Covid-19 and creative destruction – Marx, Schumpeter and the role of the state

The impact of the uncertainty generated by Covid-19 and the subsequent lockdown in countries across the world has been devastating for economies and societies. There is more to come. The world economy was already struggling somewhat in 2019, with slowdowns in the US and China, the two largest economies. In fact, what was at best sluggish growth in output and productivity in many countries had been a feature of the decade or so which followed the financial crisis of 2008. The onset of the pandemic has hit already weak or fragile economies hard.

Keynes famously argued that the ‘animal spirits’, or waves of optimism and pessimism among businessmen potentially looking to invest, were a major factor in the determinant of growth and employment, and hence economic prosperity. Uncertainty about the future could lead to spending on new industrial capacity and jobs being postponed, driving the economy into stagnation or recession. It was the job of government, he said, to ‘socialise’ investment. In other words, through judicious policy choices, it should try to maintain optimistic expectations among businessmen and make sure that there were sufficient investment opportunities to keep spending, and therefore employment, at a socially optimum level. Continue reading

Social justice and economic performance: beyond the trade-offs?

workersThe subtitle of this blog refers to two of its key concerns when it comes to the application of our ‘dismal science’: economic progress and social justice. The third is individual liberty. It was John Maynard Keynes who in 1926 coined these three as part of the “political problem of mankind” (although he referred to efficiency rather than progress), and noted how difficult they are to reconcile.

A fourth, modern, concern might be sustainability, though this can be incorporated into them in the sense that without them, the economy and society cannot be sustained in the long run. This would include environmental concerns. Theories of sustainable development look at the interaction between the economy, society and environment and try to forge a path in which, being dependent on each other, they are balanced and, literally, sustainable and sustained!

A broad conception of economic progress would necessarily see it as sustainable. If, for example, a particular pattern of economic growth destroys the nature on which it depends, then it will be undermined. At the same time, modern economic growth, which is still part of what most economists consider to be ‘progress’, is a process of transformation, not least of nature, and of society. The task is to ensure that progress can be sustained and this may require that we adopt richer measures of development. For me this needs to include social justice and well-being.

This post explores some themes relevant to the achievement of social justice and economic progress in both developed and developing economies. Some economists consider there to be a trade-off between the two, but plenty of progressive thinkers reject this pessimistic outlook. Indeed they are, together, probably two of the essential ingredients of political stability and a sustainable democracy. Continue reading

Structuralism versus the mainstream on growth and development

DSC00236aThe insightful quote below distinguishes the structural approach to economic growth from the mainstream one. Although both allow for a transformation in the structure of the economy as part of the growth process, the former leads to a stronger argument for evolving patterns of state intervention to sustain this process.

This distinction in term of policy implications probably goes some way to explaining the biases on either side of the debate, as well as some of the hypocrisy of rich country policymakers, who have often used mainstream arguments to justify non-intervention in poor countries while continuing to employ a range of industrial and technology policies at home. For me the historical record of development, in particular the limited number of countries which have successfully “caught up” with the richest, favours the structuralist approach.

“There are two views regarding the role and implication of production structure for growth. The conventional narrative is that structural change in the patterns of production, expressed numerically in terms of variations in sectoral contributions to output, employment, investment, and patterns of specialization, is just a side effect of growth. As the economy expands and markets enlarge, new demands require new production processes that come into being by attracting inputs such as labor and capital. The structural configuration adjusts to incorporate novel activities or to enlarge existing ones. Growing economies almost always move from primary to secondary and further towards tertiary sectors.

The alternative view is that these patterns of structural change are not just a byproduct of growth but rather are among the prime movers. This has inherent policy implications. Because production structure must change if growth and development are to proceed, conscious choice of policies that will drive the transformation of the system toward certain sectors is essential for long-term economic expansion.

This insight is ignored by most contemporary economic theory. But it arises from observation and analysis of economic performance of developing countries around the world in the past and present. Economists who have been trained within the structuralist tradition share this perspective, holding that development requires transformation or the “ability of an economy to constantly generate new dynamic activities”, particularly those characterized by higher productivity and increasing returns to scale of production as reflected in decreasing costs per unit of output. This logic underlies Kaldor’s growth model…

One key aspect of growth in the poorest countries is that agriculture dominates the economy. Therefore, agricultural productivity growth is crucial, as in sub-Saharan Africa now. But productivity increases in the sector are significantly constrained by lack of access to modern technology, natural factors such as low fertility land, and mostly by its intrinsic inability to offer increasing returns. Hence, per capita output growth at 2 percent requires even higher growth rates of labor productivity in leading sectors (assuming that the ratio of employed labor to the population is fairly stable).

At higher income levels, the leading sector(s) must offer increasing returns and opportunities for robust output growth in response to demand. As demonstrated in…a raft of historical studies, a clear pattern of structural change emerges from the data for economies (today mostly in East and South Asia) which sustain rapid growth. Historically, manufacturing has almost always served as the engine for productivity growth but not for job creation (India with its information processing boom is an intriguing recent exception). For a sector or the entire economy to generate employment, its per capita growth rate of demand has to exceed its productivity growth. Net job creation usually takes place in services.

…[P]atterns of international trade also shift as economies grow richer. Their exports become more technically sophisticated and shift from raw materials toward manufactured products, especially in recent decades with the explosion of assembly manufacturing around the world. Import composition also shifts in response to overall changes in the basic structure of the economy. Indeed, those changes in the pattern of specialization in international trade are an essential part of the transformation of production structures, a fact that has been highlighted by the role that the terms “import substitution” and “export diversification” have played in development debates. Concerning these changes, one key question is whether an economy can pass through the raw material and assembly export stages to sell products abroad that have a high value-added content at home.”

