Neoliberalism and economic nationalism are the two dominant meta-models for the global economy today. Proponents call them pathways to prosperity, but both have been blamed for exacerbating ongoing climate degradation, record levels of inequality, and political instability. Is there a way to build a more inclusive, more sustainable, and more prosperous economy for everyone? Economists Dani Rodrik and Suresh Naidu say their profession needs to adopt a more holistic view of prosperity, one that includes traditional metrics but also expanded measures of wellbeing like the ability to live a healthy life, to participate in democracy, and to inhabit a liveable planet. They’re two of the founding members of Economics for Inclusive Prosperity, a network of academic economists from Harvard, Princeton, Columbia, and other leading universities working to transform their field around this more expansive vision. In the inaugural episode of the Economics for Inclusive Prosperity Podcast, Rodrik, a professor of political economy at Harvard’s Kennedy School of Government, and Naidu, a professor of economics and international and public affairs at Columbia University, join host Ralph Ranalli to talk about the groups’ efforts to foster new thinking and policy ideas among their peers. They also highlight significant changes in approaches and research that are already underway, particularly among a new generation of economists using big data and empirical tools to challenge old orthodoxies. Linked for the past half-century with hyper-globalization, the free flow of capital, limited government intervention, and orthodox beliefs that markets can produce public goods, neoliberalism is widely seen as in decline and has been blamed for record levels of inequality, financial instability, the hollowing out of the middle class, and ongoing climate destruction. Economic nationalism and protectionism, meanwhile, are on the rise, and have also come with economic instability, as well as tariffs, trade barriers, and rising illiberalism in the form of zero-sum thinking, authoritarian politics, and the weakening of democratic institutions and norms. Under both, Rodrik and Naidu say, we’re seeing a world divided into a shrinking number of economic winners and a rising number of losers, and growing anger and resentment among the people being left behind. The world, they say, is in desperate need of a new way forward. Dani Rodrik is an economist and the Ford Foundation Professor of International Political Economy at the Kennedy School of Government at Harvard University, where is also co-director of the Reimagining the Economy Program. He is also a former president of the International Economic Association and the author of the new book “Shared Prosperity in a Fractured World.” Suresh Naidu is the Jack Wang and Echo Ren Professor of Economics and a professor of international and public affairs at Columbia University. He’s a former Alfred P. Sloan Research fellow who’s been recognized for his groundbreaking scholarship in labor economics. Economics for Inclusive Prosperity (EfIP) is a network of academic economists from Harvard, Princeton, Columbia, and other leading universities who are committed to an inclusive economy and society. EfIP members are working to transform their field around a new vision of prosperity—a vision that includes traditional economic metrics, but also expanded measures of wellbeing including access to health, to democratic participation and to a livable planet. They’re also highlighting the important changes in economics that are already underway. Host Ralph Ranalli is a podcaster, writer, and former journalist, who has also hosted “HKS PolicyCast,” the award-winning flagship podcast of the Harvard Kennedy School. He holds a BA in political science from UCLA and a master’s in journalism from Columbia University. The Economics for Inclusive Prosperity Podcast is recorded at the Malcolm Wiener Center for Social Policy at the Kennedy School of Government at Harvard University. The show is co-produced by Ralph Ranalli and Tony Ditta. The executive producer is Dani Rodrik.
Neoliberalism and economic nationalism are the two dominant meta-models for the global economy today. Proponents call them pathways to prosperity, but both have been blamed for exacerbating ongoing climate degradation, record levels of inequality, and political instability.
Is there a way to build a more inclusive, more sustainable, and more prosperous economy for everyone?
Economists Dani Rodrik and Suresh Naidu say their profession needs to adopt a more holistic view of prosperity, one that includes traditional metrics but also expanded measures of wellbeing like the ability to live a healthy life, to participate in democracy, and to inhabit a liveable planet. They’re two of the founding members of Economics for Inclusive Prosperity, a network of academic economists from Harvard, Princeton, Columbia, and other leading universities working to transform their field around this more expansive vision.
In the inaugural episode of the Economics for Inclusive Prosperity Podcast, Rodrik, a professor of political economy at Harvard’s Kennedy School of Government, and Naidu, a professor of economics and international and public affairs at Columbia University, join host Ralph Ranalli to talk about the groups’ efforts to foster new thinking and policy ideas among their peers. They also highlight significant changes in approaches and research that are already underway, particularly among a new generation of economists using big data and empirical tools to challenge old orthodoxies.
