Can we build a better economic framework that looks beyond the market-state dichotomy?

If the free market is dying, what replaces it won’t be found among other 20th-century models, but in new ideas that address contemporary challenges
Increased state support can help drive innovation and create jobs, but protectionist attempts to revive old industries are misguided

Dani Rodrik

Published: 11:30am, 10 Aug, 2022

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I wrote recently about the possible emergence, from both the left and right of the political spectrum, of a new economic-policy paradigm that could supersede neoliberalism.

The new framework gives governments and community organisations greater responsibility to shape investment and production – in support of good jobs, the climate transition, and more secure, resilient societies – and is much more suspicious of markets and large corporations. I called it “productivism”, though others can no doubt think of sexier appellations.

Throughout history, the pendulum of economic ideology has swung from deification of markets to reliance on the state and then back again. Superficially, we appear to be in the midst of another realignment. It was perhaps inevitable that neoliberalism’s excesses – increased inequality, concentration of corporate power and neglect of threats to the environment – would trigger a backlash.

A demonstrator holds a placard at a rally in Glasgow, UK, on November 6, 2021, during the COP26 UN Climate Change Conference. Photo: AFP

But establishing new paradigms means developing novel approaches, not just emulating the old. When the New Deal and the welfare state replaced the freewheeling capitalism that preceded them, policymakers did not simply revert to former mercantilist practices. They established new regulatory regimes and social insurance institutions, and embraced macroeconomic management in the form of Keynesianism.

If productivism is to be successful, it will have to move beyond conventional social protection, industrial policies and macroeconomic management. It will need to internalise lessons learned from past failures and adapt to new challenges.

State interventions aimed at reshaping an economy’s structure – so-called industrial policies – have traditionally been faulted for being vulnerable to capture by special interests. “Governments cannot pick winners”, as the adage goes. But much of this criticism is overdone. Recent systematic studies find that industrial policies encouraging investment and job creation in disadvantaged regions have worked surprisingly well.

Public-sector initiatives have been behind some of the most impressive hi-tech successes of our time, including the internet and GPS. For every Solyndra, the US solar cell manufacturer that failed spectacularly after obtaining US$500 million in federal government loan guarantees, there is often a Tesla, the successful electric vehicle manufacturer that also received government support during its development.

Tesla cars are seen at charging stations in California, US, on May 14. Photo: AFP

Nevertheless, there is much room for improvement. The most effective industrial policies entail close, collaborative interaction between government agencies and private firms, whereby companies receive critical public inputs – financial support, skilled workers or technological assistance – in exchange for meeting targets on investment and employment.

This kind of industrial policy is likely to work much better – whether in promoting local economic development or directing national technological efforts – than subsidies or tax incentives.

As the name suggests, productivism focuses on enhancing the productive capabilities of all regions and all segments of society. Traditional forms of social assistance, and especially better access to education and healthcare, can help in this regard.

But connecting people with productive employment opportunities requires improvements on the demand side of the labour market as well as on the supply side. Policies must directly encourage an increase in the quantity and quality of jobs available for the less-educated members of the workforce, wherever they choose (or can afford) to live.

In the future, the bulk of these jobs will come not from manufacturing, but from services such as healthcare, long-term care and retail. In the United States, virtually all net new job creation in the private sector since the late 1970s has taken place in services, and less than one in 10 workers is currently employed in manufacturing.

Even if US policy succeeds in reshoring supply chains, the effect on employment is likely to be limited. Even East Asian manufacturing superstars like South Korea and Taiwan have seen their manufacturing employment ratios steadily decline.

07:08

Tough times ahead for survivors of Hong Kong’s industrial past

This observation is important, because much US policy is focused on promoting hi-tech manufacturing, including the bill recently passed by Congress that will provide US$52 billion in funding for developing semiconductors. The initiative is aimed at both enhancing US national security vis-à-vis China and creating good jobs. Unfortunately, even if the first objective is met, the second is likely to remain elusive.

A similar point can be made about the subsidies for green technologies included in the Inflation Reduction Act, which US President Joe Biden is likely to sign soon. The green transition is without question an urgent priority that the new paradigm needs to tackle. But here, too, governments cannot kill two birds with one stone. Policies that target climate change are not a substitute for good-job policies, and vice versa.

Shoring up the middle class and disseminating the benefits of technology broadly through society requires an explicit good-jobs strategy. Such an approach would not be so fixated on competition with China, would target services instead of manufacturing, and would focus on promoting worker-friendly technologies.

More must be done for Hong Kong workers’ rights

It is too soon to tell whether a new productivism paradigm will gel, let alone prove adequate to the tasks at hand. Inflation worries may yet come to dominate policymaking and subordinate structural transformation.

Price stability is a sine qua non for the pursuit of productivist economic policies. But a return to orthodox macroeconomic approaches focused on monetary tightening and deficit reduction will leave little fertile ground for policy innovation and experimentation.

Ultimately, what economies need are sound ideas, not necessarily a new paradigm. By the time any set of ideas becomes conventional wisdom, it is riddled with one-size-fits-all generalisations that are bound to be unhelpful and misleading. Indeed, if the new thinking on productivism is successful, it will eventually be described as a “paradigm”, whether we call it that or not.

Dani Rodrik, professor of international political economy at Harvard University’s John F. Kennedy School of Government, is president of the International Economic Association and the author of “Straight Talk on Trade: Ideas for a Sane World Economy”. Copyright: Project Syndicate