Dani Rodrik's weblog

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.

The Economics Debate, again and again

The debate on the economics profession – its alleged ills and failings -- abates at times, but never ends. A recent piece in The Guardian taking the profession to task for its lack of reform has prompted a response from a group of economists. I thought it was time to re-up my own views on this debate, in the form of two sets of ten commandments. The first set is directed at economists, and the second to non-economists.   

Ten commandments for economists

1.      Economics is a collection of models; cherish their diversity.

2.      It’s a model, not the model.

3.      Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes.

4.      Unrealistic assumptions are OK; unrealistic critical assumptions are not OK.

5.      The world is (almost) always second-best.

6.      To map a model to the real world you need explicit empirical diagnostics, which is more craft than science.

7.      Do not confuse agreement among economists for certainty about how the world works.

8.      It’s OK to say “I don't know” when asked about the economy or policy.

9.      Efficiency is not everything.

10.  Substituting your values for the public’s is an abuse of your expertise.

Ten commandments for non-economists

1.      Economics is a collection of models with no predetermined conclusions; reject any arguments otherwise.

2.      Do not criticize an economist’s model because of its assumptions; ask how the results would change if certain problematic assumptions were more realistic.

3.      Analysis requires simplicity; beware of incoherence that passes itself off as complexity.

4.      Do not let math scare you; economists use math not because they are smart, but because they are not smart enough.

5.      When an economist makes a recommendation, ask what makes him/her sure the underlying model applies to the case at hand.

6.      When an economist uses the term “economic welfare,” ask what s/he means by it.

7.      Beware that an economist may speak differently in public than in the seminar room.

8.      Economists don’t (all) worship markets, but they know better how they work than you do.

9.      If you think all economists think alike, attend one of their seminars.

10.  If you think economists are especially rude to non-economists, attend one of their seminars.

I have spent enough time around non-economists to know that their criticism often misses the mark. In particular, many non-economists tend not to understand the value of parsimonious modeling (especially of the mathematical kind). Their typical riposte is: “but it is more complicated than that.” It is of course. But without abstraction from detail, there cannot be any useful analysis.

Economists, on the other hand, are very good at modeling but not so good at navigating among their models. In particular, they often confuse a model, for the model. A big part of the problem is that the implicit scientific method to which they subscribe is one in which they are constantly striving to achieve the “best” model.

Macroeconomists are particularly bad at this, which accounts in part for their dismal performance. In macroeconomics, there is too much of “is the right model the classical or the Keynesian one” (and their variants), and too little of “how do we know whether it is the Keynesian or the classical model that is the most relevant and applicable at this point in time in this particular context.”  

Taking a Crack at Neoliberalism

Here is the back story for my new piece “Rescuing Economics from Neoliberalism,” just out in the Boston Review.

I have never been a fan of the term “neoliberal.” It has never been quite clear what it means. Nor is it obvious who today’s neoliberals are. Thatcher, Reagan, Pinochet in their day, yes. But today?

Nevertheless, the term is widely used by its many critics to condemn in quite broad brush terms a certain way of thinking of the role of the market in society. There are more careful exegeses that give neoliberalism a more precise meaning and a specific historical trajectory (see here and here). But in public discourse the term has become a loose cannon – or to use perhaps a more appropriate metaphor -- a spray gun directed at one’s intellectual opponents.

I was happy to keep myself out of the ring on what neoliberalism is or isn’t. Then a few months ago Leon Wieseltier wrote to me out of the blue, and effectively cajoled me to write to a piece on the subject for what was going to be his new journal. He had seen the galleys of my new book which had apparently convinced him that I was the man for the job. So I set myself upon the task.

As it turned out, Wieseltier’s new journal was cancelled before its first issue came out. (In case you have missed it, here is the story). His publishers were kind enough to release the rights for the piece, and Josh Cohen was nice enough to want to publish it in the Boston Review.

Here is the core of it:

That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that center-left politicians—Democrats in the United States, Socialists and Social Democrats in Europe—enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization, and individual enterprise? Much of our contemporary policy discussion remains infused with norms and principles supposedly grounded in homo economicus.

But the looseness of the term neoliberalism also means that criticism of it often misses the mark. There is nothing wrong with markets, private entrepreneurship, or incentives—when deployed appropriately. Their creative use lies behind the most significant economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism’s useful ideas.

