We do not live in a post-industrial age (Ha-Joon Chang’s Thing 9)

23-things-they-don-t-tell-you-about-capitalismFrom Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism:

“We may be living in a post-industrial society in the sense that most of us work in shops and offices rather than in factories. But we have not entered a post-industrial stage of development in the sense that industry has become unimportant. Most (although not all) of the shrinkage in the share of manufacturing in total output is not due to the fall in the absolute quantity of manufactured goods produced but due to the fall in their prices relative to those for services, which is caused by their faster growth in productivity (output per unit of input). Now, even though de-industrialization is mainly due to this differential productivity growth across sectors, and thus may not be something negative in itself, it has negative consequences for economy-wide productivity growth and for the balance of payments, which cannot be ignored. As for the idea that developing countries can largely skip industrialization and enter the post-industrial phase directly, it is a fantasy. Their limited scope for productivity growth makes services a poor engine of growth. The low tradability of services means that a more service-based economy will have a lower ability to export. Lower export earnings means a weaker ability to buy advanced technologies from abroad, which in turn leads to slower growth. (p.88-9)

…[E]ven the rich countries have not become unequivocally post-industrial. While most people in those countries do not work in factories any more, the manufacturing sector’s importance in their production systems has not fallen very much, once we take in to account the relative price effects. But even if de-industrialization is not necessarily a symptom of industrial decline (although it often is), it has negative effects for long-term productivity growth and the balance of payments, both of which need reckoning. The myth that we now live in a post-industrial age has made many governments ignore the negative consequences of de-industrialization.

As for the developing countries, it is a fantasy to think that they can skip industrialization and build prosperity on the basis of service industries. Most services have slow productivity growth and most of those services that have high productivity growth are services that cannot be developed without a strong manufacturing sector. Low tradability of services means that a developing country specializing in services will face a bigger balance of payments problem, which for a developing country means a reduction in its ability to upgrade its economy. Post-industrial fantasies are bad enough for the rich countries, but they are positively dangerous for developing countries.” (p.101)

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Nicholas Kaldor on taxes and the illusion of incentives

Nicholas Kaldor was a post-Keynesian economist at Cambridge University and, during his final years in the 1980s, a devastating critic of the Thatcher government’s adherence to the doctrines of monetarism and ‘supply-side’ reform.

Here he is on tax cuts and incentives, taken from The Economic Consequences of Mrs Thatcher (1983), a collection of speeches made to the House of Lords (p. 9):

“Between 1880 and 1930, excluding the war years, hardly any new money was sunk into the coal industry or the iron and steel industry, and very little money – in comparison with Germany, not to speak of the United States – was put into the new technology industries which arose out of the invention of electricity, the motor car, heavy machinery, synthetic dye stuffs and other chemicals. Instead, vast sums were invested abroad. In some years during the Edwardian period, when home investment in manufacturing industry was almost zero, no less than 10 percent of our national income was invested abroad.

In those days there were incentives galore. However much Ministers may try to revive incentives through tax reductions, they can never hope to achieve the Victorian or Edwardian peaks in fiscal incentives, when income tax was not progressive and it was seven old pence in the pound or 3 percent instead of the present 33 percent. Yet with all those incentives, the economy was stagnating. If people think that we will now see miracles as a result of cutting income tax by, say, 3p or 6p in the pound, I can regretfully prophesy that it is more likely to make no difference whatever.

I have no doubt that without nationalisation we should have had the same situation after World War II as we had for 40 years before World War I and throughout a larger part of the inter-war years, and if one thinks that the period after World War II was bad, I can only say that in the opinion of all economic historians who have studied this matter seriously, the 20 years of the 1950s and 1960s showed more rapid economic progress and more rapid growth of productivity than any comparable 20 years in previous British history. That that was not just a reflection of a world trend is shown by the fact that while it was true of Britain, it was not true of Germany or the United States; in other words, their post-war record of productivity growth was no higher than had been achieved in previous periods. It was true in our case, and it is only in the last 10 years that our economic progress has broken down, for the reasons I mentioned (sic).”

Kaldor was not in favour of very high marginal rates of income tax, and instead favoured a progressive tax on consumption. However he was clear at the time that poor management was holding back British industry, and the problem, compared with our competitors, was ability rather than incentives.

