To imitate or innovate? Firm behaviour and economic performance

innovative-manufacturing-headerSuccessful developing countries that have made the transition to advanced country status are relatively few in number. Those that have ‘made it’ in the wake of already rich countries have tended to adopt polices which encourage firms and sectors to ‘catch up’ over a sustained period.

When economies are far from the technological frontier they can achieve more when firms learn to use and adapt already existing technology rather than innovating themselves. Historically this has taken place in countries from the US and Germany to South Korea and Taiwan. One would expect firms to imitate technology more at an earlier stage of development, assuming that there are economies, sectors and firms ahead of them and closer to or at the frontier, while as they approach the frontier, innovation should become more important.

A recent article in the journal Industrial and Corporate Change looks into this process at the firm level. Ching T. Liao explores the differences between those firms that imitate others and those that innovate, and the effect this has on productivity. Continue reading

Ha-Joon Chang on the different ways to ‘do’ economics

Chang EconomicsUsersGuideIt is important to recognize that there are distinctive ways of conceptualizing and explaining the economy, or ‘doing’ economics, if you like. And none of these schools can claim superiority over others and still less a monopoly over truth.

One reason is the nature of theory itself. All theories, including natural sciences like physics, necessarily involve abstraction and thus cannot capture every aspect of the complexity of the real world. This means that no theory is good at explaining everything. Each theory possesses particular strengths and weaknesses, depending on what it highlights and ignores, how it conceptualizes things and how it analyses relationships between them. There is no such thing as one theory that can explain everything better than others – or ‘the one ring to rule them all’, if you are a fan of The Lord of the Rings.

Added to this is the fact that, unlike things that are studied by natural scientists, human beings have their own free will and imagination. They do not simply respond to external conditions. They try – and often succeed – to change those very conditions by imagining a utopia, persuading others and organizing society differently; as Karl Marx once eloquently put it, ‘[m]en make their own history’. Any subject studying human beings, including economics, has to be humble about its predictive power.

Moreover, unlike the natural sciences, economics involves value judgments, even though many Neoclassical economists would tell you that what they do is value-free science…behind technical concepts and dry numbers lie all sorts of value judgments: what is the good life; how minority views should be treated; how social improvements should be defined; and what are the morally acceptable ways of achieving the ‘greater good’, however it is defined. Even if one theory is more ‘correct’ from some political or ethical points of view, it may not be so from another.

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin books, p.111-112.

Pandemic of inequality

The Levy Institute has just published a short paper on the inequalities associated with the Covid-19 pandemic in the US. It can be found here. A summary of the paper is below.

The costs of the COVID-19 pandemic—in terms of both the health risks and economic burdens—will be borne disproportionately by the most vulnerable segments of US society. In this public policy brief, Luiza Nassif-Pires, Laura de Lima Xavier, Thomas Masterson, Michalis Nikiforos, and Fernando Rios-Avila demonstrate that the COVID-19 crisis is likely to widen already-worrisome levels of income, racial, and gender inequality in the United States. Minority and low-income populations are more likely to develop severe infections that can lead to hospitalization and death due to COVID-19; they are also more likely to experience job losses and declines in their well-being.

The authors argue that our policy response to the COVID-19 crisis must target these unequally shared burdens—and that a failure to mitigate the regressive impact of the crisis will not only be unjust, it will prolong the pandemic and undermine any ensuing economic recovery efforts. As the authors note, we are in danger of falling victim to a vicious cycle: the pandemic and economic lockdown will worsen inequality; and these inequalities exacerbate the spread of the virus, not to mention further weaken the structure of the US economy.

The authors focus on the greater likelihood of ill health among the poorest in the population, and how they are more likely to suffer serious complications should they contract Covid-19.

They also repeat the case often made in papers from the Levy Institute, that high levels of inequality have weakened aggregate demand and growth, not least in the US. This has been associated with high levels of household and corporate debt, and played a major role in the historically weak recovery from the 2008 crisis. If steps are not made to reduce inequality, not least in access to healthcare, the US economy is likely to continue to perform poorly over the long term. This will be in addition to the shocks resulting from the response to the pandemic itself.

Industrial policy and development – some neglected themes

Production_LineThere has been a resurgence of interest in the theory and practice of industrial policy in recent years. To many, the financial crisis of 2008 exposed a general failure of the ideology, if not the practice, of a minimal state. Although the interventions that resulted were necessarily imperfect, they reawakened among more mainstream economists and other social scientists ideas that had for some time been confined to the heterodox margins of academia, at least in economics.

