Quote of the week: the need for a Green New Deal

WindTurbines

The following extract was penned in a book on globalisation published back in 2017 which, given the global crises which have subsequently occurred, seems like some time ago. However, its spirit and application across the world are surely needed now more than ever. The longer that governments leave such interventions on the back burner, the more perilous and costly the economic, social and environmental future is likely to be. The scale and disruptive nature of the change that is required will only increase the longer these kinds of policies are neglected.

“The overarching policy need for all countries, domestically and through international co-operation, is to pursue a Green New Deal. This needs to include investing in domestic and industrial energy efficiency to reduce the demand for energy; investing in renewables – wind, solar, hydroelectric, wave and tidal power – to meet these (reduced) energy needs; cutting transport emissions through regulation, innovation and localisation; altering consumer behaviour through public engagement and involvement; and shifting corporate behaviour and management decision-making through the use of legislation, regulation and taxation, and by promoting greater corporate diversity. This increased corporate diversity should include the active use of public enterprise. A small number of companies acting in environmentally friendly ways can have important knock-on effects for other companies in their networks. This is one use to which new public enterprises could be put. Increased corporate diversity should also include stronger co-operative, mutual and employee-owned sectors. Such firms may be more suited to local, regional and national operation rather than global, which is a further benefit in terms of strengthening the local in the economy – across the world.”

Jonathan Michie (2017), Advanced Introduction to Globalisation, Cheltenham: Edward Elgar, p.125-6.

COVID and the broken global order — Real-World Economics Review Blog

from C. P. Chandrasekhar

When the COVID pandemic affected every one of the world’s nations, the way forward seemed obvious, even if difficult to traverse. Given the rapid spread of the disease and its severity that overwhelmed long neglected health systems, and the cost to lives and livelihoods that shutdowns of economic and social activity […]

COVID and the broken global order — Real-World Economics Review Blog

The Power of Creative Destruction: insights from the mainstream and the role of political economy

CreativeDestructionIn this post I praise a new book on how innovation in the form of creative destruction drives economic growth and the implications of this for a wide range of contemporary economic problems. I go on to suggest that, despite this, a richer political economy approach can offer some deeper insights into such problems, with some of the ideas examined in the book as points of departure.

This blog is often critical of mainstream economics, broadly conceived. A new book exploring what it calls the “upheaval” generated by capitalism which it argues is part of the process of wealth creation has made me question this negative attitude, to a degree. The Power of Creative Destruction by Philippe Aghion, Céline Antonin and Simon Bunel argues that cumulative innovation is the main source of the growth in output and productivity which underpins collective prosperity. Creative destruction is a term originally coined by Joseph Schumpeter to describe the turbulent processes which result as entrepreneurs innovate, generating new products and processes, enter and disrupt old markets, create new ones, and innovations diffuse throughout the economy, driving the constant change that a successful capitalism seems to require. Continue reading

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

The left need not fear Darwin

For some on the left, Darwinism and theories of human evolution are associated with adherence to an extreme individualism, libertarianism and market fundamentalism. They are seen as the law of the jungle, with the strong rewarded and the weak neglected. Even if they are accepted in biology, their application to society and the economy should on this reading be avoided. But this argument is flawed. After all, human society is grounded in nature and dependent upon it. We cannot escape our origins!

Evolutionary, institutional and complexity economics draw in part on theories originating in biology. There is some overlap between the three approaches. In particular, evolutionary economics emphasises economic change, the generation of variety and novelty, and the complexity of economic systems. The change is not only quantitative, as in standard economics, but also qualitative, in the realm of technology, organisations and economic structure. It is non-linear and often chaotic, in the scientific sense of that term, which limits predictability. Institutions and their evolution are a key part of the analysis, as is innovation. Context matters, so that economic theories and laws should not be universally applied to every situation.

Geoffrey Hodgson, whose work I have recently quoted a number of times on this blog, is an institutionalist economist. In his book Darwin’s Conjecture he attempts to clarify and apply Darwin’s theories of biological evolution to socio-economic evolution. In short, Darwin’s framework of variation, selection and replication are used as a ‘metatheory’, an overarching theoretical framework which can be broadly applied to many phenomena.

Socio-economic evolution is part of the evolution of the natural world and is emergent from but irreducible to it. Applying Darwinian concepts to human society need not be simply about competing individuals but is also about institutions and organisations as evolving social structures. Competition and cooperation are both involved in socio-economic evolution. Yes, selection can involve individuals, and their genes at another level, but can also involve group selection, and institutions. The latter, broadly conceived, include such aspects of human culture as writing, laws, the codification of knowledge, and the institutionalisation of science and technology. Cooperation and morality can be selected in evolutionary processes as much as ‘winners’ from competitive processes, whether these are individuals or firms for example. This is a more subtle and comprehensive conception of human evolution.

