Left and right and the role of investment


George Osborne visits another building site

Although I wouldn’t call myself a socialist, I often read the blog Socialist Economic Bulletin, published but not written by the former Mayor of London, Ken Livingstone. Livingstone is currently embroiled in a media storm over alleged racist comments, which are nothing to do with the blog. What I want to focus on in this post is the emphasis in the economics of the SEB and many other left wing economists on investment as of paramount importance in the achievement of economic progress for the majority. What seems to stand out in such arguments is the focus on the amount of investment, to the neglect of its allocation. By contrast the right focusses on the superiority of the private sector, and neglects public investment when both are important.

The SEB is currently making the case that the UK’s poor economic performance in recent years, with weak growth in output and productivity, is due to insufficient private and public sector investment. It makes the case that a big rise in public sector investment in infrastructure will ‘crowd-in’ private investment. I have previously made a similar case on this blog. Depending on the selection of projects by the state, the crowding-in effect is indeed possible. But depending on the scale of the public investment, crowding-out is also possible, although unlikely given the current extremely low level of interest rates. Many economists have drawn the conclusion that the economy is crying out for public borrowing to finance investment. This would provide a short term boost to aggregate demand or purchasing power, and would also increase capacity, thus boosting the supply-side and in the longer term improving productivity.

Marx famously said: “accumulate, accumulate, that is Moses and the prophets.” By this he meant that capitalism is innately expansionary, despite periodic fluctuations and crises or recessions. This is surely true: investment is the motor of economic growth and leads to growth in both demand and supply. Capitalist economies have achieved growth like nothing before.

The writers on the SEB blog seem to be only half-hearted socialists, in that they favour the mixed economy, a mixture of public and private ownership with a strong role for the state in a capitalist system. They might dispute this claim, but to me they are more like statist social democrats. There may be nothing wrong with that. But the importance in their analysis given to the share of investment in GDP is typical of many on the left.

That a higher investment share in GDP in the economy need not produce more rapid growth in productivity and output is evident from the experience of Japan in recent decades. It has consistently invested proportionately more than other rich countries, but its growth performance has been mediocre. Its per capita performance has been less bad, as it has a shrinking population, but it has certainly fallen behind other advanced countries in terms of productivity. This would suggest that investment is being allocated inefficiently rather than the problem lying in its insufficiency.

Problems of investment misallocation or overinvestment can happen under capitalism or socialism, but the historical record shows that the former tends to be better at overcoming the induced problems. In the post-war period, the former Soviet Union grew fairly rapidly for some time and had high rates of investment. Ultimately this performance could not be sustained. Despite boasting the first human in space, and a powerful military, major projects which are perhaps less of a problem for state-led production, ordinary consumers were poorly served by the system.

There have also been a number of ‘growth miracles’ among capitalist nations since the war. These relied on industrial policies in which the state encouraged high rates of investment in strategically important sectors. In Japan, South Korea, and Taiwan, this took different forms, but rapid growth followed and lasted for some time, as these economies caught up technologically with the richest nations. China has followed a similar path, but remains some way behind in per capita terms. Such success stories have proved the exception rather than the rule. Many countries have attempted industrial policies, but few have made the transition to rich-country status. This seems to require a shift from an industrial policy for catching-up, which involves firms borrowing existing technologies, to one in which new technologies are themselves developed. The state may still play a role, but its precise involvement will change.

Other rich countries such as the UK currently have much lower investment shares than today’s Japan, and in the case of the former, the problem may be the level rather than the allocation.

The point is that the investment share as well as its allocation are important, and both can constrain growth in output and productivity. In the UK as elsewhere, the left may well be right: public investment is woefully low, despite many appearances by the Chancellor George Osborne on building sites, wearing a hard hat. But the rhetoric belies the reality.

The right too is guilty in its faulty analysis of investment. It tends to cling to the idea that the private sector is inevitably more efficient than the public sector. This is really ideology: investment projects should be judged on their individual merits. At the very least, public investment in research, infrastructure and education are necessary in any growing economy. Public and private necessarily interact and shape each other. If they are neglected, as public investment is at present at the altar of austerity in many countries, the advancement of prosperity will suffer.


