in economics that is often not visible to outsiders. At the same time, the sociology of the profession – career incentives, norms, socialization patterns – often mitigates against adequate engagement with the world of policy, especially on the part of younger academic economists.

The problem is compounded by the lousy reputation Economics has acquired among proponents of an inclusive economy. Too often the discipline is viewed as the source of the policies that have produced the excesses and fragilities of our time. Mainstream economics and neoliberalism are viewed as one and the same.

We beg to differ:

Many of the dominant policy ideas of the last few decades are supported neither by sound economics nor by good evidence. Neoliberalism – or market fundamentalism, market fetishism, etc. — is a perversion of mainstream economics, rather than an application thereof. And contemporary economics research is rife with new ideas for creating a more inclusive society. But it is up to us economists to convince their audience about the merits of these claims.

As important as specific policy prescriptions in different domains of economics are, we also have a bigger claim: our essays produce overarching themes that taken together provide a coherent overall vision for economic policy that stands as a genuine alternative to market fundamentalism. This is a vision that rejects the reliance on competitive equilibrium as a realistic benchmark, understands that the world is always second-best, highlights the role of power imbalances in shaping existing institutional arrangements, and emphasizes the need for imagination in devising alternatives that are both more inclusive and more conducive to prosperity. We strive for a whole that is greater than the sum of the parts.

We do not intend to duplicate the excellent work being done in policy think tanks in Washington, D.C. and elsewhere. Many economists engage with these think tanks and their ideas get airing through them. Our initiative is different in that it is a network of academic economists. We are committed to policy proposals based on sound scholarship. But we also care about what these policy ideas imply in turn for the way in which we should practice Economics in the class room and in the seminar room. And we are less influenced by immediate political constraints or opportunities of the policy scene in Washington, D.C.   

We believe Economics can be an ally of inclusive prosperity. That is why we have embarked on this project. The initial set of policy briefs on the EfIP website is our first step. We hope they will stimulate and accelerate academic economists’ sustained engagement with creative ideas for inclusive prosperity and that we will be able to follow up soon with an even richer set of policy discussions.

Economists' statement in support of Atif Mian

It is with dismay that I learned recently that Princeton's Atif Mian, one of the greatest scholars on finance and macroeconomics I know, was disinvited from Pakistan's Economic Advisory Council because of his religious beliefs. See here and here for more background.

Timur Kuran and I have put together a statement, along with many friends who support Atif. The statement is below. We already have more than 90 signatories, including 26 economists working in Pakistan and 8 Nobel Prize winners. Any academic economist wishing to add his/her name to the list of signatories should send Timur Kuran or me a note.

Economists’ Statement in Support of Atif Mian

We, the undersigned economists, believe that Atif Mian would be a fantastic addition to the Economic Advisory Council (EAC) of Pakistan. Professor Mian is a first-rate economist with expertise in development economics, financial economics, and macroeconomics. Given this expertise, we believe that his participation in the EAC would be valuable for policy-makers, and his advice would improve the lives of the broader population of Pakistan. 

Members of the Pakistani government pressured Professor Mian to resign from the EAC because of his religious beliefs. The decision by the Pakistani government to ask Professor Mian to resign from the EAC deprives the government of top economic talent. We express disappointment and disapproval of the decision to pressure Professor Mian to resign because of his religious beliefs. Such discrimination on the basis of religion should not play a role in deciding who can best serve the country.

For the full list of signatories, see here.

UPDATE (9/12/18): The signatures keep coming in. We are now at a total of 237 signatures, including many of our profession's leading names. The list of additional signatories is here.

UPDATE (9/17/18): We now have a total of 282 signatures. The updated, final list is here.

My preface to Santiago Levy's Book: Under-Rewarded Efforts -- The Elusive Quest for Prosperity in Mexico

A few years ago as I was finishing up my book Economics Rules: The Rights and Wrongs of the Dismal Science (Norton 2015), I realized that the manuscript contained a serious omission. I had written at length about how and why economists misuse the powerful tools of their discipline, but had said little about the successes. So I decided I would open the book with three vignettes of economics at its best. Each vignette would have its hero: an economist who combined economic models with real-world judgement to make life better for lots of people. 