(Dani Rodrik) economics has changed and in particular has become much more empirical. It's become less wedded to theoretical preconceptions about, such as, markets will always take care of problems or that the governments cannot ever solve things…
(Stefanie Stantcheca) What we do find in our survey work is that fairness matters a lot to people…
(Suresh Naidu) …that inclusive prosperity meant thinking about democracy and its relationship to economic policy and democratic politics as something that we were committed to…
(Atif Mian) …those deeper questions of how we want to organize ourselves
as a society, so we deliver not just economic growth, but we also deliver the values that we need to aspire to.
Intro (Ralph Ranalli):Welcome to Economics for Inclusive Prosperity. Yes, we’re a podcast, but Economics for Inclusive Prosperity is actually a network of academic economists from Harvard, Princeton, Columbia, and other leading universities who are committed to an inclusive economy and society. They’re working to transform their field around a new vision of prosperity—a vision that includes traditional economic metrics but also expanded measures of wellbeing including access to health, to democratic participation and to a livable planet. They’re also working to highlight the big changes in the economics that are already underway. A new generation of scholars and researchers, working with big data and empirical tools, are questioning old theoretical orthodoxies and proscribed remedies and are developing new policies that work for the many instead of the few.
There are two dominant economic visions of today’s global economy. The first is neoliberalism. For the last half-century it’s been associated with hyper-globalization, the free flow of capital, limiting government intervention, and orthodox beliefs in the magic of markets to achieve economic ends. It’s widely seen as in decline, and has been blamed for record levels of inequality, financial instability, the hollowing out of the middle class, and the ongoing destruction of the global climate.
The other vision could be called economic nationalism and protectionism. It’s on the rise, and it’s also come with economic instability, along with tariffs, trade barriers, and rising illiberalism in the form of zero-sum thinking, authoritarian politics, and the weakening of democratic institutions and norms. What do these two economic meta-models have in common? A world divided into a smaller and smaller number of economic winners and a rising number of losers. A planet on the brink of irreversible climate devastation. And growing anger and resentment among the people being left behind.
Clearly, we need another way. We’re at a historic crossroads that calls for new vision of economic thinking and policy that takes a wider view of prosperity means and who is entitled to it. So how do we build a more inclusive, more sustainable, and more prosperous economy for everyone?
Our conversation today is with two of the founders and co-directors of Economics for Inclusive Prosperity, which we’ll sometimes call “E-FIP” for short. Dani Rodrik is an economist and the Ford Foundation Professor of International Political Economy at the Kennedy School of Government at Harvard University, where is also co-director of the Reimagining the Economy Program. He is also a former president of the International Economic Association and the author of the new book “Shared Prosperity in a Fractured World. Suresh Naidu is the Jack Wang and Echo Ren Professor of Economics and a professor of international and public affairs at Columbia University. He’s a former Alfred P. Sloan Research fellow who’s been recognized for his groundbreaking scholarship in labor economics. I’m your host, Ralph Ranalli. So let’s get started.
Ralph Ranalli: So Dani, Suresh, it’s great to be here with the two of you today as we launch the new Economics for Inclusive Prosperity podcast. You’re two of the founders and co-directors, and this is very much your brainchild. And of course I’m talking both about both the Economics for Inclusive Prosperity network, which we’ll sometimes call “E-Fip” for short, and this podcast, which highlights its work. What I was hoping we could accomplish today with this episode is to build a foundation of understanding about what Economics for Inclusive Prosperity is, the problems it was created to address, and some of the strategies for tackling them. That way it’s helpful for people who are listening right now to our first episode, but also for members of our audience who will join us further down the line—they’ll be able to refer back to our talk today to get a baseline understanding about what EfIP is so they can better understand future episodes about more specific topics. For those listening, I thought we'd start with just some basic brief introductions. Do you mind introducing yourselves?
Dani Rodrik: Sure. I'm Dani Roderick. I'm a professor at the Kennedy School at Harvard.
Suresh Naidu: And I'm Suresh Nadu. I'm a professor of economics at Columbia.
