The end of Keynesianism
quick overview of what we said last week
- counter-cyclical policies
- monetary policy
- fiscal policy
The accepted consensus — “stimulate the economy”
- this is how we dealt with the Great Depression
State intervention in the economy
- but nothing like socialism — no state ownership or planning
Unideological
- this is how the economy behaves —
- so why not try to improve the situation?
cf. Hayek
- the rap duel from last week
- “It is state intervention that is the problem”
Keynes:
- Hayek might be right, but only in the long run
- “In the long run we are all dead”
The crises of the 1970s
Oil crisis
War in the Middle East
Stagflation
- high inflation
- economic crisis
- unemployment
Big problems in Britain
- 1977 — “winter of discontent”
- forced to borrow from the IMF — humiliating
Lyrics here.
Unclear what to do from a Keynesian perspective
- can’t stimulate the economy
- can’t pull back either
The return of free-market thinking
- this is really when Hayek enters the picture
- Thatcher and Reagan
Policies
- Give market actors as much freedom as possible
- As little government as possible
- Less regulation
- No state planning
- No state ownership of the means of production
- Union busting
Post-Keynesian era
- also when it comes to the international political economy
The debt crisis
in the 1980s
- oil prices go up — rich countries in the Gulf
- the problem of how to recycle petro dollars
- few local investment opportunities
- put the money in Wall Street banks
problem for Wall Street — what to do with the money?
- end up lending it — to countries in Latin America in particular
- “sovereign borrowing” — the countries themselves borrow
- nothing unusual about that of course …
defaulting on loans
- a problem for the American banking system
The “Washington consensus”
The solution:
- “get prices right”
- give examples — price controls, customs duties …
- rely on the fundamentals of the market
No “vicious circles”
- the economy works in the same way as everywhere else
- no particular role for the state
- let the magic of the market do its work
“The Washington Consensus”
“Washington Consensus” — “good institutions”
- these are the institutions needed for development
- assume that these institutions were used by the rich countries themselves
James Baker, Secretary of the Treasury, 1985
- debt crisis — the debtor countries have to undertake reforms
- Western banks should lend more
The recycling of money
- oil prices are going up
- oil producers make a lot of money
- recycle in American banks
- too much money here
- easy loans to Latin America
- debt crisis
Solution — “structural adjustments”
- shift towards export-led growth
- reduction of the role of the state in the economy
- public sector reforms
This is the new requirement —
- all countries asking for help from the IMF and the World Bank have to accept these terms
- cf. “the Washington Consensus”
that is, a neo-liberal consensus
- deregulate
- privatize
- no more import substitution
- rely on markets to “get prices right”
Policy advice
- growth oriented policies
- low- and middle income countries
4 reforms
1. Bringing down inflation
- had for growth — can’t plan for the future
- banks might be afraid to lend money — they will be paid back with cheaper money
2. Trade liberalization
- open, free trade — countries can specialize
- specialization makes countries more productive
3. Foreign investors should be allowed to invest in the stock market
- foreign investors provide more money to the local market
- the overall economy will grow faster
4. Privatization
- companies owned by the government should be sold
- private ownerships
Results
GDP growth:
- 3.3% to 1990
- 5.3% to 2005
The reforms worked
But caveats:
- the privatization in particular worked badly in many cases
- they didn’t all work in all countries
Help make a bigger pie
But ultimately we need to redistribute the slices too
- this is NOT a part of the Washington Consensus
Control of
- financial system control might be required
- capital movement control
Not enough about
- institutions that protect society — national institutions
- international institutions too
Capital controls?
- crisis show that some kind of limits are required
- hot money moving around
- equity investment vs. foreign direct investments
Capital can flow out again
-
- Chile in the early 1990s — capital controls — a good idea
Totally new role for the IMF
- impose conditions on poor borrowers
critique
- from the Left: impose hardship on poor people
- from the Right: still give to much of a role to the state
What is the role of the state in economic development? (Gilpin)
- The background: the phenomenal rise of East Asia
- Japan, Korea, Taiwan, Singapore
- Malaysia, Indonesia
- and after 1983 — also China
Development economics
Roughly 1945-1970
- the economics of poor countries worked fundamentally differently
Cf. Keynes — two very different situations
- “classical economics” — the economy is humming along nicely — nothing much for the state to do
- markets fail — there is a role for the state
- the logic seemed similar in poor countries
Arthur Lewis
Developmental model
- surplus workers, paid subsistence wages
- an enormous reservoir that can be tapped for development
“Unfavorable terms of trade”
- the ratio of export prices to import prices
- the amount of import goods an economy can purchase per unit of export goods
- trade cannot be used as an engine of growth
Additional issue — special situation
- market failures
- inflexible economic structures
- low savings rates
- poor educational systems
Problems of “late late development”
- no way to benefit from “the advantages of backwardness”
- will never get a share of the world economy
- discourage private enterprise
- discourage international trade
Import substitution
- Indian Colgate toothpaste, etc
Gunnar Myrdal — vicious circle
- these countries are poor — low savings and low investments
- industries can’t compete
- uncompetitive, unproductive
- remain poor — low savings etc …
“Big Push” — with the state in charge
- the state has to save and invest
- the state has to become an entrepreneur
- state-run businesses
Foreign aid can really help
Development economics falls apart
in the 1970s and 80s
- rejection of Keynes’ two kinds of economics
- there is only one — true for poor countries too
The problem:
- state intervention — distorts prices
- distorts economic initiatives
- inhibit market forces
and also …
- fiscal irresponsibility
- hyperinflation
- markets closed to international competition
The developmental state
meanwhile countries in East Asia are doing spectacularly well
- often the state plays an important role
What does the state do?
