Investment-savings, global imbalances and crisis: the economics of Michael Pettis

the-great-rebalancing-coverI have been greatly inspired by economist Michael Pettis, who blogs here. His work on the causes of the Great Recession, the eurozone crisis and, especially, Chinese development, seems to me to be both original and revelatory. In what follows I will outline the basic elements of his insightful theory of the global economy.

Pettis’ work draws on the ideas of Keynes, Minsky and many others, and incorporates lessons from economic history and political economy, which makes its scope broad and widely applicable.

At the heart of his theory are some accounting identities which are basic to international macroeconomics.

To begin with, for any economy, the current account surplus is equal to the excess of domestic savings over domestic investment. To put it another way, net domestic savings (gross savings minus gross investment, whether private or public) is equal to foreign borrowing, or domestic lending abroad. Continue reading

Keynes on global trade, conflict and full employment

keynesThe passage below is taken from the concluding pages of John Maynard Keynes’ famous General Theory, where he speculates on the benefits to international relations from avoiding conflict over international trade. If full employment can be achieved domestically through judicious government policies this would, he hoped, lessen the need for countries to come into conflict with each other over the balance of payments of trade, investment and capital flows.

Given the historical record, I am actually skeptical about the possibilities for achieving and sustaining full employment, however that might be defined. I am therefore not a perennially optimistic Keynesian. Sooner or later, growing economic imbalances will give rise to crisis and recession, and rising unemployment. However, I do think the world economy could be more wisely managed than it is now, with the US the (still?) reluctant hegemon and a rising China among other potentially destabilising trends. Continue reading

200 Years of Ricardian Trade Theory: How Is This Still A Thing?

A critique of Ricardo’s theory of international trade from the Developing Economics blog

Developing Economics

maxresdefault.jpegOn Saturday, April 19th 1817, David Ricardo published The Principles of Political Economy and Taxation, where he laid out the idea of comparative advantage, which since has become the foundation of neoclassical, ‘mainstream’ international trade theory. 200 years – and lots of theoretical and empirical criticism later – it’s appropriate to ask, how is this still a thing?[1]

This week we saw lots of praise of Ricardo, by the likes of The Economist, CNN, Forbes and Vox. Mainstream economists today tend to see the rejection of free trade implicit in Trump and Brexit as populist nonsense by people who don’t understand the complicated theory of comparative advantage (“Ricardo’s Difficult Idea”, as Paul Krugman once called it in his explanation of why non-economists seem to not understand comparative advantage). However, there are fundamental problems with the assumptions embedded in Ricardo’s theory and there’s little…

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Beggar-thy-neighbour, and thyself?

Containers are loaded onto a container ship at a shipping terminal in the harbour in HamburgYesterday’s post mentioned the ‘beggar-thy-neighbour’ policies pursued by Germany, which have supported export-led growth, at the expense of its eurozone neighbours, and more recently the wider global economy. The Trump administration has criticised German trade policies and has vowed to use protectionism to promote US industry. It is possible that this will create employment in the short run in particular industrial sectors, but the effect on the US economy overall will be more complex. Other nations could retaliate and the resultant shrinkage in world trade could ultimately undermine global economic growth, albeit unevenly.

In a world with persistently sluggish growth in demand, such as we are continuing to witness in the wake of the financial crisis, there is thus a greater potential for conflict over international trade. Things have not entirely mirrored the 1930s, when the Great Depression gave rise to substantial protectionism in many nations, but the pressure to adopt nationalist policies in the absence of global cooperation is still strong. Continue reading

US-China industry and trade relations – what’s in store?

An interview with Professor John Weeks on Trump’s efforts to revive US manufacturing and the potentially tense international relations in store. Weeks describes how many nations adopt policies which promote their exports, so that the idea of ‘free trade’ is often misleading. Subtle industrial policies such as these are apparently quite common.

Trump and free trade

A letter from economist Steve Keen, and a brief discussion by Lars P. Syll, drawing attention to the importance of absolute advantage in international trade, rather than the traditional theory of comparative advantage which students are taught at school and university.

Dear President Trump, Plenty of people will try to convince you that globalization and free trade could benefit everyone, if only the gains were more fairly shared … This belief is shared by almost all politicians in both parties, and it’s an article of faith for the economics profession. You are right to reject it […]

via Trump and free trade — LARS P. SYLL