Michael Hudson: Adam Smith was no ‘free market’ economist

Here are some further enlightening extracts from Michael Hudson’s iconoclastic J is for Junk Economics, this time on Adam Smith (p.28) and the school of Classical Political Economy. Hudson has an extraordinary knowledge of economic history, as can be gathered from viewing any of his interviews on YouTube, or reading his books.

Smith is often falsely regarded as being an advocate of the free market, justifying a libertarian focus on deregulation and minimal levels of taxation. Hudson shows that Smith’s (and the Classical’s) thinking was a bit more complicated:

Covid-19 and creative destruction – Marx, Schumpeter and the role of the state

The impact of the uncertainty generated by Covid-19 and the subsequent lockdown in countries across the world has been devastating for economies and societies. There is more to come. The world economy was already struggling somewhat in 2019, with slowdowns in the US and China, the two largest economies. In fact, what was at best sluggish growth in output and productivity in many countries had been a feature of the decade or so which followed the financial crisis of 2008. The onset of the pandemic has hit already weak or fragile economies hard.

Keynes famously argued that the ‘animal spirits’, or waves of optimism and pessimism among businessmen potentially looking to invest, were a major factor in the determinant of growth and employment, and hence economic prosperity. Uncertainty about the future could lead to spending on new industrial capacity and jobs being postponed, driving the economy into stagnation or recession. It was the job of government, he said, to ‘socialise’ investment. In other words, through judicious policy choices, it should try to maintain optimistic expectations among businessmen and make sure that there were sufficient investment opportunities to keep spending, and therefore employment, at a socially optimum level.

Economies do not move in straight lines

Richard Goodwin was an American economist, a self-described ‘wayward Marxist’ who taught at Harvard and Cambridge as well as at Siena. One of his best-known papers was a mathematical model of Marx’s description in Capital of the macroeconomic relationship between wages, growth and unemployment, which generates an endogenous growth cycle: that is, it shows how economies can grow over time with fluctuations of output, employment and the other variables in the model generated from within the system, rather than being dependent on external or exogenous ‘shocks’.

Goodwin’s growth cycle model famously draws on the Lotka-Volterra predator-prey model from biology. This describes the dynamics of two interrelated animal populations: the predator and the prey. Starting from, say, a relatively large initial level of the predator population, this could cause the numbers of prey to fall as they are consumed. As the numbers of prey diminish, there is less food for the predator population, whose numbers also then begin to diminish. Falling numbers of the predator population then allow the prey numbers to recover so that they begin to provide a more plentiful food supply for the predators, whose numbers then begin to rise once again. This generates two interdependent fluctuating population cycles, which are not reliant on external or exogenous factors or shocks.

Can Vietnam escape the middle income trap?

A recent article by Trinh Nguyen of the Carnegie Endowment for International Peace (which can be accessed for free here) describes Vietnam’s recent development success story, its lessons for other late-developers and its prospects for the near future. According to the author, this success has been based on a rapid growth in manufacturing exports, much of it from foreign invested firms. This is in turn down to a liberal approach to international trade and investment, incentives for foreign firms to invest, including the provision of “industrial parks, infrastructure building, and tax breaks”, and more widespread “improvements in its electric system, national highways, and air and sea ports”.

Rethinking anti-corruption for COVID-19 – From Poverty to Power blog

Here is an interesting recent post from the Oxfam blog From Poverty to Power, written by Mushtaq Khan and Pallavi Roy of the SOAS Anti-Corruption Evidence Consortium (SOAS-ACE).

This brief article draws on the research of the authors and the ACE to outline some general principles for developing countries to use in their response to the Covid-19 pandemic, particularly in scaling up the overall response via a coordinated effort from a variety of agencies.

The authors write:

“the reality is that in many countries, corruption and governance constraints will limit the rapid scaling up of responses to COVID-19. As we explain in a SOAS-ACE policy brief, this will not only undermine treatment responses, but result in cycles of unsustainable lockdowns and massive economic deprivation.”