Santiago Levy was one of the three heroes I chose. (The names of the other two heroes will let the reader gauge how demanding was the standard I applied: John Maynard Keynes and William Vickrey.) Santiago was the principal force behind the anti-poverty program Progresa in Mexico that quickly became a model for many other countries. This was an innovative, incentive-based program that was novel at the time, in 1997. It replaced inefficient price subsidies with direct cash grants to poor families as long as their children were kept in school and received periodic health checks. So successful was the program that subsequent Mexican political administrations would seek credit for it by renaming it; hence Progresa would turn into Oportunidades, which eventually became Prospera. 

When sound economics is combined with a practical, pragmatic bent it can be a potent force for good. There are very few people who are as good a living embodiment of this as Santiago Levy. I learned this a very long time ago, during the late 1980s, when I found myself on a visit with him to Bolivia. We were both young and inexperienced. But what stood out with him, even back then, was an imaginativeness and creativity in policy that were sorely missing from the academic literature I was steeped in. I don’t remember much about our assignment, but I have vivid memories of Santiago bursting with out-of-the-box ideas.  

Santiago has been puzzling for a very long time about the paradoxes of Mexico’s economic performance. And what a major puzzle the country poses to received wisdom about development policy!

The country has made major strides in social progress – thanks not least to Santiago’s own efforts as policy maker and advisor. School attendance has increased greatly, while educational quality has improved. Fiscal and monetary policies have ensured a stable macroeconomy and have kept financial crises at bay. No country has tried harder to integrate into the world economy.  And yet in overall productivity, the gains have been very meager. Since 1996, Mexico’s economy has expanded at barely over 1 percent per year in per-capita terms, and labor productivity has grown at less than 0.5 percent.

Santiago points his finger to the persistent (and worsening) misallocation of resources as the culprit for Mexico’s poor productivity performance. Simply put, labor and capital do not go to the most productive firms. The best performing firms in Mexico are doing very well indeed – in all respects except for increased employment. The underperformance of the less productive parts of the economy undoes whatever progress the better performing parts generate.

Santiago’s conclusions are based on a rich, firm-level analysis using census and employment data and covering millions of firms since the late 1990s to 2103. He documents that productive heterogeneity actually increased over this time: there is more informality, larger productive differences, and greater gaps in firm size. But this is not a simple and oft-told story of formal versus informal sectors. Santiago shows that the constitutionally-mandated difference between “salaried” and non-salaried” workers does more of the work in accounting for misallocation than the traditional formal/informal divide. For example, small or informal firms need not be less productive than large firms if they are employing salaried workers (albeit illegally). 

Santiago Levy’s meticulous diagnostic work leads him to conclude that the policy failures behind these patterns are highly specific to Mexico. He draws attention in particular to three different facets of the Mexican policy environment: social insurance mechanisms, tax policies, and poor contract enforcement. Together, these elements conspire to produce a disproportionate burden on formal, large, salaried firms while effectively subsidizing non-salaried workers. He shows that these policies have had larger adverse effects over time in recent decades. Santiago emphasizes that this is not a book policy. But readers will find a rich policy menu here, targeted at real problems of productivity.

The thesis of the book is as challenging as it is fascinating. It is not only a rebuke to the standard view that open trade, stable macroeconomics, or investment in human capital are enough to generate rapid growth.  Santiago also argues the attempt to provide broad social insurance to the Mexican people has backfired by taxing the more organized, more productive segments of the economy.

This is applied development economics at its best. We would not expect less from Santiago Levy.  

More on distinguishing ideas and interests -- an exchange with Peter Hall

My recent post on ideas versus interests elicited some comments from Peter Hall, my Harvard colleague who has done probably more thinking on this issue than any other scholar I know. With his permission, I am attaching these comments below, along with the brief subsequent exchange we have had.

