Dani Rodrik (Harvard Kennedy School Economics Professor) on Industrial Policy, Globalization and His Career

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>> John Hartley: This is the capitalism and freedom in the 21st Century podcast, where we talk about economics, markets and public policy.

I'm John Hartley, your host. Today, my guest is Dani Rodrik, who is the Ford foundation professor of international political economy at Harvard University's JFK School of Government. Danny is a leading scholar in international economics, development economics and political economy, as well as one of the most prominent advocates in the world for industrial policy.

And is a longstanding critic of globalization, highlighting its labor market consequences. Today, I'm gonna ask Dani all about the case for and against industrial policy, as well as what his ideal vision for a new economic policy paradigm would look like. Welcome, Dani.

>> Dani Rodrik: Thank you, John. Nice to be talking to you.

 

>> John Hartley: So I wanna start by getting into your background. You grew up in Turkey and came to the US, where you did your undergraduate work at Harvard and you did your economics PhD at Princeton. How did you first become interested in economics?

>> Dani Rodrik: It was a kind of a roundabout process, actually.

I was more interested in history and political science. At Harvard, I majored in government, which was sort of the way what political science is called at Harvard. And my father was a businessman, convinced me that I should be more interested in economics. So just to please him, I minor in economics and I wasn't sure that I wanted to do a PhD or I should do a PhD because I don't come from an academic family.

Neither of my parents went to university, so it took a while. And eventually, when I was doing my masters at Princeton in the School of Public and International Affairs, I discovered I have finally reached the conclusion that I wanted to do a PhD. But I was still not sure whether it would be in political science or in economics.

And then I remember walking into the the library and I picked up a copy of the American Economic Review and then a copy of the American Political Science Review. And I looked at each of them, and then sort of, I had an epiphany that if I did a PhD in economics, I would still be able to read the APSR.

If I were to do a PhD in political science, given the way that political science was taught at the time, I probably would not have been able to read the AER. So it made sense to do the PhD in economics and still keep my interest in other social sciences.

 

>> John Hartley: It's fascinating. All these years later, it seems like now political science is very much trying to model itself in economics and doing very much applied micro type work, trying to answer more political science type questions.

>> Dani Rodrik: That's absolutely true. I mean, that's why I need to be clear when I tell the story that this goes back quite a few decades, and political science certainly compared to politics, political economy, some parts of international relations.

Certainly American politics, they've all become much more sort of analytical and much more like applied micro. The story that I just, Paul should probably should not be a guide to anybody who's deciding to do PhD in one or the other today.

>> John Hartley: I'm sure that political theory is probably more dominant back then in political science departments as well and interesting.

I'm sure John Rawls was around Harvard at that time as well, but I think he was in the philosophy department. It's absolutely fascinating. So you then went on to spend a lot of your academic career at Harvard, as well as Princeton, Columbia, and the Institute for Advanced Studies.

I'm curious, what was the academic environment like at all these places while you were there, while also being publicly a vocal critic of globalization during this time. Were there any colleagues who vehemently didn't like you or what you were saying? This is sort of at the height of globalization, or what some people might call neoliberalism.

Did you have any adversaries, say at the famously free market University of Chicago? And who were those who were most supportive during your career, even if they maybe disagreed with you or were open minded and helpful to you along the way?

>> Dani Rodrik: With hindsight, the reason that I gravitated towards multidisciplinary environments rather than a department of economics is that.

I found that the kind of work that I do and the kinds of ideas that I have tend to generate less open hostility in such multidisciplinary environments. And so, I mean, most of my academic career has been at the Kennedy school. I've left a couple of times, and each time I decided to come back because it's the most congenial.

And in the Kennedy School proper, I have to say, I was always welcome. Even the economists in the Kennedy School, I think they have their legs, their feet firmly planted in the ground. And I think even when we disagree on policy debates, I've never felt like that my ideas were not welcome, or they thought that I was doing something crazy.

Occasionally, with people in economics departments, it's been different. When I was at Columbia for about four years, I had a joint appointment with the economics department and the school of international and public affairs. So again, I had one leg in the sort of more multidisciplinary policy school, but the economics department wasn't always comfortable.

