Surplus approach, Historical Materialism, and precapitalist economies:

New Paper by Sergio Cesaratto on a topic closely related to what he has discussed here before. From the abstract:

In the classical economists’ surplus approach retrieved by Sraffa (1951; 1960) and Garegnani ([1960] 2024), institutions regulate the  material  basis  of  society  and,  in  particular,  the  extraction and distribution  of  the  social  surplus.  In  this  regard,  classical theory  provides  a  material  anchor,  alternative  to  neoclassical New Institutional Economics, to anthropological, archaeological and  historical  studies  of  precapitalist  economies.  Expunged  of any teleological meaning, Marx’s Historical Materialism (HM) is a   natural   source   of   inspiration   for   this   interdisciplinary perspective. The nature and dynamics of Marx’s notion of modes of  production  (MOP)  are  not,  however,  firmly  defined  and  have been  the  object  of  over-complicated  doctrinal  disputes  among Marxists. Since I am unable to provide a comprehensive overview of these debates, I will limit myself to a few aspects that seem to me to be most central or that best convey the issue. The question of MOP dynamics is the most relevant and complex. All in all, the most  mature  Marx  leaves  us  a  very  flexible  reading  of  HM  as  a method of connecting economic, social, and institutional history that can be broadly shared by non-Marxists.

Read the rest here. 

Beyond vulgar heterodox economics: a note on the legacy of Pierangelo Garegnani (1930-2011)

My paper, in Italian, which was a modified version of a talk last year, has been published in Moneta e Credito, and is available for download here.

Part Two of the interview at Radio UNAL

More on the same issues, with a discussion of Piero Sraffa and the surplus approach (this week there will be an event on the legacy of Pierangelo Garegnani). In Spanish again.

Economics without Gaps: on Ibn Khaldun and non-Western traditions in the history of ideas

Ibn Khaldun, Arab scholar

A piece* from a few years ago, has again become somewhat popular and it has been making the rounds. It suggests that the Arab scholar Ibn Khaldun developed the ideas of classical political economics in the late XIV century, about half a millennia before Adam Smith, often seen as the father of classical economics, and of modern economics. Some would suggest that Khaldun was the real father of economics (or stepfather in the first essay on top). To a great extent, the discussion of the role of non-western scholars tries to show that an Eurocentric bias has dominated the history of economic thought. This discussion goes hand in hand with the notion that the Rise of the West and the so-called Great Divergence are relatively recent phenomena.

There are many elements in that assessment that are correct. Schumpeter's massive History of Economic Analysis does mention Khaldun in passing on his discussion of historical sociology, but he also argues that between the ideas of classical antiquity and scholastic thinking there was a great gap.** In his words: "So far as our subject is concerned we may safely leap over 500 years to the epoch of St. Thomas Aquinas (1225–74), whose Summa Theologica is in the history of thought what the south-western spire of the Cathedral of Chartres is in the history of architecture." There is little recognition of the role of Arab scholars in maintaining and expanding the knowledge of classical antiquity in almost all fields. And in the field that eventually would be associated with political economy, Khaldun's Muqaddimah, or Introduction (or Prolegomena), does indeed provide significant progress over the work of classical antiquity.

His work essentially deals with the cyclical rise and fall of caliphates, and analyzes the material conditions for these historical circumstances. Robert Irwin in his intellectual biography of Khaldun, reminds us that: “Arnold Toynbee, who produced a twelve-volume study of the rise and fall of civilizations, described Ibn Khaldun’s theoretical treatise on history, the Muqaddima, as 'undoubtedly the greatest work of its kind that has ever been created by any mind in any time or place'.”

However, while all of that is correct, and should lead to a more encompassing understanding of the role of non-western economic thinking, it is also important to bear in mind what was the contribution of Ibn Khaldun, how it fits in the history of ideas, and also in what sense classical political economy authors have an original theoretical framework. That tradition, it is worth noticing starts really with Sir William Petty, not Smith, as noted by whom I would suggest is the first serious historian of economic ideas, Karl Marx, in his Theories of Surplus Value. Furthermore, it is important to be careful and avoid the normal confusion of seeing Adam Smith as the father of modern, meaning marginalist (or neoclassical), economics. As a general principle, I would also be critical of the notion that the history of economic ideas is the repository of old versions of modern economic theory, that have to be deciphered and understood in modern guise. It was exactly this kind of thinking that led many marginalists, like Alfred Marshall, to suggest that they were expanding on the ideas of classical authors like David Ricardo, when in fact they were subverting them.***

I would suggest that there are two important differences between Ibn Khaldun and the Anglo-French tradition of the surplus approach, associated with the Petty-Cantillon-Quesnay-Smith-Ricardo (and I would add Marx; on the first three that form the basis for the work of the surplus approach see this chapter by Tony Aspromourgos) line of evolution. First, while Khaldun is interested in the cyclical rise and fall of civilizations, associated to the sedentary, urban, mercantile caliphates bordered by nomadic, desert populations, Smith developed at the same time and independently from Turgot (on that see Ronald Meek), a linear four stage theory of economic development, from hunting (and gathering), to pastoral, then agricultural, and finally commercial societies, which is the term he used for societies like the England of the time, were manufacturing activities and financial relations were significantly developed. These ideas would lead to Marx's materialist conception of history based on the notion of modes of production, evolving from ancient slavery and feudalism to capitalism.

