Review & Summary: Economics the User’s Guide by Ha Joon Chang
(Plus Bad Samaritans)
Review
I liked this one better than Bad Samaritans, the summary of which I’ve tacked on to the end of this post.
Chang tries to outline the basics of different schools of economic thought, never wholeheartedly advocating for one in particular. In fact a core message of the book is that objectivity is impossible, and while you should keep an open mind leaving actual decisions on policy to the experts is dangerous as different groups have different goals and metrics of success.
Summary
Discourse is cursed by vapid vocabulary and oversimplifications. Free market changes over time. Slaves & child labor used to be part of the free market.
Broad categorizations of countries often misleading. For example Singapore Considered free market, free trade and open to FDI. All land owned by the state. State enterprise is around 22% of the economy as opposed to around 10% on average.
Capitalism started in 1500s-1800s in England then Western Europe. Started in the countryside and in the colonies. Later moved to cities during the industrial revolution. Many people live for 20 years working 80 to even 100 hours per week. Machines had to be made smaller so that younger children would be able to work. Colonialism runs on capitalist principles.
Growth took off in 1820. Development of science: Galileo, Newton etc. led to a system of knowledge that made technological innovations more easily transferable, which led to the rapid creation and spread of new technologies which led to economic growth. Mechanized production of steel-making, textiles, chemicals.
Adam Smith Increased output = division of labor, = increased output, virtuous cycle.
Most people were anti technology (luddites.) Destroyed technologies that replaced them. Others sought voluntary associations. Communal working, Co-ops similar to Israeli Kibbutz.
Marx called his predecessors utopian socialists. Called his own approach scientific socialism. Build on capitalism, take advantage of productivity growth, run like capitalism in one respect. Central planning despite communist connotation is similar to a large capitalist firm. (People’s Republic of Wal Mart)
Lenin: socialist society can only come from a revolution; capitalists never give up the means.
Revisionists/social democrats: wanted a welfare state, worker regulations. Compromise seen as unrealistic since capitalists weren’t originally willing to accept reform.
1870 onward able to increase wages for workers over time. Workers worked less than 60 hours a week. Life expectancy went from 36–41 from 1800–1860.
1871 First German welfare state introduced by Otto Von Bismarck.
Myth of Free Trade: Britain was the first protectionist. Used state intervention and tariffs to protect british producers from other countries producers. Only switched to free trade when they were the dominant force of the world.
Neoliberalism valued by IMF World Bank and US Treasury all DC based.
History
1880–1914 the only place that had decent growth was Latin America which was becoming protectionist.
Decades following Russian Revolution, private property land/means were abolished. Agricultural collectivization 1928 large farmlands of the Kulaks were confiscated and made to be state farms. Farmers joined Agricultural co ops. (Really just state farms.)
Markets replaced with central planning by 1928 when first 5 year plan started.
Not capitalist. No private ownership of means, no markets, no profit motives.
Day to day life was largely the same. Workers had no say in their work life same as under capitalism. Same hierarchical relationship. Marx had left things vague so soviet union was making it up as they went along.
Communism was supposed to develop from the most developed capitalist economies which would be largely centrally planned already due to domination by large enterprise.
Soviet Union was much more successful than anyone expected. (Ask the Nazis)
Income per capita grew at 5%/year between 1928–1938. (About 3–5x average growth.) Cost millions of deaths due to repression and 1932 famine.
1932 famine: caused by shipment of food out of rural areas. Soviets were obsessed with urbanization and industrialization (Hallmarks of a developed capitalist society.) Wheat was used to feed urban populations and to trade for industrial equipment. Resources were allocated in a way that millions of people died as industrialization and growth exploded all during the great depression.
Great Depression: US hardest hit. 1929–1932 output down 30% unemployment up 800%. 1937 was when we broke even.
Neoliberals believe that the depression could have been managed if not for collapse in world trade caused by trade war and smoot hawley tariffs. It didn’t cause a trade war unless you fixate on a few small economies like Spain and Italy. Collapse in trade was caused by downward spiral in international demand due to “Balanced budgets”
Financial crisis>downturn in private sector spending>debts go unpaid>banks reduce lending>firms and individuals cut spending>reduces demands>Economy tanks.
Government is the only one that can stop the cycle by spending more not less. During the depression, they didn’t. Gold standard meant we couldn’t print money either.
Depression led to loss of faith in Laissez faire so reforms were introduced. US had 2 new deals.
Socialism’s connotation as un-American is ahistorical. People weren’t afraid to critique capitalism. War time central planning also exhibited the efficacy of the state in organization.
European Far Left political groups led to welfare and labor rights following WWII. They had unprecedented electoral success due to their roles fighting fascism, which necessitated Operation Gladio.
