Beware economists bearing policy paradigms
CAMBRIDGE – Neoliberalism is dead. Or perhaps it remains very much alive. Pundits have been calling it both ways these days. But either way, it is hard to deny that something new is afoot in the world of economic policy.
US President Joe Biden has called for a vast expansion of government spending on social programmes, infrastructure, and the transition to a green economy. He wants to use government procurement to rebuild domestic supply chains and bring manufacturing jobs back to the United States. His Treasury Secretary, Janet Yellen, is pushing for a globally coordinated increase in corporate taxes. Jerome Powell, Chair of the Federal Reserve, traditionally the most hawkish arm of government on price stability, is playing down inflation fears and lending his support to fiscal expansion.
All of these policy changes represent a sharp departure from the conventional wisdom in Washington. Do they also augur a new economic policy paradigm?
Economic policies in the US, and the West more broadly, have long been in need of overhaul. The ideas dominant since the 1980s – variously called the Washington Consensus, market fundamentalism, or neoliberalism – originally gained traction because of the perceived failures of Keynesianism and excessive government regulation. But they took on a life of their own and produced highly financialised, unequal, and unstable economies that were unequipped to cope with today's most significant challenges: climate change, social inclusion, and disruptive new technologies.
The needed paradigm change might usefully start with how we teach economics. Economists tend to be enamoured by the power of markets to promote overall economic prosperity. Adam Smith's invisible hand – the idea that self-interested individuals seeking only their personal enrichment might produce collective prosperity instead of social chaos – is one of the crown jewels of the economics profession. It also remains deeply counter-intuitive, which is perhaps why economists devote an inordinate amount of time proselytising about the magic of markets.
But economics is not a paean to free markets. In fact, much of economics instruction focuses on how markets may produce too much inequality, and how they fail on their own terms of allocating resources efficiently. Perfectly competitive markets that harmoniously produce stable equilibria are only one possibility among many. The Smithian model is not the only one. Still, the knee-jerk reaction of many economists is to treat well-functioning, competitive markets as the relevant benchmark for any proposed departure from laissez-faire.
Fortunately, a new paradigm for teaching economics does exist. The CORE Project is an online teaching tool and free, open-access textbook. Two leading economists, Samuel Bowles of the Santa Fe Institute and Wendy Carlin of University College London, are the visionaries behind it. But a large group of economists worldwide has collaborated in its development. Already, it is in use in a majority of university economics departments in the United Kingdom.
A key advantage of the CORE approach is that it tackles issues like inequality and climate change head-on. But the pedagogically more interesting move is that it replaces the standard benchmarks of economics with alternative benchmarks that are more realistic and useful. For example, in contrast to conventional economics, CORE assumes that individuals are pro-social and myopic, rather than selfish and far-sighted. Competition is imperfect, with winner-take-all characteristics, rather than perfect. Power is ever-present in the form of principal-agent relationships in labour and credit markets, instead of being treated as either diffuse or exogenous. Economic rents are ubiquitous and often required for well-functioning economies, not rare or the result of policy error.
Such a new paradigm for teaching and doing economics will produce better understanding of social outcomes. But we should recognise that it will not produce a new paradigm for economic policy. And that is as it should be.
All of our previous policy paradigms – whether mercantilism, classical liberal, Keynesian, social-democratic, ordoliberal, or neoliberal – had important blind spots because they were conceived as universal programs that could be applied everywhere and at all times. Inevitably, each paradigm's blind spots overshadowed the innovations it brought to how we think about economic governance. The result was overreach and pendular swings between excessive optimism and pessimism about government's role in the economy.
The right answer to any policy question in economics is, “It depends.” We need economic analysis and evidence to fill out the details of what the desired outcome depends upon. The keywords of a truly useful economics are contingency, contextuality, and non-universality. Economics teaches us that there is a time for fiscal expansion and a time for fiscal retrenchment. There is a time when government should intervene in supply chains, and a time when it should leave markets to their own devices. Sometimes, taxes should be high; sometimes, they should be low. Trade should be freer in some areas and regulated in others. Mapping the links between real-world circumstances and the desirability of different types of interventions is what good economics is about.
Our societies are confronted with vital challenges that require new economic approaches and significant policy experimentation. The Biden administration has launched a bold and long-overdue economic transformation. But those who are seeking a new economic paradigm should be careful what they wish for. Our goal should be not to create the next ossified orthodoxy, but to learn how to adapt our policies and institutions to changing exigencies.
Dani Rodrik, Professor of International Political Economy at Harvard University's John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy.
Copyright: Project Syndicate, 2021.