Even today, the ‘burden’ of taxation in a number of European countries is higher than in Britain, and industrial performance has been notably more impressive. So other policies are more important, but successive Conservative and even Labour governments have failed to learn this.

All this remains relevant today, not least in the wake of the Trump tax cuts, and the turn to austerity in many countries in the wake of temporary fiscal stimulus following the 2008 crash. In Britain, cuts to public services were favoured over tax increases in the attempts to reduce the deficit. This surely reached its limit some time ago, with numerous crises across public services, from the health service to prisons.

Stiglitz and Greenwald on the learning society

In the short video below, Bruce Greenwald and Joseph Stiglitz introduce their work on the learning society and the idea of development. They argue that the most important feature of economic and social development is the creation and diffusion of knowledge, rather than capital accumulation per se, which has been the traditional focus of much economic theory.

They also argue that learning takes place mainly in institutions rather than in markets, and that markets are in general inefficient due to the presence of imperfect information. State intervention is necessary to correct such market failures.

Ellen Meiksins Wood on the spread of capitalism

The Origin of CapitalismMarxist historian Ellen Meiksins Wood, in an excerpt from her hugely interesting book The Origin of Capitalism, describes the spread of capitalism from its unique genesis in England and its impact on international relations (p.174-6). The section on the role of the state in promoting ‘late’ development beyond Britain remains particularly relevant to today’s poorest countries:

“For those who regard capitalism as the consequence of commercial expansion when it reached a critical mass, there is something paradoxical about the development of English capitalism. England was certainly part of a vast trading network. But other European nation states in the early modern period were also deeply involved in the system of international trade, as were non-European civilizations, some of which long had trading networks more highly developed and extensive than the European. What distinguished England – and what was specifically capitalist about it – was not, in the first instance, predominance as a trading nation or any peculiarity in its way of conducting foreign trade. England’s peculiarity was not its role in an outwardly expanding commercial system but, on the contrary, its inward development, the growth of a unique domestic economy.

What marked off England’s commercial system from others was a single large and integrated national market, increasingly uniting the country into one economic unit (which eventually embraced the British Isles as a whole), with a specialized division of labour among interdependent regions and a growing, and mutually reinforcing, interaction between agricultural and industrial sectors. While England competed with others in an expanding system of international trade, not least by military means, a new kind of commercial system was emerging at home, which would soon give it an advantage on the international plane too. This system was unique in its dependence on intensive as distinct from extensive expansion, on the extraction of surplus value created in production as distinct from profit in the sphere of circulation, on economic growth based on productivity and competition within a single market – in other words, on capitalism.

Capitalism, then, while it certainly developed within – and could not have developed without – an international system of trade, was a domestic product. But it was not in the nature of capitalism to remain at home for very long. Its need for endless accumulation, on which its very survival depended, produced new and distinctive imperatives of expansion. These imperatives operated at various levels. The most obvious was, of course, the imperialist drive. Here again, although other European states were deeply involved in imperialism, capitalism had a transformative effect. The new requirements of capitalism created new imperialist needs, and it was British capitalism that produced an imperialism answering to the specific requirements of capitalist accumulation. Above all, capitalism created new imperialist possibilities by generating economic imperatives, the compulsions of the market, which could reach far beyond direct political dominion.

Capitalism also expanded out from Britain in another and more complicated sense. The unique productivity engendered by capitalism, especially in its industrial form, gave Britain new advantages not only in its old commercial rivalries with other European states but also in their military conflicts. So, from the late eighteenth century and especially in the nineteenth, Britain’s major European rivals were under pressure to develop their economies in ways that could meet this new challenge. The state itself became a major player. This was true most notably in Germany, with its state-led industrialization, which in the first instance was undoubtedly driven more by older geopolitical and military considerations than by capitalist motivations.

In such cases, the drive for capitalist development did not come from internal property relations like those that had impelled the development of capitalism in England from within. Where, as in France and Germany, there was an adequate concentration of productive forces, capitalism could develop in response to external pressures emanating from an already existing capitalist system elsewhere. States still following a pre-capitalist logic could become effective agents of capitalist development. The point here, however, is not simply that in these later developing capitalisms, as in many others after them, the state played a primary role. What is even more striking is the ways in which the traditional, pre-capitalist state system, together with the old commercial network, became a transmission belt for capitalist imperatives.

