Yanis Varoufakis on the paradox of success

“Self-restraint, as the philosophers know, is a rare and bewildering virtue. It is also a virtue that tends to come unstuck the more powerful we become. In this it resembles the relationship between trust and success: the stronger the bonds of trust between us, the greater our collective and individual success. But success breeds greed, and greed is a solvent of trust. Similarly with self-restraint: having it can help one succeed. But then success poses a threat to one’s self-restraint.”

Yanis Varoufakis (2015), The Global Minotaur – America, Europe and the Future of the Global Economy (p.249)

This thought-provoking quote is taken from the postscript of Varoufakis‘s enlightening book on the roots and evolution of the Global Financial Crisis, originally published in 2011.

The author describes how post-war US hegemony produced a ‘Global Plan’ which helped to underpin a successful capitalism for twenty years; its ‘finest hour’, according to Varoufakis, and what has often been called the Golden Age. This gave way to his ‘Global Minotaur’ in the 1970s, which ultimately led us to the crisis of 2008 and its collapse.

The key that links these systemic ideas, and the possibility of a successful global capitalist future is what he calls the ‘global surplus recycling mechanism’ (GSRM). The evolution of the GSRM is the unifying theme which unites the book, which I will discuss in a future post.

Some of The Global Minotaur‘s ideas overlap with those of Michael Pettis, particularly in the latter’s book The Great Rebalancing. In fact the two are largely complementary, as Pettis describes the domestic policies in countries such as China and Germany, which helped to create the financial imbalances that caused the crisis.

Joseph Stiglitz: industrial policies are becoming “in” again

In the video below, Nobel prize-winning economist Joseph Stiglitz describes the comeback of industrial policies in economic debate and policy. Stiglitz comes from the centre-left politically, and certainly takes progressive views on issues such as inequality and state intervention.

He has chosen to critique mainstream neoclassical thinking from ‘within’ by focusing on market failure and imperfections, which opens the way to policies designed to make the market work better. It remains a market-centric viewpoint.

While taking on the mainstream is admirable, this necessarily leaves out the interdisciplinary perspectives of political economy, which in my view offer a richer understanding of socioeconomic phenomena. For those more wedded to the latter, coming from outside the mainstream, industrial policy has been studied in depth for some time.

Despite this, Stiglitz remains an interesting and influential figure.

Economic crises: look to science or the rain gods? – via Michael Roberts blog

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 […]

via Economic crises: look to science or the rain gods? — Michael Roberts Blog

‘Modern’ industrial policy in brief

In the short video below, Evelyn Dietsche outlines what she calls a ‘modern’ approach to industrial policy that developing countries can apply to their policymaking. She contrasts the lessons of those countries in East Asia that industrialised successfully in the post war period, with the relative failures of such policies in other nations.

Although she mentions rent-seeking as a potentially bad outcome of industrial policy, the video misses the point that rent-seeking can lead to value-creating rents which benefit development. All economies have rents and rent-seeking, broadly defined, although they tend to be more formal and legalised in advanced countries, taking forms such as lobbying rather than bribery and other forms of corruption.

The video does discuss the need to look at the specific contexts in which industrial policy takes place in different countries. This is an important point.  In some cases, a successful industrial policy may require some kind of prior political reform; in others, a particular economic policy may be implemented straight away. In both situations, governments and other institutional actors need to adopt an experimental approach, and learn from successes and failures as they go.

Overall the video makes some helpful points in introducing some of the modern research findings on industrial policy. The latter has had something of a bad name in mainstream circles, but the tide has been shifting in recent years.

Michael Hudson on The American School of Political Economy

JisforJunkEconMore from iconoclast Professor Michael Hudson’s book J is for Junk Economics (p.30-32). For a more detailed account, I can recommend his book America’s Protectionist Takeoff 1815-1914, which I have posted on here.