Ralph Ranalli: And I'm Ralph Ranalli. I want to say what an honor it is for me to host this podcast. So, full disclosure: I’m not an economist. That’s not my job here. My background is in public policy and podcasting and journalism, and my role here is to be a facilitator, an interlocutor, and basically a bridge between Economics for Inclusive Prosperity and our audience. So that said, I thought we might start at the beginning. So where did the idea come from to create a network of academic economists who are committed to an inclusive economy and society?
Suresh Naidu: Okay, I'll, I'll start with my version, which is, it was at a conference run by the Hewitt Foundation at Stanford, and, basically the two of us were there along with Gabriel Zucman. It was an interdisciplinary conference with many other different social scientists, and basically everyone was laying blame for all of the problems of the day at the feet of economists. And so there was this idea that what economics was like the Chicago school, was arch neoliberalism, that we were like defenders of inequality. You know, the sources of all bad ideas. Us.
And when we were talking… it's not that economics doesn't have a lot of problems, but it's not these problems. And we just thought that there was a real lack of appreciation for how nuanced economics had become, how rich and multifaceted it had become, and that the sort of intellectual stereotype of economists inside other social sciences in particular were just kind of not really realistic. And we sort of realized that inside mainstream economics, there was plenty of progressive or egalitarian ideas and people inside economics, but there just wasn't any place for them to congregate. And there was no flag thrown up to basically be like, if you're interested in this kind of thing that exists, here are the people that do it. And that meant that, in some ways, a lot of the very interesting ideas that come out of a lot of economics were just not getting wider circulation. And so part of the effort was to also have this idea that economists that entered EfIP would write these policy briefs. And that would be like an entry point into this, because it would be a way of creating like a short, two-pager that kind of made some idea like legible to a congressional staffer or something like that.
And this was kind of part of this vein, I think, of a variety of projects by Hewlett and other foundations of: "Okay, well the economy is changing. We're headed towards a post-neoliberal moment. What does economics look like that looks differently? And so we got money from the Hewlett Foundation along with a number of other initiatives that were in this space. So that was, almost like it feels like a universe ago. And, you know, one useful thing is for us to think about is even the relationship of economics to policymaking in this environment is different than it was, and sort of how do we think about how what we do is changing? I think there's a role for us to play as throwing up this flag.
Ralph Ranalli: Dani, what was that moment for you?
Dani Rodrik: It was exactly as Suresh has described, the inception of EfIP is, is, you know, Suresh and I, and also Gabriel Zucman was also involved at the origin as well. Throughout most of my career, I’ve found myself in one of two positions where I'm always, you know, the outsider. Within the economics profession I always find myself—I’m often finding myself—arguing with my professional economics colleagues that there are, you know, important issues that they're overlooking or that no, no, no, there are other models and other evidence that suggest different approaches than just this particular public consensus on a policy.
And then when often I'm talking to people from other social sciences or from history, sociology, political science, other colleagues, I often find, as as Suresh said, that there is such a caricature of economists and economics that I can't recognize in my own discipline. And I find myself defending economics against those. So I think Suresh and I both sort of felt that, at least in part, we are part of the problem in the sense that we're not communicating sufficiently well the diversity and interesting perspectives that are much, much richer than what often people associate with economists. Especially in the top academic institutions, most of our ideas are not actually supportive of neoliberalism. Yes, we have a lot of ideas about how to fix inequality and the climate transition. And no, we don't agree on everything, there is not a huge amount of consensus.
And yes, economics has changed and in particular has become much more empirical. It's become less wedded to theoretical preconceptions about, such as, markets will always take care of problems or that the governments cannot ever solve things. Or that unfettered free trade is the best way to achieve our economic and social goals and so forth.
And the final thing I will say, this was a very different time than the one that we find ourselves in. Because I was trying to find the date of that conference and it was during Trump, Trump One. And then what happened a couple of years after that, when President Biden came in, we found such a different set of ideas and policies now being launched—whether it was trying to argue for the importance of the counterweight power of labor and the importance of bargaining, the need to reign in large corporations and be tougher on antitrust, or to take a view on free trade that was much more middle class-oriented as opposed to just, you know, let the chips fall wherever they may, and having mentioned chips, of course, the significant industrial policies that were now being shouted from the rooftops of the White House and so forth.
I think I remember having conversations with Suresh saying, okay, you know, maybe we won. Or maybe we are in this new era. And of course now we're in Trump Two—it's a completely different world. So I think that there’s an even much greater role, and room for economists to inject new but also well-supported ideas both from a conceptual and empirical standpoint.
