Capitalisn’t: The New Economics of Industrial Policy

Dani Rodrik: There are a whole bunch of maintained assumptions that we are not explicitly testing. Government intervention is ineffective. Markets tend to do well. It’s pointless to try to countervail against the free flow of capital.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: In 2009, a prominent economist labeled the period between 1980 and the Great Financial Crisis as the age of Milton Friedman. This period was characterized by the belief that reliance on market forces with an open economy and a stable macroeconomic environment with a sure property right was key to rapid economic growth.

Bethany: This period ended with the Great Financial Crisis and then really came to a crashing end with the COVID-19 pandemic. After these two cataclysmic events, globalization started to be reversed. Industrial policy has come back in vogue, and even the protection of property rights has started to be called into question.

Luigi: For example, with the idea of forgiving all the loans.

Jokes aside, if we take the term the age of Milton Friedman as the age that vindicated many of Milton Friedman’s claims, then we can say that this is the age of Dani Rodrik.

Bethany: Even a noneconomist like me has heard of Dani Rodrik, and I think I’ve heard of him because of his globalization trilemma: the impossibility of having at the same time a world market, national states, and a democratic system.

Luigi: Rodrik started to criticize globalization, what he calls hyper-globalization, in the late 1990s. Now, of course, Bethany, you’re too young to remember the ’90s, but at that time—

Bethany: Thank you, Luigi.

Luigi: This was the time of Clinton and Blair, who considered globalization not only desirable but inevitable. And, at the time, [Rodrik] pointed out that the distributional impact of globalization and its political consequences were not that great. In a functioning democracy, the losers from globalization would demand protection, and that is one reason why more open economies have larger welfare states. I think all these useful insights are something that very few people were pointing out at the time.

Bethany: I was laughing earlier because I thought, well, my age is not the reason why I might not remember the 1990s, but maybe we should stay away from that topic.

For Dani Rodrik, then, is it fair to say that he’s one of the rare individuals who can see outside his own time? We all do tend to believe whatever is the prevailing belief of the age. He was one of the first economists to criticize the so-called Washington consensus, the idea that protecting property rights and opening up the economy is sufficient to promote rapid growth. He was a strong supporter of industrial policy, a topic that was pretty taboo until the COVID-19 pandemic. I see him as not just an interesting thinker, but a very rare human being. Is that fair?

Luigi: It is fair. The most interesting part is that Dani is not a heterodox economist in the sense that we generally use the term because when you say heterodox economist, it’s somebody that uses a different methodology, and I think he’s a standard economist with heterodox views, which to some extent is more difficult to do. He has views that were regarded as outside the mainstream for many, many years and now have become mainstream.

Bethany: Fascinating. Without further ado, let’s bring in our guest, Dani Rodrik, who is the Ford Foundation Professor of International Political Economy at Harvard’s John F. Kennedy School of Government. He’s also the co-director of the Reimagining the Economy Program at the Kennedy School.

You’ve often talked about how the global economy needs a narrative to work, but in the international domain, laws and regulations aren’t very effective because they lack enforcement power. To function, the world economy needs to persuade people, hence the importance of a narrative.

What was the narrative that prevailed in the age of Milton Friedman, and what is that narrative now? Is there a narrative that we all agree on, or are we in search of a narrative?

Dani Rodrik: I think the answer to your second question is we are very much in search of a narrative. I think there was a well-established narrative during the period that I’ve called the hyper-globalization era, or people call it neoliberalism or market fundamentalism.

That was, in some sense, the overarching narrative about the wonders of the markets and how governments should just stay back, facilitate free trade and the flow of capital across the borders as much as possible. This would roughly be beneficial to all—even if not immediately, eventually—and all kinds of good things would follow.

Bethany: You didn’t see it that way. You were one of the few who raised questions. Why didn’t you see it that way, and what was it like to be an early naysayer?