________________________________

Dani,

A few quick thoughts inspired by your recent blog post on ideas and interests.  As you know, this is a topic that has long interested me.  These are rather cryptic thoughts (ars longa, vitae brevis) but I pass them along in case they are stimulating.

You are, of course, right to observe that interests are always interpreted (by ideas), i.e. they do not arise unambiguously from the material world.  And I think you are on the right track when you contrast the ‘ex ante’ account from interests with an ideas account of outcomes. 

But one might put even more emphasis (than I gather you do?) on the implication, which is that people always act based on both their ideas and their interests.  That is to say it is impossible to have perceptions of interest without ideas (and it is those perceptions of interest rather than the interests in themselves that motivate actors). 

Thus, claims that people are acting on their ‘interest’ are, in effect, claims that they are acting in line with some conventional set of ideas about what those interests are.  The classic example would be analyses that attribute to actors a set of interests that a conventional understanding of neoclassical economics would ascribe to anyone in their socioeconomic position.  The implicit claim of such analyses must be that those actors understand their position in that way, i.e. in line with these conventional ideas.

On my reading, this is what you mean when you associate interest-based arguments with a ‘parsimonious’ account of the attributes of the actors.  I do wonder whether parsimonious is the correct characteristic to highlight here (ie thinness vs thickness) since the ideas that underpin such action can be rather ‘thick’ (in the sense of depending on a relatively elaborate worldview).  The more important point, I think, is that these actors operate out of a worldview that can readily be seen as ‘conventional’ (in the sense of that term that it is widely-accepted as orthodox).

Now, there may be small sets of actors who in certain circumstances act against their ‘interests’ in the sense that they realize, by virtue of the ideas they hold, that they will lose something they value (material goods, power, etc.) by so acting.  And those actors might do that as a result of holding (other) sets of ideas, eg. of the sort associated with some sort of ‘altruism’.  Soldiers who sacrifice themselves in battle might fall into that category.  However, I suspect that this is a very small category of people and, in many instances, as your argument intuits, such people could be said to have an unconventional view of their interest which dictates their action.

To continue then with the main account, if my view is correct, it becomes interesting to inquire about the role of ideas when there is (some kind of) contestation about precisely what is in the interest of the actors.  In your terms, these are cases in which ideas become salient to action And it turns out that is a relatively-common occurrence.  Thus, ideas often have influence over action, and the key problem is to explain (make claims about) why some ideas become influential in specific contexts while others do not.

With regard to that problem, it must surely be the case that a specific set of ideas (relative to other ideas) are more likely to become influential when they bear directly on the interests of the actors (understood as gains/losses of power or goods that the actor values).  Actors usually gravitate toward ideas that seem to them to serve their interests, understood in this stripped-down fashion. This is why interests and ideas typically bear together on action. 

What sorts of implications follow from this?

• The Germans are probably not acting out of ‘interest’ independently of ideas. They are influenced by (Hayekian) ideas that tell them that their current posture is in the national interest as they construe it.  And, if we want to think of the latter as some sort of stripped-down ‘material’ interest, we have to bear in mind, first, that this conception of material interest is itself underpinned by an explicit set of ideas and, second, that there are other ways to interpret national interest and even material national interest.  For instance, policies that provoke a second Euro crisis might not ultimately be in that interest.  In other words, your initial point that all ‘interests’ must be interpreted by ‘ideas’ means that we cannot claim that interests trump ideas in instances such as this.

• Although ideas are, on this view, important in all cases, we can detect, as you argue, instances that are distinctive by virtue of something about the prominence of the role that ideas play in them, such as the case of the Reagan tax cut. The issue is: what is distinctive about such instances?  I would argue it is not that ideas are somehow more important than interests in such instances.  After all, making the tax cuts was very much in the political interest of the Reagan administration.  What is distinctive is that there was contestation, with significant numbers of partisans on each side, about how to interpret (in this case) the economic interests of the populace.  It is the presence of contestation, rather than the importance of ideas, that distinguishes this case.