“…The enormity of the crisis justifies thinking in terms of a wartime response and asking how the different parts of this strategy could be provided by mobilizing different delivery agencies to achieve the most cost-effective and rapid scaling up.”

They conclude:

“[D]eveloping countries could temporarily mitigate corruption and low capacity by involving public, private and third sector actors to enable scaling up on the basis of revealed competence. This does not get rid of corruption but reduces its level to maximize scaling up. This is very different from the optimization strategy of standard economics.

…[In addition] we were deliberately suggesting building in redundancy. In a storm, even if you are building a small hut, you would do well to build some redundancy into each wall. A leaner approach may look more cost effective, till the storm blows it away. It is only if developing countries have an effective strategy of strengthening their health responses in the storm can lockdowns be relaxed in a sustainable way.”

Joan Robinson on economics and the study of society

Apart from her voluminous academic writings, the Cambridge Keynesian economist Joan Robinson wrote several popular books. Freedom and Necessity – An Introduction to the Study of Society was published in 1970. Although some of it dates somewhat, there is plenty of interest and contemporary relevance that remains. Here are a few such extracts:

(From the preface) “It seems to me that an economic interpretation of history is an indispensable element in the study of society, but it is only one element. In layers below it lie geography, biology and psychology, and in layers above it the investigation of social and political relationships and the history of culture, law and religion.”

Ha-Joon Chang: facts, even numbers, are in the end not objective

This is the last in the recent series of excerpts taken from Ha-Joon Chang’s Economics: The User’s Guide. Chang is an economist at Cambridge University (his personal non-academic website can be found here) and specialises in development economics. He has also written a number of popular books, some of which aim to debunk many of the myths of mainstream economic discourse.

The User’s Guide is one such, aimed at the lay reader rather than academics, and engages in a pluralist introductory approach to economics. I have therefore chosen a number of quotes over the past few months which stood out for me and which I felt were worth sharing. Here is Chang on p.453-5:

“Johann Wolfgang von Goethe, the German writer (Faust) and scientist (Theory of Colours), once said that ‘everything factual is already a theory’. This is something to bear in mind when looking at economic ‘facts’.

Many would assume that numbers are straightforward and objective, but each of them is constructed on the basis of a theory. I might not go as far as Benjamin Disraeli, the former British Prime Minister, who quipped that ‘there are lies, damned lies, and statistics’, but numbers in economics are invariably the results of attempts to measure concepts whose definitions are often extremely contentious or at least debatable.

This is not just an academic quibble. The way we construct economic indicators has huge consequences for how we organize our economy, what kind of policies we implement and ultimately how we live our lives.

This applies to even the most basic figures that we take for granted, like GDP or the rate of unemployment. The exclusion of household work and unpaid care work from GDP has inevitably led to the undervaluation of those types of work. GDP’s inability to take into account positional goods has directed consumption in the wrong direction and made it an unreliable measure of living standards for rich countries, where those goods are more important. The standard definition of unemployment underestimates the true extent of it by excluding discouraged workers in the rich countries and the under-employed in the developing countries. Naturally, these types of joblessness have been rather neglected by policymakers.

All of this is not to say that numbers in economics are all useless or even necessarily misleading. We need numbers to be able to get the sense of the magnitude of our economic world and monitor how it changes; we just shouldn’t accept them unthinkingly.”

The Chinese economy: development, finance and reform

Even before the Covid-19 outbreak, the Chinese economy was slowing, after more than three decades of rapid economic expansion. Thirty years of recorded growth at around ten per cent per annum is unprecedented in human history. This has enabled hundreds of millions of people to be lifted out of poverty, and the material transformation of a poor country to one that is classified by the World Bank as upper-middle-income.