Dani Rodrik: I think my skepticism was based both on economic history and economic theory. On economic history, effectively, what we were trying to do during the height of the hyper-globalization era was to relive the gold standard, so that if you were experiencing unemployment, eventually, enough gold would flow into your country to increase the money supply and reflate the economy. But also, if gold was scarce around the world, interest rates would go up, and a lot of your farmers would go bankrupt.

The conception of economic policy is that there was no role for the government to interfere in what the world market is doing to you, because ultimately, the world market is a better source of adjustment than what governments would do.

The first waves of populism, actually, were a reaction to globalization under the gold standard. Historically, we’ve seen the backlash to advanced forms of globalization, and I think it was impossible not to think that we were going to go through that.

The reason I say it was also based on economic theory is that the basic theory of international trade and comparative advantage is that trade enlarges the pie but also redistributes a lot of income. A lot of people, including many in the economics profession, were pooh-poohing those distributional effects.

It was unlike the Bretton Woods period, the Keynesian era, when there was a very clear understanding that the world economy was in the service of domestic full employment and domestic social cohesion. During hyper-globalization, increasingly, domestic economic policies were at the service of international competitiveness.

The right and the left, essentially, had a very similar narrative. They were both saying, “Here’s what we need to do to become more competitive in the world economy.” They may have differed a little bit on the details. The right would say, “Let’s cut taxes, let’s eliminate red tape and bureaucracy and regulation.” And the left would say, “Let’s invest in education and infrastructure.” But when you asked why, well, the answer was always, “So we can become better competitors in the world economy.”

In the end, the neoliberal, hyper-globalization narrative essentially dissipated, I would say, because of the rise of the far right, the populists, which made it evident to the elites that, actually, a lot of people had been left behind, and they were responding by voting for populists, particularly of the far right.

The pandemic played an immediate role because of the notion that, “Oh, my god, maybe we should bring our supplies a little bit closer and not be so reliant on trade.”

But probably the most important thing that really made all of this come together into the idea that now, we need to move to a new world was China turning into not just an economic threat but a major geopolitical threat on the part of the US and, to some extent, Europe as well.

In some sense, I was being more true to the economics profession by saying, look, let’s take our theories more seriously than most people were, that this is going to have significant distributional effects and there will be lots of losers, and that will also create problems.

Luigi: I think you are either too kind or too modest or both, because having lived part of that period, there was a very strong consensus that was isolating you and making it difficult for people to think differently.

I don’t remember the exact year, but Paul Samuelson, who is the father of modern economics, before he passed away at age 90-something, wrote a Journal of Economic Perspectives piece on raising the cost of free trade. In spite of his credentials, in spite of everything, he was attacked bitterly, and people even dismissed him as senile.

I think it’s very important for us to understand why these narratives become so powerful and why it becomes so difficult to see what you are saying. It’s obvious, and of course, looking from the perspective of today, I say, how can so many smart people not see this point?

Dani Rodrik: I’m not sure. I don’t have a very good answer. I do think that narratives are very, very important. There are a whole bunch of maintained assumptions that we are not explicitly testing. Government intervention is ineffective. Markets tend to do well. It’s pointless to try to countervail against the free flow of capital.

I spent a couple of years of my life doing an empirical study that reviewed all the empirical literature on the growth benefits of trade and showing that these papers were really quite problematic. In private, I had a lot of trade theorists tell me, “I’m glad you’re doing this because we never believed these results.” In public, I think the views were very different.

Now, I sometimes give the example—I wrote this up somewhere—if you are a journalist, and you dress up as a graduate student and then go to the office hours of a leading professor of international trade and ask him or her, “Professor, is free trade good?”

“Well, this is a really difficult and tough question. First, you have to be clear what you mean by good.” And then there’s a long exegesis on efficiency, growth, welfare, all being different kinds of things.