Then, of course, I had these amazing conversations with Jagdish Bhagwati, who was, of course, a very distinguished trade theorist and also very much a pro free trade. And I think he always thought that I was a kind of somebody who was doing a lot of damage to the profession.

So we got along very well at a personal level but I think he really hated the work that I was doing here at Harvard. In the economics department, I've had people have always uneasy relationships with certain people. I won't name names because they're sort of colleagues. But I remember giving a talk in the economics department on why some of the growth benefits of international trade integration may have been inflated in the empirical literature to that.

And amidst the usual technical discussion about the issues of theory and measurement and so forth. A senior faculty member raised his hand and basically said, Dani, why are you doing this? As if it was a kind of an ulterior motive that I had to sort of justify myself because I was arriving at a conclusion that was quite different from what was then fashionable in the profession.

I have another senior colleague in the economics department that anytime I ran into him in the Harvard yard, he would just give me a smirk and say, so how's the revolution going, Dani? Then at some point, I sort of began to tell him, well, don't you realize I won.

And sort of that stopped because the climate had changed quite a bit. And there's a sense in which I feel so much more mainstream these days because the nature of the conversation has changed. So, I encounter much less of that these days.

>> John Hartley: That's fascinating. Did you ever do a job market talk at the University of Chicago or anything like that?

Did you ever have any interactions with-.

>> Dani Rodrik: Yeah, actually I mean, I think when I finished my PhD at Princeton, that was back in 1985, and then sort of went on the job market. The two offers that I considered most seriously were one from, of course, the Kennedy School, which I ended up taking, but the other one was from the School of Graduate of Business at Chicago.

But the job talk that I gave there at Chicago was probably the most unpleasant experience I've ever had. And the bit of it that stands very clearly is literally within three minutes of my introduction. I got interrupted by Lester Telser in a very, very rude way by sort of who just turned to me and said, do you know even what a tariff schedule looks like?

And that was this question to me, sort of implying that what I was talking about had no bearing on reality. And luckily, I had spent a year at UNCTAD in Geneva looking at tariff schedules, so I could answer, yes, but I don't think it quite overcame his skepticism.

But so I don't think I would ever have gotten an offer from the economics department and I don't know how it is that I got an offer from the business school there. But eventually, I felt that Kennedy School, being sort of more of a policy place, was much more to my liking.

 

>> John Hartley: That's fascinating. And it sounds very apropos for what the University of Chicago economics department was like in the late 80s. And also fantastic to hear about how welcoming and supportive and open-minded the Kennedy School economics department. As a graduate of it, myself, as an MPP graduate, totally understand that ethos and how open-minded I think a lot of those in the economics department at the Kennedy School are.

I'm curious, so, you've done a lot of work in political economy, development, and international economics, and before sort of getting into your views and thoughts on these topics. I'm just curious, what led you to political economy, development, international economics? Did growing up abroad kind of influence you in any way to study these subjects?

I know you mentioned you're in the library and you're sort of opening up the APSR and AER, and that being a government undergrad was influential in some way. But I guess what I find living in the US now and having grown up in Canada is that when I grew up in Canada in general, it's focused on what else was happening around the world.

And for example, a lot of very famous international economists happen to be Canadian. And I think a lot of international in development economists in general tend to hail from outside the US, at least relative to other fields. Was there anything in, I guess, your own upbringing or growing up abroad that got you interested in studying political economy, development, international economics, studying countries beyond just the US?

 

>> Dani Rodrik: I think it definitely played a key role. I think I came from Turkey to US in 1975 at 18, and I hadn't done a whole lot of. This was my first time in the US. I'd been in Europe, Western Europe, for a little bit. But I mean, the contrast, I mean the level, I mean, the development gap is something that, of course, you've read about before.

When you were growing up in Turkey, you were always conscious of this gap you had somehow lagged behind. The Ottoman Empire was on top of the world. You ruled much of Europe and North Africa and the Middle East in the 16th and 17th centuries. So, this notion of somehow having fallen behind and figuring out what the reasons for that were just sort of very much burning questions.

