CIGI Senior Fellow Miranda Xafa on State of The Eurozone

Centre for International Governance Innovation Senior Fellow Miranda Xafa comments on the "State of the Eurozone" discussions which took place on October 6th, 2014 at the the German Marshall Fund of the United States in Washington, D.C. Xafa notes that the recent ECB announcement on asset purchases and the likelihood of a relatively successful forthcoming banking union may help to reduce Euro fragmentation and possibly ease credit issues. She cautions, nevertheless, that such structural reforms alone will not be enough to get the Eurozone out of its current long-run low-growth equilibrium.

New ILO Book: "Transforming Economies - Making industrial policy work for growth, jobs and development"

From the introduction

Building on a description and assessment of the contributions of different economic traditions (neoclassical, structural, institutional and evolutionary) to the analysis of policies in support of structural transformation and the generation of productive jobs, this book argues that industrial policy goes beyond targeting preferred economic activities, sectors and technologies. It also includes the challenge of accelerating learning and the creation of productive capabilities. This perspective encourages a broad and integrated approach to industrial policy. Only a coherent set of investment, trade, technology, education and training policies supported by macroeconomic, financial and labour market policies can adequately respond to the myriad challenges of learning and structural transformation faced by countries aiming at achieving development objectives. The book contains analyses of national and sectoral experiences in Costa Rica, the Republic of Korea, India, Brazil, China, South Africa, sub-Saharan Africa and the United States. Practical lessons and fundamental principles for industrial policy design and implementation are distilled from the country case studies. Given the fact that many countries today engage in industrial policy, this collection of contributions on theory and practice can be helpful to policy-makers and practitioners in making industrial policy work for growth, jobs and development.

Be sure to see the chapter by Robert Hunter Wade - "The mystery of US industrial policy: the developmental state in disguise" - on page 379.

The book is available as a pdf for free download here.

Technological determinism and economic growth

Technological determinism is widespread. The Solow model basically suggests that it is technological progress, measured incorrectly as Total Factor Productivity (TFP), that drives growth. The same is true of Schumpeterian models with a demiurgic role for the innovating entrepreneur.

But technological determinism is not just typical of economics, historians too tend to accept that technology drives history. Leo Marx and Merritt Roe Smith tell us in the intro to their edited book titled Does Technology Drive History? that:

The collective memory of Western culture is well stocked with lore on this theme. The role of the mechanic arts as the initiating agent of change pervades the received popular version of modern history. It is embodied in a series of exemplary episodes, or mini-fables, with a simple yet highly plausible before-and-after narrative structure. Before the fifteenth century, for example, Europeans are said to have known little or nothing about the western hemisphere; after the compass and other navigational instruments became available, however, Columbus and his fellow explorers were able to cross the Atlantic, and the colonization of the New World quickly followed. Newly invented navigational equipment is thus made to seem a necessary precondition, or "cause," of as if it had made possible Europe's colonization of much of the world. 

Similarly, the printing press is depicted as a virtual cause of the Reformation. Before it was invented, few people other than the clergy owned copies of the Bible; after Gutenberg, however, many individual communicants were able to gain direct, personal access to the word of God, on which the Reformation thrived. As a final example, take the story, favored by writers of American history textbooks, about the alleged link between the cotton gin and the Civil War. In the late eighteenth century, slavery was becoming unprofitable in the American states; but after Eli Whitney's clever invention, the use of African slaves to harvest cotton became lucrative, the reinvigorated slavery system expanded, and the eventual result was a bloody civil war.

And when it comes to economics technological determinism is not only a trait of the mainstream of the profession. The editors argue that Heilbroner (who was very open, but more conventional in is economics than people think) is the closest in their book's collected essays to accept technological determinism. Heilbroner's classic paper "Do Machines Make History?" starts with Marx's (Karl not Leo) epigraph (from The Poverty of Philosophy) according to which: "the hand-mill gives you society with the feudal lord; the steam-mill, society with the industrial capitalist." Mind you, I think that regarding Marx, the quote might be misleading. Marx clearly thought that there was a technological component to the mode of production, but social relations of production mattered too.

What is NOT discussed in most analyses of the technological determinism by conventional and more than a few heterodox authors is the role of demand in creating the conditions for technological change. In that case, technological change is not the cause of growth, but the result. As in Adam Smith's story, it is the extent of the market (demand) that limits the division of labor (productivity). In modern parlance the idea is known as the Kaldor-Verdoorn Law.*

Obviously there is a certain serendipity in the process of technological innovation, and, hence, it is not uniquely determined by the pressures of a growing market. The point is more that there is no reason for an invention to be pursued systematically if it does not somehow provide for an existing and pressing need. Think of steam engines (the ones that give you the industrial capitalist), which were known for millennia, way before Newcomen and Watt, but had no relevant productive use until they were employed for pumping water out of mines. Only then the potential of the machine was comprehended, and the real work of incremental improvements that made it really useful started.