Helped create social peace and mobility, encouraging investment and innovation. Basic services were nationalized, NHS. State was able to move into technology focused areas that were too risky for the private sector.
Sweden voted in soc dem party in 1932 started an income tax (much later than most) and used it to expand the welfare state.
1945–1973 Golden age of capitalism. Aka the only true capitalism. Nothing else counts. Highest growth rate. 4% growth rate in Europe.
Unemployment virtually eliminated. High stability due to unapologetic Keynesianism. Technologies used during the war could now be applied for businesses.
Bretton Woods institutions — IMF to provide short term funding to countries in balance of payments crises. When a country has a balance of payments crises people aren’t willing to lend money to them which leads to panic and recession which is bad for all.
The World Bank meant to loan for project lending. Money loaned for longer or lower interest allows more aggressive investment.
GATT General Agreement on trade and tariffs signed 1947. Helped rich countries cut tariffs since they were at similar levels of development these led to positive outcomes. Expanding markets increasing productivity.
Banking was boring. Krugman:
“When I was a graduate student in Economics only the least ambitious of my classmates sought careers in the financial world. Even then investment banks paid more than teaching or public service, but not that much more.”
Widespread Decolonization: starting in Korea, and India. Then Kenya, more sub Saharan countries followed in the 1960s. Angola and Mozambique decolonized from Portugal in 1975. Namibia in 1990 from S. Africa. Most gained independence by the end of the golden age.
Most post colonial nations rejected free market/trade. Most pursued state led industrialization strategies. (Import substitution industrialization ISI strategy.) Protect domestic producers by restricting imports. Regulating foreign countries operating in your country.
China, N. Korea, N. Vietnam and Cuba ended up socialist.
1960–1980: Africa was the slowest growing region. Latin America grew 2x as fast at 3%. East Asia grew 3x as fast at 5%.
Golden Age: govt. intervention increased in all areas in all countries. Economic performance has never been matched. Capitalism regulated guided and stimulated by the state.
Ended by first oil shock 1973. 400% increase overnight due to cartel collusion of OPEC. Led to inflation, later stagflation. This crisis created space for neoliberals to enter the conversation.
Stagflation depicted as a disaster by free market economists which is somewhat of a self own. 2% income per capita growth from 1973–1980 was higher than the decades that followed.
Inflection Point
1980 Thatcher: lowered marginal income tax, cut spending on education, housing, & transport, abolished union power, and capital control. (Restriction on cross border movement of money.) Sold SOE’s to private investors. Gas water electricity steel airline, car, public housing.
Interest rates raised to reduce inflation, activities, demand and drove up the value of the pound making harder to export.
Reagan 1981 outdid Thatcher. Cut marginal tax rates, saying the rich would invest and create wealth since they could keep more. Once wealth is created rich will spend more creating jobs. Interest rates cranked to reduce inflation. Over 20% devastated the Midwest. (Started by Volcker under Carter)
Subsidies for the poor were cut, minimum wages frozen to make people work harder. Make the rich richer to make them work harder. Make poor poorer to make them work harder.
“If you feed enough oats to the horse, some will pass through to feed the sparrows” — John K Galbraith
Fear of hostile takeovers and asset strippings firms had to focus on short term or else lose their shareholders investments, lowering stock prices and increasing propensity to be taken over. Easy way to maximize short term profit is to downsize even if it is counterproductive in the long run and on the macro economy.
Volcker shock hurt developing countries the most. Developing countries had borrowed a lot of money, higher interest rates led to mass defaults.
Third world debt crisis countries had to turn to BWI’s like IMF and World Bank. They would be helped on the condition that they implement the SAP.
Structural Adjustment Program: Shrink the role of government, cut budget, privatize, reduce regulations on international trade.
Led to massive slowdown in per capita income growth in Latin America. 3% from 1960–1980 to .3% from 1980–2000. SSA Sub Saharan Africa Per capita income fell 13% from 1980–2000.
Chile did OK during this time if you ignore the Pinochet dictatorship. (You shouldn’t.) All other success stories used state intervention starting out and gradually liberated.
1989 Fall of the Wall Strategy to liberalize soviet countries was meant to be like a Big bang. Capitalism overnight. (Alternatively: Shock Therapy) Led to disaster. In Yugoslavia it led to wars, ethnic cleansing. Others had depressions. Russia had economic collapse, unemployment which led to so much misery that millions died. Political elites became economic elites. Gradual reforms worked out better, but still not great. Poland Hungary.
1994 NAFTA US Canada Mexico First free trade deal between rich & developing countries.
Worldwide trade deals lead to somewhat free trade. Globalization becomes a thing. Countries must open up to international trade and investment. Anyone who doesn’t consent is a luddite.