And I mean, at the time I started getting engaged with these questions more seriously, I guess in the early 80s and so forth. We knew what were the right policies that countries like Turkey had to do. So there was a general, what later came to be called the Washington consensus, a sense of let markets work.

Join the world economy, open up your economy to international trade and investment, make sure you run your macroeconomy sensibly. And so the big questions weren't really what to do. The big questions were, how come they don't get done? And so I think the reason that I got interested in political economy early on, was that the important questions really seem to be about, why is it that the policies that generally convinced.

It should be the right ones aren't the ones that policymakers in lower-income countries adopt? And so what are the political reasons? What are the structural reasons? So that was one strand of and that was sort of why eventually I got more interested in political economy. But I was also a little bit always having started asking these questions from somewhat different domains of political science and history.

And having sort of a sense that different countries have prospered with very different type of institutional arrangements, very different types of policies. The whole experience of Japan with catching up with the West through its policies of promoting its industries and, of course, South Korea and Taiwan, extensive use of industrial policies.

I was always a little bit skeptical about the Washington consensus recipe. Another track that my research was on was really sort of saying, okay, let's use the tools of economics as we understand it, which is sort of our formal models and our tools of empirical analysis. But let's sort of broaden, let's see how we can broaden to also understand why is it that South Korea's interventionism worked, whereas it might not have worked somewhere else.

So, broadening this range of policy implications of our existing tools was kind of agenda that I was engaged in.

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>> John Hartley: Well, you've written quite a few papers, and quite a few would be an understatement. You've written a whole number of very, very influential papers in development, international economics too many to discuss here. But I guess I'm just curious as you mentioned, you've for long been a skeptic of globalization as sort of a panacea, as well as what some people call neoliberalism.

And sort of a long been an advocate of industrial policy and active labor market policies. Obviously, industrial policy is a very hot topic right now, and for a number of reasons, some being more non economic national security related reasons, with sort of decoupling from China. And others being more economic related, and sort of how to respond to deindustrialization and the China shock domestically.

I'm curious, you've been a long time critic. What is your vision for a new economic paradigm? I know you talk a lot about good jobs over sort of a welfare state with transfers to compensate people for, say, those who are left behind from globalization. I'm curious, what is your vision for a new economic paradigm?

 

>> Dani Rodrik: First, lemme say that I think in terms of my views on globalization and the role that I played in those debates, I've always seen myself as kind of somebody was trying to lean against the wind. Because I thought that the consensus view had departed so much from any sensible take off policy that the evidence or history would sustain.

So, I think when I was writing sort of my more skeptical pieces on globalization or trade in the latter part of the 1990s or the 2000s, I mean, the consensus in the economics profession had. And also in the policy world, in the sort of the world of economic policy technocracy just moved so much in a direction that I think was really quite divorced from the evidence where basically joining the world economy became the development strategy for countries.

That all you had to do was essentially lower your trade barriers, integrate into the world economy, and that would be your growth strategy. Whereas when I looked at countries that had done well both concurrently and also in history, those were always countries that had combined a strategy of using the world economy for getting the technology for selling their exports and getting foreign capital in.

They've always sort of leveraged the world economy and combined it with a sort of domestic investment strategy, domestic strategy of structural transformation. That was true of Japan, that was true of South Korea. It was true of Singapore, it was true of Taiwan. Of course, it became increasingly clear that was also going to be true of China, which is, of course, what they did.

So my interest in industrial policy, in trying to understand it, was because it was so ubiquitous in South Korea and Taiwan, which was these two critical countries that did so well in the period after the early 1960s. And you couldn't get away from the conclusion that industrial policy had played a very key role.

I think the notion that was prevalent in the times that I was engaging in these debates on trade and globalization, industrial policy in the late 90s and early 2000s. That these countries had done well, that Japan and South Korea and Taiwan had done well despite their industrial policies, rather than because they always seemed to be so preposterous.

And so that was, I got interested in that because I was trying to understand exactly what they did, how they did, and how that might have been different in other countries that also tried to replicate many of these same policies, but that didn't work. So that eventually would lead to another strand of my work, which is to try to understand why economic policies don't travel, why context matters.

