Sunday, 16 January 2011

Rhetorical Rebound

From an article in today's editorial section of the Taipei Times, this time written by one Dani Rodrik, a professor of political economy at Harvard:
"Here are seven commonsense principles of global economic governance that they might agree on. One, markets must be deeply embedded in systems of governance. The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all.

Markets require other social institutions to support them. They rely on courts, legal frameworks and regulators to set and enforce rules. They depend on the stabilizing functions that central banks and counter-cyclical fiscal policy provide. They need the political buy-in that redistributive taxation, safety nets and social insurance help generate. All of this is true of global markets as well."
What I find objectionable in these two paragraphs, more than simply the content of the assertions themselves with which I disagree and which I hold to be partly false and partly presumptuous, is that these assertions are presented as "common sense" with the implication of that term being that anyone who disagrees must be lacking in "common sense" and whose views ought therefore perhaps, to be "taken with a pinch of salt" if not simply dismissed outright. It is just another form of the argument from authority, so often relied upon by poor propagandists. This isn't necessary. Some additional criticisms:

Rodrik uses the language of empirical statements to describe his political prescriptions - he presents his political values as mere facts. So he merely asserts that central banks, counter-cyclical policies, taxes and welfare schemes are necessary for the functioning of the market without at least a precis, or even a single sentence of justification for why he believes them to be so. Like the argument from authority, the intended effect is presumably to render his prescriptions as equivalent to facts not subject to dissent except by those whose views he presumably deems unworthy of attention anyway. Yet I believe that his assertions are at least problematic (where they are not largely false), and that this can be partly shown by their ahistorical nature, and partly by further argument and evidence. Prior to the passing of the Federal Reserve Act in 1913, for example, the people of the United States, without the services of a central bank, nonetheless enjoyed a market economy; the same can be said of the U.S. prior to the passing of the Social Security Act in 1935 and likewise prior to the passing of the various Federal Income Tax Acts from the civil war onwards. Moreover, although Rodrik's assertion that markets require other social institutions to support them, such as courts and laws, is true, it does not mean either that such institutions are logically prior to the market (they are not) or that they can only be established or operated by the right to violence presumed by the State (an entirely separate discussion). If it was Rodrik's intention to claim merely that markets may function better with such institutions than without, then perhaps he ought to have clearly expressed that view and gave at least some hint of argument for it.

The rhetorical effect of Rodrik's language is also reinforced by sleight of hand: his assertion that "the idea of self-regulating markets received a mortal blow during the financial crisis" is an assertion which obscures the fact that U.S. financial institutions were and are subject to government regulation, much of which may be easy for the naive observer to miss (or dismiss) because it is indirect - this is particularly true, for example, of the Communities Reinvestment Act. Michael Barr, a law professor at the University of Michigan wrote in his testimony to the House on their hearing on this act:
"...more than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision..."
Yet this claim ignores the fact that these independent mortgage companies arranged loans between sub-prime borrowers and CRA regulated lenders. Without the CRA, it is questionable whether many of subprime loans would have been made in the first place.

As against the substance of Rodrik's views expressed in the above quotation, I believe (with the Austrians) that, in spite of the Fed's attempt to draft effective counter-cyclical measures, it is precisely the Fed's exercise of monetary policy which actually creates and sustains the trade cycle by keeping interest rates artificially low, encouraging excessive lending and malinvestments (e.g. the housing bubble) and thereby distorting the structure of both capital and labour markets. So, I would say, with Hayek, that markets could function far more efficiently in the absence of a central bank with its monopoly on the issue of currency being replaced by competition among competing commodity-exchange currencies. The primary reason for this is that under a competitive system, any tendencies on the part of one currency-issuing institution toward inflation or deflation would be restrained by the freedom of the public to switch their custom to another currency.

Rodrik is, and should continue to be, free to express his views in whichever way he likes - quite irrespective of criticism. Yet it is nonetheless true that he could have presented his opinions as precisely that - as opinions which depend upon argument, rather than "common sense" matters of fact.

My comment to Rodrik himself:
"Mr Rodrik: I will say to you that not only do I strongly disagree with you, but that the manner in which you present your views is transparently manipulative and therefore unworthy of academic virtues."

Update: Look at this post by Rodrik from November last year. The manner in which the questions are asked is all important. The guy is not an academic - he's a propagandist, and a cheap one at that.


  1. Michael,

    His article seemed to be an advertisement for his book that was released later in 2011. I'm sure he elaborates on his position in his book.

    I was curious if you would care to comment on his paragraph #4?

    4."We should therefore accept that countries may uphold national rules – tax policies, financial regulations, labor standards, or consumer health and safety rules – and may do so by raising barriers at the border if necessary, when trade demonstrably threatens domestic practices enjoying broad popular support. If globalization’s boosters are right, the clamor for protection will fail for lack of evidence or support. If wrong, there will be a safety valve in place to ensure that contending values – the benefits of open economies versus the gains from upholding domestic regulations – both receive a proper hearing in public debates."