1995 Mexico crisis: Investors assumed that due to NAFTA Mexico would be the next miracle. Bailed out by US Canada and IMF.
1997 Asian financial crisis. Asset bubble burst. Too much foreign capital flowed in. Higher asset prices lead to higher expectations more borrowing lending, until people pulled out. Millions lost work with no safety net. To get a bailout asian countries had to swallow a lot of liberalization policies especially in their financial markets. This combined with Russian and Brazilian crisis led to some concern about the end of history. (Fukuyama)
1999 Repeal Glass Steagall which had separated commercial from investment banking.
2000 .Com bubble fed cut Interest Rates. Early 2000s Decent growth great asset increases.
Bernanke called this period the “Great Moderation” Science of economics had conquered boom and bust. Alan Greenspan 1987–2006 supposedly directed a permanent boom sans inflation.
Chinese miracle growth. 1970s 2.5% of world economy. 2000s it was 8%. Boosted raw materials exporters, Latin America and Africa started to make up lost ground from the previous decades of neoliberalism.
2007 some were concerned about non repayment of subprime mortgage loans. (Loans unlikely to be paid back.) People were lent more than they could pay back under the assumption that housing would continue to rise. Worst case scenario they just sell it. Thousands of these high risk mortgage loans were then combined into composite financial products. Sold as low risk assets. Obviously the more people the lower risk.
2008 Global panic when Bear Stearns and Lehman Brothers went bankrupt. Just about everyone owned some dubious composite financial products. Car companies and banks were bailed out with public money.
Interest rates were brought down to historic lows. Then engaged in Quantitative Easing- Create money, release it by buying government bonds usually.
2010 Balanced budgets and austerity come back to the UK and Europe.
2011 Republicans get Obama to cut spending. Right wing used argument of balanced budgets to prune welfare state which is their solution to literally everything.
2012 output was lower than 2007 in 22 countries of the OECD.
Austerity holds back recovery as we’ve seen from the great depression. May lead to a lost decade as Japan in the 1990s or Latin America in the 1980s. Unemployment went up about 20% in Spain and Greece.
Schools of thought
Different schools of economics fit together differently. Lines between them can be blurry. No theory is adequate.
Classical School: Ricardo, Comparative Advantage. Rich people should get more money since they are the ones who invest and generate growth.
Say’s law supply creates its own demand. Every activity generates income = to its output so no such thing as a recession due to a downfall in demand. Since market can’t generate a recession any attempt to counter it by the state is disturbing the natural order. This belief prolonged many depressions before Keynes.
Neoclassical: Emphasizes demand more than supply when determining the value of a good. Demand matters more in the short term. Supply matters more in the long term.
Classical-ists thought value was determined by costs of production. (Labor Theory of Value.)
Similarities: Self interest + competition = socially beneficial outcomes. Markets self equilibrate.
Neoclassical economists can be left or right. Stiglitz and Friedman. Can be used to justify anything. Too accepting of status quo. Still assumes rational actors.
Marxists: True heir of classical school. LTV focused more on production as opposed to consumption and exchange. Production is the basis of social order.
Society run by classes not individuals. Class conflict center of history. Working class isn’t passive, has agency. Different from classical who saw them as cattle.
Marx: work allows us to express creativity. Hierarchical capitalist firms block creativity. Dehumanizing repetition division of labor. Smith said the same. Marx made technology the central element of his theory.
Developmentalist: Backwards economies can’t develop if left to the market.
Oldest and most important economic tradition. (Chang is a development economist…) No clear founders. Kuznets is relevant though. Improve productive capabilities.
Ability to produce and develop new technologies and organizations. This does not develop on its own in a developing economy since it’s all conducted by other countries.
Mercantilists first developmentalists focused on higher productivity through policy interventions. A trade surplus is an indicator of success, but is not the goal.
Infant Industry argument, Hamilton is the true father. Trade protection allows possibility for productivity, but actual improvements require education, training, and R&D.
Austrian: Friedrich Hayek, and Ludwig Von Mises Government = bad.
Any government intervention leads to socialism. Road to Serfdom Political alliance with neoclassical but is skeptical of human rationality. World is too complex to run an economy so don’t bother.
Neo-Schumpeterian Joseph Schumpeter Creative destruction.
Technology drives innovation, entrepreneurs etc. Innovations are temporary monopolies which leads to entrepreneurial profit before the market gets saturated. Tech competition vs neoclassical price competition. No firm safe from creative destruction.
Predicted atrophy of capitalism. As capitalist firms grow professional managers, execs and bureaucrats will deprive capitalism of its dynamism. Will slowly wither away into socialism. Wrong since capitalism has become more dynamic.