Ralph Ranalli: Right. Dani, can we pick up on that point about the economics profession being richer in ideas than many people give it credit for, and how you’d like Economics for Inclusive Prosperity to encourage a take wider and more holistic view of what the discipline is? Particularly a broader and more holistic view of what constitutes prosperity? If we’re truly moving beyond old paradigms—I like the alternate terms you sometimes use, “meta-models” and “meta-frameworks”—like neoliberalism and market orthodoxy behind, what are the inputs that economists need to take into account when they’re defining a new meta-model built around the notion of inclusive prosperity that includes things like health and meaningful employment and making sure we have a habitable planet?
Dani Rodrik: So I think, you know, economists have been working on the climate transition issue for quite some time. And so it's not a new issue within economics. But I think what has to happen—and to some extent has happened—and I think that movement that I'm just going to talk about, is indicative of what the new perspective that EfIP brings is. It’s to be more welcoming and more interested and curious about second- best approaches to solving some of our problems. And I think too often economists get enamored of, you know, first best.
So, what is a climate problem, it's a problem of emissions. How do you solve emissions? You solve them by taxing emissions. And because this is a global public bad, then you have to do that at a global level. So we need global agreements on taxing emission or some kind of a global cap and trade. Now the logic of this, of course, is quite correct. But I think any engagement with the real world and what actually has happened on the ground suggests that there are a much richer set of strategies, some of which actually are bringing us much greater benefit and getting us there faster.
In particular, it turns out that you know, something that economists had not paid any attention to at all in this climate transition space has been extremely productive. And that's the green industrial policies that China has been engaged in renewables. As I said, until really Biden came into office, it was a given that industrial policies are a no-no. You don't talk about industrial policies in polite company. But first, China and other successful countries, including the United States, have engaged industrial policy for a very long time. But intellectually, economists have been very hesitant to get into these issues because it entails governments engaging in making decisions about resource allocation and so forth and being very skeptical that that's something governments ought to do.
Now, 15 years into intensive green industrial policies in China, the prices of renewables globally have collapsed by 95%. And now we're at the cusp of a transition to green economy that even people who are extremely worried about climate transition are now finding some shed of optimism that we might actually be able to leave to our grandchildren a habitable planet. We haven't won the war by any means, but the benefits are coming—from tools and approaches that are non-standard, that are unorthodox, not incompatible with mainstream economic thinking—as long as we enlarge our look and consider a wider range of political economy and second-best issues as well.
Suresh has worked on climate policies, so I'm sure you would want to say something.
Ralph Ranalli: Suresh, what about that notion of being more inclusive of different ideas and approaches? Of lensing out and taking a broader view? What does that mean to you?
Suresh Naidu: So everything Dani said, I agree with. But I'll just also add another part to it, which is, I think part of it—maybe it's the empirical turn or something—is that the dimensions of wellbeing that economists now pay attention to are much larger than GDP. And so there's active literature in health economics, in crime, in measuring like even mental health and wellbeing more holistically.
And the idea that economists just kind of say “maximize GDP” or some notion of narrow economic efficiency, I think there's probably still people that think that. And, you know, it is in fact true across countries—GDP is correlated with almost any other measure of wellbeing that you could look for. But that said, that doesn't mean we shouldn't also try to figure out direct ways of improving those other dimensions of wellbeing. And you know, there's literature and economics going way all the way back to Amartya Sen's capabilities approach and others that really puts the point on GDP not being the end-all and be-all of what an economy is for.
In this empirical turn, in some ways one of the places that you kind of really can see observable outcomes is health and lifespan and these things where you don't in fact have to make that many assumptions about what is good and what is not good. You have a very clear target and you're trying to move that. So I think that's been a widening of the lens. I also think that as the discipline has become more inclusive itself—with the gender balance really changing and along with that concerns about gender equality—even things about kids and sort of traditionally female concerns are now just becoming a larger, important part of what economics does. And I think that's partly because the composition of who is an economist has changed a lot.
And I'll just end with one thing that’s also interesting to just talk about—certainly for those of us at the beginning and in the founding part—is that inclusive prosperity meant thinking about democracy and its relationship to economic policy and democratic politics as something that we were committed to. And I will say that at the beginning, we didn't feel like it was at risk in the countries we lived in. And I think like in our current moment, we're just definitely thinking about that precipice. And I've worked on democracy, Dani's worked on democracy, and we are, I think, trying to bring this political economy lens where we think about the relationship of democracy and the economy. I think we're probably both thinking about how it relates to where we are now.
