High hopes for growth

I’ve been re-reading (after a long time) David Landes’ The Unbound Prometheus, having found a 2nd hand copy in a Sedbergh bookshop, Westwood Books, earlier this year. It’s an interesting read, albeit showing its age (I found a 1993 edition, but the first was 1969). I’d forgotten that he looked at post-2nd world war growth in the final chapter, which also concludes with some reflections about the links between technological innovation and economic growth.

“The effective utilization of scientific and technical knowledge requires a whole sequence of decisions and action in the world of production and distribution. Pioneering entrepreneurs and managers must be prepared to risk money on the translation of ideas into commercially feasible techniques; while others must be incited by the prosepct of gain, or the fear of loss, to follow suit.” He goes on to say that the quality of management, the skills of the workforce, consumer tastes must also fall into place. “Scientific creativity is by no means an assurance of growth.” Interesting to see Paul David’s argument in The Dynamo and the Computer prefigured here. Growth is “a marriage of knowledge and action”, not the outcome of the impersonal forces of supply and demand.

Above all, growth will vary according to the particular needs, opportunities and history of different economies. Even the role of government varies greatly, Landes argues. The common factor in the postwar period, however, was, “A revolution of expectations and values. The expectations were not new; they were a return to the high hopes of the dawn of industrialization, to the buoyant optimism of those first generations of English innovators. Yet never before had they been so widespread; and never before had they been so strikingly confirmed by the facts.”

The trentes glorieuses seem like prehistory in today’s unsettled world. I’m not a techno-pessimist, and disagree with Robert Gordon’s thesis. But vision (expectations, we might say in economese) is a constant that really matters. I’ve always liked Paul Krugman’s 1991 QJE paper, History versus Expectations, on the importance of people weighting the future as more important than the past, if an economy is to grow. No high hopes, no growth.


Performing (economic) miracles

The metaphor ‘economic miracles’ as applied to the few once-poor countries that have achieved a trajectory of catch-up growth is revealing: these growth dynamics are spectacular, but happen very rarely. In their terrific new book, Beating the Odds: Jump-Starting Developing Countries, Justin Yifu Lin and Célestin Monga give the best overview account I’ve read of how countries might begin to achieve the lift-off from poverty trajectory, and an outline of how in practical terms governments might go about it. And although directed at poor countries, their analysis is more general.

The book points out that mainstream thinking is both impractical and factually wrong. Impractical because, given the emphasis on institutions now, the advice is often: “Be more like Denmark.” Sure, that would be marvellous. Incorrect, because the examples we have of countries reaching escape velocity for the most part did not have the fine, transparent and effective institutions or high-quality infrastructure now usually recommended as preconditions.

One of the platitudes they attack is that corruption or at least bad governance is the main barrier holding back poor countries. Rich countries have corruption scandals too, they point out. Are these less severe than in poor countries? They ask whether the role of money in US elections or corporate lobbying in the west is really ‘less corrupt’. Is the expected 20% tip everywhere in the US different from the expectation in say India that one will make payments to all kinds of people – in both cases, people not earning very much can’t afford not to expect the tip.

So if not western-style institutions or education or infrastructure, what does lead to growth? The book answers: “Sustained growth takes place because of continuous technological upgrading, institutional innovation and structural change.” At the heart of the process is an evolving set of factor endowments. Poor countries must start from the reality of labour intensive resources, and must focus on using what they have; it’s all about (latent) comparative advantage. The factor endowments will change over time, and hence the need for changing institutions and adopting additional technologies. All countries are different: there is no standard, abstract model. High-profile failed ‘big push’ efforts typically ignored the reality of factor endowments – this includes examples such as Zaire’s (DRC) attempt to start up an auto industry in the 1970s, or Indonesia’s bid to enter the shipbuilding market, when neither had the capital or the skills to produce these goods, nor high enough incomes for a domestic market to grow.  Successful ‘miracles’ start with what they have, continuously diversify, and identify and encourage agglomeration economies.

