“The Larry Summers era is over,” Politico proclaimed, after the House Oversight Committee released correspondence from Jeffrey Epstein’s estate attributed to the veteran Harvard economist Lawrence Summers. That framing seemed a bit over the top. It is true, though, that, in the thirty-plus years that I’ve been writing about the economy and economic policy, Summers has been pretty much a constant presence. His sudden downfall got me thinking about what has changed in economics since he first appeared on the public stage, and where it’s going from here.
A recently published collection of essays, “The London Consensus,” with the ambitious subtitle “Economic Principles for the 21st Century,” offers a helpful starting point. The book, which grew out of a conference held at the London School of Economics and Political Science a couple of years back, addresses a range of global issues, including trade, growth, macroeconomic stability, and inequality. It was edited by three L.S.E. economists: Tim Besley, a specialist in economic development; Irene Bucelli, a researcher on poverty and inequality; and Andrés Velasco, a macroeconomist who from 2006 to 2010 served as the finance minister of Chile. When I caught up with Velasco last week, he had just returned to London from a leg of his book tour that took him to Buenos Aires and Montevideo. “The question you get is: What are you economists thinking that could be useful here?” he told me.
Back in the nineteen-nineties, there was a ready, if controversial, answer to this question: “the Washington Consensus,” a term that the late British economist John Williamson coined in 1989 to describe ten policy prescriptions that global economic agencies, such as the International Monetary Fund and World Bank Group, with the backing of the U.S. government, were imposing on developing countries as a condition of receiving aid or debt relief. The Washington remedies included deficit reduction, deregulation, privatization, and removing barriers to international flows of goods and financial capital. Protective tariffs, price controls, and other government interventions were frowned upon.
Summers served as the World Bank’s chief economist in the early nineties, then, during the Clinton Administration, as a senior official at the Treasury Department before eventually becoming Treasury Secretary. This was the era in which China, India, and other developing nations were rapidly integrating their economies and workforces into the worldwide capitalist system. The Clinton Administration was a firm supporter of reducing trade barriers and globalization, which, as Summers pointed out, lifted hundreds of millions of people in poor countries out of acute poverty.
Globalization and trade liberalization also came with downsides, of course, including financial instability—which manifested in the Asian financial crisis of 1997-98 and the global financial crisis of 2007-09—and offshoring, fuelling the rise of economic populism, which, in the Trump years, has led to a sharp turn away from free trade and open markets. During this turbulent period, there were also significant changes within the economics profession, Velasco recalled. Empirical studies gained prominence, and some economists, at least, recognized the need to be less dogmatic and to be more willing to draw upon insights from other fields, such as psychology and political science.
“The London Consensus” traces this evolution. It includes contributions from dozens of economists who have either taught or studied at the L.S.E., but, as Velasco put it, “you will not find Ten Commandments that are universally applicable.” Rather than making blanket policy pronouncements, he and Besley outline several general economic principles in a lengthy introductory essay and then apply them across various policy domains, while highlighting the value of “care and gradualism,” and “pragmatism.”
As defined by Besley and Velasco, the London Consensus doesn’t throw out all the Washington Consensus. Like its predecessor, it prioritizes fiscal prudence and low inflation. But it also emphasizes the importance of regulating the financial system effectively to prevent booms and busts, and asserts that policymakers should not shy away from occasionally using foreign-exchange controls to “prevent destabilizing short-term capital flows.”
In keeping with the Washington Consensus, the London version says that global trade generates substantial economic gains over all. But, in an essay detailing the evidence to support this claim, the M.I.T. economist Dave Donaldson points out that trade liberalization creates not only winners but losers, and that the hits to jobs and income can have a lengthy negative impact on whole regions and even entire countries. “We see this where negative trade shocks have left places in a low-level trap, persistent across multiple generations, and in those countries that have failed to establish new industries that are internationally competitive,” Anthony Venables, of Oxford, writes, in a comment on Donaldson’s essay.
One of the general principles of the London Consensus is “Growth matters, but so does place.” To cushion trade shocks, it calls for the losers to be compensated financially, and for governments to invest in infrastructure and education to make economically depressed regions more attractive to outside companies. During the nineties, some officials inside the Clinton Administration advocated for trade-adjustment policies of this nature, but they didn’t make much progress. Now they have been vindicated. “The structural changes required to make the most of trade opportunities, and to adjust to trade shocks, often require systematic policy intervention,” Venables argues.
Thirty years ago, many mainstream economists regarded industrial policy with deep suspicion. The London Consensus embraces it, albeit under a different moniker—“productive development policies,” which encompasses everything from investing in skills and infrastructure to insuring access to key raw materials to setting up a regulatory structure that encourages innovation and punishes corporate predation. “Economic growth requires an enabling environment, the lion’s share of which is created by deliberate government action,” Besley and Velasco write.
