He predicted globalization's failure, now he’s planning what’s next

Dani Rodrik (Intro): And that's, I think, where economists have generally tended to go wrong, is become too wedded to a particular model, so mistaking a model for the model and then sort of trying to apply it. Going back to our earlier discussion, I mean, there's a version of neoliberalism, which is preference for markets, which might work under certain circumstances when, let's say, there's too much regulation or incentives have all been distorted because of variety of factors, then going to the essential logic, the market logic, might make sense, but you can also overdo that. There will often be circumstances when that model will fail very badly. We have not been very good at changing the models.

Ralph Ranalli (Intro): Welcome to the Harvard Kennedy School PolicyCast. I’m your host, Ralph Ranalli. For more than a quarter century, economist and Harvard Kennedy School professor Dani Rodrik has been ringing alarm bells about the dangers of globalization. And for a long time, it didn’t seem like a whole lot of people were listening. But now as record economic inequality, a climate in crisis, and global financial shocks from to the COVID pandemic and Russia’s invasion of Ukraine have exposed both the vulnerabilities and shortcomings of both unchecked globalism and neoliberal orthodoxy about the primacy of markets, Rodrik may be having the world’s least-satisfying “I told you so” moment. Yet while the temptation might be to look backward for vindication, Rodrik is choosing to look toward solutions instead. He says that finding a way forward for the world economy will require two kinds of thinking: small picture—about how to create good jobs in an equitable way in specific settings—and big picture: imaging possible futures and what a more exclusive, post-globalism economy might look like. And he says it will also mean freeing political and economic discourse from what he calls a “prison of ideology” that rigidly limits policymakers’ ability to consider solutions outside of market-centric approaches. Rodrik recently launched a new project called Reimagining the Economy with fellow professor Gordon Hansen, supported by a $7.5 million grant from the William and Flora Hewlett Foundation. The initiative will be based at the Kennedy School's Malcolm Wiener Center for Social Policy and Dani Rodrik joins me now.

Ralph Ranalli: Dani, welcome to PolicyCast.

Dani Rodrik: Very nice to be with you.

Ralph Ranalli: So your books and writings have turned out to be very prescient given where we are today. In 1997, you wrote “Has Globalization Gone Too Far?” — which was 25 years ago — anticipating a lot of the criticisms of unfettered globalization that have now become widely accepted. In 2011, you wrote “The Globalization Paradox,” where you talked about the inescapable tension about pursuing democracy, national self-determination, and economic globalization at the same time. And I guess just wanted to start by wondering if you're feeling any sense of vindication or does this win the prize for least satisfying “I-told-you-so” moment?

Dani Rodrik: I don’t know if I feel any vindication, I certainly feel a lot more mainstream these days than I used to back then. So in that sense I’m feeling a little bit less forlorn and out in the woods. I’m not really very interested in going back and litigating the past, I’m more interested in how we can move forward. And I think the important question before us is how can we move forward and create a world economic and political order that is both more secure and more prosperous. And so the question is do we draw the right lessons from where we have ended up? And if so, what does that mean for the future order? So that’s really mostly where my concerns are these days.

Ralph Ranalli: And part of going forward is understanding, of course, what it is we're actually talking about, and finding some common ground on definitions. You've written about neoliberalism, which is a term that's widely used in mainstream circles, but one that even itsharshest critics concede that the definition of it is hard to pin down. Can you give me your economist’s definition of what neoliberalism is and how we can use that to go forward and try to figure out something better?

Dani Rodrik: That's a challenge. I mean, I don't know economists... economists are probably the ones that use the term neoliberalism the least. Even I myself resisted writing about neoliberalism as such or using the term for a very long time. I think my first real piece on neoliberalism was five years ago, where I wrote a piece for the Boston Review called rescuing economics from neoliberalism. I might have used the term sparingly before then, but I was never quite comfortable with it.

