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
Following the extracts I have posted in recent weeks, this is the last in the series from the 1947 edited volume The New Economics: Keynes’ Influence on Theory and Public Policy. Once again the piece is from the chapter by Douglas Copland, this time on addressing the problems of the global economy while maintaining a policy of high employment. In particular, Copland discusses the balance of payments and the high demand for imports that will tend to result from such a policy. As before, it is of historical interest, being written while Keynes’ influence was in its ascendency. But it also remains relevant today, in that conflict over international trade is much less likely if the countries concerned are able to achieve full employment. Free trade by itself is not enough and is unlikely to be sustained if it is not associated with high levels of employment and widely-shared prosperity. Continue reading
Income inequality within countries can contribute to economic imbalances at the global level, threatening instability and rising unemployment. The underlying imbalances which led to the Great Recession remain and need to be tackled in the years ahead, whatever else we may be going through.
Reducing inequality and injustice in all its forms has long been a goal of many on the left. With enough political pressure, the right may be persuaded to follow suit, at least to a certain extent. Policies which tackle inequality are often praised for their own sake, or at least for the apparent good of society. But many progressive economists would argue today that excessive inequality can damage the economy, slowing growth in living standards and job creation and creating instability.
An article in the January issue of the heterodox Cambridge Journal of Economics by Fabio Ascione and Matthias Schnetzer (paywall, though you can read the article abstract) investigates the impact of income inequality and household debt on the current account in 31 countries over a period of 45 years, to see whether things have changed since the Great Recession of 2008-9. Continue reading
The Cambridge Journal of Economics is a leading heterodox journal which often contains articles with an interdisciplinary approach. Last November’s issue carried one such (behind a paywall, though you can read the article summary) by Gabriel Porcile and Diego Sanchez-Ancochea which linked an economic model of growth and development to institutional change and political conflict. There is no need to include the formal details of the model here, rather I want to share some of the insights that it offers.
The authors model a small economy open to international trade and containing three social classes: formal workers, supported by protective institutions such as trade unions and certain labour rights and with access to a welfare state; informal workers who lack these rights and protections; and capitalists, who aim to maximise profits and minimise labour costs by curbing protective institutions. Continue reading
Since I was a student I have been fascinated by industrial policy and the role it can play in fostering economic development. It is important for all countries, not least the poorest, but also for those defined as ‘middle income’, which have already industrialised, and some of which have subsequently experienced economic stagnation and even premature deindustrialisation as they cease catching up with the richest countries or those at the technological frontier. Industrial policy in all its forms, whether it involves the promotion of industrialisation itself, or the discovery and commercialisation of new technologies, is vital for raising living standards and enabling the reduction of poverty and inequality around the world. Continue reading
The battle against Covid is coined by Martin Wolf in today’s Financial Times as a ‘gobal war’. He argues that the pandemic can be defeated within a year with the right approach to policy across the world. If this can be done, it will be optimism fulfilled. But it will require significant global cooperation, and support for the poorest and most vulnerable countries.
The advent of the pandemic shows that global health is very much a public good, requiring public action to manage effectively. Globalisation has suffered over the last year or so, with disruption to global supply chains and efforts to more closely manage national borders in attempts to prevent the importing of cases of the virus. Lockdowns have created major economic damage, both both nationally and, inevitably, internationally. No prosperous society or economy can remain isolated from the rest of the world, and while some of the richest can withdraw into greater self-reliance for a time, there remains a need to sustain international integration. Capitalist prosperity relies in part on the growth of global markets. Other pressing global crises remain, particularly environmental concerns such as climate change, pollution and the loss of biodiversity. Covid is diverting the energies of policymakers at a crucial time. Continue reading
This is the fourth and final post in a recent series drawing on ideas contained in the book Trade Wars are Class Wars, co-authored by economic journalist Matthew C. Klein and economics professor Michael Pettis. The last three posts explored, respectively, the importance of a macro or systemic analysis in economics, the nature and dynamics of savings and profits in the economy and the two broad models of economic development as set out by the authors in the book.
The essential thesis of the book is that rising inequality within many nations is restraining global demand and weakening global growth, leading to conflict over trade at the international level. In particular, excess savings, sometimes called a ‘savings glut’, in countries such as Germany and China, are reflected in current account surpluses. The latter are one way of saying that total savings in these countries exceeds total investment.
