Quote of the week: Ann Pettifor on how a genuine revival of social democracy requires global reform

“Social democracy’s blind spot for the international financial architecture and its power over domestic policy-making has had other consequences. Not only does neglect of the international system let globalized capital markets off the regulatory hook, but globalization has also led to the rise of economic nationalisms. Globalization represents the tragic reversal of all that Keynes hoped to achieve at Bretton Woods: an international framework that would end nationalisms, international trade competition, high levels of domestic unemployment, low levels of aggregate demand and the consequent debt deflation. It was an attempt by Keynes and other economists to prevent the return of nationalisms and fascism by developing policies that increased domestic demand not by boosting exports and raising demand externally but by raising living standards at home: an inter-national system that would restore policy autonomy to democratic states and stability to the world’s economies. Bretton Woods was an incomplete framework and, in some respects, unsatisfactory. Nevertheless, its ambitions were to be promptly and forcefully undermined by private European and American financial institutions.

The reality is that, today, all states are embedded in, governed by and subject to the international system of mobile, volatile, private financial markets – a system that has indebted and impoverished the many and raised political tensions, as reflected in the rise of nationalism. Millions of voters understand the nature of globalization, even while dimly aware of the monetary, fiscal or trade theories on which the system is built. This public awareness explains why some electorates have backed the election of “strong men” – politicians who offer “protection” from the very global markets that have stripped economies of jobs and income, while enriching rentier capitalists. Demands to “take back control” from these private markets by “building walls” and intensifying protectionism is what catapulted the governments of Trump, Bolsonaro, Modi, Duterte and Johnson to power.

It will not be possible for progressives to reverse nationalism, or reform or restructure the domestic state “for the common good”, without a transformation of the governance of the international system. Such a transformation will require the restoration of public authority over private, deregulated, globalized capital markets and the restoration of policy autonomy to governments and their electorates; in other words, the restoration of economic democracy to the international system.”

Ann Pettifor (2021), “To restructure the British state, the international financial system must be transformed”, in Patrick Allen, Suzanne J. Konzelmann and Jan Toporowski (eds.), The Return of the State, Newcastle upon Tyne, UK: Agenda Publishing, p.204-5.

A progressive transformation of the UK. Part 2: Industrial strategy

The next UK government needs an effective industrial strategy. The Labour Party are promising one, as a means to raise the country’s growth rate and accelerate the transition towards a greener, cleaner and more productive economy and society.

A definition

An industrial strategy, or industrial policy, as it used to be more commonly known, is a set of policies which aim to develop particular sectors which are deemed to be beneficial for the economy as a whole. Although manufacturing has traditionally been the focus, these days targets tend to be broader, given its relatively small share of overall GDP and the dominance of the services sector. This is not to neglect it, nor to belittle its role in innovation and raising productivity, and its linkages with other sectors.

Some progressives draw attention to what they call the foundational, everyday and overlooked parts of the economy, which together represent around 60 percent of employment in the UK, and consist of universal basic services in the public and private sectors as well as both essentials such as food, and occasional purchases such as furniture, all of which are deemed vital for sustaining a good quality of life for the mass of the population.

Taking such a broad outlook risks overloading the definition of industrial strategy, but it at least emphasises that progressive or widely-shared economic and social development which generates greater welfare and well-being requires more than just an innovative and productive manufacturing sector.

Need

I have posted here on the need for industrial policy in both rich and poor countries. Depending on the level of development, technology, politics, institutions etc., an industrial strategy can take different forms. However, when considering the potential for intervention in the economy, it is important to get past the misleading ‘state versus market’ dichotomy, with the political left supposedly favouring a greater role for the state, and the right favouring the market. This leads on to arguments over the likelihood and potential harm caused by market failure on the one hand, and government failure on the other.

In truth, all capitalist economies are mixed economies to greater or lesser degrees, with an inevitable symbiosis between the state and the market, and the public and private sectors. Economic policy can never be completely technocratic and apolitical. All economic change creates winners and losers, vested interests often loom large in pushing for change or preventing it, and there is thus a need for a political economy approach in analysing socioeconomic development and the scope for policies which support it.