It seems that while a perception that, what we now call, the social sciences are historical in nature was clearly in Khaldun's writings, the conception of history, and the scope of the analysis was different than the one in Smith. The reason is not only related to the fact that Khaldun was writing in the Middle Ages, before the rise of capitalism, but also, and more importantly it seems, Khaldun was looking at the specific circumstances of Arab societies, even if there were universal lessons in his analysis. The evolution from hunter-gathering to agriculture and to manufacturing are more universal. Further, Marx's conception of modes of production emphasizes the method and the social relations of production by which surplus is extracted from workers. Command and coercion in the context of slave and feudal societies, and market relations in the case of capitalism.

The second difference is related to the notion of surplus, and the source of value. It is true that there was a notion of a surplus beyond what is needed for survival in Khaldun's work, and that it allowed in his view for crafts and division of labor, or specialization, as would be discussed by classical authors much later. And there was also a clear sense that labor was the source of value, and that a producer must cover the costs of production. Some have argued that one can see the labor theory of value (LTV) in Khaldun's writings. However, it is clear that the conception of profits and of prices in Khaldun was not in conformity with the LTV.

He argues in chapter 5 of the Muqaddimah that: "Commerce is a natural way of making profits. However, most of its practices and methods are tricky and designed to obtain the (profit) margin between purchase prices and sales prices. This surplus makes it possible to earn a profit." In other words, the surplus results from selling at a higher price than purchased in the process of exchange. Profits were not a residual obtained in the process of production for Khaldun, after the conditions for reproduction of society, in particular the subsistence of the labor force, was obtained. This is, of course, the whole point of classical political economy. The understanding of the objective, material conditions for the reproduction of society. Profits were obtained in the process of production, and that would allow to understand accumulation, since the surplus was the basis for economic growth. Accumulation and not the cyclical fluctuations of civilizations were at the center of classical political economy analysis, reflecting, perhaps, the dynamic nature of capitalist societies.

These differences suggest that Khaldun was, most likely, an important source for scholastic, and mercantilist/cameralist authors to which classical authors were to some extent responding in their own writings. Mercantilists authors also thought in terms of profits in the process of exchange, which was to some extent to be expected in pre-capitalist societies with a large mercantile sector. These were essentially agrarian societies, and the transformation of the structure of production was not yet significant.  Recognizing the role of Arab scholars in preserving the texts and the knowledge of ancient scholars, and their ability to move beyond the ancients is crucial for the proper understanding of the evolution of economic ideas. But it is important understand their actual contributions to avoid more confusion in the history of ideas.

-------------------

* In this piece it is suggested that the history of thought textbooks by Screpanti and Zamagni and by Roncaglia are mainstream texts, and put in the same category with Blaug's book. That is of course a misconception. The former differentiate between classical and marginalist traditions, and do not argue for the continuity, as Blaug does, and can be seen as clearly heterodox in nature.

** Spengler (1964) is the classic study on Khaldun by western historians of economic thought. Although his essay is careful about Khaldun's contribution it might give to much credence to the notion that the "economic literature of Islam can be traced to the Economics of Bryson", for the ancient Greek philosopher. 

** It is worth noticing that the piece cited at the beginning suggests that Khaldun is a precursor of Smith, presumably because of the division of labor, but without a distinction of productive and unproductive activities, but also of Alfred Marshall. We are told that Khaldun "analyzed markets which arise based on the division of labor and examined market forces in a simple didactic way which is very similar to the attitude of Alfred Marshall. The invention of supply and demand analysis wasn’t invented in the 19th century: the islamic scholar also described the relationship of demand and supply." Supply and demand forces were well-known before Khaldun. Marginalism suggested that long-term prices, what Smith called natural prices, were determined by those forces.

Poor Richard Goes to London: The Economic Ideas of Benjamin Franklin

Another episode of my podcast on The Worldly Philosophers Go to Washington: From Alexander Hamilton to Janet Yellen. The ideas of early classical political economists and their influence in America are analyzed in this episode. The role of Sir William Petty’s ideas in the development of Benjamin Franklin’s early policy proposals is discussed. It is noted how Franklin had a firm grasp of the main economic theories of his time, even before some of these ideas were fully developed in Europe, by the Physiocrats and Adam Smith. In fact, some of Franklin’s original ideas influenced European political economists. The notion that the influence of economics is a recent phenomenon cannot be supported by the evidence.

Class conflict, Economic Development and the Brazilian Crisis

Last summer readings

The issue of class conflict and its relation to accumulation of capital was central for classical political economists of the surplus approach. That tradition has survived in political science mostly through the work of Marxist authors. And in many recent discussions of the Brazilian crisis, that started with the 2013 protests, the 2015 turn in economic policy, the 2016 mediatic/parliamentary coup against Dilma, and the 2018 unlawful jailing of Lula and fraudulent elections of Bolsonaro, the theme of class and the role of the bourgeoisie has been widely discussed.