And trying to do what we came to call growth diagnostics, which is to figure out what the binding constraints or economic activity or growth might be different in different contexts. But I mean, that early work on industrial policy then, of course, now, as you say, all of a sudden becomes very, very topical because every country is now doing industrial policy and doing it self consciously.

I think that's the main real difference is not that industrial policy is back. It's that it's back self consciously, that it's governments are not afraid to shout it from the rooftops that that's what they're doing. In reality, it never disappeared, but now they're sort of proudly proclaiming that they're doing it.

So in the spirit of going back to where I started, of leaning against the wind, now, these days I sometimes worry that it might go too far, are it might be in the wrong direction. So sometimes you'll find me sort of being a little bit skeptical that the kinds of industrial policies that we have today, whether it's CHIPS or IRA, can achieve all the objectives that the Biden administration has set for these things.

So those, it's really sort of might come back to industrial policy. But later, lemme say a few words about the big question you asked about my vision for the next set of economic policies in the future. I think I see a lot of our economic and political malfunction as being the result of the various labor market dislocations of the last few decades through automation, skill bias, technological change, globalization, the austerity policies.

The deregulation of labor markets, weakening of unions and so forth, really weakened the foundations of the middle class both in the United States and Europe. And the disappearance and the scarcity of good jobs that in turn has provided fodder for the rise of populist movements and the weakening of democracy, the rise of authoritarian values and so forth.

So these divisions of society, this polarization, the political polarization that we have is in many ways a product of the labor market polarization that we have experienced during that neoliberal era. So I think it's fundamental to repair those labor market fissures. And the main idea that I'm trying to get across is that we can't do it by going back to the policies of the 60s and 70s.

These manufacturing jobs, which were the foundation of the middle class, are not going to come back. The jobs of the future are going to be in services. So we need to think about how to increase productivity in labor absorbing services, whether it's care, whether it's retail, whether it's education, personal services, and so forth.

So this is an entirely very new domain of thinking about economic policy that focuses on how can we increase productivity in the services sector. I sometimes call it kind of an industrial policy for services, although there's a kind of a contradiction in terms there. But that's really the kind of thing that we need to do, sometimes I've called this a productivist approach, which is trying to engage in the real economy with a range of policies to increase productivity.

And there's a whole set of policy proclivities that come with this, with engaging the private sector, cross sector collaboration, thinking about technology as something that can complement labor instead of just replacing it and so forth. So I've been trying to fill in my most recent work some of the gaps in the thinking on these.

 

>> John Hartley: That's fascinating, I know you also talk a little bit about good jobs over transfers. I think that the idea with, I guess, the more neoliberal advocates was that I think a lot have recognized that there have been folks who have been left behind. But I guess the solution there, the policy solution there that I think a lot of people in that older free market era have sort of.

The policy prescription that they've advocated is for having policy responsive transfers to help those left behind rather than in active industrial policy. Why do you think it's more important to have, say, good jobs over transfers?

>> Dani Rodrik: I think this is one of the blind spots in neoclassical economics, that the importance of jobs to sense of individual well-being as well as societal well-being.

I mean, how we think about where utility comes from, it's all defined over our consumption bundle. And then our jobs, really enter our utility indirectly through how it affects our budget constraints. So the only way that having a good job really would enter, is by giving you a better sort of relaxing your budget constraint, allowing you to consume more.

I think just looking around, or indeed, if you want more careful evidence, looking at what the empirical literature on happiness or life satisfaction shows, I mean, the jobs. Having a good job or a job, is one of the most important thing to an individual's well-being. Losing a job is something that causes inordinate loss in utility.

And if you try to figure out what the monetary compensation would be, it's often four to six times the value of the job, of the income that you are getting from job. And I think sociologists and political philosophers have also stressed, that jobs are important for a sense of social recognition.

That people define their sense of self worth and their sense of who they are, by contributing to society in a productive way. That's what my colleague here, Michael Sandel, calls contributive justice, as opposed to distributive justice. When we think about justice in terms of who gets what, it's in the frame of distributive justice.