• My bottom line is that the analytical way forward is not to ask: ‘can we distinguish cases in which ideas were more important or influential from cases in which they were not?’ but rather to ask: ‘how might we best distinguish between situations in which ideas play a somewhat different role in the interaction between interests and ideas that underpins all action?’.

Don’t hold me to this.  These are difficult issues and I find my views on them changing over time.  But I hope this is stimulating.

Peter

____________________________

Dear Peter

Thank you very much for this. It is incredibly helpful, and I agree with much of it.

I am all for pursuing the agenda you set out at the very end – tracing out the different ways in which ideas affect interests and their interaction with prevailing ideational environment. But I would like to resist the formulation where interests are always subservient to ideas, which this approach presumes. There is a sense in which this is true, and you put it very well yourself in your note. A statement of the form, “the industry pursued its interest” must have some meaning, even though at the end of the day what we really mean to say is “the industry pursued its interest, as it perceived its interest to be.”

We are often concerned with explaining changes. Why did an actor change its behavior? There is substantive difference, it seems to me, between two sort of explanations:

• an explanation that relies on behavior in the context of an unchanged understanding of what the actor’s interests are. The actor’s utility function and its understanding of how the world works stay the same, but there are changes in the world it confronts. For example, the constraints it faces are altered.
• An explanation that relies on a change in the actor’s understanding of what its interests are. The actor’s utility function changes or its understanding of how the world works is altered.

The distinction I would like to make is that case (a) is what many realists have in mind in IR or rational choice political economists tend to focus on. And I think it is OK to call these cases interest-driven cases.

Case (b) would fall in my ideational category.

Just like you, I am not sure about any of this. But we should try to figure out a way of thinking these issues more.

Best

Dani

______________________________

Dani,

What you say makes excellent sense.  Focusing on cases of change is very promising.  And the distinction you draw between (a) and (b) a compelling one.  I agree that ideas do not trump interests.  The latter are just as important to be sure.

Of course, some of the most interesting cases are ones with features of both (a) and (b), i.e. constraints/opportunities in the world change and (partly by virtue of that) there is consideration, albeit not always adoption, of new ideas.  But the distinction strikes me as an excellent starting point.

Peter

 

 

 

Has Global Finance Reformed Itself More Than It Appears?

The answer is yes, according to Ilene Grabel in her fascinating new book When Things Don't Fall Apart. I wrote a preface for the book, which is reproduced below. It explains why I liked the book so much.

It happens only rarely and is all the more pleasurable because of it. You pick up a manuscript that fundamentally changes the way you look at certain things. This is one such book. Ilene Grabel has produced a daring and delightful reinterpretation of developments in global finance since the Asian financial crisis of 1997–1998.

The book addresses, and resolves, a long-standing puzzle: Why has our present model of financial globalization been so resilient, despite an abysmal track record that includes the most severe global financial crisis since the Great Depression, recurrent sovereign debt crises (in Latin America, East Asia, Russia, and Turkey), and many other disappointments (such as capital flowing “uphill” from poorer to richer nations)? How is it that we have not jettisoned this model for something that is more sensible and works better?

Professor Grabel’s insight is that those of us who were looking for signs of change have had the wrong idea about how real reform often happens. We have been mistaken in searching for evidence of wholesale, programmatic reconsideration of the rules of global finance. Systems of governance rarely change through established blueprints, a master plan, or radical reforms. And besides, such a reform path would suffer from the same kind of hubris that the neoliberal playbook produced.

Instead, she suggests, it is the cracks in the consensus, the local heresies, and the small departures and innovations that matter and lead us in an altogether novel direction. Inconsistency, ambiguity, and incoherence are useful and productive—they are a feature, not a bug.

Thus, Professor Grabel builds a case for a gradual, evolutionary change in the global financial system and argues that there is at least as much evidence for this alternative thesis as there is for the regime-continuity thesis. The Asian financial crisis may have given the IMF new powers, but it also set in motion defensive moves on the part of developing countries, such as self-insurance through reserve accumulation and mutual swap arrangements. The G-20 and Financial Stability Board may have been largely ineffective to date, but there are signs they can evolve into experimental, networked forms of global financial governance accommodating greater developing-country influence. The IMF itself has not been overhauled, but it has changed: it no longer treats capital controls as taboo, has distanced itself from austerity, and pays increasing attention to social safety nets. And look at the new institutions that have been created—regional reserve pooling arrangements, development and infrastructure banks—and the forum-shopping benefits they confer to client states.