The book by Armando Boito Jr. (pictured above) is, perhaps, the best of those that analyze the role of class alliances and the anti-PT (anti-Workers' Party) backlash that led to the Brazilian economic collapse. The main argument is that PT had built an alliance with what he calls, following Poulantzas, the internal bourgeoisie, in particular after the fall of Palocci and the rise of Mantega in the Finance Ministry, and that this alliance fell apart in the end of the first Dilma administration. This internal bourgeoisie included many of the industrialist connected with the construction sector, the agro-business and the metal-mechanic complex, and was dependent on the internal market, while the external bourgeoisie, more favorable to the neoliberal policies of Fernando Henrique Cardoso and his social democratic opposition party (PSDB), was connected to financial markets and the international economy.

The reasons for the collapse of PT's coalition are complex, but essentially tied to the change in economic policies in 2011, the now infamous New Economic Matrix, referred to as the FIESP Agenda, by Laura Carvalho, in her useful book Valsa Brasileira, that promoted lower interest rates, a more depreciated currency, and tax incentives, rather than vigorous public investment in infrastructure, as the main tool for economic expansion. This was then exacerbated after Dilma's narrow win in 2014, when in 2015 she did a volta face on election promises and started a fiscal adjustment program.

As we discussed here before, the protests in Brazil started earlier, in 2013, and they came essentially from the left, with complaints about public transportation costs in São Paulo. But by 2015 the protests were clearly of a different nature. They were less about economic conditions, and more about corruption and the middle class was prominent among the protesters hitting pots (paneleiros) against the Workers' Party administration. In Boito's story is the break up of the coalition, and the abandonment of the Workers' Party by the internal bourgeoisie that marks the beginning of the crisis. In part, it seems, by the failure of the economic agenda (the FIESP Agenda, here this name is more revealing, since it marks that it was connected with industrialist interests) would be central for this.

Note that the policy turn precedes the protests. Note also that the complete turn in the economic policy, with the prioritization of austerity follows the electoral victory in 2014, and the nomination of Joaquim Levy to the Finance Ministry in 2015, arguably hoping to conciliate with a very hostile opposition that was vowing not to accept the electoral results the following day after the election (the defeated candidate, Aécio Neves, said so in the Senate in so many words). In many ways, like Vivek Chibber argued more generally about the State-led developmental phase, it is the national bourgeoisie that becomes the main constraint on growth.

While for the most part I agree with this analysis, I am not completely convinced about the break between a National or Internal bourgeoisie that is more industrialist, and an International or Neoliberal branch of the elites that is more financial, which is at the center of Boito's argument. For one, the differences between the internal and a more international one, and the industrial and financial one are less clear than suggested. The subdivisions might be exaggerated. Boito is careful and notes that FIESP supported both the more monetarist groups around Palocci, and also the Neo-Developmentalist groups linked to Mantega. A finger in every pie, so to speak. And that's a general problem with similar discussions within Marxism, and the whole division of financial capital and industrial capital. At the end of the day, capital is fungible, and even though one might have particular groups concentrated in one or other sector, it is relatively easy to diversify and move from one to the other. Jessé de Souza's book, also pictured above, provides a more direct critique of the role of the elites as a block (I have my issues with some of his critiques of certain Brazilian social scientists, but that's probably something for another post.

Boito, also, perceptively notes the role of the middle class. He does not emphasize it, but notes that it was particularly important in the use of the juridical system as a political element to bring down the Workers' Party. The prosecutors and the judges of the Car Wash (Lava-Jato), now increasingly less credible with all the revelations of abuse of power in their investigations as shown by The Intercept, are members of what he calls the upper middle class. I should note here the role of the United States, which trained some of these bureaucrats, including Sérgio Moro, then judge, not Attorney General of the Bolsonaro administration. Not just an elite that was committed to maintaining a backward system, the Elite of Backwardness in a possible translation of Jessé de Souza's expression, but a middle class of backwardness.

I see a parallel, with many caveats of course, to what happened in Chile with Allende. In that case, it seems that the causes for the demise of the state-led accumulation regime, as much as the retraction of the Keynesian welfare state in the advanced countries during that period, was related to its political limitations and what has been termed the Revolt of the Elites, by Christopher Lasch. In the Chilean case, the ideas of the so-called Chicago Boys were initially rejected even by the Conservative Party, and there was a significant consensus in society about the need to expand the welfare state. For example, the nationalization of copper, which had started during the Christian Democratic government of Frey, was passed in Congress with support not just from left-of-centre parties but also with support from centrist parties. In some respects, the Chicago Boys, with their ideas about liberalization and privatization, acted as a Leninist revolutionary vanguard.

In part, this was possible because the success of the state-led industrialization had created a middle class and an incipient industrial bourgeoisie that was susceptible to the fears of a communist takeover and was willing to support a violent coup to repress class conflict. It was the reaction to the political changes of the state-led industrialization period that increasingly led to the incorporation of marginal sectors of society that created the conditions for the neoliberal turn. Fears that were stoked by the United States, which provided support for the coup. In similar fashion, the success of the Workers' Party (sure there were mistakes in economic policy, but overall the economy grew, and inequality was reduced), and the improvement of the conditions in the bottom created sufficient fears in the upper and middle classes to provide support for a coup. And again the US seems to have played a role, now using other methods, with lawfare at the center of the strategy.

PS: If you want to know more about Brazil just click on the label below, and organize by date. There are posts going back to the beginning of the crisis in 2013.

