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.