Monday, July 16, 2007

What a Difference a Month Makes

For Brad DeLong, who not so long ago was telling everyone to beware free marketeers bearing analysis:

My view is that the neoclassical economics toolkit can be very, very useful--no, stronger than that, is very useful and necessary--for everybody from the center on left. The methodological individualism of the toolkit forces you to look at real people and how situations help or hurt them. The competitive market benchmark assumed by the toolkit requires you to think carefully and specifically about just where the externalities are that keep you from relying on markets alone to solve whatever problem you are looking at. The equilibrium conditions established by the toolkit force you to check for unanticipated consequences, for blowback due to changes in incentives and so forth.

The result is that the neoclassical economics toolkit makes you a smarter, stronger, more powerful, more effective, more reality-based leftie.

By contrast, the neoclassical toolkit can be absolute poison for people right on center. It functions like a kind of crack, reducing their arguments to empty slogans: "the market takes care of that"; "acts of capitalism between consenting adults"; "they hired the money, didn't they?"; "it's not the government's, it's theirs." People right-of-center should be exposed to the neoclassical economics toolkit only after posting a $1M bond to cover collateral damage, and only under the supervision of trained professionals.

But, that was June. In July an actual bout of econosparring caught DeLong's attention, and it was the 'reality-based leftie' being drubbed:

In the ring, Dani Rodrik stumbles into a knockout punch from Don Boudreaux:

Apparently by a right hook:

The knockout punch, of course, is that Dani Rodrik's country whose "labor force that is producing at low levels of productivity" is doing so because it has lousy political institutions: it lacks the "constitution... judiciary, nation-wide financial regulation, and free flow of labor" that have underpinned economic growth in the rich post-industrial core. The poor country is poor because its government is incompetent, and corrupt.

And yet Dani wants--in this situation--to enhance and extend the role and powers of the poor-country government by asking it to implement an active protectionist industrial policy because "there exists a bunch of arguments having to do with learning and (domestic) market failures under which subsidization of tradable activities could speed up your economic growth."

As Lant Pritchett put it once: "there is nothing as catastrophic as state-led development led by an anti-developmental state." Any argument to commit a government to an active protectionist industrial policy must be accompanied by arguments about why the government will be capable and effective in this role when it has not been capable and effective in its primary roles of establishing property rights, providing tolerable administration of justice, building infrastructure, and providing education.

So I score this for Don: a knockout.

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