It has been difficult to resist writing about Dani Rodrik’s new book, Economics Rules: The Rights and Wrongs of the Dismal Science, before the embargo date, but at last I’m free to say how terrific it is. Rodrik is of course one of the most eminent public intellectual economists, engaged with policy and the ‘real world’, and a natural communicator. I’m completely in sympathy with his dual aim of aiming the correct criticisms at economics while defending it others: “I have long been critical of my fellow economists for being narrow minded, taking their models too literally and paying inadequate attention to social processes. But I felt that many of the criticisms coming from outside the field missed the point.” This might sound defensive but it matters to get the criticisms right: some of the old chestnuts (too mathematical, all about selfishness etc) give economists a free pass because they allow them to ignore the more troubling issues.
Economics Rules: The Rights and Wrongs of the Dismal Science
What are these? Rodrik supports the mathematical nature of economics as bringing clarity of meaning, and argues that the subject is far more applied and empirical than its detractors realise. But he criticises large-scale macro models and time series regressions. “I cannot think of an important economic insight that has come out of such models,” he writes. He also flags up the lack of testability of many economic models: they purport to be deductions from theoretical principles, but as they are ‘deduced’ to explain a particular phenomenon (credit rationing, say), then that phenomenon cannot be used to test the model. “Very few of the models that economists work with have ever been rejected so decisively that the profession discarded them as clearly false.”
Another consequences is that there are huge waves of fashion in economic models. Almost the opposite problem is the use of models that *are* built up from 1st principles and have no relationship with reality – prime culprits being macro DSGE models.
Finally, Rodrik writes, “The profession values smarts over judgment, being interesting over being right – so its fads and fashions do not self-correct.” I would suggest (Rodrik does not note this) that this helps account for the male dominance of economics (like philosophy); young women are very strongly socialised out of this kind of showy intellectual display.
So what, then, does the book argue is good about economics? Rodrik portrays the version of the discipline done well as highly empirical, using inductive and deductive methods, sensitive to context – historical, social, conjunctural – and eclectic in its selection of models. It’s horses for courses. We should think of models as a kind of library of diagnostic texts.
Towards the end of the book, he addresses the kind of challenge exemplified by Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets. Sandel writes: “Putting a price on the good things in life can corrupt them. That’s because markets don’t only allocate goods, they express and promote certain attitudes toward the goods being exchanged.” Rodrik acknowledges that economists could do with a “richer paradigm” of human behaviour but defends the economic efficiency lens, the analysis of the efficient allocation of resources. Efficiency is a good thing, an important consideration. If carbon trading will reduce emissions, and you believe that to be vital, why would you reject the market approach as immoral? This section ends: “The early philosophers encouraged the spread of markets not for reasons of efficiency or for the expansion of material resources, but because they thought it would produce a more ethical, more harmonious society. It is ironic that, three centuries later, markets have come to be associated in the eyes of many with moral corruption. Just as today’s advocates of markets overlook the limits of efficiency, perhaps the critics neglect some of the ways in which markets contribute to a spirit of co-operation.”
The main message I hope non-economist and economist readers alike will take away from this book is the importance of specific contexts for economic analysis and policy. The book ends with Jean Tirole explaining how frustrating it was for many people, when he won his Nobel Prize, that it was impossible to summarize his work in a brief statement. “It is industry-specific,” Tirole said. “The way you regulate payment cards has nothing to do with the way your regulate intellectual property or railroads.”
The final couple of pages have Rodrik’s Ten Commandments for Economists. Numbers one and two are: Economics is a collection of models; It’s a model, not the model. And also Ten Commandments for Non-Economists, which include: maths is useful; economists are not all alike; economists typically do understand how markets work.
I’m not sure how much traction any book trying to bridge the gap between the best of economics and the subject’s critics can gain (having tried myself in a different way by explaining some areas of economics on the research frontier in The Soulful Science.) The fact that there are plenty of economists doing the version Rodrik criticises in the book doesn’t help our cause; just turn on the TV or read social media and you find oodles of economists making strong, universal claims about macroeconomic policy or trade policy. But I hope open-minded critics of economics will read Economics Rules to learn how the best of economists approach the subject, and how important their work is.
By the way, Dani Rodrik is speaking at the LSE on 7 October.