8 thoughts on “Left and right and the role of investment

  1. You might find a chapter in P.T. Bauer’s “Equality, the Third World, and Economic Delusion” rather interesting, probably even congenial in some respects: chapter 14 of the book—entitled “The Investment Fetish”.

    Bauer argues that “investment” is an elusive concept prone to be defined and stretched to suit political purposes.

    Policy-related “investments” (say to maintain employment) assume the reputation of efficiency-enhancing investments, when they have nothing to do with productive capital formation.

    Hidden agendas are being pushed with reference to the seemingly neutral category whose desirability appears to be established unassailably by definition. The call for the panacea “investment” is often serves to veil repression and power grabs. “Investment” has often little to do with economic rationality and efficiency. All too often, we are faced with a case of merely ostensible objectivity.

    Let a non-believer in anthropocentric global warming argue with a green politician over the nature of investments (to be) made in so-called renewable energy.

    Indubitably, “investment” has been a source of considerable economic damage, unproductive social dislocation, human suffering and societal tension.

    Writes Bauer: ” … Simon Kuznets … found that capital formation has played a very small part in long-term development in the West … The same applies to the contemporary Third World. Emergence from poverty there does not require large-scale capital formation. It requires changes in attitudes and mores adverse to material improvement, readiness to produce for the market instead of for subsistence, and the pursuit of appropriate government policies. Much of capital-formation is not a precondition of material advance but its concomitant …” (p. 248)

    Investment may be a subject whose nature demands case-by-case assessment and hence immersion in lower levels of abstraction than the practitioners of high theory are used to.

    Perhaps. to come to grips with it, we require a meta-economics that focusses on the errors we are bound to make if we rely on traditional economic theory in the wrong circumstances.

    At any rate, I think, the investment issue lies at the soft political heart of economics.

    Bauer prefaces the part in which the above mentioned chapter appears with this quote from Joan Robinson:

    “The purpose of studying economics is not to acquire a set of readymade answers to economic questions, but learn how to avoid being deceived by economists.”

    • I still think that investment is vital, but it needs to embody and be associated with advancing knowledge and technology, products and production processes, which capitalism seems to be good at. I don’t think this means that things can all be left to the market, and I think history confirms this. As ever, both market and state are involved and intertwine in economic progress, and even right wing parties are driven to intervene in the economy. This may not always be benign or beneficial, but at times it is surely essential.

      • I agree, and you are “spot on” to single out the concept of investment for careful scrutiny, as you do in this post, which has alerted me to the elasticity of the term, the spectrum of aspects covered by it and its value-dependent and political nature.

  2. Left to themselves both capitalism and socialize lead lead to economic excess and extremes that ultimately end in both political and economic tyranny.

  3. However when the best of socialism and capitalism are joined together they balance each other out so that the access and extremes are avoided. While separately both capitalism and socialism lead to what we have today: an economy with a small group of elites (haves) taking from the larger group of have nots who are then forced to fight each over the few crumbs falling from the table of the haves.

    • I think there’s a lot of truth in that. Whatever system is adopted to organise society, perpetual change seems to be the norm. The mixed economy is still to me a form of capitalism, even if there is a role for significant state intervention, but some sort of ‘middle way’ may offer more opportunity for widely shared prosperity. Marx defined capitalism in terms of the dominance of commodity production for sale and profit, and the conflict between what he saw as the two great classes, capital and labour. Others would see it differently, especially today, and would stress the dominance of markets rather than debates over class. Sometimes this becomes purely academic and a matter of semantics. Having said that, the state played a big role, sometimes violent, in establishing the conditions for capitalism to emerge. Conflict and uneven development are two of the difficult aspects of change under capitalism and necessitate a role for the state, and I think history confirms this. Thanks again for your comments.

      • The “Free Market” concept is a myth for there are only two types of markets: a captured market and/or a regulated market. It is the role of government to equally impose and enforce rules that are fair to both capital and labor in order to keep the economy properly balanced. Unfortunately unbridled capitalism always lead to a captured market while unbridled socialism always leads to an over regulated market.

    • I agree. Both approaches need to be preserved from the dogmatic, often destructive effects of ideology, and combined with one eye on rational analysis and decision making, and the other on addressing human and environmental need. Balance is as vital as the motivation to get things done.

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