Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

The Perils Of Economic Consensus

Dani Rodrik 22nd August 2014

Dani Rodrik

Dani Rodrik

The Initiative on Global Markets, based at the University of Chicago, periodically surveys a group of leading academic economists, of varying political persuasions, on the issues of the day. Its latest roundup asked whether President Barack Obama’s stimulus plan helped to reduce unemployment in the United States.

Officially known as the American Recovery and Reinvestment Act of 2009, the plan entailed government spending of more than $800 billion on infrastructure, education, health, and energy, tax incentives, and various social programs. Implemented in the midst of an economic crisis, it was the classic Keynesian response.

The economists were virtually unanimous. Thirty-six of the 37 top economists who responded to the survey said that the plan had been successful in its avowed objective of reducing unemployment. The University of Michigan economist Justin Wolfers cheered the consensus in his New York Times blog. The virulent public debate about whether fiscal stimulus works, he complained, has become totally disconnected from what experts know and agree on.

In fact, economists agree on many things, a number of which are politically controversial. The Harvard economist Greg Mankiw listed some of them in 2009. The following propositions garnered support from at least 90% of economists: import tariffs and quotas reduce general economic welfare; rent controls reduce the supply of housing; floating exchange rates provide an effective international monetary system; the US should not restrict employers from outsourcing work to foreign countries; and fiscal policy stimulates the economy when there is less than full employment.

This consensus about so many important issues contrasts rather starkly with the general perception that economists rarely agree on anything. “If all the economists were laid end to end,” George Bernard Shaw famously quipped, “they would not reach a conclusion.” Frustrated by the conflicting and hedged advice that he was receiving from his advisers, President Dwight Eisenhower is said to have asked once for a “one-handed economist.”

No doubt, there are many public-policy questions that economists debate vigorously. What should the top income-tax rate be? Should the minimum wage be raised? Should the fiscal deficit be reduced by raising taxes or cutting spending? Do patents stimulate or impede innovation? On these and many other issues, economists tend to be good at seeing both sides of the issue, and I suspect that a survey on such questions would reveal little consensus.

A consensus among economists can arise for both good and bad reasons. Sometimes a consensus is innocuous enough, as when you hear economists argue that one ignores the role of incentives at one’s peril. Can anyone really disagree with that? Sometimes it is restricted to a particular episode and is based on evidence accumulated after the fact: Yes, the Soviet economic system was hugely inefficient; yes, the Obama fiscal stimulus of 2009 did reduce unemployment.

But when a consensus forms around the universal applicability of a specific model, the critical assumptions of which are likely to be violated in many settings, we have a problem.

Consider some of the areas of widespread agreement that I listed above. The proposition that trade restrictions reduce economic welfare is certainly not generally valid, and it is violated when certain conditions – such as externalities or increasing returns to scale – are present. Moreover, it requires that economists make value judgments on distributional effects, which are better left to the electorate itself.

Likewise, the proposition that rent controls reduce the supply of housing is violated under conditions of imperfect competition. And the proposition that floating exchange rates are an effective system relies on assumptions about the workings of the monetary and financial system that have proved problematic; I suspect a poll today would find significantly less support for it.

Perhaps economists tend to agree that certain assumptions are more prevalent in the real world. Or they think that one set of models works better “on average” than another. Even so, as scientists, should they not adorn their endorsements with the appropriate caveats? Shouldn’t they worry that categorical statements such as those above may prove to be misleading in at least some settings? The problem is that economists often confuse a model for the model. When that happens, a consensus is certainly not something to cheer about.

Two kinds of mischief may then follow. First, there are errors of omission – cases in which blind spots in the consensus prevent economists from being able to see troubles looming ahead. A recent example is the failure of economists to grasp the dangerous confluence of circumstances that produced the global financial crisis. The oversight was not due to the lack of models of bubbles, asymmetric information, distorted incentives, or bank runs. It was due to the fact that such models were neglected in favor of models that stressed efficient markets.

