Wednesday, May 12, 2010

Trilemmas

Ok, so close readers of this blog will remember that there's an economic trilemma when it comes to international economics. A country cannot simultaneously have an independent monetary policy, open capital accounts, and a fixed exchange rate.

Not too long ago, FLG was reading Global Capital and National Governments by Layna Mosley and in it she references the Rodrik trilemma. FLG understood that there was some sort of political irreconcilability with globalization, but couldn't understand exactly how that all worked or what its implications were from the explanation Mosley provided. He reckoned Mosley assumed it was common knowledge among her target audience and consequently glossed over it. Anyway, FLG made note of the reference and filed it away to read later.

Well, today Greg Mankiw links to an article by Dani Rodrik that explains it better:
economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.

Personally, FLG is far more sanguine. Unlike the economic trilemma, which will crumble quickly do it its inherent instability, a political trilemma seems overstated. Even if there is a trade-off between these three things, politics can negotiate that sort of thing.

If you have an open capital account then you must choose between a fixed exchange rate and an independent monetary policy. Trying to have both will fail instantaneously. With a political trilemma, you can have a little less globalization and a little more democracy and sovereignty. It's not an absolute choice.

The political trilemma seems more about choosing among infinite points in some three dimensional, albeit constrained, space; whereas the economic trilemma is about choosing two out of three. All that said, FLG still needs to go read the original piece in which Rodrik described his theory.

3 comments:

George Pal said...

”Unlike the economic trilemma, which will crumble quickly do it its inherent instability, a political trilemma seems overstated. Even if there is a trade-off between these three things, politics can negotiate that sort of thing.”

Negotiating a political trilemma is an exercise best left to the theorists. Any application will lead to a new ‘law’ expressing the inexorable dynamic and final result of any such attempt. So, along with Murphy’s and Gresham’s, there will be FLG’s Law – global trumps national trumps individual, or simply, the little fish get eaten first.

The Ancient said...

FYI

http://www.tnr.com/article/politics/the-case-economic-doom-and-gloom

http://escholarship.org/uc/item/0sg0782h

(I am sorry to say that I agree with much of this.)

FLG said...

George Pal:

I will make no laws.

The Ancient:

I read that Brenner link and I caught a whiff of Marxism in the first paragraph. His story is largely like the one Herman Schwartz tells in Subprime Nation. However, I find Schwartz's explanation more nuanced and at the end of the day more convincing. Looking to a corporatist system, like Japan, for lessons about the present issues facing America, an Anglo-Saxon system, and talking about all developed nations as a group. Put simply, I think he's somewhat Marxist and suffers from their typical oversimplification of the various capitalist systems. Not to mention distinctions between capitalists themselves.

 
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