Beyond the perfect and imperfect to the real

“There are…, I should admit, forces which one might fairly well call “automatic” which operate under any normal monetary system in the direction of restoring a long-period equilibrium between saving and investment. The point upon which I cast doubt – though the contrary is generally believed – is whether these “automatic forces” will…tend to bring about not only an equilibrium between saving and investment but also an optimum level of production.”

John Maynard Keynes

This brief quote from the great man sums up the argument put forth in his magnum opus, The General Theory, that a capitalist economy does not have an automatic tendency to achieve full employment. It may possess other “automatic forces”, but these will not do the trick. Continue reading

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Ha-Joon Chang on economic development

Development economist Ha-Joon Chang here discusses a range of issues, including the nature of development, industrial policy, the role of government, political economy, and the teaching of economics.

Economics is for everyone

“…[I]t is tempting to leave economics to the experts, particularly as this is part of the dominant political culture of the twentieth century, but in this case we cannot afford to. We are being sold short because the very knowledge and skills we need to address the great challenges humanity faces in the twenty-first century have been systematically left out of the education of those who go on to run our economy…as a society this binds us in a mental straightjacket that prevents us imagining the economy in any other way. This is turn precludes any real discussions about what our collective values are, how we wish to organise the economy and how we should address the challenges we face. We must reform economics so that the next generation of economic experts have the skills needed to reinvigorate economics and to build a society in which economics is a dialogue people actively take part in.

The aim…is to create spaces in which we can individually and collectively begin to rethink economics. In time we hope these spaces will become concrete institutions which enable mass participation in economic decision making. Ultimately we believe that economics must become a public dialogue and never again be left only to the experts.”

Joe Earle, Cahal Moran and Zach Ward-Perkins (2017), The Econocracy: The perils of leaving economics to the experts, p.169-170

Perspectives on the UK’s productivity problem: the end of the puzzle?

workersThe UK’s productivity problem continues. Output per worker has barely grown since the beginning of the financial crisis in 2008. Why is this a problem? Because if we want rising living standards, we must have rising productivity over time.

In theory, rising productivity in our economy gives us choices between increased income and increased leisure time. We can choose on a spectrum between more income for the same hours worked and the same income for fewer hours worked, in other words, more leisure time. Depending on how we in society value work and leisure, increased productivity should make possible increases in human welfare.

Today, output per hour worked in the US is at a similar level to that in France and Germany. However, total hours worked per head in the US have tended to outstrip those in the latter two countries, meaning that output per head remains higher there.

Americans are on average richer (although greater inequality means that many of them are not), but they achieve these greater riches by working longer, while their French and German counterparts have more leisure time, including a shorter working day and longer holidays. This is down to collective economic and social choices, although these are also necessarily political in nature, and far away from simple choices freely made by individuals, as some might choose to believe. Continue reading

Free trade, trade policy and the WTO

“Free trade is the sensible rule of thumb most of the time in most sectors. It is sensible because the efficiency gains are often real, even if the theory of comparative advantage over-generalizes them; and it is a simpler rule for any state and for inter-state agreements than rules for managed trade. But the argument…about production and employment, in the context of economic growth rather than static resource efficiency, suggests that inter-state agreements, including the rules of the WTO, should be revised to permit more government “leadership” and “followership” of the market – sometimes by leading the production structure into activities the private sector would not undertake on its own, sometimes by making bets on initiatives already underway in the private sector to assist those initiatives to scale up. This contrasts with the current situation, in which the WTO restricts the use of instruments relevant to developing countries’ efforts to upgrade the national production structure – including tariffs, non-tariff barriers, and direct industry subsidies – while allowing instruments relevant to advanced countries’ efforts to grow new activities on the world frontier, such as R&D subsidies. The WTO is, put crudely, an industrial upgrading device for advanced countries, an industrial downgrading device for developing countries. President Trump surely does not intend his skepticism of free trade to benefit developing countries, but it gives the potential for others to modify international rules towards more “policy space””.

Robert H. Wade (2017), Is Trump wrong on trade? A partial defense based on production and employment, in E. Fullbrook and J. Morgan (eds.), Trumponomics – Causes and Consequences, College Publications and World Economic Association, p.97

The full article can be viewed for free here.

When protectionism worked (and why it probably won’t today)

The Guardian’s economics editor Larry Elliott writes here about the potential of Trump’s trade war to herald a return to the 1930s, a decade of rising protectionism and shrinking world trade.

He makes the important point that the EU and China run trade surpluses, and are therefore likely to suffer more than the US from tit-for-tat protectionist policies. However this does not mean that, to quote Mr Trump, trade wars are ‘good and easy to win’.

I have often written about the case for selective and temporary protection for infant industries in developing countries. For several decades after World War Two, the threat of the spread of communism gave the US, as global capitalist hegemon, a strong incentive to promote successful capitalist development across the world. Developing countries were therefore given policy space to promote their domestic industries, even as trade became more free in the rich world. Continue reading