Covid-19 and the unbalanced budget

Countries across the world have responded to the economic damage induced by the global pandemic by allowing budget deficits to rise dramatically. They have undertaken a variety of schemes ostensibly designed to support the economy. But what kind of support is most effective?

The pandemic itself, and the policy responses, have induced dramatic economic ‘shocks’ to both aggregate demand and aggregate supply, that is the demand and supply for the economy as a whole. The increased uncertainty about the future among consumers, alongside the various lockdown restrictions, have generally reduced aggregate consumption, the largest component of aggregate demand. They have also changed the composition of consumption giving rise, taking the most obvious example, to an accelerated rise in the demand for online shopping and home delivery. Continue reading

Questions of fairness in political economy – what should we do?

This post is a thought experiment, for myself as much as for my readers. It is laid out as a series of questions on some of the most important topics in political economy and economics. At its heart, it tries to stimulate thinking about the highly loaded and subjective notion of fairness, and ultimately asks: what is fair, and what is unfair? Careful readers will note that the way many of the questions are framed presupposes certain value judgements. The order in which the topics are presented is not intended to imply that some are more vital than others, but maybe they reveal something about the author himself.

Taxation and public spending

Is it helpful to see taxation as theft or as the price we pay for organising a civilised society?

Which is fairer for the poorer members of society, and which for the wealthy: taxation that is progressive or regressive? Which of these choices creates greater incentives for productive activity?

Do high rates of tax penalise economic success?

Is it fair for wealthier individuals to pay a larger proportion of their income in tax than poorer ones?

Should we tax income more from wages, or from profits?

Should we rely more on taxing income or consumption?

Should we tax wealth at a higher rate than we tax income?

Should we emphasise the taxation of wealth in the form of housing, land or financial assets?

If the distribution of income and wealth is perceived as unfair, and even inefficient, should the government rely more on redistribution via taxation and public spending, or predistribution via changes to the regulation of the economy, so that income and wealth prior to taxation and public spending are more equally distributed?

Is it fair that those with the highest incomes, who are required to pay the greatest absolute amount of tax, are more able to employ those who can help them evade or avoid it? Continue reading

From dirty to green: alternative pathways of industrial development

The history of economic development shows that long term increases in living standards and poverty reduction require sustained rises in productivity. In turn, this requires investment in improved and evolving technologies. What is more controversial, even among development economists, is the claim that some sectors are more important than others in this process, which argues for industrial policies that target sectors with a greater potential for productivity increases. Manufacturing, as well as some service sectors, seem to have this potential. Historically, industrialisation has been associated with this process.

The first industrial revolution in the UK took place in the 18th century and was associated with the spread of steam power, the use of machinery and the factory system among other advances. It subsequently spread to continental Europe, the United States and Japan in the 19th century. These developments transformed economies and societies and were associated with rapid increases in population.

Technological progress can take place gradually, with new knowledge and discoveries building on old ones. It can also give rise to more dramatic revolutions across many sectors. Many of the technological advances and growing output associated with the early industrialisers and their followers have proven to be ‘dirty’ or polluting and damaging to the environment. In today’s global economy, we are more aware than ever of the need for a transition to a greener, less damaging and more sustainable path of development. Yet there are many poorer nations which, if they are to significantly ‘catch up’ economically with their richer neighbours, will need to develop a larger industrial base in order to achieve rapid increases in productivity and living standards.

In order to do so, it is simply not sustainable for such nations to copy the ‘dirty’ path of the early industrialisers. A number of successful later developers, such as South Korea and Taiwan, employed interventionist industrial policies which dramatically accelerated growth to rates far greater than those of the early industrialisers, and enabled them to become rich within a matter of decades. The nature of these transformations was the product of a particular historical context and are not possible for many poor and emerging nations. Having said that, late developers, by definition, still have the potential to copy already existing technologies from richer nations rather than having to develop them from scratch, so fairly rapid growth remains a possibility for them. But with today’s concerns about the environmental consequences of economic growth, from pollution and climate change to losses in biodiversity, current late developers need to forge a ‘cleaner’ and greener development path. At the same time, they must be given space and even helped to adopt policies which reduce poverty and increase living standards, and this means promoting sectors with the potential for rapid increases in productivity.

