Industrial policy – blurring the boundaries

AfricanEconDev2The debate over the merits or otherwise of industrial policy, broadly defined, is less polarised in policymaking circles these days. Former World Bank chief economist, Justin Lin, has for some time been arguing for the adoption of his ‘New Structural Economics’ to aid development in the poorest nations, while one of his predecessors, Joseph Stiglitz, is a firm advocate of policies which aim to overcome the numerous market failures which he argues characterise such nations.

Many development economists coming from a more heterodox tradition have long advocated industrial policy as essential, based on the rich historical experience of successful periods of growth in a wide range of countries. Most if not all of today’s richest nations have made use of industrial policies, and still do, if in different forms from the past.

Such economists have followed the arguments of the Cambridge Keynesian Nicholas Kaldor, claiming that there is something ‘unique’ about manufacturing that makes its promotion essential for accelerating economic growth and development. Continue reading

Complexity economics and transcending the micro-macro division

origin-of-wealth“[Traditional] economics is split into two halves: microeconomics and macroeconomics. Microeconomics is the bottom-up view of the economy and starts with individual decision makers and then builds up to markets and economies. Macroeconomics is the top-down view that starts with questions such as why there is unemployment and then drills down to find an answer…Most economists agree that ideally, there should not be a separate microeconomics and macroeconomics. One should be able to start with micro behaviors and work up, or with macro patterns and work down, and be able to use either approach seamlessly within one theory. Although the two halves of the field share many ideas, techniques and the overall traditional equilibrium framework, they unfortunately have yet to achieve that aspiration. Like the two teams that built the transcontinental railroad across the United States in the nineteenth century, microeconomists and macroeconomists have been working toward each other from different sides of the field. Unfortunately, after a century of laying tracks, they have failed to meet in the middle…

The micro-level interactions of agents in a complex adaptive system create macro-level structures and patterns…The ultimate accomplishment of Complexity Economics would be to develop a theory that takes us from the theories of agents, networks, and evolution, all the way up to the macro patterns we see in real-world economies…

Such a theory would view macroeconomic patterns as emergent phenomena, that is, characteristics of the system as a whole that arise endogenously out of interactions of agents and their environment…

Emergence may seem mysterious, but it is actually something that we experience every day. For example, a single water molecule of two hydrogen atoms and one oxygen atom does not feel wet (assuming that you could feel a single molecule). But a few billion water molecules in a cup feel wet. That is because wetness is a collective property of the slippery interactions between water molecules in a particular temperature range. If we lower the temperature of the water, the molecules interact in a different way, forming the crystal structure of ice, losing its emergent characteristic of wetness and taking on the characteristic of hard. Similarly, what we call a symphony is a pattern of sound that emerges out of the playing of individual instruments, and what we call a kidney is a pattern of cells working together to provide a higher-level function that none of the cells could do on its own.

Complexity Economics likewise views economic patterns such as business cycles, growth, and inflation as emergent phenomena arising endogenously out of the interactions in the system.”

Eric D. Beinhocker (2006), The Origin of Wealth – Evolution, Complexity, and the Radical Remaking of Economics, (p.163, 167-8).

Accelerating development – rejecting fatalism and the case for experimentation

AfricanEconDev2Here is another clear and inspiring quote from the newly published book African Economic Development (p.244-5). It rejects what the authors, who combine long experience in research, in the field and in policymaking, call ‘impossibilism’ in the realm of development policy, whether it comes from the mainstream or heterodox camps:

“Some development economists have relatively recently come to acknowledge what before were dismissed as unsound arguments: that the development of capitalism has always owed a particular debt to the role of manufacturing; and that industrialization has always and everywhere depended on state intervention that has ‘got prices wrong’. But the typical refrain of common sense is still: ‘well, it may have worked before – in Taiwan, in Vietnam, or somewhere, but please please don’t try this yourself!’ The argument is that the risks of failure are so high (and the historical record certainly does show many failures), and capacities in Africa so low, that it would be unwise to try to emulate the ‘lessons’ of economic history. For example, Paul Krugman came to recognize that theoretically, there was a very good case for ignoring the principle of comparative advantage, but, he argued, officials should actually stick to the principle and to producing unsophisticated goods because otherwise politics will get in the way and ruin things. Rather, prudent African policy officials should bide their time, getting the elements of good governance aligned, gradually building capacities, and confining themselves to the modest work of the facilitating state. African states, this plausible version of impossibilist common sense has it, should intervene up to and not beyond their current level of capacity.