A primer on the economics of immigration: a surplus approach perspective

This is definitely not my topic of research. So you may very well ask why would I venture to write about it, beyond the obvious reason that it is probably one of the most debated issues these days in the US, with the government shutdown being related to the now infamous wall. I am myself twice an immigrant, I descend from immigrants (my parents returned to their country of origin, but had emigrated, and on my mother side my grandfather was also an immigrant, and the same goes on my father's side a few generations before), I might add. But that is not the whole, or the most relevant, reason.

Most debates about immigration center on labor market issues, and discuss the issue analytically with the tools of marginalism. The conclusions, by definition, are the logical consequence of the assumptions in that model, and the reading of the evidence is biased by those theoretical concepts. Here is a place were the capital debates (go read this very old post) might be important for a policy issue that is in the news constantly and that should concern economists. Being in favor of a return to the old and forgotten method of classical political economy, or the surplus approach, and not having seen any discussion of the issue along those lines is what led me to write this brief post.

Let me start with a very simple representation of the conventional argument. In the conventional story, you have a market for factors of production (labor in this case), and equilibrium is obtained when the marginal productivity of labor equals the marginal disutility of labor, where firms maximizing profits and individual workers maximizing utility find the optimal solution, shown in point C in the figure below (with variables with their traditional meanings; note I use N for labor, since I leave L, for liquidity; yep, I still teach the ISLM with that pesky L in there).

In this case, the effects of immigration are relatively simple to understand. Mainstream economics suggests that immigrants would add to the labor force, increase the labor supply, reduce the real wage, and lead to firms hiring more workers and increasing production. Output and employment should go up, while real wages would go down. The effect on the wage bill (W/p * N) depends on certain assumptions, but certainly native workers lose to the extent that their real wages go down. Hence, a backlash against immigration by working class native groups should be expected.

This simple analysis abstracts lots of things, of course. Differences in the quality (skills) of workers, and immigrants, and what would happen in the presence of capital mobility (with profits going up, with lower real wages, and capital mobility, then new factories should move into the country to take advantage of lower wages and increase the demand for labor, eliminating any initial effects on real wages). A lot of the academic debate has been based on arguments along these lines (see, for example, the Card and Borjas debate on the effects of the Marielitos Cuban immigrants in Miami real wages in this nice Vox post). Note, also, that the evidence suggests that the effects of immigration on real wages of unskilled workers are relatively small (if you believe Card).

In this view, then, there are some acceptable reasons for workers to be concerned with immigration. Note that this says nothing about fiscal issues, which many conservatives also use against immigration, suggesting incorrectly that they do not pay taxes (they certainly pay sales taxes, and other local taxes, and given the low incomes of most unskilled workers, would not qualify for income tax anyway), and take advantage of public goods. However, there are many analytical problems with the assumptions of the model above.

Note that the basis of the marginalist (or neoclassical) model presented above is the principle of substitution. In other words, as labor becomes cheaper than capital, that is by assumption fully utilized, then firms hire more labor. So the lower wages guarantee the full utilization of labor. The intensity of labor increases as its remuneration falls, and the price of labor, as any other price in marginalist theories (Austrian too, although they sometimes confuse this) reflects the relative scarcity of the factor of production. Note that for classical political economy authors (including Adam Smith) real wages resulted from historical and institutional factors, and supply and demand were only one of the factors affecting them. Under the conditions they analyzed the economies of their time they assumed that real wages were essentially at subsistence level.

The capital debates become relevant because they essentially show that the substitution principle has logical problems, and they open the possibility to a return of the sort of historical and institutional analysis of the labor market of classical political economics. I will not discuss the whole issue here again (check that post linked above), but the essence of the argument is that sometimes when real wages go down instead of leading to firms hiring more workers, the opposite might occur. Think of a situation in which real wages fall, and as a result, there is less demand for the goods produced by the firm. Perhaps the firms goods are bought by workers themselves.  Even though labor is cheaper, there is no reason for the firm to hire more workers if they cannot sell their goods, and the income effect overwhelms the substitution effect (the capital debates suggest that the substitution effect may go in the wrong direction, on top of that). That's essentially what Keynes said on chapter 19 of the General Theory (in chapter 2 he basically accepts the marginalist demand curve above, which is problematic, and shows the limitations of the supply curve; my paper on reading Keynes after Sraffa, the key author of the capital controversy, here).

The point is that it cannot be guaranteed that immigration would lead to a reduction of real wages, at least not on the basis of the logic of the model above. The actual result is ambiguous. Classical political economy provides an alternative framework to look at the labor market effects of immigration. It is clear that an increase of the labor supply might affect negatively the bargaining power of the established workers. But note that this is not always necessarily the case. Arguably, in the case of many immigrants in the so-called first globalization (late 19th to early 20th century), in which significant amounts of Socialists and Anarchists from Eastern and Southern Europe came to the US (and other parts of the Americas), the effect was to raise the class consciousness and the combativeness of the working class, helping strengthen some unions.

And the reverse is true, a country that experiences emigration might actually lose key workers, and unionization rates might decrease. In the last 30 years or so, the US has experienced an increase in the population of immigrants, many came from Mexico of course, and yet both countries have experienced a decrease in unionization rates (see here for Mexico). This suggests that other forces are in action, and that wage stagnation might be related to those policies, and not just, or not even fundamentally, as a result of the flows of workers from one country to the other.