The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. A proper understanding of the economics that lies behind neoliberalism would allow us to identify—and to reject—ideology when it masquerades as economic science. Most importantly it would help us develop the institutional imagination we badly need to redesign capitalism for the twenty-first century.

For the full piece, go here.

PS. Many thanks by the way to Adam Kirsch and Lev Mendes for their work on the original piece.

What’s Wrong With Our System Of Global Trade And Finance?

That is what John Judis wanted to talk to me about, and we did. This over at TPM is what came out.

By the way, Judis' book on populism is great. It makes an important distinction between right-wing and left-wing populism, a distinction that I have used as well.

Why Did So Many Cheer Turkey's Democracy While It Was Dying?

Claire Berlinski’s excellent account of the Western (and domestic) observers who cheered on as Turkey was sliding into authoritarianism reminds me of a point I long wanted to make.

There was in Erdogan’s early years some reason to be confused as to what was going on. Was he a Muslim democrat who was essentially the Turkish equivalent of a European Christian Democrat? Or was he an authoritarian at heart who would resort to repression as soon as he had sufficient control?

We know the answer now. But at the time there was perhaps what an economist would call an “observational equivalence” between the two scenarios.

In his early years, Erdogan was not sufficiently secure in power. Remember that as late as 2008, his party barely escaped closure thanks to a very narrow constitutional court decision. The first five years or so of his coming to power were years of transition, from the secular elites to the AKP-Gulenist alliance. During the transition, Erdogan naturally sought allies among the liberals and the West. But beyond that, the transition opened up space for political discussion and debate in ways that had long escaped the country. The old guard’s power was weakening while Erdogan had not yet consolidated his power. The former could not put the lid on the new developments, while the latter was not strong enough (yet) to crush all potential opposition.

So at the time it may have been genuinely hard to tell where Turkey was really headed – greater democracy or simply a new set of authoritarian elites.

What also contributed to this was that Erdogan, whose reference point was Islam and Ottoman flowering rather than Turkish nationalism and the Young Turks, did not share the secularists’ taboos on two long-festering issues – the Armenian genocide and the Kurds’ demands for greater autonomy. This allowed much greater freedom to discuss those issues than had been the case under the secularists, adding to the appearance of democratic flowering.

To distinguish between the two scenarios, you’d have to look very carefully beneath the surface. Until 2010, I was among those who gave Erdogan the benefit of the doubt. But then I was not writing on Turkey’s politics and did not feign any expertise in it. When I started to pay more attention as a consequence of the Sledgehammer case in early 2010, the true nature of the Erdogan and his Gulenist allies became alarmingly clear. This was not just a massive power play aimed at current and potential opponents. It represented the wholesale undermining of the rule of law. Erdogan was at worst behind it, at best knowingly complicit in it.

In any case, by 2011 there was absolutely no excuse for the commentators Berlinski mentions (and many others) to be singing the democratic tune. I have yet to see a single one of them provide an apology or an honest account of how/why they got it wrong.

Prudential regulation, capital controls, and second-best

A usual argument against the use of capital controls as a prudential measure is that it is always better to tackle problems at their source rather than trying to deal with symptoms.  This is called the principle of economic targeting in Economics, one of the discipline’s most powerful teachings. The problem with indirect remedies is that they create problems themselves, “by-product distortions” in Econ-speak. With capital controls, those would be corruption and the discouragement of trade and other flows that are not necessarily a problem.

Hyun Song Shin essentially relies on this principle when he argues against capital controls (in a speech yesterday in Washington, DC):

The lesson is to distinguish underlying causes from outward symptoms. Yes, the 2008 financial crisis was in large part a cross-border phenomenon, but focusing on capital flows confuses the symptoms (capital flows) from the underlying causes (excess leverage and funding risk). If the problem is excessive bank leverage and funding risk, then address these risks directly with traditional microprudential, or regulatory tools.

This argument always reminds me of opponents’ argument about why gun controls are not needed: “it’s not guns that kill people; it’s people.” The implication is that we should target the criminals and not the guns. Of course, if we could perfectly regulate the behavior of future criminals, we would not need controls on the sale of guns directly. But most of us are reasonable enough to realize that we have imperfect control over the behavior of gun owners and so we think direct gun controls make sense.

