Transcript Development Policy in a Historical Perspective

Towards Another Canon of
Contemporary Economic
Thought
Erik S. Reinert
The Other Canon Foundation
Moscow, January 19, 2010
Things economics does not explain well:
Why are there so few middle income nations?
Korea (Rep.)-Somalia, GDP per Capita 1950-2001
Korea (Rep.)
Somalia
16000
14000
12000
10000
8000
6000
4000
2001
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
0
1950
2000
Source: original data extracted from Angus Maddison, OECD, Paris, 2003
Growth rate of GDP per capita of selected world regions; regional
average in selected periods between 1820 and 2001; annual average
compound growth rate.
5
4
A fric a
3
A s ia (J apan
exc luded)
L atin A meric a
2
E as tern E urope
1
F ormer US S R
0
1820-1870
-1
-2
1870-1913
1913-1950
1950-1973
1973-2001
Per capita GDP in BRIC countries 1950-2008:
USSR/Russia, Brazil, China, and India.
Latvian Ministry of the Economy
1994:
Peru. Increasing Exports and Falling Wages:
The break in the mid-1970s
100 %
7
75 %
6
50 %
5
25 %
4
White collar wages
Blue collar wages
0%
3
-25 %
2
-50 %
-75 %
1
-100 %
0
1960
1970
1980
1990
2000
Export
De-industrialized countries have
a worsened income distribution
Forces set in motion:
• De-industrialization
• De-agriculturalization
• De-population
Examples: Southern Mexico, Moldova,
Caribbean states
Falling Real Wages:
• In small Latin American countries from the mid
1970s.
• Stagnating wages in the US from about the same
time.
• Root cause: De-industrialization of The Second
World starting in 1990 (from Latvia to Mongolia).
• Argentina late 1990s (real wages down by 40 per
cent from peak) + Asian crisis.
• Western Europe is being hit now.
The Problems with Ricardian
Economics:
• Overly abstract
• When he created economics, Ricardo
forgot to create ’money’ as a category
• Ricardian trade theory sees all economic
activities as being qualitatively alike for
promoting development
• Does not recognize the importance of
entrepreneurship and innovations.
The Knowledge- and Production-Based
Other Canon of Economics
Tudor
Economic
Policy in
England 1485+
Realökonomisch
Mercantilism:
Growth as
Activity-Specific
Alexander
Hamilton
US 1791
Daniel Raymond
US 1820
M. & H. Carey
US 19. Century
Renaissance
E. Peshine
Smith
Giovanni Botero 1588
Antonio Serra 1613
Friedrich List
1841
US Industrial Policy
Veblen and the
Institutional
School
Japan
1860+
Japan +
Asian Tigers
1945+
Schumpeter
Evolutionary
Economics
Barthélemy de Laffemas 1597
Jean Baptiste Colbert 1651+
Von Hornick
Germany 1684
German Cameralism
& Anti-Physiocracy
Schmoller
Sombart
German Historical
School 1848+
Verein für Sozialpolitik 1872-1932
Classical
Devp. Econ.
1945+
Marx
Keynes
The
Other
Canon
Joseph Schumpeter (1883-1950)
The Circular Flow of Economics
The real economy
”Black
Box”
Production
of goods
and
services
Financial/money
economy
Money/capital
Importance of Entrepreneurship
‘The bourgeoisie, by the rapid
improvement of all instruments of
production, by the immensely
facilitated means of communication,
draws all, even the most barbarian,
nations into civilization’.
Karl Marx and Friedrich Engels, The
Communist Manifesto, 1848
Classical economists (including Marx)
did not understand that there was not only
ONE industrial revolution, but that the
whole process of economic growth
consists of subsequent waves of largescale innovations (Schumpeter’s ’Gales
of Creative Destruction’) that each needs
a new set of entrepreneurs.
Economists’ trade-off:
‘The general reader will have to
make up his mind, whether he
wants simple answers to his
questions or useful ones – in this as
in other economic matters he
cannot have both’.
(Joseph Schumpeter 1932).
”David Ricardo’s economic
theories are excellent, they lack
nothing but sense”.
Joseph Schumpeter.
Economics is a cyclical science,
and crises determine the
turning points in the cycle!
So now is a turning point.
The impact of financial crises on the
publication of economics books.
From fact-less to empirically
based economics:
’One of the nice things about economics is
that it is only a way of thinking, factual
knowledge does not exist’.
Victor Norman, Norwegian economist, 1994.
’The root of everything we can call theory is
to observe things as they are’.