An industrial strategy is not simply about the state correcting market failures. Historically it has also played a much more varied role in its pursuit of development, not least in responding to non-economic factors, such as national security threats alongside geopolitical trends, as well as securing political legitimacy and political stability. These often require policies favouring one social group over another, for example in reducing inequality and the potential for social conflict. While they can consume resources which might otherwise be directed towards economic development, they can be the least bad option since political instability and a lack of social cohesion can undermine the conditions required for growth. Thus a ‘pure’ focus on growth and development may in fact be impossible.

Quote of the week: Steve Keen on complexity in economics

“Firstly, as Anderson put it so well in “More is different” (sic), the behavior of complex systems cannot be extrapolated from the characteristics of its constituent parts alone:

“The behavior of large and complex aggregates of elementary particles, it turns out, is not to be understood in terms of a simple extrapolation of the properties of a few particles. Instead, at each level of complexity entirely new properties appear, and the understanding of the new behaviors requires research which I think is as fundamental in its nature as any other.”

Consequently, the properties of a complex system cannot be derived by extrapolating from the properties of an isolated entity – which is the essence of methodological individualism. The theory of demand, for example, attempts (and fails – an issue I return to later) to derive the phenomenon of a downward-sloping market demand curve from the properties of a single isolated consumer. This is equivalent to attempting to derive the features of water by studying the properties of an isolated molecule of H2O. This of course cannot be done: a single molecule of water is not “wet,” neither can it turn into ice or snow. All those phenomena are the product of the interaction of water molecules with other water molecules, in what are known as “emergent properties.” Economics is unique among intellectual disciplines in its insistence upon deriving upper level phenomena  (market and macroeconomy) by extrapolation from lower level phenomena (individual consumer, firm or investor). The source of the insistence is the neoclassical school (as Arnsperger and Varoufakis define it) and no other.”

Steve Keen (2016), “Is neoclassical economics mathematical?” in J. Morgan (ed), What is Neoclassical Economics?, Abingdon, Oxon: Routledge, p.245.

A progressive transformation of the UK. Part 1: the macroeconomy

Across the world, 2024 will see the largest ever number of voters heading to the polls, with elections being held everywhere from the UK and US to India. This does not necessarily mean that democracy is in great shape. Disenchantment with mainstream politics has seen a rise in populism, particularly of the right-wing variety. Sluggish growth in living standards in many countries, since at least the financial crisis and Great Recession of 2008-9, coupled with rising inequality and insecurity, have bred disaffection. The pandemic, international conflict, the need to respond to climate change, and growing global tensions over trade have combined to yield a peculiarly difficult environment, both for policymakers, and for those whose lives they ostensibly aim to support and improve.

In the wake of these multiple challenges, and among the richest economies, the UK is having a pretty bad time of it, worse than many of its peers. There is much that does not work, from the economy to public services, and we now have a general election campaign underway, with the vote to be held in just over four week’s time.

This new four-part series will look at the economic policy challenges facing the next government, and explore possible solutions. I will concentrate on the macroeconomy, industrial policy, the labour market and public spending. While it remains UK-focussed, many of the principle progressive ideas explored could apply to other rich countries.

The goals of policy

Much of what any progressive government wants to achieve depends to a great extent on economic growth, from rising living standards and improved funding for public services to reducing inequality and poverty. The UK has had a particularly bad record on improving living standards since at least the advent of the Great Recession. Yes, since the recovery began the economy has created a lot of jobs, but weak growth in GDP has meant that this has been associated with stagnant productivity and wages. High levels of net inward migration have boosted the population and labour force, and thus flattered the overall growth figures. Per capita GDP growth, which is a better indication of trends in living standards, has been historically poor.

Many factors influence trends in economic growth, some outside the influence of governments, but there is plenty that they can do. The goal should be faster sustained growth in GDP per capita with low inflation, and less dependence on rising debt, particularly private debt. Growth should raise living standards for the majority of ordinary households, and be associated with reduced inequality, both nationally and between regions. Thus it needs to particularly benefit those areas of the country outside London and the South East, which have in many ways been left behind. Growth should be more sustainable, economically, socially and environmentally. The productivity gap between the UK and the US, as well as France and Germany, which is around 15 percent in terms of GDP per hour worked, needs to be closed. This is easier said than done.

