AEA Papers and Proceedings 2020, 110: 366–371 https://doi.org/10.1257/pandp.20201000
ECONOMICS FOR INCLUSIVE PROSPERITY (EFIP)
Economics after Neoliberalism: Introducing the EfIP Project †
By Suresh Naidu, Dani Rodrik, and Gabriel Zucman*
We live in an age of astonishing inequality, have organized a group of economists—the together with volatile and oligarchic politics. Economics for Inclusive Prosperity EfIP net- We also confront seemingly intractable ineffi- work—to make policy recommendations( across) ciencies in key sectors like education, finance, a wide range of topics, including labor markets, health, and media, and a spectacular ongoing public finance, international trade, and finance.1 climate crisis. The purpose of this nascent collective effort is We believe that these are all solvable prob- not simply to offer a list of prescriptions for dif- lems—or at least that we can make serious head- ferent domains of policy but to provide an over- way on them. Economists have an indispensable all vision for economic policy that stands as a role to play. Indeed they have already started to genuine alternative to the market fundamental- play it. ism that is often—and wrongly—identified with economics. I. The Role s of Economists We personally saw the power of this iden- ( ) tification in early 2018, when the three of us While the sociology of the profession—career attended a workshop on “new thinking beyond incentives, norms, socialization patterns—often neoliberalism.” The participants—historians, militates against engagement with the policy political scientists, sociologists, legal scholars, world, especially by younger academic econo- and economists—agreed that the prevailing mists, a sense of public responsibility is bring- neoliberal policy framework had failed society, ing people into the fray. resulting in monumental and growing inequal- The tools of economics are critical to devel- ity. All of us were worried by the illiberal, nativ- oping a policy framework for what we call ist turn in our politics, fueled in part by these “inclusive prosperity.” While prosperity is the chasms. There was consensus around the need traditional concern of economists, the “inclu- for a genuine alternative—a set of policies that sive” modifier demands both that we consider were both effective and inclusive, responding the whole distribution of outcomes, not simply to legitimate grievances without sowing deeper the average, and that we consider human pros- societal divisions. perity broadly, including nonpecuniary sources Although we fully embraced these aims, we of well-being, from health to climate change to found ourselves on the defensive. For in the political rights. To improve the quality of pub- eyes of many, the turn toward neoliberalism is lic discussion around inclusive prosperity, we closely associated with economic ideas. Leading economists such as Friedrich Hayek and Milton Friedman were among the founders of the Mont * Naidu: Columbia University email: sn2430@ ( Pelerin Society, the influential group of intellec- columbia.edu ; Rodrik: Harvard Kennedy School email: tuals whose advocacy of markets and hostility to [email protected]) . Zucman: UC-Berkeley (email: [email protected] . )This is a revised and updated( ver- government intervention proved highly effective sion of our introduction to) EfIP policy briefs, published orig- in reshaping the policy landscape after 1980. inally in the Boston Review. We thank Joshua Cohen, the other founding EfIP members, and participants in the Boston Review forum for comments. 1 A list of these policy briefs and the current members of † Go to https://doi.org/10.1257/pandp.20201000 to visit EfIP are available at https://econfip.org. We encourageall the article page for additional materials and author disclo- economists to submit policy briefs drawing on economic sure statement s . research. ( ) 366 VOL. 110 ECONOMICS AFTER NEOLIBERALISM: INTRODUCING THE EFIP PROJECT 367
Deregulation, financialization, dismantling of other economists all are available at https:// the welfare state, deinstitutionalization of labor econfip.org/ . ( markets, reduction in corporate and progressive In the face) of the broad loss of legitimacy taxation, and the pursuit of hyperglobalization— neoliberalism has cost economics, we must the culprits behind rising inequalities—all seem first address the issue of how to persuade to be rooted in conventional economic doctrines. noneconomists that economics is part of the The discipline’s focus on markets and incen- solution. To be sure, many economists’ habits, tives, methodological individualism, and math- especially when it comes to how they engage in ematical formalism all seem to stand in the way public debates, are to blame for the misunder- of meaningful, larger-scale economic and social standing of what economics is and what econ- reform. In short, neoliberalism appears to be just omists do. another name for economics. Among many things, economists study Consequently many people view the disci- markets. When markets look like they do in pline of economics with outright hostility. They textbook economics, they do a good job of believe the teaching and practice of economics aggregating information and allocating scarce has to be fundamentally reformed for the disci- resources. The principle of comparative advan- pline to become a constructive force. There are, tage, which lies behind the case for free trade, indeed, legitimate reasons for discontent with the is one of the profession’s crown jewels—both way economics is too often practiced and taught. because it explains important aspects of the Conservative foundations and think tanks have international economy and because it is, on its often monopolized the banner of economics in face, so counterintuitive. Similarly, economists policy circles, pushing the view that there is a believe in the power of incentives: we have evi- steep efficiency–equalitytrade-off and assigning dence that people respond to incentives, and we priority to economic growth. Students often leave have seen too many well-meaning programs fail their introductory economics courses thinking because they did not pay adequate attention to that “markets always work.” Conservatives tend the creative ways in which people behave to to deploy “economics” as a justification for pre- realize their own goals. ferred policies, while liberals are seen as insensi- Yet too many economists believe their quan- tive to the requirements for prosperity. titative tools and theoretical lenses are the only Our response is fundamentally different. ones that count as “scientific,” leading them to Many of the dominant policy ideas of the last dismiss disciplines that rely more on qualitative few decades are supported neither by sound eco- analysis and verbal theorizing. Many econo- nomics nor by good evidence. Neoliberalism— mists feel they need to take the side of markets or market fundamentalism, market fetishism, because no one else will and because doing oth- etc.