Over at The American Prospect, Robert Kuttner has a nice article this month that argues that some of the leading mainstream economists are starting to embrace the realization that markets are embedded in social and political systems, and are dependent on them for stability and growth.
March 15th, 2011: By training, economists tend to be uncomfortable with politics. In the purest version of the standard economic paradigm, political interference by narrow interests or clumsy bureaucrats distorts the efficiencies of markets. Since the financial collapse, that narrative has necessarily been on the defensive. Even so, most of the profession remains wedded to the master story of market efficiency -- and nowhere more emphatically than in the area of the global economy where an outmoded idiom of "free trade" versus "protectionism" still reigns. Radical political economists have never bought this story, but revisionism by mainstream economists is still relatively novel and risky to one's career.
Dani Rodrik is an economist of impeccable credentials, with a doctorate from Princeton and a Harvard chair in international political economy. His new book, The Globalization Paradox, is simply the best recent treatment of the globalization dilemma that I've read, by an economist or anyone else. The paradox of his title is the fact that markets need states, but states are weakened, perhaps fatally, as globalization advances. When they promote ever deeper globalization, economists undermine the very markets they cherish as well as the state's capacity to reflect the democratic wishes of its citizens.
In 1997, a younger Rodrik wrote a more tentative critique, Has Globalization Gone Too Far?, which addressed the disruptive effect of globalization on domestic well-being, as brokered by democratic states. In this new volume, he gives us nothing less than a general theory of globalization, development, democracy, and the state. The book provides the pleasure of following a thoughtful, critical mind working through a complex puzzle. Rodrik writes in highly friendly and nontechnical prose, blending a wide-ranging knowledge of economic history and politics and a gentle, occasionally incredulous, skepticism about the narrow and distorting lens of his fellow economists.
Rodrik begins by observing that when you look at actual economic history, "markets and states are complements, not substitutes." Over the past three centuries, some states have facilitated economic development well, and some have done it badly, but there is no successful case of pure laissez-faire. He recounts the history of governments as enablers of global commerce, the hypocrisy of nations such as Britain that commended free trade but benefited from colonies, and the actual extensive role of the state in promoting business. Next, he describes how most economists just get this story wrong, either because they can't bring themselves to study the messy details of politics and history or because they cling deductively to assumptions rather than addressing evidence.
Turning to a rare moment when sensible economic theory was married to good economic practice, Rodrik invokes the postwar Bretton Woods era as an ideal middle ground, when statesmen devised a balanced system that promoted foreign commerce but recognized the necessary role of the state as an agent of development, stability, and democracy: "A delicate compromise animated the new [global] regime: allow enough international discipline and progress toward trade liberalization to ensure vibrant world commerce, but give plenty of space for governments to respond to social and economic needs at home. ... The goal would be moderate globalization, not hyperglobalization." Looking back at the past century and the headlong rush to ever deeper globalization, he concludes, "A 'thin' version of globalization, a la Bretton Woods, seems to work best."
The trade regime of the early postwar years allowed government interventions that were plainly inconsistent with both the norm of free trade and the subsequent stampede to hyperglobalization. Those interventions included state subsidies, anti-dumping duties, the wholesale exclusion of textiles and agriculture from rules of liberal trade, moderately high tariffs, and tight national regulation of global capital movements or speculation in currencies. But the system worked. It allowed high levels of growth and permitted democratic states to respond to the demands of citizens. "Until the 1980s," Rodrik wrote in a 2000 article, "these loose rules left enough space for countries to follow their own ... paths of development."
After the fixed exchange rates of the Bretton Woods system collapsed, mainly because the dollar was in the unsustainable role of both a national currency and a global one, the middle ground of "moderate globalization" collapsed with it. A newly fundamentalist economics profession became a scholarly lobby for laissez-faire trade, while business elites lobbied for deep globalization to escape the regulatory constraints of states. "Domestic economic management was to become subservient to international trade and finance, rather than the other way around."
Developing countries, nonetheless, went right on violating the practice of laissez-faire, and their state-led development served them well. Mainstream economists preserved their theories only by leaving out Asia. Yet the rush to deep globalization continued. The "hyperglobalizers," Rodrik demonstrates, suffered from two fatal blind spots: "One was that we could push for rapid and deep integration of the world economy and let institutional underpinnings catch up later. The second was that hyperglobalization would have no, or mostly benign, effects on domestic institutional arrangements."
The folly of financial globalization underscored why the conventional wisdom was catastrophically wrong. The costs in increased instability far outstripped any efficiency gains. Global finance, Rodrik says, outran national regulation: "Domestic finance is underpinned by common standards, deposit insurance, bankruptcy rules, court-enforced contracts, a lender-of-last resort, a fiscal backstop, [and] regulatory and supervisory agencies. None of these exists globally."
Given the implausibility of global government and the abysmal failure of partial global regulatory regimes such as the Basel Accords on capital standards, the nation state is still the only game in town, says Rodrik: "The scope of workable globalization limits the scope of desirable globalization." Summing up elegantly, Rodrik defines a "trilemma." Despite the beau ideal of most of the economics profession, it is not possible to have deep globalization and political democracy and a competent nation state. At most, you can have two out of three. "Ultimately," Rodrik says, the quest for global governance leaves us with too little real governance." Rodrik's plea is for us to give up the dangerous fantasy of deep globalization to preserve the state as instrument of democracy and an efficient mixed economy. According to Rodrik, the "golden straitjacket" commended by Thomas Friedman, of a single set of rules and norms to attract global capital, is a straitjacket all right, but a disastrous one.
In his final chapters, Rodrik calls for a Capitalism 3.0 -- a mixed system in the spirit of Bretton Woods. Though I could quibble with some details, his basic principles are spot-on: "Markets must be deeply embedded in systems of governance. ... There is no 'one way' to prosperity. ... Countries have the right to protect their own social arrangements, regulations, and institutions. ... Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies."
Rodrik has done an immense service by reconnecting economics to politics, reviving an older tradition of political economy and generalized social science. One area he leaves out, however, is the politics of why deep globalization keeps gaining ground despite its practical failures -- specifically, its distorting effect on deliberation within the democracies. Had he ventured even further into the political thicket, he might have shed more light on the hegemonic alliance that links the economics profession, political elites, the global business class, and its low-wage partners in developmental states. Overthrowing this perverse paradigm in practice will be even more difficult than demolishing it in theory, as Rodrik has so elegantly done. (read more)
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