From the University of Chicago, Booth School of Business, Chicago Booth Review: Capitalisn't, August 2, 2024:
Harvard’s Dani Rodrik first introduced his theory of the “globalization trilemma,” which states that no country can simultaneously support democracy, national sovereignty, and global economic integration, in the late 1990s. Over time, the theory has gained influence as governments seek to address populism, trade imbalances, and uneven growth through renewed interest in industrial policy, or government efforts to improve the performance of key business sectors.
On this episode of Capitalisn’t, Rodrik joins hosts Bethany McLean and Luigi Zingales to discuss changing attitudes toward globalization, including its distributional effects, its impact on politics, and its lack of a consistent narrative between academia and the media.
Audio Transcript
Dani Rodrik: There are a whole bunch of maintained assumptions that we are not explicitly testing. Government intervention is ineffective. Markets tend to do well. It’s pointless to try to countervail against the free flow of capital.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Luigi: In 2009, a prominent economist labeled the period between 1980 and the Great Financial Crisis as the age of Milton Friedman. This period was characterized by the belief that reliance on market forces with an open economy and a stable macroeconomic environment with a sure property right was key to rapid economic growth.
Bethany: This period ended with the Great Financial Crisis and then really came to a crashing end with the COVID-19 pandemic. After these two cataclysmic events, globalization started to be reversed. Industrial policy has come back in vogue, and even the protection of property rights has started to be called into question.
Luigi: For example, with the idea of forgiving all the loans.
Jokes aside, if we take the term the age of Milton Friedman as the age that vindicated many of Milton Friedman’s claims, then we can say that this is the age of Dani Rodrik.
Bethany: Even a noneconomist like me has heard of Dani Rodrik, and I think I’ve heard of him because of his globalization trilemma: the impossibility of having at the same time a world market, national states, and a democratic system.
Luigi: Rodrik started to criticize globalization, what he calls hyper-globalization, in the late 1990s. Now, of course, Bethany, you’re too young to remember the ’90s, but at that time—
Bethany: Thank you, Luigi.
Luigi: This was the time of Clinton and Blair, who considered globalization not only desirable but inevitable. And, at the time, [Rodrik] pointed out that the distributional impact of globalization and its political consequences were not that great. In a functioning democracy, the losers from globalization would demand protection, and that is one reason why more open economies have larger welfare states. I think all these useful insights are something that very few people were pointing out at the time.
Bethany: I was laughing earlier because I thought, well, my age is not the reason why I might not remember the 1990s, but maybe we should stay away from that topic.
For Dani Rodrik, then, is it fair to say that he’s one of the rare individuals who can see outside his own time? We all do tend to believe whatever is the prevailing belief of the age. He was one of the first economists to criticize the so-called Washington consensus, the idea that protecting property rights and opening up the economy is sufficient to promote rapid growth. He was a strong supporter of industrial policy, a topic that was pretty taboo until the COVID-19 pandemic. I see him as not just an interesting thinker, but a very rare human being. Is that fair?
Luigi: It is fair. The most interesting part is that Dani is not a heterodox economist in the sense that we generally use the term because when you say heterodox economist, it’s somebody that uses a different methodology, and I think he’s a standard economist with heterodox views, which to some extent is more difficult to do. He has views that were regarded as outside the mainstream for many, many years and now have become mainstream.
Bethany: Fascinating. Without further ado, let’s bring in our guest, Dani Rodrik, who is the Ford Foundation Professor of International Political Economy at Harvard’s John F. Kennedy School of Government. He’s also the co-director of the Reimagining the Economy Program at the Kennedy School.
You’ve often talked about how the global economy needs a narrative to work, but in the international domain, laws and regulations aren’t very effective because they lack enforcement power. To function, the world economy needs to persuade people, hence the importance of a narrative.
What was the narrative that prevailed in the age of Milton Friedman, and what is that narrative now? Is there a narrative that we all agree on, or are we in search of a narrative?
Dani Rodrik: I think the answer to your second question is we are very much in search of a narrative. I think there was a well-established narrative during the period that I’ve called the hyper-globalization era, or people call it neoliberalism or market fundamentalism.
That was, in some sense, the overarching narrative about the wonders of the markets and how governments should just stay back, facilitate free trade and the flow of capital across the borders as much as possible. This would roughly be beneficial to all—even if not immediately, eventually—and all kinds of good things would follow.
Bethany: You didn’t see it that way. You were one of the few who raised questions. Why didn’t you see it that way, and what was it like to be an early naysayer?
Dani Rodrik: I think my skepticism was based both on economic history and economic theory. On economic history, effectively, what we were trying to do during the height of the hyper-globalization era was to relive the gold standard, so that if you were experiencing unemployment, eventually, enough gold would flow into your country to increase the money supply and reflate the economy. But also, if gold was scarce around the world, interest rates would go up, and a lot of your farmers would go bankrupt.
The conception of economic policy is that there was no role for the government to interfere in what the world market is doing to you, because ultimately, the world market is a better source of adjustment than what governments would do.
The first waves of populism, actually, were a reaction to globalization under the gold standard. Historically, we’ve seen the backlash to advanced forms of globalization, and I think it was impossible not to think that we were going to go through that.
The reason I say it was also based on economic theory is that the basic theory of international trade and comparative advantage is that trade enlarges the pie but also redistributes a lot of income. A lot of people, including many in the economics profession, were pooh-poohing those distributional effects....
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