Eventually, I came to think that it does reflect a certain frame of mind. And whether we call it market fundamentalism, we call it neoliberalism, I think it is, broadly speaking, a kind of an excess of faith on what markets can achieve and an excessive deficit of imagination with respect to what collective action—whether it is on the part of the government as our agent or on the part of civic organizations or society—what collective action can achieve. So it's a highly distorted view of society where it all revolves around individual economic transactions and the sanctity of those transactions, as well as the solution of these decentralized market transactions to all our not just economic problems but also our social and political problems.

Ralph Ranalli: Yeah, my own personal definition of it, just that I've been walking around with, was always sort of that it was this mindset that everything can—and possibly should be—a profit center. And that there were some things that... and instead of a mindset where there are some things where it's okay that it's a profit center and it operates under the market capitalism model, but there are other things where that doesn't work and you don't end up with growth or with economies that work in an equitable way. In fact, you have the opposite.

You've said the problem that you've grappled with for your academic career, most or all of it, is really how to create economies that are both more productive and more equitable. And now you have a new project called Reimagining the Economy with Gordon Hansen. You've got a $7.5 million grant from the William and Flora Hewlett Foundation for the first five years, and the initiative will be based at the Kennedy School's Malcolm Wiener Center for Social Policy. Can you talk a little bit about the project and what you're looking to achieve with it?

Dani Rodrik: I think the project has narrow goals and broad goals. I think the narrow goal is really to envisage a new set of economic policy practices at the local and national level that can create better jobs, create a good jobs economy where people are not being left behind. Gordon and I both believe that we need a set of interventions that include—but go beyond—skills and training, to working with firms and coordinating services, public services, that enhance the ecosystem in which good jobs can be created and productive firms can be established. So that's the more micro, if you will, smaller scale objective is just doing this work of economists of understanding what works and what doesn't.

I think the broader objective, I would say, is also to think a bit more about what the future of the market economy is; what the future of our economy is going to look like. I don't think we can resuscitate the old New Deal welfare state kind of arrangements, so we'll need a new set of tools and ways of thinking about the kind of economy that we want to create. And so for that purpose, I think we're also very interested in talking to sociologists, philosophers, social and political theorists, to expand our institutional imagination. And so I think those are... We're moving on those dual tracks.

Ralph Ranalli: You've said we've lagged behind in generating good policy responses and good institutional responses, but that raised the question for me: Is it really a lack of responses, feasible responses, or more of a lack of will to pursue them? And I'm wondering about that in the context of where we are right now, because the pandemic has really laid bare globalism's flaws and the supply chain pain we've experienced to now is only going to be made worse by Russia's invasion of Ukraine. To what extent are you seeing attitudes changing over the last couple of years that maybe could lead to greater receptivity to new and different thinking and different responses than the ones we seem to be just trying over and over?

Dani Rodrik: Well, I mean, I think it is an opening. So right now it's quite clear that there is a general consensus that the kind of hyper globalization that we had, and since the 1990s, that what we described earlier as neoliberalism, that those are really essentially gone. Those are not the motivating ideas of our era. They're not going to be the ones that are driving policy and action in the immediate future. I think that opening means that there is room for doing different things. And I think we can take an ugly path or we can take a good path. And I think what I want to argue is that it is possible to think of a world economy that is both significantly open and responsible to our economic and public health and environmental challenges. In other words, can generate enough cooperation globally in those critical areas, but is also very sensitive to the legitimate needs of individual nations, for national security, for domestic equity and inclusion, for significant maneuvering room and autonomy in the conduct of their economic and social policies at home.

I think the mistake that we made in the hyper globalization era was to subsume all those other objectives under the logic of the global market. And essentially we made our economic and social policies and our objectives a means to an end, and the end was to compete in the global economy. So the global economy became the end and our national economies and their prosperity and their inclusiveness became the means. That is actually a relatively recent and different view of thinking about the relationship between the national and global. I think for the first few decades after the second world war, I think that relationship had been the opposite one, that it was that we viewed the global economy as a means to full employment and the achievement of healthy domestic economies in society. And I think it's only after the 1990s when we reversed those objectives.