Then there are the errors of commission – cases in which economists’ fixation on one particular model of the world makes them complicit in the administration of policies whose failure could have been predicted ahead of time. Economists’ advocacy of neoliberal “Washington Consensus” policies and of financial globalization falls into this category. What happened in both cases is that economists overlooked serious second-best complications, such as learning externalities and weak institutions, which blunted the reforms and, in some cases, caused them to backfire.

Disagreements among economists are healthy. They reflect the fact that their discipline comprises a diverse collection of models, and that matching reality to model is an imperfect science with a lot of room for error. It is better for the public to be exposed to this uncertainty than for it to be lulled into a false sense of security based on the appearance of certain knowledge.

© Project Syndicate

Dani Rodrik
Dani Rodrik

Dani Rodrik, professor of international political economy at Harvard University’s John F Kennedy School of Government, is president of the International Economic Association and  author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press).

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834664e04a 8a1e 4ee0 a6f9 bbc30a79d0b1 2 Closing the Chasm: Central and Eastern Europe’s Continued Minimum Wage ClimbCarlos Vacas-Soriano and Christine Aumayr-Pintar
u421983467f bb39 37d5862ca0d5 0 Ending Britain’s “Brief Encounter” with BrexitStefan Stern
u421983485 2 The Future of American Soft PowerJoseph S. Nye
u4219834676d582029 038f 486a 8c2b fe32db91c9b0 2 Trump Can’t Kill the Boom: Why the US Economy Will Roar Despite HimNouriel Roubini
u42198346fb0de2b847 0 How the Billionaire Boom Is Fueling Inequality—and Threatening DemocracyFernanda Balata and Sebastian Mang

Most Popular Articles

startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer
u421983467 2a24 4c75 9482 03c99ea44770 3 Trump’s Trade War Tears North America Apart – Could Canada and Mexico Turn to Europe?Malcolm Fairbrother
u4219834676e2a479 85e9 435a bf3f 59c90bfe6225 3 Why Good Business Leaders Tune Out the Trump Noise and Stay FocusedStefan Stern
u42198346 4ba7 b898 27a9d72779f7 1 Confronting the Pandemic’s Toxic Political LegacyJan-Werner Müller
u4219834676574c9 df78 4d38 939b 929d7aea0c20 2 The End of Progess? The Dire Consequences of Trump’s ReturnJoseph Stiglitz

Foundation for European Progressive Studies Advertisement

Spring Issues

The Spring issue of The Progressive Post is out!


Since President Trump’s inauguration, the US – hitherto the cornerstone of Western security – is destabilising the world order it helped to build. The US security umbrella is apparently closing on Europe, Ukraine finds itself less and less protected, and the traditional defender of free trade is now shutting the door to foreign goods, sending stock markets on a rollercoaster. How will the European Union respond to this dramatic landscape change? .


Among this issue’s highlights, we discuss European defence strategies, assess how the US president's recent announcements will impact international trade and explore the risks  and opportunities that algorithms pose for workers.


READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

KU Leuven advertisement

The Politics of Unpaid Work

This new book published by Oxford University Press presents the findings of the multiannual ERC research project “Researching Precariousness Across the Paid/Unpaid Work Continuum”,
led by Valeria Pulignano (KU Leuven), which are very important for the prospects of a more equal Europe.

Unpaid labour is no longer limited to the home or volunteer work. It infiltrates paid jobs, eroding rights and deepening inequality. From freelancers’ extra hours to care workers’ unpaid duties, it sustains precarity and fuels inequity. This book exposes the hidden forces behind unpaid labour and calls for systemic change to confront this pressing issue.

DOWNLOAD HERE FOR FREE

ETUI advertisement

HESA Magazine Cover

What kind of impact is artificial intelligence (AI) having, or likely to have, on the way we work and the conditions we work under? Discover the latest issue of HesaMag, the ETUI’s health and safety magazine, which considers this question from many angles.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
How are minimum wage levels changing in Europe?

In a new Eurofound Talks podcast episode, host Mary McCaughey speaks with Eurofound expert Carlos Vacas Soriano about recent changes to minimum wages in Europe and their implications.

Listeners can delve into the intricacies of Europe's minimum wage dynamics and the driving factors behind these shifts. The conversation also highlights the broader effects of minimum wage changes on income inequality and gender equality.

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641