And distributive justice can be addressed by transferring income to people who don't have it. By contributive justice is giving people an opportunity to contribute to society as productive members of that society. And that requires giving them an opportunity to be productive workers, and to work in work environments where they have decent carrier ladders.

They can exercise agency and autonomy, they can be productive and effective in that way. But the importance of adding good jobs goes beyond the effect on individuals, an individual's self worth. One of the things that, again, sociologists have taught us, and now to the most recent wave of empirical work related to the China trade shock and so forth, has shown us.

Is that when good jobs disappear from local communities, it's not just a loss of income, it's just a significant deterioration of the social and political fabric of that society. So, deforest rates rise, mortality rise, suicide rates rise. And individuals become actually politically more authoritarian and long held divisions about sort of, attachments that might lead to political polarization.

Like aversion to foreigners, to immigrants, to racial or ethnic minorities tend to increase. So there's all kinds of social and political consequences of the disappearance of good jobs. And if you will, these are good job externalities. And so that's, I think for all those reasons, it's extremely important to look at our next set of challenges.

As being one of not just redistribution, and God knows the social insurance system in the United States can be improved. But I don't think the solution is just simply thinking in terms of the welfare state. It's really about, increasing our number of good jobs our economy generates. And that's where industrial policy comes.

Industrial policy is really about increasing the productive capacity of a society by targeting those sectors that have the possibilities of increasing productive employment opportunities. And that requires working with firms understanding what they need. There's a huge local element to that because you need to develop these cross sectoral coalitions, to figure out what needs to be done.

I could get into the details, but I think it might get us too far afield. So, let me just stop it here.

>> John Hartley: To sort of push you just a little bit, cuz I fully agree with you that disappearance of good jobs is definitely a very negative thing, and something that can be devastating for communities and societies.

But I guess the real question is what can we do to remedy these things that is most effective? And I guess in terms of whether our goals are growth versus equality, these are also different objectives too. So, I guess there's questions about what our objectives are, whether it's really just minimizing distortions and redistributing resources.

Or whether it's very much focused on promoting inequality, especially amongst, say something, having good jobs. I'm just curious, I really want to make the case, understand what the best case is for industrial policy. We've seen a lot of good non economic national security cases. Think about China and Taiwan, semiconductors, chips Act.

Then there's obviously a lot in the sort of green space. Think of some of the things with IRA and EV subsidies and so forth. Obviously there's critics of these things and that they're somewhat distortionary and don't necessarily lead to all that many good jobs. But there's more sort of classically, just in terms of economic theory, there's always been this infant industry argument.

And I'm curious, you mentioned that we're not gonna bring back manufacturing jobs less than 10% of America's workforce are manufacturing jobs just down from 30% right after the second world war? Those aren't coming back, you're very focused on service sector jobs. I'm curious, in what industries do you think industrial policy is maybe most impactful in economic terms, in terms of possibilities?

And is there maybe a limit on some of these policy ideas before, say, incentives start becoming a real barrier?

>> Dani Rodrik: Yeah, I mean, first, I think when I'm asked what's the rationale for industrial policy, I actually like to turn that question around. The economic rationale for industrial policy is very strong.

And in fact, most debates on industrial policy don't revolve around the economic rationale at all. It revolves around issues of, but can governments really do this? Want governments really get corrupted? Will they actually know what to do? So the real debate is really about issues, about political economy, about administration, about the capacity of the government, rather than the economic rationale.

Now, why do I say this? I mean, the economic rationale for industrial policy is essentially, I would summarize it under three headings. One is learning spillovers, knowledge spillovers. And these are ubiquitous, especially in new areas. The second would be kind of coordination failures or issues of agglomeration, where you might need to coordinate investments and behavior by private actors.

And again, these tend to be fairly ubiquitous, especially in areas and regions that are lagging behind. So you might need to invest simultaneously. Training on the one hand, and infrastructure on the other, and some knowledge and other kinds of public infrastructure somewhere else. These are all sort of issues of coordination.

And third, it's about critical public inputs that public private firms need in order to prosper. Now, when we think about public inputs, we usually think about these as public infrastructure and education and good regulation and so forth. Which we think of as horizontal policies that aren't like industrial policies, which tend to focus on individual sets of firms or individual sectors.

