How Abraham Lincoln’s political economy ‘trumped the Free Trade British System’

I have written before on the oft-neglected American School of political economy, drawing on the work of Michael Hudson here and here.

Along the same vein, November’s issue of the Cambridge Journal of Economics features an article by Emir Phillips. It is included as the Editor’s Choice, so you can read it for free on the journal website or by downloading the pdf.

Here is the abstract:

The Whigs could legitimately emphasise what Hamilton’s Report had not touched upon: urban labourers made unemployed by import competition could not shift to ‘collateral employments’ with the presumptive ease asserted by Free Trader Democrats. More than anything, it was the structural cyclical instability (Minsky moments) that engendered a new party (Republican) to exert political pressures for government involvement in the management of the economy (mercantilism). Economic beliefs played the most fundamental role in Lincoln’s career, and his mercantilist views, in conformity with Hamilton, Clay and the economist Carey, were key determinants in effectuating the Industrial Revolution within the United States through tariffs, government-supported macro-projects and structurally stimulating aggregate demand through a national currency. Permeating Lincoln’s political economy was a fierce non-neutral view of money wherein banks created the funds to ignite the American System. Henry Clay, Henry Carey and Abraham Lincoln were seeking to supplant the Ricardo–Malthus long-term model of economic growth (emphasising distribution within a relatively stagnant economy) with one of expanding productive powers and rising wage levels. These interventionist issues are still quite relevant since US economics students are taught modernised versions of the doctrines of Ricardo and Malthus which were controverted more than a century ago by the American School, and more specifically by Abraham Lincoln.

The article tells the story of how 19th century Whig-Republicans, and Abraham Lincoln in particular, accelerated industrialisation in the US through government intervention in the economy, such that

Mercantilist nationalism (Republican Party of 1860) confronted both the Free Trader Jacksonian-Democrats and the US Constitution, and created a commercially linked Nation whose industrial productivity over the next 60 years (all US Presidents without exception were Republican until President Wilson) supplanted England as the world’s workshop (p.1455).

The policies used included a combination of tariffs to protect domestic industry from English manufactured exports and raise government revenue, investment in transport infrastructure, particularly railroads, and management of the national currency to sustain aggregate demand and investment in industry.

The American System or School saw capital and labour as potentially complements, in that investment in productive capacity in increasing returns industries, namely manufacturing, would stimulate rising productivity and output. This would enable both profits and wages to rise, so that both capitalists and workers would benefit from economic development, resulting in some form of social harmony and supporting national democracy. Thus

[b]y 1845, Lincoln perceived these United States as entirely dependent upon certain economic activities subject to increasing returns, with each regional section being a synergetic phenomena built upon a mutual dependency created by finely knit and interlocking network of rail, divisions of labour and raw inputs into a manufacturing Northeast. Within this matrix, social mobility (‘equal opportunity for the pursuit of happiness’) was enchained to industrial productivity to the benefit of all Americans. The increasing returns found in Northern manufacturing created the synergetic element that made the United States greater than its parts (the States). The Republicans were then the National Capitalist Party, with wealth creation and not Constitutional adherence as its abiding precept (p.1455-6).

Heiner Flassbeck – Harz IV and the purpose of economics

Here is the latest post from Heiner Flassbeck, formerly of UNCTAD, and who now runs his own consultancy which focuses on macroeconomic questions.

The post explores how a decade of wage repression following the Harz IV reforms in Germany resulted in weak growth in wages relative to productivity, which in turn weakened growth in domestic demand and led to a boom in exports. The piece contains some useful charts comparing the growth in foreign and domestic demand in Germany and France.

These trends created major economic imbalances in the eurozone which in the long run proved unsustainable as they weakened economic performance in the region and were a major factor behind the global financial and eurozone crises.

Whether you are a supporter or detractor of the ‘European project’, these arguments should not be ignored. They point to the need for reforms to the structure of policymaking in the eurozone, particularly in Germany, it being the largest country with the largest current account surplus. Such reforms are needed in order to promote widespread prosperity and help to safeguard the future of the region. On the other hand, if this need is neglected, the disruptive breakup of the eurozone cannot be ruled out.

Flassbeck concludes as follows:

“In order to counter the centrifugal forces in Europe, Germany must lead the way by withdrawing its reforms and normalising wage developments. On the other hand, Germany would undoubtedly be hit hard economically in an exit scenario of Italy or France. It would have to reckon with its production structure, which is extremely export-oriented and which was formed in the years of monetary union, being subjected to a hard adjustment. The German recession is already showing how susceptible the country is to exogenous shocks.