Failed to see entrepreneurship as a collective endeavor. No longer relying on one guy to make the whole idea. Government, universities and charities all innovate.
Keynesian: Long run we’re all dead. Most important economist of the 20th century. Invented macro. Whole economy separate from the sum total of its parts.
Disproved Smith’s run country like a household idea. Which is still around. “Balance the Budget” Investment will only be high enough for full employment only when animal spirits are stimulated by new tech, financial euphoria etc. Normal state will be that investment will be insufficient for full employment so the government is obligated to prop up demand.
Financial market is a place for speculation. Buying and selling is not guided by the asset itself but by what the average person will think of the asset in the future. Leads to herd behavior & boom bust. Better fit for the capitalist economy than neoclassical or classical schools.
Separation of savers and investors made the equation of savings and investment and full employment different than what it was before. Also was able to deal with advanced financial markets which were primitive during the development of neoclassical economics.
Institutionalist Schools: No such thing as an individual.
Thorstein Veblen: coined conspicuous consumption.
Structural Determinism We are determined by our society. Institutions constrain unfettered self seeking behavior but enable us to do more collectively.
Behavioralist: Realist We aren’t rational. Youngest School, 1940s. To much uncertainty and limited knowledge so we use heuristics. Bounded rationality.
Satisfice look for good enough, not always the best.
These approaches should try to learn from each other.
Economics is “providing justification of what those in power want to do anyway.” (Modern clergy)
When Thatcher says There is no alternative, we know better. Economics is a political argument not a science.
Economy is made of classes. — Classical Marxist & Keynesian.
Economy is made of individuals. Neoclassical & Austrian
Economic decision making is no longer individualistic. Large organizations are the ones who make decisions that matter. Corporations are most important.
200 corporations produce 10% of output. 30–50% of international trade is intra firm. Prices in these transactions are set by company HQ not the market.
Individualist view on the economy is ideological and has been promoted by moneyed interests. Even individuals can be broken down further since we behave differently in different circumstances even unrelated to economics.
Separation of owners and control: Owners and managers can have separate interests. Owners gain control by increasing fear of hostile takeovers or paying leaders in shares. Stakeholders matter. Companies with worker or state involvement behave differently.
Cooperative: Owned by users, consumers, employees etc.
Mondragon CC has 70,000 employees. $19B revenue. Cooperatives 1 person one vote, not one share one vote. Wage Rule: 9x max difference between max and minimum wage. American managers get 300–400x even 1000x the average, not minimum wage.
Anti specialization: Some co-ops rotate jobs. Better morale, more versatile workforce, but anti capitalist in a way since they are not specialized for one task to specialize in.
Trade Union membership organizations one member one vote. Negotiate between workers and managers.
When Volvo bought Samsung they ordered them to form a union since that’s how they were used to communicating with workers. In some Nordic countries it’s kind of a given. Majority of workers are unionized. 11% in the US. Sometimes they have a say in policy not related to the worker status themselves.
Government is usually the largest employer. Has more diverse goals than corporations.
Regional Multinational Banks owned by rich country governments loan to developing countries. Asian Development Bank, African Development Bank, Inter American Development Bank. Offer lower rates, longer periods.
IMF makes large scale short term loans to countries in crisis.
IMF and World Bank demand certain economic policies in target countries. Generally impose policies that rich countries choose.
WTO and BIS set rules. Bank for International Settlements, sets rules on financial regulations.
WTO sets rules on international economic interactions, trade investment, intellectual property rights, one country one vote. Votes are rarely taken. Rich countries use informal influences.
UNIDO industrial development. UNDP poverty reduction ILO worker rights.
Politics of ideas: rich corporations and people fund think tanks to justify their wealth. Heritage: poverty is your fault, rich people deserve it, just try harder and so on… Lower taxes, welfare spending, less regulation fewer worker rights.
Diverse motivations, it’s naive to think we’re all selfish and one dimensional.
If people aren’t rational it doesn’t matter because the model still predicts it correctly. Except it doesn’t.
Efficient Market hypothesis caused crash. According to EMH, prices reflect all available info. Stocks always trade at their fair value making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.
Wishful thinking, panic, herd mentality, framing, overreaction to new information take a psych class all humans think emotionally. Accusing someone else of being emotional while insisting that you have a claim to facts and logic shows a delusional lack of self awareness and basic humanities education.
NDP Net DP includes depreciation.
GNP Output includes international production by your companies. Rich countries has GNP a few percent higher than GDP. GNP is a better measure.
Household work 30% of GDP isn’t counted. GDI should be identical to GDP but it’s not.
US 22% China 10% Japan 8% Germany 5% France 4% of world economy.
