Re-reading Keynes

Economist John Maynard KeynesI recently re-read John Maynard Keynes’ magnum opus, The General Theory of Employment, Interest and Money (hereafter GT). First published in 1936, this was the great man’s attempt to persuade his fellow economists that changes to their understanding of economic theory and policy were necessary to remedy the mass unemployment which seemed to be a recurring feature of capitalist economies, particularly during the Great Depression of the 1930s.

It is now a decade since the onset of the Great Recession, when governments across the world ‘rediscovered’ Keynes, or what they thought were Keynesian ideas, for fighting the economic slump. There was a brief revival of activist fiscal policy: taxes were cut, public spending increased and government deficits rose. But once the threat of collapse had been averted, there was a turn to austerity in many countries, amid renewed worries about ‘credibility’ and business confidence. Continue reading

Marx, Keynes, Hayek and Minsky on economic crises: room for agreement?

At first glance, it would seem fanciful that the theories of Karl Marx and Friedrich Hayek could be drawn on together to explain economic crises, or cycles, booms and busts. Certainly, the two men’s politics could not have been more different: Marx predicted (and hoped for) either the collapse or the overthrow of capitalism and its replacement by socialism and communism. Hayek thought that most kinds of state intervention in the market were the thin end of the authoritarian wedge.

The ideas of John Maynard Keynes and Hyman Minsky are more compatible, and both have many disciples in the post-Keynesian school. Minsky developed Keynes’ theory of investment and its role in instability under capitalism. For Keynes and Minsky then, capitalism is inherently unstable, money and finance play a large role in this instability and it is the job of government to save the system from itself.

On economic policy, these four influential thinkers part ways. Marx offered little theory of policy; Hayek, like others in the Austrian school, rejected it as damaging and favoured a laissez-faire approach; Keynes and Minsky were interventionists. Continue reading

Equality and growth – no conflict?

“To lay a factual foundation to the argument for raising the American income floor, we need to sweep away the remnants of an older view that policies cannot promote both equality and growth. The older view assumed an “efficiency-equity trade-off.” If such were true, then nothing could be done to foster economic growth without the collateral damage of greater inequality, or greater equality without the collateral damage of less growth.

History does not confirm such a trade-off. To remember why, first consider a simple point about the political process…A dominant historical outcome has been that vested interests have blocked initiatives that would promote growth and/or equality. A conspicuous example is the suppression of mass public schooling – an investment that clearly promotes both equality and growth. Our second consideration comes from the numbers: history does not record any correlation – negative or positive – between income equalization and economic growth, either in our new American history over the past 360 years or world history over the past 150 years. The correlation does not emerge, regardless of whether “growth” means the GDP per capita growth rate or its absolute level, and regardless of whether “equalization” means the share of social spending in GDP, some measure of policy-induced redistribution, the level of pre-fisc income inequality before taxes and transfers, or even the rate of change in any of these.

Economists have explored the effects on income per capita growth of three kinds of egalitarian variables: tax-based social spending and its composition; fiscal redistribution, measured by the gap between pre- and post-fisc inequality; and the greater equality of pre-fisc incomes before taxes and transfers. An empirical literature using contemporary world evidence finds that the growth effect of equalizing incomes is not significant. History agrees. American experience does not reveal any clear effect on GDP of greater tax-based social spending or more progressive redistribution from rich to poor. Indeed, recent analyses suggest that greater pre-fisc equality has a positive effect on growth. This result supports the argument that egalitarian investments in human capital simultaneously achieve more equality and more growth. While these statistical results can be and have been debated, they do not support any claim that equalizing incomes must lower growth. American income history offers no support either.

If there were any fulcrum at which historical insight might be applied to move inequality, it would be political…no nation has used up all its political opportunities for leveling income without harming economic growth. Improving education, taxing large inheritances, and taming financial instability with regulatory vigilance – the opportunities are there, like hundred dollar bills lying on the sidewalk. Of course, the fact that they are still lying there testifies to the political difficulty of bending over to pick them up.”

Peter H. Lindert and Jeffrey G. Williamson (2016), Unequal Gains – American Growth and Inequality since 1700, Princeton University Press, p.261-2.

There are influential theoretical arguments in economics supporting policies which promote growth by, on the one hand, increasing and, on the other, reducing inequality. The above conclusion to Lindert and Williamson’s comprehensive historical study of American growth and inequality is either ambivalent to or in support of a positive relationship between reduced inequality, certainly at its current level in many countries, and faster growth.

