The euro disaster — Wynne Godley was spot on already back in 1992! — LARS P. SYLL

If there were an economic and monetary union, in which the power to act independently had actually been abolished, ‘co-ordinated’ reflation of the kind which is so urgently needed now could only be undertaken by a federal European government. Without such an institution, EMU would prevent effective action by individual countries and put nothing in […]

via The euro disaster — Wynne Godley was spot on already back in 1992! — LARS P. SYLL

America’s lead on innovation and the role of the public sector

A nice post here by British economist Paul Ormerod which describes how the US is leading the world in the development of Artificial Intelligence (AI). In the last paragraph, he discusses how the development of key technologies that are perceived to be in the national interest there are initially funded and developed by the public sector, with an eye to their subsequent practical application by the private sector.

The idea that the world’s most powerful nation and largest economy owes many of its strengths to public sector-led innovation is an important one. In her eye-opening book, The Entrepreneurial State, Professor Mariana Mazzucato shows as a key example how many of the technologies that make up the smart phone were initially developed by the US government, and only later combined into desirable consumer products by private companies such as Apple and Samsung. From the internet and GPS, to the touchscreen and voice activation, government institutions led the way, mostly to try to maintain the country’s military superiority.

Mazzucato argues that we should acknowledge the key role of the public sector in taking on certain financial risks which the private sector will not bear, and support these kinds of innovation policies. Of course, there will be failures as well as successes, but this should not be a reason for abandoning state intervention. The private sector can fail as much as the public, sometimes on an enormous scale, ‘wasting’ resources in the process. As long as an experimental approach and a willingness to learn are adopted, there is the potential for a greatly positive public-private co-evolution which can help to drive economic progress.

The public-private divide under capitalism should be seen as something of a myth: the two are symbiotic and support each other in successful economies more extensively than is often believed. It is misleading and potentially damaging to call public provision or even public-private partnerships ‘socialist’. The truth is that the development of capitalism from its inception to today’s increasingly complex economy remains dependent on the state as much as the private sector.

Reviving UK manufacturing, Brexit and the future of Labour

A short interview with businessman, economist and Labour party donor John Mills, on reviving manufacturing in the UK and its role in rebalancing the economy and improving economic performance, which I have written about recently. He also comments on the likely outcomes of Brexit and the fortunes of Labour under Jeremy Corbyn.

Brexit and the UK: lull before the storm or a much needed rebalancing?

800px-A1_Houston_Office_Oil_Traders_on_MondayWill the vote for Brexit derail the UK economy? The Guardian newspaper yesterday contained a brief report here from two economists, both formerly members of the Bank of England’s interest rate-setting Monetary Policy Committee (MPC). Both of them focus on trends in domestic spending and consumption, driven mainly by wage growth and employment. Unemployment has apparently ticked up a little according to the latest figures. They conclude that economic growth will slow into 2017, and while one predicts that the UK will avoid recession, the other concludes with some gloomy speculation on an ‘oncoming Brexit tsunami’.

The pound has fallen sharply since the result of June’s referendum became apparent. Whatever else happens, I see this as a good thing, and necessary to help promote a long overdue rebalancing of the economy. As Roger Bootle writes here, the Brexit vote was the trigger for the pound’s devaluation, but not its deeper cause. Continue reading

Ecological economics: human progress as part of nature

599px-The_Blue_Marble“The term ‘ecological economics’ should be a little redundant, as both words share the Greek root oikos (household) and together mean something like household-study household-law. It is telling that the two fields of ecology and mainstream economics have grown so far apart in the century and a half since they were named that they now represent completely different sets of principles.

The basic idea of ecological economics can be summarised by [Herman] Daly‘s argument with the World Bank economists: when you draw the box for the economy, you have to put it in a larger box called the environment. The human economy is a subset of the world system. Our inputs, in terms of natural resources, and outputs, including pollution, are like the metabolism of a kind of super-organism. We can analyse it using the same kinds of tools as we use to analyse other living systems, such as a cell, or a beehive, or a complete ecosystem.

Instead of being a closed system, like a machine, the economy is open to the environment. Attention therefore shifts from the inner mechanics of the economy to big-picture questions related to things like scale and timing and the flow of energy. Is the economy becoming to big relative to its environment? Is it consuming resources at too fast a rate? Is it adequately disposing of its own waste? Is it endangering the food chain on which it depends for its survival?”

David Orrell (2010), Economyths: How the science of complex systems is transforming economic thought

But remember, it’s all just models within models within models. They are all we have, so if we are to sustain human progress, we need to build better ones: better at explanation, and better at laying out the options for responding to change.

