The productiveness of the welfare state

While the modern welfare state is generally supported by the political left, it is sometimes merely tolerated by the right. Simplistic critiques which decry “workshy” benefit recipients funded by the tax revenues drawn from “hard-working families” can be typical. A variety of schools of economic thought have historically deployed arguments that social spending is unproductive, a drain on the public purse, and a burden on the private, market-based sectors of the economy. But there are alternatives to this line of thinking, which argue that a well designed welfare state can not only reduce poverty, but also enhance the productivity of the economy and society as a whole. There is thus a potential win-win for progressive social policy and public spending more broadly. I consider these ideas below. Continue reading

Institutions, Economic Development, and China’s Development Policy for Escaping Poverty – Developing Economics

This interesting post by Professor Ting Xu from the Developing Economics blog reflects on the realities of development as a process of Schumpeterian creative destruction, and the institutions which can promote this process, with an emphasis on the relationship between the market and the developmental state. Historically, successful developmental institutions have tended to be different to those considered in mainstream economics discussions. The post also discusses how these ideas apply to the experience of China and its policy aim of escaping poverty.

Money and Power: the keys to development – great men vs political economy

MoneyandPowerThis is the second in a series inspired by Vince Cable’s new book Money and Power. It follows last week’s discussion of history as a great deal more than the story of “great men”. Since the book takes great men (and women) and their making of economic history as its focus, I will once again take this as my point of departure, but this time I will explore some of the deeper and more complex reasons for developmental success, or otherwise.

As already pointed out, (economic) history is much more than the story of great men and their actions when in power. One of Cable’s central themes in the book is the economic ideas which his politicians drew on to inform their policies: they were all, he argues in the spirit of John Maynard Keynes, “slaves of defunct economists”. Ideas are undoubtedly important, but the focus on a few powerful individuals remains a somewhat popular analysis. It is perhaps apposite in an age of celebrity and social media influencers, but I would point out that more can be gleaned from a broader social science, and in particular from political economy. Continue reading

The left need not fear Darwin

For some on the left, Darwinism and theories of human evolution are associated with adherence to an extreme individualism, libertarianism and market fundamentalism. They are seen as the law of the jungle, with the strong rewarded and the weak neglected. Even if they are accepted in biology, their application to society and the economy should on this reading be avoided. But this argument is flawed. After all, human society is grounded in nature and dependent upon it. We cannot escape our origins!

Evolutionary, institutional and complexity economics draw in part on theories originating in biology. There is some overlap between the three approaches. In particular, evolutionary economics emphasises economic change, the generation of variety and novelty, and the complexity of economic systems. The change is not only quantitative, as in standard economics, but also qualitative, in the realm of technology, organisations and economic structure. It is non-linear and often chaotic, in the scientific sense of that term, which limits predictability. Institutions and their evolution are a key part of the analysis, as is innovation. Context matters, so that economic theories and laws should not be universally applied to every situation.

Geoffrey Hodgson, whose work I have recently quoted a number of times on this blog, is an institutionalist economist. In his book Darwin’s Conjecture he attempts to clarify and apply Darwin’s theories of biological evolution to socio-economic evolution. In short, Darwin’s framework of variation, selection and replication are used as a ‘metatheory’, an overarching theoretical framework which can be broadly applied to many phenomena.

Socio-economic evolution is part of the evolution of the natural world and is emergent from but irreducible to it. Applying Darwinian concepts to human society need not be simply about competing individuals but is also about institutions and organisations as evolving social structures. Competition and cooperation are both involved in socio-economic evolution. Yes, selection can involve individuals, and their genes at another level, but can also involve group selection, and institutions. The latter, broadly conceived, include such aspects of human culture as writing, laws, the codification of knowledge, and the institutionalisation of science and technology. Cooperation and morality can be selected in evolutionary processes as much as ‘winners’ from competitive processes, whether these are individuals or firms for example. This is a more subtle and comprehensive conception of human evolution.

The economy can be seen as being embedded in society, which can in turn be seen as embedded in nature. Nuno Ornelas Martins, in his book The Cambridge Revival of Political Economy, argues that for an evolutionary social theory, there are potentially transformational interactions between human agency, social structures, technology and the mode of production, whether that be feudalism, capitalism, socialism or whatever. These interactions occur to varying degrees at different historical moments.

