The retreat of orthodoxy and return of prudence

Consider the following emerging trends. Manufacturing activities are critical for economic growth and should therefore be reshored. Industrial policy is important to support manufacturing. Strategic industries should be subsidised (and even winners there should be picked). Certain trade restrictions are necessary to level the playing field and protect domestic industry and jobs. Regulation of financial markets is essential. Financialisation should be controlled. Globalisation should be slowed and reversed. Capital controls are good and external borrowings should be constrained. The inflation target should be higher. Deficits and public debts are fine as long as their growth is slower than the economic growth rate. Rent controls may be required to make housing affordable. Government financing is critical for the green transition. Government intervention in general is important for economic growth. And so on.

In the coming months and years, more will certainly follow. I can think of a few more. Executive compensation should be curtailed. Private equity firms should be regulated more tightly. Capital gains should be taxed at higher rates. Marginal income and corporate tax rates should be increased. Windfall taxes should become the norm. Wealth tax should be reintroduced to maintain intergenerational equity. Minimum wages should rise. Large firms should be regulated, even broken down. In addition to consumer welfare, size, and anti-competitive practices should become the tests for anti-trust actions. 

These trends are contested as being anti-orthodoxy. Academic researchers, experts, and commentators scorn these emerging policies and rail against them as being against technical expertise and wisdom. Some say these policies run against evidence. 

There might be a simple explanation for this reversal.

For long these policies suited the domestic and international requirements of developed countries led by the United States. These policies were in their national interest. These countries were the main beneficiaries of these policies. They formed the core of the so-called Washington Consensus. 

The net losers on these were the developing countries. It was therefore natural that there was strong opposition among these countries to the Washington Consensus policies. These critics in the global South were then contemptuously dismissed by the commentators and scholars in the West as being left-wing ideologues and snake oil peddlers. Notwithstanding overwhelming empirical evidence, Western intelligentsia and media were unwilling to accept their arguments. 

Now that the shoe is on the other feet, the same countries are at the receiving end of the adverse consequences of these policies. When faced with this reversal of fortunes, academic elites are emerging from the woodwork to advocate the same policies they excoriated when implemented earlier by developing countries. The IMF, long used to forcing such orthodoxy down distressed economies, has now emerged as the champion of these reversals. They are all now using the same evidence, logic, and methodologies that the developing countries then used to make in defending their policies. 

The reversal has been necessitated by a few forces. One, the emergence of China as the factory of the world and a manufacturing superpower has upended the global economic order, leaving Western markets captive and their firms uncompetitive. Two, the dynamics of technology-biased changes and off-shoring of manufacturing activities have resulted in an acute scarcity of good jobs. Three, the financialisation of the economy has created several distortions that hurt the economy, society, and polity. Four, the capture of the rule-making process by Big Tech and Wall Street threatens to break down the social contract. Finally, the speed and extent of climate change have forced existential challenges for everyone. 

This is also a reminder that public policies are rarely ever about strict adherence to some theory or orthodoxy. All things we do in our daily lives are guided by some principles that are overlaid in the context of making judgments about what to do. On the same lines, public policies emerge from a combination of theory and precedent filtered by context and some salient evidence, all combined to exercise some judgment. This is prudence. 

Experts and academic researchers, skewed by their theoretical knowledge and logical frameworks but without the benefit of the contextual and implementation experience, are deeply constrained in their ability to exercise good judgment about what might be good policy responses to problems facing their countries. Prudence and wisdom cannot be substituted with technical expertise in addressing complex public policy challenges. 

In the next post, I'll provide another perspective on these shifts. These shifts should be seen as a recalibration and rebalancing of policies that had gone too far and created several distortions.