Rodrik, Dani. "The Foxes and Hedgehogs of Finance". In The Globalization Paradox: Why global markets, states, and democracy can't coexist, by Dani Rodrik, 112-134. Oxford: Oxford University Press, 2011.

Rodrik, Dani. "The Foxes and Hedgehogs of Finance". In The Globalization Paradox: Why global markets, states, and democracy can't coexist, by Dani Rodrik, 112-134. Oxford: Oxford University Press, 2011.

• Increased global capital flows can be benefits to countries with lots of investment opportunities and a lack of saved capital because they allow for improved access to finance and thus faster economic growth (112).
• A profitable exchange is only desirable by larger society when it reflects the social opportunity costs of that exchange, meaning that lack of information about those opportunities cost, which is very frequent in international financial markets, leads to consequences that are bad for society at large, like financial crises (112-113). 
• These general financial problems, sometimes called asymmetric information, are controlled to some degree at the domestic level by regulations, standard practices, deposit insurance, bankruptcy rules, legally binding contracts, financial backstops, and lenders of last resort. None of these exist in global financial markets (113, 129). 
• Moreover, countries have common monetary policies, a single currency, and fully integrated markets, meaning that they are immune from currency speculation. The global market does not have any of this (120-121).
• "[...], why are financial markets so poorly managed? The problem derives from a tendency among economists and policymakers to downplay the consequences of these failures for the actual conduct of policy, sheltering the case for financial liberalization from their ominous implications. It's not that financial markets don't fail, it's that we carry on as if they don't" (113).
• Sir Isaiah Berlin, a liberal philosopher, divided all thinkers into two categories based on a 7th Century BCE saying by Greek poet Archilochus: "The fox knows many things, but the hedgehog knows one big thing" (114). Sir Berlin sympathized more with foxes, who he believed resisted grand viewpoints as the world defied generalization (114). 
• In economics, those you believe in market liberalization as a positive good as the hedgehogs, while those who believe that circumstances dictate whether market liberalization is good or bad are foxes (114).
• In the hedgehog world, "Questions of equity and efficiency can be neatly separated. Market failures are presumed nonexistent unless proven otherwise and, if present, are to be addressed only by the most directly targeted remedies. People are rational and forward-looking. Demand curves always slope down (and supply curves up). Economywide interactions do not overturn the logic of partial analyses [...] driven by a straight-forward, almost knee-jerk logic: remove and government intervention or barrier and economic performance will get better" (114-115).
• "In their [foxes'] world, the economy is full of market imperfections, equity and efficiency cannot be neatly separated, people do not always behave rationally, some otherwise undesirable policy interventions can generate positive outcomes, and complications that arise from economywide interactions can render doctrinaire analyses suspect" (115).
• "In a perfect world, we would minimize the adverse side effects of free capital mobility through appropriate regulations without having to resort to direct controls on capital flows. We do not live a perfect world and caution dictates that we not let our financial markets run wild" (120).
• The biggest difference in how hedgehogs and foxes approach economy is their reaction to market failures. Hedgehogs will argue that markets should be made to work better by removing distortions, without government restriction. Foxes advocate for direct intervention against problems, without concern for the general freedom of markets as a good (115-116).
• The main issue with financial liberalization is that when it occurs there are too many distortions in the markets that are being liberalized, but the liberals are not interested in these imperfections and do not notice any issues until a crisis emerges (116). This is seen in the vague and ill defined policy proscriptions in favor of 'good institutions' and 'strong systems' by economists like Stanley Fischer or Frederic Mishkin (117-118).
• These ideas of simple financial liberalization also ignore complex and difficult many of the problems they want resolved are. For financial liberalization to be beneficial, countries must eliminate corruption, secure rule of law, and establish strong institutions, but these goals are difficult and cannot be easily reached just because an economist says they should (118).
• Hedgehogs also act as if success will come to those countries who enact such reforms, but this is not necessarily the case. Argentina had some of the strongest financial regulations in the world during the 1990s and was the IMF's golden child, but still faced financial collapse in 1999 due to fallout from Brazil's currency crisis. Refusing to recognize the problems inherent in global finance also means that economists can always blame domestic institutions for the crisis, no matter how 'reformed' they were deemed prior to the crisis (119). 
