Straight talk from Dani Rodrik

The legion fans of Dani Rodrik will love his new book, Straight Talk on Trade. I’m one of them, and massively respect him for warning all the rest of us economists about the political economy consequences of globalisation long before these became obvious. As he writes in the last chapter of this new book, looking at recent voting trends in many countries,  “It is dawning on economists and policymakers that they severely underestimated the political fragility of the current form of globalization…. This backlash was predictable.” He has the sombre pleasure of having predicted this for a couple of decades now.

Regular readers will find many of the thoughts in Straight Talk familiar from previous books such as The Globalization Paradox and Economics Rules, and from papers such as Rodrik’s work on ‘premature deindustrialization‘. The new book updates the issues for the present context of the political success of anti-globalizers, nationalists, statists. It argues that there is little evidence of a major retreat from economic integration, and that the rhetoric and headline measures are a useful safety valve. “What looked to contemporaries like damaging protectionism was in fact a way of letting off steam to prevent an excessive build up of political pressure. … [W]e need to place the requirements of liberal democracy ahead of those of international trade and investing.”

I’m in two minds about this line of argument. It is undeniably true that the dogma of globalization gave cover to a lot of toxic practices, from financialization and speculation to multinational tax avoidance. However, I fear the protectionist, nationalist rhetoric will create its own reality – I found the argument in The Weaponization of Trade by Jack and Rebecca Harding persausive on this. Nor am I as sure about the ‘continued resilience of the nation state’ – and see its potential fracture as a dangerous moment.

On the questions of domestic economic policy and industrial policy, though, I’m 100% with Rodrik’s argument. He points out that the policies labelled ‘structural reform’ (econ jargon for politically very difficult measures) “were only loosely correlated with turning points in economic performance.” There are no silver bullets. Rather, growth take-offs “were associated with a targeted removal ofkey obstacles to growth rather than broad liberalization and economy-wide reforms.” Measures need to be targeted, and political capital and administrative resource needs to be focused on areas where there will be an early return. “In economies that suffer from multiple distortions, small changes can make a big difference.” The best policy advice is to experiment, and try local institutional innovations.

Reflecting on the lessons of past growth take-offs and failures leads into a section on the role of economics and economists – some of this familiar from Economics Rules. Economists must pay more attention to politics if they are giving policy advice, he argues, and in particular to the scope for political innovations – ideas that can durably relax political constraints and enable measures that make people better off without threatening political upheaval. Or in other words, enable the capture of efficiency gains while more or less protecting the economic rents of existing elites. Rodrik draws an interesting parallel with technological innovations, and the role of policy entrepreneurship, learning by doing, learning by experimentation, copying, serendipity and not forgetting the role of crises. “Taking ideas seriously renders the notion of interests slippy and ephemeral. Interests are not as fixed as other economists, such as Daron Acemoglu, suggest. People may need a new idea to appreciate their interests in a different, more accurate, light. “Raising the profile of ideas would also help alleviate the tension that exists today between political economy on the one hand, and normative economics and policyy analysis on the other.”

Looking at the current political context, some new ideas are surely needed, especially when it comes to global trade and investment. Rodrik has written elsehere about the need for New Rules for the Global Economy, and argues again here that the conventional policy suggestions will fail.

Straight Talk ends on a potentially optimistic note, however: “If one lesson of history is the danger of globalization running amok, another is the malleability of capitalism.  … It was not tinkering and minor modification of existing policies that produced these achievements [the New Deal, Bretton Woods], but rather radical institutional engineering.” If big, bold ideas can be implemented, the liberal democratic order may be reinvigorated. Looking at the present crop of politicians, this is only a slightly comforting thought, but I for one will take that sliver of comfort.

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Greetings from the multiverse

It has been a week of mad travel so although I haven’t posted much, at least I’ve had plenty of time to read. One of the books was, well, extraordinary. In a really good way, although I have no idea what to make of it in terms of substance. It’s The Beginning of Infinity: Explanations that Transform the World by David Deutsch. He’s a computational physicist so it is very much not an economics book, but Deutsch is bravely going far beyond the boundaries of his own discipline, something to be applauded given the height of the silo walls in the academic world.