Then he says, “Here’s this long list of requirements under which, even if you’re focusing on efficiency, that trade liberalization would guarantee increases in efficiency.” And then, he would say: “By the way, growth is an entirely different matter, and that’s much longer. Come back to my office hours next week, and I’ll talk to you about that.”

The journalist says, “This is really complicated,” and then goes back to her office and calls the professor on the phone and says: “I’m so-and-so from The New York Times. Can you tell me if this trade agreement is a good idea or not?” And the professor says, “Of course, free trade is good. Absolutely.”

This is how the profession really behaved. The conversation in the seminar room and the public-facing conversation were completely different.

Bethany: How do you think about that dichotomy in a field like yours, which is supposed to be quantitative, driven by models, pure and separate from the narrative of the time or from any kind of narrative, and yet, that narrative actually has such a profound effect on what the models end up saying? How do you think about that balance, or how do you prevent the narrative from infecting the way in which you approach your work?

Dani Rodrik: That’s a great question. I’ve actually spent a lot of time thinking about it. I’ve been talking recently about the difference between economic models and economic paradigms.

Economics is a science. I’m going to quote Keynes here. He says economics is the science of thinking in terms of models joined to the craft of picking the relevant models. It’s not an exact quote, but it’s a paraphrase.

Economics is basically a collection, an ever-increasing collection of models, which are really if-then statements. If these are the background conditions, and I shock it in this way, these are the outcomes I’m going to get.

But because there is an almost infinite variety of these models, they don’t actually tell us what to do in any particular setting. Basically, any graduate student can generate any policy outcome that he or she wants by picking the assumptions that go into a particular model.

For us to be useful in the public sphere, if we’re going to be in a policy domain, then we have to engage in this art of picking relevant models. Unless you have the luxury of running in real time some randomized, controlled trial, you can never actually, in real time, know what model is the relevant one in a particular context.

All useful economics actually relies on a lot of arm-waving and judgment about which subset of these models are relevant or not, and which, I think, is why Keynes called this the art or the craft rather than the science of models.

This is where paradigms come in. Paradigms are essentially shortcuts. They tell us which of these maintained assumptions we should just maintain, essentially. As economists, I think we’re no better than any others, including the ordinary people on the street. We are as much a part of whatever is in the water.

Maybe you’re right to say that we should be a little bit better, because we know there are these other models, and maybe we should be a lot more discriminating. I think the economics profession is to be faulted for falling into these paradigms a little bit too quickly.

Luigi: I think that one of the problems with economics today is that it’s getting more and more away from all the other social sciences. Economists don’t think about what they’re doing in a context. There are some maintained assumptions, and then, you can build models that maintain the assumptions.

If the quality of your model is based on how sophisticated it is, you want to go with the maintained assumption because it’s easier to sell. And so, there is a pressure to maintain the assumption without challenging the assumption, without even recognizing that there are these maintained assumptions.

Then, there are big events like the Great Financial Crisis that shift the beliefs of a lot of people. And so, these maintained assumptions become different, but people don’t really understand and look back and say that there’s been this change.

In addition, I would say, there is an enormous pressure to conform. Economics has become a very sophisticated science and a very meritocratic science, where people are ranked on the basis of citations, articles in the JPE, whatever you want, pick your poison. You want to conform and rank on those bases rather than say, “Look, some of the stuff these people do might be technically elegant, but with the wrong maintained assumption, it doesn’t make any sense.”

Dani Rodrik: Yeah, there is the motive to be different. When you think about it, the way that we actually publish, certainly, if we want to publish in the top journals, is not being fully conformist. You’re not going to get publication in a top journal by simply doing a twist of an existing model. By generating surprising results, you are more likely to be successful as a pure economist.

Where the conformity really comes in is in our public-facing side. Let me give you a concrete example. One of the best examples of this that I know is Jagdish Bhagwati. Jagdish Bhagwati is a good friend, I love him, but he’s always been one of the standard-bearers of free trade within the economics profession. He owes his academic fame to a series of papers, all of which demonstrate how small departures from the assumptions of competitive markets can produce adverse effects and, therefore, free trade can be undesirable or at least need to be complemented with policies to fix things.