Dani Rodrik: Can I add one more thing here? I think earlier when I was talking about the climate transition, I was talking about the instruments and sort of broadening our lens on the type of instruments for achieving our goals. And Suresh has now talked about how it's important to broaden our lens on the objectives of our economy and what should our economy be producing. And he mentioned the health and other measures of social wellbeing.
I will specifically want to focus there or add the importance of jobs, in particular good jobs. And this is an area where. I think economists have had a kind of a blind spot that goes all the way back to Adam Smith, where Adam Smith, sort of taking the mercantilists as his foils, said that really ultimately the point of an economy is to produce consumption possibilities, to expand consumption. And ever since, I think economists have had this kind of a lens where we measure our wellbeing by sort of asking, “Well, does that expand the possibilities of consumption?” So complete, unfettered free trade with China is wonderful, because look at Walmart and the shelves are full of cheap goods that come from China. And then if people lose their jobs in the process, maybe we should train them or they can move somewhere else, or maybe we can compensate them.
On the point of compensation, actually I want Suresh to say a word about the paper of his that is very interesting on this. But the point is that, when we look at sort of economic life from the perspective of just consumption, we lose sight that a job is not just a source of income. It's not just—to use economist language—just something that relaxes your budget constraint and, in fact, enters negatively into your utility function.
And this utility of work, it actually enters very positively, in that one of the most important things that we do is the sense of contributing to society through the job that we make.
And that's now actually, interestingly, what economists are finding out. You know, asking either in the context of life satisfaction studies or in one case in a very interesting NBER paper of, I think last year, going back to these narrative interviews from the New Deal, and finding out that when you ask people what gives meaning to your life, the work that they do is as important as their family. And therefore in that context, just saying, “OK, if people lose their job, we just maybe compensate them by giving them some transfers or finding some other means,” doesn't do quite justice to what is it that, that we're losing out on.
And I think it makes a huge difference, and in part to link it up with the last point that Suresh is making, in part it’s also linked to the frailty of our democracy. I think when, you know, so many people have been dislocated by these economic changes, whether it's globalization or technological change, they've lost a sense of meaning, belonging. They've lost connections through the political elite. And I think a politics of resentment and anger and being open to right-wing authoritarian slogans and ideologues has been part of the consequence of this.
Suresh, you want to say just a word about...
Suresh Naidu: I mean, I can talk. Let's… Let me get into it. I think part of this focus on jobs is just... Keynes has a line that's like “while like an unemployed machine is just kind of unfortunate, an unemployed worker is a tragedy.” And it's just really true—persistent and sustained unemployment wrecks people's lives in a way that I think you just don't see from their measures of consumption or any of these things.
I think the paper Dani's referring to is that when, with my co-authors, Ilyana Kuziemko and Nicholas Longuet-Marx, we assembled all of this Gallup data on political polls that we're asking people about different types of policies. And there's support for different types of policies all the way back to the 1940s. And what we found, we were trying to explain this realignment in politics of the relatively college-educated towards the Democratic party and the loss of the less, relatively less-educated from the New Deal Coalition into the Republican party.
And we're trying to explain it in terms of policy preferences, and what we sort of found was that first there's a very sharp educational gradient in preferences for policies that intervene in the labor market—what we call pre-distribution, so things like tariffs or unions or minimum wages or jobs-for-all. I'm surprised at even today, jobs for all—the government should provide everyone a job—polls super strongly among people without a college degree. And so this idea that work is kind of the thing, good jobs are something that people really want, that's something that less educated voters have always liked a lot more than relatively educated voters. And that's constant all the way back to the 1940s.
And so then we are like, okay, nobody's changing their preferences and policies, and so what could explain realignment? And we kind of show in a variety of ways that it's when the Democratic party pivots in its policy orientation away from these kinds of New Deal good jobs sort of policies—towards still egalitarian, but trying to do it more through like the tax and transfer system, like EITC and expansion of food stamps and doing it more through the welfare state rather than delivering it through the jobs—that's kind of the moment that you start to see this divergence in the educational gradient in terms of the relatively less-educated leaving the Democratic party. So our, our idea there is that this kind of like educational realignment that you could argue is kind of lying behind where we are today, has as its origins in some ways in this divergence in where the Democratic party went in terms of its policy direction and it lost one group of voters and gained another.
