S8 Ep64: A London economic consensus?

Episode Summary

Executive Summary: The episode discusses The London Consensus, a new economics book by LSE economists Andres Velasco and Tim Besley that rethinks policy for the 21st century. It rejects one-size-fits-all “recipe” economics, emphasizing wellbeing, growth, resilience to shocks, politics, and state capacity as context-dependent principles rather than a universal policy blueprint.

Main Topics: Why a new consensus is needed (Priority: 5/5): The editors argue the Washington Consensus was too narrow, too technocratic, and insufficiently attentive to politics, culture, and new economic challenges such as climate change, populism, and inequality. Economics as principles, not recipes (Priority: 5/5): They stress that economics should guide thinking and diagnosis, not impose universal policy packages. Countries need bespoke solutions grounded in local legitimacy and democratic ownership. Five principles for the 21st century (Priority: 5/5): The book’s framework centers on wellbeing beyond GDP, the continuing importance of growth, government as insurer of last resort, politics as an enabler, and state capacity. Growth, innovation, and structural transformation (Priority: 5/5): Growth is presented as more complex than deregulation or capital accumulation; it depends on innovation incentives, competition, and state support for sector-specific inputs. Shock absorption and government insurance (Priority: 4/5): Governments should help households and firms manage financial, health, geopolitical, and transition shocks, while maintaining the credibility of public debt through borrowing in bad times and repayment in good times. Politics, culture, and legitimacy (Priority: 4/5): The discussion argues that policy succeeds when it has local ownership and aligns with political institutions and culture, rather than being imposed from above. Operationalizing state capacity (Priority: 4/5): State capacity is broken into tax collection, rulemaking/regulation, and collective capacity to deliver public services; its design must fit national history and political will.

Key Arguments: The London Consensus is not a universal policy recipe; it is a set of economic principles that help countries design their own solutions. Top-down policymaking without local ownership often fails because policies lack legitimacy and disappear when governments change. The Washington Consensus addressed macro instability and debt, but left out major issues now central to policy: innovation, climate change, inclusion, and populism. Wellbeing cannot be reduced to income alone; dignity, status, identity, and social recognition matter for good policy. Growth remains essential, but it must be understood as structural transformation driven by innovation and competitive incentives, not merely higher investment. Governments are not just enforcers of generic stability; they provide specialized inputs tailored to sectors and can enable dynamic industries such as education and finance. Public debt and fiscal policy are useful tools for smoothing shocks, but only if governments borrow in downturns and rebuild fiscal space in good times. Politics should be seen as the mechanism for peaceful collective decision-making and institution-building, not merely as an obstacle to economic reform. State capacity rests on three pillars: revenue collection, regulation/law, and effective delivery of collective goods and services. Culture and history shape what policies are feasible, so reform must be adapted to each country’s norms and institutions.

Data Points: Book length: About 600 pages - The conversation notes the ambition and size of The London Consensus. Time since Washington Consensus: 35 years - Used repeatedly to frame what has changed in economics and policy since 1989. Washington Consensus launch year: 1989 - Described as emerging from an academic conference in Washington in late 1989. Latin American debt crisis: Late 1980s - Identified as a major macroeconomic instability shaping the Washington Consensus. Jakarta metropolitan population: 42 million - Used to illustrate the welfare costs of poor spatial planning and commuting. Jakarta commute time: 3 hours - Average resident spends three hours traveling back and forth to work. UK gas bills shock: 50% to 80% increase - Example of a geopolitical supply shock from Russia’s invasion of Ukraine. Pandemic timing: Five years ago - Refers to the biggest health shock and the policy response during COVID-19. Financial crisis timing: 15–20 years ago - Referenced as an example of a systemic shock requiring state intervention. Open access: Free to access online - The book is described as open access for global readership. Author composition: Nearly half born in emerging or developing countries - Used to counter the idea that the project is simply rich-country imposition.

Pivotal Quotes: "Economics isn't a recipe book of policies, it's a way of thinking and analyzing problems" — Tim Besley: Explaining the philosophical basis of The London Consensus. "Beware of economists bearing paradigms" — Dani Rodrik (quoted by host/interviewees): Used to discuss skepticism toward oversimplified economic frameworks. "Politics is the great enabler" — Tim Besley: Describing politics as the collective process that makes policy and institutional reform possible.

Implications: The episode positions economics as more contextual, political, and human-centered than older policy frameworks. For policymakers, it suggests future reforms should pair growth with legitimacy, resilience, and state capacity rather than chasing GDP alone.