Note also that classical political economy authors assumed that output was given in their discussion of distribution, and that separation of the theories of output and employment (dominated by Ricardian Say's Law, that was not a necessary feature of classical thinking, and that can be superseded by the Keynesian Principle of Effective Demand) allows us to understand other aspects of immigration. In other words, the level of output and employment would depend on autonomous spending (demand), and immigrants can easily be accommodated in society without displacing the native workers. Of course that would depend to a great extent on the government macroeconomic policies (not just fiscal and monetary policy, but also the setting of minimum wages, industrial and trade policy and so on).

In this view, it is less the effects of immigration on the labor market (along neoclassical lines of reducing real wages and increasing employment) that matter. It has been the policies that actually led to lower growth, lower union participation, trade policies that favored the loss of manufacturing jobs that have created the conditions for real wage stagnation. In that sense, it is those policies that are responsible for the backlash against immigrants among large groups of resident (native) workers, that could be exploited politically by right-wing populists, often with fascistic and authoritarian tendencies (not just in the US). Immigrants are actually escaping from similar neoliberal policies in their countries of origin.

And all of these points are just about the most direct economic consequences of immigration. There are other issues that are as relevant beyond economics. And it goes without saying that both immigrants and refugees (in particular those that result from US direct or indirect intervention abroad) deserve humane treatment, even if the conventional mainstream story was correct and immigration did cause inequality.

Hyperinflation and inequality

I'm still reading The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, which is fun, well-written and in my view less controversial than what most reviews have suggested. Yes, inequality tends to fall mostly by violent means during periods of crisis. Note, also, that Walter Scheidel uses in this book the concept of surplus, and as noted earlier here (or here and here) before is part of this broader group of social scientists that still use the concepts of the old and forgotten classical political economists. There are significant advantages to this approach (see here, for example).

Having said there is an issue that is a bit annoying in the book, which is it simplistic Monetarist view of hyperinflation. For example, he says about the two world wars and the inter-war period that:

“These gargantuan struggles were for the most part funded by borrowing, printing money, and collecting taxes. Borrowing variously translated to future taxation to service public debt, inflation to erode it, or default. Only the leading Western powers successfully managed inflation...
... the United Kingdom, the United States, and Canada were prepared to 'soak the rich,' whereas more autocratic systems such as Germany, Austria-Hungary, and Russia preferred to borrow or print money to sustain their war effort. The latter, however, later paid a high price through hyperinflation and revolution, shocks that likewise compressed inequality.”

There is no more detailed analysis, but one would infer from this that if the elites chose to print money to finance their war incurred fiscal deficits they ended up with hyperinflation. I have discussed hyperinflations before here (see also this one). Don't get me wrong, hyperinflations are destructive forces and certainly played a role in the Great Contraction (the inequality reducing forces that operated in this period, although I would put, as Scheidel seems to do also, more emphasis on the policy variables like New Deal kind of programs, taxation, land reform, etc). However, money supply was simply endogenous and had little impact on economies that were already in shambles. Inflation (hyper) resulted from the collapse of the economies and more often than not the pressing need for foreign currency that led to massive depreciation, and wage resistance.

You can read my paper on inflation and money here, if you're interested.

Psychologists and the Surplus Approach

I noted before about the fact that historians, like McNeill use the notion of the surplus to explain how primitive societies developed economically. Their lack of modern training in economics is a blessing and they end up using at least some elements of the old classical political economy authors. This is true of physiologist and popular writer Jared Diamond (see here and here). The figure below is from the book Sex at Dawn by two psychologists,  Christopher Ryan and Cacilda Jethá.

While the book is mostly about how behavior, in particular sexual behavior but violence and war too, changed with the development of agriculture, they also introduce the role of the surplus in economic development. Note that the food surplus is what allows for social hierarchy and specialization, which is what Adam Smith would have called the division of labor. And don't forget the division of labor is the basis of the wealth of nations. They also note other mechanisms associated to the development of agriculture that play an important economic role, like increased population growth (demand) and trade networks.

It is clear that while the preoccupation with the reproduction of the economy, which was central for the authors of the surplus approach, has disappeared from mainstream economics, is still very much alive in other branches of the social sciences.

On Argentina's secular decline: why The Economist is wrong

The Economist had a few weeks ago an issue on Argentina (here; subscription required), which I wanted to address, but had no time before today. The argument implies that the current Argentine woes (discussed here before) are part of a pattern which is associated to the long decline in income per capita from the late 19th century and early 20th century until now.

The Economist suggests that:

"In 1914 Argentina stood out as the country of the future. Its economy had grown faster than America’s over the previous four decades. Its GDP per head was higher than Germany’s, France’s or Italy’s. It boasted wonderfully fertile agricultural land, a sunny climate, a new democracy (universal male suffrage was introduced in 1912), an educated population and the world’s most erotic dance. Immigrants tangoed in from everywhere. For the young and ambitious, the choice between Argentina and California was a hard one."

