Capitalism, socialism and innovation – the role of soft budget constraints

DSC00236Since I was a student, industrial policy and its key historical role in promoting prosperity under capitalism have been among my main interests in economics. An article by Max Jerneck in the December issue of the journal Industrial and Corporate Change explores the role of so-called soft and hard budget constraints (SBCs and HBCs), how they differ under capitalism and socialism, how they promote or hinder innovation, and their role in successful industrial policy.

Jerneck refers to the work of Janos Kornai, who developed the ideas of SBCs and HBCs in relation to different economic systems and policies. The budget constraint is part of the external environment faced by firms. Under SBCs, which for Kornai are typical under socialism, the state will support producing firms however they perform, which hinders innovation, as firms lack the incentive to improve products, processes and efficiency in response to market pressures. Organisations “can avoid making internal adjustments to changing conditions” which is “an expression of market power”. External financial support is sustained, leading to general expectations among all firms that this is the norm. This goes beyond the occasional bailouts and rescues that occur under capitalism. Under socialism, “the survival and growth of an organisation is not decided by market forces but by bureaucratic coordination and bargaining”. Continue reading

Biden, tax and infrastructure – a costly job destroyer?

JoeBidenAccording to the BBC, a coalition of business groups have teamed up to oppose the Biden administration’s proposed increases in corporation tax, which are intended to help fund planned new infrastructure spending. They classify themselves as ‘job creators’ whose positive impact on the economy will be stifled by the new higher rates of tax, which fall on company profits.

Many economists think that US infrastructure is in a poor state, after decades of neglect of public investment, and needs a major upgrade. Carefully targeted investment could therefore pay off handsomely over many years. Infrastructure might be referred to as the lifeblood of the economy. Without underlying support from sufficient transport, energy and communications networks, businesses and households would have a pretty difficult time functioning. The private sector needs modern, effective infrastructure to create wealth and jobs. And in order for the economy to evolve and continue to generate sustainable prosperity which is widely shared, that infrastructure needs similarly to evolve. Think of new and cleaner ways of generating and distributing electricity, travelling to work, and faster internet speeds. Continue reading

Ending Covid with enlightened self-interest

The battle against Covid is coined by Martin Wolf in today’s Financial Times as a ‘gobal war’. He argues that the pandemic can be defeated within a year with the right approach to policy across the world. If this can be done, it will be optimism fulfilled. But it will require significant global cooperation, and support for the poorest and most vulnerable countries.

The advent of the pandemic shows that global health is very much a public good, requiring public action to manage effectively. Globalisation has suffered over the last year or so, with disruption to global supply chains and efforts to more closely manage national borders in attempts to prevent the importing of cases of the virus. Lockdowns have created major economic damage, both both nationally and, inevitably, internationally. No prosperous society or economy can remain isolated from the rest of the world, and while some of the richest can withdraw into greater self-reliance for a time, there remains a need to sustain international integration. Capitalist prosperity relies in part on the growth of global markets. Other pressing global crises remain, particularly environmental concerns such as climate change, pollution and the loss of biodiversity. Covid is diverting the energies of policymakers at a crucial time. Continue reading

Money and Power: the keys to development – great men vs political economy

MoneyandPowerThis is the second in a series inspired by Vince Cable’s new book Money and Power. It follows last week’s discussion of history as a great deal more than the story of “great men”. Since the book takes great men (and women) and their making of economic history as its focus, I will once again take this as my point of departure, but this time I will explore some of the deeper and more complex reasons for developmental success, or otherwise.

As already pointed out, (economic) history is much more than the story of great men and their actions when in power. One of Cable’s central themes in the book is the economic ideas which his politicians drew on to inform their policies: they were all, he argues in the spirit of John Maynard Keynes, “slaves of defunct economists”. Ideas are undoubtedly important, but the focus on a few powerful individuals remains a somewhat popular analysis. It is perhaps apposite in an age of celebrity and social media influencers, but I would point out that more can be gleaned from a broader social science, and in particular from political economy. Continue reading

Michael Hudson on social progress and mythical stages of development

hudson-200x300Some more extracts in this occasional series from Michael Hudson’s J is for Junk Economics. Here he aims to take apart modern notions of progress and of financialized capitalism as somehow the most efficient form of socioeconomic system.

Progress: Today’s word “progress” has degenerated from its 19th- and 20th-century meaning of democratic reform. Every process of social decay euphemizes itself as progress, as if moving forward in time is invariably upward, not retrogressive. So there is “real” progress and false progress. The neoliberal ideology favoring rentier income over wages, deregulation, financialization and privatization over public investment is antithetical to classical political economy’s definition of social progress as replacing feudal privilege with progressive income tax and regulatory policy promoting greater equality of opportunity and income, mainly by taxing economic rent and windfall to property and financial gains.