Now, my claim is that in this new era it is entirely possible to strike a much better balance, that understands the priority of domestic goals, whether it is equality, whether it's social inclusiveness or whether it is national security, but those do not necessarily mean either that great powers have to seek primacy and therefore be over overtly aggressive against their other nations, or that they end up being closed economies pursuing autarky economic policies. I do believe that, you mentioned political will before, I think politicians just like everybody else operate in a prison that is framed and shaped by the ideas of the time. And I think that what made politicians in the 1990s and 2000s behave in a particular way, was less, in some sense, the power of banks or corporations or the rules of the WTO, than the ideas that they had internalized about what's the right way to do things. And it was that ideological prison that shaped and constrained what people could do. I think if we get the right ideas into people's minds, including politicians, I think constraints such as political will or the power of special interests also become significantly less constraining, I think. After all, I mean, nobody, no politicians does something by saying, "I'm doing this because all my money comes from a particular lobbyist or particular financial interest." Everything has to be rationalized by some understanding of what the pursuit of common good entails. And framing those, I think, is critical. And I think that's the key issue.

Ralph Ranalli: One of the other things I've found very interesting and engaging about your writing is that you're very forthright about the flaws in your own profession, which is being an economist. Can you talk a little bit about those flaws that you've written about and how they have contributed to getting us to where we are now?

Dani Rodrik: I find economics as a very powerful way of thinking. I think economists have theoretical and empirical tools that actually are very useful for me in the way that I think about both how our economy works at present and how it can be reformed. And I think those tools of thinking in a very abstract way, in the way of simple models, thinking carefully about evidence, thinking about causal inference, what causes what, I think those are, those habits of mind are extremely important. I think where often economists have gone wrong is committing the error of thinking a model is the model. I like this quote from Keynes, which is that economics is the science of thinking in terms of models joined to the art of finding the relevant models that fits the challenge of the time. I'm paraphrasing obviously. But there are really two ideas there. One is that thinking in terms of simplified abstract models is actually not a bug, it's a feature. And actually it helps because every social reality is very complex, but you can only understand it by trying to break it into its bare essentials, and that's what models do for us. But precisely because the world is complex and ever changing and essentially infinitely malleable, we can't ever have one model that's going to apply everywhere and over time to different circumstances. So a successful economist takes his inventory of models, his library of models, and tries to find the right model that applies to the context that he's analyzing. So that means that sometimes for example, the Keynesian model, the macro model, will fit. Sometimes it won't fit, so you may need to use a classical model. Or sometimes the competitive model will fit into a labor market, sometimes it won't, so you may need to use a monopolistic model, which produces very different results. So figuring out which model applies is critical.

I think we economists are very good at coming up with models and thinking in terms of models, but are not necessarily very good at navigating across those different models. In part because we actually don't teach it. We have one way of navigating models that we teach in graduate school, which is learning about causal inference, doing randomized experiments or doing sophisticated econometrics, but in most policy settings, we don't actually have the luxury of applying those sophisticated tools. We need to do this in real time without the perfect experiment or without the perfect econometric design. And we actually don't teach how to do that. I mean, we try to teach it in the program that I chair at the Kennedy School, which is the MPA ID, but it's much more informal. It's what we call the diagnostic approach to figuring out development policy. And that's, I think, where economists have generally tended to go wrong, is become too wedded to a particular model, so mistaking a model for the model and then sort of trying to apply it. Going back to our earlier discussion, I mean, there's a version of neoliberalism, which is preference for markets, which might work under certain circumstances when, let's say, there's too much regulation or incentives have all been distorted because of variety of factors, then going to the essential logic, the market logic, might make sense, but you can also overdo that. There will often be circumstances when that model will fail very badly. We have not been very good at changing the models.