Average income is only a good indicator of standard of living in a relatively equal society.
Purchasing Power Parity PP measure across borders by consumption basket.
Positional good: only valued by possessor
Inequality should not be too high or too low.
Kuznets nobel prize 1971, as economy develops inequality goes up then down. Kuznets curve. 1) Early stage everyone’s poor. 2) Countries industrialize people get higher wages so inequality goes up. 3)As more work in urban service and industrial sector inequality goes down. Does not hold up. Because economic policy matters. Deregulation, and tax cuts do what you think they do.
Gini Coefficient: The Gini Coefficient is equal to the area between the actual income distribution curve and the line of perfect income equality.
Lorenz Curve: a graphical distribution of wealth developed by Max Lorenz in 1906, shows the proportion of income earned by any given percentage of the population. Diagonal line shows perfect equality, other line shows the actual distribution of income.
GINI over .6 A few S. African countries Over .5: Gini coefficients in Africa and Latin Over .4 US and China
Wealth inequality is higher than income inequality & hard to measure. Inequality everywhere has gone up since the 1980s.
1% used to have 10% of income, now it’s 25%. .1% moved from 4% to 12%.
Absolute vs relative poverty: “Things become necessities when it becomes indecent for creditable people, even of the lowest order to be without.”
Not everything can be blamed on systems. Suppression of individual talents too much can make society equal but unfair. That being said Much of poverty is structural. Nutrition, lack of learning stimulus, underfunded schools. Parents may juggle multiple jobs and be uneducated themselves. Lack of connections and cultural gaps can also negatively affect those who start behind.
Rigged Markets: The rich can write their own policy when they lease politicians. Deregulation and tax cuts don’t have to make sense. They just need to get done.
Lowest Poverty: Denmark, Iceland, Luxembourg, Finland Highest: Israel, US, Japan, Spain
Public intervention can address poverty. Better childhood conditions, welfare, education spending. Improve access to jobs. Absolute poverty can be eliminated.
We don’t lack the means or even the desire necessarily we lack the political power.
Conspicuous consumption: To show off rather than genuine utility.
Child Labor: When children work adult jobs development, even physically is hampered.
Division of labor can cripple workers mentally. -Marx & Adam Smith
Working too much can be detrimental to health. (Read Rutger Bregman) Excessive hours = over 48 hours per week. Bifurcation: In many countries you choose between part time and overtime.
Latin Americans and Greeks have a stereotype of being lazy. The opposite is true. Work does not equate to wealth. Poverty does not equate to laziness.
Productivity is a measure of industry not laziness.
More intellectually creative jobs are more rewarding. More pressured workers are more upset.
Notion that any job regulation is bad since the workers are consensual in their miserable conditions. Work or die isn’t really a free choice. “When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist.”
Solution to laziness is conveyor belt and measured simple tasks. In order to keep workers capitalists pay more than their competitors. Wages go over market clearing level and we get unemployment.
High unemployment is not necessary. Golden age unemployment was extremely low. (Debatable)
Milton Friedman and Karl Marx agree that a significant portion of the population must be kept unemployed to keep wages low enough for capitalism to function. Milton called it the Natural Rate of Unemployment, Marx called it the Reserve Army of labor.
Unemployment: Has mental implications. Loss of dignity depression suicide etc. If unemployed for long skills become outdated, and confidence is eroded. Social costs: wastes resources, social decay, urban degeneration.
Benefits in Europe are around 70% of previous income. The US is 30%. Developing countries have none.
Neoclassical Says law: Unemployment exists because of trade unions, labor laws, minimum wages etc.
Cyclical unemployment solution is deficit spending and loose monetary policy until it goes down.
Marx and Stiglitz (Efficiency wage model) unemployment is inherent to capitalism.
Kalecki Polish economist: full employment is incompatible with capitalism. Inflation down.
Systemic unemployment: barely existed in golden age. Has risen a lot 1–3% vs 3–10%.
3–5% used to be considered high unemployment. We’ve become used to 5–10%. Unemployment seen as inevitable now. Full employment which used to be the most important and frequently achieved goal is now seen as barely in our control.
High unemployment is more damaging than inflation, but is seen as an inevitable minor problem while inflation (where it exists) is seen as a crisis. Inflation hurts creditors/rich. Unemployment hurts the poor.
Political Economy: More honest name for economics.
No serious economic theory believes in the abolition of the state. Left or right.
Free market: Limit state to military, defense, property rights, infrastructure.
Statist: Central planning by the state to coordinate the economy.
Hobbes: Individuals exist without government war of all against all. Life is solitary, poor, brutish, and short. So we voluntarily accept some restrictions on freedom by the government so we can have social peace.
