Plenty of economists are critical of the apparent irrationality of financial bubbles, which have occurred throughout the history of capitalism. That they recur despite the efforts of governments to regulate the markets and prevent their worst excesses suggests that, at least to some degree, they are inevitable.
Alan Greenspan, former chair of the Federal Reserve, famously termed the dot-com bubble in the 1990s a bout of “irrational exuberance”.
In an interesting and iconoclastic piece written back in 2004, John Eatwell of Cambridge University considered the possibility of what he termed “useful bubbles”. In his own words, he was attempting to “row against [a] powerful tide of condemnation”, but was defining “useful in a very limited way – that is, as producing some positive consequences”, despite the potential for panics and crashes. Continue reading →
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.”
Put briefly, austerity weakens aggregate demand when it cannot be offset by monetary policy (as has been the case since the recession). This may create an ‘innovations gap’. Firms facing reduced demand for their products will slow down the rate at which they create or utilize new products, processes and technology via new investment, leading to weaker growth in productivity. This sort of investment would have ’embodied’ the new technology, but in its absence, the improvements will not take place.
This short interview from the Real News Network illustrates the progress of clean energy generation in the US, compared with dirtier sources. The argument is that the cost of renewables is falling fast, such that they are becoming cheaper than coal-fired generation, which Mr Trump has promised to support. Cleaner sources also have positive spillover effects on health, known in economics as a positive externality.
The logic of market forces has probably been helped along by industrial policies, from Obama’s Clean Power Plan to the Chinese government, which has promoted the development of its solar panel industry. But if clean energy becomes cheaper than dirty energy, surely a Republican president looking for a good deal can’t argue with that.
A nice post here by British economist Paul Ormerod which describes how the US is leading the world in the development of Artificial Intelligence (AI). In the last paragraph, he discusses how the development of key technologies that are perceived to be in the national interest there are initially funded and developed by the public sector, with an eye to their subsequent practical application by the private sector.
The idea that the world’s most powerful nation and largest economy owes many of its strengths to public sector-led innovation is an important one. In her eye-opening book, The Entrepreneurial State, Professor Mariana Mazzucato shows as a key example how many of the technologies that make up the smart phone were initially developed by the US government, and only later combined into desirable consumer products by private companies such as Apple and Samsung. From the internet and GPS, to the touchscreen and voice activation, government institutions led the way, mostly to try to maintain the country’s military superiority.
Mazzucato argues that we should acknowledge the key role of the public sector in taking on certain financial risks which the private sector will not bear, and support these kinds of innovation policies. Of course, there will be failures as well as successes, but this should not be a reason for abandoning state intervention. The private sector can fail as much as the public, sometimes on an enormous scale, ‘wasting’ resources in the process. As long as an experimental approach and a willingness to learn are adopted, there is the potential for a greatly positive public-private co-evolution which can help to drive economic progress.
The public-private divide under capitalism should be seen as something of a myth: the two are symbiotic and support each other in successful economies more extensively than is often believed. It is misleading and potentially damaging to call public provision or even public-private partnerships ‘socialist’. The truth is that the development of capitalism from its inception to today’s increasingly complex economy remains dependent on the state as much as the private sector.
This post continues an occasional series based on chapters in Ha-Joon Chang’s book 23 Things They Don’t Tell You About Capitalism. Chapter 12 aims to counter the idea among free market economists that the government should not be in the business of supporting particular firms or sectors, and should leave things, as far as possible, to the market. In other words, if industrial policy is at least partly about ‘picking winners’, then ministers and bureaucrats should stay out of the way, as those in business will inevitably know more about how to achieve economic success.
Chang notes that there are plenty of examples from across the world in the history of capitalism of the successful picking of winners by the state, from South Korea to the US. In another part of the book, he points out that what is good for one particular firm may not be good for the economy as a whole. After all, economic growth and development under capitalism involves a process of creative destruction and structural change, as some firms succeed and others fail, expanding and creating new jobs in some cases, and stagnating or shrinking in others, going bankrupt or being taken over and restructured, with jobs being lost. There is constant change in a successful economy, and this is essential to rising productivity and overall living standards. If the state can play a role in facilitating this process, then this may involve intervention and not simply deregulation and leaving it all to the market. Continue reading →
A short video talk from TED by Professor Mariana Mazzucato of Sussex University on the state’s vital role in promoting innovation in a capitalist economy. Her book The Entrepreneurial State makes a fascinating read.
I wrote my MSc dissertation, way back when, on Industrial Policy in Malaysia, which admittedly had mixed results. Since then I have always been interested in how state intervention can promote growth and development, both in rich and developing nations.
Mazzucato describes how all the key technologies which make up the smart phone were funded by the US government, which definitely goes against much propaganda and conventional wisdom.