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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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towards another canon of contemporary economic thought

Towards Another Canon of Contemporary Economic Thought

Erik S. Reinert

The Other Canon Foundation

Moscow, January 19, 2010

slide2

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

2000

0

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2001

Source: original data extracted from Angus Maddison, OECD, Paris, 2003

slide3

Growth rate of GDP per capita of selected world regions; regional average in selected periods between 1820 and 2001; annual average compound growth rate.

forces set in motion
Forces set in motion:
  • De-industrialization
  • De-agriculturalization
  • De-population

Examples: Southern Mexico, Moldova, Caribbean states

falling real wages
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
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.
slide12

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. CareyUS 19. Century

US Industrial Policy

E. PeshineSmith

Veblen and the Institutional School

Japan +

Asian Tigers

1945+

Giovanni Botero 1588

Antonio Serra 1613

Friedrich List

1841

Japan

1860+

Evolutionary

Economics

Renaissance

Schumpeter

Barthélemy de Laffemas 1597

Jean Baptiste Colbert 1651+

SchmollerSombart

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

Marx

Keynes

the circular flow of economics
The Circular Flow of Economics

The real economy

Financial/money economy

”Black Box”

Production of goods and services

Money/capital

importance of entrepreneurship
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

slide16

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.

slide18

”David Ricardo’s economic theories are excellent, they lack nothing but sense”.

Joseph Schumpeter.

slide19

Economics is a cyclical science, and crises determine the turning points in the cycle!

So now is a turning point.

from fact less to empirically based economics
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 physics based economics
Three Times Rise and Fall of ’Physics-based’ Economics

School Starting point Peak Death

Physiocracy Quesnay 1758 1760s ca. 1770

(’Rule of Nature’)

Classical Ricardo 1817 1840s ca. 1895

Economics

Neoclassical Samuelson 1948 1990s NOW!

Synthesis

slide24

How economic growth happens.

(why growth is activity-specific)

slide26

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

1850 15.5

1900 1.7

1923 1.1

1936 0.9

slide27

How the wage differentials between rich and poor nations were created through sequences of ’productivity explosions’ translated into wage rents.

Malthusian activities

Textiles

Shoes

Radio

TV

Schumpeterian activities

Electronics

1750

2000

slide28

This type of sophisticated understanding disappeared with a simplistic dichotomy with the fall of the Berlin Wall’s, either

  • The market is the enemy and the state solves all problems, or
  • The state is the enemy and the market solves all problems.

(like: you must agree either with George Bush or with the Taliban)

slide30

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.

russian strategists who got it right
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
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
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 economics34
The Circular Flow of Economics

The real economy

Financial/money economy

”Black Box”

Production of goods and services

Money/capital

slide35

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’

slide36

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
slide37
Culprits:

’The Terrible Simplifiers’

Jacob Burchardt

delft holland 1650s an innovation system based on diversity
Delft, Holland, 1650s: An Innovation System Based on Diversity

NAVY & MERCHANT MARINE

Supply: new

species from

afar to study

Supply: canvas,

linseed oil

Demand: artists for

drawing new specimens

ART

SCIENCE

Supply: lenses and brass

for binoculars + maps

Supply: lenses for

camera obscura

Demand:

luxury painting

Supply: lenses

+ brass for

microscopes

INDUSTRY

Textile production uses glass lenses

Printing: copper for printing plates

Pottery: tiles for export

slide39

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
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 productinnovations, Ford & Microsoft. (dynamic, Schumpeterian imperfect competition, ‘market failure’ (?)) New products based on ICT.
how the use of ict reduces value added
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.
slide42

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 – 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

first listian principle abandoned
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
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
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).
slide47
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

slide48

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