“According to libertarians any state intervention without unanimous consent of all individuals in society is illegitimate.” Only justified actions are provision of law and order, property rights, national defense and infrastructure. Anything beyond these minimum wages, welfare, tariff protection are the first step on the inevitable road to serfdom. *Checks watch…*
Humans have always lived as members of some society. The idea of a freestanding individual is a product of capitalism. Thatcherism is intellectually bankrupt.
Contractarians have overestimated individuals independence from society and underestimated legitimacy of collective entities, including the state.
Market Failures
Public goods: Roads, bridges, lighthouses, flood defense etc. Few goods have to be public.
Break up firms to increase competition. Ban oligopolies from forming cartels and colluding. Nationalize and run by the state.
Schumpeterians and Austrians denounce perfect competition as innovation killing. Temporary monopoly is what encourages innovation. Breaking up monopolies will reduce innovation.
Waste: Electoral systems based on constituencies lead to politicians diverting funding to their constituencies which is why countries have more airports and sports stadiums than they need.
Self seeking bureaucrats look out for their departments over the people.
Interest group lobbying: bankers for deregulation, industrialists seeking protection, unions seeking higher wages.
Government failure argument: exaggerates the extent to which governments fail. If true, every government would be in endless turmoil around the world. In reality many governments work well, some even excellently. Imperfect does not equal ineffective.
Economic depoliticization is antidemocratic. Turning over power of how to run society to those with more money. There is no way to draw boundary between market and politics. There is no reason the market should inherently dominate over other domains of life.
No scientific list of what should or shouldn’t be sold in the market. It’s a political issue. All Societies keep things off the market. Organs blood slaves etc. All were legal at some point.
Taxes: Income tax, corporate tax, property tax, Value Added tax (sales tax), excise tax. Government expenditure has risen a lot in 150 years. 45% average in OECD. 30% Korea Switzerland Australia Japan Over 50% Denmark Finland France Sweden Belgium.
Transfer payments should not count towards GDP.
Before the 1980s people thought the miracle economies of East Asia were free market because of small government by GDP percent. They were in fact very hands on; planning, regulation etc.
Political has become a dirty word. Many politicians come to prominence because they aren’t politicians. Mistrust has been well earned.
Free market economists have convinced the world that we can’t trust the government therefore less government the better. All economic success stories have been facilitated or even orchestrated by the state. More government isn’t inherently better, but it isn’t inherently worse. Good state intervention is good, bad state intervention is bad. The state is the most powerful organizational technology we’ve invented so far.
More History
1792 Britain requested free trade in China to reduce its large trade deficit. British love tea. China sent back a letter saying “Our celestial empire possesses all things in prolific abundance and lacks no product within its own borders.” Britain resorted to stepping up its opium exports to China leading to an addiction crisis. 1838 a new Chinese Drug czar cracked down on opium smuggling. British started the Opium War in 1840. Victorious Britain forced free trade including opium. Led to a century of external invasions, civil war, and national humiliation.
Qianglong: while ridiculed has a view on free trade that aligns with European economists at the time including Smith.
Absolute advantage: A country does not need to trade if it can produce everything more cheaply anyway. According to comparative advantage it should. Countries should specialize. International trade benefits all. The logic makes sense given its assumptions, but the assumptions are not given.
Heckscher-Ohlin-Samuelson model (HOS) lies at the heart of modern free trade argument. HOS structurally rules out the most important form of beneficial protectionism by assuming all countries are equally capable. They can use any technology they want. No possibility that tech may be too difficult for the country.
Rules out infant industry protection which was key in the success of any developed nation. HOS is overly positive about liberalization because it assumes capital and labor can be remodeled for use in any sector at no cost. Blast furnaces can’t turn into microchip makers. Huge environmental costs. Steel workers can’t become investment bankers. Perfect factor mobility assumption.
Compensation principle: as trade makes countries better off, losers can be fully compensated via welfare or otherwise. Winners still have the additional income. The trouble is compensation isn’t actually made.
Criticizing free trade does not equal opposing trade. International trade provides bigger markets, economies of scale. Trade was 12% in the 60’s now it’s 29% despite increasing GDP.
The US isn’t the only victim. In reality, imports and exports are almost equal in the US. We are one of the least trade dependent countries in the world.
Larger economies are less dependent on trade. Small economies are dominated by trade. Hong Kong 206%, Singapore 198%. They import to export. (Re-exporting)
Current Account: Balances in trade, income and current transfers.
Income Worker compensation and investment income
Current transfers, remittances and foreign aid. Haiti gets 27% GDP in remittances
Capital account capital transfers, acquisition, disposal of non financial assets.