Their argument is that the forces generating inequality are largely exogenous (they come from outside the economic system), and so can be altered through policy without harming growth.

Clearly there are limits to this. Perfect equality of incomes and wealth would destroy the incentives required for economic activity. Ever-increasing inequality could also lead to the sort of social division and political instability which would be destructive of the status quo. Neither extreme is sustainable.

From a macroeconomic perspective, greater inequality can promote or reduce growth, depending on the economic context. If productive investment is constrained by a lack of savings, redistributing income and wealth to those economic agents who tend to save a larger share of their income, such as the wealthier members of society or firms, would provide the resources for that investment by increasing the economy’s savings rate. In this situation, greater inequality can boost growth.

This is an argument often associated with Marxist thinking and the central notion of the rate of profit or surplus in providing the resources and motivation for new investment. Growth is “profit-led”.

By contrast, if productive investment is constrained by a lack of consumption spending, then redistribution to those who consume a larger share of their income, normally the poorer members of society, will boost consumption and stimulate investment. In this case, reducing inequality can boost growth, while policies which increase it will lower growth.

This latter argument finds support in Keynesian and post-Keynesian thinking, so that spending for consumption helps drive investment spending. Growth is held back by “under-consumption” and is “wage-led”. If this is the case, then a strong argument can be made for win-win progressive policies which boost household incomes and wages and reduce inequality while raising growth.

Inequality shapes and is shaped by both economic and political forces. There is perhaps “plenty to play for” in terms of policies which promote greater social justice under capitalism, without undermining its foundations. In today’s climate, they are surely essential to sustaining those foundations.

Trumponomics and investment

“The weakness of private business investment in most developed countries through the neoliberal era is difficult to explain on the basis of a standard regression equation. Most of the usual determinants of investment – including profitability, interest rates, and tax and regulatory policies – were aligned in a direction that should have elicited more private investment effort. But the neoliberal recipe delivered less investment, not more. And the failure of accumulated wealth to trickle down creates major economic and political problems for the system and its elites.

For all of Donald Trump’s claims of being an “outsider”, changing the traditional rules of politics and policy, his economic program is absolutely consistent with the general direction of the trickle-down, neoliberal policies that have already governed the US for almost four decades. Trump will further shift the distribution of income upward to corporations and those who own them. His policies will suppress the incomes and the consumption of workers – including cutting their public services. His regulatory and fiscal priorities will favour investment in expensive, capital-intensive sectors (like energy and defense) that support relatively few jobs, while imposing enormous costs on broader society and the planet. His financial and monetary policies will continue to privilege financial wealth and speculation over real investment and production, undoing even the baby steps taken to rein in finance after the conflagration of 2008. The core logic of his approach is transparent: enhance the wealth and power of business and the wealthy, and they will invest more in America, and everyone will prosper. There is very little novel content in Trump’s incarnation of trickle-down policy, and very little reason to believe that it will succeed in revitalizing business investment activity that has chronically disappointed. Outside of bursts of new activity in a couple of targeted sectors (like energy and military industries), there is no reason to expect that the trajectory of US business investment will improve in any sustained fashion under Trump’s guidance. Certainly his program cannot recreate the virtuous combination of driving factors that powered the long postwar boom in US capital accumulation: near-full employment, a growing public sector, and strong productivity growth, all of which (for a while) reinforced the vitality of private investment.

Even if the Trump program did succeed in motivating a generalized resurgence in US private business investment, of course, Americans (and others around the world) would have to ask themselves, “At what cost?” A temporary burst in investment in fossil fuel extraction and consumption, achieved by abandoning environmental regulations that were already too weak, is of dubious value when the costs of fossil fuel use are becoming intolerable. Similar questions could be asked about the general strategy of reinforcing profit margins through the suppression of wages and other socially destructive levers, in a country which already experiences more poverty and inequality than any other industrial nation. Business investment is never an end in its own right; it is socially beneficial only to the extent that it underpins job creation, incomes, productivity, and ultimate improvements in living standards. Trying to elicit a bit more investment effort by suppressing living standards a little further, is self-defeating to the ultimate purpose of economic development.