In a sense that's true. According to Maddison's data in 1913 Argentina per capita GDP (in 1990s dollars) was 3,797 while France and Germany had respectively 3,485 and 3,648 (data available here). However, the reasons for the decline in the 20th century are based on simplistic notions, typical of the so-called New Institutionalism of North and more recently Acemoglu and Robinson (for a critique go here). In their words:

"Building institutions is a dull, slow business. Argentine leaders prefer the quick fix—of charismatic leaders, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools."

They blame corruption and populism (mind you currency pegs were actually typical of liberal governments, both the ones that adopted the Gold Standard, an international institution, back when the economy was fine according to The Economist, and during the 1990s during the Neoliberal experiment, that The Economist fully supported; but I'm glad that now they admit that currency pegs might be sometimes dangerous. The Economist is not for the Gold Standard anymore, it seems. Any day now they will abandon their beliefs on free trade).

On a different note they also suggest that commodity production might be a problematic path to development (yes, The Economist again has a positive take on Prebisch-Singer; see before here). They say:

"Commodities, Argentina’s great strength in 1914, became a curse. A century ago the country was an early adopter of new technology—refrigeration of meat exports was the killer app of its day—but it never tried to add value to its food (even today, its cooking is based on taking the world’s best meat and burning it). The Peróns built a closed economy that protected its inefficient industries; Chile’s generals opened up in the 1970s and pulled ahead. Argentina’s protectionism has undermined Mercosur, the local trade pact. Ms Fernández’s government does not just impose tariffs on imports; it taxes farm exports."

In other words, Pinochet was great (Chile is developed it seems; again according to Maddison's data the Chilean GDP per capita in 1990 dollars in 2008 was 13,185 while the Argentine was 10,995. Not much of a difference; back in 1913 Chile's was 2,968 and like Argentina's high for Latin America's standards. In other words, while France and Germany had in 2008 22,223 and 20,801 respectively in 2008, both Chile and Argentina had fallen behind), and redistribution towards the poor (read Perón and the Kirchners) is bad. That's why the lesson is "that good government matters."

Don't get me wrong, the State matters, and a developmental state matters a lot. However, when and how you connect with global markets also matters. While France and Germany might have had a slightly smaller GDP per capita in 1913 than Argentina, they were quite ahead in the second Industrial Revolution, with firms that were leaders in steel production, in the chemical and pharmaceutical sectors, and with a developed network of firms and universities producing first rate scientists and technological innovations. Meanwhile, Argentina (but also Chile) produced mostly commodities (and only adopted imported technology) and the vast majority of their exports were concentrated in one or two commodities exported to a limited number of countries. Hence, only someone with the limited understanding of The Economist would have thought that Argentina and Chile were in 1913 as developed as France and Germany.

The lesson is more complex than The Economist's 'the state matters' (interestingly enough if markets did matter, which is their traditional motto, specialization in commodities due to comparative advantage should pose no problems). The state matters, but so does your colonial past (being an exploitation colony rather than a settlement one is a problem), what you export matters, and the access to international capital markets also matters (France and Germany got a Marshall Plan to reconstruct, since the US was afraid of Uncle Joe, but in Argentina we weren't that lucky). The parable of Argentina is a rich one, from which many should learn, but The Economist still has no clue.

PS: Don't get me wrong, building schools is nice, and Argentina actually produced three Nobel prizes in sciences (the last one in the 1980s), but schools alone do NOT produce development.

PS': Also, why is Messi a symbol of Argentina's secular decline?

'Political Economy: Studies in the Surplus Approach' now available electronically

Two Sraffian journals were started in the 1980s, one, Contributions to Political Economy, continues to be published (see here), while the other, Political Economy: Studies in the Surplus Approach, ended a long while ago. Now the Centro Sraffa has made all the issues available for free electronically (here). Really good news. Enjoy!

Jan Toporowski: Michał Kalecki and Oskar Lange in the 21st Century

It is possible to identify in The General Theory and Kalecki's work key ideas that they had in common.  The first is that in a capitalist economy output and employment are determined by business investment, so unless investment is high enough the economy is unlikely to be at full employment.  Secondly that investment determines saving, rather than the other way around.  Both men denounced the doctrine of the social value of thrift that so comforted the complacent Victorian bourgeoisie and that just made such a comeback today.  Finally, contrary to the Neoclassical and the Ricardian-Marxist view both men argued that wage rises would increase employment rather than decreasing it.  Underlying this commonality of view on how the capitalist economy works was a fundamental principle of the economic method that Kalecki explicitly employed to great effect and Keynes in a somewhat more haphazard way: the principle of the circular flow of income.  This is the idea that incomes are determined by expenditure decisions, rather than being decided in complex games of exchanging resources, capital or labor.  The principle goes back to the work of the French Physiocrat François Quesnay but had been lost to political economy by the 19th century with the ascendency of the idea that prices integrate individual exchange decisions, so all you need is correct prices.  Nevertheless, a hundred years ago the great Joseph Schumpeter recognized the importance of the circular flow of income...

See rest here

On principles courses, DeLong, Krugman and the limits of the mainstream

 

'cause it has no implications...

In a previous post, Anonymous commented: "Brad DeLong has been posting slides from one of his classes going over supply and demand (and quotas and price ceilings, market equilibrium, etc.) on his blog. They're pretty entertaining and filled with pop-cultural references. I was wondering what a Post-Keynesian perspective on them might be."