Financial Account: Portfolio investments, equity, debt including bonds and derivatives, FDI other investments, reserve assets.
Current Account can still have a deficit so either borrow money or sell assets.
CFA capital account and financial account.
Current account balance and financial account balance in theory should = 0. Never calculates perfectly to 0 though.
Most rich countries have trade deficits between -5 and 5%. Some countries have surpluses over 30%. 40% in Liberia Haiti and Kosovo.
FDI has grown faster than international trade. Gone from .5–3% of global GDP. FDI brings in new tech, new strategies. Good and bad. When exploiting resources or cheap labor there are few benefits.
Tax evasion Companies seem to make less money than they actually make. How? Inflate costs of subsidiaries in countries with lower or even near zero tax rates.
Underprice exports, over price imports. $4000 tweezers. Transfer pricing. This means they are using public infrastructure but are not paying.
Transnational companies (TNC) can crowd out local firms for credit since they are backed by successful global firms. TNC’s can also change the laws to favor them in any country they go to.
Banana Republic: Honduras, Guatemala, Colombia controlled by UFC United Fruit Company. 1928 massacre of striking workers in Colombia. Colombian government, threatened by US marines sent in troops and killed thousands of workers.
US TNC’s actively cooperate with the CIA and right wing militaries to overthrow democratically elected leftist governments across Latin America.
In the long run FDI can make it hard for the host country to increase its own productive capabilities. Once TNC’s establish themselves, local firms will struggle to survive. That’s why developed nations today (Japan, Korea, Taiwan) strictly restricted FDI until domestic companies could compete in the world market.
If Japan opened its car market to FDI in the 50s they would be wiped out or taken over by American or Euro TNC’s.
FDI needs to be regulated for benefits to take place. Generalizations are difficult in different countries, industries, criteria. Benefits are immediate, costs are long term.
Some countries limit the industries that can take FDI. Majority foreign ownership can be banned in certain industries.
Local content requirement Countries can mandateTNC’s buy some inputs locally.
Japan Korea & Taiwan used these to maximize benefits and limit costs.
The US has been the biggest recipient of FDI followed by UK China France and Germany. Developing world FDI countries include China.
How a country should use free trade or protectionism depends on circumstances/goals.
Free market economists are inconsistent when they don’t believe in open borders.
Immigration generally benefits both the immigrants and their destination. They fill labor shortages particularly 3d jobs. Dirty Dangerous, Demeaning. Or highly skilled jobs.
Most immigrants pay for their services via taxes. Even on meager welfare states there is a fear of welfare tourism. In reality immigrants pay more taxes than they absorb since they tend to be younger and don’t use social services as much. Increased cultural diversity inspires creativity, new ideas, new methods of doing things.
Disaffected workers stoked by right wing populists are prone to blaming immigrants for economic stressors, but generally corporate strategy, government policies, shareholder value maximization, poor macroeconomic policies, inadequate worker training. Failure of mainstream politicians to deal with these issues leads to anti immigrant parties.
Brain Drain Generally skilled immigrants are more able to move.
Brain Gain Sometimes skilled workers learn more, come back home and teach others. Immigration rate has fallen in the last 20 years.
Some rich countries, France Germany Spain Belgium also have high remittances.
Takeaways:
Ask who benefits Trickle down depends on the assumption that given a bigger slice of national output, the rich will use it to increase investments, which hasn’t been borne out by reality.
Pareto criterion: A change is only an improvement when it makes some people better off without making anyone worse off. Which implicitly benefits those at the top in the status quo.
We need numbers but should view them with skepticism. they can’t tell the whole story.
“An expert is someone who doesn’t want to learn anything new.” — Truman
Economic understanding should be broad. We can’t expect someone fixated on a small section of one field to make real life decisions that have implications for more than one area of life.
Keep an open mind, but have an opinion.
One dollar one vote means poor people don’t get to vote meaningfully.
Acknowledging change is difficult is no indication that it’s time to stop.
2008 showed us we can’t leave the economy to the nerds. (Technocrats) Buying into that assumes there is an objective universal goal to be reached, but in reality everyone has different competing goals. Uncritically gifting it to nerds who are accountable to whoever has the most power isn’t a great plan.
Bad Samaritans Summary
Do as we say not as we did. Developed nations spread free market ideology despite historically using tariffs, subsidies, state coordinated development of industry etc.
Not all succeed with protectionism but few succeed without. For the poor free trade has rarely been a choice. It has been an imposition, even militarily.
Economies should be opened up selectively and gradually. Neoliberalism claims to sacrifice equity for growth. Achieves neither. Growth has slowed last 30 years. Instability has increased as well.