Ralph Ranalli: So that definition, that expansive definition of what prosperity is and what wellbeing is needs to include things like having a job and having meaningful work and having the ability to live a more sort of complete life that just isn't about economic struggle all the time. It makes sense, and seems to be sort of almost like what I think of as the soul of, if has a soul, it's sort of the soul of EfIP.
But it’s interesting. When people ask me what I’m working on, and I talk about what EfIP is and what it’s trying to do, and how it’s trying to highlight new thinking in economics and help the field move beyond the neoliberal, market orthodoxy meta-model in favor of a new one built around an expanded definition of inclusive prosperity, I get a lot of “Well, good luck with that.” In other words, a lot of cynicism. And I get it, dominant mindsets can be stubborn things, especially if they have vested interests who benefit from them. Can you talk about some of the difficulties that lie ahead trying to change mindsets and perceptions? And does it take a moment of big political, social, and economic upheaval like the one we’re in now to make that possible? Is the turmoil we’re seeing actually fertile ground for planting some seeds of change? And what will it take for that change to take root?
Dani Rodrik: Well, Ralph, when you said that, you know, the reaction you get is precisely the kind of feeling we're trying to counter. And so my response to that would be, well, as somebody who's in the profession, I would say that this is what the profession in many ways is actually doing, but is not interested in necessarily investing in the public facing activities that would convince ordinary people that economists are actually an ally, they're not the enemy here. And I think that's the part that in some sense, we're trying to fix.
I would say that the kind of work we're talking about, that we've been talking about in the last 5-10 minutes is just a fraction or a tiny, tiny just sliver of the very interesting work that economists are already doing. Really enlarging our scope of both the kinds of things we should be interested in and how we, how we get there. So the thing that I think Suresh and I have had to … and along with, by the way, there are others involved in this project, Atif Mian and Ilyana Kuziemko and Stefanie Stantcheva and Gabriel Zucman, who I've mentioned, and so many other contributors to our policy briefs on our attendees in the conference we had a couple of years ago. It is how to beef up the incentives of engaging in these policy debates and sticking your neck out and saying something in public that isn't necessarily nailed down by the laws of causal inference or wouldn't pass a five referee report test, but contributes to the public debate and also shows that economists have interesting and diverse ideas on this.
Because emphasizing diverse ideas is important because we don't want to look like we are we are the alternative. You know, that's not the point. The point is here are a bunch of alternatives. They're all sort of driven by a more inclusive understanding of what economics should be about. But we're not talking like, “No, this is not what your trade policy should look like. “This is not, you know, here is your ideal blueprint on labor market policies or antitrust. It's just to convey the breadth of possibilities and to getting more economists engaged in these kinds of debates.
I think what we are fighting for, my version of the obstacle we face, is that I think there is still a tendency for most economists to—when they're engaging in public debates, whether it is talking to a newspaper person or whether it's the conversation around the Thanksgiving table with their families and friends—is to retreat to some very baseline benchmark intuitions about the economy that still comes from the perfectly competitive benchmark. And to be always a defender of that benchmark rather than being more open-minded. Not because that's not what they do in the seminar room or professionally, but making that additional leap in this particular policy context requires a little bit more investment.
Ralph Ranalli: I think the term you used in some of the descriptions of Economics for Inclusive Prosperity was the sociology of the profession, right? So, Suresh, how do you think about overcoming the dominant sociology of the profession in order to elevate the broader range of ideas that Dani's talking about.
Suresh Naidu: Yeah, let me give two examples, one very close to what I work on, and one that's more in the policy area. So, I work a lot on monopsony and labor markets. And I think there's been a real sea change in labor economics that's sort of migrating, I think, into other fields about just how pervasive employer's ability to set wages is. And one of the things that that does is like... look, employers are always trading off turnover and payroll, and so there's always some wiggle room where you can like, keep wages a little bit lower than you might have otherwise, suffer the additional turnover, but hey, you make a little bit more profit from that and that's kind of what's going on. And it turns out that slight modification—you know, it's not particularly a radical departure, it's been around in economics since Joan Robinson in 1933. But it, I think in combination with a bunch empirical evidence, both the evidence on the minimum wage, the evidence that some jobs, like for the same worker, it really depends which firm that they're working at. In some cases, direct experiments when you like, can randomize the wage and sort of see how different workers quit or, or are hired.