Similarly, if one could design the perfect prudential regulatory regime, targeting all the relevant distortions at source and adjusting pre-emptively to all future financial innovations, then indeed we would not need direct controls on capital flows. But if we cannot, and we surely cannot, we need to work on as many margins available to us as we can. That is why capital controls belong in the arsenal of sensible policy makers.

One of my favorite aphorisms is “the world is second best, at best” (due to Avinash Dixit). It tells us that first-best logic can be misleading in the real world. Interestingly, Shin himself starts his speech by reminding us of the second-best theorem. But then he goes on to apply a first-best argument to dismiss capital controls.

Trade, redistribution, and social dumping

I just saw this response from Joel Trachtman to my column "Too Late To Compensate Free Trade's Losers." Trachtman argues that "the fundamental problem of winners and losers will not be solved by these changes."

I do not disagree. But the fundamental political problem with trade is not there are winners and losers -- the domestic market generates much greater job churn and dislocation than trade does. It is that it generates unfair redistribution, or at least redistribution that can be legitimately perceived as unfair, when goods cross jurisdictional boundaries.

As I explain here:

It’s important to distinguish between two versions of an argument as to why trade may be problematic from a social or political perspective.

Some suggest trade is problematic because it redistributes income. The basis for that claim is true, but trivial. Pretty much everything else that happens in a market economy somehow redistributes income. Technology and market competition are the sources of endless churns in an economy. Moreover, plenty of other things, including skill-biased innovation and minimum-wage laws, have vastly greater effects on income distribution than trade.

So it makes very little sense to set international trade apart and decouple it from other domains or approaches for dealing with inequality in labor markets at large (progressive tax systems, active labor market policies, employment-friendly macro policies, etc.). Imports from Germany may adversely affect domestic companies that are displaced, but there’s no reason to treat the people who lose out any differently from workers who are adversely affected by, say, technological innovation. There is a coherent justification for compensating the losers of free trade for reasons of solidarity and equity, but the justification would apply in the case of innovation. Consequently, the preferred remedies should be the same as well.

That brings us to a different social and political objection to trade — that trade violates norms embodied in our institutional arrangements. The suggestion here is that trade may undercut the social bargains struck within a nation and embedded in its laws and regulations. [In this case] compensating the losers would be beside the point, because what is at stake is the surreptitious modification of the rules of the game — the undermining of domestic social bargains through the back door. Trade is not merely a market relationship, but an intervention into domestic institutions and an instrument for reconfiguring them to the detriment of certain groups. It would be entirely legitimate to respond to such an injury by directly curtailing the trade flows that have the alleged effect. After all, this is no different from keeping out imports that violate, say, domestic health and safety regulations, which most countries already do.

As Pierre Rosanvallon puts it, inequality is felt most acutely when citizens believe that the rules apply differently to different people.” It is not inequality per se that people mind; it is unfairness.

This also relates to a question I get very often. If trade is apparently a small component of the overall impact on labor markets, why focus at all on globalization or devise special remedies for globalization. The answer is that it is not the overall quantitative impact that often matters; it is the normative filter through which those impacts are viewed.

Dismal thoughts about the Turkish referendum

I don’t write a lot on Turkey these days. (My latest piece was published last September. It was on Erdogan’s missed opportunities to enter history books as a truly great leader, rather than the corrupt tyrant he seems destined for.) It’s partly because the subject is too depressing: try hard as I might, I really cannot find a good scenario developing over the years ahead.

It’s also because conventional wisdom has so thoroughly converged on what I have been saying since I first began to write on Turkey’s politics in 2010. For a few years, I was a relatively lonely voice in a Western media landscape full of cheerleading for Erdogan and his then-allies, the Gulenists.  (Sorry pundits, I wrote my “Turkey’s Democracy is Dead” piece seven years ago, back in June 2010!) I don't see much to be gained today by repeating what everyone else is saying about the abysmal state of Turkey’s democracy and rule of law.

I do think a lot about Turkey, mostly about whether there was another path. Had the secular elite been more tolerant and opened up the political system earlier, might the religious-conservative backlash been avoided? Or, as many among those former elite argue these days, not without some justification, would the end simply have come sooner?  