Meanwhile, the other strand of impossibilist common sense rolls out a series of warnings suggesting that almost all policies or accumulation strategies simply have no chance of succeeding because the dominant material and ideological forces of global capitalism are stacked against low-income peripheral countries. Global value chains are controlled tightly by powerful systems integrators that brook no significant technological upgrading by developing country producers, who remain constrained to producing relatively simple goods on a lowly rung of the ladder. The world market prices for all the goods produced in poor countries are so volatile that the imports required for dynamic growth and political stability cannot reliably be acquired. The World Trade Organization (WTO) imposes rules so binding on developing countries that they are now unable to avail themselves of the kinds of policies in the trade and financial sectors used successfully by earlier ‘catching-up’ countries.

We acknowledge that it is easier to fail than to succeed with development policy – often more for domestic political reasons than reasons of measurable technocratic ‘capacity’. For example, in Ghana and Kenya political pressures were able – at some times more than others – to overwhelm sophisticated economic technocrats. We also acknowledge that the external financial and economic environment confronting developing country economies and governments is prone to wild fluctuations, often hostile, and poses risks to improving welfare. But there is still significant, proven scope for governments to intervene in support of an accelerated dynamic of accumulation, structural change, and not insignificant welfare improvement. And there is scope for governments to intervene beyond their current capacity levels, to experiment.”

How elites sold out American workers and how to fix it

A short interview with Matthew Klein, co-author with Michael Pettis of Trade Wars are Class Wars, who gives a nice summary of the central thesis of their new book, which I have already introduced here. Over the next few weeks I will be publishing a number of longer posts inspired by and drawing on some of the ideas contained in the book, and trying to go a little deeper into the relevant economics and political economy.

Wages and productivity — Real-World Economics Review Blog

from David Ruccio and issue 9 of RWER Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity. Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili: Firms cannot afford a misalignment of their workers’ pay and productivity increases – the employees will move to other […]

via Wages and productivity — Real-World Economics Review Blog

The economy is not just like a household

A standout quote taken from my current reading which debunks an enduring economic myth. While this sort of thing has been said enough times, it is worth repeating. The final paragraph also provides a brief and helpful justification for the notion of ‘structuralism’ in economics: macro forces can shape micro behaviour as much as the reverse.

Margaret_Thatcher_(1983)“Many politicians have made use of the idea that ‘an economy is just like a household’ in order to justify the economic policies they favour. Electorates are routinely told that just as households need to be careful not to spend beyond their means, so countries need to adopt the same attitude. This means the national debt should be reduced, and public and private borrowing (and spending) reined in. This was at the heart of Margaret Thatcher’s rhetoric about fiscal policy in the UK in the 1980s. Meanwhile, in the wake of the Global Financial Crash of 2008, German Chancellor Angela Merkel used the common-sense maxim that ‘One should simply have asked the Swabian housewife.’ This was because every housewife ‘knows that we cannot live beyond our means’.

This is perhaps the most striking case of a ‘common-sense’ idea in economics: apparently obvious and sensible, easy to understand, powerfully influencing policy debates, while at the same time deeply ideological (in Marx’s sense of ideology as an inversion of reality). An economy is not like a household. It is not even like a business firm. There are two main ways in which this Swabian housewife logic fails. First, compared to private households, governments have many more and effective tools at their disposal to manage debt. Furthermore, public sector debt can be key to sustaining and expanding economic activity (the returns to which can be used to make repayments). Second, the Swabian housewife logic runs into a fallacy of composition. As Keynes pointed out, calling it the ‘paradox of thrift’, an individual may increase saving by withholding spending, but if all individuals in an economy raise their saving simultaneously then there will be a decline in output and income, meaning aggregate saving will be unchanged (at best).