There is therefore a need for the evolution and adoption of green technologies to help spur development paths in all nations, including the poorest. The latter need to ‘skip’ using dirtier and less sustainable technologies, since their global impact is too damaging.

The leaders and citizens of many poorer and emerging economies have argued that they should be allowed to follow the industrial development paths of today’s rich countries. The latter are seen as being hypocritical in denying poorer nations the (dirty) path that they themselves followed in their pathways to wealth and prosperity. This is a fair point. But globally speaking, we cannot afford for them to do so. What is needed instead, as already mentioned, is a green and sustainable development path. The technologies to support this process are already with us, and are continually evolving and improving. Today’s rich countries did not have the green option during their earlier industrial development, while today’s poor countries do. The right moral, economic and most sustainable option is for today’s richer countries to enable the transfer of cleaner and greener technologies to their poorer neighbours, and to encourage their rapid adoption and diffusion.

For today’s wealthiest nations, it seems that they had no alternative pathway to industrial development other than a dirty and polluting one, and today’s green technologies have been built on a dirty past. But today’s poorer nations do have a different option. In order to promote their sustainable development, make rapid inroads into poverty and significantly raise living standards, they need help from those who are most able to give it.

Mariana Mazzucato on the mission economy

MissionEconomyHere is a brief quote from Mariana Mazzucato’s latest book, which neatly sums up her main arguments. She wants policymakers to reform capitalism by establishing stronger and more participatory state-led innovation, drawing lessons from the ‘mission’ that resulted in the first moon landing, and led to a whole host of spin-off technologies in the years that followed.

“Mission-oriented thinking cannot be based on the status quo. The mission attitude is not about picking individual sectors to support but about identifying problems that can catalyse collaboration between many different sectors. It is not about handing out money to firms because they are small or because they are in need, but structuring policies that can crowd in different solutions (projects) by multiple types of organizations. It is not about fixing markets but creating markets. It is not about de-risking but sharing risks. It is not about picking winners but picking the willing. And it is not simply about setting the ‘rules of the game’ but about changing the game itself so that a new direction can foster change – change towards a green transition and/or the digitalization of the population.”

Mariana Mazzucato (2021), Mission Economy – A Moonshot Guide to Changing Capitalism, Allen Lane, p.159.

Pathways to a progressive capitalism

To some the notion of a capitalism that can fulfill progressive goals is anathema. In today’s world of multiple crises, we may seem some way from such a society. But there are plenty of innovative thinkers who do not think that replacing capitalism is the only way to solve our major economic, social and environmental problems. That is not to say that capitalism will necessarily be with us forever. It remains a historically specific mode of organisation of the economy, and at some point humanity may evolve past it. But there is no doubting its tremendous power to transform the world, for good and ill. Reform-minded progressives are about harnessing this power to achieve and sustain what is in their eyes the good, and to undo and prevent the negative aspects. Continue reading

Marxism without guarantees – the economics of Resnick and Wolff

Richard Wolff is perhaps the most prominent Marxist economist in America today. He hosts the weekly program Economic Update, which can be found on YouTube and elsewhere. Whether or not one agrees with his views, he comes across as a thoroughly engaging communicator. With his colleague, the late Stephen Resnick, he developed an original approach to Marxist political economy over the last few decades. He sees political activism and public education as the way to promote and achieve the socially transformative goals which arise from his academic work.

Although I have found there to be much to admire and absorb in Marx and plenty of his multifarious followers, I would not call myself a Marxist. Wolf unashamedly does so, in his quest to end exploitation in the workplace, which he and Resnick see as the key to unlocking the workings of capitalism and ending it in order to achieve greater social justice in a transformed society. Continue reading

Economics and nature – approaches, problems, solutions

599px-The_Blue_MarbleIt is sometimes easy to forget the ‘other’ crises facing the world as we become absorbed in dealing with Covid-19. Opinions may differ, but climate change and, more broadly, humanity’s impact on planetary ecology, have not gone away. Stark inequalities of income and wealth, within and between many nations, are also key to much dissatisfaction, distress and conflict.