But in public, Bhagwati is a completely different person. He is for completely unadulterated free trade. I think the conformity really comes in our public-facing side, and that’s where we get all . . . There’s nothing in our training that forces us to be any different, to not be subject to any of the behavioral biases or the hubris that ordinary people face. And so, we act like any ordinary group of human beings, except that economics somehow is taken seriously by policymakers, and therefore, we can do bigger damage on account of that.

Bethany: Yeah, I think I was mulling over, as both of you were talking, that tension between conformity and nonconformity, and I think it exists in journalism, too. There’s always a pressure to be where everybody else is, or if you’re going to be outside that, to still be marginally outside that in a way that everybody finds interesting, because otherwise, it can risk becoming irrelevant.

This is probably too stark a way to see it, but is US policy or US thinking about globalization simply being yanked around by where China is? During a period where it looked like China was advantageous to the United States, we were all believers in globalization, and once China started to become more frightening and more of a threat, suddenly we’re more skeptical. Is that too simplistic a way of seeing things, that our mindset is actually being dictated by what’s happening in China?

Dani Rodrik: To some extent, that is exactly what is happening. Whether we get out of this a good narrative or a bad narrative is going to depend on whether the United States and Europe essentially look at this and say: “OK, this is now why we need to do things differently, and here’s what we need to do for our own sake. Let’s fix our own problems. Let’s fix our climate problem. Let’s fix our middle-class problem. Let’s fix our problem of declining regions,” as opposed to the alternative path, which is to say, “We just need to essentially ensure that we can compete better against China, that China doesn’t become technologically sophisticated.”

There is a constructive version of the reaction to China and the reactive version. I worry about the reactive version, which puts China as the bogeyman as the center of what we need to do. That’s our basic target. That, I think, distorts our priorities with respect to what needs to be done at home, and it raises geopolitical tensions and the risk of military and other conflict with China.

Luigi: Speaking of the China shock, we had Glenn Hubbard sometime back on the podcast, and we asked him, “What would you have done differently at the CEA, the Council of Economic Advisors, had you known then what you know now?”

Now, I’ll ask you the question in a slightly different way, because your ideas were different back then. What would you have done in 2001, had you been in his position, knowing what you knew then, and what would you have done, knowing what you know now?

Dani Rodrik: We have the experience of earlier export surges and how we used to respond to these export surges when they threatened to cause economic and social dislocation. In the 1980s, it was Japan, and Reagan was the president, the first neoliberal president of the United States.

What did Reagan do? He put up trade barriers against Japanese exports. He saved Harley-Davidson because it was just about to go bankrupt. We think about Reagan as this noninterventionist, free-trade guy, but he was actually doing what it was routine to do in the pre-hyper-globalization era, which was that when your economy experiences periods when significant segments are going to come under pressure, you put up some temporary walls.

That’s not being protectionist. That’s actually saving the system, because if you don’t save the system, you’re going to get somebody like Trump coming and doing much worse.

The Chinese export surge, obviously, was much bigger than the Japanese one, but I think it was the same kind of response that was called for. Rather than the ideological, knee-jerk, free-trade attitude, which is to say, we take all this stuff on our chin, and those who are bearing the brunt, you guys go get an education, you basically slow down. Where needed, you negotiate bilateral export-restraint arrangements, like in the 1980s or 1970s with China.

The focus was really on trying to compensate the losers from this trade, but it never worked. Besides, the losers really didn’t want compensation alone. They wanted jobs, and so, there wasn’t the kind of investment in infrastructure, in industrial policies, to create jobs that would compensate, truly, in a meaningful way, for this deindustrialization, which was going to happen anyhow, but just happened very quickly with Chinese trade.

