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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.
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Erik S. Reinert
The Other Canon Foundation
Moscow, January 19, 2010
Why are there so few middle income nations?
Korea (Rep.)-Somalia, GDP per Capita 1950-2001
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.
Examples: Southern Mexico, Moldova, Caribbean states
Other Canon of Economics
Tudor Economic Policy in England 1485+
M. & H. CareyUS 19. Century
US Industrial Policy
Veblen and the Institutional School
Giovanni Botero 1588
Antonio Serra 1613
Barthélemy de Laffemas 1597
Jean Baptiste Colbert 1651+
Classical Devp. Econ. 1945+
The Other Canon
Von Hornick Germany 1684
German Cameralism & Anti-Physiocracy
German Historical School 1848+
Verein für Sozial-politik 1872-1932
The real economy
Production of goods and services
‘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 large-scale innovations (Schumpeter’s ’Gales of Creative Destruction’) that each needs a new set of entrepreneurs.
”David Ricardo’s economic theories are excellent, they lack nothing but sense”.
Economics is a cyclical science, and crises determine the turning points in the cycle!
So now is a turning point.
’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.
School Starting point Peak Death
Physiocracy Quesnay 1758 1760s ca. 1770
(’Rule of Nature’)
Classical Ricardo 1817 1840s ca. 1895
Neoclassical Samuelson 1948 1990s NOW!
(why growth is activity-specific)
USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’
USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’.
Man-Hours Required by Best-Practice Methods of Producing A Pair of Medium-grade Men’s Shoes at Selected Dates in the U.S.
Year Man-Hours Per Pair
How the wage differentials between rich and poor nations were created through sequences of ’productivity explosions’ translated into wage rents.
This type of sophisticated understanding disappeared with a simplistic dichotomy with the fall of the Berlin Wall’s, either
(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 knowledgeTariffs: bringing new knowledge to new areas.
Capitalism, industrialism and crises.
The cyclicality of capitalism.
Agriculture and the peasant economies
A Large Number of Economic Activities all Subject to Increasing Returns
= Synergies between Industry, Agriculture and Advanced Service Activities.
The real economy
Production of goods and services
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’
’The Terrible Simplifiers’
NAVY & MERCHANT MARINE
afar to study
Demand: artists for
drawing new specimens
Supply: lenses and brass
for binoculars + maps
Supply: lenses for
+ brass for
Textile production uses glass lenses
Printing: copper for printing plates
Pottery: tiles for export
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.
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 – market-driven ‘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’
Two Ideal Types of Protectionism Compared
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