Quote of the week: heterodoxy versus the mainstream in economics

“I think heterodox economics is a constructive challenge to mainstream economics; and it has posed that challenge since the 1960s. And heterodox economics is a challenge at the same time to the epistemic hegemony of the economic knowledge centred in Anglo-Saxon mainstream institutions. So it’s not only a challenge to mainstream economics, but a challenge to the institutions which are embodying that mainstream economics. As you know very well, there’s a major humanitarian issue at stake at the moment (sic). Heterodox economics claims that the existing economy based on the idea of the free market does not stand adequately for what the economy should stand for, for human beings let alone other sentient beings. The other major thrust of heterodox economics is that it does not accept the fact that the market as described by neoclassical economics is self-adjusting by converging towards equilibrium. It is not only not self-adjusting but, more seriously, it is not just, from the point of view of heterodox economics. Thus, it has mounted an intellectual challenge to the neoclassical view of automaticity of an adjusting system as well as a philosophical challenge to the view that the societies can be just within the kind of economic system based on orthodox economics.”

A. Mearman, S. Berger and D. Guizzo (2019), ‘Karma Ura’ in What is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.87.

Move fast and break things? What’s missing from the UK’s ‘growth plan’

The UK has a new Prime Minister and cabinet, from a party that has been in power for twelve years. The Conservatives have presided over austerity and Brexit, as well as a pandemic and now war in Europe. Many economists argue that the first two have sapped economic growth since the Great Recession of 2008-09, even before the disruption of the latter two factors. Productivity growth has been feeble during those years, breaking sharply with the previous long run trend. Other countries have experienced productivity slowdowns, but the UK’s has been particularly poor. The ‘new’ government and its leader Liz Truss have promised to ‘grow the economy’ faster via a mix of tax cuts and deregulation. Rather than acknowledging the Conservatives’ role in holding the country back, she has blamed some made-up enemies: the ‘anti-growth coalition’, which in practice seems to mean anyone who opposes her policies, and a focus of previous governments on redistribution rather than growth itself. As a self-styled controversialist, she has claimed that disruptive change is needed in order to restore the country’s economic fortunes.

All this seems to imply a future of regressive growth at all costs, whether socially, environmentally or even, paradoxically, economically. The government may not see it this way, and the full extent of its plan has yet to be laid out. But as an antidote to what is likely to prove to be a fantasy, more or less libertarian, set of economic policies, I thought I would lay out some areas of progressive concern over the ‘growth plan’, by taking a constructive approach rather than a purely critical one. The following sections are not meant to be in order of importance. In fact I think that all these areas are important to securing a more widely-shared prosperity, not least for the UK, as well as elsewhere. Continue reading

Is it time to hike the minimum wage?

Contando_Dinheiro_(8228640)The Progressive Economy Forum (PEF) recently published a report recommending that the UK’s minimum wage, now called the National Living Wage, should be substantially raised in order to help tackle inequality and poverty. They argue that this should form part of a broad package of policies to encourage a more egalitarian and dynamic economy and society, with higher wages and productivity. The report, by James Meadway and Howard Reed, can be downloaded here. It focuses on the UK case, but has lessons for progressive policymaking in any capitalist economy.

The background

As elsewhere, the UK currently faces a serious cost of living crisis in which real wages are now falling, and in fact have on average barely risen for more than ten years, creating a ‘lost decade’ for millions. Calls for wages to keep up with inflation have been criticised by the government and the Bank of England as threatening a ‘wage-price spiral’, in which wages and prices follow each other upwards, embedding high rates of inflation and ultimately creating little real terms wage gains for workers. That has not happened yet. At the moment, average wage rises are falling well behind price rises. This is in stark contrast to the 1970s, when many firms faced a profit squeeze as wages at times rose faster than prices. Today many large firms are experiencing soaring profits. The PEF report therefore argues that there is a need for policy to shift the balance of power in the labour market away from capital and back towards labour, by increasing trade union membership and the coverage of collective bargaining. Continue reading

Robert Reich destroys minimum wage myths

In this video, Robert Reich, former labour secretary under Bill Clinton, and founder of Inequality Media, destroys a number of the myths surrounding the minimum wage, which in the US has not risen since 2009. In particular, he challenges the notions that raising it will kill jobs, damage business, raise inflation and even benefit the wrong people. In fact, it is likely to raise productivity, reduce worker turnover and training costs, boost demand by increasing consumer spending and have a negligible impact on the inflation rate. It will also reduce both racial inequality and the need for welfare spending to support those on the lowest incomes. As he says, if business owners rely on paying workers ‘starvation wages’ in order to survive, they should not be in business!

