“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.
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.
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 […]
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.
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.
More 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.”
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, 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 →