I promised to check Brad's posts and provide a short answer. So here it is. In fact, this semester I am teaching an intro course, something I haven't done since my time in Kalamazoo College. This is not a regular course for me to teach, in other words, like say intermediate macro. At Bucknell all intro courses provide more than the neoclassical (marginalist) perspective. While Brad starts with a neoclassical version of supply and demand (see here) on the basis of Krugman's intro textbook, we start with history and history of ideas, based on a discussion of the classical authors and Marx (here, here and here) and only then get to the supply and demand approach (here). In fact, I am also using Krugman's textbook, together with Heilbronner and Milberg's The Making of Economic Society and additional readings.

In other words, while there is a need to teach the basics of what the mainstream of the profession thinks it is relevant, it is also important to provide critical alternatives to the mainstream. The liberal arts education in the US allows for a lot of flexibility and for the introduction of alternative perspectives. The textbooks (almost all neoclassical) tend to fudge the fact that the notion that economics is about rational choices of individuals faced with scarcity is relatively new (the Marginalist Revolution of the 1870s)*, and quite different from the old classical (or surplus approach) tradition of the material reproduction of society.

* Interestingly enough, in the US the profession was not dominated by neoclassical economics until the 1930s and 1940s, when the rise of Keynesian economics, in the Neoclassical Synthesis version, brought it to the forefront of research, teaching and policy influence. Samuelson's 1948 Economics, the forerunner of all mainstream textbooks, did probably more than any other book to make neoclassical economics the dominant view. Before that the profession in the US was dominated by a potpourri of eclectic and institutionalists authors that held the main teaching positions and were at the head of key institutions like the American Economic Association and the National Bureau of Economic Research (NBER).

Pivetti on Advanced Capitalism and the Determinants of the Change in Income Distribution: A Classical Interpretation

Massimo Pivetti

Technological change, though paramount in the dominant theoretical approach to distribution in terms of the relative scarcity of factors, also plays a significant role in the alternative classical surplus approach.

See rest here

Geoff Schneider on Adam Smith and Karl Marx

Available here the Power Point presentation for Geoff's Principles class on Smith and Marx. For more you can read chapters 2 and 3 in his textbook Introduction to Political Economy (here if you want to buy it).

Ben Franklin, Consumption and the Industrial Revolution

The idea that demand expansion was central for the Industrial Revolution, in Keynesian fashion, was at some point dominant among economic historians. It was, for example, explicit in both Phyllis Deane and David Landes famous books about it, both published in 1969 (The First Industrial Revolution and The Unbound Prometheus, respectively).

It is also well-known that Adam Smith recognized that productivity growth (the division of labor) was limited by the extent of the market (demand), so that growth and the wealth of nations, which depended on productivity growth, and not on the accumulation of foreign reserves (gold) or trade surpluses as defended by Mercantilists, was in a sense demand-led.

Ben Franklin is not often cited in relation to his economic writings, but he was knowledgeable in the main developments of his time.  He was both a defender of the labor theory of value, and of paper currency in his famous A Modest Enquiry into the Nature and Necessity of a Paper-Currency, and the consensus is that his ideas came essentially from William Petty, the father of the surplus approach according to Marx.

As it turns out Franklin had also something to say about the role of demand in the process of industrialization in Britain. He said in Observations Concerning the Increase of Mankind, Peopling of Countries, etc. (here) that:

"But in Proportion to the Increase of the Colonies, a vast Demand is growing for British Manufactures, a glorious Market wholly in the Power of Britain, in which Foreigners cannot interfere, which will increase in a short Time even beyond her Power of supplying, tho' her whole Trade should be to her Colonies."

In other words, he suggests that the role of higher demand by the colonies was essential in the process of industrialization. I should note that there is no consensus among those that defend the demand side story of the industrial revolution between domestic demand or foreign demand, but increasingly the literature associated to the changes in the patterns of consumption in Britain suggests that it was domestic markets (e.g. Maxine Berg and her discussion of the consumer revolution).

Rescuing Sartre From Anachronistic Individualism

In this updated version, see here, István Mészáros lucidly rescues Jean-Paul Sartre's existentialist anthropology from the philosophical hermeneutic watershed of anachronistic individualism. The author critically examines evidence for a complementarity between Sartre's phenomonological ontology with historical-materialism, while paying particular attention to how Sartre's work is largely contributive to the Marxist Humanist attention to forms of social consciousness. What is stressed is that although Sartre rejects the 'dialectics of nature', this is not a total rejection of the dialectical method, since Sartre's attention to issues of morality are squarely placed in a historically-specific social context, specifically with respect to the parameters and social practices of capitalism, whereby, in similar fashion to Marx's concern with the dialectical contradictions between authentic human development and alienation, 'nothingness', or 'free will', is limited by the extent to which the actually existing physical world forces mankind to be subservient to constrained subjectivities, of which meaningful sense of self and dignity are lost in translation.

PS: Note that Mészáros is often considered part of Marxist Humanism, a school that emphasizes Marx's early writings, in particular his Economic and Philosophical Manuscripts. Mészáros most famous book is on Marx's theory of alienation here (and where he applies Marx's theory of alienation to reassessing the socialist alternative, and the conditions for its realization, is here). For the more directly relevant economic aspects of Marx's critique and reconstruction of the surplus approach one only needs to read his Theories of Surplus Value and, obviously, Capital (and the extent to which Piero Sraffa revived Marxist Economic Theory - see here & here ). Mind you, this is not to suggest an epistemological break in Marx's work, as authors like Louis Althusser have propounded. For debates on the supposed structural discontinuity, see here (subscription required) and here.