    Also, one more from an article about the failure of NAFTA which I recently read:

    "The Mexican experience reminds us that increased trade and investment should not be the end objectives of economic integration. Instead, they should be considered as possible means to improve social welfare."


  2. Derek,

    Certainly: that fourth paragraph exemplifies two points on which I would reject Rodrik's prescriptions.

    First, his royal "we" and insistence upon "popular support" is the democratic endoresement of coercion, i.e. an instance of coercion is justified if enough people agree with it. My objection to this is that my life is not the rightful property of other people to violate with coercion, whatever their number. Simple.

    Second, it is disingenuous for Rodrik to claim this: "If globalization’s boosters are right, the clamor for protection will fail for lack of evidence or support." Under free trade, some people will lose jobs and others (often in other countries) will gain them - nobody disputes this, nobody claims that real people will not suffer under free trade conditions. Even though the overall economy is likely to "benefit" from free trade, the "economy" is not a person; it is made up of millions of real people some of whom will suffer and find it difficult to cope, whilst others may find the adjustment easier.

    What people like Rodrik sometimes fail to consider, however, are the costs of protectionism, who these costs typically fall on and what their secondary consequences are over time.

    One reason (though certainly not the only one) why I support free trade is because I believe the costs of protectionism outweigh the costs of free trade, though I recognize that settling such a issue on an empirical basis is out of the question - unless we compare extremes (e.g. Hong Kong vs North Korea).

    On the Mexico quote: wellbeing is the point of trade - i.e. people would not trade if they did not think it beneficial in some way. But again nobody claims that trade alone is the answer to everybody's problems - the people in Mexico suffer from a lot more than just lack of trading opportunities, so it should therefore come as no surprise that increasing trade between Mexico and the rest of North America is not going to solve all of their problems. As you said yesterday - Mexico is a "mess"...

  3. On your first point. But isn't there some need for a consensus based on popular support for a society to exist? To take a simple example. Let's say I want to start a business--what if I setup shop inconveniently, near a popular location, obstructing traffic or just "getting in the way". Is this okay, or does some type of consensus need to be reached by the majority regarding what can be done, and where? If there is no 'voting process', who then has the right to make a decision that will have effects on other people?

    OK, your second point: You say that protectionism will cause costs and consequences over time. For Mexico prior to NAFTA, who do you see as carrying the burden of these costs? And specifically, what are these costs? I would assume you will respond by saying the state takes money from working taxpayers, and gives it to the poor/peasants/farmers, keeping them on life support.

    Lastly, I'm curious what you have to say about 'transitional economies'. For instance (and to stay on the same topic), when Mexico signed NAFTA, many new that imports from U.S. Agribusiness would eliminate Mexico farmers. But, the cost of food went up for Mexicans, and the farmers lost their jobs. How does this (free trade) benefit Mexico, when the majority of their population worked in the countryside? And, to get back to my transitional economy question: is there any way that the Mexican government could have eased the transition, providing some sort of consolation and investment for the Mexican farmer's future? For instance, perhaps by opening up Mexico's economy to U.S. investors, Mexican farmers would in return gain rights and access to some agricultural technology that the U.S. possesses, as not to displace so many of their people people. Perhaps this would have been in the U.S.'s interest as well, considering a result of NAFTA was increased illegal immigration problems for the U.S..


  4. On decisions affecting other people - this is the importance of the political recognition of rights (since rights are universal, they have two-way implications for either party, e.g. I have the right to private property, but so do other people and I must therefore consider possible externalities). Does there need to be some sort of "consensus"? Yes. Must that "consensus" arrive at coercion via democratic mechanisms? No.

    "For Mexico prior to NAFTA, who do you see as carrying the burden of these costs? And specifically, what are these costs?"

    I'd have to read up a bit on Mexico to be specific.

    "I would assume you will respond by saying the state takes money from working taxpayers, and gives it to the poor/peasants/farmers, keeping them on life support."

    That might have been one dynamic, but more than likely it'll have been the poor and the peasants who were exploited too, since they tend to be the politically weakest groups - even the "protections" dished out to the poor in other countries tend to have perverse, and perniciously exploitative aspects. Farmers are often more politically protected than other groups, but in the case of Mexico I'd have to read up.

    " there any way that the Mexican government could have eased the transition..."

    Possibly yes, but that would likely have created other problems (e.g. the "me too" effect - the State "helps out" one industry and the others start clamouring for help too). It's not all a question of what the Mexican government could have done or not done since U.S. government policies are heavily consequential for Mexico too e.g. the prohibitions on drugs like cannabis incentivizing the narcotics business with its particularly ugly "externalities"; the subsidies and manipulation of U.S. agriculture; and the unsustainable politicization of healthcare, education and housing - all of which provide incentives for illegal immigrants from Mexico.

    The Mexican government could perhaps have done this or that differently, but they were never in a position to do anything about U.S. policies.


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