What about tariffs? A central element of the Washington Consensus was its commitment to freer trade. Noting the shift toward protectionism in recent years, and the acceleration of this trend since the start of Trump’s second term, Besley and Velasco state, “Our principles do not rule out all protection measures categorically.” They then add, “This certainly does not mean that any old protectionist policy is justified.” When I pressed Velasco on this ambiguity, he said tariffs shouldn’t be used to expand the life of mature industries, but that under certain circumstances they could be utilized, in conjunction with other policies, to help develop industries of the future. This reasoning certainly wouldn’t support Trump’s fifty-per-cent levy on steel imports, or his blanket tariffs on goods from more than a hundred countries, but could it justify the hefty levies on Chinese electric vehicles that the Biden Administration introduced as part of its effort to stimulate green manufacturing? The London Consensus endorses green growth as a goal. Still, Velasco didn’t seem very enthusiastic about using protectionist measures to advance it. “If you think of the list of tools that governments can use to stimulate growth and development, tariffs are pretty far down,” he told me.
Another contributor to “The London Consensus” is Philippe Aghion, the French economist who shared this year’s economics Nobel for his theoretical work on how “creative destruction” drives economic growth. Citing this research, the London Consensus advocates for policies that stimulate innovation. Some of the recommendations, such as supporting scientific research, are obvious. Others aren’t. In an essay co-written with John Van Reenen, of the L.S.E., Aghion calls for stricter antitrust policy, particularly in regard to corporate mergers. The issue is that established tech giants such as Alphabet and Meta have a strong incentive to monopolize their markets and to acquire nascent innovators whom they view as threats. Governments can “make our economies both more innovative and more inclusive, by constantly favouring the entry of new innovative firms and the emergence of new talents,” Aghion and Van Reenen write.
Protecting the interests of small innovative firms aligns with the London Consensus’s commitment to “empowerment,” which includes supporting labor unions and policies that promote gender equality in the workplace, such as parental leave and child care. Another significant departure from the Washington Consensus is the understanding that inequality cannot be ignored, not only because of the harmful effect it can have on individuals’ lives but also because of its broader consequences for economic development and political systems. Francisco H. G. Ferreira, a former World Bank economist who teaches at the L.S.E., reminds us that the notion that high levels of wealth inequality can lead to capture of the state by a self-interested élite harks back to Plato’s Republic. The fact that economists have belatedly rediscovered it is surely a welcome development.
So is the recognition that “there is no good economics without good politics,” another general principle that Besley and Velasco outline. During the nineties, Velasco reminded me, “there was an implicit belief that, if you got the economics right, politics would get sorted out along the way.” The shortcomings of this approach were illustrated by the blowback to globalization and the global financial crisis. “We learned from the fate of the Washington Consensus that, if a policy is forced down people’s throats, it isn’t going to be long-lasting,” Velasco said.
This is essentially the same insight that Karl Polanyi, the Austro-Hungarian political economist, had nearly a century ago, as he witnessed the disasters of the interwar period, which he attributed to a misguided effort to re-create the laissez-faire system of the late nineteenth century. Polanyi argued that the economy is embedded in, and subordinate to, a preëxisting set of social structures, and efforts to reverse this chain of authority inevitably lead to powerful counterreactions, which can be as peaceful or as violent as circumstances dictate. In the early nineteen-thirties, Polanyi regarded fascism or socialism as the two most likely outcomes of this dynamic. After the New Deal and the Second World War, though, he became somewhat more sanguine about social democracy, and its potential to restore balance between markets and society.
Although Besley and Velasco don’t mention Polanyi explicitly, the London Consensus makes clear the need to keep economics and politics in an equipoise: “As societies cope with the fallout from globalisation, technological change and climate change, and deal with the reality of populism and polarisation, there is a growing risk that politics will be the source of economic shocks.” To help forestall this danger, policymakers need “to be mindful of whether a given policy helps or hinders the building of social cohesion, a consideration that is absent from a purely economic approach.”
The prospect of an A.I. revolution attended by further economic and social dislocation arrived too late for the L.S.E. economists to consider at length, but the potential risks only add to the urgency of their task. Questions can be raised about how far the viewpoints in the London Consensus extend beyond the L.S.E.—even within the volume, there are significant differences of opinion between its contributors—and whether it represents a big enough break with the past. (In some areas, I rather doubt it does.) But its over-all attempt to broaden the economic lens is commendable. As Velasco said, “What we are seeking isn’t just an economic consensus; it’s a political-economy consensus.” ♦