There's an evidence base that is really illuminated by this different way of thinking about the labor market. And it means that around the casual conversation, whenever your drunk uncle says: "Oh, that minimum wage that's going to kill jobs." And you're like, “Well, not exactly. It does actually raise prices, but not because of the reasons you might think.” You might still come back with the minimum wage is bad, but you'll at least come at it with a whole range of the mechanisms and evidence and there's a real there there. While before, it would just be like an economist would reach intuitively into their mind for the model where the labor market looks like supply and demand curves and be like, yes, price floors are bad, and their minimum wage is just a price floor. And that's bad. And so that's, I think, some ways in which like the consensus on economics has moved away from kind of the folk economics of the Thanksgiving dinner. And we're just trying to help make that happen faster.
And I'll just give an example from my current policy work, housing is clearly a big subject these days, and housing and abundance, and affordability of housing is clearly an issue. But again, I think housing is exactly the kind of market where every kind of condition under which markets are supposed to work breaks down. It's not by any means the kind of market that you would think, “Oh yeah, this just like supply and demand.” And yet when economists I think are forced on their heels to think about it on the fly, they'll reach for expanding supply is the best and only way to do things. And, you know, that's probably still true, but we should have like a rich library of like: Why did we get the housing regulations that we have? What other problems are there in the housing market you're trying to address?
And I think we're going to probably see a wave of evidence around this because economists are good at sort of spotting open questions and answering them. And that will be interesting to also bring that into the public debate, and I think EfIP will try to do something with that.
Ralph Ranalli: Yeah. You mentioned policy, so can we stay with that for a minute? I know that a big emphasis of EfIP is not just theory, but concrete policy ideas. It's connecting up the world of economics and economic thought with actual policy ideas on the ground. Can you talk about why it's important to have economists thinking in terms of policy?
Dani Rodrik: Well, I would say because precisely of the kind of things that Suresh was talking about in connection to either employment policy or with respect to rent controls, that we want to expand the range of... expand what's on the policy menu. And move away from this extremely limiting idea that everything has to be measured against the first best ideal of a free market where, if you removed all the impediments and price controls, you would get at the best possibility. Because that's not the world that we live in.
And you know, it's, it's something I quote all the time. My Princeton PhD advisor, Avinash Dixit once said: "The world is second best at best." And so you just have to consider that—depending on the circumstances you're facing, and what's doable and what's not doable, and what's removable and what's not removable—the range of things that might make economic sense, even from an economic efficiency standpoint, is much, much broader than most economists, in their public facing moment, give credit to. And therefore we want economists to be a little bit more adventurous in developing those kinds of ideas and giving people—once we have sort of more reasonable people running the White House and other leadership positions around the world that—a wider range of menus that are on offer, and that could also be supported by economic analysis and, and good evidence. We don't want the policy menu to be driven by people who don't resort to either of those, and the cranks.
And so I think that we have a role to play in that, and that's why I think the policy briefs play a role in that. Just to give a couple of examples of how I've benefited from some of those policy briefs, just maybe kind of a plug, Arian Dube wrote a very nice piece on sectoral wage boards, how do we move towards establishing a floor on wages in an economy which is not organized around of manufacturing and labor unions that are based in industrial plants and so forth. Thinking sectorally and establishing wage boards that will be sensitive to industry and regional context. And I think those are very interesting ideas.
Or something else from our policy briefs: Max Kasy's work on how do we approach issues of AI and regulating and thinking about the control of AI and new technologies. And thinking about that it's ultimately whoever defines the objective function for what the AI is solving for actually determines what AI will do and who will benefit. And therefore that's a deep, deep insight, and understanding that and drawing the policy implications are very important.
Ralph Ranalli: So one more thing I think we should emphasize in this first interaction with our audience is that Economics for Inclusive Prosperity is putting an emphasis on communicating with younger economists and aspiring student economists. I think they’re an interested group because chronologically their cohort has never lived in a world and in an America that weren’t getting progressively more economically unequal, right? Not just economic inequality but worsening economic equality is their lived experience. How do you think their lived experience and worldviews could shape this next phase of economic thinking and what are you hoping to instill in them to get them to think broadly, think about policy, and to bust free of some of the more hidebound aspects of the profession?