These positive net savings, or total savings minus total investment, are in these cases the flipside of underconsumption. They have proven to be unproductive, since they cannot be absorbed by productive domestic investment, and have therefore ended up being absorbed abroad, by countries which are willing to run current account deficits, fueling rising debt-fueled consumption, or rising unproductive investment in the form of financial speculation and asset price bubbles. For several decades, this has particularly been the case for the US, which has been willing to absorb unproductive savings from the surplus countries, and has therefore acted as a global spender of last resort in its provision of demand. Continue reading
This is the second post in a series inspired by Matthew C. Klein and Michael Pettis’s Trade Wars are Class Wars, following my look at the importance of systemic factors and emergence in economic analysis.
This time I want to discuss the book’s conception of savings and profits, particularly at the level of the economy as a whole, since this is what the book’s theoretical framework focuses on.
The term ‘profit’ is nowhere to be found in the index, and the main arguments focus more broadly on ‘savings’: how they relate to rising inequality; their relationship to investment and consumption at the macroeconomic level; the impact of these variables on economic growth, trade and financial imbalances; and how all this comes together to provoke international conflict over trade.
The book is not an academic tome, although those who have not digested Pettis’ previous works may find some of the authors’ arguments take a while to grasp, but it is, at least in the world of economics, written for a more general audience. It should thus appeal as much to economists as to policymakers which, given the contemporary relevance of the subject matter, is surely essential. Continue reading
This is the first in a series of posts inspired by Matthew Klein and Michael Pettis’s excellent new book Trade Wars are Class Wars. I introduced this series here. Rather than review the book, which many others have done, I wanted to explore some of the economic, or political economic, ideas that in my view it points towards.
I start by quoting a recent tweet by Michael, which helpfully summarises the content and implications of this post:
“Many economists and economic commentators have a very hard time understanding how systemic constraints work. They assume that the collective is nothing more than the sum of millions of individual decisions freely arrived at, when in fact those decisions are collectively constrained by adjustments in the system that force a certain outcome. That is why everyone’s “individual” decision ends up being collectively whatever it takes to get the systemic constraints to resolve.”
In short, this makes the important point that macroeconomics does not reduce to microeconomics. This is contrary to so-called ‘representative agent’ models of the economy, which assume that the latter can essentially be represented by a single individual. By adding the behaviour of millions of identical such individuals together, such models argue for highly restrictive ‘micro-foundations’. Continue reading
“When they hear someone criticizing free trade, free-trade economists tend to accuse the critic of being ‘anti-trade’. But criticizing free trade is not to oppose trade.
Apart from the benefits of specialization that the theory of comparative advantage extols, international trade can bring many benefits. By providing a bigger market, it allows producers to produce more cheaply, as producing a larger quantity usually lowers your costs (this is known as economies of scale). This aspect is especially important for smaller economies, as they will have to produce everything expensively, if they cannot trade and have a bigger market. By increasing competition, international trade can force producers to become more efficient – insofar as they are not developing country firms that would get wiped out by vastly superior foreign firms. It might also produce innovation by exposing producers to new ideas (eg., new technologies, new designs, new managerial practices).
International trade is particularly important for developing countries. In order to increase their productive capabilities and thus develop their economies, they need to acquire better technologies. They can in theory invent such technologies themselves, but how many new technologies can relatively backward economies really invent on their own?…For these countries, therefore, it would be madness not to take advantage of all those technologies out there that they can import, whether in the form of machines or technology licensing (buying up the permit to use someone else’s patented technology) or technical consultancy. But if a developing country wants to import technologies, it needs to export and earn ‘hard currencies’ (universally accepted currencies, such as the US dollar or the Euro), as no one will accept its money for payments. International trade is therefore essential for economic development.
The case for international trade is indisputable. However, this does not mean that free trade is the best form of trade, especially (but not exclusively) for developing countries. When they engage in free trade, developing countries have their chances of developing productive capabilities hampered…The argument that international trade is essential should never be conflated with the argument that free trade is the best way to trade internationally.”
Ha-Joon Chang (2014), Economics: The User’s Guide, Pelican Books, p.412-4.