The authors are firm advocates of strategic industrial policies, in the sense of continual upgrading of hard and soft (legal, financial, educational) infrastructures to suit the changing needs of the private sector, the goods and services it produces and the markets it serves. “Clearly, individual firms cannot internalise all these changes cost effectively, and spontaneous co-ordination among firms to meet these new challenges is often impossible. … For this reason, it falls to the government either to introduce such changes or to co-ordinate them proactively. This essential piece of the growth and development puzzle has been missing in the standard model and the traditional development policy framework.” The government also needs to provide information (about say technologies, management techniques and markets) and provide initial human capital (training): “The social value to the economy as a whole of the first movers’ investments is usually much larger than their value to specific firms.” Finally, governments may need to attract FDI or incubate new activities, “to overcome deficits in social capital and other intangible constraints.”

These roles for active government policy are surely valid – and as much for the UK as for a low income economy. The authors are deeply sceptical about the value of (much) foreign aid and especially the multiple conditionalities attached.

In short, “Modern economic growth is a process of continuous structural changes in industry and technology and in political and socioeconomic institutions.” This is as true now as it has been everywhere since the late 18th century. As the book points out, this is not a radical new idea – it quotes Simon Kuznets saying so in 1966, and indeed economists from Marx and Schumpeter to Robert Solow and Joseph Stiglitz have made essentially the same point. Somehow, though, by the time the official aid organisations get involved, the policy advice has been bowdlerised into a standard set of impossible conditions, not recognising how counter-productive these can be in a second-best world.

Elsewhere, the authors have developed a more practical toolkit (the GIFF, growth identification and facilitation framework) for governments to identify their economies’ specific endowments and niches. The downside of recognising the importance of context is that one cannot sum up an economic development programme in ten universal bullet points. In general terms, the book supports export zones and infrastructure investment, and mitigating rent-seeking through exposure to the sunlight of foreign competition as well as political leadership.

The book ends with The Conference of the Birds: thousands of birds embark on a long and perilous journey but only 30 make it the whole way. When they reach their destination, they find the mythical king they were looking for is a reflection of themselves. Achieving successful development cannot start with a list of mythical missing ingredients as preconditions. Development economists and donors have been wrong to insist on an ideal model, Lin and Monga argue – and they are no keener on the latest development economics fashion for experiments and RCTs, as these ask micro questions and get micro answers; they cannot address the need for structural transformation. The bottom line is pragmatism, and the willingness to embark on the long and perilous journey, like the brave handful of birds in the 12th century Persian story.


Google and growth

I was disappointed by Douglas Rushkoff’s , in the sense that my expectations were high and it didn’t live up to them. To start with the positives, it’s a  good read, and I share Rushkoff’s concerns about aspects of the ever-more-digital economy. There’s the inequality at self-destructive levels in many OECD countries. The obscene amounts of money many corporate execs pay themselves. The determination of some of the digital titans to entrench their monopoly power and indeed extend it to more markets. The intrusiveness of online surveillance for profit. The undermining of content creation in news and the creative sector as Google and Facebook vacuum up a large and growing proportion of the advertising revenue. All of that, yes.

[amazon_image id=”1617230170″ link=”true” target=”_blank” size=”medium” ]Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity[/amazon_image]

It is, though, all familiar and Rushkoff doesn’t offer much that seems either new or practical to combat it. In terms of policies, he advocates a sub-40 hour work week and a universal basic income. Both have supporters, both are problematic. He also advocates new, community currencies, enabled by blockchain. Technology might be making it more feasible (although I’m a blockchain sceptic because of the energy requirement), but people have been writing about local and community currenies for decades.

Above all, though, Rushkoff wants companies to change their behaviour, treat workers well, and focus less on ‘growth’. And this was my biggest frustration with the book. He makes no distinction between financial ‘growth’ in the sense of short term profits and share price (so VCs can get their money out, shareholders get their returns and execs cash in their options), and economic growth in the sense of goods and services, often innovative, valued by consumers. Heaven knows, that needs to be sustainable too. But there is a difference between, say, changing corporate law to ban quarterly reporting or share option schemes, and limit financial short termism, and the changes in behavior and policy that would ensure sustainable economic growth. Of course they are linked, including throuhg corporate behaviour. But while bringing about an end to the financialisation would be desirable indeed, bringing about an end to economic growth would be very undesirable. After all, for many people in the western economies, there hasn’t been any economic growth for a decade or so, and the results are not pretty.

