Why Biden is right to depart from decades-old Western economic orthodoxy
- The ideas dominant since the 1980s produced highly financialised, unequal and unstable economies
- The Biden administration has launched an overdue economic transformation. The point is not to create the next ossified orthodoxy, but to learn to adapt policies
Neoliberalism is dead. Or perhaps it remains very much alive. Pundits have been calling it both ways these days. But either way, it is hard to deny that something new is afoot in the world of economic policy.
All of these policy changes represent a sharp departure from the conventional wisdom in Washington. Do they also augur a new economic policy paradigm?
Economic policies in the US, and the West more broadly, have long been in need of overhaul. The ideas dominant since the 1980s – variously called the Washington Consensus, market fundamentalism or neoliberalism – originally gained traction because of the perceived failures of Keynesianism and excessive government regulation.
02:26
Demand for free food rises in US as nation’s Covid-19 pandemic crisis deepens
The needed paradigm change might usefully start with how we teach economics. Economists tend to be enamoured of the power of markets to promote overall economic prosperity. Adam Smith’s invisible hand – the idea that self-interested individuals seeking only their personal enrichment might produce collective prosperity instead of social chaos – is one of the crown jewels of the economics profession.
It also remains deeply counterintuitive, which is perhaps why economists devote an inordinate amount of time proselytising about the magic of markets.
But economics is not a paean to free markets. In fact, much of economics instruction focuses on how markets may produce too much inequality, and how they fail in their own terms of allocating resources efficiently. Perfectly competitive markets that harmoniously produce stable equilibria are only one possibility among many.
The Smithian model is not the only one. Still, the knee-jerk reaction of many economists is to treat well-functioning, competitive markets as the relevant benchmark for any proposed departure from laissez-faire.
A key advantage of the CORE approach is that it tackles issues like inequality and climate change head-on. But the pedagogically more interesting move is that it replaces the standard benchmarks of economics with alternative benchmarks that are more realistic and useful.
Such a new paradigm for teaching and doing economics will produce better understanding of social outcomes. But we should recognise that it will not produce a new paradigm for economic policy. And that is as it should be.
All of our previous policy paradigms – whether mercantilist, classical liberal, Keynesian, social-democratic, ordoliberal, or neoliberal – had important blind spots because they were conceived as universal programmes that could be applied everywhere and at all times.
03:14
Is the US economy an oligarchy?
Inevitably, each paradigm’s blind spots overshadowed the innovations it brought to how we think about economic governance. The result was overreach and pendular swings between excessive optimism and pessimism about government’s role in the economy.
The right answer to any policy question in economics is: “It depends.” We need economic analysis and evidence to fill out the details of what the desired outcome depends upon. The keywords of a truly useful economics are contingency, contextuality and non-universality. Economics teaches us that there is a time for fiscal expansion and a time for fiscal retrenchment.
Our societies are confronted with vital challenges that require new economic approaches and significant policy experimentation. The Biden administration has launched a bold and long-overdue economic transformation. But those who are seeking a new economic paradigm should be careful what they wish for. Our goal should be not to create the next ossified orthodoxy, but to learn how to adapt our policies and institutions to changing exigencies.
Dani Rodrik, professor of international political economy at Harvard University’s John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy. Copyright: Project Syndicate