Review of Dani Rodrik, Economics Rules: Why Economics Works, When It Fails, and How to Tell the Difference

At 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.

 

The book review is published in the Journal of Philosophical Economics. To continue reading it, click on the following link.

 

 

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