Sunday, 24 January 2016

Economics Rules by Dani Rodrik


This is a great book, and given the post financial crisis criticisms of mainstream economics it is relevant and timely. It is also accessible and easy to read for anyone interested in how economists actually think and work, rather than the stereotypes of unrealistic assumptions and ideological biases typically found. Most of the topics would be understood by interested non-economists, and be particularly useful for people who are unclear about how economics progresses by developing new models that generally complement, not replace, older ones.

The first part of the book explains economic thinking, and the role of the models that economists use. The basic idea is that there are many valid models, and the challenge is to know which is applicable to a specific problem or issue. This is the main point of the book and is a message worth repeating: different models have different applications, there are no wrong models, only badly and inappropriately applied models. Rodrik thus regards contemporary economics as a collection of models, not as single grand theory (or a quest for one). The economist’s craft lies in knowing which model is appropriate to the task at hand.

Another important point is that all the big, ultimate answer type models have proved to be disappointing when confronted with economic conditions they do not incorporate. Thus Keynesian models didn’t work in the 1970s with stagflation, and new classical models led to the 2007 financial crises and had little to contribute to policy responses. It is not necessary to discard these models, but there are others that are more appropriate for the circumstances. There are a number of good examples of how this works in practice.

Rodrik’s writing style explains things in a way that is both illuminating and sensible. There were moments when I found myself seeing economics from a new perspective, something that does not happen often, and there were many new ideas I hadn’t come across before. Also, there was nothing I disagreed with, despite the book’s wide scope and the range of topics covered. I recommend it to anyone interested in economic policy, or economic theory.

A video of him presenting the ideas in Economics Rules is at