Hans-Georg Gadamer, Lob der Theorie. Reden
und Aufsätze, 1991.
Three Times Rise and Fall of ’Physicsbased’ Economics
School
Physiocracy
Starting point
Quesnay 1758
Peak
1760s
Death
ca. 1770
1840s
ca. 1895
1990s
NOW!
(’Rule of Nature’)
Classical
Economics
Ricardo 1817
Neoclassical Samuelson 1948
Synthesis
The need to bring non-Ricardian
elements back in simultaneously:
Novelty (innovation)
Diversity (heterogeneity)
Scale (increasing returns)
Synergy (e.g.
manufacturing/agriculture)
How economic growth happens.
(why growth is activity-specific)
Activity-specific Economic Development:
The mechanization of cotton spinning during the First Industrial Revolution.
Ave annual
increase in
productivity
30,0
25,0
20,0
15,0
10,0
5,0
0,0
1750
1800
Source: Carlota Perez, Calculations from Jenkins 1994
1850
1900
1950
2000
2050
Years
USA: Learning Curve of Best-Practice
Productivity in Medium Grade Men’s
Shoes’
Shoes’.
1818
1616
1414
Man-Hours Required by Best-Practice Methods
of Producing A Pair of Medium-grade Men’s
Shoes at Selected Dates in the U.S.
1212
1010
8 8
Year
6 6
Man-Hours Per Pair
1850
15.5
4 4
1900
1.7
2 2
1923
1.1
0 0
1936
0.9
1850
1850 1900
1900 1923
1923 1936
1936
How the wage differentials between rich and poor
nations were created through sequences of ’productivity
explosions’ translated into wage rents.
Textiles
Malthusian
activities
Shoes
Radio
Schumpeterian
activities
1750
TV
Electronics
2000
This type of sophisticated understanding
disappeared with a simplistic dichotomy
with the fall of the Berlin Wall’s, either
a) The market is the enemy and the state
solves all problems, or
b) The state is the enemy and the market
solves all problems.
(like: you must agree either with George
Bush or with the Taliban)
Institutions that made economic
growth possible:
Patents and modern tariffs were created at
about the same time, in the late 1400s.
Patents: Promoting new knowledge
Tariffs: bringing new knowledge to new areas.
Russian Strategists who got it right:
• Peter the Great: Diversifying the
economy and industrialization.
Emulate Holland.
• Sergei Witte: Diversifying the
economy, industrialization and
infrastructure. Emulate Germany.
Theories of Friedrich List.
Russian Economists who
Understood Capitalism well:
• Michael Tugan-Baranowsky (1865-1919)
Capitalism, industrialism and crises.
• Nicolai Kondtratiev (1892-1938)
The cyclicality of capitalism.
• Alexander Chayanov (1888-1937)
Agriculture and the peasant economies
Characteristics of
Wealthy Countries:
A Large Number of Economic
Activities all Subject to
Increasing Returns
= Synergies between Industry,
Agriculture and Advanced
Service Activities.
The Circular Flow of Economics
The real economy
”Black
Box”
Production
of goods
and
services
Financial/money
economy
Money/capital
SINCE 1990 THE WASHINGTON INSTITUTIONS
HAVE PROVIDED A STRING OF RED HERRINGS
‘get the prices right’
‘get the property rights right’
‘get the institutions right’
‘get the governance right’
‘get the competitiveness right’
‘get the innovations right’
‘get the entrepreneurship right’
‘get the education right’
’get the climate right’
’get the diseases right’
‘get the culture right’
Missing dimension:
‘GET THE ECONOMIC ACTIVITIES RIGHT’
Résumé of 500 years of History of Economic Policy
• A nation is better off with an
inefficient industrial sector than with
none at all.
• Industrialization must be
accompanied by competition
Culprits:
’The
Terrible
Simplifiers’
Jacob
Burchardt
Delft, Holland, 1650s:
An Innovation System Based on Diversity
NAVY & MERCHANT MARINE
Supply: canvas,
linseed oil
ART
Supply: lenses for
camera obscura
Demand:
luxury painting
Demand: artists for
drawing new specimens
Supply: lenses and brass
for binoculars + maps
INDUSTRY
Textile production uses glass lenses
Printing: copper for printing plates
Pottery: tiles for export
Supply: new
species from
afar to study
SCIENCE
Supply: lenses
+ brass for
microscopes
Colonialism as a Technology Policy.
