Mundell’s Goats

Nobelist Robert Mundell has put together a great slide show on the current uproar in which he identifies the five goats (slide 60):

• Ranieri
  
  
• Clinton
  
  
• Greenspan
  
  
• Bernanke
  
  
• Paulson
  

If you don't know who Ranieri is, go here. Mundell dings Ranieri for having "lost connection between original borrowers and lenders" which seems dead on to me: the reason we can't do workouts is that nobody knows who owns this stuff.

He blames Clinton for repealing Glass-Steagall which is a fair cop, although I'd say others are more culpable (I'm looking at you, little Phil Gramm). He also blames Clinton for "strengthening the 1977 Community Reinvestment Act," and I don't think we have enough data on that one yet. Way I see it, most of the problem loans came from lenders not covered by CRA, and lots of CRA borrowers have continued to perform well. But we need to know more.

The rap on Bernanke is not quite what you might guess: mainly that he let the dollar soar in 2008 which (per Mundell) triggered the credit crunch (so also PaulsOn).

BTW on close scrutiny, I see his five goats are really six: he also has a slide for Maurice "Hank" Greenberg, who gave us AIG.

H/T: Dani Rodrik. Not sure my link to Mundell will work; if not, follow the link from Rodrik's page.

Three of a Kind

What do these guys have in common: Charles Tilly and Dani Rodrik? Okay, maybe a lot of things, but what's the answer I'm looking for? Here's a hint: throw in a third name--A. O. Hirschman? Answer: Tilly and Rodrik are the first two winners of the Hirschman Prize, awarded by the Social Science Research Council (link). But it's more than that: the extra fillip is that I really can't think of a major award where the award and the recipients have so much in common--in common, that is, not so much in terms of content as of style. They're all original and creative, but so are a lot of other people. What's interesting about these three is that they seem to have an extraordinary openness to possibilities from more or less obvious ideas that don't seem to have been obvious (until they wrote) to anyone else--a kind of Mozartean ease in making the hitherto unnoticed appear inevitable. No point in detailing the entire record, but let me commend one of the best economics books I ever read--Hirschman's Exit, Voice and Loyalty; and one of the best books about politics--Tilly's Coercion, Capital and European States (1992); and about the best economics book I've read in the past year-Rodrik's One Economics, Many Recipes (2007).

The SSRC blurb on Hirschman says he wrote "some of the most provocative books in the social sciences, on recurring themes of economic development, political democracy, and the surprising relationships between the two" (link). That's a pretty good capsule summary of all three.

H/T: Crooked Timber.

Aftethought: Oh, and here's a nominee for next year (link).

Notes on Dani Rodrik

Notes on Dani Rodrik’s One Economics, Many Recipes (2007) (I'm always late getting to the party).

One thing to like about Dani Rodrik: his modesty. Of course, as a development economist, he has a lot to be modest about. It is hard to think of a profession that has been more crashingly, resoundingly, repeatedly, publicly wrong over 50-60 years in the advice it has offered (cf. this guy, passim, ad nauseam).

In fairness, Rodrik isn’t personally responsible for many, if any, of the excesses and illusions of his trade. Rather, he shows signs of having learned from them.. Indeed his point of departure would be the “Washington Consensus” the summum bonum of development wisdom, or as Rodrik presents it, the “Augmented Washington Consensus”—the mantra of first principles that are presumed to underlie attempt at economic development.

What keeps Rodrik’s list from being just another anodyne position paper is that he actually tries to measure the effectiveness of the consensus in action. And surprise: it doesn’t work very well. Consider the “Asian Tigers”—Korea, Taiwain, Thailand, even China itself. Every one of them has achieved growth under terms that the Consensus would deem impossible. Or South America: hardly any place in the word has worked harder to stand by first principles. Its reward: stagnation. Even Africa has taken impressive steps to clean up its act with little or nothing to show for it.

Rodrik doesn’t present himself as a radical here. By his own avowal,his tastes are quite orthdox. Rather his point is that agendas like the “Consensus,” are too abstract, too formalized, too immune for the texture of experience.

The strategy has the virtue of putting Rodrik into the small and honorable company of those who understand the first principle of market ideology: that a market is an artifact, created, nurtured and sometimes distorted and destroyed by those who live in it. So just as there are many recipes, there are many markets, and some can do their jobs in ways that academics can scarcely have anticipated.

Rodrik is great at the telling counter-example, suggesting how abstract principles may go awry. He’s got plausible and interesting stories about how some places (China, Korea, Taiwan) work well in spite of the rules and how some (Brazil) work well in spite even of themselves.

He is, perhaps inevitably, less elegant at prescription. He operates on the principle that most of life is learning-by-doing, and that entrepreneurship, by definition, is discovery of stuff that you didn’t know in advance. This is probably true enough in itself, but it leaves the reader with the suspicion that you’ll need managers as clever and self-critical as Rodrik himself (plus a huge dollop of luck) to make it work.