Put all of this together and we have what Professor Grabel calls a move toward “a more complex, fragmented, and pluripolar direction” in international financial governance, “driven in large part by initiatives from below rather than from above.” The evolving system is one that provides greater policy space, enables “unscripted innovations,” and makes “pragmatic adjustments not dictated by an overarching scheme of economic organization.”

The book’s deeper argument about how regimes really change is as interesting as the specific details of the case of international finance. Here looms the large figure of Albert Hirschman. As Professor Grabel is happy to remind us at every turn, her argument is very much a Hirschmanian one. Hirschmanian motifs—the advantages of improvisation, surprise, incrementalism, and pragmatism—are all over the book.

But to say that the book owes a debt to Hirschman is to undersell it. The Hirschmanian perspective has rarely been deployed so well and to such great effect. The reason Hirschman never developed a school of thought, as he himself well recognized, is that his thinking did not lend itself to emulation and replication. The flashes of brilliance, the unexpected turn of argument, and the relish of paradox that characterized his style spawned admirers but not followers.  But we have all of those in this book. Professor Grabel has produced not only an extensively researched book but also one that is tremendously fun to read.

My colleague Roberto Mangabeira Unger likes to say that universal orthodoxy cannot be defeated solely by local heresies; overcoming it requires a universalizable heresy. Professor Grabel disagrees, as would Albert Hirschman. She would be the first to acknowledge that the incremental innovations she discusses in the book do not, in her words, “come close to displacing neoliberalism from top to bottom.” But the neoliberal consensus is gone, the institutions that uphold it have become more agnostic and flexible, and new arrangements have sprung up. We do not yet know where the international financial system will end up. Professor Grabel says this is as it should be: enjoy the Hirschmanian moment, and keep your fingers crossed that sanity and common sense will prevail.

Telling interests and ideas apart

A long standing debate in the social sciences is whether behavior is driven by “interests” or “ideas.” The debate is central in political science, where it plays out as an argument between realists and constructivists. It is less well articulated in economics, to the discipline’s detriment. (See here for my thoughts on what economists would gain by taking the role of ideas seriously.)

As constructivists like to point out, interests are “congealed ideas.” Or to put it differently, we don’t have interests; we have ideas about what our interests are. Perhaps it’s all about interests in the short run and it’s all about ideas in the long-run.     

But if so, is there an analytically meaningful distinction between ideas and interests? And could we ever distinguish empirically between cases where outcomes are driven by interests as opposed to ideas?

I have never seen a good treatment of these questions. The two sides of the debate tend to talk across each other. In particular, both realists and constructivists tend to associate the interest-based perspective with rational-choice modeling, which is neither correct nor helpful.

A couple of years ago, I taught a seminar at HKS where the students and I discussed these questions in different domains – civil conflict, international trade, finance, human rights, and many others. It was a useful experience which helped my thinking along, though it also showed how tough it is to sort out the issues involved.

I plan to return to teaching and writing on this topic, but in the meantime here are a few ideas.

Let me begin my interest-based theories. Such theories are characterized by:

·        a parsimonious specification of agents’ characteristics

o   based on economic (industry, occupation, etc.), social (class), or personal (dominant ethnic/identity marker) status;

·        a mapping from these characteristics to behavior through a payoff function;

·        usually, though not always, a game in which agents interact. 

Therefore we can say outcomes are “interest-based” when they are the direct result of agents’ ex ante characteristics. More specifically,

·        these characteristics must be salient ex ante

·        there must be a tight mapping from these characteristics to perceived payoffs

·        the setting must not admit plausible alternative “causal models”

An important note: the payoffs need not be exclusively material/economic. Saying that behavior is driven by interests does not imply that individuals care exclusively or mostly about their incomes/consumption. These interests could also be defined in terms of cultural values or identities. A Catholic group that is lobbying against abortion is acting in its own interest. Yes, this is a result of some strongly held ideas (interests are indeed “congealed interests”). But individuals or groups favoring their material interest do so also because they think (they have the “idea” that) this is what they should be striving for.     

