Dani Rodrik, right as usual

Dani Rodrik’s weblog: Why do economists disagree?

A second argument is that the presence of additional market imperfections does not change the first-best logic; it simply calls for each market imperfection to be treated with its own first-best solution. This allows each expert in a field to propose first-best solutions in that field, leaving complications elsewhere to be dealt with by others. Larry Summers had a nice point to make about this approach in his comments on a paper on banking reform in China (Brookings Papers on Economic Activity, 2006:2):

Like experts in many fields who give policy advice, the authors show a preference for first-best, textbook approaches to the problems in their field, while leaving other messy objectives acknowledged but assigned to others. In this way, they are much like those public finance economists who oppose tax expenditures on principle, because they prefer direct expenditure programs, but do not really analyze the various difficulties with such programs; or like trade economists who know that the losers from trade surges need to be protected but regard this as not a problem for trade policy.

This used to piss me off no end when I was talking to economists. The “free” traders always thought it was sufficient to show that the aggregate gains from increased trade were sufficient for the winners to compensate the losers, but showed no interest in making sure that the compensation actually took place. (There was a strange disconnect in their positions — they argued for “free” trade as some kind of moral good because it increased overall wealth, but the fact that it virtually always resulted in more wealth for some groups and less for others was somehow morally neutral.)

The first-besters remind me of the famous joke about the mathematician and the hotel fire: he dabbles his finger in the water from the tap, murmurs “a solution exists” and goes back to sleep.


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