Response

by Dani Rodrik on November 13, 2007

I owe Henry Farrell thanks for managing to get me such a thoughtful set of reactions from such a distinguished group of commentators. It is gratifying that the book’s main themes appear to have resonated with these readers—even though of course there are many areas of gentle dissent and some real disagreements. I am struck as well by the richness of the diverse elaborations my commentators offer, suggesting that my very practical agenda may have come into contact with strands of intellectual inquiry of which I was perhaps only vaguely aware.

John Quiggin inverts my question to ask why so many growth recipes fail. As he notes, economists tend to see in successful economies those features that they want to see, while ignoring the rest. So in South Korea they saw outward orientation, but ignored the role that industrial policy played. Today in China they see the move toward market liberalization, but ignore all the institutional heterodoxy that allowed China to get there. This kind of myopia is an essential ingredient of the fads and fashions to which development “big think” is given.

David Warsh places my work against the backdrop of evolving intellectual traditions within mainstream economics, a story which he has traced out eloquently in his Knowledge and the Wealth of Nations: A Story of Economic Discovery and which he summarizes in his comment here. He is correct to emphasize that I come from a development tradition (I read Hirschman and Lewis before I read Samuelson and Solow), but that I recognized that one “couldn’t hang out a shingle except as a full-fledged practicing member of the community of mainstream economics.” He is also correct to say that I view my task as one of “rebuild[ing] development economics on the firmer foundation of the new, more cosmopolitan economics – all the various “new” economics that have emerged since the 1970s, when game theory and decentralized stochastic general equilibrium models became part of the normal graduate student toolkit.” I am also gratified that he likes the Growth Diagnostic framework enough to make it required reading (and mulling over) by the World Bank and the UN.

Mark Thoma makes a number of interesting suggestions, in particular on what it takes to transform growth accelerations into sustained growth. He posits that maybe the transition has to do with a “process of clearing out unproductive, unprofitable firms … [as] an essential part of getting to the second stage and that this process must begin fairly early in the development process…” Perhaps. One can make his point more broadly not just about firms but all pre-existing institutions. At some point, inherited institutions can become dysfunctional—even if they served to ignite growth (think of China’s property regime or Germany’s welfare state). Figuring when you want to get out, while things are still going relatively well, is a complicated dynamic programming problem.

Adam Przeworski pays me a great compliment when he writes “this is a book that convinces by its intelligence and evokes trust by its modesty and its sense of responsibility.” He is correct in emphasizing that there is a single economics “only with regard to the criteria of inference and evidence that are required to publish in the journals of the discipline.” Indeed, the uniqueness that I claim is one having to do with methodology. He is also right in saying that “studying specific situations is a craft, not a science.” But what I tried to suggest in the book and show through examples is that this unique methodology does help us navigate the complexity of specific local situations.

Przeworksi writes:

I wish, however, that Rodrik had clarified the relation between two points he makes, namely, that a successful market economy can be sustained by a variety of institutional arrangements and that ‘institutions matter,’ even more narrowly, that ‘participatory institutions’ are the engine of growth. If ‘there is no single mapping between the market and the set of nonmarket institutions required to sustain it’ (page 162), then identifying the institutions that are compatible with sustained growth calls for a different methodology than Rodrik, and everyone else, uses.

He is quite correct here too. I think cross-national empirical analysis has so far gotten away because it has not focused much on the causal impact of specific institutional designs. Asking whether investors feel secure from expropriation is very different from asking whether laws takes a particular form. Asking whether civil liberties are protected is different from asking what specific institutional arrangements achieve that end.

Henry Farrell starts out by contrasting my work to Roberto Unger’s recent book, also published by Princeton University Press. As he notes, our rhetoric may seem far apart, but we are a lot closer than it seems. Not a big surprise here. He and I have been discussing these issues intensely over the last few years, have taught together, and I cite him as one of my two major influences (the other is Ricardo Hausmann). It is quite possible that Roberto may have been, just slightly, influenced by me as well. In any case, I have been making the case for neoclassical economics to Unger over many years, although it would be foolish for me to claim success.

Farrell also says that I am less of a neoclassical than I presuppose, mentioning the parts on industrial policy and on the primacy of democracy. I suppose he may be right. I do make the case in the discussion of industrial policy that the standard principal-agent way of thinking on this issue is not very helpful (a point that I borrow from Chuck Sabel). And in my discussion on democracy, I am taking a normative stand, which does require me to leave my neoclassical baggage at home (at least if I am honest). And no, being taken as a political theorist does not offend me at all, although it does make me feel a bit like the bourgeois gentilhomme.

I am happy that Daniel Drezner liked parts of the book. As for the other parts, I wonder if his complaints are not the result of his having read them a bit too quickly. One complaint is that “It’s far from clear whether the political organizations that Rodrik is counting on are up to the task.” This is odd in light of the amount of attention I devote to how the requisite organizational arrangements can be designed (this is the non-neoclassical parts of the book the Henry Farrell talks about). It is also odd in light of a key argument in the book, namely that the diagnostic framework I advocate economizes on political and institutional resources, relative to the Washington Consensus and other approaches.