By fortuity, just a few hours after I finished Rodrik, I read Greg Mankiw’s complaint that “mere Muggles” (link) don’t get free trade. Rodrik, as it happens, offers a ready-made response: free trade is not an end in itelf; it is an instrument. Free trade may help to bring economic growth but there are economies that have grown without it (that woud be us, among others) and those that have not grown with it. Institutions are richer than theory, and economics is richer than doctrine (cf. Rodrik's own blog, with a useful comment thread (link)).

Brad DeLong says that Rodrik is “the finest political economist of [DeLong’s] generation” (link). That’s a bold claim. It might be true, but I don’t need to endorse it to say this is about the best single book on development that I’ve read for a very long time.

Who're You Callin' Insolvent?

Dani Rodrik didn’t write this about the United States, and he didn’t write it last week, but read this catalog of how an economy might go bollywackers:

When the economy is on an unsustainable path—for example, when the country as a whole or the government is accumulating obligations at a rate that will compromise its ability to abide by them—participants in the economy know that the current rules of the game will need to be abandoned and act to protect themselves from the expected changes rather than engage in productive investments. Problems of macro stability can be generated by imbalances arising from different areas. The fiscal accounts may be in deficit, and public debt may be increasing faster than the capacity to service it. Longer-term fiscal commitments, in particular the actuarial liabilities of the government vis-à-vis the pension system, may bankrupt an otherwise solvent government. A monetary policy may be too looses, causing a loss of international reserves and an eventual large depreciation. Banks may be taking excessive risk, which can result in a disruptive crisis that often weakens both fiscal and monetary stability. The country may be running large external imbalances that translate into reserve loss or a rapidly rising external debt and signal the need for eventual currency depreciation. The real exchange rate may be misaligned, limiting the profitability and growth of export- and import-competing sectors.

—Dani Rodrik, One Economics, Many Recipes 74 (2007)

Remind you of anyone you know?

Milton-Friedmanism RIP

Brad DeLong is on a roll this week. He’s declared the Democratic primaries over. And now he has declared Milton Friedman dead.

He’s got a better chances for selling the second claim than the first, but actually, his full claim is stronger: not just that Friedman is dead but that the Age of Milton Friedman is now kaput at the age of 30, the victim of increasing irrelevance and general exhaustion.

Okay, I exaggerate. DeLong didn’t quite declare Friedmanism over, but he did write it obituary. Friedman, says DeLong:

adhered throughout his life to five basic principles: strongly anti-inflationary monetary policy; a government that understood that it was the people's agent and not a dispenser of favors and benefits; a government that kept its nose out of people's economic business; a government that kept its nose out of people's private lives; and an enthusiastic and optimistic belief in what free discussion and political democracy could do to convince people to adopt principles one through four.

The fifth, I’d say, is not really a “principle” as it is a description of Friedman in action. Anyway—DeLong tips his hat to Friedmanism, particularly insofar as it got us out of the doldrums of the 70s. But:

Nevertheless, the distribution of economic welfare produced by the market economy does not fit anyone's conception of the just or the best. Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically elected representatives than of decisions implicitly made as the unanticipated consequences of market processes.

We also believe that government should play a powerful role in managing the market to avoid large depressions, redistributing income to produce higher social welfare, and preventing pointless industrial structuring produced by the fads and fashions that sweep the minds of financiers.

DeLong says he builds on the idea “that market economies and free and democratic societies are built on a very old foundation of human sociability, communication and interdependence.” This declaration is not, I think, merely an empty vacuity. This capacity for cooperation, contingent and limited though it may be, is one of the extraordinary facts of the human condition. It is a feature which, as the Victorians would have said, distinguishes us from the lower animals. It’s the kind of characteristic which economic modeling, at least through the Age of Friedman, has kept pretty much at bay.

DeLong builds his riff on a remark from Dani Rodrik, the development economist. The choice is worth noting, I think, because the development economists have gone further than virtually anyone else in trying to figure out what actually works in society. They know better than almost anybody that a “market” is a cultural artifact the creation of human actors, one that that exhibit a thousand different faces, only some of which let the human spirit soar.

Fn.: I’ve always been a little pushed by the idea that “Friedman” is somehow central to the age of Friedman. Granted that he’s an important economist, but there are a fair number of those. His real mastery is publicity. Others (von Mises, Hayek, I’d say particularly Frank Knight) deserve a lot of credit for what is Friedmanesque about Friedmanism. Friedman may be just one more illustration of the insight credited to his friend and colleague, George Stigler—that the guy who credits for an idea is not the first man to think of it, but the last.

Update: Well, can't please 'em a (link):

Oh my! Is this confused mix of platitudes, generalizations, half-truths, old wives’ tales and gool ol’ collectivism supposed to replace Friedman’s vision for a society of free associating (legal) peers, on the basis of the impersonal justice of property rights? Dream on.