National development goals and evolving institutions and policy

As economies grow and inevitably evolve over time, they require different sets of government policies and institutions to maintain prosperity. In his 2007 book ‘The European Economy since 1945’, Barry Eichengreen argues that Western European economies, devastated to various degrees by World War II, managed to grow fairly rapidly during what became known as the ‘Golden Age‘, broadly the 1950s and 1960s. In terms of levels of productivity and GDP per capita, they made great strides in catching up with the US until the 1970s when this convergence slowed in the face of rising inflation and balance of payments imbalances. Some economies in the region continued to catch up in terms of productivity, but owing to falling working hours, their levels of output per capita lagged behind. Some might see this outcome of using higher productivity to achieve greater leisure rather than material consumption as socially beneficial, and there is a debate about why this happened which I will not go into here.

Among the richest countries in Europe, there has been some divergence of economic performance compared to the US with some economies continuing to catch up and even overtake the latter, as in the case of Ireland. With the benefits of North Sea Oil wisely managed, Norway has also performed very well. Eichengreen argues that in general European economies, with more of a tradition of tripartism (cooperation and coordination between the state, firms and trade unions) and the welfare state may have to abandon the latter to some degree in order to become more innovative and to produce and take advantage of new technology if they want to continue to be prosperous and, particularly for some of them, reduce unemployment, which has remained stubbornly high through both periods of relative progress and of, recent, crisis. But as more of an economic historian than a futurist, Eichengreen is somewhat non-committal about what is required in terms of institutional and policy change.

What is quite convincing in the book, is the argument that the Golden Age growth was more ‘extensive’, relying on rising inputs of capital and labour, with an emphasis on high levels of investment and structural change as labour shifted from agriculture to industry. The potential for economies to catch-up with the technological leaders is only that, a potential. It also requires effective institutions and policies. Western Europe inherited supportive institutions in the post-war period, and industrial policy in the form of coordinated investment between sectors in some economies, as well as wage restraint by trade unions, led to the maintenance over the period of high profits which could be reinvested in expanding production. Once the period of catch-up was largely over, a shift towards innovation as opposed to simply using already existing technology was required in the form of ‘intensive’ growth.

There has arguably been, as already mentioned, a divergence of economic performance between economies in Europe in recent decades. The Nordic countries have liberalized to some degree since their own crises of the 1990s, while maintaining the traditions of strong welfare states and public services, and tripartism. Until recently, they have performed relatively well. France, Germany and especially Italy, as the three largest economies in the Eurozone, have done less well. There is a myth that the German economy has performed well, leading to it dominating policy-making in the EU and Eurozone. But although unemployment is now quite low, growth in output and productivity has been poor, and the majority of workers saw virtually no rise in wages during the 2000s. It suffers from weak growth in domestic demand in the form of both private and public consumption and investment, with its large and growing current account surplus the result, acting as a drain on activity in the rest of the EU, and frustrating efforts to reduce unemployment, and public and private debt levels, among its neighbours.

So some European countries need reform more than others. Those on the political left would like to see the maintenance of institutions promoting cooperation and social justice in the form of limited rises in inequality, even in the face of more rapid technological change. The experience of the Nordic countries offers them some hope. Inequality has risen in the latter, but from a much lower base than elsewhere, so that they can still be seen as promising examples of progressive economic and social change.

Returning to the theoretical basis of this post, there are a number of traditions in economics that emphasise the evolving nature of and relationship between technological change and social institutions. Marx referred to these as the forces and relations of production. They have also been called the regime of accumulation and the mode of regulation by the Regulation School. All these schools of thought emphasise the requirement of a compatibility between on the one hand technology and the associated growth regime, and on the other the social institutions and related policies. Major economic crises or persistent stagnation can be caused by conflict between the two aspects of the political economic system. When this occurs, the ability of the system to resume decent rates of growth and the potential for positive social outcomes will require a set of policy and other changes which can give rise to new or adapted institutions supporting a new growth regime.

Eichengreen argues in his book that Europe needs to adapt its institutions to the requirements of the advancing technological frontier. But the evidence of a variety of outcomes among European economies in recent decades would caution against simply abandoning many of the industrial and labour market policies that, along with a supportive welfare state, have been adapting to the new business environment, in many ways successfully. The Nordics are evidence of this. While the vision of the economic system as comprising an evolving pattern of technology which in turn requires evolving institutions and policies is a powerful one, I would support the conservative argument that adaptation and evolution rather than revolution may well be the way forwards. The distinction between these two latter ideas may be a fuzzy one, and can depend on the time scale under consideration: the capitalist economy has revolutionised societies over the period of its existence but in the shorter time scale in which national governments and firms make their policies and plans, evolution is a more appropriate descriptor.

Capitalism and its associated institutions and technologies have helped to produce accelerated social change for more than two centuries. If it is to continue to do so, it will inevitably require reforms on the part of governments, firms, unions and other social actors, which will need to respond to the inevitable tension between technology and institutions. But it is not clear that the struggle for social justice need be abandoned. After all, the aim should be the advancement of humanity on many levels, with the material realm only a basis for other forms of progress.

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