Ralph Ranalli: Right, that's the art part. I really enjoyed your analogy—in this context—to maps. Can you talk about that a little bit? How there are different kinds of maps to describe the same physical circumstance and those maps are great when they're applied in the right context for the right purpose. Can you talk a little bit about that? I just found that—as a layman, not economist—I just found that very helpful as a way to get a grasp on it.

Dani Rodrik: Economist models are like maps, which are simplifications and deliberate distortions of the underlying reality. So if you look at the Boston subway map, you are not going to recognize any physical reality of Boston. It's not accurate. It's not drawn to scale, but it's incredibly useful if you're traveling by subway. Or you can look at a bike map or a walking map of downtown Boston. And again, it's a simplification because the only things that are going to be marked are those that are relevant to your bike route or to your walking route. But a lot of the other physical aspects, including major roads and other things are not going to be marked. So you have this dual feature of a model, which is that it's useful precisely because it leaves out a lot of the reality, but it's useful because it points you in the right direction, given where you want to go and your vehicle for transport.

The criticism that economists often get from other social scientists is that these models are just such distortions of reality, they're such "abstractions", but it's so much more complicated. We need to take a holistic view. I think the point is precisely that you can't... there is no understanding. There's no analysis that's possible without breaking a problem into its parts. In fact, we go back to the Greek roots of the term analysis, it means breaking a complicated problem into smaller components, into smaller parts so you can actually analyze each one of them separately, which you say everything is too complicated, there's no comprehension that's possible. At the same time, I think thinking about these models as maps also points to the mistake that often economists make, or where our weak point is, because, what I was saying before in terms of not being able to navigate the models would correspond to the mistake of, you're going out on your bike, but you take a subway map with you and that's not going to be helpful and it's actually probably going to be very, very bad. So if we don't have the right map with us, the consequence can be quite disastrous. So it's important that we have these maps, but we also need to know exactly which map to take with us, where. And that's typically where we don't necessarily do as well.

Ralph Ranalli: So you've said the work on your project will draw from international models that emphasize place-based approaches, which is, I guess, another way of saying a map that really is the useful map for the particular task you want to achieve other than, and instead of relying on solutions like tax incentives to attract new businesses. And one of the interesting examples that you cited there was this Chinese notion from the 1980s of townships and village enterprises, where you had collectives owned and controlled by local governments. And even though they were publicly-owned, the entrepreneurs received the protection they needed against expropriation, and the local governments had a direct stake in the profits of the firms. And it struck me that's that sort of turns the traditional model of a "company town"—which I think the landscape of America is littered with former company towns whose economies have collapsed—and it turns that on its head and essentially what you have are town companies and not just businesses that can pick up and leave when the next state over offers better tax incentives or to some country overseas. Can you talk about that model and other European models that are in this universe of the things you're going to be examining and maybe suggesting as alternatives to the neoliberal approach?

Dani Rodrik: I think we're quite open to considering different models of firm ownership or corporate governance. And I think we have examples of cooperative governance, cooperative firms or firms that are, in the case of TBEs in China, sort of owned by local governments or even firms that are owned through local, national public holding companies, state owned firms, that have periodically been successful. So I think that's an area that we need to have an open mind toward. We're interested in looking at those different kinds of possibilities. I'm a little bit skeptical about the idea of social enterprise, per se, in the sense of thinking of the enterprise as responding to broader social goals, rather than simply becoming economically more productive and making more profits for its shareholders. And the reason I tend to be a little bit skeptical is because I don't necessarily want the firm in whatever form to be the arbiter of what social value is. Our focus on sort of stakeholder capitalism and social enterprise and environmental and social governance, ESG for example, is often a kind of a shortcut to the harder work that we need to do. And I think we just basically hand this responsibility over to firms or to shareholders, but in a corporate context, to determine what the ends of corporations ought to be, in other words, what social value is. But I don't know that we have accountability mechanisms that are in place to ensure that whatever will come out of that system is the right one.

