November 21, 2014—Economists must heed their craft as well as science if they want to solve real-world problems, the noted development and globalization economist Dani Rodrick said. And by craftsmanship he means mastery of an “inventory” of models and applying the right model in specific contexts.
This ability to “navigate among models” in a context-specific fashion should define the professional, Rodrik told staff and guests at Nathan Associates. Unfortunately, students receive too little instruction in how to pick one model over the other. And while professionals like those at Nathan can rely on experience, taste, and judgment, all practitioners can be more systematic in using models to “lay bare a very large variety of causal relationships, one at a time.”
For example, a negative correlation between industrial performance and subsidies in South Korea doesn’t necessarily argue against industrial policy in East Asia, Rodrik said. While opponents of industrial policy argue that industry-specific subsidies failed because the government is unequipped to pick industries and is swayed by lobbying, the accurate story is that the Korean government had to make choices that took into account the cost of subsidies in gauging the amount of intervention. The government “was still doing the right thing.”
Rodrik’s remarks were especially meaningful to the Nathan staff, who apply economics in an array of international development services, including economic policy and governance as well as trade facilitation and private sector development, in addition to business and industry consulting and litigation support. While pressures are particularly daunting, because Nathan consultants work under deadline and where data may be incomplete, and in adversarial settings such as courtrooms, Rodrik offered encouragement and advice.
For example it might be wise to replace a model if the assumption, say, of perfect mobility of labor—the ease with which workers can move from one occupation or one location to the other—doesn’t work without too much adjustment. Lawyers in an antitrust case may discourage an economist from giving any quarter to the other side’s economic arguments, but the savvy economist can anticipate the counterarguments, even acknowledge them.
At the same time, communicating to judges and juries, let alone the public, can be a challenge when audiences crave neither subtlety nor nuance. Economists, meanwhile, are drawn into increasingly public roles. The risk, as Rodrik stated in a paper accompanying his remarks, is that “ideology and political preferences frequently substitute for analysis in choosing among models.”
“The reason that economics has become sort of a priesthood is largely because there has been demand for answers to the kinds of questions economists supposedly can answer,” such as the broadened role of government, he said in response to a question. “Some of this increase in the prominence of economics as a profession is justified. The key thing is to know exactly what we can do and what we cannot do and do the job of communicating that correctly.”
Rodrik is Albert O. Hirschman professor of economics at the Institute for Advanced Study, in Princeton, New Jersey. In a series of books, culminating in The Globalization Paradox: Democracy and the Future of the World Economy (2011), he challenged the notion that “hyperglobalization”—countries “opening themselves unconditionally to international trade and finance”—offers unalloyed benefits. Development policy, he has argued, cannot be prescriptive from the outside but needs to be country specific.
Though he stressed the need for craft, Rodrik emphasized equally that economics is still a science. More academically oriented economists come up with theories, such as auction theory, that contribute to business innovation such as the creation of eBay Inc.
“Let academics roam freely,” he said, joking that “a tiny majority will produce enough social value” to justify salaries.
Rodrik will expand on the discussion, “What Kind of Science is Economics,” in a forthcoming book from W.W. Norton. “What I’m trying to do is distill what economics does well,” he said.