The European state system, then, was a conduit for the first outward movements of capitalism. From then on, capitalism spread outward from Europe both by means of imperialism and increasingly by means of economic imperatives. The role of the state in imperial ventures is obvious, but even in the operation of purely economic laws of motion, the state continued to be an unavoidable medium.

Capitalism had emerged first in one country. After that, it could  never emerge again in the same way. Every extension of its laws of motion changed the conditions of development thereafter, and every local context shaped the processes of change. But having once begun in a single nation state, and having been followed by other nationally organized processes of economic development, capitalism has spread not by erasing national boundaries but by reproducing its national organization, creating an increasing number of national economies and nation states. The inevitably uneven development of separate, if interrelated, national entities, especially when subject to imperatives of competition, has virtually guaranteed the persistence of national forms.”

Industrial policy: the last 30 years, the next 30 years

More on industrial policy, this time from Carol Newman of Trinity College, Dublin. She outlines some key findings on industrial development from some of the more successful late developers and looks ahead to what is necessary to encourage development in Sub-Saharan Africa. Interesting stuff. For such a short video, she manages to pack in quite a lot of information.

More education in itself is not going to make a country richer (Ha-Joon Chang’s Thing 17)

23-things-they-don-t-tell-you-about-capitalismAnother golden nugget from development economist Ha-Joon Chang‘s book 23 Things They Don’t Tell You About Capitalism, continuing this occasional series:

“There is remarkably little evidence showing that more education leads to greater national prosperity. Much of the knowledge gained in education is actually not relevant for productivity enhancement, even though it enables people to lead a more fulfilling and independent life. Also, the view that the rise of the knowledge economy has critically increased the importance of education is misleading. To begin with, the idea of the knowledge economy itself is problematic, as knowledge has always been the main source of wealth. Moreover, with increasing de-industrialization and mechanization, the knowledge requirements may even have fallen for most jobs in the rich countries. Even when it comes to higher education, which is supposed to matter more in the knowledge economy, there is no simple relationship between it and economic growth. What really matters in the determination of national prosperity is not the educational levels of individuals but the nation’s ability to organize individuals into enterprises with high productivity (p.178-9).

…take the case of the East Asian miracle economies, in whose development education is supposed to have played a critical role. In 1960, Taiwan had a literacy rate of only 54 per cent, while the Philippines’ was 72 per cent. Despite its lower education level, Taiwan has since then notched up one of the best economic growth performances in human history, while the Philippines has done rather poorly. In 1960, the Philippines had almost double the per capita income of Taiwan ($200 vs. $122), but today Taiwan’s per capita income is around ten times that of the Philippines ($18,000 vs. $1,800). In the same year, Korea had a 71 percent literacy rate – comparable to that of the Philippines but still well below Argentina’s 91 per cent. Despite the significantly lower literacy rate, Korea has since grown much faster than Argentina. Korea’s per capita income was just over one-fifth that of Argentina’s in 1960 ($82 vs. $378). Today it is three times higher (around $21,000 vs. around $7,000) (p.180-1)…

What really distinguishes the rich countries from the poorer ones is much less how well-educated their individual citizens are than how well their citizens are organized into collective entities with high productivity…[d]evelopment of such firms needs to be supported by a range of institutions that encourage investment and risk-taking – a trade regime that protects and nurtures firms in ‘infant industries’, a financial system that provides ‘patient capital’ necessary for long-term productivity-enhancing investments, institutions that provide second chances for both the capitalists (a good bankruptcy law) and for the workers (a good welfare state), public subsidies and regulation regarding R&D and training, and so on.

Education is valuable, but its main value is not in raising productivity. It lies in its ability to help us develop our potentials and live a more fulfilling and independent life…the link between education and national productivity is rather tenuous and complicated. Our overenthusiasm with education should be tamed, and, especially in developing countries, far greater attention needs to be paid to the issue of establishing and upgrading productive enterprises and institutions that support them” (p.189).