Trade Wars are Class Wars – models of development

This is the third in a recent series of posts which draws on ideas discussed in the book Trade Wars are Class Wars by Matthew C. Klein and Michael Pettis. Previously, I explored the importance of a macro or systemic analysis in economics, and the nature and dynamics of savings and profits in the economy. Today, I want to look at the two broad models of growth and development outlined by the authors: the high savings model and the high wages model.

In fact, I posted on this a couple of years ago here, following a blog post by Pettis, so I will try not to repeat myself too much and explore some different aspects of the topic. If you haven’t read their book, or any of the authors’ previous output on this, I recommend reading my blog post first, as well as that of Pettis.

Politics, institutions and development – an uncomfortable reality

“Capitalism is not nice”: these words from one of my lecturers have stayed with me since my university days. He was not only considering the often difficult contexts in which poor countries make the transition to a pathway of modernisation and development, but also that of capitalist development more generally, not least in advanced countries. He then added: “but how else are poor countries going to raise the living standards of the mass of their populations?”

Historically, the emergence and evolution of particular economic institutions and policies which have successfully driven periods of development have often been associated with threats to the established political and social order, sometimes in the form of conflict (whether internal or external) or, in more general terms, pressures which has driven fundamental changes in society and laid the foundations for economic growth and transformation.

Are corporate CEOs worth $20 million? — Real-World Economics Review Blog

from Dean Baker

This simple and important question does not get anywhere near the attention it deserves. And, just to be clear, I don’t mean are they worth $20 million in any moral sense. I am asking a simple economics question; does the typical CEO of a major company add $20 million of value to […]

Are corporate CEOs worth $20 million? — Real-World Economics Review Blog

Industrial policy – blurring the boundaries

The debate over the merits or otherwise of industrial policy, broadly defined, is less polarised in policymaking circles these days. Former World Bank chief economist, Justin Lin, has for some time been arguing for the adoption of his ‘New Structural Economics’ to aid development in the poorest nations, while one of his predecessors, Joseph Stiglitz, is a firm advocate of policies which aim to overcome the numerous market failures which he argues characterise such nations.

Many development economists coming from a more heterodox tradition have long advocated industrial policy as essential, based on the rich historical experience of successful periods of growth in a wide range of countries. Most if not all of today’s richest nations have made use of industrial policies, and still do, if in different forms from the past.

Such economists have followed the arguments of the Cambridge Keynesian Nicholas Kaldor, claiming that there is something ‘unique’ about manufacturing that makes its promotion essential for accelerating economic growth and development.

Trade Wars are Class Wars – savings, surpluses and profits

This is the second post in a series inspired by Matthew C. Klein and Michael Pettis’s Trade Wars are Class Wars, following my look at the importance of systemic factors and emergence in economic analysis.

This time I want to discuss the book’s conception of savings and profits, particularly at the level of the economy as a whole, since this is what the book’s theoretical framework focuses on.

The term ‘profit’ is nowhere to be found in the index, and the main arguments focus more broadly on ‘savings’: how they relate to rising inequality; their relationship to investment and consumption at the macroeconomic level; the impact of these variables on economic growth, trade and financial imbalances; and how all this comes together to provoke international conflict over trade.

The book is not an academic tome, although those who have not digested Pettis’ previous works may find some of the authors’ arguments take a while to grasp, but it is, at least in the world of economics, written for a more general audience. It should thus appeal as much to economists as to policymakers which, given the contemporary relevance of the subject matter, is surely essential.

Complexity economics and transcending the micro-macro division

“[Traditional] economics is split into two halves: microeconomics and macroeconomics. Microeconomics is the bottom-up view of the economy and starts with individual decision makers and then builds up to markets and economies. Macroeconomics is the top-down view that starts with questions such as why there is unemployment and then drills down to find an answer…Most economists agree that ideally, there should not be a separate microeconomics and macroeconomics. One should be able to start with micro behaviors and work up, or with macro patterns and work down, and be able to use either approach seamlessly within one theory. Although the two halves of the field share many ideas, techniques and the overall traditional equilibrium framework, they unfortunately have yet to achieve that aspiration. Like the two teams that built the transcontinental railroad across the United States in the nineteenth century, microeconomists and macroeconomists have been working toward each other from different sides of the field. Unfortunately, after a century of laying tracks, they have failed to meet in the middle…

The micro-level interactions of agents in a complex adaptive system create macro-level structures and patterns…The ultimate accomplishment of Complexity Economics would be to develop a theory that takes us from the theories of agents, networks, and evolution, all the way up to the macro patterns we see in real-world economies…

Such a theory would view macroeconomic patterns as emergent phenomena, that is, characteristics of the system as a whole that arise endogenously out of interactions of agents and their environment…

Emergence may seem mysterious, but it is actually something that we experience every day. For example, a single water molecule of two hydrogen atoms and one oxygen atom does not feel wet (assuming that you could feel a single molecule). But a few billion water molecules in a cup feel wet. That is because wetness is a collective property of the slippery interactions between water molecules in a particular temperature range. If we lower the temperature of the water, the molecules interact in a different way, forming the crystal structure of ice, losing its emergent characteristic of wetness and taking on the characteristic of hard. Similarly, what we call a symphony is a pattern of sound that emerges out of the playing of individual instruments, and what we call a kidney is a pattern of cells working together to provide a higher-level function that none of the cells could do on its own.