Quote of the week: Ha-Joon Chang – more equal societies have grown faster in many cases

ha-joon-chang“Not only is there a lot of evidence showing that higher inequality produces more negative economic and social outcomes, there are quite a few examples of more egalitarian societies growing much faster than comparable but more unequal societies.

During their ‘miracle’ years between the 1950s and the 1980s, Japan, South Korea and Taiwan grew much faster than comparable countries despite having lower inequalities. Japan grew much faster than the US, while Korea and Taiwan did so too in relation to the much more unequal countries in Africa and Latin America.

Despite being one of the most equal societies in the world, more equal than even the former Soviet bloc countries in the days of socialism, Finland has grown much faster than the US, one of the most unequal societies in the rich world. Between 1960 and 2010, Finland’s average annual per capita income growth rate was 2.7 per cent, against 2.0 per cent in the US. This means that, during this period, the US’s income rose 2.7 times while Finland’s rose by 3.8 times.

These examples do not prove that higher inequality leads to lower growth. There are other examples where more egalitarian societies have grown more slowly than comparable but more unequal countries. But they are enough to let us reject a simplistic ‘greater inequality is good for growth’ story. Moreover, the majority of statistical studies looking at a large number of countries show a negative correlation (which does not necessarily mean a causality) between a country’s degree of inequality and its growth rate.

Analysis of the same society over time also lends support to the view that inequality has negative effects on growth. During the last three decades, despite the income shares of those at the top rising in most countries, investment and economic growth have slowed down in most of them.”

Ha-Joon Chang (2014), Economics: The User’s Guide, London: Penguin Books, p.321-3.

Quote of the week: Ha-Joon Chang – too much inequality is bad for the economy

ha-joon-chang“Few, if any, people would advocate the extreme egalitarianism of China under Mao or Cambodia under Pol Pot. Nevertheless, many people argue that too much inequality is a bad thing, not just ethically but also in economic terms.

Some economists have emphasized that high inequality reduces social cohesion, increasing political instability. This, in turn, discourages investments. Political instability makes the future – and thus the returns on investments, which are by definition in the future – uncertain. Reduced investments reduce growth.

Greater inequality also increases economic instability, which is bad for growth. A larger share of national income going to the top earners may increase the investment ratio. But an increased share of investment also means that the economy is more subject to uncertainty and thus becomes less stable, as Keynes pointed out. Many economists have also pointed out that rising inequality played an important role in the making of the 2008 global financial crisis. Especially in the case of the US, top incomes have soared while real wages have been stagnant for most people since the 1970s. Stagnant wages made people incur high levels of debts to keep up with the ever-rising consumption standards at the top. The increase in household debts (as a proportion of GDP) made the economy more vulnerable to shocks.

Others have argued that high inequality reduces economic growth by creating barriers to social mobility. Expensive education that only a tiny minority can afford but that you need in order to get a well-paid job, personal connections within a small privileged group (the French sociologist Pierre Bourdieu famously called it social capital) or even the ‘subculture’ among the elite (e.g., accents and attitudes you acquire in expensive schools) can act as barriers to social mobility.

Reduced social mobility means that able people from poorer backgrounds are excluded from high-end jobs and thus have their talents wasted from both an individual and a social point of view. It also means that some of the people filling the top jobs are not the best that the society could have got, had it had higher social mobility. If sustained over generations, such barriers make able youngsters from less privileged backgrounds give up even trying for higher-end jobs. This leads to cultural and intellectual ‘inbreeding’ among the elite. If you believe that big changes require fresh ideas and unconventional attitudes, a society with an ‘inbred’ elite is likely to become bad at generating innovation. The result is reduced economic dynamism.”

Ha-Joon Chang (2014), Economics: The User’s Guide, London: Penguin Books, p.319-321.

Joseph Stiglitz on globalisation’s discontents

In this video Nobel Memorial Prize winner Joseph Stiglitz describes what in his view are the flaws in the dominant model of globalisation and the policies which have promoted it in recent decades. He argues that markets are generally neither efficient nor stable and that free trade and free capital movements have contributed to rising inequality in many countries. If globalisation is to result in a more widely-shared prosperity, then a new social contract is needed.

