Dani Rodrik on economic ideology and the meaning of self-interest

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

— John Maynard Keynes, The General Theory of Employment, Interest and Money, (1935)

Dani Rodrik, who’s one of the more thoughtful economists out there, has written an interesting piece about the meaning of self-interest. We often write about self-interest as if it were something innate and self-evident, but it’s not so simple. Rodrik writes:

Interests are not fixed or predetermined. They are themselves shaped by ideas – beliefs about who we are, what we are trying to achieve, and how the world works. Our perceptions of self-interest are always filtered through the lens of ideas.

He argues that self-interest can take many different forms:

Consider a struggling firm that is trying to improve its competitive position. One strategy is to lay off some workers and outsource production to cheaper locations in Asia. Alternatively, the firm can invest in skills training and build a more productive workforce with greater loyalty and hence lower turnover costs. It can compete on price or on quality.

The mere fact that the firm’s owners are self-interested tells us little about which of these strategies will be followed. What ultimately determines the firm’s choice is a whole series of subjective evaluations of the likelihood of different scenarios, alongside a calculation of their costs and benefits.

Rodrik puts his finger on one of my major beefs with the economics profession. Most American economists don’t have anything like Rodrik’s nuanced understanding of self-interest. To them, self-interest equals utility maximization, and utility maximization basically means accumulating as much wealth as possible, and the only way to achieve that on a large scale is through low taxes, a radically diminished public sector, and heavily deregulated markets.

But there are other ways to achieve economic growth, particularly if we are interested in doing so over the long term. For example, if we want to have the kind of society where entrepreneurship is encouraged, we would create a health care system that doesn’t tie people’s access to affordable care to their employment. And if we wanted a society that made the most efficient use of everyone’s talents, we’d ensure that everyone who is capable of succeeding in college could could get a higher education for free.

These days, the apostles of the free market argue that in order for the economy to thrive, the government must drastically cut back spending. But in reality, the best way to promote economic growth is through fiscal stimulus by the government. Cutting spending dramatically reduces the kind of growth and innovation that our free market system could otherwise achieve.

It’s long been fashionable among the neoliberal pundit class to deride New Deal policies such as Social Security, strong unions, and labor protections, but the fact is that those programs were created by self-interested elites who wanted to save capitalism. At the time, the capitalist system was in crisis, and it was feared that if concessions were not made to the masses, they would revolt. Achieving the minimal level of economic security that the New Deal provided did much to extinguish revolutionary fervor, and the owners of capital were able to breathe a sigh of relief.

It’s no accident that economic growth soared in the post-World War II era. A much greater public sector and a more highly regulated economy actually helped that economy to grow and become more efficient. But in the intervening decades, elites have forgotten those lessons, and the American economics profession, which has pushed a vision of self-interest and the good society that was grossly distorted, and yet extremely influential, has a lot to answer for here. What Rodrik refers to as “the unbridled liberalization and financial excess” of the past several decades was promoted by the economics profession as a whole, and it has led us to the brink of economic disaster.

Indeed, with its corrupt and dysfunctional government, stagnant economy, soaring income inequality, and significantly diminished social mobility, America is on its way toward becoming a second-rate power. Ironically, a more realistic concept of what is in their best interests might have prevented, and may still yet prevent, our elites from wrecking our economy, and, over the long haul, destroying themselves.

Kathleen Geier

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee