The circuit between material relations and ideas

Following my comments in yesterday’s post about the relationship between material relations and human consciousness, it is interesting to see Samuel Brittan mentioning these two factors in the opening paragraph of his article in today’s ft as potential drivers of social evolution or, as he puts it, what ‘governs’ the world. Specifically he asks whether ‘material interest in the form of class conflict, the latter driven by the state of technology’, or ‘ideas’ are the key factor. He says that Marx claimed the former were, while Keynes favoured the latter. Ideas are part of human consciousness, but if we take a circular view of the forces governing social evolution, the two theories need not be separate, as they are in Brittan’s piece, where he claims that either one or the other are right.

Putting the two together, as I mentioned yesterday, we can see that material forces and relations can determine human consciousness, which in turn can affect those material relations, in a circular fashion. In fact, I think that Marx, in suggesting that the force of men’s will can transform society, through revolution in his view, also points to his emphasis on continuous change, from the material to ideas or consciousness and back again, as society evolves. Capitalism need not lead to socialism as Marx claimed and hoped it would, but social evolution is a continuous process and society can be thought of as transforming in this way.

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Holistic theory and political economy

Holism is the view that natural systems (from physical to social) should be studied from the point of view of wholes, rather than parts. In political economy, a holistic analysis could proceed from the study of society, rather than individuals, and assume that individual behaviour is determined by the social whole, rather than the converse. Karl Marx, in his study of political economy, analysed capitalism as a whole system, with particular structures and tendencies, while also using class as the key building block of society. Thus individual behaviour is said to be determined by the properties of the class within which it is situated.

More generally, heterodox approaches to economics, such as Marxism or Post-Keynesianism, tend to take a more holistic approach to analysis and reject the reductionist approach of mainstream or neo-classical theories. As already mentioned, the former view individual behaviour as being determined by social categories such as class or society, whereas neo-classical economics models individual behaviour as the key determinant of social outcomes.

But if we move beyond the confines of a purely economic analysis, and employ an inter-disciplinary perspective, what determines whether a particular approach to social science is holistic or not? One could argue that the individual is an holistic category if we draw on biology and accept that he or she is a whole composed of interdependent organs, bones, fluids etc. These latter categories interact to affect individual behaviours and outcomes. Similarly, biologists analyse particular organs as composed of constituent parts, but also the whole organ whose functioning is determined by the interaction of those parts. In all these cases, the behaviour of the whole can be seen as more than simply the sum of its parts.

From a larger perspective, the global economy affects individual behaviour through its impact on national economies through trade, capital flows, migration and the exchange of ideas and technologies. The question needs to be: what is the appropriate level at which to conduct analysis? Is it the global or national economy, the region, sector or company, or the class or individual?

In political economy, as inter-disciplinary social science, we can draw on methods and perspectives beyond the purely economic, from political science, sociology and philosophy for example. But from social wholes to the individual, even if we take a holistic view of what determines behaviour, the units of analysis are necessarily partial views of reality. They are models. The model we select when setting out on the path of analysis may depend on what has worked well in the past and also on the object of analysis. Perhaps just as important are the values of the analyst, or the politics implied by the outcome of the analysis. These latter subjective factors are bound to influence the objective methods. A Marxist might have sympathies with socialist politics and policies, a post-Keynesian with social democratic outcomes and a neo-liberal with more free-market ones. These political sympathies may have causes in the personality of the analyst, with genetic and psychological or learned values as causes of the personality. The social and academic environment in the past and present may in turn be a determinant of these learned values. These environments also have determinants in the structure and behaviour of social categories, as well as individuals. And so on.

Marx argued that the material relations and conditions of society determined human consciousness, but while this is a powerful idea, this need not be the end of the analysis. Human consciousness, men’s ideas and will, can alter the material conditions of society. In fact, by calling for social revolution, Marx accepted this idea too. We can view this as a kind of circuit running between material conditions and human consciousness at the social level, which structures the evolution of society.

These thought exercises question the objectivity of social science and show that analysis can start from the end point where the outcomes are consistent with particular values and subjective choices, and subconsciously justify the method or model used. It also shows the importance of overdetermination, the idea that an observed effect has multiple causes. This makes for a more complex analysis but, I would argue, a richer one, and calls for an emphasis on inter-disciplinarity. In social science, it underlines the importance of a genuine political economy, which draws on insights from across the field and outside it.

With holism, we analyse whole systems, greater than the sum of their inter-dependent parts. With over-determination, we stay open to potential causes both within and outside the primary subject matter. A political economy open to its own origins and method, with a great potential for evolution, is a hoped-for result.

Varieties of industrial policy for promoting economic development

The key to a successful industrial policy, one which promotes the growth and structural change in a ‘late-developing’ nation and enables it to catch up with much richer countries, is one which stimulates technological learning by firms and industrial sectors, rapid productivity growth across the economy, and a leap up the technology ‘ladder’.

Industrial policies which have been at least to some degree successful in achieving catch-up growth and development have been carried out in a number of countries, albeit in different forms. In Japan, South Korea and Taiwan for example, policies involved a mixture of import substituting industrialisation and (later on) export promotion. Particular industrial sectors were supported as infant industries which needed to ‘grow up’, even if this meant going against these countries’ comparative advantage, or those industries which were ‘naturally’ price-competitive in national and international markets. Thus these countries’ governments ‘got the prices wrong’, through such policies as tariffs, subsidies, public ownership of particular enterprises and enforced credit allocation through state-owned banks.  This strategy, which promoted domestic firms and sectors as a route to development, resulted in rapid GDP and productivity growth and structural change and a catching-up with much richer countries during the post war period.

By contrast, countries such as Malaysia in the 1970s and 1980s and China in the 30 years since reforms began in 1978, relied more on foreign direct investment (FDI), as a route up the technological ladder. Multi-national corporations (MNCs) were encouraged to invest in special economic zones through a mixture of tax incentives, infrastructure provision and the promise of political stability which, although not a purely economic issue, is surely vital to sustained investment. These zones were intended to be used for production for export. However, in order to achieve technological progress beyond simply the foreign firms themselves, which could have simply imported components for assembly and exported the finished product, with minimal spill-over benefits for the wider economy, these countries’ governments pushed hard for a minimum level of local content inputs to production, in order to stimulate the growth of domestic firms and encourage broader indigenous growth and transformation. Backward linkages from MNCs to local firms were thus an important part of the industrial strategy. The size of the Chinese market and a well educated and cheap labour force were also a factor in its attractiveness to foreign investors.

While growth in Malaysia was never as fast as the East Asian Newly Industrialising Countries (NICs) of South Korea and Taiwan, as well as Japan, it nevertheless grew quickly and achieved its own measure of catching-up development during the last quarter of the 20th century. Growth in China has been more rapid, at an average of around 10% for 30 years.

Thus different types of industrial policy can be compatible with rapid development. In all cases, the state is able to encourage a broad pattern of technological learning and catching up in firms and sectors which act as an engine of growth.

Rents, rent-seeking and the role of industrial policy in economic development

The role of industrial policy in helping countries such as Japan, South Korea and Taiwan ‘catch up’ economically with the world’s rich countries in the post-war period has been extensively documented. Yet industrial policy, defined here as a government policy of targeting particular industries and technologies with support with the view that their rapid development has wider social and economic benefits in the national interest, has been far from a universal success story across developing countries. In fact, the failures probably outnumber the success stories in that only a few countries have made the successful transition from developing to rich country status. Rent-seeking processes have often been blamed for these failures, yet such studies ignore the pervasiveness of rents and rent-seeking in all modern economies. As will be discussed below, the desire to eliminate rents and rent-seeking is misguided and the creation of rents which support the development process has been key to the success of a number of newly industrialised countries (NICs).

In order for poor countries to catch up with the rich ones, they need to go through a process of rapid productivity growth and structural change, much faster than that prevailing in the technological leaders. Their companies need to learn how to use increasingly sophisticated technology as they move up the  ‘ladder’. At the early stages of development, innovation is probably less important than technological ‘learning-by-doing’: they must learn how to use technologies already in existence, rather than create new ones, although there is likely to be a degree of adaptation to local conditions, which could be seen as a kind of innovation.

Rapid transformation from being a poor country to a rich one will in almost all cases involve industrialisation, the structural shift from an economy dominated by agriculture to one of industry and services. Productivity growth needs to take place in all three of these sectors, while labour shifts from the primary to the secondary and tertiary sectors.

While technological backwardness and the dominance of agriculture offer potential for catching-up, this is far from an easy or automatic process. It is widely acknowledged that in countries such as Japan during the 1960s and 1970s, and South Korea and Taiwan during the 1970s and 1980s, the state had a strong developmental role and used a range of policies to promote particular industries in the service of broader economic goals. The results were dramatic in terms of GDP and productivity growth, which were rapid over these periods. A second tier of countries, particularly in South East Asia, such as Malaysia and Thailand also grew rapidly during the late twentieth century, in the run-up to the Asian Crisis of 1997-8, when they entered deep recessions. Industrial policy was attempted in these latter two, but was not as extensive as in the NICs, largely due to political constraints, as they possessed a different balance of power between the state and various social classes which left a faithful copying of the industrial policies of the NICs very difficult.

Many other countries tried industrial policies during the post-war period, such as nations in Africa and South America, as well as South Asia. This often involved nationalisation of particular industries and import-substituting-industrialisation (ISI), in which domestic industries are protected from foreign competition by tariffs, as a form of infant industry protection. The aim is that companies should be sheltered from more productive rivals until they ‘grow up’ and are able to compete in terms of price, technological sophistication and product quality. This will occur if the protected firms and those they employ engage in learning-by-doing and especially if they can take advantage of economies of scale in production, both of which can stimulate productivity growth. However, many of these industries, while they made initial progress and contributed to fairly rapid growth in the aforementioned countries, never fully grew up to compete internationally and continue to produce for export, without government support. By contrast, in the successful NICs, initially protected industries did become internationally competitive after a period of protection. Government support in the form of subsidies, tariffs and preferential access to credit was withdrawn after a time, and the industries continued to grow and become more productive.

What was the difference between the industrial policy successes and failures? The economist Mushtaq Khan has argued that the view that differences in corruption and other forms of rent-seeking explain the contrasting fortunes is misleading, as corruption tends to be a structural feature of all developing countries. While all developing countries (and indeed probably all rich countries as well) suffer from rent-seeking, the major differences between successful late-developers and those countries which have not performed as well, are the rent outcomes produced by the rent-seeking processes.

The most successful of the late-developers such as South Korea and Taiwan had states that were able to carry out policies which targeted support at particular industries in a time-limited fashion: support was withdrawn both when sectors became competitive internationally and could engage in exporting and also when they failed to become competitive. One difference with less successful countries was that governments in the latter failed to withdraw support even when the sectors and firms didn’t to grow up to be competitive and such economies were left with substantial welfare losses and without the successful exporters that the NICs possessed. Khan argues that the outcome of failed industrial policies can be worse than simply ‘leaving it to the market’, due to both static and dynamic welfare losses. The first best outcome would be rapid development as a result of successful industrial policies, as in the East Asian NICs, but such policies, certainly in the way they were carried out in the NICs, are not possible everywhere. What countries need to do is to match their policies which aim to stimulate technological and industrial upgrading with what is possible given the balance of power between classes, which produce a particular political settlement. If particular social classes are able to prevent the withdrawal of state support to firms and sectors, even when these have not grown up and become competitive, then economic stagnation can result. In these cases, the rent outcomes will be negative. By contrast, a different balance of power within a society, from a strong state insulated from the such social classes, and/or one whose interests are aligned with capitalists providing kickbacks to the state, can produce positive rent outcomes which may outweigh the rent-seeking costs which are likely to prevail in all societies.

It follows that, certainly at earlier stages of development and during the catching-up phase of growth, states should focus on industrial policies that are achievable and, if none are, then political reform is important to enable such policies to be put in place. In short, state industrial policies should provide targeted and time-limited support to particular sectors, conditional on performance. If firms and sectors do not perform well and become competitive, ultimately on an international scale with export potential, then support should be withdrawn. The necessary political reform obviously goes beyond economics, and shows the importance of a political economy approach to development.