Whereas in the real world, these kinds of inputs are highly context specific and highly need to be customized to the needs of individual firms or individual industries. So whether you're talking about training or you're talking about infrastructure, you're talking about technology or talking about management assistance, these all need to be customized and tailored to the needs of a particular set of industries and firms.

And that's why they tend to start looking like industrial policy, because you're engaging with firms, trying to understand their needs and then providing specific inputs. And by the way, so industrial policy, I think, is much, much broader than simply subsidies. I think it's a mistake to think of industrial policy purely as the provision of subsidies is really a provision of public assistance in this very broad sense to a particular set of firms.

With the idea of being able to overcome various types of market failures or coordination failures or the need for specific public inputs. Now, do they always work? No, have they often failed? Absolutely yes. Can we do too much of it and overdo it? Absolutely yes. But here's the most important thing to draw from this discussion.

Just like in any other area of economic policy, the issue here is not whether there is a good justification for the government to be doing it. Or whether the kinds of market failures that are of concern, whether they exist or not. The question is how can we do it better?

So the discussion really ought to be about how to do industrial policy better and not whether we should have industrial policy at all. And unlike so many other areas of policy, where you can also worry about capture by insiders or by inadequate information on the part of the government, these problems plague.

All areas of government policy, whether it's education, whether it's energy policy, whether it's macroeconomic stabilization policy. But in none of these areas are we really discussing whether the government should have a policy in the first place or not. We discuss how can the government do better. And I think that's the discussion that we ought to be having in industrial policy rather than this completely unproductive discussion of whether governments should do it or not.

 

>> John Hartley: That's fascinating and interesting way to think about it. One, I guess we should maybe rethink how we measure economic progress and think about it broadly. But also that it's a learning by doing type approach rather than an industrial policy, yes or no type of approach, in that we already have a lot of industrial policies as it is.

And the extent that we have it, how do you end up get a better result, say, South Korea, Taiwan, type of outcome. Rather than, say, a Japan ministry of International Trade and industry type result, which I think a lot of critics use against industrial policy? I wanna talk just a little bit more about trade and globalization.

President Biden has largely continued many of that tariffs and quotas put in during the Trump administration. I mean, do you see tariffs and quotas being an actual norm going forward, or like, for economic reasons. Or do you see it as more of just a geostrategic, sort of non economic objective tool, similar to, say, sanctions to punish foreign policy adversaries like China?

 

>> Dani Rodrik: I think it's mostly the latter. I think it's being used mostly for geopolitical reasons, for reasons that I think we've already discussed. I don't see a huge role for trade policy in generating good jobs or dealing with issues of labor market polarization or addressing the problems of lagging regions in the United States.

And to the extent that I think those problems are linked and their solutions are sought in trade policy or trade restrictions, I think is going to yield disappointing results. So I think we need to live with two somewhat contradictory ideas in our head. Yes, the trade shocks of the 1990s and two thousands did play a role in creating labor market problems and polarization and fueling the rise of populists like Trump.

But, yes, also at the same time that most of those jobs that were destroyed in manufacturing through trade shocks are not going to come back to the United States. So that we have to look elsewhere for productive employment opportunities.

>> John Hartley: That's fascinating, its interesting to think about how trade policy will evolve in the coming decades.

It seems like in terms of remedies for these trade dislocations, you're a bigger advocate for active labor market and industrial policies rather, rather than a response in trade policy. I'm curious just sort of stepping back a bit and looking at the sort of broader picture in terms of all of these sorts of policies.

Whether it's trade policy, industrial policy, active labor market policies, thinking about, say, antitrust, have we hit a new political economy equilibrium? Or have we reached, say, a new Washington consensus with industrial policy, tariffs, quotas, aggressive antitrust, and so forth. The IMF now supports some limited controls on capital inflows.

That's a huge break from what the IMF was supporting, say, 25 years ago, say, when Ann Kruger was the deputy managing director of the IMF. Are we at the beginning of a shift, or have we hit some sort of a new political economy equilibrium?

>> Dani Rodrik: We clearly have shifted, and we clearly are not going back to the earlier Washington consensus or the period of neoliberalism or what I've called the period of hyperglobalization.