Had the Gulenists not whipped up Erdogan into a frenzy of paranoia by concocting fictitious coup attempts, might he have eased up? What if the Gulenists had not been so intent on toppling him, once their alliance collapsed? What if the coup attempt, organized by Gulenists in all likelihood, had never taken place? What if Erdogan had not allowed the Gulenists so much power in the bureaucracy, judiciary, and police in the first place?

What if France and Germany had provided a clear path to European membership soon after 2005? What if Kurdish fighters had nor restarted their military campaign against the Turkish state in the summer of 2015? What if there were real leaders within the AKP, not wannabes such as Gul, Davutoglu, or Arinc? What if the main opposition party was run by a charismatic leader who could connect with the masses?

What if, what if.

Erdogan is not a political Islamist or an Islamic ideologue. His own sensibilities and personal cultural orientation are Muslim for sure. But he is first and foremost a political opportunist. That is a good thing, because it means he knows when and how to lower political tension when needed and establish stability.

Had he won the referendum with a comfortable margin, we might have consoled ourselves by thinking that the country would be moving into a calmer period. Erdogan might then have chosen to contest the next election for executive president – which will happen in 2019 latest -- as a unifier. But he lost all the major cities and may have needed some last minute skullduggery for the constitutional change to pass. So I do not see Erdogan easing up on his divisive rhetoric and policies anytime soon.

Asked to predict Turkey’s future by a Turkish newspaper a while back, I said the country would end up looking like Malaysia at best and Afghanistan at worst. A liberal, secular path, with tolerance for diversity, civil liberties, and free speech no longer seems in the cards. That is still pretty much my prognosis.

PS. And here are my rules on post-election punditry, posted on Twitter yesterday:

Ariel Rubinstein on Economics Rules

The great Ariel Rubinstein has a review of my book Economics Rules in the latest issue of the Journal of Economic Literature. It is a fun review – gratifying for me because Ariel agrees with many of my arguments – and it has a deeply personal, even emotional, feel to it. Ariel feels strongly about the turn the profession has taken, and agree or not, the essay makes for a very interesting read.

The review took me back to my graduate-student days at Princeton. The place had a very strong crop of theorists among the graduate students, and I used to hang out with them a lot. I am not sure quite why, since what I did was very different from what they did. But they were the most fun bunch in Princeton at the time. I have fun memories of many a drunken night at the Annex – the student bar long since gone.

I remember distinctly our contrasting attitudes to Economics. The theorists had it all together; they knew what they were doing and had few questions about methods or approach. By contrast, I was full of doubt and uncertainty: What was I doing in Economics? Did Economics really help answer any of the big questions? How would we know?

At one of our gatherings, I tried to voice some concerns about economic methodology. One of the theorists impatiently brushed me off. “Why do you bother with methodology,” he asked. “It’s a waste of time. Do your work.”  I tried to convince him that these were interesting and important questions. “Maybe so,” he said. “But if any important result comes out of it, someone will tell us and we will know.”

Ariel is evidently a different kind of theorist. He cares about method and doesn’t think we should leave it to just methodologists or philosophers of science. Do read his Economics Fables.  

A Foreword to Kari Polanyi Levitt

I was recently asked to write a foreword to the Mexican edition of Kari Polanyi Levitt’s From the Great Transformation to the Great Financialization. Kari is Karl Polanyi's daughter, and the essays in her book -- part memoir, part intellectual history, part analysis of the global economy -- provide a wonderful Polanyi-esque perspective on our day. I happily accepted, and my Foreword is below.

****

I first encountered Karl Polanyi as an undergraduate, in a course on comparative politics. “The Great Transformation” was on the course syllabus, sitting somewhat awkwardly amidst more standard political science fare. The assigned reading, on the Speenhamland system and the reform of the Poor Laws in Britain made little impression on me at first. But over the years, I found myself coming back to the central arguments of the book: the embeddedness of a market economy in a broader set of social arrangements, the rejection of an autonomous economic sphere, the folly of treating markets as self-stabilizing.

I am lucky that I had been exposed to Polanyi before I became a full-fledged economist. Looking at standard neoclassical fare from the perspective of the Great Transformation kept me alert to the hidden assumptions of economic theory. Behind those market transactions, expressed with mathematical formalism and in Greek letters, was a host of social, political, legal institutions that enabled those transactions. And these institutions were not unique: they had taken diverse form in different societies and historical periods.