Quote of the week: Michael Hudson on conservatives

“People seeking to conserve the status quo and power of the vested interests. In the 19th century they fought to preserve the legacy of feudalism by blocking parliamentary reform and its seeming evolution toward democratic socialism. In the United States, Republican Jim DeMint of South Carolina spelled out the conservative political strategy in a nutshell when he left the Senate to head the Koch-backed Heritage Foundation: “Obstruct, obstruct, obstruct” to stop so-called big government from enacting changes that would favor the 99 Percent. One could add “privatize, privatize, privatize” and “delay, delay, delay” to round out their political strategy. That is the spirit of conservatism through the ages.”

Michael Hudson (2017), J is for Junk Economics: A Guide to Reality in an Age of Deception, Germany: ISLET-Verlag, p.63.

Comparative versus competitive advantage: theories of international trade and the resolution of global imbalances

There has been a lot of debate recently about China’s international trade performance. This is not a new concern. The Chinese economy is once again running large and growing trade surpluses, as it did in the build up to the 2008 financial crisis and has done more or less since then. Its exports of sophisticated products like electric vehicles have been absorbing an increasing share of global demand. Authors such as Michael Pettis, a professor of finance at Peking University, have long argued that over the last couple of decades China’s economic policy has become a problem for the world. Briefly, its industrial policy has generated domestic imbalances which restrict consumption as a share of GDP. In aggregate, it is saving too much, and investing too much, and some of that investment has been poorly allocated. This is reflected in the fact that despite its enormous share of investment in GDP, the economy has been slowing steadily in recent years, and rapidly and unsustainably accumulating debt.

An article by Pettis in the FT from 28th May makes the point that China’s large trade surpluses are caused by weak domestic demand, and therefore a weak demand for imports, rather than by comparative advantage. China is not alone here. Other major economies, particularly Japan and Germany, have long run large trade surpluses while their overall GDP growth has been relatively weak.

The theory of comparative advantage, originated by the classical economist David Ricardo, is perhaps one of the most sacred theories in mainstream economics. Even distinguished economists whose work has questioned it, such as Paul Krugman, tend to support its implications for policy: countries both rich and poor have much to gain from free trade, and interfere with it at their peril.

The theory results in the argument that nations should specialise in the production and export of those goods and services in which they are relatively most efficient in producing. Even if they have no absolute advantage in producing anything compared with other countries, they should still gain from this. They can export goods in which their comparative costs of production are lowest, and then import goods and services of an equivalent value in order to maximise domestic income, consumption and welfare. I will come onto to some of the problems with this theory below.

There are alternative theories of international trade, which are critical of Ricardo. Anwar Shaikh, a professor of economics at the New School in New York, in his 2016 magnum opus Capitalism, has argued that a theory of absolute or competitive advantage, rather than one of comparative advantage, fits the facts much better. For Shaikh, trade takes place between trading firms rather than countries, and is regulated by real relative costs between them. These costs are largely determined by real wages and productivity, and all the factors that affect these two variables.

In the end, the key debate over all of these theories comes down to how economies adjust, or don’t, in order to maximise sustainable efficiency, production and consumption.

Quote of the week: the historical record on development and the lousy advice of the rich world

“What seems most wrong in all this is that wealthy nations, and the economic institutions that they created like the World Bank and the International Monetary Fund, provided lousy developmental advice to poor states that had no basis in historical fact. Once again: there is no significant economy that has developed successfully through policies of free trade and deregulation from the get-go. What has always been required is pro-active interventions – the most effective of them in agriculture and manufacturing – that foster early accumulation of capital and technological learning. Our unwillingness to look this historical fact in the face leaves us with a world in which scores of countries remain immiserated; and in which rural poverty nourishes terrorist groups that echo those suppressed in south-east Asian countries, but which now directly threaten the citizens of rich nations. It is not easy to implement the policies discussed in this book (sic), especially land reform. However I repeat what others concluded after the Second World War: that to turn away from such policies indicates that the world is acceptable to us as it is. Take a look at south Asia, the Middle East and Africa, and ask yourself if it is.”

Joe Studwell (2014), How Asia Works: Success and Failure in the World’s Most Dynamic Region, London, UK: Profile Books Ltd., p.226.