High wages vs high savings as models of development

I refer to the work of Michael Pettis quite often on this blog. He strikes me as a highly original thinker, combining macroeconomics, finance, development, political economy and economic history in a way which provides a deep understanding of world economic events.

He recently posted here about what he sees as the two main models of economic development which nations have used to transform their economies at certain times in history: the high wages model, and the high savings model.

Models of development can be described as a set of policies and institutions which aim to develop the economy and achieve sustained rises in productivity and output via industrialisation and the advancement of technology.

For Pettis, both models aim to raise wages and productivity, but they are distinct from one another in how they drive the investment which makes this possible. Continue reading

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“America First”, Fiscal Policy and Financial Stability: a report on the US economy

What does the future hold for the US economy, given its current trajectory and recent changes in government policy?

The Levy Economics Institute of Bard College, of which distinguished former associates include post-Keynesians Hyman Minsky and Wynne Godley, has just published its Strategic Analysis report on the medium-term prospects for the US.

Godley is recognised as having predicted a severe recession in the US some years before it began in 2008, due to the unsustainable build-up in private sector debt, particularly among households.

Minsky is also well known for his ‘financial instability hypothesis’ and its implication that ‘stability is destabilising’ in the financial sector of capitalist economies: periods of stable economic growth can create fragile balance sheets in the private sector, which often lead to stagnation or crisis. Continue reading

Michael Pettis on China, the US, debt and trade tensions

Michael Pettis is a Professor of Finance at Peking University’s Guanghua School of Management, and an economist whose work I have found to be original, interesting and inspiring. His book The Great Rebalancing explores the role of current account imbalances in the Great Recession and its aftermath of slow growth. I explore some of his ideas in more detail here.

Particularly relevant to today’s events is his prediction that, just as in the 1930s, in a world of limited demand, tensions over international trade are inevitable.

In the short video below, he explores some of the issues facing China’s economy over the next decade, its misallocated investment and unsustainable rise in debt, relations with the US including trade tensions, GDP and its measurement, and liberalization under different economic and financial circumstances.

The American School of Political Economy – two bios

I have posted before here and here on the neglected American School of Political Economy, which has been well-documented in the work of Michael Hudson. Below are brief bios of two of its members, taken from Hudson’s highly informative and thoroughly heterodox J is for Junk Economics (p.210 and p.176).

Their policy proposals were designed to encourage a dynamic and sustainable economic development path with benefits accruing to the broad population, and emphasized abundance rather than scarcity. The success of such policies in driving industrial and agricultural expansion in the US does not mean that they are necessarily applicable to today’s advanced economies.

The ASPE illustrated the importance of economic and social context, which would change depending on whether an economy is catching up with or occupying the technological frontier.

To take one example which remains highly relevant: in today’s America, and elsewhere among the richest countries, infrastructure spending has been squeezed thanks to the austerity drive, rather than used as a means to enhance prosperity following the economic crisis. This has surely been a serious mistake. Continue reading

Inequality, global imbalances and crisis

Tracing a connection between rising inequality and the Great Recession of 2008 is appealing to leftist economists. It suggests that what they see as two of the potential downsides of capitalism and in particular the neoliberal economic order can perhaps be mitigated via appropriate policies. Thus, a more egalitarian capitalism can become less prone to crisis or recession.

Of course, what is appealing as social and economic outcomes is not a good enough reason to investigate linkages between them, though I suspect that I am far from the only one who is drawn to particular ideas as a matter of bias.

Perhaps there is nothing wrong with that as a starting point, followed by economic analysis of the chosen object of study.

An article in the latest issue of the heterodox Cambridge Journal of Economics explores the potential linkages between the distribution of income and current account imbalances in a simplified model of the global economy consisting of the US, Germany and China, prior to the 2008 recession.

These three countries had the largest current account imbalances in absolute terms in the run-up to the recession. The US ran a deficit, and Germany and China were running surpluses. Since these imbalances have been pinpointed by some economists as a cause of the recession itself, analysing them is important. Continue reading

Michael Hudson on The American School of Political Economy

JisforJunkEconMore 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.”

Trumponomics Part 3: Alternatives

TrumponomicsHere is Part 3 of my series on the book Trumponomics – Causes and Consequences. As it is an early assessment of the economics of the Trump presidency, concrete left policy alternatives do not take up much of the content, but there are some ideas to draw on.

Central to the aim of making the left ‘great again’, to quote one of the authors, is a political programme which pivots away from the dominant liberal, politically correct agenda, and which serves the interests of the masses.

This would be a social democratic platform, offering a radical alternative to the neoliberal ideology which has captured both major parties in the US. Bernie Sanders, despite failing to win the Democratic nomination, gave many a taste of what could be achieved.

Sanders styled himself a ‘socialist’, but by the standards of Europe, his policy proposals were far more social democratic. He certainly was not calling for the revolutionary overthrow of capitalism, but merely a larger role for government in the economy. Continue reading