Theories of progress treat the debt buildup as cumulative and irreversible, in contrast to ancient society’s idea of circular time with periodic financial clean slates to restore economic balance from outside “the market”. Without debt cancellations, economies evolve into oligarchies, which depict their takeovers as “progress” and thus as morally justified on the ground of its seeming inevitability.” (p.184)

Stages of Development: The idea that history has been moving inexorably toward the present distribution of wealth and income, assuming (by tautology) that today’s status quo must be the most efficient and hence “fittest”. The hypothesized stages of development usually are arrayed in sets of three, eg., from agriculture via industrial capitalism to “postindustrial” finance capitalism, culminating in today’s dominance by financial planners – as if this is the end of history, not a retrogression to feudalism.

Most concepts of “stages of development” get the actual sequence backward. Headed by the Austrian School, 19th-century monetary theorists speculated that economies evolved from barter via a money economy to a credit system. This misses the fact that the Neolithic and Bronze Age Mesopotamian economies were credit economies. As planting and harvesting developed in the Neolithic, credit became necessary to bridge the time gap for expenses incurred during the crop year (such as ale to drink and agricultural and public services, typically to be paid for at harvest time).

All three “stages” are usually found simultaneously. Economic historian Karl Polanyi’s (1886-1964) “three stages” of market development, for instance, distinguish reciprocity (gift exchange) and administered prices from market exchange at flexible prices. Even in today’s economies, individuals still reciprocate meals, gifts and other social obligations.

Money developed gradually as a means of denominating and settling crop debts, most of which were owed to the temples and palaces. Rulers set prices for grain, silver, and other key goods and services to enable debts to be paid to these large institutions in these commodities (“in kind”).

The volume of debt grew so large under Rome’s oligarchy that the fiscal and monetary system broke down for the vast majority of the population. Except for the narrow warlord-landlord layer, economic units were obliged to become locally self-sufficient. The Western Roman Empire deteriorated as silver and gold were drained to the East. Debt deflation, austerity and collapse are thus the final stage of debt-ridden economies. This makes the “credit” or “financial” stage a transition to economic collapse and reversion to barter, unless political decisions from “outside” or “above” the market check rentier power to create a more stable and equitable social arrangement. That requires debt cancellations to bring an economy’s debt overhead back within the ability to be paid.

Nearly all modern “stages of growth” theories deny the basic principle that defines “the final stage” of financialization: debts that cannot be paid, won’t be. Either a clean slate or a lapse into debt serfdom is needed to end the preceding cycle and inaugurate a new takeoff or recovery.” (p.213-4)

Economic recovery from Covid and the threat of inflation

The fear of rising inflation in countries emerging from the Covid-induced recession has been all over the financial and business press in recent days. This follows higher than expected price increases, particularly in the US. Some economists and commentators have argued that the increase is temporary, down to factors on the supply-side such as bottlenecks, in response to the ‘bounce back’ in consumer spending as households begin to spend accumulated savings, and significant fiscal stimulus. Plenty of demand and problems with supply offer a simple explanation of price rises. When demand exceeds supply, prices rise, and this can also be the case at the level of the economy as a whole.

When I was studying economics at school, textbooks proffered a variety of explanations of inflation, or sustained increases in the price level. Continue reading

John Weeks on the econfakers, wages and unemployment

EconOfthe1%Another quote from the late John Weeks to focus one’s thinking. In the book which contains this passage, he refers to the intellectual mythmakers in economics as the “econfakers”. Here he argues that there is no simple one-way relationship between wages (and working conditions) and employment or unemployment, as is often claimed (and taught):

“What seemed so simple and obvious – lower wages, cheaper labor, more employment – proves impossible to establish as a general rule. For an individual company reducing wages may result in more employment. That is not the issue. At the level of the company, lower wages may allow for lower prices, and the lower-wage company takes business away from its rivals. The “higher wages cause unemployment” accusation is quite different. It alleges a fakeconomics faux law that a general increase in wages for the economy as a whole will reduce employment (and vice versa). This allegation cannot be established in theory, nor is it supported by empirical evidence. It is an ideological construction intended to justify lower wages and higher profits, and to blame unemployment on workers themselves.

In practice the econfakers and those they have indoctrinated trumpet this argument as a law of nature, and use it against all attempts to improve the conditions and hours of work. For example, laws that regulate working hours and require additional pay for overtime allegedly reduce employment because they increase labor costs. The same ideological illogic applies to workplace protection, health and safety legislation, and protection of vulnerable workers. They all raise the cost of employing people. Therefore, they must contribute to unemployment. All attempts to improve the conditions of labor, either through the collective action of workers or legislation, are self-defeating. These arguments are wrong, technically, empirically and morally. In civilized societies all people are paid decently and work in healthy conditions to the extent that the level of economic development allows. This is a simple and straightforward hypothesis that requires no fanciful assumptions to establish.

The econfakers look back to Adam Smith as their intellectual ancestor and their inspiration for the free market. However, the great contributor to the Scottish Enlightenment had no truck with “labor markets”:

What are the common wages of labour depends everywhere upon the contract usually made between [workers and employers]… It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily, and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen… In all such disputes the masters can hold out much longer.