Investment in the US, and other advanced industrial countries, is held back by more fundamental problems than corporate tax design or environmental regulations. The fundamental vitality of the profit motive in eliciting accumulation, so celebrated in the early chapters of capitalist history, seems to have dissipated. The owners of businesses are content to consume their wealth, or hoard it, or speculate with it, instead of recycling it via new investments. Ever-more desperate attempts to elicit a bit more investment effort never seem to alter this stagnationist trajectory – with the incredible result today that overall production is actually becoming less capital-intensive, despite “miraculous” technological innovations. Trump is giving the trickle-down theory one more kick at the can, having successfully capitalized on popular discontent with the failures of previous attempts. Progressives must work harder to illuminate the failure of this business-led economic logic, and come up with other visions for financing capital investment, innovation and job-creation that do not depend on fruitlessly bribing the investing class to actually do the job it is supposed to.”

Jim Stanford (2017), US private capital accumulation and Trump’s economic program, in Trumponomics: Causes and Consequences, World Economic Association: College Publications, p.135-7.

The complete original article can be accessed for free here.

On catch-up industrialisation

In a number of previous posts on development and industrial policy, I have mentioned the concept of ‘catch-up’. I thought it might be useful to define it in some detail, so here is Akira Suehiro of the University of Tokyo, taken from his comprehensive work Catch-Up Industrialization (2008, p.3-4):

“Catch-up industrialization is a pattern of industrialization frequently, indeed necessarily, adopted by late-industrializing countries and late-starting industries. It is an essential aspect of any attempt to reduce the gap in national wealth between developing and developed countries.

The many varieties of catch-up industrialization generally have the following two points in common.

First, latecomers to industrialization enjoy the advantages of “economic backwardness”, or the advantage of being able to make use of technologies and knowledge systems developed by countries that have gone before. It is expensive and time-consuming for any country to independently develop new technologies and products, not to mention new industrial structures or management organizations. Latecomer countries can achieve great savings of time and capital by adopting the necessary technology and know-how from countries that have already industrialized.

It follows that an important challenge for governments and enterprises in latecomer countries is how to go about importing, adapting, and improving foreign technologies and systems as smoothly as possible. From this fact of life stem many of the most striking features of catch-up industrialization: strong government leadership, positive involvement by financial institutions (with corporate finance through commercial banks rather than stock-markets), development of information-sharing systems between government and private sector and between assemblers and suppliers (intermediate organizations, keiretsu, etc.), the continuation of family businesses such as zaibatsu in corporate management, and the development of distinctive production management control systems in the workplace (the kaizen and just-in-time systems, workers’ commitment to management, etc.).

The second common feature among latecomers to industrialization is that they have to start by importing most industrial products. For some time they have to earn the foreign currency to pay for these imports through exports of primary products such as mineral and agricultural products. In order to reduce imports, the latecomer countries launch a policy of domestic production and import substitution, starting with relatively low-tech, labor-intensive industries. Consider, for instance, the case of textile products. If a country has just commenced domestic production of synthetic fiber products, that necessitates imports of the chemical raw materials, plus the machinery and equipment to process them. The country has to export textile products to get the necessary foreign currency for these imports, while also commencing production of chemical products and machinery at home.

A cycle consequently develops: from importing to domestic production, then to exporting (or overseas production), then to re-importing. At the same time it is important to establish a trade policy centered on import substitution and export promotion, and an industrial policy aimed at the protection and fostering of domestic industries. In short, trade and industry are inextricably interlinked. It follows that under the conditions of this first phase, with its dependence on imports and its need to conserve limited supplies of foreign currency, an important challenge for those who would catch up is the effective distribution and control of available economic resources. This means that a set of policy structures – regulations on trade, tariffs and investment, export-led industrialization, tie-ups with foreign capital to foster export-oriented industries, etc. – constitute another feature of catch-up industrialization.”

Industrial policy and Chinese development

The rapid growth and transformation of the Chinese economy since 1978, when policymakers began a programme of economic reforms, has been extraordinary. Up until the last few years, GDP growth averaged around 10% per year, lifting hundreds of millions out of poverty. This represents the largest episode of poverty reduction in human history. China, as the largest manufacturing nation, has become the ‘workshop of the world’.

With a population of 1.4 billion, and an economy relatively open to international trade, these changes have and will continue to have an enormous impact on the rest of the rest of the world. For this reason, we should take a great interest in China’s continuing evolution.

Donald Trump, both on the campaign trail and since becoming US President, has placed great emphasis on getting some sort of ‘better deal’ between the US and Chinese economies. His administration has criticised China for taking advantage of the US on trade and the use of technology. But should China’s rise be a worry in these respects? Or is the US being hypocritical? In fact today’s rich countries all intervened in the economy and used forms of trade, industrial and technology policy to promote their growth and enable periods of ‘catch up’ with those at the frontier. China has been no exception. Continue reading