Bethany: By choosing to try to compensate the losers from our policies in a financial way rather than by fixing it on the front end and by creating jobs, are we doing the expedient thing, or are we doing the only thing? In other words, is it possible to actually enact a policy, where everybody can have a good job? Is that a utopian ideal, or can that possibly exist?

Dani Rodrik: That’s the only choice. We have no other choice. The economics literature is very clear. The evidence is that there’s no way you can make up for the loss of a job, what it does, not just for that individual, but for the family and the community, by simply providing for financial compensatory transfers, even if you actually manage to do that.

And we don’t even manage to do it. Here is an important topic. These jobs in manufacturing are not going to come back. Manufacturing today is extremely capital- and skill- and technology-intensive. A lot of the policies today of the Biden administration to spur manufacturing are having an effect in terms of manufacturing construction, manufacturing investment.

It is not having any effect on manufacturing employment, for the simple reason that TSMC is creating three fabs in Arizona at a total cost of $65 billion, and they’ll create 6,000 factory jobs. That’s $10 million per job. So, that’s not where the jobs are going to be.

The jobs are going to be in services. They’re going to be in personal, in care, in medical services, in food services, in retail. That’s a very different area. And some of these jobs are the worst kinds of jobs that we have in the United States.

We need to think about what I’ve called an industrial policy for services and trying to upgrade productivity in these labor-absorbing services, which is a very different type of policy than we might have thought of in the ’80s or even in the early ’90s, when there was still some prospect of reviving manufacturing employment.

Luigi: I was born in Italy at the peak of the so-called Italian miracle, the economic miracle, and that miracle was a transfer of the workforce from agriculture to industry. The capabilities that were required for somebody to move from agriculture to the industrial sector were not that demanding, and you could do that in a simple transition.

The problem we’re facing today is that when certain manufacturing jobs disappear, desirable alternatives—the ones that pay nice salaries—have some capabilities that are not in the set of the people there. And so, if you are past 40, I think it’s very hard to adapt to the new situation.

How do you deal with that problem? We can train the new generations, but what about the old ones or the ones in the middle?

Dani Rodrik: Obviously, education and training is always the solution for the future, and it’s never going to be adequate for the reasons that you’re mentioning. It has to be coupled with investments in the capabilities of firms and in technological investments that will be directly geared toward increasing demand for less-than-college-educated workers.

Part of it is making the right kind of investments in technology: technologies that are much more friendly to labor, that compliment low-skill labor. An example of this from the care sector would be technologies like handheld tools and AI that give care workers the ability to monitor their patients on an ongoing basis, in real time, and to increase the kinds of stuff they can do—in economics terms, the range of tasks that they can perform—and make them much more responsible members of a care team as opposed to today, when there are very, very limited things that they can do if they’re home-care workers. These are some of the worst jobs in the United States today.

There’s no reason those jobs . . . which by the way, is going to be the largest expansion. The biggest expansion of jobs that’s going to happen in the next 10 years is, essentially, long-term care and home care. There’s a lot that can be done by innovating technologically and organizationally about changing the nature of that work.

Also, if they are able to care better for old people, then you reduce hospitalization rates, you reduce incidence of chronic illness, you increase patient satisfaction. All of these show up as reduced costs somewhere else in the system. These productivity-enhancement investments, organizational and technological, are things that we’re not really spending a lot of time thinking about today, but that’s really where our focus should be if we’re thinking about good jobs. Not chip-style investments in semiconductors.

Luigi: I want to ask, as a fellow European, I’m sure you have looked at the European elections, even if Turkey has been kept out of the European Union. At least when I look at them, I get the impression that your trilemma idea is really in place here. You have a gigantic backlash to the fact that all the unification ideas, the integration ideas of the market, have sacrificed any form of local welfare, and now, country after country is moving to the right in order to get from the right the welfare it didn’t get from the left. Am I wrong here?