Divisions between the economy, society and the environment are a simplification, and a potentially dangerous one. Ecological economics offers useful ways of thinking about the state and direction of humankind as part of nature, rather than its master. So too does sustainable development. In my view we also need a political economy approach to the environment which studies how the costs and benefits of change lead to potential conflict and particular distributions of power in society. These processes require management by governments working with each other and with civil society. Such issues are surely the most urgent of our times.

The UN’s Sustainable Development Goals: pipedreams or a call to action?

While I applaud the vision outlined by this short video, I am pessimistic about the widespread implementation of these goals. In the absence of crisis (and some might argue that parts of the environment are already in crisis), it is not clear to me whether the minds of politicians and civil society are sufficiently focussed on the tasks ahead. Can we achieve widespread development and continued growth while sustaining the environment that it all depends on?

Action on the goals requires international cooperation. Some of this has already occurred. Having committed to change, nation states need to knuckle down on the policy front, acting with a more distant vision than is usual in politics and confronting vested interests. The largest and most powerful economies must in the end lead the rest, setting an example, creating much of the change that is needed and helping the poorer and weaker countries to develop their own economies in what must be a considerably greener fashion than today’s richest nations managed.

Sustainable development: economy, society, environment

sustainable_development

An illustration of the concept of sustainable development

I have blogged far too little on sustainable development, a pattern which I hope to redress. This blog started out back in 2008, when I was beginning to turn my attention from the more traditional concerns of economics and development, towards incorporating environmental concerns. Not long afterwards I studied a masters-level module on SD with CeDEP, which runs excellent distance learning courses for postgraduates. This opened my eyes to new ways of looking at development and the environment, and how much can be learned from studying the two together.

Concerns about climate change, biodiversity loss, natural resource depletion and the health of the biosphere are ever-present. Sadly, the more immediate focus among politicians across the capitalist world has been restoring growth in the aftermath of the financial crisis. The issue of inequality within many of the richest nations has also been more to the fore, even if little has yet been done about it on the policy side. But in times of recession, the environment tends to take a back seat. Mainstream debates focus on growth at all costs. Continue reading

Free trade does not make poor countries richer

A short interview with Cambridge economist Ha-Joon Chang on how free trade has not helped poor countries develop. He contrasts ‘free trade’ with ‘international trade’, illustrating how countries which have become rich nurtured infant industries and engaged strategically with the rest of the world, rather than simply liberalizing markets. Contrary to popular belief, this includes the US and the UK at certain stages in their history.

Free trade, economic growth and poverty reduction: thoughts on a failed doctrine

“Modern growth is…not tied to free trade. Higher manufacturing growth rates have been typically associated with higher export growth rates (mostly in countries where export and import shares in GDP grew), but there is no statistical relation between either of these growth rates and the degree of trade restrictions. Rather, almost all of the successful export-oriented growth has come with selective trade and industrialization policies. In this regard, stable exchange rates and national price levels seem to be considerably more important than import policy in producing successful export-oriented growth. Conversely, there “are no examples of countries that have achieved strong growth rates of output and exports following wholesale liberalization policies”. Japan, South Korea, and Taiwan are the classic cases of successful development through the application of “highly-selective trade policies.” On the other hand, Chile (1974-1979), Mexico (1985-1988) and Argentina (1991) did follow wholesale liberalization, which not only wiped out weak sectors but also potentially strong ones, often at great social cost over a long period of time. Chile’s economy grew at less than 1% per capita from 1973 to 1989. Mexico suffered similar setbacks and slowdowns. And Argentina, which was lauded as being a good ‘globalizer’ as recently as 2002 ended up mired in deep crisis from which it recovered precisely by not following the rules. What is true is that economic growth is correlated with reductions in poverty in countries where the distribution of income remained stable. Unfortunately, income distribution does not generally remain stable in the developing world so growth does not necessarily produce poverty reduction. On the other hand, poverty reduction is generally good for growth. Thus, the high correlation between growth and poverty reduction does not tell us the causation, and certainly does not guarantee that the former will produce the latter.”

Anwar Shaikh

To sum up, trade liberalization has not helped poor countries industrialize and ‘catch-up’ with rich ones, and the latter have tended to try to ‘kick away the ladder’ that they themselves climbed, once they have become rich. Free trade has allowed them to dominate the global economy and has prevented the poorest nations from following their development path. Of course, state intervention has a chequered history, and there have been successes as well as failures in the developing world. But this does not mean that liberalization is the only option. Rather, industrial and trade policies should take account of what is possible given the politics of the country in question.