Questions of fairness in political economy – what should we do?

This post is a thought experiment, for myself as much as for my readers. It is laid out as a series of questions on some of the most important topics in political economy and economics. At its heart, it tries to stimulate thinking about the highly loaded and subjective notion of fairness, and ultimately asks: what is fair, and what is unfair? Careful readers will note that the way many of the questions are framed presupposes certain value judgements. The order in which the topics are presented is not intended to imply that some are more vital than others, but maybe they reveal something about the author himself.

Taxation and public spending

Is it helpful to see taxation as theft or as the price we pay for organising a civilised society?

Which is fairer for the poorer members of society, and which for the wealthy: taxation that is progressive or regressive? Which of these choices creates greater incentives for productive activity?

Do high rates of tax penalise economic success?

Is it fair for wealthier individuals to pay a larger proportion of their income in tax than poorer ones?

Should we tax income more from wages, or from profits?

Should we rely more on taxing income or consumption?

Should we tax wealth at a higher rate than we tax income?

Should we emphasise the taxation of wealth in the form of housing, land or financial assets?

If the distribution of income and wealth is perceived as unfair, and even inefficient, should the government rely more on redistribution via taxation and public spending, or predistribution via changes to the regulation of the economy, so that income and wealth prior to taxation and public spending are more equally distributed?

Is it fair that those with the highest incomes, who are required to pay the greatest absolute amount of tax, are more able to employ those who can help them evade or avoid it? Continue reading

From dirty to green: alternative pathways of industrial development

The history of economic development shows that long term increases in living standards and poverty reduction require sustained rises in productivity. In turn, this requires investment in improved and evolving technologies. What is more controversial, even among development economists, is the claim that some sectors are more important than others in this process, which argues for industrial policies that target sectors with a greater potential for productivity increases. Manufacturing, as well as some service sectors, seem to have this potential. Historically, industrialisation has been associated with this process.

The first industrial revolution in the UK took place in the 18th century and was associated with the spread of steam power, the use of machinery and the factory system among other advances. It subsequently spread to continental Europe, the United States and Japan in the 19th century. These developments transformed economies and societies and were associated with rapid increases in population.

Technological progress can take place gradually, with new knowledge and discoveries building on old ones. It can also give rise to more dramatic revolutions across many sectors. Many of the technological advances and growing output associated with the early industrialisers and their followers have proven to be ‘dirty’ or polluting and damaging to the environment. In today’s global economy, we are more aware than ever of the need for a transition to a greener, less damaging and more sustainable path of development. Yet there are many poorer nations which, if they are to significantly ‘catch up’ economically with their richer neighbours, will need to develop a larger industrial base in order to achieve rapid increases in productivity and living standards.

In order to do so, it is simply not sustainable for such nations to copy the ‘dirty’ path of the early industrialisers. A number of successful later developers, such as South Korea and Taiwan, employed interventionist industrial policies which dramatically accelerated growth to rates far greater than those of the early industrialisers, and enabled them to become rich within a matter of decades. The nature of these transformations was the product of a particular historical context and are not possible for many poor and emerging nations. Having said that, late developers, by definition, still have the potential to copy already existing technologies from richer nations rather than having to develop them from scratch, so fairly rapid growth remains a possibility for them. But with today’s concerns about the environmental consequences of economic growth, from pollution and climate change to losses in biodiversity, current late developers need to forge a ‘cleaner’ and greener development path. At the same time, they must be given space and even helped to adopt policies which reduce poverty and increase living standards, and this means promoting sectors with the potential for rapid increases in productivity.

There is therefore a need for the evolution and adoption of green technologies to help spur development paths in all nations, including the poorest. The latter need to ‘skip’ using dirtier and less sustainable technologies, since their global impact is too damaging.

The leaders and citizens of many poorer and emerging economies have argued that they should be allowed to follow the industrial development paths of today’s rich countries. The latter are seen as being hypocritical in denying poorer nations the (dirty) path that they themselves followed in their pathways to wealth and prosperity. This is a fair point. But globally speaking, we cannot afford for them to do so. What is needed instead, as already mentioned, is a green and sustainable development path. The technologies to support this process are already with us, and are continually evolving and improving. Today’s rich countries did not have the green option during their earlier industrial development, while today’s poor countries do. The right moral, economic and most sustainable option is for today’s richer countries to enable the transfer of cleaner and greener technologies to their poorer neighbours, and to encourage their rapid adoption and diffusion.

For today’s wealthiest nations, it seems that they had no alternative pathway to industrial development other than a dirty and polluting one, and today’s green technologies have been built on a dirty past. But today’s poorer nations do have a different option. In order to promote their sustainable development, make rapid inroads into poverty and significantly raise living standards, they need help from those who are most able to give it.