Drezner also says that I am inconsistent in my discussion of the constraints that globalization imposes on national policy. Again, Drezner does not seem to have read the book carefully, as he conflates a discussion of the current situation (in chapter 4), with a discussion of the direction in which we are headed (chapter 7), and both of these with a description of a theoretical ideal type (chapter 8). Finally, Drezner chides me for not asking whether the global economic arrangements I advocate are incentive compatible. But the point I am making in the book is precisely that such a system is in the interest of both advanced countries and developing nations—because it is the only one that can sustain the type of globalization that actually benefits them! Something that advances your interest is incentive compatible, no?

Jack Knight’s fascinating discussion clarifies (and complicates) my scratching-of-the-surface on experimentalism. In the process, he greatly strengthens (I think) my argument. I learned much from his sophisticated discussion of the relationship among pragmatism, democracy, and institutional choice. A key point is that we need to provide a stronger foundation to the primacy of democracy as a meta-institution, something which the line of thinking that Knight advocates is able to do.

Daniel Davies makes the interesting point that my book is purposefully subversive: I intend to show what a disaster neoclassical economics really is by contrasting it to non-neoclassical modes of reasoning, and letting the readers make up their own minds. While I am open to this idea, I agree only partially with the argument that he makes. I think the problem resides with Davies’ definition of neoclassical economics, which crudely put is: methodological individualism + math. I don’t see math really as being key here. Some brands of Marxian economics are much more mathematical than anything I do.

Also Davies has issues about math, which I did not quite follow. For example, I do not see any inconsistency between discussing a wedge between social and marginal valuations (“tau”) as a conceptual construct and granting the empirical difficulty of identifying it in practice. It is still the case that the concept clarifies what we should do in practice (and indeed the “lambdas” if not the “taus” are what the growth diagnosis tries to uncover). Davies is right that there are some tensions in my work between the neoclassical pretensions and the occasional non-neoclassical colorations (as Farrell also notes). Where that is coming from is well explained in Warsh’s contribution.

OK I have to stop now before I split too many hairs and abuse the patience of the gentle people who have done me the favor of paying close attention to what I have written. I am delighted with the warm reception the book has received. I am also delighted that it has served as a springboard for further thoughts in so many different directions. With these kinds of reactions, it is hard not to feel happy.

{ 7 comments }

1

dsquared 11.14.07 at 12:33 pm

It is still the case that the concept clarifies what we should do in practice

I don’t think it does – or at least, not to anyone except a neoclassical economist (hence my crack about neoclassical economics as being only useful as a means of communicating with neoclassical economists). As I said in my piece, I think that even thinking about distortions and reforms in terms of shadow prices is potentially misleading, and thinking in terms of those shadow prices as Lagrange multipliers encourages a mental model of the economy that isn’t actually very realistic.

The institutional search for “what we should do in practice” is actually very clear and doesn’t need clarifying. The fact that it needs to be forced into a particular means of expression in order to convince economists who have been trained a certain way, just means that we need to stop training economists that way.

2

John Emerson 11.14.07 at 6:56 pm

I actually hold off with my comments around here sometimes just because I’m not really part of the argument, but people are being so cautious that the threads are dying.

It strikes me that Hodgson’s “How Economics Forgot History” and Dennis Wrong’s “The Persistence of the Particular” are relevant here, at least for someone who is less interested in remaining within the orthodoxy.

3

mq 11.14.07 at 10:07 pm

Comment #1 is very interesting. Is it clear enough what needs to be done in practice, so that we don’t need to approach problems using theoretical framing devices? Are the mental models that come out of ordinary experience superior or inferior to ones that have been worked over to be internally consistent with a grand theory of how societies function? Is that a general problem with social theorizing vs. attention to the particular, or is it unique to economics because of e.g. methodological individualism or excessive abstraction?

4

mq 11.14.07 at 10:08 pm

Oh, and one reason these round tables might not get enough commentary is that the comments are split between too many different threads. Hard to find where the relevant conversation is happening.

5

lemuel pitkin 11.14.07 at 11:13 pm

pj-

Right. As I suggested in response to Henry’s kick-off post, these seminars would generate much better discussions if they were spread out over a week instead of being posted all at once.

6

lemuel pitkin 11.14.07 at 11:14 pm

er, mq, not pj.

7

William Newman 11.17.07 at 5:03 pm

Dani Rodrik writes “But the point I am making in the book is precisely that such a system is in the interest of both advanced countries and developing nations — because it is the only one that can sustain the type of globalization that actually benefits them! “

Necessarily the *only* way? And everyone will cooperate effectively to achieve it because everyone will agree with you about that even down to all the gritty details?

It seems reasonable for Drezner to look for more consideration of incentives than this. He can’t reasonably expect you to slavishly follow his house style of analysis of incentives, or anything like that: an interesting alternative would be a crushing counterattack against thinking in the shallow Federalist Papers tradition when history has long been understood to show no useful pattern of organizations following analyzable incentives. But whatever argument you choose to make, his point deserves a more serious reply. Even if the exclamation point had been conveniently available for use in the 18th century, it wouldn’t’ve been enough to predict the Constitution going down in flames “because rich and poor and north and south can all see that cooperating effectively against ratification is the only way that they can sustain the type of Confederation that actually benefits them!”

“Something that advances your interest is incentive compatible, no?” I’m no expert, but I will guess that for at least one commonly used definition the answer is “no.” Even just lumping individual interests together through voting mechanisms seems to make questions like that quite tricky. And the real world is complicated by other things, too, like the limited rationality of actors. (You may have noticed that even though now that you have demonstrated that yours the only way to sustain the kind of globalization that benefits them, not everyone has internalized it yet.:-)

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