Dani Rodrik on the Bretton Woods Compromise and Hyper-Globalization

Dani Rodrik is one of the leading economists who is critical of the Free Trade orthodoxy in economics. While Rodrik is very much in favor of countries pursuing an outward-focused and export-oriented strategy of growth (which sets him apart from non-economists who vehemently lambaste what they call the Neo-Liberal model or bias), he is critical of the view that nations need to fully and immediately embrace the policies promoted by Free Trade advocates.

Rodrik is a big fan of the Fox and Hedgehog metaphor and view the proponents of rapid and comprehensive trade liberalization, such as Jagdish Bhagwati, as hedgehogs promoting the big idea of Globalization. One manifestation of this big idea is the Washington Consensus which created a laundry list of domestic institutional changes that proponents argued were necessary for nations to implement if they wanted to grow. Rodrik characterizes this push to have nations conform to a rigid (and growing) set of policy guidelines as Hyper-Globalization.

Rodrik argues that this approach differs greatly from that used at the end of World War II under the Bretton Woods system. While the Bretton Woods conference is more closely associated with monetary policy, Rodrik views it as part of a broader international effort to open trade and promote global economic growth. In Rodrik's view, the key to the success of this approach was that it encouraged the growth of international trade without dictating that nations implement specific policies. This gave nations a good deal of policy space within which to craft their own unique policies and strategies for achieving the goals being promoted by the international community. He calls this approach the Bretton Woods Compromise and argues that it was very successful at achieving high levels of growth in domestic economies and international trade.

In contrast, Hyper-Globalization leaves very little policy space within which nations can craft their own growth strategies and pursue the policy goals they deem most important. Worst of all, adhering to the rigid requirements of Hyper-Globalization does not guarantee economic growth and in many cases has led to economic turmoil. So, where Thomas Friedman sees Globalization requiring nations to don a Golden Straitjacket, Rodrik argues that there is nothing golden about it.

Furthermore, Rodrik argues that, in the end, the Golden Straightjacket isn't much of a straightjacket either. That is to say, when push comes to shove, democratic leaders will respond to domestic political demands over international economic pressure or they will be replaced by other leaders who do so. Indeed, if leaders ignore domestic demands in favor of international ones, the democracy of the nation would be impaired.

Of course, national leaders do have to deal with conflicting demands from domestic and international sources.  Rodrik sees this conflict as part of a trilemma in the world economy. International integration (or globalization), nation states (or the preservation of their current role), and democratic politics (or the ability for populations to pursue their desired goals) create conflicting demands.

Rodrik argues that only two sets of demands can be reconciled at a time. Hyper-Globalization (or the Golden Straightjacket) satisfies the demands of international integration and the nation state, but does so at the expense of democracy. The Bretton Woods Compromise satisfied the demands of the nation state and democratic politics at the expense of international integration. Some sort of global federalism that allows democratic participation in setting the rules of international integration could satisfy the demands of democracy and international integration at the expense of diminishing the nation state's current role. However, Rodrik argues that, not only is the world a long way away from such a system, but it is unlikely that the diverse interests of developed and developing nations could be reconciled under one government.

Therefore, Rodrik argues that some sort of modified Bretton Woods Compromise is the best approach to managing the world economy. At Project Syndicate, Rodrik lays out seven principles that he thinks nations would agree to if they held a Bretton Woods type conference today. The essay is quite concise and worth reading in its entirety, but the seven principles are as follows :

1. Markets must be deeply embedded in systems of governance.
2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities.
3. Pluralist prosperity.
4. Countries have the right to protect their own regulations and institutions.
5. Countries have no right to impose their institutions on others.
6. International economic arrangements must establish rules for managing interaction among national institutions.
7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies.

The Fox and the Hedgehog

Nate Silver's FiveThirtyEight.com officially launched this week and it has taken a fox as its logo. In his rather long manifesto, What the Fox Knows, Nate Silver explains that this is an allusion to a phrase by the Greek poet Archilocus , "The fox knows many things, but the hedgehog knows one big thing.” Silver explains that at FiveThirtyEight he intends to take a pluralistic approach to analyzing the news in order to provide a better understanding of it. The banner used in his post (shown below) gives you a sense of what he means:

In the Silver graphic, we see the hedgehog has gotten over a couple of obstacles but is stuck at the first tall barrier. Meanwhile the fox has surmounted that barrier, perhaps by going back a jumping from the top of the second one, and is looking forward and above the remaining ones.