I also disagree on one other key point. Rushkoff writes: “The economy is less like a forest or weather system than it is like a technology or a medium. It was created not by God but by people.” Leaving aside divine agency, I’d argue the economy is both – both a natural system of creatures (us) acting in accord with our biological nature, and a system we have some ability to change. It is therefore incredibly complex (in both normal and technical senses). While possible to change its course, this is not as straightforward as saying ‘we’ need to do this or that – adopt the blockchain, introduce a minimum income, report on long term rather than short term profits – and all will be well. Google’s monopoly power is a good place to start, but I’d place more of my hopes on Margarethe Vestager’s use of competition powers than on Google’s executives following this book’s advice to act sustainably.

So in short, a book whose heart is in the right place, but too garbled in its analysis to appeal to me.


The moral consequences of economic decline?

In his FT column today, the ever-thoughtful Tim Harford has written about the dangers of moving into a zero-sum world, with the economy heading into a post-Brexit recesssion and in a political atmosphere which is already a game of grievances and blame. The column cites a wonderful book, Benjamin Friedman’s (2005) . I’m biased, as Ben was my thesis adviser, but I do believe it to be a truly important book, especially for anyone also concerned about sustainability.

The book asks whether economists are right to care about economic growth, and finds the affirmative answer in political economy and the inter-relationship between growth and institutions. I wrote briefly about the book in 2012, worrying then about the rise of political extremism. Looking at the book again today, I am struck by its warning about the adverse consequences of withdrawing the state from social support, and its concern about the distribution of the benefits of economic growth. This now looks very prescient.

“Broadly distributed economic growth creates the private attitudes and public institutions that foster, not undermine, a society’s moral qualities,” Ben writes. “At the outset of the twenty first century, America’s problem is not unemployment. It is the slow pace of advance in the living standards or the majority of the nation’s citizens.” Rising living standards – for all – make societies more open and democratic. Unfortunately we in the UK seem likely to be testing what happens when living standards are falling, and the already-have-nots find they have even less.

[amazon_image id=”1400095719″ link=”true” target=”_blank” size=”medium” ]The Moral Consequences of Economic Growth[/amazon_image]


Coase, cars, cities

Alerted to it by Peter Sinclair, this week I read Ezra Mishan’s 1967 (and frequently reprinted up to 1993) book . It’s a short, polemical book, and the overwhelming impression you get is that the author was a grumpy chap not at all happy about modern life. Especially in cities. Too much noise, too much dirt, too many people, too much traffic, above all too much traffic. I’m not entirely sure I’d want to have been seated next to him at dinner.

[amazon_image id=”0140210903″ link=”true” target=”_blank” size=”medium” ]The Costs of Economic Growth (Pelican)[/amazon_image]

Still, there’s a lot to like in the book. It has some excellent sections on the Coase theorem; on its non-applicability in many situations of environmental externalities because the transactions costs of negotiation are so large; and of the way the legal framework, in defining the status quo, shapes the outcome. If the law does not protect the interest of inhabitants in clean air, polluters will have no incentive or need to negotiate. Mishan in fact calls for general amenity rights to be enacted in law, rather radical but think how much difference it would have made to pollution and emissions since the 1960s. He also wants private vehicles banned from city and town centres, which also seems a radical but basiclly good idea; as he points out, transport analysts too often think their job is to get the traffic moving, when it ought to be to get people moving.

He also points out the importance of the initial distribution of income: “The wealthier the party, the more likely it is that his, or its, favoured outcome will be the optimal outcome.” The reason is that relative wealth will affect the parties’ judgements about what they are willing to accept/pay in a negotiation. Generally, the book is clear – as economists often are not – that an evaluation of social welfare is not possible without taking initial distribution into account. The level and distribution of income are not separable. I might need to go on to read Mishan’s .

A little bit of his dyspepsia is reserved for the way evaluations of policy only take account of what can be measured even if it is clear that effects that cannot be measured are nevertheless very important. He would like to “arrest the mass flight from reality into statistics,” he writes. He decries ‘growthmania’, “the fact that the fascination with index economics detracts attention from the broader aims of economic policy.” There’s certainly something in this, and indeed I increasingly think economists have to do much better at measuring the size of externalities rather than shrugging the collective shoulders. But, unlike Mishan, I’m for sustainable growth, not no growth.

Mishan died aged 96 in 2014. I’m glad to have filled a gap in my knowledge.