Recently, mainstream economists have been debating yet again why ‘economics’ was unable to see the global financial crash coming and/or provide effective policies to end what I have described as the Long Depression that has endured since the end of the Great Recession in 2009. Mainstream economists John Quiggin and Henry Farrell summed up the […]
James Crotty discusses some of Keynes’ key ideas on the uncertain nature of the future and how this affects investment and finance in a capitalist economy. He points out that many of Keynes’ important insights can be found in Marx, but that Keynes put financial instability centre stage.
Another excerpt from Michael Hudson’s J is for Junk Economics, his heterodox ‘guide to reality in an age of deception’. Here he defines and discusses rent-seeking (p.199-200), an important concept in economics. For those seeking a rich and detailed non-mainstream treatment of the theory of rents and rent-seeking and its application to development, I can definitely recommend Khan and Jomo (2000), but Hudson’s discussion is still interesting and provocative:
“Rent-seeking: A zero-sum activity in which one party’s gain is another’s loss, unlike new capital investment and hiring that expand an economy’s production and income stream. The classical meaning of “rent-seeking” refers to landlords, natural resource owners or monopolists who extract economic rent by special privilege, without their own labor or enterprise.
Neoliberals have diverted attention from the land rent, resource rent or monopoly rent that classical economists associated with the FIRE (finance, insurance and real estate) sector. They have re-defined “rent-seeking” to refer only to politicians and labor unions lobbying for “special privileges”, such as Social Security, a minimum wage and public programs to meet other basic needs. But these programs have nothing to do with classical rent-seeking. They are proper functions of government.
In introducing the term “rent-seeking” in 1974, Anne Krueger applied it to import licensing and quotas that she claimed interfere with free trade, and extended the idea to government regulation in general – including legislation setting a minimum wage, claiming that this led to rising unemployment. Gordon Tullock, a follower of Ludwig von Mises, defined rent-seeking as lobbying by politicians for special privileges such as higher Social Security payments.
As a high-ranking World Bank and IMF official defending free trade, Ms. Krueger opposed agricultural protectionism designed to save foreign economies from food dependency on US farm exports. Conflating rent-seeking with subsidies to modernize, her 2012 book Struggling with Success (p.86) accused all government regulations, tariffs and subsidies of being bad and wasteful. “Ultimately, regulation has negative effects on the market in the country imposing the regulation…” The political effect of such deregulation and non-subsidy is to let “the market” pass by default to financial managers – as if their own major aim is not to seek classic economic rents to empower themselves as monopolists and financial rent-seekers!
Nobel Prize-winner James Buchanan’s euphemistic “public choice” anti-government philosophy (that government should make no choices, except to disappear) goes so far as to claim “that a tax with more excess burden,” such as taxing wages or industrial profits (adding to the cost of living and doing business) is better than a more reasonable tax on land rent with less burden. His argument is that classical rent theory would work, but that this would increase government power, precisely by being reasonable and economically efficient – “because government, if allowed to tax in the less burdensome way, may get more revenue,” which Buchanan opposes.
Such language makes a travesty of economic vocabulary. It strips away the classical association of rent with the FIRE sector, applying it only to the “cost” of government regulations and pretending that only government bureaucrats receive economic rent, not private sector rentiers. This leaves out of account the obvious fact that a strong government is needed to overcome opposition from predatory vested interests. The political effect of “public choice” ideology and its self-proclaimed “libertarian” doctrine is thus to serve as a handmaiden to oligarchy. It relinquishes economic rent to the FIRE sector instead of taxing it.
At the end of this road, imagine everyone paying user fees for everything from fire hydrants to schools, turning every road and parking space into a toll road. Payment for these erstwhile free public services would be made to owners and financiers of these natural monopolies, free from public regulation or other “Big Government” acting to save the economy by preventing predatory fees. In the name of opposing economic rent as “socialism”, AKA “the road to serfdom”, “public choice” doctrine thus prepares the groundwork for classic rent grabbing, financialization and kleptocracy.”
Tilman Altenburg of the German Development Institute discusses a range of issues related to industrial policy in developing countries. He is promoting his book, but that aside, he highlights some important points in the debates on industrial policy and its role in accelerating development.
The book itself is sitting on my bookshelf, and I hope to post on it at some point. In my view industrial policy, or at least state intervention to promote development, remains vital in both rich and poor countries. If it is to be successful, its form must necessarily change as countries approach the technology frontier in particular industrial sectors, but the need for it never really goes away.
It will also tend to vary depending on the structure of industry, the nature of technology and institutional and political factors.
Immigration can be a divisive but also a sensitive issue. Arguments surrounding last year’s referendum here in the UK on EU membership could not avoid it. Media hysteria, particularly from the right, has focused mainly on the negative impacts, and rational debate has been drowned out. The right seemed to shout loudest, and the left often ended up talking to itself.
The overall findings of the study suggest that, at least in the UK, the overall net economic and fiscal (tax and public spending) outcomes from large-scale immigration are small when compared with the effects of more rapid population growth. Rowthorn argues that considerations of the latter should play a more important role when deciding future government policy. Continue reading
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.
Another 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).
Below is a useful excerpt from the book launch of Professor John Weeks‘ Economics of the 1%. It came out in 2014, and I can wholeheartedly recommend it. The book is aimed at the intelligent general reader, and contains plenty of ‘debunking’ of myths in economics from a left perspective, as well as the author’s ideas for economic reform.
Weeks has written other more technical books for those who are interested, most recently Capital, Exploitation and Economic Crisis and The Irreconcilable Inconsistencies of Neoclassical Macroeconomics. The first is Weeks’ constructive take on Marx’s theory of capitalism and crisis, while the second is a thorough critique of neoclassical macroeconomics, as the title suggests.
Following yesterday’s post, here are the final two parts of the discussion on governance reform and development by Mushtaq Khan, Professor of economics at SOAS in London.
Marxist economist Michael Roberts recently posted on the dire economic and social situation in Venezuela. An oil price boom in the 2000s allowed the government of Hugo Chavez to pour the resultant tax revenues into boosting the incomes and welfare of the poor. Significant progress was made with poverty reduction during this period and the economy grew relatively rapidly for a number of years.
All that is now going into reverse as the economy experiences a deep contraction, galloping inflation, and shortages of basic goods in the shops, alongside a consolidation of anti-democratic forces. With oil prices subdued and a lack of industrial diversification, the sources of any future economic recovery remain unclear.
As he has often argued when confronting the downsides of capitalism, Roberts argues that the problem is ‘not enough socialism’. His favoured policy response would be increased government ownership and direction of the economy via central planning, in order to boost investment and diversify the structure of the economy.
The intended ends of such a response are indeed laudable: during the boom years, the government relied on oil revenues to reduce poverty, as already mentioned. But it failed to encourage the diversification of production into higher value-added goods and services. Continue reading