The basic decision in favour of the euro can still be justified today with good economic arguments. The dominant economic theory, however, has ignored these arguments from the outset and politically disavowed them. Built on monetarist ideas in the European Central Bank and crude ideas about competition between nations in the largest member state, the monetary union could not function. All those who want to save Europe as a political idea must now realise that this can only be achieved with a different economic theory and a different economic policy that follows from it. Only if the participation of all members of society in economic progress is guaranteed under all circumstances and the competition of nations is abandoned can the idea of a united Europe be saved.”

Reflections on industrial policy – France and ‘Les Trente Glorieuses’

Les30Glorieuses‘The Glorious Thirty’ was originally coined by the French demographer Jean Fourastié in 1979 to describe his country’s unprecedented economic boom between 1945 and 1975. Lasting from the end of World War Two to the first oil shock of the 1970s,  it saw growth in output, productivity, wages and consumption faster than before or since, and significant structural change, as resources moved from the agricultural sector and luxury artisan products towards industry.

France rapidly closed the gap in living standards with the US over the period, more or less matched West Germany’s performance, and overtook the UK. It managed an average growth rate of 5.1% throughout the 1960s.

This was in many ways the heyday of state intervention in the major capitalist economies, and the use of various forms of industrial policy was widespread. Post-war France, as elsewhere in Europe, required a major rebuilding of infrastructure and industrial capacity after the damage wrought by conflict. These included transport, the utilities, capital goods and heavy industry.

Beyond this, the government felt that a high standard of living and strong national defence to preserve relative independence required industrialisation. It was decided that this could not be wholly left to the uncertain outcomes associated with market forces. After the experiences of economic planning in many countries during the war, state intervention was felt to be both necessary and effective for the purposes of accelerating recovery while preserving freedom, democratic institutions and private property as far as possible. Continue reading

Where to Invade Next – social progress and a productive economy

WhereToInvadeNextI have ‘enjoyed’ (if that is the appropriate word) much of the work of US filmmaker Michael Moore. He tirelessly aims through this work and beyond it to campaign for a more progressive society and politics. He tries to entertain, inform and persuade. I often get the feeling when watching his films that he is preaching to the converted, but I still find myself learning something new.

His 2015 offering Where to Invade Next sees him visiting various countries around the world, mainly in Europe but also elsewhere, exploring aspects of their culture which as an American ‘liberal’ he admires more than the home-grown alternative. For each aspect, he plants the stars and stripes, indicating his ‘invasion’, and vows to steal the particular idea and take it back to the US. Continue reading

The policy that shall not be named

Production_LineThe IMF recently published a refreshing paper on the principles of industrial policy. The paper is quite lengthy, so I will summarise and discuss some of the main points here. The authors do not speak for the IMF of course, and it merely reflects their current research, but it remains important.

The paper is important because it unambiguously makes the case for an active industrial policy in developing countries to enable them to catch up with the richest countries.

They argue that successful examples of such a development strategy have been extremely rare in recent decades, but that it is vital to learn from them. They use the case studies of the ‘Asian miracle’ economies of South Korea, Taiwan, Singapore and Hong Kong, which were relatively poor some decades ago, but managed to industrialise and grow rapidly, enabling them to catch up and graduate into the club of advanced economies.

They also note that most if not all of today’s rich countries, including the US, Japan and Germany, followed such a strategy during their catch-up phases of growth, and continue to employ industrial and technology policies, albeit in different forms.

The paper is also refreshing because the IMF, and the World Bank, are not known for supporting the principles of industrial policy as a viable development strategy. In their dealings with financial crises and developing countries in recent decades, they have tended to promote and enforce an anti-developmental state neoliberal policy agenda, known as the Washington Consensus, with often dire results for levels of poverty and inequality and the ability of governments to encourage successful development. Continue reading

The UK’s pay squeeze – no end in sight?

workersSince the Great Recession, and among the world’s richest economies, pay growth in the UK has been historically weak. The Economist magazine reported on 20th April that the pay squeeze in the UK has eased during the last year or two, but is by no means over.

Nominal wages are now growing at around 3.5% year, while real wages (adjusted for inflation) are growing at 1.5%. In a way, this slight improvement is to be expected, with employment at a high level and unemployment relatively low, creating a tightening labour market, and shifting bargaining power from employers towards workers.

Another piece of good news is that more of the jobs now being created have higher pay. To put it another way, the composition of the workforce is changing. As The Economist put it, “strawberry-pickers have made way for stock-pickers”. Continue reading

Modern Monetary Theory and disguised unemployment

Thomas Palley, a post-Keynesian economist, here provides a critique of recent policy proposals by US Democratic politicians employing some ideas from Modern Monetary Theory. They variously want to fund programmes such as universal healthcare and a ‘Green New Deal’, financed to a large degree by increased government borrowing.

MMT, as a set of ideas, is an offshoot of post-Keynesianism, but is perhaps more straightforward to grasp when it comes to budget deficits and its opposition to austerity; hence its current popular appeal. Continue reading