So I go into this a little bit skeptical that the right set of interventions really are about socializing the enterprise, if you will, other than in the sense that I think local communities and workers should have a much greater voice, because they're so directly involved by decisions that are taken by corporations. But ultimately I think we have to have broader social regulations and standards to which... different political processes through which those standards are being set. So I don't necessarily want, for example, a firm to decide what a good job is. I want a local community to decide what a good job is, of course, with interaction, in collaboration, with firms, but it should not be a decision for firms to decide what a good job is. I don't think the right way to create good jobs will be to rely on the goodwill of firms.

Ralph Ranalli: It seems to me that a lot of this is about, for lack of a better term, reconnecting economics and economic models to democracy. Because democracy is where you get the input from a broad base of people, in theory anyway, depending on your democratic model. And I think we've seen a lot of flaws exposed, not just in our economic system, but also in our democratic system lately. That would seem to me to be a very interesting challenge, because I think one of the fallouts of neoliberalism and hyper globalism is this large numbers of people who feel like they've been left behind by that system, and then you get the rise of right wing authoritarian and populist politics that is essentially anti-democratic. You just put the decision-making power into the authoritarian elites, as opposed to putting them into the power of the economic elites. How do you see us reconnecting economics to democracy in that way that is going to help achieve some of these goals?

Dani Rodrik: I think the key is to understand that one of our central dichotomies—which is embedded actually in the way that neoliberalism thinks—is this dichotomy between the market and the state, or the firms and the government. This dichotomy makes absolutely no sense at all. It doesn't make any sense because every successful market economy requires rules. And those rules are determined and set, in large part, by the state, by the public authorities. So rather than this being a market versus state thing, it's always market and state. And so markets and states are not substitutes. They are not alternative ways of achieving our objectives. They are compliments. And the whole question is, in what way should they compliment each other? So the moment you realize that a market economy requires rules, whether it's rules with respect to product standards, consumer information, about anti-competitive behavior, about macroeconomic policies that stabilize, aggregate demand, property rights and contract enforcement, which has to be provided by the state, the whole ecosystem of investments in infrastructure, research and development in education and training, which the states do by and large.

So these are things without which an economy cannot or a market or a firm cannot thrive. And so the question then becomes who determines those rules? Where do those rules come from? And the relation with democracy comes that democracy, essentially our meta regime, our meta institution, is the institution that establishes other institutions, including the rules that govern the management of the economy. So democracy then becomes sort of our rule-making machine. And so rather than being something that is in tension with the economy, that causes us to worry about whether it is going to be too much state ... it's really our rule making machine without which we cannot do. And of course then, once we understand that the state and the markets are complimentary, that democracy is the best way to generate the rules that require under which our government agencies will work and our economy will be shaped, then we've moved away from unproductive debates about the state and market, and then we can discuss what those rules ought to be.

Ralph Ranalli: I think since Reagan we've had, not just the dichotomy between the market and government, we've had outright hostility towards the notion of government itself in a lot of cases, but especially government interventions in regulations and rule making. How much of this... and it's always seemed to me, and you can tell me if you think I'm off base about this, but it's always seemed to me that the very nature of corporations and how they operate pushes them to reject as much regulation as they can simply because of the imperatives that are built into how corporations work and how the current rules under which they operate, that that is just an inherent part of the beast that is the modern corporation. Do you think there are changes that need to be made in the nature of how corporations operate in order to enable this necessary collaboration between government and economics for that collaboration to actually have a chance at succeeding?

Dani Rodrik: I mean, I think you're right that since the 1980s and the Thatcher and Reagan revolution, that the way that we've talked about these issues have made many people, including most notable, of course, corporations and corporate leaders, think about government and regulation as the opposition and as a hostile force. First, I mean, I think the wiser and the more thoughtful among them clearly understand that this is not inherently true for what I've talked about earlier, which is that governments would be nowhere, I mean, firms would be nowhere, including international corporations, without the laws and regulations and support of their host government and their home governments.