So I think those we've left behind, and we also are definitely going to see going forward much greater economic nationalism. Which I have to say I don't necessarily think necessarily in purely negative terms, because to the extent that countries look out for their own economic interests and build stronger economies and more cohesive societies.

They're actually doing a great service for the of the world, too, so I think one of the best ways in which you can contribute to the world economy is by being a strong economy yourself. I mean, look at China we complain to this day about China's Trade policies, industrial policies, how they manage their currency.

But if you grant a point that those were economic management that actually contributed to China's growth, and I think it'd be hard to argue otherwise. That ultimately China, by providing a huge market for Western firms and Western investors, actually helped the rest of the world through these policies rather than actually hurt them.

So that's kind of a bit of a side note on how a shift towards somewhat more economic nationalist attitudes towards trade policies and the international economy may not necessarily be all that bad. Having said that, I think what we don't know is what that new equilibrium is going to look like.

So I would say that we have three possibilities, if you will. The good, the bad and the ugly. I think the bad really would be a kind of eventual return to the 1930s style, autarky and bilateralism and a complete collapse in world trade. I don't think we're really going there.

I mean, the cost of that would be so large given how much more integrated all the major economies of the world are today compared to the 1930s. I just can't believe that we'll end up there but there is a contest between the good scenario and the ugly scenario.

The ugly scenario, I think, is a world in which we don't go back all the way back to the 1930s. But a world in which geopolitical competition, particularly between the US and China, becomes the perspective, the prism through which all our relationship to the world economy gets measured by.

So essentially we transform a setting in which we should look at the world economy in positive sum terms. We start looking at it in zero sum terms because that's the kind of perspective of geopolitics as opposed to the perspective of economics. I think that would be a world in which we neither get more peace because it's just going to heighten tensions with China.

Also, we don't get, obviously, much greater prosperity because all economic interdependence essentially becomes weaponized for geopolitical and strategic ends. I think this is an obvious scenario, I hope we don't end there, but I think that's quite likely. I think the good scenario is one where countries are able to carve greater policy space and policy autonomy, to rebuild their middle class.

To rebuild their economies, to foster more cohesive societies through greater equity and productive opportunities, and so forth. So that's all linked with the kind of good jobs agenda that we were talking about before. That will require a certain degree of greater economic nationalism than we've experienced under hyper globalization.

But I think the paradox is that actually that might, in the end be better for the world economy than trying to go back to an unsustainable type of hyperglobalization because it ends up being so divisive economically and politically within countries.

>> John Hartley: Yeah, its fascinating to think about what the political equilibrium future will look like.

I think two big things to watch are what happens with China and its current growth malaise and whether it takes a step back from its big state capitalist approach under the Xi Jinping era, back toward the more free market era that was inaugurated by Deng Xiaoping. Also, the 2028, I think the presidential election in the US is gonna be a huge turning point in the battle for ideas in the sense that, have had presidents Biden and Trump the helm of the presidency for 12 years.

And I think in both parties, as they seek to find their new leaders, both Republicans and Democrats, to what degree will they be willing to accept a lot of this, call it new Washington consensus or new political economy equilibrium ideas? Or revert back to more the ideas of the old Washington consensus?

Something I'm certainly going to be watching, as I'm sure you will be as well. Dani, I wanna thank you so much for coming on. This has been an amazing discussion, and really amazing, and an honor to get to talk to you. I think you've been the leading person and advocate for industrial policy and active labor policies.

And have been very pressing as well in talking about some of the dislocation type of effects from pursuing free trade strategies and something that we only became aware of very much later. Or had people been listening to you earlier, I think people would have been paying more attention to things like the China shock earlier.

Really wanna thank you for coming on.

>> Dani Rodrik: Thank you, John, it was good to talk to you today.

>> John Hartley: Today our guest was Dani Rodrik, who is the Ford Foundation Professor of International Political Economy at Harvard University's JFK School of Government. This is the Capitalism and Freedom in the 21st Century podcast where we talk about economics, markets, and public policy.

I'm John Hartley, your host. Thanks so much for joining us.