The economy can be seen as being embedded in society, which can in turn be seen as embedded in nature. Nuno Ornelas Martins, in his book The Cambridge Revival of Political Economy, argues that for an evolutionary social theory, there are potentially transformational interactions between human agency, social structures, technology and the mode of production, whether that be feudalism, capitalism, socialism or whatever. These interactions occur to varying degrees at different historical moments.

In his 2015 work Conceptualizing Capitalism, Hodgson argues further that capitalism itself evolves, qualitatively as much as quantitatively. In fact the two are inextricably intertwined. It can evolve from within, but also due to external threats or interventions, such as war, foreign aid or the transfer of technology. The diffusion of technology across the system, as well as that of institutions, information and knowledge (and there is an overlap between these processes), helps to drive periods of growth and development. This tends also to involve increasing complexity within the system. But such growth is not automatic, and economies can pass through periods of stagnation as well. Competition may not necessarily increase efficiency or be economically optimal and it remains dependent on the successful functioning of particular institutions. Due to the fact that new institutions and behaviours are often path-dependent, building on old ones, there is always the possibility of ‘institutional sclerosis’ as society and the economy become locked-in to dysfunctional activities and outcomes.

Turning to a non-economist, Robert Anton Wilson, whose eclectic work Prometheus Rising attempts to describe the evolution of humanity, particularly as a result of the evolution of the brain and nervous system: there is some link, though not a direct correspondence, between evolution, wealth creation and the acceleration of the generation and use of information in human society. Genuine wealth creation that serves humanity comes not just from the orthodox economic factors land, labour and capital, but from using the neurons in our brains intelligently. This is not necessarily synonymous with GDP growth, at least over short periods, and to the extent that wealth creation can damage the environment, it can generate new problems to be solved alongside less sustainable forms of wealth.

Wilson echoes the arguments of Eric Beinhocker in his The Origin of Wealth by claiming that genuine increases in wealth and economic value involve the creation of greater order and coherence, or negative entropy. So there is some sort of correspondence between evolution and wealth creation. Socio-economic evolution is occurring faster than biological evolution, though the former remains dependent on the latter and truthfully speaking is part of it. We run a great risk of seriously damaging our own prospects if we neglect our impact on the nature on which we all depend. This is the essence of arguments for a more sustainable form of human development.

Thus applying biological theories such as Darwinism to the economy and society generates many insights, which can be more various and subtle than knee-jerk responses which object to the law of the jungle and the undermining of a kinder, gentler, more cooperative and less competitive world. There is plenty to learn from such an approach, for the left as much as the right. We cannot escape our place and role in nature. With the advance of knowledge and technology, we increasingly amass the power to damage the environment as well as solve its problems. All too often, these problems are of our own making. Let us hope that we can learn from such processes sufficiently to prevent the damaging activity which could potentially overwhelm our continued development.

Ricardo, Keynes or Schumpeter? Paths out of lockdown

Across the world, government borrowing has soared in response to a dramatic shrinkage in economic activity. State-mandated lockdowns have been a major cause of this. As vaccination programmes gather pace in a number of the wealthiest nations, and some of them begin to ease their lockdown restrictions, attention turns to the likely form and pace of economic recovery and the implications for the public finances.

Although lockdowns have seen a significant shift among households towards online shopping, and some of this may persist even as high streets become busier again, the recession, unprecedentedly severe for peacetime, has seen consumption, the largest component of aggregate spending, contract, albeit unevenly as spending patterns have changed. The government response to this in terms of its budget has been twofold: support aggregate demand by allowing the deficit to rise, and to a degree temporarily maintain the structure of aggregate supply via support for existing firms and jobs. These two elements have produced a large government deficit. The economy has still shrunk dramatically, and with interest rates already extremely low, it has been left to fiscal policy to support aggregate demand. Continue reading

Mariana Mazzucato on the mission economy

MissionEconomyHere is a brief quote from Mariana Mazzucato’s latest book, which neatly sums up her main arguments. She wants policymakers to reform capitalism by establishing stronger and more participatory state-led innovation, drawing lessons from the ‘mission’ that resulted in the first moon landing, and led to a whole host of spin-off technologies in the years that followed.

“Mission-oriented thinking cannot be based on the status quo. The mission attitude is not about picking individual sectors to support but about identifying problems that can catalyse collaboration between many different sectors. It is not about handing out money to firms because they are small or because they are in need, but structuring policies that can crowd in different solutions (projects) by multiple types of organizations. It is not about fixing markets but creating markets. It is not about de-risking but sharing risks. It is not about picking winners but picking the willing. And it is not simply about setting the ‘rules of the game’ but about changing the game itself so that a new direction can foster change – change towards a green transition and/or the digitalization of the population.”

Mariana Mazzucato (2021), Mission Economy – A Moonshot Guide to Changing Capitalism, Allen Lane, p.159.