Meanwhile, the experiences of economies in East Asia, such as Japan, South Korea, Taiwan and Singapore, which all experienced significant periods of rapid catch-up growth to advanced country status, revealed that, if one cared to look closely enough, industrial policy had never really gone away.

Moving to the present day, policy-makers all over the world have engaged in unprecedented intervention to try and protect parts of the economy during the Covid-19 pandemic and subsequent widespread lockdown. While these are more general than traditional industrial policies, those economists more sympathetic to state intervention are making the case that economies should learn some lessons from the current crisis, such as that there is very often a need for the state to work with the private sector to tackle public ‘missions’ at the national and international levels. Continue reading

The Promise – and Pitfalls – of State-led Development in Resource-rich Countries: Resource Nationalism in Latin America and Beyond — Developing Economics

The eclipse of neoliberalism in 2000s coincided with the so-called commodity ‘super cycle’ that lasted between 2002 and 2012. In search of a new model, resource-rich states began to articulate resource nationalism as a development strategy. While ownership and control of minerals and hydrocarbons are intricately tied to claims of state sovereignty and exercise of […]

via The Promise – and Pitfalls – of State-led Development in Resource-rich Countries: Resource Nationalism in Latin America and Beyond — Developing Economics

Michael Hudson on trickle-down economics

hudson-200x300Another excerpt in this occasional series from Michael Hudson’s J is for Junk Economics, his often enlightening and generally iconoclastic dictionary of the dismal science (p.231-2).

The pretense that reversing progressive taxation and giving more income to the wealthiest One Percent will maximize economic growth and prosperity for the 99 Percent. The actual effect is to help the rich get richer. The rentier class has manipulated the tax code so that, as Leona Helmsley put it: “Only the little people pay taxes.”

A supporting factoid is that the One Percent spends its income buying products produced by labor. That was Thomas Malthus’s argument for why British landlords should receive agricultural tariff protection (the Corn Laws). His argument endeared him to John Maynard Keynes, but in practice the wealthy bought largely foreign luxuries and financial securities or more property. Today’s One Percent lend out their income and wealth to further indebt the economy to themselves.

Another false assumption is that financiers and property owners (the FIRE [Finance, Insurance and Real Estate] sector) will save and invest their revenue to expand the means of production and employ more labor. In practice, the wealthy wield creditor power to force governments to privatize the public domain and buy companies already in place. When the fictions of “trickle-down economics” lead to financial crises, the wealthy demand that governments rescue banks, give bailouts to uninsured depositors and bondholders, and shift taxes to further favor the FIRE sector at the expense of labor. The result of trickle-down policy is thus economic polarization, not prosperity.

One of the earliest and most blatant expressions of trickle-down demagogy is found in the pleading by Isocrates in his Areopagiticus (VII, 31-34, written in 355 BC). Like most Sophist rhetoric teachers, he charged fees so high that only the wealthy could afford to study with him, so it hardly is surprising that his written speeches supported the oligarchy. “The less well-to-do among the citizens were so far from envying those of greater means that they…considered that the prosperity of the rich was a guarantee of their own well-being.” This may be the earliest written example of the Stockholm Syndrome.

Isocrates praised harsh judges for being “strictly faithful to the laws”. This meant creditor-oriented laws. He noted that “judges were not in the habit of indulging their sense of equity”, that is, what would be fair in the traditional morality of mutual aid. His over-the-top rationale for why Athenian judges “were more severe on defaulters than they were on the injured themselves” (meaning the creditors “injured” by not being paid in full) was that “they believed that those who break down confidence in contracts” (as if being unable to pay was a deliberate attack on pro-creditor laws) “do a greater injury to the poor than to the rich; for if the rich were to stop lending, they [the rich] would be deprived of only a slight revenue, whereas if the poor should lack the help of their supporters they would be reduced to desperate straits.” It is as if usury doesn’t deprive the poor of their land and liberty, which Socrates did not hesitate to explain as the “sting” of usury that stripped debtors of their land and hence degraded their status as citizens.”

Neoclassical economics and the severity of the coronavirus crisis. — LARS P. SYLL

This training in economics makes politicians and bureaucrats incapable of understanding a crisis like this. They are, however, very susceptible to the advice of economists. They therefore enacted policies that reduced our capacity to cope with a pandemic, crafted systems of production and distribution that drastically amplified its damaging impact when it did arrive, and […]

via Neoclassical economics and the severity of the coronavirus crisis. — LARS P. SYLL

Deregulation can damage your wealth – supply-side labour market reforms and productivity

Deregulated and flexible labour markets promote economic efficiency. That has been something of a conventional wisdom in mainstream economics, and an article of faith among proponents of the so-called free market since the 1970s. The examples of the US and the UK, and to a lesser and more variable extent Western Europe, have apparently proven that labour market regulations and the power and influence of trade unions should be curtailed as far as possible, the results being greater efficiency in the form of faster growth in productivity and lower unemployment.

