Dani Rodrik - Economics Rules: The Rights and Wrongs of the Dismal Science

Economics
Rules

THE RIGHTS AND WRONGS OF THE
DISMAL SCIENCE

Dani Rodrik

W. W. NORTON & COMPANY

Independent Publishers Since 1923

New York | London

TO MY MOTHER, KARMELA RODRIK,

AND THE MEMORY OF MY FATHER, VITALI RODRIK.

THEY GAVE ME THE LOVE OF LEARNING AND THE POSSIBILITIES

FOR EMBRACING IT.

This book has its origins in a course I taught with Roberto Mangabeira Unger on political economy for several years at Harvard. In his inimitable fashion, Roberto pushed me to think hard about the strengths and weaknesses of economics and to articulate what I found useful in the economic method. The discipline had become sterile and stale, Roberto argued, because economics had given up on grand social theorizing in the style of Adam Smith and Karl Marx. I pointed out, in turn, that the strength of economics lay precisely in small-scale theorizing, the kind of contextual thinking that clarifies cause and effect and sheds lighteven if partialon social reality. A modest science practiced with humility, I argued, is more likely to be useful than a search for universal theories about how capitalist systems function or what determines wealth and poverty around the world. I dont think I ever convinced him, but I hope he will find that his arguments did have some impact.

The idea of airing these thoughts in the form of a book finally jelled at the Institute for Advanced Study (IAS), to which I moved in the summer of 2013 for two enjoyable years. I had spent the bulk of my academic career in multidisciplinary environments, and I considered myself well exposed toif not well versed indifferent traditions within the social sciences. But the institute was a mind-stretching experience of an entirely different order of magnitude. The institutes School of Social Science, my new home, was grounded in humanistic and interpretive approaches that stand in sharp contrast to the empiricist positivism of economics. In my encounters with many of the visitors to the schooldrawn from anthropology, sociology, history, philosophy, and political science, alongside economicsI was struck by a strong undercurrent of suspicion toward economists. To them, economists either stated the obvious or greatly overreached by applying simple frameworks to complex social phenomena. I sometimes felt that the few economists around were treated as the idiots savants of social science: good with math and statistics, but not much use otherwise.

The irony was that I had seen this kind of attitude beforein reverse. Hang around a bunch of economists and see what they say about sociology or anthropology! To economists, other social scientists are soft, undisciplined, verbose, insufficiently empirical, or (alternatively) inadequately versed in the pitfalls of empirical analysis. Economists know how to think and get results, while others go around in circles. So perhaps I should have been ready for the suspicions going in the opposite direction.

One of the surprising consequences of my immersion in the disciplinary maelstrom of the institute was that it made me feel better as an economist. 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. There was too much misinformation about what economists really do. And I couldnt help but think that some of the practices in the other social sciences could be improved with the kind of attention to analytic argumentation and evidence that is the bread and butter of economists.

Yet it was also clear that economists had none other than themselves to blame for this state of affairs. The problem is not just their sense of self-satisfaction and their often doctrinaire attachment to a particular way of looking at the world. It is also that economists do a bad job of presenting their science to others. A substantial part of this book is devoted to showing that economics encompasses a large and evolving variety of frameworks, with different interpretations of how the world works and diverse implications for public policy. Yet, what noneconomists typically hear from economics sounds like a single-minded paean to markets, rationality, and selfish behavior. Economists excel at contingent explanations of social lifeaccounts that are explicit about how markets (and government intervention therein) produce different consequences for efficiency, equity, and economic growth, depending on specific background conditions. Yet economists often come across as pronouncing universal economic laws that hold everywhere, regardless of context.

I felt there was a need for a book that would bridge this divideone aimed at both economists and noneconomists. My message for economists is that they need a better story about the kind of science they practice. I will provide an alternative framing highlighting the useful work that goes on within economics, while making transparent the pitfalls to which the practitioners of the science are prone. My message for noneconomists is that many of the standard criticisms of economics lose their bite under this alternative account. There is much to criticize in economics, but there is also much to appreciate (and emulate).

The Institute for Advanced Study was the perfect environment for writing this book in more than one way. With its quiet woods, excellent meals, and incredible resources, the IAS is a true scholars haven. Faculty colleagues Danielle Allen, Didier Fassin, Joan Scott, and Michael Walzer stimulated my thinking about economics and provided inspiration with their contrasting, but equally exacting, models of scholarship. My faculty assistant, Nancy Cotterman, gave me useful feedback on the manuscript on top of her amazingly efficient administrative support. I am grateful to the institutes leadership, especially its director, Robbert Dijkgraaf, for allowing me to be part of this extraordinary intellectual community.

Andrew Wylies guidance and advice ensured that the manuscript would end up in the right handsnamely, W. W. Norton. At Norton, Brendan Curry was a wonderful editor and Stephanie Hiebert meticulously copyedited the manuscript; they both improved the book in countless ways. Special thanks to Avinash Dixit, a scholar who exemplifies the virtues of economists that I discuss in this book, who provided detailed comment and suggestions. My friends and coauthors Sharun Mukand and Arvind Subramanian generously gave their time and helped shape the overall project with their ideas and contributions. Last but not least, my greatest debt, as always, is to my wife, pnar Doan, who gave me her love and support throughout, in addition to helping me clarify my argument and discussion of economics concepts.

Ten Commandments for Economists

1. Economics is a collection of models; cherish their diversity.

2. Its a model, not the model.

3. Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes.

4. Unrealistic assumptions are OK; unrealistic critical assumptions are not OK.

5. The world is (almost) always second best.

6. To map a model to the real world you need explicit empirical diagnostics, which is more craft than science.

7. Do not confuse agreement among economists for certainty about how the world works.

8. Its OK to say I dont know when asked about the economy or policy.