Review of Rudiger Dornbusch, Keys to Prosperity: Free Markets, Sound Money, and a Bit of Luck
J. Bradford DeLong
Forty-nine separate short essays commenting on modern macroeconomics and macroeconomic policy by Rudi Dornbusch. All are well-written, almost all are well-argued, and all take a definite point of view: Rudi Dornbusch would rather be wrong and clear than right and muddled--he is the antiparticle to that bete noire of Harry Truman, the "on the one hand, on the other hand" economist.
Underlying all the essays is a single point of view, the Chicago point of view that, as Dornbusch puts it (p. ix) "markets solve problems best... bureaucrats... are distracted by politics or excessive zeal for perfect solutions." Thus the answer to almost all problems--however complex--is simple: trust the market. "True," Dornbusch admits, the trust-the-market "answers are a bit rough at times, but who is to argue that on balance the bureaucrats have had better results?"
Yet the belief that complex problems can be solved by the simple expedient of trusting the market does not mean laissez-faire. Markets need proper support. As Dornbusch puts it: "free markets must be judiciously supplemented" by a government that will correct market failures. "Moreover, the market-determined distribution of income and wealth may pull societies apart. Creating opportunities by education and removing obstacles to competition imposed by governments or unions is important, as is some fiscal redistribution that stops short of being a disincentive. The aspiration of striking a balance between market forces and social cohesion seems a good idea even if in practice it has culminated in too much 'social' and too little 'market.'" Rudi may be Chicago, but he is Chicago Light, or Chicago-Style Social Democracy, or Chicago with Karl Polanyi's Face.
Trusting the market may be a simple answer, but it does not mean that economic policy can be made by the simple-minded. The well-functioning markets that generate economic growth are disabled by "instability, inflation, mindless bureaucracies, closed and repressed economies--all these are environments where progress is possible but only by working extra hard" (p. 7). Moreover, when it comes to the details of economic governance, the answers are not simple: "when it comes to corporate governance, U.S. style versus Japan, or labor-market characteristics with European long-term relations or a U.S.-style high turnover, it is hard to show that one or the other has the better influence on how to get ahead. Japanese governance and the German labor market once seemed to hold out the prospect for much better performance; today, one is indentified with the bankruptcy of Japan and the other with the sclerosis of Europe. The search for good answers continues..." (p. 7). I at least am reminded of Clausewitz, who wrote that it is indeed the case that what needs to be done is very simple, but that doing even very simple things turns out in practice to be very difficult indeed.
From this basic perspective, Dornbusch writes a great many things that are dead accurate, and a great many things that are probably correct. He is, after all, a genius: his mid-1970s work on the sources of exchange rate volatility would guarantee him an eventual Nobel Prize even had he never written another word in his life. But he has continued to think and write. And in a profession--economics--where clear and interesting prose is not found lying on the sidewalk, he is a $1,000 bill.
One of my favorite parts of this book are the essays that find Dornbusch in utopian mode, celebrating the tremendous economic growth of the twentieth-century and proclaiming that the medium-run future looks brighter still. More of my favorite parts find Dornbusch analyzing two of the major macroeconomic problems of our age: Eurosclerosis, and international monetary instability.
Yet much as I liked the book, when I finished it I felt as though the appropriate function had not been maximized. With just a little bit more work Dornbusch could have put the essays in this book into perspective--so that we would know on what occasions they were written, whether they served their purpose, what about them was right, and what about them was wrong. I look at an essay title like "A Bailout Won't Do the Trick in Korea." Well, a bailout *did* do the trick in Korea, and now I want to know what Dornbusch thinks was wrong with his analysis, and why the Korean economy is in such good--and largely unreformed--shape. I look at an essay that warns of the *dire* *future* *consequences* of the coming to power of German's social democratic party because the sensible Schroeder is just a Trojan horse for the nonsensible Lafontaine, and I want to know why Dornbusch's judgment of the late-1990s social democrats went awry--and just why did Oskar Lafontaine quit the German government anyway?
And I want Dornbusch to reconcile the inconsistencies that arise between essays. How can he applaud work that claims that it is worthwhile undergoing the unemployment pain to reduce inflation from 3% to 0%, and yet also complain that "the worst enemy of the transition to a free market is a central bank staging fights against inflation or unduly concerned with maintaining a hard currency. Stable and moderate inflation is important... but there is a time and place for everything..."? If we knew more about the contexts of these essays, we could more readily understand how to modulate Dornbusch's signature strong pronouncements into a nuanced picture of economic policy options at the beginning of the twenty-first century.
Not, mind you, that I am complaining. I find that I can count up all the economists in the world from whom I have learned more than from Rudi Dornbusch without taking off my shoes. And it was well worth my time to read and think about these collected essays: I continue to learn from almost every word of Rudi Dornbusch's that I read. But I am greedy, and the marginal benefit to my intellectual development from just a little more time spent assembling this book would have been high.