“American School of Political Economy: The northern economists who focused on protective tariffs, infrastructure investment and a national bank to promote industrial and agricultural technology before and after the Civil War (1861-65). Mathew and Henry Carey, Henry Clay and William Seward among the Whigs and, after 1853, the Republicans, provided the economic policy that enabled America to industrialize and overtake England. They also emphasized the positive effect of rising wage levels and living standards on the productivity that made the American economic takeoff possible. Every major Northern politician and region was associated with a major economist: Alexander Everett for Daniel Webster and other Bostonians; Calvin Colton for Henry Clay; the Careys for Pennsylvania industrialists; and E. Peshine Smith for Seward and the Republicans. They developed the logic for tariff protection as opposed to Ricardian free-trade theory, and for government-sponsored internal improvements and a national bank to finance industry and achieve monetary independence from Britain.

It is testimony to the censorial power of subsequent free-trade ideology that these writers make no appearance in histories of economic thought. Historians have also ignored them, focusing on the Democratic Party (which meant mainly the South seeking to add slave states). At issue was whether the United States would suffer deflation and monetary and trade dependency on Britain, or would become independent. The American School opposed westward expansion and Manifest Destiny, and also opposed the Anglophilia of free traders and slave owners. The latter demanded monetary deflation to prevent industrialization so as to keep food prices low (and hence the cost of feeding slaves).

When the Civil War brought the Republicans to power, the American School found that the most prestigious colleges – founded originally to train the clergy – simply taught mainstream British free trade economics (largely because New England and southern seaboard schools favored free trade). The path of least intellectual resistance was to create a new set of schools – business schools and state land-grant colleges.

A central tenet of the American School was technological optimism in contrast to the Dismal Science of Ricardo and Malthus based on diminishing returns in agriculture and overpopulation leading to poverty. Also central was the Economy of High Wages doctrine: “It is not by reducing wages that America is making her conquests, but by her superior organization, greater efficiency of labor consequent upon the higher standard of living ruling in the country. High-priced labor countries are everywhere beating ‘pauper-labor’ countries.”

By the late 19th century nearly all the major American economists studied in Germany and followed the Historical School. Returning to America, they developed the Institutionalist School to explain why the United States should follow a different economic path from free-trade Britain. They continued to elaborate the logic for the protective tariffs that were nurturing American industry, as well as for public support for internal infrastructure improvements so as to create a low-cost competitive US economy. Most notable was Simon Patten, the first professor of economics at the Wharton School at the University of Pennsylvania. He taught protectionist trade theory and led economists into the discipline of sociology to analyze what he called the Economy of Abundance that resulted from the increasing returns in industry and agriculture.

When the United States achieved world industrial and financial dominance after World War I, it deterred other countries from protecting their own industry and agriculture – while continuing to protect its own. This about-face emulated British experience in urging free trade on other countries so as to make them dependent. This free-trade logic remains the buttress of today’s financial austerity and privatization policies imposed on debtor economies by the United States, the World Bank, and the International Monetary Fund. These policies are the opposite of America’s own protectionist takeoff, the Economy of High Wages Doctrine and the Economy of Abundance that powered its rise to global economic supremacy. The lessons of the American School of Political Economy provide a more realistic model for other countries to emulate.”

Synthesizing of Marx and Keynes

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.

Justin Lin on ‘jump-starting’ development: what’s good and what’s missing

LinMongaBeatingTheOddsJustin Lin, a former Chief Economist at the World Bank, is the author of several works on what he calls ‘new structural economics’. His latest book, Beating The Odds, is co-written with Célestin Monga, the current Chief Economist at the African Development Bank. It is ambitiously subtitled Jump-Starting Developing Countries.

The book contains some useful ideas on development policy, although for those more wedded to a political economy of development, rather than neoclassical economics, and all the self-styled ‘new’ branches of neoclassical theory, it is necessarily limited, compared to a more interdisciplinary story of development theory and policy.

I shall start with what is good in the book, and move on to what is missing, from the perspective of what I find to be a richer framework of political economy. Continue reading

Politics and economics overlap

I am very much in favour of interdisciplinarity when it comes to economics and the richer insights it provides of the economy and society. Here is Mark Blyth on how it is misleading to separate the economic from the political. Doing so neglects a proper incorporation of such factors as distribution, power and vested interests:

Michael Hudson on rent-seeking

JisforJunkEconAnother 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.”