Curiously, the more I became an economist, the more Polanyi’s insights resonated. In my own writings on economic development and globalization, I felt often that I was simply restating the main themes of the Great Transformation for our current era.

I still have on my bookshelf the heavily annotated copy of The Great Transformation from my undergraduate days – along with a newer edition with a foreword from Joe Stiglitz. The old copy has since been enriched by a nice note and signature from Kari Polanyi Levitt which I managed to obtain during a visit to McGill University in February 2001. So it gives me great pleasure to return the favor by writing a few words about Kari Polanyi Levitt’s impressive book, From the Great Transformation to the Great Financialization.

Perhaps no-one has greater claim to the mantle of keeping Karl Polanyi’s thought vibrant and relevant to our current problems than Kari Polanyi Levitt herself. In this beautifully written collection of essays, she not only draws a vivid portrait of her father as a man, a scholar, and an activist, but also provides some extraordinarily prescient analysis of how the world economy got to where it is today. Levitt’s memories of her father are particularly touching. In addition, the essays range widely over economic history, the history of economic thought, the international economic system, and economic development. They are all informed by the same combination of sharp insight and social conscience that made Karl Polanyi’s work stand out. Levitt brings a rich historical texture to the analysis of contemporary problems of the global economy and the challenges of economic development. The spirit of Polanyi lurks always, not too far from the surface.

Levitt aptly uses the term “The Great Financialization” to describe the regime that took over after the Keynesian order inscribed in the Bretton Woods arrangements collapsed. I do not know if Keynes ever read The Great Transformation or was familiar with Karl Polanyi’s thought. But the Bretton Woods arrangements were very much Polanyian in spirit. As Levitt underscores in chap 5, Polanyi was like Keynes in many respects, but unlike Keynes, he questioned the role of economic motives in driving human behavior, which he thought was unique to industrial capitalism.

Keynes sought an international regime that would be hospitable to international trade among nations, but not so intrusive that it would undercut economic management domestically. One key requirement of such a regime was that international finance would be kept in check. Keynes made clear that controls on international capital flows were not meant to be simply a temporary expedient, to be removed once global financial stability was achieved. They were a permanent feature of the system – essential to macroeconomic management at home, and eventually, to the building of mixed economies with adequate social protection.

As Levitt nicely explains, after the 1980s this understanding was superseded by a new one that once again raised the market – and financial markets in particular – above the needs of society. Europe, America, and eventually most middle-income developing nations embraced financial globalization. Free flows of finance across borders, they were led to believe, would allocate savings and investment where they could be used most profitably. Domestic economic management became hostage to the whims of financial markets. Globalization became an end rather than a means.

This wasn’t quite the Gold Standard that Karl Polanyi had held responsible for the political upheavals of the early part of the 20^th century. Polanyi thought that the attempt to reimpose the 19^th century liberal economic order after World War I produced the world economic crisis and had led to the demise of democracy in Europe. Currencies were now flexible, except for the European nations that would eventually adopt a single currency. Nevertheless, financial globalization entailed donning the Golden Straitjacket, in Thomas Friedman’s evocative phrase.

Many of these essays were written years ago, yet Levitt is prophetic in portraying the hubris and triumphalism of neoliberalism’s advocates and the risks that their experiments took. As she writes, “the attempt to impose on the rest of the world a radical Anglo-American vision of the autonomy of market forces, backed by sanctions to subordinate nations, peoples and communities to the rights of property, is a Utopian project which threatens to unleash uncontrollable reactionary political forces” (p. 52). It is “incompatible with democratic governance, cultural diversity and pluralism” (52).

As I write these words, Donald J. Trump is one month into his presidency. The reactionary backlash that Levitt foresaw, the second part of Polanyi’s double movement, is in full force not only in the United States but in a large number of European nations as well. In Levitt’s words, “market forces of polarization will disembed the economy from traditional social relations and people will seek solidarities of community, ethnicity, religious belief or other solidarities of the excluded” (p. 105). Or as she puts it elsewhere: “democracy is striking back at economics” (p. 60).

We ignore Karl Polanyi at our own peril. And there is no better, richer account of why and how than this wonderful collection of essays.