• Hedgehog free trade fundamentalists hold that governments fuck up every time they get near an economy, meaning that, even when markets fail, these failures are still better than the effect of government intervention (116).
• This idea that undermines another hedgehog position: that governments should not intervene directly but instead undertake fine tuned policy changes to indirectly fix market distortions. If government fuck up the big stuff, they are definitely going to fuck up the delicate market changes. So, if hedgehogs are right about governments, then their own policy ideas should fail (117).
• The latest argument of those promoting capital market liberalization is that these reforms have collateral benefits by creating better and more efficient banking systems, firms, and governments by subjecting them to market discipline. This argument is in response to the general failure of financial liberalization to produce more rapid growth, as was promised (123).
• This is not, however, necessarily the case and liberalized financial markets can just as easily support bad economic behavior as punish it. Examples include Turkey, whose access to cheap international credit since the 1980s facilitated decades of economic mismanagement prior to the 2001 crash, and Greece, whose EU connections allowed its debt to be horribly mismanaged for decades (124).
• Moreover, it is difficult to view international finance as an effective form of market discipline as it exacerbates market swings, not dampen them. Foreign loans are generally available and non-disciplining during boom times and suddenly absent during financial crises (124-125).
• The other problem with this view is that is views disciplining by financial markets as a good thing, whereas the interests of bankers and financiers often differs from the public good. Economies might often be healthier if bankers had less influence over politics (125).
• The ideas behind the 2008 subprime mortgage crisis originally sounded very good, as they extended homeownership to millions of families who had been previously excluded from those loans by opening up home loan markets to new financial institutions and allowing new kinds of mortgage contracts. Risk from this was supposedly minimized by combining mortgages into tranched bonds that could be sold to investors with variable interest rates and degrees of risk, as derivatives to act as insurance on the default of those mortgage bonds (126).
• The USA experienced a period of general financial stability between the end of the Great Depression and the savings and loans crisis in the 1980s, whereas in previous periods financial crises had occurred every 15 or 20 years. This stability was guaranteed through government regulation of finance, including disclosure and transparency requirements in equity markets, that banks accepted in return for the US government providing deposit insurance and acting as a lender of last resort (127).
• Financial regulation during the 1980s ended the period of financial stability in the USA, as financial markets shifted to self regulation and invented new financial instruments that were poorly understood, even by the banks that created them (127-128).
• Whereas the USA had been self-sufficient in credit prior to the 1980s, access to international credit, largely from savings in Asia, led to massive expansion in international borrowing by American banks. Banks took advantage of this cheap credit available from the late 1990s onward to expand their balance sheets and leverage expanded credit to reloan these assets at slightly higher rates and profit from the marginal difference. The growth of international financing made the coming financial crisis global, as the bad mortgage loans had been allowed to spread from American banks to infect the balance sheets of banks all over the world (128-129).
• Since markets are imperfect and regulations often inadequate, the current financial problems will always exist in international financial markets. Since we cannot perfectly regulate markets and we live in a world of divided sovereignty, financial liberalization cannot be controlled and should be refused in the name of safety (130).
• In the aftermath of the 2008 financial crisis, mainstream economists, including former IMF chief Simon Johnson, attacked the political control that Wall Street exercised in the USA. These economists blamed the crisis on the corruption of bankers and politicians in the USA and the ability of Wall Street to deregulate markets and generally do as it pleased by buying the support of politicians (130-131).
• The views of economists expressed after 2008 do not deal with how economists themselves are at fault for creating the crisis. Many of the same liberalization policies and deregulation that bankers bought from politicians were also advocated for by those same economists prior to the 2008 crash; they need to take responsibility for advocating the ideas and policies that lead to the crisis (131-132). Simon Johnson himself said that the 2008 financial crisis converted him from a 'hedgehog' advocate of free trade into a skeptic (131).
• Economists have multiple different economic models and assumptions that could be applied to any situation and the craft of economics comes in applying the correct model to best demonstrate relevant findings. Hedgehogs should mainly be faulted for failing to consider that they might be applying the wrong model for this situation (133).
• Unlike science, new economic theories and models do not necessarily replace older theories and models. Each model gives new insight into certain aspects of economics, but needs to be considered in light of other considerations and alongside the insights of other theories. Bad things happen when policies are based on the newest fad in economics (133-134).