Suresh Naidu: So I'll start, I guess, as like on the younger end of this. I mean, it's been going up, inequality's been going up, all my lifetime and I'm pretty old. I'll just say from my experience actually, there was something around the financial crisis that… I got my PhD right in 2008 and I think there was a consensus in economics that was interrupted by the shock that was the financial crisis. And so I think that sort of did change a little bit the selection and like orientation of younger… of people coming into economics after that. So I think there has been a trend and I don't know if it'll last, and I'm not young enough to know exactly how the recent cohorts have been changed by COVID and everything since.
But I do think that part of this is that, when you say it's really tough to change minds, it's the way academic disciplines change, that famous adage of gravestone by gravestone. And so in some ways it's going to be that the kind of people that put forward new paradigms and new ideas and like broaden this lens are probably going to be the young economists of now, thinking about how to make economics work for the problems of today, that are going to be having the really innovative ideas. And we just kind of want to create like a safe space, if you will, for them to do that and feel like they can do that. And feel like they can be professionally rewarded with that and they won't have somebody slam them down. So I think that's kind of what we are trying to do is encourage young economists to think broadly and think in terms of policy in a way that you're often like not incentivized to do that until you have tenure or something like that.
Ralph Ranalli: Yeah. Dani when you talk to your economic students, what are your impressions of them about how maybe their mindset or their worldview is different from yours when you were their age? And what do you say to them?
Dani Rodrik: I mean, I think the empirical turn in economics has had huge, huge impact. It's been good for a lot of different reasons, but the one that matters probably the most in the context of the current conversation is if you don't have good evidence, good data, and not much consensus on how to interpret evidence, then essentially evidence doesn't count for much. It's like the way that the drunk uses a lamppost, right? For support, not for illumination. And then your theoretical, your conceptual priors determine everything.
And when I came of age in economics, that was still more or less what economics profession was like. I mean, when I was doing my PhD and a good I would say ten years afterwards, it was only the less able, capable, doctoral students who would do empirical work. This is literally true. If you were not good enough to do either theory or applied theory, which applied theory, by the way, meant a theory applied to a particular model, it didn't mean actual empirical work. Then you would be advised: "Well, maybe you'll go to a multilateral institution.” Or you go to a consulting and you may want to just run a few regressions. And so that's how the profession was in that context—the theoretical priors determine everything. And everybody's theoretical priors are the competitive market economy.
So now when you do empirical work with good tools of causal inference and the world throws out all kinds of findings you weren't expecting before, then not only are you forced to question the assumptions that you went into, you're also then forced to go back and say: “What is it about theory that I missed out?” Right? Again, you know, the standard example is the labor market with the minimum wage studies and how they forced us to rethink what kind of market structures or institutional setups would then produce increases in the minimum wages increasing employment rather than reducing it.
But that really has been now all over the place. I mean, in trade of course, now we understand much better the consequences of trade liberalization in industrial policy. There's a vast new literature that shows that industrial policy can be very effective under certain settings, using state of the art tools on causal inference and so forth. So this transformation is really happening because people are coming with much looser theoretical priors, doing good empirical work to see what is working, what is not working, throwing up new results. And then going back to theory, then reconceptualizing. And that's exactly what we want young people to be doing, you know, keeping that open mind and doing that work.
And then as, as Suresh said, open up some safe, safe spaces where they can take those ideas maybe just a little bit further and think a little bit more seriously also about what the policy implications might be and how that might apply in any particular kind of, context. But you know, it's giving them a little bit of a push rather than making them change direction or change the discipline. Although I think the the social returns from this activity are huge for our intellectual conversation, I would say.
Ralph Ranalli: Well, this has been a great conversation. I hope it’s given our audience a solid sense of what Economics for Inclusive Prosperity is and what we’re hoping to achieve. And I, for one, am really excited to keep these conversations going and elevate these ideas. So thanks for being here with me.
Dani Rodrik: Thank you.
Suresh Naidu: Thanks so much for the conversation.
Outro (Ralph Ranalli): Thanks for listening. The Economics for Inclusive Prosperity podcast is based and recorded at the Malcolm Wiener Center for Social Policy at the Kennedy School of Government at Harvard University. Please join us again in two weeks for another new episode featuring E-fiP co-director Atif Mian discussing his research on the relationship between the financial sector, debt, and the surprising repercussions of growing wealth concentration for the broader economy.