Stiglitz works broadly in the neoclassical tradition in economics, which is often strongly criticised by heterodoxy, but he remains very much a progressive thinker and committed to reforms which aim to benefit the many across the globe, not least the poorest and most vulnerable in society.

Considering Keynes’s ‘Liberal Socialism’

Was Keynes a champion of a reformed capitalism or a liberal socialist? He consistently argued for a middle way between laissez-faire and state socialism as a means of achieving the good society. But although he referred to a form of socialism in some of his work, his possible variant of such a system creates some confusion in the use of language and argument. A modern social democratic liberalism retains the core features of capitalism and can continue to draw on the ideas of Keynes, even if it does ultimately evolve into something different.

keynesThe conventional wisdom on Keynes has it that the great economist and statesman argued for a reformed capitalism, in order to save the system from its flaws, and guard against political extremism of the left and right. But some of today’s thinkers make a rather different case. They hold that he wanted to see reform lead the way to what he called ‘liberal socialism’.

James Crotty has turned this idea into a whole book, which I wrote about in this post. But Rod O’Donnell makes a similar argument, following the evolution of Keynes’ output during the 1920s, 30s and 40s, in a short chapter from an edited volume from 1999 honouring the work of the late post-Keynesian Geoff Harcourt. The chapter is titled “Keynes’s Socialism: conception, strategy and espousal”. In it, O’Donnell argues that Keynes consistently made the case for a middle way between (and in the process rejecting) laissez-faire capitalism and state socialism. This was his liberal socialism. Politics and economics were to be the means to achieve an ethical goodness in society. This system should combine the best elements of liberalism and socialism, and discard the worst. Continue reading

Decent employment: the role of labour market institutions in creating prosperity and justice

The creation of full and decent employment under capitalism may well be vital to creating and sustaining material prosperity and social justice alike, as well as democratic institutions, attitudes and policies. In this post I summarise an article which compares labour market outcomes in recent years across 24 advanced countries with a variety of institutional frameworks. I go on to explore some of the practical policy implications of marrying prosperity and justice at the national and international levels.

Before the advent of the pandemic and war in Ukraine, the rise of populism since the Great Recession was an important story in many countries, and dismayed centrists and liberals alike. Appealing to rational political argument has not been enough to stem the tide, not least in the US with the rise of Trump, and Brexit in the UK. But many analysts, including economists, have pointed to the genuine concerns of disaffected polities, not least the failure of national economies to generate and sustain decent employment in recent years. Such developments provide at least a partial explanation of the appeal of populist figures, and their ability to tap in to these concerns, even if they have not provided real solutions.

An article in the January 2021 issue of the Cambridge Journal of Economics (paywall, but you can read the abstract), by Hang Le, Geoffrey Wood and Shuxing Yin, employs a comparative institutional analysis of various labour market institutional regimes among 24 OECD countries between 2000 and 2015, in order to explore the impact of institutional differences on economic and social outcomes.

In general, “the state, firms and stakeholders play different roles in the employment relations in different countries”. While it may not be straightforward for particular countries to import institutions from abroad without adapting them to their own framework, governments and policymakers can certainly learn from each other and improve the functioning of labour markets in order to try and generate fuller and more decent employment in their economies and societies. Continue reading

The unifying impact of external threats

EUUrsulavdLThe Ukraine-Russia conflict and the evolving response to it from much of the ‘west’ has reminded me of a key aspect of the political economy of development: external threats to sovereign states and their neighbours, including wars hot, cold and everything in between, have the potential to unite otherwise divided populations around a common cause and transform politics and policymaking.

Events have been moving quickly in recent days, in all sorts of ways. Protests against Russia’s war in Ukraine have mobilised across Europe. The leaders of EU member states, as well as the bureaucratic machinery of the EU itself, have rallied to condemn and respond to the invasion. NATO members have cohered into an unusually united front. Germany has promised to rapidly increase defence spending and modernise its armed forces. A number of countries are providing Ukraine with supplies of weapons. The escalation of financial sanctions promises to do serious damage to the Russian economy. The tragic return of war to Europe in this form is rapidly shaking up politics and policymaking. Continue reading