Golden Straightjacket:
“Thomas Friedman refers to the Washington Consensus prescription as the ‘Golden Straitjacket’. He argues that ‘As your country puts on the Golden Straitjacket, two things tend to happen: your economy grows and your politics shrinks.’ It is a straitjacket because it ‘narrows the political and economic policy choices of those in power to relatively tight parameters. That is why it is increasingly difficult these days to find any real differences between ruling and opposition parties.’”
So you’re right. We live in a guided democracy, but it’s actually good.
Growth in developing nations fell from 3.5% in the 60s and 70s to 1.7% in the 80s. (Would be lower if not for China & India.) Rich countries fell 3.2% to 2.1%.
History is written by victors. We view the past through the lens of the present. Protectionist history of the first world is underplayed, as is imperialist origin of global integration. Rich countries induce poor countries to adopt their policies via foreign loans & trade agreements.
African countries for decades have been basically run by IMF and World Bank.
3rd world debt crisis led to increased SAP (Structural Adjustment Programs) by unholy trinity. (IMF World Bank, WTO) All 3 have overstepped their initial purposes. IMF is the gatekeeper of international finance.
Globalization is set by politics not technology. “There is no Alternative” of Thatcher is not true.
Before 1970s targeting unemployment meant reduced economic instability.
Since 1980s, monetarists target low inflation. It is thought that inflation prevents growth which is a common sentiment based on nothing.
1–3% inflation as a requirement is arbitrary. Anything under 10% is fine and even below 40% there is no correlation between inflation and growth. (Dubious of this but we’re overdue for an inflation discussion.)
Neoliberals claim inflation is uniquely bad especially for those on fixed incomes. However the policies designed to prevent inflation generally hurt working people reducing prospects and wages. (We should be skeptical when Neoliberals claim to be concerned about the poor.)
Protecting central bankers from politicians also shields them from democracy.
Long term deficits as a developing country is like taking out loans for school or training. Well… it literally is that. It’s worth it and can be paid back later.
IMF demands balanced budgets every year, which is a completely arbitrary timescale. Unemployment crises and riots in the streets are OK if it means a budget surplus.
Poor countries are expected to be austere during downturns which would never happen in rich countries (except for the poor). Keynes for the rich, monetarism for poor. (Insert MLK quote…)
Patent law unnecessary: imitation lag, reputational advantage, racing down learning curves head start. Schumpeter was not concerned with patents. He said monopoly rent, is a big enough incentive for investment.
Patents by definition are monopolies which impose costs on society. Economic development is about absorbing advanced foreign technologies. Whatever slows that is bad including patents.
China didn’t invent the borrowing of patents. All developed countries have borrowed intellectual property from each other.
Patent explosion since 1983: From 1% to 5% per year.
Theft of traditional knowledge: Turmeric patented as medicine which has been a medicine for millennia. Overturned due to India’s size & power.
Rich countries low originality bar (US) hurts developing countries. Making increasingly minute pieces of tech patent-able reduces innovation.
How to weaken IPR: shorten the period of protection, raise the originality bar, and make compulsory licensing parallel imports easier. If this leads to insufficient incentive the public sector can step in. (Already does)
Academic books should be cheaper in developing countries. More knowledge diffusion is good and they aren’t buying them anyway. Also applies to fake luxury goods.
Will economic development lead to democracy?
No, (China) but is the free market good for economic development?
Also no, (China) but can we at least say democracy and free markets are natural partners which reinforce each other?
No. Democracy = 1 man 1 vote. Market = $1 1 vote. Result: we spend more researching weight loss than Malaria. This distinction was obvious to classical liberals who immediately choose free markets.
Neoliberals unlike classical liberals cannot openly oppose democracy, so instead they try to discredit “politics” “Depoliticization of policy decisions in a democratic polity means,- let’s not mince our words,- weakening democracy.”
They also have no success story to point to, and since they are in denial of ever being wrong they must find explanations in politics and culture. (Beyond Parody)
Markets are political constructs, all property rights and other rights have political origins. Many rights which are natural today were unheard of in the past. Such as the right to not have to work to live until you are 18.
No correlation between democracy & growth.
“Democracy is acceptable to neoliberals only insofar as it does not contradict the free market. This is why some of them saw no contradiction between supporting the Pinochet dictatorship and praising democracy… they want democracy only if it is largely powerless.”
Economists love choice until a poor country chooses its own economic policy.
Well designed welfare and retraining reduces costs of unemployment.
Rationalism, long term planning etc. comes from development, not the other way around. Japanese, German people were once considered easy going, slovenly.
Putting rich and poor countries on a level playing field is like an NFL team playing against a college team. Level playing field does not equal fair. Things should be made easier for the poor countries, not to give them an advantage, but to give them a chance.
