Quote of the week: five reasons why manufacturing matters for growth and development

“The manufacturing sector plays a key role in rapid growth and development for five reasons. First, manufacturing growth fosters diversification, backward and forward linkages, agglomeration economies and dynamic economies of scale through learning-by-doing. Thus, manufacturing tends to ‘pull’ the other economic sectors, even when they are initially larger. Second, manufacturing offers greater scope than agriculture or services for productivity growth through the development and adaptation of new technologies. These innovations are subsequently diffused across the economy through the spread of new skills and production methods and the sale of manufactured inputs. Third, manufacturing productivity tends to rise with the rate of growth of manufacturing output, potentially creating virtuous circles of growth across the economy. Fourth, manufacturing can more easily foster export diversification and the production of import substitutes, which can alleviate the balance of payments constraint. Fifth, manufacturing sector wages tend to be relatively high, which can support demand growth and improvements in living standards. Hence, intersectoral shifts of labour and other resources towards manufacturing can help to raise productivity and growth rates in developing economies; conversely, economic structures narrowly determined by static comparative advantages, as is envisaged by mainstream economics, are sub-optimal for long-term growth and for global convergence.”

Alfredo Saad-Filho (2021), The ‘Rise of the South’ and the Troubles of Global Convergence, Chapter 3 in Growth and Change in Neoliberal Capitalism, Chicago: Haymarket Books, p.79.

Too much industrial policy? The case of China

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China has reached a stage in its development where it needs to reform its growth model and rebalance its economy. But it is finding it hard to do so. Its policy framework remains too focused on expanding industrial capacity and insufficiently on rebalancing domestic demand away from excessive investment and towards consumption. In this sense China has ‘too much’ industrial policy. Sufficient incentives for progressive reform in China and other ‘imbalanced’ economies may ultimately require a new kind of global trade and financial system.

Many heterodox economists with an interest in development have made the case for industrial policy. Part of the reason for this is that all of today’s advanced economies have used it in various forms in order to accelerate growth and structural transformation. So-called late industrialisers, such as South Korea and Taiwan, have used it as part of their strategy to catch up with the richest countries. There have undoubtedly been industrial policy failures, with policies used to support fledgling industrial sectors becoming entrenched and firms failing to ‘grow up’ and become internationally competitive. However, these cases should not lead us to reject such policies wholesale. Rather we should learn from both the success stories and the failures in order to do the policies better and get state intervention right. Continue reading

Marx, Keynes and the limits to wage increases

“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage  will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”

In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’. Continue reading

Quote of the week: Thatcher, monetarism and Marx’s reserve army

Following the last two weeks’ quotes from an interesting chapter by Fabio Petri, this is the third and final extract in this ‘mini’ series. It includes a revealing statement by a top Treasury civil servant under Margaret Thatcher in the 1980s, which saw a severe recession and the return of mass unemployment, topping three million by the middle of the decade, justified by the need bring down inflation.

The use of incomes policies involving negotiations between government, employers and trade unions to limit wage rises and mitigate the wage-price spiral of the time had largely broken down and the new government declared that the monetarist policies championed by Milton Friedman were the only way to do it. But the quote below reveals that Thatcher, rather than strongly adhering to monetarism, saw mass unemployment as an effective way of weakening the power of organised labour and its wage demands.

Inflation did come down, not just due to the renewed weakness of the working class, but also due to the sharp fall in the price of oil and other commodities on global markets, caused by recession across many of the world’s advanced economies. These developments came at great cost, and one must still wonder whether there could have been an alternative to the economic and social brutalities they engendered. Thatcher had declared not, an attitude exemplified by her famous TINA (There Is No Alternative) slogan. The reappearance of what Marx called the ‘reserve army’ of the unemployed, and the end of the post war policy commitment to full employment had been predicted by Michal Kalecki back in 1943.

“The 1970s witnessed the end of the Golden Age. Palma (sic) reports a declaration by Sir Alan Budd (a top civil servant at the British Treasury under Thatcher, and later Provost of Queen’s College, Oxford) on the real reasonings behind the Thatcher government’s use of neoclassical monetarist arguments to justify its brutal restrictive monetary policy:

The Thatcher government never believed for a moment that [monetarism] was the correct way to bring down inflation. They did however see that this would be a very good way to raise unemployment. And raising unemployment was an extremely desirable way of reducing the strength of the working classes…What was engineered – in Marxist terms – was a crisis of capitalism which re-created the reserve army of labour, and has allowed the capitalists to make high profits ever since.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.58.

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

Structuring the economy to give money to the rich is inflationary — Real-World Economics Review Blog

from Dean Baker

I just read this NYT column by Bryan Stryker, on how Democrats can win back the working class. I have no idea how its proposals poll, but as an economic matter, they will do little to help the working class. The big problem with Stryker’s argument is that it assumes that the working class […]

Structuring the economy to give money to the rich is inflationary — Real-World Economics Review Blog

The semiconductor bill and the Moderna billionaires — Real-World Economics Review Blog

from Dean Baker

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade. To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity […]

The semiconductor bill and the Moderna billionaires — Real-World Economics Review Blog

Inflation, the supply-demand debate and the policy response

BankofEnglandAs central banks around the world tighten monetary policy by raising interest rates in order to restrict demand, there remains an ongoing debate about whether this is the right response to the current inflation.

A large share of the inflation in many countries has been caused by supply shocks, as much of the world went through and then emerged from pandemic lockdowns, and as a consequence of the war in Ukraine. Taken together, these two have restricted the supply and thus increased the cost of food and energy on global markets. But there have also been impacts from the demand side, as many governments supported their economies with major fiscal stimuli during and after the lockdowns. The scale of these varied across countries, with the economic impact varying as a result. The US stimulus was particularly large and has helped restore its collapsed employment rate to the pre-pandemic level in recent weeks. However it is also arguable that this dramatic boost to demand has helped to fuel inflation. EU countries tended to be less ambitious fiscally, with the supply shocks contributing a greater share of the rise in inflation there than they have done in the US. The current inflation varies between countries, with Japan seeing a much smaller increase given its structurally weak demand and its historic struggles with deflation and weak growth in recent decades.

One of the big questions that has fuelled much debate in the media, not least on Twitter, is whether central banks need to be raising interest rates, which their own models say will only fully affect the rate of inflation a year or two down the line, when the global economy has begun to slow and forecasts of recession are becoming more frequent. If the very purpose of monetary tightening is to reduce demand in the form of investment and consumption and raise unemployment, which economists tend to think of as socially undesirable even if they may sometimes be intentional consequences of policy, the question arises as to whether such moves are necessary. Continue reading

Joseph Stiglitz on what to do about the present inflation — via LARS P. SYLL

To be sure, some normalization of interest rates would be a good thing. Interest rates are supposed to reflect the scarcity of capital, and the “correct” price of capital obviously is not zero or negative – as near-zero interest rates and very negative real (inflation-adjusted) interest rates would seem to imply. But there are substantial […]

What to do about the present inflation — LARS P. SYLL

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!