—is not the consistent application of modern erwise might “provide ammunition to barbar- economics but its primitive, simplistic perver- ians” i.e., self-interested pressure groups and sion. And contemporary economics is rife with rent seekers( . And even when some economists new ideas for creating a more inclusive society. recognize market) failures, they worry govern- But it is up to us economists to convince our audi- ment action will make things worse and sweep ence about the merits of these claims, which is many of the discipline’s caveats under the rug. why we have embarked on this project. We hope Economists thus get labeled as cheerleaders for the policy briefs written by EfIP members, some free markets and hyperglobalization. of which we outline here, stimulate and acceler- Economists also often get overly enamored ate academic economists’ sustained engagement with models that focus on a narrow set of issues with creative ideas for inclusive prosperity.2 We and identify first-best solutions in the circum- have since had additional contributions from scribed domain at the expense of potential complications and adverse implications else- where. A growth economist, for example, will 2 There are many think tanks that rely on economists’ analyze policies that enhance technology and ideas and engage them in thinking about policy issues. innovation without worrying about labor mar- However, we are not aware of any academic network of economists focused on turning research and scholarship to ket consequences. A trade economist will rec- policy use in the broad domain that we have called “inclu- ommend free trade and assume that devising sive prosperity.” compensatory mechanisms for people who lose 368 AEA PAPERS AND PROCEEDINGS MAY 2020 their jobs is somebody else’s responsibility. And market failures. For example, to address global a finance economist will design regulations to warming, economists are likely to support put- make banks safe without considering how these ting a steep price on carbon. But the science of may interact with macroeconomic cycles. Many economics has never produced predetermined policy failures—the excesses of deregulation, policy conclusions. In fact, all predictions and hyperglobalization, tax cuts, fiscal austerity— conclusions in economics are contingent. The reflect such first-best reasoning. To be useful answer to almost any question in economics is in discussions of real policies, economists have “it depends,” followed by an exegesis on what to evaluate those policies in the totality of the it depends on and why.3 Back in 1975, in a col- context in which they will be implemented and lected volume entitled International Trade and consider the robustness of policies to many pos- Finance: Frontiers for Research, an economist sible institutional configurations and political named Carlos F. Diaz-Alejandro wrote, “by contingencies. now any bright graduate student, by choosing But these bad habits aside, contemporary his assumptions … carefully, can produce a economics is hardly a paean to markets and self- consistent model yielding just about any policy ishness. The typical course in microeconomics recommendation he favored at the start” p. 97 . spends more time on market failures and how Economics has become even richer in the( inter)- to fix them than on the magic of competitive vening four decades. We might say, only slightly markets. The typical macroeconomics course facetiously, that today the graduate student need focuses on how governments can solve prob- not even be that bright! lems of unemployment, inflation, and instability Moreover, economics research has become rather than on the “classical” model where the significantly more applied and empirical since economy is self-adjusting. The typical finance the 1990s. This is important because system- course revolves around financial crises, exces- atic empirical evidence is a disciplining device sive risk taking, and other malfunctions of against ideological policy prescriptions. The financial systems. In fact, the “competitive equi- recent empirical bent makes it more difficult to librium model” in which free markets are maxi- idolize markets because it makes it more difficult mally efficient—even if they are not good for fair to ignore inconvenient facts. Recent empirical distribution—is the dominant framework only findings, for example, have found that interna- in introductory economics courses. Thoughtful tional trade produces large adverse effects on economists quickly move away from it. some local communities, that minimum wages Economics is still somewhat insular within do not reduce employment, and that financial the social sciences because of its methodologi- liberalization produces crises rather than faster cal predilections: methodological individualism, economic growth. model-based abstraction, mathematical and sta- Economics does have its universals, of course, tistical formalism. But in recent decades econo- such as market-based incentives, clear prop- mists have reached out to other disciplines and erty rights, contract enforcement, macroeco- incorporated many of their insights. Economic nomic stability, and prudential regulation. These history is experiencing a