- encourage savings
- encourage investment in strategic industries — give cheap credit
- selective access to credit — or to foreign currencies
- organizes the market — market leaders
- organizes research and development
- allows monopolistic practices — close ties among govt, local banks and industry
- “industrial policy” — governed market — “picking winners”
Market creation
- an economic infrastructure that would not have existed otherwise
- protect “infant industries”
- tariffs and customs
- restrict foreign direct investments
Export-led growth
- as official policy
- impossible for companies in poor countries to reach a world market — you need the state to promote you
“Asian values”
- land reform
- education
- income equality
Critique from traditional economists:
- they were successful since they relied on the traditional tools — savings and investments — market forces
- Krugman: Chinese growth a matter of traditional input/output — it would be strange if China had not grown
General problem:
- economists are not very good at understanding economic growth
- they basically only have their input/output model
- but growth is a matter of the organization of society as a whole
- the importance of a national development strategy
East Asian financial market
- the problem of “crony capitalism”
- the problem of “irresponsible international financial markets” — overlending
Turkish cars as a case study
TOGG
Is this a good idea, or a bad idea?
- free trade argument
- developmental state argument
and remember …
- In 2015 Turkey produced over 1.3 million motor vehicles, ranking as the 14th largest producer in the world.
- global car manufacturers with production plants include Fiat/Tofaş, Oyak-Renault, Hyundai, Toyota, Honda and Ford/Otosan.
Automotive industry in Turkey
Chang on protectionism and neoliberalism
download pdf
Chang-Ha-Joon-2012-Kicking-Away-the-Ladder-Neoliberalism-and-the-‘Re
Ha-Joon Chang
Neoliberalism
- belief in the market
- deregulation
- private property
- rule of money
Developing countries in trouble
- told by IMF etc that they should cut spending
- tighten the belt
- high interest rates
Rich countries in trouble
- cut interest rates
- socialism for the rich and capitalism for the poor
- increase government spending — spending money
Obama response to the 2008 crisis
- but Obama put people in place who created the problem in the first place
- unregulated markets
Nationalization of the banks
- Sweden for example
- France
banks are too important to be in private hands
- the tax payers are paying for it — these are the capitalist rules
- public enterprises can work well
Latin America
- drifting away from neoliberalism
- myths of free markets
- protectionism
- and state funding
Today’s rich countries all developed by means of protection
only free trade the last 50 years
now the policy advice from rich countries is all about cutting back the state and relying on markets, but history has been rewritten
- they themselves relied very heavily on protection
- state involvement
Tariffs & subsidies
- Britain very similar to South Korea or Japan before 1860
- before WW2, the US was the most protected country in the world
They were “kicking away the ladder”
General point:
- institutions were not as important as the Washington Consensus people say
- all institutions came later — property rights is one example
“The American System”
Alexander Hamilton
- “infant industry argument”
- influenced Friedrich List
Other cases
- Sweden too very protectionist
- only Holland and Switzerland are exceptions
- they were both close
to the “technological frontier” — that is, they had little to fear from competition
Property rights regimes
- most patent laws were very lax in checking the originality of the invention
- These laws afforded only very inadequate protection
The influence of the anti-patent movement was sweeping Europe at the time.
- loosely related to the free-trade movement, this condemned patents as being no different from other monopolistic practices.
- Switzerland did not acknowledge any intellectual property rights until 1888
Mazzucato on wealth creation
who are the value creators?
We need a theory of value
- we have lost our way on this issue
- we misunderstand what productive activities are
- too easily captured
2009
- “Goldman Sachs is the most productive bank in the world”
- but their mortgage lending came close to ruining the economy
- had to be bailed out — 10 billion dollars
Wealth debate
- where does wealth come from?
- who is responsible for making countries wealthy?
300 years ago
- Physiocrats: obvious farming
- farmers, merchants and “sterile class” — landlords
Simulating what happened if land was made more productive
1800s — industrial revolution:
- Smith, Ricardo, Marx
- we have already talked about “the wealth of nations”
Industrial labor — labor theory of value
- specialization increases production
Marx:
- it is the workers who is the productive class
- the capitalists do nothing
Unproductive classes
- some parts of the economy are becoming too big
Neoclassical economics
No longer objective conditions
- instead: how individuals make their decisions
- microeconomic foundations
- supply and demand — equilibrium price
“Prices reveal value”
- affects how we remunerate people
How we think about output
- GDP
- GDP measures how valuable our lives are
But weird things happen if we only include things that can be priced
- marry your baby-sitter — the GDP goes down
- pollution improves GDP — you have to pay someone to clean it up
Until 1970s
- the financial sector was not included in GDP
“The banking problem”
- instead of thinking about what banks do
- they just come to include it
But companies often use finance to financing themselves
- Only maybe 20% goes to the real economy
- “fire” — finance, insurance and real estate
Over financialization
too much focus on share prices
- stock options
- buying back their own shares
Its not going into actual job creation
- all this influences how we think about the economy
Growth happiness indicators
- indoor plumbing
- literacy rates
- health services
Moon landing
- but this was a crazy business proposition
We need the state to invent and invest
- a long list of similar experiments
- climate change