Mariana Mazzucato’s economics: value and the role of the state

Mariana-Mazzucato2Mariana Mazzucato is known for her view that the state plays a vital role in promoting innovation, which is an essential part of the process of economic growth and development. In her book The Entrepreneurial State she debunked the myth that a flourishing economy requires the state to ‘get out of the way’ of the private sector.

In her latest, The Value of Everything, published earlier this year, she attempts to reignite the debate over the sources of value which, she argues, has been neglected in mainstream circles since the rise of neoclassical economics at the end of the nineteenth century.

Indeed, until the neoclassical school became influential, the source of value in economics was a central concern and a matter of some controversy. The Mercantalists saw gold and precious metals as source of value, and their accumulation was held to be the object of economic policy. For the Physiocrats, only land and natural resources produced value, while for the Classical political economists like Adam Smith, industry was the source. Karl Marx held that labour and its production of a surplus product were the origin of value. Continue reading

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Invention, innovation and evolution

JamesLovelockJames Lovelock is a radical scientist and the originator of the Gaia hypothesis, the idea that Earth and its living, and non-living, inhabitants need to be viewed as a complex, holistic, self-regulating system. In his most recent book, A Rough Ride to the Future, he discusses such issues as his latest views on the evolution of humanity as part of Gaia, climate change, urbanisation, environmentalism and scientific progress.

Significantly, he is critical of the green movement and renewable energy, accepting the idea of climate change while arguing that many scientists’ models of it are flawed and potentially misleading.

He remains optimistic about the future of human life on Earth, while cautioning that we are unlikely to be able to stabilise the climate and prevent it changing. Continue reading

Richard Koo – The Other Half of Macroeconomics and the Fate of Globalization

Richard Koo The Other HalfRichard Koo’s big idea is the theory of balance sheet recessions (BSR), and he has written a number of books that explain and apply it to our current economic problems. His latest was published earlier this year: The Other Half of Macroeconomics and the Fate of Globalization.

I do enjoy his work, as it is somewhat iconoclastic, and despite some repetition, both within and between the individual works, he is well worth reading. I have summarized his previous ideas here, so in this review I will concentrate mainly on what is new in this book.

The not so new

For readers unfamiliar with his previous work, Koo outlines his theory of BSRs; his critique of Quantitative Easing and the risks involved as it is unwound by central banks; and the source of the Eurozone crisis and solutions to it which avoid the creation of a fiscal union, which still lacks political legitimacy and support across the EU.

All of this is already covered in his books The Holy Grail of Macroeconomics and The Escape from Balance Sheet Recession and the QE Trap.

The new

Koo’s latest book elaborates and extends his theory of BSRs (what he calls ‘the other half of macroeconomics’) to longer term questions of economic development. He also addresses the current backlash against aspects of globalisation embodied in support for Donald Trump, Brexit and the like. Continue reading

Free trade, trade policy and the WTO

“Free trade is the sensible rule of thumb most of the time in most sectors. It is sensible because the efficiency gains are often real, even if the theory of comparative advantage over-generalizes them; and it is a simpler rule for any state and for inter-state agreements than rules for managed trade. But the argument…about production and employment, in the context of economic growth rather than static resource efficiency, suggests that inter-state agreements, including the rules of the WTO, should be revised to permit more government “leadership” and “followership” of the market – sometimes by leading the production structure into activities the private sector would not undertake on its own, sometimes by making bets on initiatives already underway in the private sector to assist those initiatives to scale up. This contrasts with the current situation, in which the WTO restricts the use of instruments relevant to developing countries’ efforts to upgrade the national production structure – including tariffs, non-tariff barriers, and direct industry subsidies – while allowing instruments relevant to advanced countries’ efforts to grow new activities on the world frontier, such as R&D subsidies. The WTO is, put crudely, an industrial upgrading device for advanced countries, an industrial downgrading device for developing countries. President Trump surely does not intend his skepticism of free trade to benefit developing countries, but it gives the potential for others to modify international rules towards more “policy space””.

Robert H. Wade (2017), Is Trump wrong on trade? A partial defense based on production and employment, in E. Fullbrook and J. Morgan (eds.), Trumponomics – Causes and Consequences, College Publications and World Economic Association, p.97

The full article can be viewed for free here.

On catch-up industrialisation

In a number of previous posts on development and industrial policy, I have mentioned the concept of ‘catch-up’. I thought it might be useful to define it in some detail, so here is Akira Suehiro of the University of Tokyo, taken from his comprehensive work Catch-Up Industrialization (2008, p.3-4):

“Catch-up industrialization is a pattern of industrialization frequently, indeed necessarily, adopted by late-industrializing countries and late-starting industries. It is an essential aspect of any attempt to reduce the gap in national wealth between developing and developed countries.

The many varieties of catch-up industrialization generally have the following two points in common.

First, latecomers to industrialization enjoy the advantages of “economic backwardness”, or the advantage of being able to make use of technologies and knowledge systems developed by countries that have gone before. It is expensive and time-consuming for any country to independently develop new technologies and products, not to mention new industrial structures or management organizations. Latecomer countries can achieve great savings of time and capital by adopting the necessary technology and know-how from countries that have already industrialized.

It follows that an important challenge for governments and enterprises in latecomer countries is how to go about importing, adapting, and improving foreign technologies and systems as smoothly as possible. From this fact of life stem many of the most striking features of catch-up industrialization: strong government leadership, positive involvement by financial institutions (with corporate finance through commercial banks rather than stock-markets), development of information-sharing systems between government and private sector and between assemblers and suppliers (intermediate organizations, keiretsu, etc.), the continuation of family businesses such as zaibatsu in corporate management, and the development of distinctive production management control systems in the workplace (the kaizen and just-in-time systems, workers’ commitment to management, etc.).

The second common feature among latecomers to industrialization is that they have to start by importing most industrial products. For some time they have to earn the foreign currency to pay for these imports through exports of primary products such as mineral and agricultural products. In order to reduce imports, the latecomer countries launch a policy of domestic production and import substitution, starting with relatively low-tech, labor-intensive industries. Consider, for instance, the case of textile products. If a country has just commenced domestic production of synthetic fiber products, that necessitates imports of the chemical raw materials, plus the machinery and equipment to process them. The country has to export textile products to get the necessary foreign currency for these imports, while also commencing production of chemical products and machinery at home.

A cycle consequently develops: from importing to domestic production, then to exporting (or overseas production), then to re-importing. At the same time it is important to establish a trade policy centered on import substitution and export promotion, and an industrial policy aimed at the protection and fostering of domestic industries. In short, trade and industry are inextricably interlinked. It follows that under the conditions of this first phase, with its dependence on imports and its need to conserve limited supplies of foreign currency, an important challenge for those who would catch up is the effective distribution and control of available economic resources. This means that a set of policy structures – regulations on trade, tariffs and investment, export-led industrialization, tie-ups with foreign capital to foster export-oriented industries, etc. – constitute another feature of catch-up industrialization.”

Sun hats and development

I recently bought a new sun hat (stay with me). A label inside reads ‘made in China’. Replacing my previous hat was well overdue, as it was more than 20 years old. Out of curiosity and before getting rid of it, I checked inside and saw a label, which also read ‘made in China’. I must be something of a geek, as this got me thinking about the manufacture of clothing and development processes.

It is notable that China is manufacturing and exporting clothing such as this, just as it was twenty years ago. The hats are not dissimilar. Of course, the Chinese economy is the largest manufacturing nation in the world and exports a huge amount of goods of all kinds. But according to this experience, companies there are still involved in the manufacture of quite basic clothing. Continue reading