Economic ‘distortions’, ideology and the role of government

HudsonTradeDevFDebtMichael Hudson, the heterodox economics Professor whose work I have featured on this blog quite a bit this year, wrote a history and critique of theories of trade and development back in 1992. It was reissued in 2009 and I have just finished reading it.

His central thesis is that, to quote the subtitle, “trade and development concentrate economic power in the hands of dominant nations”. I will not be reviewing the book here, but here is an extract, the gist of which I have agreed with since I was a graduate student (p.169-70):

“Just what is an economic distortion? To define the norm as an unimpeded working of “market forces” means that any subsidy, trade barrier or political decision to influence the economy in any way is a distortion. This semantic twist makes the term “distortion” a synonym for any policy planning! It is an ideological label with a negative value judgment regarding what governments are supposed to do.

…Ideology is much like a factor of production in its effect on economic development, because it is the logic that guides public policy. Governments that refrain from shaping market forces in the national interest let their economies become malformed by nations pursuing a more active economic diplomacy. If the world is steered by what Krueger calls distortions, then for any given country to drop these government policies is to allow its economy and domestic resources to be steered by those nations with more nationalistic and protectionist trade regulations, foreign aid strategy and diplomacy via the IMF and World Bank.

…The real issue is not whether governments should shape market forces – obviously they do, because that is the proper role of governments. The key is what they seek and how best to intervene to shape these forces. Successful governments have promoted self-sufficiency in essentials such as energy, grains and other basic needs, raised living standards, and often supported farm incomes to finance agricultural modernization, as the United States has done since 1933 and the European Community since 1957. Governments may also promote domestic food production to bolster their trade balance and prevent their terms of trade from deteriorating. Yet they are told to avoid all such policies by economists trained in nations whose own governments historically have pursued them.”

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