An interesting corrective to these tenets of neoclassical economics, particularly its free market variant, can be found in the March issue of the heterodox and usually fairly leftist Cambridge Journal of Economics. A paper by Alfred Kleinknecht provides a commentary on the links between supply-side labour market reforms and lower productivity growth since 2005, in the US, Japan and Western Europe. Continue reading

Ha-Joon Chang: why history matters

ha-joon-chang“History affects the present – not simply because it is what came before the present but also because it (or, rather, what people think they know about it) informs people’s decisions. A lot of policy recommendations are backed up by historical examples because nothing is as effective as spectacular real-life cases – successful or otherwise – in persuading people. For example, those who promote free trade always point out that Britain and then the US became the world’s economic superpowers through free trade. If they realized that their version of history is incorrect, they might not have such conviction in their policy recommendations. They would also find it harder to persuade others.

History also forces us to question some assumptions that are taken for granted. Once you know that lots of things that cannot be bought and sold today – human beings (slaves), child labour, government offices – used to be perfectly marketable, you will stop thinking that the boundary of the ‘free market’ is drawn by some timeless law of science and begin to see that it can be redrawn. When you learn that the advanced capitalist economies grew the fastest in history between the 1950s and the 1970s when there were a lot of regulations and high taxes, you will immediately become sceptical of the view that promoting growth requires cuts in taxes and red tape.

History is useful in highlighting the limits of economic theory. Life is often stranger than fiction, and history provides many successful economic experiences (at all levels – nations, companies, individuals) that cannot be tidily explained by any single economic theory. For example, if you only read things like The Economist or the Wall Street Journal, you would only hear about Singapore’s free trade policy and its welcoming attitudes towards foreign investment. This may make you conclude that Singapore’s economic success proves that free trade and the free market are the best for economic development – until you also learn that almost all the land in Singapore is owned by the government, 85 per cent of housing is supplied by the government-owned housing agency (the Housing Development Board) and 22 per cent of national output is produced by state-owned enterprises (the international average is about 10 per cent). There is no single type of economic theory – Neoclassical, Marxist, Keynesian, you name it – that can explain the success of this combination of free market and socialism. Examples like this should make you both more sceptical about the power of economic theory and more cautious in drawing policy conclusions from it.

Last but not least, we need to look at history because we have the moral duty to avoid ‘live experiments’ with people as much as possible. From the central planning in the former socialist bloc (and their ‘Big Bang’ transition back to capitalism), through to the disasters of ‘austerity’ policies in most European countries following the Great Depression, down to the failures of ‘trickle-down economics’ in the US and the UK during the 1980s and 1990s, history is littered with radical policy experiments that have destroyed the lives of millions, or even tens of millions, of people. Studying history won’t allow us to completely avoid mistakes in the present, but we should do our best to extract lessons from history before we formulate a policy that will affect lives.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin books, p.48-50.

Minskyan processes and the coronavirus shock

The Levy Institute has a brief paper here by Michalis Nikiforos on how the shock of the coronavirus pandemic has hit already fragile economies, making the likely eventual economic outcomes particularly damaging. His main focus is the US, but the analysis can be applied to other advanced economies.

The abstract of the paper is below:

The spread of the new coronavirus (COVID-19) is a major shock for the US and global economies. Research Scholar Michalis Nikiforos explains that we cannot fully understand the economic implications of the pandemic without reference to two Minskyan processes at play in the US economy: the growing divergence of stock market prices from output prices, and the increasing fragility in corporate balance sheets.

The pandemic did not arrive in the context of an otherwise healthy US economy—the demand and supply dimensions of the shock have aggravated an inevitable adjustment process. Using a Minskyan framework, we can understand how the current economic weakness can be perpetuated through feedback effects between flows of demand and supply and their balance sheet impacts.

In the paper’s conclusion, he outlines the necessary policy response including, importantly, that:

“unlike the response to the 2007-9 crisis, the assistance provided to large corporations come with strings attached – so that they do not return to the same old (destabilizing) practices once the emergency has passed.”

This was written before the $2 trillion US support package passed through Congress. It seems as if the author’s hope has not been fulfilled.