revival, behavioral higher-order principles are associated with effi- economics has put homo economicus on the ciency and are generally presumed to be condu- defensive, and the study of culture has become cive to superior economic performance. But these mainstream. At the center of the discipline, dis- principles are compatible with an almost infinite tributional considerations are making a come- variety of institutional arrangements, with each back. And economists have been playing an arrangement producing a different distributional important role in studying the growing concen- outcome and a different contribution to overall tration of wealth, the costs of climate change, prosperity. The recipe thus calls for comparative the concentration of important markets, the institutional analysis of economic performance— stagnation of income for the working class, and not glib “markets work” slogans. The abstraction the changing patterns in social mobility. Economists still have a strong bias toward 3 Rodrik 2015 argues that the scientific nature of eco- market-based policy solutions, and the pol- nomics resides( precisely) in this ability to generate condi- icy prescriptions endorsed by economists tend tional hypotheses that can be confronted with evidence even to be narrowly focused on addressing precise if not decisively tested . ( ) VOL. 110 ECONOMICS AFTER NEOLIBERALISM: INTRODUCING THE EFIP PROJECT 369 with which economists perceive complex bun- both on our ultimate objectives and the potential dles of institutions also gives practitioners tools fit with local context. to help design large-scale alternatives, from As we grapple with new realities created by precision tweaks to the tax code to full-blown new technologies such as artificial intelligence , visions of post-capitalist societies. demographics—and ( their impacts on labor mar)- Consider even the simplest economic setting kets, such questions about the allocation of prop- of a perfectly competitive market economy. erty rights among different claimants—become When an economist draws a supply-and-demand crucial. Economics does not necessarily have diagram on the blackboard, she may not list all definite answers here. Nor does it provide the the institutional prerequisites that lie behind appropriate distributional weights how to weigh the two curves. Firms have property rights over the returns to workers, employers,( and the gov- their assets and can enforce their contracts with ernment, and what procedural and deontologi- suppliers. They have access to credit, can rely cal constraints should be respected . But it does on public infrastructure such as transportation supply the tools needed to lay out the) trade-offs, and power, and are protected from thieves and thus contributing to a more informed democratic bandits. Their employees accept the terms of debate. employment and show up at work each day. The same kind of institutional indetermi- Consumers have all the information they need to nacy pervades all other policy domains. Which make reasonable choices. They are reasonably labor market institutions minimize job insecu- confident that firms do not cheat them. There is rity without jeopardizing employment creation? a stable unit of value and means of exchange for How do we best provide social protection with- buying and selling goods. out blunting economic incentives? What kind of Clearly markets rely on a wide range of insti- financial regulations ensure financial stability tutions; they are “embedded” in institutions, as without blocking financial innovation? What Karl Polanyi would say. But how should those kind of monetary and fiscal rules are best for an institutions be designed? Take property rights as open economy? Economics does not provide a an example. The Coase theorem suggests it does fixed answer to these questions. Instead, it high- not matter for efficiency how property rights are lights the potential consequences of different allocated as long as transaction costs are zero. arrangements. But the caveat does a lot of work here: trans- There is already a considerable variety of actions costs matter greatly. So we must make institutional arrangements in existence today. choices. Should a job belong to a company, a Welfare and labor market arrangements, for worker, or a combination? Perhaps the company example, differ greatly across the developed itself should be owned by a third party—a local world, and the United States can learn a lot from government entity, say—and simply ensure experiments elsewhere. But plausible institu- incentive compatibility for managers and work- tional diversity is not limited to existing prac- ers. That might sound crazy to most Americans, tices. We can—and will need to—develop new but China has eked unprecedented rates of institutions. Nothing in laissez-faire guarantees economic growth out of such a property-rights that growth will be equitable or globalization regime. Perhaps employers should have prop- sustainable. The markets that we have inherited erty rights for a fixed period only over new from the past are likely not those that we would assets they (create, with existing) assets distrib- intentionally craft. We need to design policies uted among other claimants. That too sounds and institutions that make inclusive prosper- crazy, unless we realize that is exactly what ity possible and globalization sustainable— the patent system does, giving innovators tem- politically and economically. With a powerful porary ownership over new “intellectual prop- theoretical machinery that allows them to think erty.” Perhaps the government, on behalf of the in abstract terms about such matters, econo- general public, should retain part ownership of mists’ imagination is crucial to the task. new technologies since so much of innovation relies on public infrastructure public R&D and II. Limitations and Criticisms subsidies, higher education, the( legal regime, etc. . The choices that need to be made must There is a clear tension: we believe econo- consider) distributional concerns and depend mists can be significant players in progressive 370 AEA PAPERS