Dani Rodrik's weblog

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.

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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

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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

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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.

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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.  

 

 

My Twitter account has been hacked

In case you read some weird tweets on my @rodrikdani account.... it seems to have been taken over or hacked (as of around 3:30 pm today). The password has been changed and I cannot access it.

UPDATE: I have regained ownership of my account. The attack seems to have been the work of a pro-Erdogan Turkish group ("Ayyildiz Tim") which has also hacked the twitter accounts of many others. The lesson: turn on two-factor authorization.