His argument is that there is such a thing as progress, which began with the Enlightenment (the British rather than the romantic Continental variant), and that humans are rather special. The engine of progress is not empiricism, nor accurate prediction, but rather the ability to conjecture and see whether conjectures are consistent with what else we’ve learnt about reality, rejecting them if not. The scientific method consists not in careful observation followed by theorising, but the creative development of theories or hypotheses which then have to be confronted with observations, with robust mechanisms of rejection. So all this is somewhat contrarian, even I know, but it also seems pretty persuasive. Even the parts about how unlikely and therefore central to progress humans are in the universe.

Ah yes, the universe. One of the most gripping sections of the book is its explanation of quantum mechanics. I’ve never pretended to understand at all what this implies about the nature of reality. I still don’t, but Deutsch does nevertheless give one of the clearest explanations I’ve come across. To which the only reaction is awe at the sheer weirdness of the multiverse and therefore everyday life. I don’t think being on an overnight flight had much to do with my reaction. This is seriously weird.

It is all very enjoyable, including wonderful factoids and expressive comparisons along the way. That Oxfordshire is really a bleak deathtrap without so many human innovations to sustain life. That it is easy to confuse mathematical abstractions with physical facts (eg that the angles of a triange add to 180 degrees – only in maths, not on the ground). (By the way, economics is riddled with this kind of error; I give you ‘capital’ or ‘goods’.) That an American born today has more chance of being killed by an asteroid than of dying in a plane crash.

The one section I didn’t much appreciate tries to explain social choice theory. Even given that I know a lot more about this than about quantum physics, and other readers will know more about other subjects covered here, from evolutionary biology to astrophysics to philosophy, this is not a criticism – this is the inevitable downside of inter-disciplinarity. But we need more of this.

After I read the book (first published in 2011), I looked at some reviews. Most reviewers enjoyed it too, even though, as the New York Times review pointed out, “The chutzpah of this guy is beyond belief.” But concludes, “He is exactly who he is, and he is well worth getting to know, and we are very lucky indeed to have him.” So I wasn’t deranged by aircraft fumes; this is a book worth reading.

 

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Reclaim your attention

I caught up with Timothy Wu’s The Attention Merchants: The Epic Struggle to Get Inside Our Heads on my recent travels. It’s a very interesting history of advertising, not surprisingly US-focused. There are some compelling characters in the earlier part of the story – some I knew about already like Bernays, others unknown such as the rather extraordinary Claude Hopkins. Advertising and media have always, I guess, attracted outsize characters. And some of the tales about the impact of ads are astonishing – early campaigns promoting smoking as a health-giving activity; the genius of the ‘Marlboro man’ campaign, taking Marlboro from a 1% market share to the 4th bestselling brand in the US in less than a year.

The book is excellent (as one might expect from the author of The Master Switch, a terrific book) on the interplay between technological and commercial or creative innovations. Wu writes: “Technology always embodies ideology, and the ideology in question [with the spread of cable TV] was one of difference, recognition and individuality.” The arrival of many upstart channels successfully contested the broad middle ground previously held by the main networks, and with it the cohesive, mass attention of network TV viewing.

The book moves on from old media to new media, and I also enjoyed the section on the early days of the internet and the stumbles and successes in getting all of us online. Email was an early killer app, which one forgets. “It may be hard for some to imaine a moment when receiving email was considered a big deal.” But there was indeed the movie You’ve got Mail featuring AOL in a comedy romance. Wu also reminded me that AOL got people online by sending them a physical disk in the post, or later free on the front of magazines – apparently they mailed several hundred thousand floppy disks in a 1993 mailshot – and got a 10% success rate. The company’s chief marketing officer said, “50% of the CDs produced worlwide had AOL’s logo on them,” by the late 1990s, the book reports.

As it gets towards today, the book is a bit less compelling, and I think this is because it’s so hard to get one’s mind what’s going on in the world of attention-grabbing. Of course, we know Google and Facebook are eating all the ad revenue (and attention) but there’s that fraudulent, algorithmic, complicated market, the imperative of SEO, and the fragility of offline advertising. Not to mention the blurring of news, native ads, fake news, and random dog and cat videos. It would be unfair to criticise Wu for not pinning down all this, and the addiction of social media, in a final chapter, and I’m not. The book really ends with that promising moment when ad blocking looked like a thing; but events have moved on.

There is an afterword about Trump, “the attention merchant turned President,” and then an epilogue calling for technologists to turn their focus to “the goal of reclaiming our time and attention” in these days of clickbait and the ludic loop of browsing and checking all social media without cease. The grim alternative? “The enslavement of the propoganda state as well as the narcosis of the consumer and celebrity culture.” But it isn’t just down to technologists – the battle for attention starts with oneself.