Productive versus unproductive labour: Michael Hudson on the creation of value

Where do we define the boundaries of productive activity in the economy? As Mariana Mazzucato argues in The Value of Everything, the ‘production boundary’ has changed over time throughout the history of economic thought until the present, in which mainstream neoclassical economics considers anything priced by the market to be a source of value, amended by the possible presence of market imperfections. She wants to rekindle the debate on the sources of value in economics, with the state as a potential co-creator of markets and innovative activity and, hence, economic value.

hudson-200x300I have already posted on Mazzucato’s book here, so here is Michael Hudson’s take on the issue, from his J is for Junk Economics (p.182-3):

Productive vs. Unproductive Labor: Defining productivity is fairly easy when the measure of output consists of uniform commodities: steel, crops or automobiles produced per man-year. But today’s National Income and Product Accounts (NIPA) define the productivity of labor by Gross Domestic Product (GDP) per work-year, regardless of whether it produces commodities, financial “services” or simply makes money by zero-sum speculation.

Goldman Sachs’s Lloyd Blankfein has bragged that his firm’s partners are the economy’s most productive individuals, as measured by the huge amounts of money they make. This reasoning is circular: it claims that people are paid according to their productivity as measured by their wages, salaries and/or bonuses – which are assumed to be paid in proportion to their productivity!

But what about economic activity that is merely extractive and predatory? Value-free economics abandons the classical definition of productive labor or investment as that which produces profit on “real” production. At issue is what is real and what is mere overhead.

Adam Smith and his followers defined labor as productive only if it produced commodities for sale. That was in an epoch when most services were performed by servants (maids, butlers, coachmen and other employees of the wealthy) as consumption expenses. This personal employment was deemed to be part of the rentier class’s overhead. Church officials, government workers, the army, tutors and teachers or other professionals in what today is called the non-profit sector also were deemed unproductive.

To Karl Marx, labor under industrial capitalism was productive to the extent that it produced a profit for its employer. He pointed out that even prostitutes were productive – of a profit, if employed by their madams, just as steel workers were productive of a profit to mill owners. His 3-volume Theories of Surplus Value reviewed the classical discussion of productive labor, value and price.

From the classical vantage point, rent extraction, debt leveraging and related financial overhead is not part of the economy’s necessary core, and thus would be viewed as a subtrahend from “real” output and productivity. Post-classical economists stopped distinguishing between intrinsic value and market price so as to avoid the critique of land rent, monopoly rent, and financial and other rentier charges as undesirable overhead.

After Russia’s 1917 revolution, Soviet statisticians reverted to Adam Smith’s definition of physical productivity: material output per worker. Their non-capitalist society had no rentier class, and the state did not charge interest or rent, so no implicit rent-of-location or cost of capital was measured in their national income statistics. These exclusions left Russia somewhat naïve when it opened its economy to the West in 1991, not realizing that the main aim of neoliberal investment was rent extraction from natural resources, land and monopolies.

The postindustrial epoch in the West itself has seen industry turned into a vehicle to extract economic rent and interest, and to make “capital” gains from asset-price inflation as a “total return” on equity. From the classical vantage point of the industrial economy at large, this is an overgrowth of unproductive investment. The quick collapse of Russian manufacturing after 1991 is an object lesson in the effect of replacing industrial productivity with rentier asset stripping.”

A disintegrating Europe? Why the region needs a more ambitious industrial policy

threads_eu_600x423The pandemic crisis has spurred EU institutions into proposing a sizeable economic response. In May the European Commission “unveiled the Next Generation EU recovery plan that aims to address the damage caused by the pandemic and invest in a green, digital, social and more resilient EU”. It is a shame that it took this historical turn to galvanise such ambition. Despite all this, EU member states are some way from agreement over the size and distribution of the Covid-19 recovery package. But ambition is needed, now more than ever, to respond in a way that promotes a renewed, sustainable and socially cohesive prosperity across the continent. Continue reading

Covid-19 and creative destruction – Marx, Schumpeter and the role of the state

The impact of the uncertainty generated by Covid-19 and the subsequent lockdown in countries across the world has been devastating for economies and societies. There is more to come. The world economy was already struggling somewhat in 2019, with slowdowns in the US and China, the two largest economies. In fact, what was at best sluggish growth in output and productivity in many countries had been a feature of the decade or so which followed the financial crisis of 2008. The onset of the pandemic has hit already weak or fragile economies hard.

Keynes famously argued that the ‘animal spirits’, or waves of optimism and pessimism among businessmen potentially looking to invest, were a major factor in the determinant of growth and employment, and hence economic prosperity. Uncertainty about the future could lead to spending on new industrial capacity and jobs being postponed, driving the economy into stagnation or recession. It was the job of government, he said, to ‘socialise’ investment. In other words, through judicious policy choices, it should try to maintain optimistic expectations among businessmen and make sure that there were sufficient investment opportunities to keep spending, and therefore employment, at a socially optimum level. Continue reading