When are outcomes driven by ideas instead? When behavior cannot be directly predicted by interests as defined above, and when we can trace the impact of prevailing discourses/narratives on changing how interests are perceived. In particular,  

·        we must show ideas have independent traction, by delineating causal chain from ideas to how

o   they shape worldviews,

o   render salient identities, or

o   expand strategy (policy) space

·        importantly, we must also show influence of those ideas cannot be predicted from ex ante salient characteristics/markers of agents.

This way of thinking provides us with a way to testing interest-based arguments. We ask:

·        Are the individual characteristics that define preferences (and produce behavior in question) ex ante salient?

o   such as social, ethnic, or class identity, occupation, sector, weights on material versus other goals, etc. 

·        Is the strategy space ex ante determinate?

·        Are all the relevant options already on the table?

·        Is there unique, plausible model of the world?

o   or are there alternative models that could be plausibly considered?

Applying the framework

I provide two brief applications to show how this works. In the first case, the Reagan income tax cut of 1981, evidence suggests it was ideas that was dominant. In the second case, German support for austerity policies in the euro zone, I argue it was interest.

Reagan tax cut of 1981

This is typically viewed as the result of big business interest in low taxes. And it is true that business eventually became a supporter of low taxes on personal incomes. But as Monica Prasad among others has shown, business opposed those tax cuts in 1980. They were more concerned about cutting the deficit than about the provision of supply-side incentives. In Prasad’s (2012) words, “the record could not be clearer that business groups opposed Kemp-Roth.”

Ideas appear to have played a crucial role in changing perceptions of interests; it was all about selling a new model of how the world works. Here the policy entrepreneurship of Jack Kemp, Art Laffer, Jude Wanniski was particularly important. The Laffer curve may have been a gimmick, but it was effective in packaging, marketing and framing the tax cut proposal.

Most importantly, it convinced Reagan not only that personal tax cuts would improve incentives, but they would raise revenue. Business remained skeptical, and became a convert to the idea afterwards, once the tax cuts were passed. In other words, income tax cuts did become an interest for big business, but only eventually. It is difficult to attribute the actual reform to interests of big business or any other organized group. It was ideas that seem to have made the difference.  

German support of austerity policies in euro zone

This is typically presented as the result of peculiar German ideas on economics: “Americans are from Keynes; Germans are from Hayek.” But one can present a counterargument that stresses the primacy of interests instead.

Note that Germany had strong ex ante salient characteristics that produced an “interest” in austerity:

•       Germany was structurally a strong country (with a current account surplus and full employment)

•        therefore was not in need of explicit stimulus unlike e other countries in the euro zone

•        in any case there were already strong counter-cyclical stabilizers in Germany, which did produce the intended fiscal expansion

•       euro-wide expansionary policies would mainly serve to help/bail out indebted countries

•       the hyperinflation experience had produced very high weight on inflation avoidance

•        yes, an idea, but one already embodied in ex ante preferences

•       Germany had no apparent desire for deepening political integration (which austerity policies would serve to undermine)

Therefore it was in Germany’s interest to pursue austerity policies.

***

You can agree or disagree with the arguments in these specific cases. What I am more interested in is the analytical distinction between interest- and ideas-based outcomes. It seems to me that any meaningful, non-tautological distinction must rely on the empirical leverage provided by interest-based theories’ reliance on a parsimonious set of attributes/characteristics of agents.

If we can predict outcomes based on these characteristics, by showing that they were salient ex ante and that they directly led to the behavior in question, we can argue that interests win the day. (Once again, these interests need not be material or selfish.) If we need to appeal instead to reconceptualization of objective functions or altered worldviews, and can show that specific ideas were responsible for that, then it is ideas that have the upper hand.