The question is then one of causality (as it often is between heterodox and mainstream views). Do innovations cause growth or are caused by growth (even if there is some two-way causality the question is which one predominates)? Were the high wages in England that forced capitalists to economize on labor (Principle of Substitution) and led to the Industrial Revolution, as Robert Allen suggests, or did the high wage economy, and the extended domestic markets (let alone the external markets) that provided the stimulus for technological change? I still believe that the weight of the historical evidence suggests that demand rules the roost.

The notion that technology is demand driven is also the only alternative, even though that is not understood very well by historians (economic or otherwise) to technological determinism. In this case, the reasons behind innovations are associated to the more complex social forces that determine the expansion of demand. They involve issues related to income distribution (high or low wages), or the social patterns that determine tastes and consumption (the reasons why the British consumed Indian calicos and porcelain pottery), the access to foreign markets, and the geopolitical forces that explain why some won and others lost in the pursue of those markets, to name a few. Note that power and politics are central to technological innovation, since they involve issues like income distribution and global access to markets. How can you understand the US National Innovation System (NIS)** without the Military-Industrial Complex and its role in providing access to global markets?

Sure enough a demand driven story has space for the sort of external supply-side effects that allow technology and innovations to thrive. So the expansion of demand in a society like England that was going through a Scientific Revolution would have more chances to lead to technological innovation (there is a gap between science and technology, of course) and  provide certain advantages over their competitors for global hegemony, to say the least. In other words, a demand driven story does not imply that supply side factors are irrelevant, they are simply not the prime movers.

* Neo-Schumepterians often refer to this view as the demand-pull hypothesis, due to Jacob Schmookler's Invention and Economic Growth.

** Another Neo-Schumpeterian beloved concept.

Malcolm Sawyer - Financial Development, Financialization and Economic Growth

 

Read rest here

Raúl Prebisch on Cyclical growth and center-periphery interaction

New Working Paper at the IDEAs Network. From the asbtract:

Prebisch believed that understanding the evolution of capitalist economies over time and in different contexts required a general cycle approach, which he labeled ‘dynamic economics’, encompassing all the different areas of economic activity. His dynamic economics stemmed from a critique of both neoclassical and  Keynesian theories, which Prebisch viewed as static representations of capitalism. His dynamics was first applied to a closed economy and then to a center-periphery context. These combined the notion that profit is  the driving motive of  economic activity with a process of forced savings and the idea that the time lag between income circulation and the derived demand, and the time taken in the productive process was the main source of cyclical fluctuations. Prebisch’s dynamic theory, which he never completed, influenced his Development Manifesto (1949).

Full paper available here. From the conclusion:

The long process of development of Prebisch’s economic ideas, which did not stop with his famous Development Manifesto in 1949, from the 1920s culminated in the late 1940 with his dynamic theory. The essence of Prebisch’s dynamic analysis, in which cycle and growth went hand in hand, was the introduction of time lags in a process of continuous disequilibrium. In his model fluctuations result from the difference in the time-period for incomes to circulate within the productive process with the time period required for final production to be brought and sold on the market. In this respect, he was part of a broad tradition of authors trying to formalize macro-dynamics in the wake of the Keynesian Revolution. He maintained elements that were Keynesian in spirit with others that were decidedly neoclassical, while at the same time introducing elements of the old classical school, as it should be expected in a period of transition in the economic profession, and also in an author that was brought up intellectually in a rather eclectic environment.

More importantly, Prebisch stands alone among his contemporaries in trying to explain the cyclical growth of the global economy as the result of the interaction of center and periphery, in which the international division of labor matters. Not only Prebisch introduces the specificity of the problems of managing the peripheral economy, but also he is unique among the economists dealing with cyclical growth to discuss the importance of the change in the global center in the inter-war period from the United Kingdom to the United States.

His conception of the institutional and historical specificity of economic dynamics would eventually develop into what Structuralists at ECLAC would refer to as the Historical-Structural method of analysis, which analyzed the process of structural transformation of underdeveloped economies in historical perspective. In this sense, his understanding of capitalist dynamics, right before he wrote the Development Manifesto and became the Secretary General of ECLAC, was based on a theory that purported to be general and encompassing well beyond the problems of peripheral countries with declining terms of trade, which became the trade mark of his contributions to economic analysis.