Then secondly, it's not always been like this. I mean, I think that's why now we're talking about a different era where I think it's much harder for corporate leaders to talk in those terms. But I think it's also important for the public leaders, for government leaders at the state and local level to demonstrate that they understand the nature of production, that they understand the nature of a firm, that they have the capability to provide the supports that are important and are appreciated by firms. But it's all a quid pro quo here. So on the one hand, we need firms to do what they do well, which is to innovate, which is to produce, to create good jobs, employ lots of people and invest for the future, but we also need local and government and state agencies to produce the kind of public inputs and services that are important for firms to achieve those objectives.

So a firm that sees that local agencies or local community colleges, or local economic development officials are investing in skills in creating the right ecosystems, that are able to provide management and technological assistance, that are creating the sites where they can expand into, understand and appreciate the benefits of those public services. And that creates the environment in which that kind of collaboration can develop. I mean, nowhere do you necessarily have to start with a full trust. It doesn't have to be that government agencies trust firms or the firms have full trust, but you can build trust by understanding what the objectives are and working towards common objectives. So I think where local economic development happens, happens well, is where you build on these collaborative arrangements and build trust over time. And that I think is entirely feasible. And once we do that, I think, nobody talks about a state versus government or public versus private, then becomes public and private. So public private partnerships then become, you know, kind of a non ideological way of talking about this because everybody realizes that the challenges are such that you need both sectors and civic organizations to work alongside. So that's inevitable.

Ralph Ranalli: So the last thing I wanted to touch on was, in the broader international context, the elephant in the room right now that I think more people are finally talking about, is the climate crisis and how that fits into all of this. And this notion that we need to move quickly to an economic model that's based on sustainability. Otherwise none of this really matters. Is there a model within these alternate economic ideas and maps that also incorporates sustainability in a way that is hopefully going to have a meaningful chance of giving our kids a livable planet to inherit from us?

Dani Rodrik: Climate transition is extremely important and I think it's another example of how our priorities for the world economy have gone astray in the last few decades. I mean, people now talk about globalization and de-globalization as if globalization was just one thing. I mean, the fact is that we established a very particular kind of globalization that revolved around maximizing international trade investment, where we put at the center of the global economy institutions like the IMF or the WTO, or the OECD. We might as well, we could have just as easily, if we had put our mind to it, created a globalization that revolved around international climate agreements, where we prioritized the green transition, a system where we significantly wrapped up our investments in green technologies, phased out fossil fuels and figured out ways in which we could provide the necessary technological and financial transfers to low and middle income countries, which have less capacity to do so. That would've been a very different model of globalization where, in some ways we would not have had nearly as much international trade and investment, but would've been a much healthier world and I think would've put us on amuch better path.

I think that's entirely ... that's still possible. I don't think it's going to come via global conferences, global agreements. I think it is much more likely to come as different groupings, so-called climate club countries, sort of basically ramping up their efforts. And that might even, in the transition, entail some restrictions on trade. For example, the Europeans are talking about these carbon border adjustments that would entail tariffs on highly dirty industries. And that might look like it's even violating the rules of the world trading order because it's protectionism. But I think that's a way to get there. And I think if we have our priorities straight that this is something that we can do. And I think that the same principle applies to a lot of different areas as well. We would have created a much better globalization if we had prioritized the rights of labor or they prioritized human rights as opposed to prioritize the rights of international banks or corporations. I think that's the kind of opening I was talking about before, which is precisely because everybody understands that hyper globalization is no longer sustainable. I think we now have the room to think about these alternative globalizations that might be more socially and environmentally more advantageous.

Ralph Ranalli: Well, Dani, thank you very much for this conversation. I felt like I learned a lot and I enjoyed it very much.

Dani Rodrik: Thank you, Ralph. Thanks for your interest. It was good to talk to you.

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