Review of Dani Rodrik, Economics Rules: Why Economics Works, When It Fails, and How to Tell the Difference, Oxford University Press, 2015, hb, ISBN 978-0-19-873689-9, xi+253 pages

Abstract

Review of Dani Rodrik, Economics Rules: Why Economics Works, When It Fails, and How to Tell the Difference, Oxford University Press, 2015, hb, ISBN 978-0-19-873689-9, xi+253 pagesAt the beginning of every course of economics, students are taught that free-markets are what should be aimed for. That markets have the ability to self-adjust, every intervention of the state leading to a misallocation of resources. Only later do students learn that the free-market concept may backfire by not bringing the anticipated results. Two cases are worth mentioning: (i) the one of South East Asian economies and (ii) the other of Latin America. In the first case, a pivotal role was played by the long arm of the state, which established important protectionist measures that in turn helped the countries of the region to further develop the private businesses and the well-being of labour (Lim, 1983). Those economic policies contradict the idea that free-market economic theory is the most effective way of organizing a market. In the second case, the Latin American countries applied the principles mentioned in the Washington Consensus, which mainly propose stability based on three pillars: macro-stability, liberalization, and privatisation (Williamson, 1990). However, these failed due to the fact that free markets work in the presence of healthy institutions, which were taken for granted. A malfunctioning institution cannot enforce the law, which can affect the relationship between different market actors. The problem of enforcing the contracts is one such example.These cases represent only a few of the many situations that demonstrate the failure of mainstream economic theory to deliver the promised results. Therefore, questioning the economics discipline seems to be something normal. However, the criticism towards this science has started to increase in intensity after the 2007-financial upheaval when the mainstream economic theory failed to predict it. Yet, economic science is still in high demand across the world.Often labelled as an economist that casts doubt upon the power of free market, Rodrik has brought significant contributions to political economy through his focus on growth policies, industrialization and globalization. To better understand an economic model, Rodrik analyses in his last book the way in which it is created and it can be applied within different parts of the world. In this way, the weaknesses and strengths of the discipline can be better underlined. The author wants to make economists and non-economists understand that a model and not the model is applicable in various social, political and economic contexts. The models have to be seen as a toolbox where each model can solve a specific problem within the market. As such, there is no unique tool, or universal grand theory, that can be applied in all settings.In the first chapter of the book, Rodrik attempts to offer a description of what models do. An association is made with the fables (18-21). Fables keep reality simple by emphasizing the personalities of the characters in the introduction. The actions taken by the characters lead to the conclusion from where the moral of the fable is deduced. In economic science, the abstract environment with real companies and persons that have well-countered characteristics is described in the beginning of the model. The 'story' revolves around the cause and effect, while from the conclusion we can extract the moral or the policy recommendation.Both fables and models need careful judgement before being applied in specific contexts because they can offer different conclusions that vary according to the cause-and-effect process of the action. In the case of the fables, the morals might differ because: you must have friends, but not that many; trust and cooperation are important, but self-reliance also plays a role; prepare, but do not over-prepare etc. In economics, the conclusion of applying one theory might offer distinct results. …