José Antonio Ocampo, Codrina Rada, and Lance Taylor (2009), Growth and Policy in Developing Countries: A Structuralist Approach, New York: Columbia University Press, p.8-10.

Indonesia’s State-Led Development: Custodian of the National Interest, or Boondoggle? — Developing Economics

Nobel Laureate Esther Duflo once likened the work of economists to that of plumbers – tinkering and adjusting as necessary as they engage with the details of economic policy-making. The implication in this comparison is that economists generally understand economic systems and behaviour – how the pipes come together – and that the main work […]

via Indonesia’s State-Led Development: Custodian of the National Interest, or Boondoggle? — Developing Economics

Corruption and development: the importance of political economy

DSC00236aCorruption is generally seen as a major social problem, and is particularly prevalent in many developing countries (DCs), but also to a lesser degree in middle income and advanced economies. We frequently read in the media about new political leadership in all sorts of places promising to fight corruption in order to improve the social, political and economic environment, from China and Angola to South Africa and Mexico, to take some fairly recent examples.

Unfortunately, such battles against corruption in DCs frequently end in failure, an outcome that is demoralising, not least for the populations of the countries concerned, but also for those external actors who set great store by these kinds of reforms.

Corruption is often conceived of as a moral issue, but some heterodox economists have argued that it is frequently much more than this. They contend that it is more a political and structural problem symptomatic of societies undergoing change as new social forms struggle to emerge. This is typically the case in poor countries experiencing a socioeconomic transformation towards capitalism. Continue reading

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.”

Tariffs and Trump

During his election campaign, Donald Trump’s rhetoric was consistently anti-free trade. He threatened to impose tariffs on US imports from China and to renegotiate trade agreements such as the North American Free Trade Agreement (NAFTA). His argument for such policies is that they have led to enormous job losses in American industry. Indeed, this may explain some of his appeal to former ‘Rust Belt’ workers who have not been sharing in the ‘American Dream’.

The absence of the American Dream for enormous numbers of Americans is nothing new. Since the 1970s, median wages have been largely stagnant, while the so-called 1%, at the top of the scale, have done exceptionally well. This is reflected in rising income inequality. Among the 1%, one might include CEOs and many of those working in the financial sector.

So if Trump is as good as his word, will he enact protectionist policies, and will these restore more widespread prosperity among the poor and middle-class? Continue reading

The Economist on manufacturing in the UK: why I disagree

PrintThe Economist magazine has a piece this week on the role of manufacturing in the UK. While it half-heartedly concludes that a larger, more competitive manufacturing sector may benefit the economy, it suggests that today’s shrunken sector is increasingly employing only highly skilled workers on high wages, producing hi-tech products. The piece argues that the hope that a larger sector would directly benefit those currently left behind by its relative decline over the last few decades is a forlorn one. In other words, jobs which pay more moderate wages and demand fewer skills would not be created, given recent trends.

I disagree. This argument merely extrapolates trends which were at least in part due to the periodic and sustained overvaluation of the pound vis-a-vis our trading partners. I have argued here recently that the serious imbalances in the UK economy could be significantly reduced by an economic strategy which gives a greater priority to a lower exchange rate. Continue reading

Brexit and the UK: lull before the storm or a much needed rebalancing?

800px-A1_Houston_Office_Oil_Traders_on_MondayWill the vote for Brexit derail the UK economy? The Guardian newspaper yesterday contained a brief report here from two economists, both formerly members of the Bank of England’s interest rate-setting Monetary Policy Committee (MPC). Both of them focus on trends in domestic spending and consumption, driven mainly by wage growth and employment. Unemployment has apparently ticked up a little according to the latest figures. They conclude that economic growth will slow into 2017, and while one predicts that the UK will avoid recession, the other concludes with some gloomy speculation on an ‘oncoming Brexit tsunami’.

The pound has fallen sharply since the result of June’s referendum became apparent. Whatever else happens, I see this as a good thing, and necessary to help promote a long overdue rebalancing of the economy. As Roger Bootle writes here, the Brexit vote was the trigger for the pound’s devaluation, but not its deeper cause. Continue reading

Competition and growth under capitalism: does Marx trump Keynes?

9780199390632“Capital is a particular form of social wealth driven by the profit motive. With this incentive comes a corresponding drive for expansion, for the conversion of capital into more capital, of profit into more profit. Each individual capital operates under this imperative, colliding with others trying to do the same, sometimes succeeding, sometimes just surviving, and sometimes failing altogether. This is real competition, antagonistic by nature and turbulent in operation. It is as different form so-called perfect competition as war is from ballet.

…Real competition is the central regulating mechanism under capitalism. Competition within an industry forces individual producers to set prices with an eye on the market, just as it forces them continually to try to cut costs so that they can cut prices and expand market share. Cost-cutting can take place through wage reduction, increases in the length or intensity of the working day, and through technical change. The latter becomes the central means over the long run [my emphasis].

…The notion of competition as a form of warfare has important implications. Tactics, strategy, and resulting prospects for growth are central concerns of the competitive firm…In the battle of real competition, the mobility of capital is the movement from one terrain to another, the development and adoption of technology is the arms race, and the struggle for profit growth and market share is the battle itself.”

Anwar Shaikh (2016), Capitalism: Competition, Conflict, Crises, p.259-260

Continue reading