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So long as markets require rules to operate, those writing the rules matter most, writes Dani Rodrik, professor of international political economy at Harvard University. Only democratic politicians can make the world safe, and economists should refrain from denigrating democracy and the rule of law, he argues in this commentary, provided to Fortune by Project Syndicate.

Safe Place for (Democratic) Politicians

 

At a recent launch of my new book, The Globalisation Paradox, the economist assigned to discuss it had an unexpected criticism.

“Rodrik wants to make the world safe for politicians,” he huffed.

His point was illustrated by his reminding the audience of the former Japanese minister of agriculture who argued that Japan could not import beef because human intestines are longer in Japan than in other countries.

The comment drew a few chuckles.

Who does not enjoy a joke at the expense of politicians?

The remark had a more serious purpose and was evidently intended to expose a fundamental flaw in my argument.

Allowing politicians greater room to manoeuvre was found to be a cockamamie idea by the economist, who assumed the audience would concur. Removing constraints on what politicians can do would result in silly interventions that throttle markets and stall the engine of economic growth, he implied.

This criticism reflects a serious misunderstanding of how markets really function. Raised on textbooks that obscure the role of institutions, economists often imagine that markets arise on their own, with no help from purposeful, collective action.

Adam Smith may have been right when he said that, “The propensity to truck, barter, and exchange is innate to humans.”

A plethora of non-market institutions is needed to realise this propensity. Consider all that is required.

Modern markets need an infrastructure of transport, logistics, and communication, much of which is the result of public investments. They need systems of contract enforcement and property rights protection. They need regulations to ensure that consumers make informed decisions, externalities are internalised, and market power is not abused.

Markets also need central banks and fiscal institutions to avert financial panics and moderate business cycles. They need social protections and safety nets to legitimise distributional outcomes.

Well functioning markets are always embedded within broader mechanisms of collective governance. That is why the world’s wealthier economies, those with the most productive market systems, also have large public sectors.            

Once it is recognised that markets require rules, the writers of those rules must be determined.

Economists who denigrate the value of democracy sometimes talk as if the alternative to democratic governance is decision making by high-minded Platonic philosopher kings, the ideal economist.

This scenario is neither relevant nor desirable. For one thing, the lower the political system’s transparency, representativeness, and accountability, the more likely the rules are to be hijacked by special interests. Democracies can be captured too, but they remain the best safeguard against arbitrary rule.

Rule making is rarely about efficiency alone. It may entail trading off competing social objectives such as stability and innovation or making distributional choices. These are not tasks that should be entrusted to economists, who might know the price of many things, but not necessarily their value.

The quality of democratic governance can sometimes be augmented by reducing the discretion of elected representatives. In well functioning democracies, rule making power is often delegated to quasi-independent bodies when the issues at hand are technical and do not raise distributional concerns.

This is the case when log rolling would otherwise result in suboptimal outcomes for all or when policies are subject to short-sightedness, with heavy discounting of future costs.

An important illustration of this is provided by independent central banks. It may be up to elected politicians to determine the inflation target, while the means deployed to achieve that target are left to the technocrats at the central bank. Even then, central banks typically remain accountable to politicians and must provide an account when they miss the targets.

There can be useful instances of democratic delegation to international organisations. Global agreements to cap tariff rates or reduce toxic emissions are valuable. Economists have a tendency to idolise such constraints without sufficiently scrutinising the politics that produce them.

It is one thing to advocate external restraints that enhance the quality of democratic deliberation, by preventing short-termism or demanding transparency. It is another matter to subvert democracy by privileging particular interests over others.

The global capital adequacy requirements produced by the Basel Committee, established in 1974, overwhelmingly reflect the influence of large banks. If the regulations were to be written by economists and finance experts, they would be far more stringent.

Alternatively, if the rules were left to domestic political processes, there could be more countervailing pressure from opposing stakeholders, even if financial interests are powerful at home. 

Despite the rhetoric, many World Trade Organisation (WTO) agreements are the result not of the pursuit of global economic wellbeing but the lobbying power of multinationals seeking profit making opportunities.

International rules on patents and copyright reflect the ability of pharmaceutical companies and Hollywood, to name two examples, to have their way. These rules are widely derided by economists for imposing inappropriate constraints on the ability of developing economies to access cheap pharmaceuticals or technological opportunities.

The choice between democratic discretion at home and external restraint is not always a choice between good and bad policies. Even when the domestic political process works poorly, there is no guarantee that global institutions will work any better. Often, the choice is between yielding to domestic rent seekers or to foreign ones; in the case of the former, at least the rents remain at home.

Who becomes empowered to make the rules required by markets?

The unavoidable reality of the global economy is that the principal focus of legitimate democratic accountability still resides within the nation state.

I readily plead guilty to the critic’s charge: I want to make the world safe for democratic politicians. Frankly, I wonder about those who do not.

 
  Dani Rodrik, professor of international political economy at Harvard University   
   
 
 
 
   
   
   
 
 
 

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