Dani Rodrik: No, I think you’re absolutely right. In fact, when I came up with the trilemma, I wasn’t thinking about Europe at all. Then, over the years, I’ve realized that the European Union is actually the trilemma very much in action.

I once heard a finance minister from the eurozone, and he told me: “I think the reason that the far right is winning is that they are the only political force in Europe who are explicit about the existence of the trilemma. And they’re making a very clear-cut decision on which two of the nodes they want.”

They’re picking, essentially, national sovereignty and local majoritarianism, national majoritarianism, local elections, and they’re saying, to hell with European integration and globalization. We’ll put our own national interests, our own national needs, first.

Whereas centrist political forces, to this day, are still basically saying, “Oh, we can tackle all of these things at once.” They’re not facing up to the trade-offs. They’re not being honest.

I think if they were honest, they would say to their electorate: “We do face a choice. We deepen economic integration, but the only way we can do it is, really, by giving up on national sovereignty, which is to integrate politically as quickly as we can. Or, if we cannot manage deep political integration and really go for a European political community in a meaningful sense, then we need to figure out a way of loosening the economic integration.”

Those are really the two options, and there needs to be an explicit facing up to that.

Luigi: But actually, I heard you say that we need more economic populism precisely to defeat the political populism. Can you elaborate on this idea?

Dani Rodrik: I think there’s a common misperception in economics that all kinds of populism is bad. There is a strand of populism which has always been a reformist trend that stands against large, concentrated power, corporate power, and is very reformist.

We were talking earlier about the gold standard. Who were the populists who stood out against the gold standard? It was the People’s Party in the 1890s, and some of their economic ideas became mainstream later on, or the graduated income tax or the progressive income tax. That was also a progressive idea.

Interestingly, back then, the progressives didn’t like import tariffs at all because they thought they were benefiting large corporations. They said we should substitute progressive income taxation for import tariffs.

The reason that economic populism, I should say, has a negative reputation among economists is, essentially, that people associate economic populism with the macroeconomic populism of the Latin American variety of the 1970s and 1980s.

But we can all agree that we don’t want to engage in macroeconomic spending that goes beyond what’s supportable, and that creates huge inflation and balance-of-payments crises. That’s not at the center of economic populism, historically.

Bethany: Last question, at least from me. If an inescapable part of the Milton Friedman decades has been corporate America’s focus on its bottom line, what role should corporate America play in a differently configured world or a differently thought-of world? And can corporate America play a different role? Are they capable of that?

Dani Rodrik: I think the advantage of investors and corporate America is that they’re more attached to their bottom line than to any particular ideology. I think if you can actually blame one reason that economists or other public intellectuals sometimes have a problem, it is that their currency is the ideology and what they believe in. They may stick to those ideas far longer than it makes sense. Whereas if you are investor or a corporation, of course, you’re also part of the general drift of ideas, but ultimately, you’re trying to make money. You’re just trying to grow your business.

One thing we know is you can grow your business and be successful under very different kinds of policy configurations. The Italian businesses that Luigi was talking about during the Italian growth miracle were operating in a very different policy environment than they are now.

If you talk to them now, they’ll say, “Oh, my God, no, we are a globalized world, and you can’t have this regulation, you cannot have the unions, or you cannot have these taxes, and so forth.”

But I think once they figure out that, yeah, you can pay taxes, and then those taxes come back to them in the form of public infrastructure that increases their productivity, or they treat their workers better, and therefore, there’s less turnover, and their labor costs go down as a result, and it turns out that they’re still making money, I think that the corporations and private investors will be the first to leave aside their beliefs in a particular paradigm.

It’s really up to the policymakers and the politicians to set the new rules of the game. I think we would find that corporations are among the most flexible to adjust. I think they hate uncertainty and unpredictability, but they’re always well suited to adjust.

Bethany: Luigi, we recently had Joe Stiglitz, who’s become the other main critic of globalization, on our podcast. How did you come away thinking that Rodrik’s position is different from Stiglitz’s?