What makes me bring this up is that I have seen this fox-hedgehog dichotomy before in Dani Rodrik's The Globalization Paradox. In that book, he makes a distinction between economists who are captivated by one theoretical model or interpretation of the world (their one big idea) and other economists who entertain multiple models or interpretations. Like the hedgehog, who responds to every perceived threat by curling up in a ball, the first group of economists interpret every situation through the same theoretical lens and prescribe the same solution to every problem or policy question. The second, more fox-like group, sizes up the situation, chooses what they think is the most applicable model or combination of models,  and then offers a solution somewhat unique to the problem at hand.

Rodrik uses the analogy more recently in a recent post at Project Syndicate. There he writes:

The philosopher Isaiah Berlin famously distinguished between two styles of thinking, which he identified with the hedgehog and the fox. The hedgehog is captivated by a single big idea, which he applies unremittingly. The fox, by contrast, lacks a grand vision and holds many different views about the world – some of them even contradictory.

We can always anticipate the hedgehog’s take on a problem – just as we can predict that market fundamentalists will always prescribe freer markets, regardless of the nature of the economic problem. Foxes carry competing, possibly incompatible theories in their heads. They are not attached to a particular ideology and find it easier to think contextually.

Scholars who are able to navigate from one explanatory framework to another as circumstances require are more likely to point us in the right direction. The world needs fewer hedgehogs and more foxes.

It is important to point out that Rodrik is not arguing against having models or simplified visions of the world. He notes that everybody has some mental model (or set of models) of the world that categorizes the objects and people in it, and identifies cause and effect relationships among them. Because they are simplified, these models are all necessarily wrong at some level and prone to backfire on us when we try to use them in situations to which they do not apply. Yet, such models are necessary to enable people to navigate the complexities of the world.

Rodrik argues that the strength of social science lies not in eschewing such models but in building more thought out and explicit ones. In his words (again in the Project Syndicate piece):

The best that social science has to offer is in fact not much different. Social scientists – and economists in particular – analyze the world using simple conceptual frameworks that they call “models.” The virtue of such models is that they make explicit the chain of cause and effect, and therefore render transparent the specific assumptions on which a particular prediction rests.

Good social science turns our unexamined intuitions into a map of causal arrows. Sometimes it shows how those intuitions lead to surprising, unanticipated results when extended to their logical conclusions.

Even so, Rodrik argues that social scientists can do real harm if they apply the wrong model to a situation, such as diagnosing a situation as comparable to Munich in 1938 when it is in fact more comparable to Sarajevo in 1914. The underlying problem, as Rodrik sees it, is not that social science develops models but that it does not teach social scientists how to choose between alternative models. Furthermore, it does not reward them for being good at choosing between existing models as much as it does for developing new models.

From my point of view, the fox-hedgehog analogy is useful to emphasize the need to choose wisely among alternative models. However, in denigrating the hedgehogs' attachment to a model, it runs the risk of denigrating the usefulness of the models to which the hedgehogs are attached. Indeed, Isaiah Berlin noted that there is some debate among scholars about what Arcohilocus meant to say about the fox and the hedgehog. After all, the hedgehog's one big idea (to curl up in a ball and let its spiny quills protect it from predators) tends to defeat the fox's many ideas. I am also reminded of what Kenneth Waltz (who is certainly in the hedgehog category) said in defense of realism, that goes something like "Realism does not explain everything, but what it does explain is important."

Therefore, if an analogy must be used, I prefer a tool box analogy (which I inherited from one of my professors, David Austen Smith). Theoretical models are like tools in a toolbox and, generally more are better than less. Over the years, I have had that stuck in my head and have joined it with old cliche that "If all you have is a hammer, everything looks like a nail." This cliche covers the so-called hedgehogs who may be thought of as possessing one theoretical hammer, but keeps in mind the undeniable value of having a good hammer when you need to drive a nail.

In general, analogies are imprecise things and it is probably better to lay things out in precise terms. Theoretical models are necessary to social science and using most appropriate model is critical to explaining particular events. However, it is in the nature of academia, indeed of most professions, that some people will specialize in developing and applying one model. Furthermore, it may be that the nature of academic discipline provides incentives for such specialists to defend  their approach as more encompassing in validity than alternative theoretical approaches. Since new ideas replacing old ideas is a fundamental part of scientific progress, some level of such competitiveness may be essential and desirable. An unfortunate side effect of this may be that the need to pick and choose among alternative theories is often obscured.

In the end, the choice is between being doctrinaire or pragmatic in one's use theory.