AND PROCEEDINGS MAY 2020 politics but are reluctant to make an explicit nor- killing the golden goose by suggesting that this mative commitment ourselves. Economists are a was a mistake? valuable expert community but should be more In our view, portraying China and India as neo- explicit and self-critical about their normative liberal success stories hides more than it reveals. assumptions and, alternatively, not shy about The key reforms in these cases are reconfigura- articulating the values that animate their work. tions of state–economy relationships, far from There is nothing in mainstream economics that neoliberal prescriptions. Indeed, if these coun- stands in the way of this, but we want to keep tries had been failures, there would be no short- our own values separate from what we think age of neoliberal takes today as to why that is so: economics can accommodate. the state is still too powerful, there is too much We also think that the liberation of economics industrial policy, international trade is not free from neoliberalism will allow for new flavors enough, and so on. Very little of why the policy of conservatism to be expressed in an econom- changes worked in these countries can be under- ics dialect. Now that a post-Trump Republican stood with textbook economics or the first-best Party is less in thrall to its free market factions, benchmarks of the neoliberal economist. We it is unsurprising that conservatives want an eco- would not want a post-neoliberal economics nomics that allows nonpecuniary values of tra- to become an ideological tool for defending dition, authority, and security to be articulated the rents of rich citizens against incursions by as social goals to be traded off against economic the poor. But we would also like economists to performance. understand that global economic integration is To reiterate, there is nothing in mainstream a means and not an end, and that a panoply of economics that stands in the way of the emer- institutional arrangements are needed to manage gence of a communitarian conservative view, it and keep it politically sustainable. Economists but to the extent this view depends on claims have a lot to contribute to this kind of policy about how the world works rather than what is problem, when aware of politics and pluralist good, it will have to be defended on the basis values, and we think a less ideological eco- of the peer-reviewed evidence to have standing nomics will do more to promote prosperity and inside contemporary economics. We are inten- development than one that always prescribes tionally aimed at debunking antieconomics ste- more markets and less government. reotypes we encounter on the left, and it is a task for others to exposit modern economics to an III. Some Ideas in the Policy Briefs audience of conservatives more concerned with family, community, and nation than economic The ideas in the policy briefs are varied, but growth. Besides the content of economics, all have grounding in recent economics research there are important sociological and pedagogi- and all are intended to be accessible by policy- cal changes that we view as complementary. In makers and journalists. Here we highlight a few socializing prospective economists, economics themes in the recent submissions. still fetishizes a combative attitude, superflu- Daron Acemoglu, Max Kasy, and Anton ous mathematical prowess, and cultural signi- Korinek all write about the endogeneity of tech- fiers of “smarts” in graduate students, creating nological change. Rather than take technology inhospitable environments for underrepresented as an exogenous shifter, these briefs show that minorities and women. This should all be fixed, policy, incentives, and even normative values both institution by institution and in the field as a have an important role in shaping what technol- whole, and it is a safe bet that the diversification ogy looks like and who it benefits. of the economics pipeline will also diversify the Ilyana Kuziemko, Sandra Black and Jesse policy conclusions. Rothstein, and David Deming all emphasize While neoliberal economics may be obso- direct government provision of goods like lete in the advanced countries, some argue that education, health care and social insurance. its basic policy messages have proven to be For example, Kuziemko argues that extending effective in bringing large groups of desperately Medicare to the whole population would raise poor people into the global middle class. India middle-class incomes while substantially and China have shown the power of liberalized shrinking the health insurance sector and shrink- markets and international trade. Might we be ing bloated payments to providers. VOL. 110 ECONOMICS AFTER NEOLIBERALISM: INTRODUCING THE EFIP PROJECT 371
Another theme is the necessity of financial extensive system of labor market-specific wage regulation for macrostability. Atif Mian dis- floors, as proposed by Arindrajit Dube. cusses how inequality fuels a saving glut that Other proposals focus on important issues exposes the economy to aggregate risk. Anat like climate change, labor market policy, racial Admati discusses the importance of bank- inequality, and political institutions, and we ing capital requirements in order to prevent encourage readers to peruse them. excess leverage in banking, while S¸ebnem Kalemli-Özcan discusses leverage restrictions REFERENCES in nonfinancial corporations. Finally, monopoly and monopsony appear Diaz-Alejandro, Carlos F. 1975. “Trade Policies with some regularity. Jonathan Baker and Fiona and Economic Development.” In International Scott-Morton present ideas on streamlining anti- Trade and Finance: Frontiers for Research, trust. Jose Azar, Ioana Marinescu, and Marshall edited by Peter B. Kenen, 93–150. Cambridge, Steinbaum discuss applying antitrust in labor UK: Cambridge University Press. markets. Beyond antitrust, labor market poli- Rodrik, Dani. 2015. Economics Rules: The Rights cies for addressing monopsony include unions, and Wrongs of the Dismal Science. New York: as discussed in Suresh Naidu’s brief, or an W.W. Norton & Company.