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‘Free’ markets

I read recently The Illusion of Free Markets by Bernard Harcourt (date), on the recommendation of an esteemed colleague. The bulk of the book is about state discipline – Bentham’s Panopticon, Foucault, the American penitentiary state. The bit that really appealed to me was the opening section on French grain markets in the 18th century, compared with Chicago commodities markets in the late 20th century.

The book opens with great detail about how intensively regulated markets were in early 18th century France, with even trivial breaches of the rules in theory liable to punishment, imposed by the police des grains. Harcourt then draws the comparison with what we think of as a model of free market capitalism, the open outcry pit of the Chicago Board of Trade (I visited once  – an amazing experience). As he convincingly establishes, there os no sharp contrast, as the modern market rules are in fact just as detailed as the 18th century version.

Why then do we contrast ‘free markets’ as today’s ideal with the over-regulated past? The book attributes the turn to the Physiocrats, and “that contested moment in the 18th century when notions of natural order were beginning to take shape.” The argument is that they shaped a sharp dichotomy between “the economy as the realm of natural order” and everything else which was thereby in the sphere of being policed by the state. “In other words, the market is efficient, and within that space there is no need for government intervention. What is criminalized and punished is behaviour outside the sphere of the orderly market.” The government can legitimately penalize non-market behaviours.

But of course, the dichotomy is a false one. The state is present in all markets, and often in just as much detail as the C18th police des grains. The rhetoric of ‘free markets’ is misleading.

I certainly agree with this last point, as does anybody who (like me) has spent some time as an economic regulator (the UK Competition Commission in my case). Modern economies are highly regulated, and that goes for the Anglo-Saxons as much as anyone else. I don’t know nearly enough about the C18th or the literature on punishment to evaluate those parts of Harcourt’s book. But it certainly offers food for thought.

 

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Getting a grip on intangibles

One of the missing parts of the picture when it comes to measuring and understanding the economy consists of intangibles. This is a big gap, given that services make up four fifths of the UK economy, and that firms invest so much in intangibles, which account for the great majority of their stockmarket valuation. Yet it is so hard to get a grip of the implications of changes we find hard to visualize and do not measure.

A big contribution to starting to fill this gap comes from a new book by Jonathan Haskel and Stian Westlake, Capitalism Without Capital: The Rise of the Intangible Economy. It starts with a description of what the intangible economy is and how we do (currently) and could (in future) measure it. The characteristics of intangible investment are captured in four Ss: intangible assets are more likely than tangible ones to be scalable; they involve higher sunk costs; they are likely to involve spillover effects or externalities; and they exhibit synergies with each other.

Scalability comes about largely because of the non-rival character of intangible goods. Sunk costs are the result of the need for high upfront investment – with software or databases or movies for instance – and then very low marginal cost. Spillovers are present in knowledge-based goods, again due to non-rivalry – the famous Thomas Jefferson quotation, “He who receives an idea from me receives intstruction himself without lessening mine.” This is the fundamental point in endogenous growth theory. Finally, the synergies reflect the need for complementary investments (tangible ones too) to embody ideas in useful outputs.

Having set the scene, the book goes on to consider the implications of the intangible economy in a number of areas: the productivity puzzle; inequality; finance; business management; and public policy. These are explored through the lens of the four Ss. For example, does the public goods characteristic of non-rivalry imply that a greater proportion of the total investment will need to be publicly funded? Should governments encourage a switch from debt to equity financing of investment through changes to the tax system? (This chapter is set up as a series of essentially rhetorical questions – the answers are yes and yes!)

The key message is that the economy has changed and is changing its character fundamentally, yet businesses and governments have hardly begun to get to grips with the implications. After all, we are not even measuring intangibles properly. In both the winning Indigo Prize essays fixing this was one of the key recommendations – it is hardly surprising the essays included this as mine was co-authored with the head of Australia’s intellectual property agency and the other co-authored by Jonathan Haskel, but my point is that the distinguished panel of judges saw this as important.

There are some other books emphasising intangibles, such as Baruch Lev’s work on accounting, The End of Accounting being the most recent. For an introduction, though, it would be hard to do better than Capitalism without Capital, which is clear and lively and raises – without having all the answers – the relevant questions.

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