Complexity Economics likewise views economic patterns such as business cycles, growth, and inflation as emergent phenomena arising endogenously out of the interactions in the system.”

Eric D. Beinhocker (2006), The Origin of Wealth – Evolution, Complexity, and the Radical Remaking of Economics, (p.163, 167-8).

Accelerating development – rejecting fatalism and the case for experimentation

Here is another clear and inspiring quote from the newly published book African Economic Development (p.244-5). It rejects what the authors, who combine long experience in research, in the field and in policymaking, call ‘impossibilism’ in the realm of development policy, whether it comes from the mainstream or heterodox camps:

“Some development economists have relatively recently come to acknowledge what before were dismissed as unsound arguments: that the development of capitalism has always owed a particular debt to the role of manufacturing; and that industrialization has always and everywhere depended on state intervention that has ‘got prices wrong’. But the typical refrain of common sense is still: ‘well, it may have worked before – in Taiwan, in Vietnam, or somewhere, but please please don’t try this yourself!’ The argument is that the risks of failure are so high (and the historical record certainly does show many failures), and capacities in Africa so low, that it would be unwise to try to emulate the ‘lessons’ of economic history. For example, Paul Krugman came to recognize that theoretically, there was a very good case for ignoring the principle of comparative advantage, but, he argued, officials should actually stick to the principle and to producing unsophisticated goods because otherwise politics will get in the way and ruin things. Rather, prudent African policy officials should bide their time, getting the elements of good governance aligned, gradually building capacities, and confining themselves to the modest work of the facilitating state. African states, this plausible version of impossibilist common sense has it, should intervene up to and not beyond their current level of capacity.

Meanwhile, the other strand of impossibilist common sense rolls out a series of warnings suggesting that almost all policies or accumulation strategies simply have no chance of succeeding because the dominant material and ideological forces of global capitalism are stacked against low-income peripheral countries. Global value chains are controlled tightly by powerful systems integrators that brook no significant technological upgrading by developing country producers, who remain constrained to producing relatively simple goods on a lowly rung of the ladder. The world market prices for all the goods produced in poor countries are so volatile that the imports required for dynamic growth and political stability cannot reliably be acquired. The World Trade Organization (WTO) imposes rules so binding on developing countries that they are now unable to avail themselves of the kinds of policies in the trade and financial sectors used successfully by earlier ‘catching-up’ countries.

We acknowledge that it is easier to fail than to succeed with development policy – often more for domestic political reasons than reasons of measurable technocratic ‘capacity’. For example, in Ghana and Kenya political pressures were able – at some times more than others – to overwhelm sophisticated economic technocrats. We also acknowledge that the external financial and economic environment confronting developing country economies and governments is prone to wild fluctuations, often hostile, and poses risks to improving welfare. But there is still significant, proven scope for governments to intervene in support of an accelerated dynamic of accumulation, structural change, and not insignificant welfare improvement. And there is scope for governments to intervene beyond their current capacity levels, to experiment.”

Trade Wars are Class Wars – the importance of the systemic

This is the first in a series of posts inspired by Matthew Klein and Michael Pettis’s excellent new book Trade Wars are Class Wars. I introduced this series here. Rather than review the book, which many others have done, I wanted to explore some of the economic, or political economic, ideas that in my view it points towards.

I start by quoting a recent tweet by Michael, which helpfully summarises the content and implications of this post:

“Many economists and economic commentators have a very hard time understanding how systemic constraints work. They assume that the collective is nothing more than the sum of millions of individual decisions freely arrived at, when in fact those decisions are collectively constrained by adjustments in the system that force a certain outcome. That is why everyone’s “individual” decision ends up being collectively whatever it takes to get the systemic constraints to resolve.”

In short, this makes the important point that macroeconomics does not reduce to microeconomics. This is contrary to so-called ‘representative agent’ models of the economy, which assume that the latter can essentially be represented by a single individual. By adding the behaviour of millions of identical such individuals together, such models argue for highly restrictive ‘micro-foundations’.

How elites sold out American workers and how to fix it

A short interview with Matthew Klein, co-author with Michael Pettis of Trade Wars are Class Wars, who gives a nice summary of the central thesis of their new book, which I have already introduced here. Over the next few weeks I will be publishing a number of longer posts inspired by and drawing on some of the ideas contained in the book, and trying to go a little deeper into the relevant economics and political economy.

Wages and productivity — Real-World Economics Review Blog

from David Ruccio and issue 9 of RWER Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity. Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili: Firms cannot afford a misalignment of their workers’ pay and productivity increases – the employees will move to other […]

via Wages and productivity — Real-World Economics Review Blog