Luigi: Rodrik has been much more articulate from the beginning in his criticism of globalization. I would say that Stiglitz’s criticism of globalization was more ideological from the beginning.

Dani is not saying that globalization is bad. In fact, he calls it hyper-globalization because he’s in favor of globalization, but he has been much more attentive, if you want, to the distributional effect of globalization and the impact that this has on politics.

I think his trilemma is very strong, and I really like the answer about the European Union because it’s an aspect that a lot of people, especially Europeans, don’t like to hear, but there is a fundamental contradiction in the system that Europe has pushed, and this contradiction, unfortunately, is exploding now.

Bethany: Why do you think people in Europe don’t want to hear it? Just because it is still outside the conventional wisdom there?

Luigi: Yeah, I don’t know whether you want to call it the Brussels consensus, but the Brussels consensus is much, much stronger than the Washington consensus, and especially if you are European, and you are a legitimate economist, if you don’t subscribe to the Brussels consensus, you are really ostracized. In my particular case, I sometimes criticize some stuff about Europe, and I’ve been faced with a lot of contempt.

Bethany: What have you criticized, and what kind of contempt did you get met with?

Luigi: My line has been very simple. A fixed exchange rate in the euro has not been particularly useful for Italy, because it’s true that Italy abused devaluations in the ’70s and ’80s, but it got rid of devaluations when they really needed one.

My favorite line is: “Devaluations are like a drug. If you keep using it, you abuse it, and it’s bad. However, if you have to do a root canal or brain surgery, you want some drugs to go through that.”

Italy in the late ’90s and early 2000s went through a root canal because the competition from China—and that’s also part of what will serve in the United States—was devastating. Italy is a little bit like the Midwest of the United States. There are very little services and a lot of manufacturing. and this manufacturing faced enormous competition from China.

When you have a shock like this, that’s exactly when a flexible exchange rate that allows you to absorb this effect is crucial. Italy gave that up exactly at the time when this was needed.

It doesn’t mean that Italy should get out now because the costs are very large, but it’s something that we need to think about very seriously, and especially at the time where the European monetary policy was pretty tight, this was really costly in terms of adjustment for Italy. I think that people underestimate that Italy is a country that did not grow in per-capita income in the last 25 years. That’s a long time not to grow.

Bethany: Tell me your view of the trilemma. What did you think when you first heard Rodrik use that phrase? Is that something that you’ve agreed with in the past, or is it something that you were not sure about that you have come to think that he’s right about?

Luigi: It resonates. For Europeans, it resonates as so obviously right. The creation of the European project basically implies a reduction of the welfare state in Europe. The reason why, not surprisingly, the right is more pro-welfare state in Europe than the moderate left is because the moderate left bought into the inevitability and irreversibility of the European Union and the euro as a common currency.

As a result, it is willing to sacrifice on the altar of that goal any other goal, including national welfare. Marine Le Pen is an example of the right supporting national welfare against Brussels.

Bethany: After our discussion with him, do you think that he’s fundamentally an optimist or a pessimist?

Luigi: Actually, ironically, I find him in an uncomfortable position. He used to be the guy criticizing from the outside, and all of a sudden, he has become mainstream. I think he’s a little bit worried about how many of his ideas might be taken to an extreme, and he is not in favor of that extreme. When it comes to industrial policy, and when it comes to some form of reduction of globalization, even when it comes to the trilemma, my impression is that he’s kind of scared of taking them to the ultimate limit, and maybe rightly so. But did you get that sense?

Bethany: A little bit, maybe, and I was thinking when we were talking to him, too, about how difficult it is for someone who was an outsider to become the mainstream and possibly start seeing your ideas put into action, and that would be a very interesting thing for a theoretical economist. Even if that’s what you think you want, it could be very scary to have people actually go ahead and do it.