Methodologically, this logic is linked to the idea that macroeconomics is simply the aggregation of individual micro-economic choices. Together, these form the ‘micro-foundations’ of macroeconomics, with causation running up from these micro-foundations to the overall macro-economy. What is missing from this vision is the possibility of ‘downward causation’: the idea that the structural features of a society, including macroeconomic change, can exert a huge influence on individual behaviour.”

Christopher Cramer, John Sender and Arkebe Oqubay, African Economic Development – evidence, theory, policy (p.66).

Capitalism, unbalanced development and Albert Hirschman

AfricanEconDev2“Balance matters greatly to development economists from one end of the (ideological, methodological) scale to the other. For some, economies develop through the continuous balancing out of market exchanges, with a high-wire act of constant small adjustments facilitated by flexible prices, nudging the process onward one step at a time. For others, markets left to themselves may hang in a hopeless low-income equilibrium ‘trap’, snared by a series of ‘gaps’ (the savings gap, the skills gap, the technology gap, the capital gap). These different sets of ideas, converging on the importance of balance, lie behind a great deal of policy advice meted out to officials in African (and other) governments.

…[T]hese visions of balance are blind to the history and dynamics of capitalism. They project fantasies of orderly and largely predictable processes onto fundamentally uncertain, contradictory, and frequently unstable realities. We contrast these illusions with a view of economic development that positively embraces imbalance, contingency, productive mistakes, and unexpected chain reactions…

In doing so, we resist the danger of replacing one fantasy with another by emphasizing the difficulties that come with fundamental uncertainty and detailing some grandiose development calamities. However, we also remind devotees of the steady and balanced that there have often been overlooked developmental benefits generated by supposed ‘development disasters’…”

“Balance, as an organizing principle, runs through much thinking on economic development, both from orthodox and heterodox viewpoints. Balance is fetishized above growth and development in IMF advice; is the defining feature of neoclassical economic theory and modelling; and is the anxious concern of UNCTAD advice to governments pushing for mutually supportive changes across a huge range of sectoral and institutional activities…

[P]olicy officials should reject this obsession with balance – it creates unrealistic expectations, is analytically misleading, and can throw development strategies off course. By contrast, we have argued for greater commitment among policy officials to a strategy of unbalanced growth, using this as a jumping-off point to explore the relevance of Hirschman’s economics. Hirschman is often regarded as a maverick, not to be taken too seriously by the new generation of economists, trained as they are to jump through the hoops of econometric and mathematical techniques. While mainstream economics has dallied with some of his ideas (most notably those in his book Exit, Voice and Loyalty), it has largely ignored or mangled his insights. On the other side of the coin, his ideas do not fit easily within debates about grand ‘-isms’ (neoliberalism, imperialism) and so have never found a secure place in the work of heterodox economists. We argue that many of Hirschman’s ideas, as well as his methodological approach, should be central to development economics. Hirschman’s methods – immersing himself in the particular and drawing general principles from close empirical observation – draw him close to Kalecki, who spent many years collecting detailed information on factories and businesses, and to Amsden. His understanding of uncertainty puts him firmly in the Keynesian tradition, while his ideas about linkages connect with the economics of Adam Smith, Allyn Young, Kaldor, and many others.”

Christopher Cramer, John Sender and Arkebe Oqubay (2020), African Economic Development – evidence, theory, policy (p.132, 157).

Approaching inequality: conservatives, liberals, radicals

StilwellPEofIneqFor anyone looking for a clear, critical and comprehensive guide to inequality in today’s world, I can recommend Frank Stilwell’s The Political Economy of Inequality. It is not technical, so remains suitable for all social scientists, not just economists, as well as the intelligent layperson. It manages to illuminate the key theoretical and practical issues regarding what has become of vital concern to many.

I will not be reviewing or summarising the book here, but I would like to discuss one aspect of it which I found inspiring and enlightening: as the title suggests, this is a book which adopts a political economy approach which, as regular readers of this blog will appreciate, I find offers a richer understanding of particular aspects of the economy and society than pure economics. Continue reading