The deep causes of the Great Divergence: or why China fell behind

In the last post, I suggested that Kenneth Chase's explanation of why China invented, but did not pursue the development of gunpowder and guns to its ultimate consequences, could be seen as the very deep cause of the so-called Big Divergence, i.e. of the rise to dominance by Western Europe. Chase explains the lack of interest in the development of firearms in China as the result of geographical conditions and how they affected warfare. He argues that two types of warfare developed after the invention of firearms.

"Where there were technologically advanced agrarianate societies that were not threatened by steppe or desert nomads, we find the combination of firearms and pikemen, with an emphasis upon infantry (western Europe, Japan). Where there were technologically advanced agrarianate societies that were threatened by steppe or desert nomads, we find the combination of firearms and wagons, with an emphasis upon cavalry (eastern Europe, the Middle East, India, north China)."

From a geographical point of view Chase divides Eurasia in three regions. The Arid Zone, which includes those areas that supported pastoral nomads, the Inner Zone including the areas that were directly threatened by pastoral nomads, principally eastern Europe, the Middle East, India, and China, and the Outer Zone that was not directly threatened by pastoral nomads, principally Western Europe and Japan, as shown in his map below.

In a sense, this is a more sophisticated geographical argument than the one put forward by Jared Diamond in Guns, Germs and Steel, since it is capable of explaining why Western Europe and not China (or India, or the Ottomans) dominated the world, while Diamond (in a book that uses old political economy arguments, in particular the notion of surplus, something typical of many historians as argued here before) can only explain why Europeans conquered the people outside Eurasia (that had less luck in the choice of animals and plants to domesticate, and less chance to spread them in an East-West axis with similar climate) really. Note that Cipolla long ago had noted that the main advantage of Westerners when they arrived in the East (Vasco da Gama in 1498) was basically military.

The only thing missing in most of these non-economists discussions of the causes of Western European dominance is the role of demand expansion in technological progress and economic growth in general. But many historians do have an implicit demand-led growth or Keynesian story too, I should add. By the way, on the Keynesian view of many historians it might be worthwhile reading the last section of Garegnani and Palumbo's entry on the Elgar Companion to Classical Economics available here.

PS: This also suggests that on some level, particularly military and naval technology, the West was already ahead of the Oriental Empires considerably before Pomeranz and the revisionists time frame (i.e. around 1800).  However, the argument does not hinge on Eurocentric views about the superiority of culture, as in many neo-Weberian arguments (e.g. David Landes).

Keynes, Hobson, Marx, & Classical Political Economy

From Robert Skidelsky:

"Fundamental to Keynes are the concepts of uncertainty and under- employment equilibrium. From Hobson we get an understanding of how inequality of wealth and income makes crisis more likely and recovery more difficult. From Marx we get an explanation of why inequality of wealth and income is inherent in an unmodified capitalist system. We need to put together the three accounts in order to achieve a fuller understanding of the events through which we have recently been living." (the rest: see here).

PS: A detailed presentation of classical-Keynesian political economy, which is not Skidlesky's view of Keynes, by the way, is provided by Henrich Bortis - see here.

Human Development Index: now and then

The new Human Development Report is out. It compares the 2012 Human Development Index (HDI) with the initial one, from 1990. Norway at the top, and Congo at the bottom of the list. As it turns out, only two countries, Zimbabwe and Lesotho, have seen their index scores fall. The chart below shows several countries (h/t The Economist).

The additional red dot, is the Inequality adjusted HDI (IHDI). Note also that in the case of Western European countries (Norway, Germany, Sweden, France, Italy, Britain) the IHDI is in between the 1990 and the 2012 HDI. So adjusted to inequality the HDI now is better than in 1990. That is not the case for the US. For the methodology for including inequality in the HDI go here.

The largest improvements in the index are Afghnistan (ravaged by a 10 year war with Russia when it started to be measured; and with significant transfers from the US now), China, Iran, India, and Egypt. Left of center countries in Latin America did reasonably well in the last 10 years.

The report suggests that: "the state of affairs in 2013 may appear as a tale of two worlds: a resurgent South—most visibly countries such as China and India, where there is much human development progress, growth appears to remain robust and the prospects for poverty reduction are encouraging—and a North in crisis—where austerity policies and the absence of economic growth are imposing hardship on millions of unemployed people and people deprived of benefits as social compacts come under intense pressure." Further, it argues that the number one driver of improvement in the Global South is a: "strong, proactive and responsible state [that] develops policies for both public and private sectors", since "governments can nurture industries that would not otherwise emerge."

PS: The HDI was developed by Amartya Sen, who also got the Sveriges Riksbank Prize. His work on the capabilities approach is based on social welfare theory and, while critical of the idea of rationality, in some aspects it remains founded in mainstream analysis. For a discussion of his critique of the mainstream and its relation to the one based on the surplus approach see the references provided by Robert Vienneau here. I remain skeptical about the compatibility of Sen's analysis with the old and forgotten classical tradition.