Anyone familiar with the union-busting campaigns of the closing decades of the twentieth century in the US and Europe would recognize the similarities with the closing decades of the eighteenth century.”

John F. Weeks (2014), Economics of the 1%, Anthem Press, p.37-8.

Debunking the ‘Free Market Miracle’: How industrial policy enabled Chile’s export diversification — Developing Economics blog

Assessing industrial policies in Chile remains a rather contentious and divisive topic. Chile has long been held up as an almost‐textbook example of the success of ‘letting the market work’, as there was a broad agreement among mainstream economists that Chile has largely succeeded in promoting strong and stable growth because it has embraced free […]

Debunking the ‘Free Market Miracle’: How industrial policy enabled Chile’s export diversification — Developing Economics

Money and Power: the making of history, from “great men” to dialectics

MoneyandPowerFollowing Monday’s post introducing a series inspired by Vince Cable’s new book Money and Power: The World Leaders who Changed Economics, this is the first of several posts in that series. To reiterate, I will not fully review the book, as I am sure that is being done sufficiently elsewhere. Rather I will try to look in depth at some of the key issues tackled in the book, by taking them as a point of departure. Broadly speaking, they are to some degree inspired by the book, but they will also critique it.

In the book’s introduction, Cable discusses his approach:

“I try to pursue the links between economics and politics through individual politicians. Carlyle once observed that ‘history is the study of great men’ and I adopt that approach. It can reasonably be argued, however, that the study of ‘great men’ (and women) is to trivialize economic history: to reduce it to the world of ‘good’ and ‘bad’ kings in the manner of 1066 and All That. It ignores the power of technological change, demographics and migration, nutrition and medicine, changing social mores and popular movements…much of the critical commentary on the market-based transformations of the last few decades tends to dismiss individual leaders as mere flotsam on a tide of ‘neo-liberalism’.

Yet it is possible to overdo the impersonal. When future generations look back on the twentieth century with the same detachment as we currently see the Middle Ages, it will very likely be a tale of three destructive monsters (Stalin, Hitler and Mao) as well as the less memorable and more anonymous people who helped to create unparalleled prosperity and technological advance in Europe and North America and who lifted poor countries out of centuries of destitution…

Through my examples, I hope to better understand the links between good (and bad) politics and economics…sometimes, politicians emerge who make a big difference. That is my focus here.”

Continue reading

The misleading ideology of “burdensome government”

EconOfthe1%“At its core, the ideology of “burdensome government” comes from a fundamental and intentional misrepresentation of human existence. It forms a key part of the literally egocentric worldview that people exist as individuals, and individuals create institutions which they can join or leave as they wish. The cult of the individual produces this illusion. In reality, “government” is nothing more than a word for the mechanism by which groups of human beings administer their existence. In the absence of purposeful administration, existence degenerates into chaotic violence.

We find as a close familiar of this illusion the belief that “markets” and “governments” represent separate realms. This misconception results in the associated misconception that governments “intervene” in markets. If we again touch base with reality, we recognize that markets require governments as a precondition of their existence, as well as a necessary condition for their continued functioning. To put it simply, markets function because of government regulations, not despite those regulations.

Every market exchange involves a transfer of ownership. As a result, exchange always involves a prior structure or “regulation” of the definition and rights of ownership. An exchange as simple as purchasing an apple from a street seller requires that the buyer accept that the vender owns the apple. Similarly, prior to the exchange, the vender accepts that upon payment the ownership of the apple passes to the buyer. While it may appear that such an arrangement could arise spontaneously, reflection reveals that it cannot.

Exchange requires clear ownership rights, and with those rights go equally clear obligations. All exchanges place upon the seller the obligation not to defraud the buyer. A food seller must not poison the buyer, and claims of the qualities of the food do not constitute a defense. All countries have legal systems that enforce the obligation of the seller to adhere to basic standards without which exchange would be impossible or severely limited. Governments enforce property rights and the obligations associated with them. The regulating government cannot in most cases be local if commerce extends across national or international markets. This is why the US constitution grants the federal government control over commerce.

The idea that markets and the exchange that occurs in them arise spontaneously, and subsequently suffer government regulation motivated by self-serving interests, challenges credibility and common sense. Every successful exchange requires guarantee of property rights, enforcement of health and safety standards, legal oversight of credit and debt, and prevention of fraud, to list the most obvious. Even arriving at the market, if actually a place, requires governments to manage traffic flow, keep unsafe vehicles off the road, and monitor the qualifications of drivers. The nature and extent of regulations and management vary from place to place and from country to country, and in no meaningful sense do “governments intervene in markets.” It is the equivalent of saying, “Umpires intervene in baseball games” or “Referees interfere in football matches.” That is why they exist.”

John F. Weeks, Economics of the 1%, Anthem Press, p. 117-9.