Luigi: Yeah, especially if some of the people pushing your ideas are not those who you particularly like, because some of these ideas are pushed by extreme right-wing parties. I don’t know his political views, but I doubt he’s from that ideology. There is a bit of fear that your wishes came true too fast and too strongly.

Bethany: Yeah. That’s interesting. I wonder if part of the appeal of Friedman’s philosophy and why it might in the end prove so difficult to supplant is that it wasn’t nuanced. It was very much a no-holds-barred, hands-off, philosophical justification for letting markets do their thing and for not intervening. Having to figure out a much more nuanced way of how to intervene and to what extent is a much more challenging place to occupy than just saying: “Don’t. Hands off. Focus on profits.”

Does that make sense? Do you think I’m onto something here?

Luigi: Oh, absolutely. Yeah, I agree with you, but it’s even worse than that. Once you start to deviate from that, how do you prevent the worst degeneration? Of course, he’s going to be in favor of a Green New Deal, but are you going to get a Green New Deal, or will you get an Arms New Deal in which everybody invests massively in armaments and potentially becomes a more aggressive, nationalist country? The moment you go down the path of nationalism, and you don’t have any constraint at the international level, that’s a very likely outcome. I think that he’s haunted by that fear, in my view, and rightly so.

Bethany: Yeah. And then, how do you make something like a Green New Deal not turn into an even worse version of crony capitalism than what we have now, per our questioning of Stiglitz over his seeming belief that government is automatically better than markets?

Maybe the way forward would be to come up with some kind of way for markets to keep government in check and governments to keep markets in check, some kind of iterative functioning, where each one could serve to rein in the excesses of the other one, rather than each one either being totally unrestrained or fomenting the excesses of the other.

Luigi: Yeah. I think that one important lesson is that we need a capable government. There is some genre of free marketeers that really think that the smaller the government, the more impotent the government it is, the better it is. I think that’s wrong.

You need some government competency, and this makes all the difference in the world when it comes to, for example, industrial policy. Ironically, the United States had a very good industrial policy when they were doing military defense because they allocated a lot of resources in a fairly efficient way.

If you think about the Cold War, if you think about the space program, they generated enormous technological improvement at costs that, if you look back, they are not that big. I’ve not seen anybody documenting massive waste in the Apollo program. The question is, why was the government able to do that and now is not able to even do the most basic things?

Bethany: And why the government was able to do it in a somewhat . . . I’m struggling to come up with the right words here, but a somewhat unplanned way, in a sense that the goal wasn’t industrial policy. The goal was national defense, and industrial policy was a byproduct of a different goal.

I usually tend to think that things are better being what they are. In other words, if you’re going to hand over money to companies to do something, it should be very clear that that’s what you’re doing. In this case, it was kind of a byproduct of a different goal.

Luigi: I think that, actually, sometimes you do the best when you’re not aiming at that goal.

Bethany: Right? Yeah.

Luigi: Here, the goal was to defend the United States against a very threatening and powerful enemy. That moral tension might have helped to create a better allocation of resources. When you are only talking about money and making people richer, then everybody feels more entitled to steal as much as they can.

Bethany: Yeah, that’s interesting. A phrase slipped out of me when I was talking about my new book, and I’m not quite sure it’s right, but I’m thinking about it, which is that you can’t have markets without morality.

In a weird way, what we’re talking about is exactly that, because when the big moral stakes were the defense of the United States, maybe this function does a check on natural human greed. When industrial policy is just grab as much money as you possibly can because the government’s handing it out, maybe then, you don’t have the necessary moral check.

Luigi: But I will add, you cannot have government without morality because part of the problem here is that everybody who was involved, let’s say, in the Apollo program, felt very strongly about the sense of mission.

I don’t think that if you go around to many of the participants in industrial policy today, they do feel the same sense of mission. Even on an issue like fighting climate change, which is a big, big, very important issue, I’m not so sure that people are so purely dedicated, at least the ones working in the administration.

Bethany: Yeah, I think that’s a very fair point.