‘That all Negroes shall be prohibited from weaving
either Linnen or Woollen, or spinning or combing of
Wooll, or working at any Manufacture of Iron, further
than making it into Pig or Bar iron: That they be also
prohibited from manufacturing of Hats, Stockings, or
Leather of any Kind… Indeed, if they set up
Manufactures, and the Government afterwards shall be
under a Necessity of stopping their Progress, we must
not expect that it will be done with the same Ease that
now it may’.
Joshua Gee, Trade and Navigation of Great Britain
Considered, London, 1729.
How innovations spread:
• Classically: as lowered prices to the
consumers. Typically in agriculture and
process innovations (perfect competition)
Using ICT
• ‘Collusively’: as higher profits, higher wages
and higher tax base for the producing country.
Typically in product innovations, Ford &
Microsoft. (dynamic, Schumpeterian imperfect
competition, ‘market failure’ (?)) New products
based on ICT.
How the use of ICT reduces value
added
• Tourism: internet bookings reduce margins for
hotels in Venice and Costa del Sol, Spain.
• Used books: instead of finding books through
catalogues, customers now find them on the
web. Result a precipitous fall in prices for used
books. Book descriptions on the web reduce
need for high-skilled cataloguers.
Two Ideal Types of Protectionism Compared
East Asian: ‘Good’
Latin American: ‘Bad’
Temporary protection of new industries/products for the world
market
Permanent protection of mature industries/products for the home
market (often very small)
Very steep learning curves compared to the rest of the world
Learning that lags behind the rest of the world
Based on a dynamic Schumpeterian view of the world – marketdriven ‘creative destruction’
Based on a more static view of the world – planned economy
Domestic competition maintained
Little domestic competition
Core technology locally controlled
Core technology generally imported from abroad/assembly of
imported parts/‘superficial’ industrialization
Massive investment in education/industrial policy created a huge
demand for education. Supply of educated people matched
demand from industry.
Less emphasis on education/type of industries created did not
lead to huge (East Asian) demand for education. Investment in
education therefore tends to feed emigration
Meritocracy – capital, jobs and privileges distributed according to
qualifications
Nepotism in the distribution of capital, jobs and privileges
Equality of land distribution (Korea)
Mixed record on land distribution
Even income distribution increased home market for advanced
industrial goods
Uneven income distribution restricted scale of home market and
decreased competitiveness of local industry
Profits created through dynamic ‘Schumpeterian’ rent-seeking
Profits created through static rent-seeking
Intense cooperation between producers and local suppliers
Confrontation between producers and local suppliers
Regulation of technology transfer oriented towards maximizing
knowledge transferred
Regulation of technology transfer oriented towards avoiding
‘traps’
The United State as the Ideal Type of a
Developmental State (about 1830):
‘Of course, free trade is the ideal, and the United States will
proclaim the true cosmopolitan principles when the time
is ripe. This will be when the United States has a hundred
million people and the seas are covered with her ships;
when American industry attains the greatest perfection,
and New York is the greatest commercial emporium and
Philadelphia the greatest manufacturing city in the world;
and when ‘no earthly power can longer resist the
American Stars.’ Then ‘our children’s children will
proclaim freedom of trade throughout the world, by land
and sea.’ (Joseph Dorfman)
First Listian Principle Abandoned:
Listian principle: A nation first industrialises and is
then gradually integrated economically into nations at
the same level of development. Symmetrical
integration: win/win situations.
Neoclassical principle: Free trade is a goal per se,
even before the required stage of industrialisation is
achieved. Risk of lose/lose situation & factor-price
polarization.
.
Second Listian Principle abandoned:
• Listian principle: The preconditions for
wealth, democracy and political freedom are
all the same: a diversified manufacturing
sector subject to increasing returns.
 Neoclassical principle: all economic activities
are qualitatively alike, economic structure does
not matter.
Third Listian Principle abandoned:
 Listian principle: Economic welfare a result of
synergy. 13th century Florentine Chancellor
Brunetto Latini (1210-1294) explains the
wealth of cities as a common weal (‘un ben
comune’).
 Neoclassical principle: ‘There is no such thing
as society’, Margaret Thatcher (1987).
Asymmetrical integration creates the
Vanek-Reinert effect:
When two nations at widely different
technological levels integrate, the first
casualty is the most advanced economic
activity in the least advanced nation. This
in turn contributes to factor price
polarization and migration of skilled labor
Résumé of 500 years of History of Economic Policy
• A nation is better off with an
inefficient industrial sector than with
none at all.
• Industrialization must be
accompanied by competition