Despite all this, there is a broad consensus, including among Chinese government officials, that the country’s development model needs to change if it is to continue its transformation and become a rich country. Many economists argue that this will involve a rebalancing of the economy, in order to continue to grow and develop in a way that is more sustainable both for China itself, and for the rest of the world, given that as the world’s second largest economy behind the US, internal changes now have a major impact globally.

Paul Ormerod: History shows us that slavery is an economic catastrophe as well as a moral one

An interesting and topical article by Paul Ormerod, which argues that slavery has historically been as much an economic problem as a moral one. Slave-based societies have no incentive to invest in labour-saving technologies, given the low cost of the workforce. The widespread adoption of improved technologies is necessary for sustained rises in productivity and living standards.

I would also add that there is a potential problem of insufficient demand due to the absence of wages. Of course, low wages and poor working conditions can also be a problem for a capitalist society, if growth is constrained by inadequate demand in the form of consumption out of wages. Decent pay and working conditions also help to promote well-being. But despite their flaws, only capitalist economies have enabled sustained rises in living standards for the masses. Ormerod concludes:

“Slavery is of course morally repugnant, a stain on the histories of civilised societies. But it is also economically detrimental to the societies it ostensibly appears to benefit. The fact is that no society based on slavery has ever come anywhere near to delivering decent living standards for the average person.

The only system which has is capitalism. Britain and other areas of north west Europe started to become rich through a system based on the rule of law, the ability of individuals to profit from innovation and not be expropriated, and the freedom of labour to negotiate contracts.

Morality undoubtedly played a part in Britain’s leading role in abolishing slavery. But by the early nineteenth century, it had become an anachronism. Resources employed in slavery could be put to much more productive use under capitalism.”

Michael Hudson on the End of History and Fukuyama’s about-face

Another extract in this occasional series from Michael Hudson’s J is for Junk Economics (p.88-9), a book which aims “to revive a more reality-based analysis and policy-making…[by reconstructing] economics as a discipline, starting with its vocabulary and basic concepts.” This time he considers the phrase famously coined by political scientist Francis Fukuyama in the early 1990s, and how events superseded Fukuyama’s ideas, forcing a change of heart.

“End of History: A term reflecting neoliberal hopes that the West’s political evolution will stop once economies are privatized and public regulation of banking and production are dismantled. Writing in the wake of the collapse of the Soviet Union, Francis Fukuyama’s The End of History and the Last Man (1992) coined the term “liberal democracy” to describe a globalized world run by the private sector, implicitly under American hegemony after its victory in today’s clash of civilizations.

It is as if the consolidation of feudal lordship is to be restored as “the end of history,” rolling back the Enlightenment’s centuries of reform. As Margaret Thatcher said in 1985: “There is no alternative” [TINA]. To her and her neoliberal colleagues, one essayist has written “everything else is utopianism, unreason and regression. The virtue of debate and conflicting perspectives are discredited because history is ruled by necessity.”

Fukuyama’s view that history will stop at this point is the opposite of the growing role of democratic government that most 20th century economists had expected to see. Evidently he himself had second thoughts when what he had celebrated as “liberal democracy” turned out to be a financial oligarchy appropriating power for themselves. In 1995, Russia’s economic planning passed into the hands of the “Seven Bankers,” with US advisors overseeing the privatization of post-Soviet land and real estate, natural resources and infrastructure. Russian “liberalism” simply meant an insider kleptocracy spree.

Seeing a similar dynamic in the United States, Fukuyama acknowledged (in a February 1, 2012 interview with Der Spiegel) that his paean to neoliberalism was premature: “Obama had a big opportunity right at the middle of the crisis. That was around the time Newsweek carried the title: ‘We Are All Socialists Now.” Obama’s team could have nationalized the banks and then sold them off piecemeal. But their whole view of what is possible and desirable is still very much shaped by the needs of these big banks.” That mode of “liberal democracy” seems unlikely to be the end of history, unless we are speaking of a permanent Dark Age in which forward momentum simply stops.”