In his 2015 work Conceptualizing Capitalism, Hodgson argues further that capitalism itself evolves, qualitatively as much as quantitatively. In fact the two are inextricably intertwined. It can evolve from within, but also due to external threats or interventions, such as war, foreign aid or the transfer of technology. The diffusion of technology across the system, as well as that of institutions, information and knowledge (and there is an overlap between these processes), helps to drive periods of growth and development. This tends also to involve increasing complexity within the system. But such growth is not automatic, and economies can pass through periods of stagnation as well. Competition may not necessarily increase efficiency or be economically optimal and it remains dependent on the successful functioning of particular institutions. Due to the fact that new institutions and behaviours are often path-dependent, building on old ones, there is always the possibility of ‘institutional sclerosis’ as society and the economy become locked-in to dysfunctional activities and outcomes.

Turning to a non-economist, Robert Anton Wilson, whose eclectic work Prometheus Rising attempts to describe the evolution of humanity, particularly as a result of the evolution of the brain and nervous system: there is some link, though not a direct correspondence, between evolution, wealth creation and the acceleration of the generation and use of information in human society. Genuine wealth creation that serves humanity comes not just from the orthodox economic factors land, labour and capital, but from using the neurons in our brains intelligently. This is not necessarily synonymous with GDP growth, at least over short periods, and to the extent that wealth creation can damage the environment, it can generate new problems to be solved alongside less sustainable forms of wealth.

Wilson echoes the arguments of Eric Beinhocker in his The Origin of Wealth by claiming that genuine increases in wealth and economic value involve the creation of greater order and coherence, or negative entropy. So there is some sort of correspondence between evolution and wealth creation. Socio-economic evolution is occurring faster than biological evolution, though the former remains dependent on the latter and truthfully speaking is part of it. We run a great risk of seriously damaging our own prospects if we neglect our impact on the nature on which we all depend. This is the essence of arguments for a more sustainable form of human development.

Thus applying biological theories such as Darwinism to the economy and society generates many insights, which can be more various and subtle than knee-jerk responses which object to the law of the jungle and the undermining of a kinder, gentler, more cooperative and less competitive world. There is plenty to learn from such an approach, for the left as much as the right. We cannot escape our place and role in nature. With the advance of knowledge and technology, we increasingly amass the power to damage the environment as well as solve its problems. All too often, these problems are of our own making. Let us hope that we can learn from such processes sufficiently to prevent the damaging activity which could potentially overwhelm our continued development.

Ricardo, Keynes or Schumpeter? Paths out of lockdown

Across the world, government borrowing has soared in response to a dramatic shrinkage in economic activity. State-mandated lockdowns have been a major cause of this. As vaccination programmes gather pace in a number of the wealthiest nations, and some of them begin to ease their lockdown restrictions, attention turns to the likely form and pace of economic recovery and the implications for the public finances.

Although lockdowns have seen a significant shift among households towards online shopping, and some of this may persist even as high streets become busier again, the recession, unprecedentedly severe for peacetime, has seen consumption, the largest component of aggregate spending, contract, albeit unevenly as spending patterns have changed. The government response to this in terms of its budget has been twofold: support aggregate demand by allowing the deficit to rise, and to a degree temporarily maintain the structure of aggregate supply via support for existing firms and jobs. These two elements have produced a large government deficit. The economy has still shrunk dramatically, and with interest rates already extremely low, it has been left to fiscal policy to support aggregate demand. Continue reading

Covid-19 and the unbalanced budget

Countries across the world have responded to the economic damage induced by the global pandemic by allowing budget deficits to rise dramatically. They have undertaken a variety of schemes ostensibly designed to support the economy. But what kind of support is most effective?

The pandemic itself, and the policy responses, have induced dramatic economic ‘shocks’ to both aggregate demand and aggregate supply, that is the demand and supply for the economy as a whole. The increased uncertainty about the future among consumers, alongside the various lockdown restrictions, have generally reduced aggregate consumption, the largest component of aggregate demand. They have also changed the composition of consumption giving rise, taking the most obvious example, to an accelerated rise in the demand for online shopping and home delivery. Continue reading

Industrial policy – blurring the boundaries

AfricanEconDev2The debate over the merits or otherwise of industrial policy, broadly defined, is less polarised in policymaking circles these days. Former World Bank chief economist, Justin Lin, has for some time been arguing for the adoption of his ‘New Structural Economics’ to aid development in the poorest nations, while one of his predecessors, Joseph Stiglitz, is a firm advocate of policies which aim to overcome the numerous market failures which he argues characterise such nations.

Many development economists coming from a more heterodox tradition have long advocated industrial policy as essential, based on the rich historical experience of successful periods of growth in a wide range of countries. Most if not all of today’s richest nations have made use of industrial policies, and still do, if in different forms from the past.

Such economists have followed the arguments of the Cambridge Keynesian Nicholas Kaldor, claiming that there is something ‘unique’ about manufacturing that makes its promotion essential for accelerating economic growth and development. Continue reading

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.