This post will look at some of the approaches used to study the economics of the ‘environment’, or ‘nature’, as some would have it. It identifies some of the problems addressed by these approaches, as well as some possible solutions, and raises some questions usually neglected by mainstream economics. These include ideas studied by political economy, such as treating economic growth and development as a process of socioeconomic (and natural) transformation, rather than a linear process of factor substitution and accumulation subject to random shocks. Continue reading

Progressive perspectives on inadequate demand and economic recovery

Even before the advent of the Covid-19 pandemic, the world economy was suffering from inadequate demand in the long aftermath of the Great Recession of 2008-9. A range of often radical responses to the pandemic, including lockdowns and fiscal support for struggling businesses and individuals, have been forced on governments around the world, particularly in the richest nations where the capabilities of the state are typically greater than in poorer ones.

Low inflation and record low interest rates in the major economies suggest that inadequate demand is currently more of a problem than inadequate supply. Opinions among progressive and leftist economists differ on this. Keynesians typically see government action to stimulate demand with monetary and fiscal policy, and the avoidance of premature austerity, as vital to restoring prosperity during or following a recession. The more radical post-Keynesians likewise see deficient demand as the key problem, but call for deeper reforms of the economy, encompassing redistribution, policies which raise wages for the less well off while avoiding excessive inflation, and a new global monetary framework in the spirit of the original post war Bretton Woods system which promotes global demand and ensures that it is distributed in a sustainable fashion across the member countries.

Many socialist and Marxist economists argue that economic cycles, however disruptive, are a part of life under capitalism. In fact, they make the case for downturns as necessary to restore the health of the economy by destroying ‘weaker capitals’ or less productive businesses, and creating a ‘reserve army’ of the unemployed in a way which restores the profitability of the system and lays the foundation for a new phase of economic expansion. There is thus a need for a Schumpeterian process of ‘creative destruction’, and Keynesianism cannot prevent it. Continue reading

Where you start, where you finish – the implications of different approaches to economic analysis

This blogger has for many years been drawn to non-mainstream or heterodox approaches to economics. Heterodox economics is dominated by leftist analysis and policy conclusions. It is not exclusively so: Austrian economics is one exception. Many heterodox thinkers prefer to use the term political economy instead of economics. The former emphasises that there is more to analysis than the definition and use of the ‘science of rational choice’, dependent on methodological individualism. They are more willing to engage in interdisciplinarity, to draw on and integrate ideas from politics, philosophy, biology and so on. Continue reading

“The Scheme for Full Employment” – finding the economics in an unusual novel

I have to admit that much of my day-to-day reading is dominated by economics and political economy. Even when turning to fiction, at least in this instance, reading the cover of Magnus Mill’s unusual 2003 novel The Scheme for Full Employment instantly peaked my curiosity. For most of my (economics) life I have been concerned with the issue of unemployment under capitalism, the prospects for full employment and greater social justice, and how the work of Keynes and other great progressive economists has dealt with these.

MagnusMillsTheSchemeforFEMill’s novel is undoubtedly an entertaining and quirky read. I am informed that much of his writing is in this spirit. This example uses the story to take a humorous look at a ‘social experiment’ designed to ensure that everyone who wants a paid job in some non-specific nation can have one. If this is not provided by the private sector then ‘the Scheme’ will do it.

The Scheme itself seems to produce nothing, and consists of a huge number of ‘UniVans’ driven by the regular employees along numerous predetermined routes to various destinations, dropping off and picking up parts for the UniVans themselves. It thus provides activity and employment, whose only purpose is to eliminate unemployment in the fictional society.

The plot culminates in a strike by the workers, pitting the “flat-dayers” committed to an eight hour working day without exception, against the “swervers”, who want to facilitate more flexible and shorter working hours. In the end the strikers fail to achieve their aims, and the very end of the book sees the rapid unwinding of The Scheme as it loses public support. Continue reading