Ellen Meiksins Wood on the spread of capitalism

The Origin of CapitalismMarxist historian Ellen Meiksins Wood, in an excerpt from her hugely interesting book The Origin of Capitalism, describes the spread of capitalism from its unique genesis in England and its impact on international relations (p.174-6). The section on the role of the state in promoting ‘late’ development beyond Britain remains particularly relevant to today’s poorest countries:

“For those who regard capitalism as the consequence of commercial expansion when it reached a critical mass, there is something paradoxical about the development of English capitalism. England was certainly part of a vast trading network. But other European nation states in the early modern period were also deeply involved in the system of international trade, as were non-European civilizations, some of which long had trading networks more highly developed and extensive than the European. What distinguished England – and what was specifically capitalist about it – was not, in the first instance, predominance as a trading nation or any peculiarity in its way of conducting foreign trade. England’s peculiarity was not its role in an outwardly expanding commercial system but, on the contrary, its inward development, the growth of a unique domestic economy.

What marked off England’s commercial system from others was a single large and integrated national market, increasingly uniting the country into one economic unit (which eventually embraced the British Isles as a whole), with a specialized division of labour among interdependent regions and a growing, and mutually reinforcing, interaction between agricultural and industrial sectors. While England competed with others in an expanding system of international trade, not least by military means, a new kind of commercial system was emerging at home, which would soon give it an advantage on the international plane too. This system was unique in its dependence on intensive as distinct from extensive expansion, on the extraction of surplus value created in production as distinct from profit in the sphere of circulation, on economic growth based on productivity and competition within a single market – in other words, on capitalism.

Capitalism, then, while it certainly developed within – and could not have developed without – an international system of trade, was a domestic product. But it was not in the nature of capitalism to remain at home for very long. Its need for endless accumulation, on which its very survival depended, produced new and distinctive imperatives of expansion. These imperatives operated at various levels. The most obvious was, of course, the imperialist drive. Here again, although other European states were deeply involved in imperialism, capitalism had a transformative effect. The new requirements of capitalism created new imperialist needs, and it was British capitalism that produced an imperialism answering to the specific requirements of capitalist accumulation. Above all, capitalism created new imperialist possibilities by generating economic imperatives, the compulsions of the market, which could reach far beyond direct political dominion.

Capitalism also expanded out from Britain in another and more complicated sense. The unique productivity engendered by capitalism, especially in its industrial form, gave Britain new advantages not only in its old commercial rivalries with other European states but also in their military conflicts. So, from the late eighteenth century and especially in the nineteenth, Britain’s major European rivals were under pressure to develop their economies in ways that could meet this new challenge. The state itself became a major player. This was true most notably in Germany, with its state-led industrialization, which in the first instance was undoubtedly driven more by older geopolitical and military considerations than by capitalist motivations.

In such cases, the drive for capitalist development did not come from internal property relations like those that had impelled the development of capitalism in England from within. Where, as in France and Germany, there was an adequate concentration of productive forces, capitalism could develop in response to external pressures emanating from an already existing capitalist system elsewhere. States still following a pre-capitalist logic could become effective agents of capitalist development. The point here, however, is not simply that in these later developing capitalisms, as in many others after them, the state played a primary role. What is even more striking is the ways in which the traditional, pre-capitalist state system, together with the old commercial network, became a transmission belt for capitalist imperatives.

The European state system, then, was a conduit for the first outward movements of capitalism. From then on, capitalism spread outward from Europe both by means of imperialism and increasingly by means of economic imperatives. The role of the state in imperial ventures is obvious, but even in the operation of purely economic laws of motion, the state continued to be an unavoidable medium.

Capitalism had emerged first in one country. After that, it could  never emerge again in the same way. Every extension of its laws of motion changed the conditions of development thereafter, and every local context shaped the processes of change. But having once begun in a single nation state, and having been followed by other nationally organized processes of economic development, capitalism has spread not by erasing national boundaries but by reproducing its national organization, creating an increasing number of national economies and nation states. The inevitably uneven development of separate, if interrelated, national entities, especially when subject to imperatives of competition, has virtually guaranteed the persistence of national forms.”