Exporting US capitalism

When I was in the early days of my previous journalism career, writing for the Investors Chronicle, and also pregnant with child number 1, I was taken by a stockbroker (I think it was Smith New Court, bought by Merrill Lynch in 1995) on an investors’ tour of Budapest and its environs. It was early 1990, and the ‘shock therapy’ privatisation of companies in the formerly communist countries was under way. One visit vivid in my memory was the day trip to Ganz Electric on the outskirts of Budapest, where it seemed like iron ore went in at one end and everything from tractors and trains to light bulbs emerged at the other. But the toilet paper for the office suite was locked up in a cupboard to which only the Director’s formidable secretary had a key.

Ethan Kapstein’s Exporting Capitalism: Private Enterprise and US Foreign Policy brought this all back to me because one of the chapters covers that post-perestroika era. (Indeed, my previous job had involved interpreting perestroika for western European clients of an economic forecasting company and I, like many others, was coming to realise that the figures for material output of the Soviet bloc had led us to greatly over-state the prior economic growth of those countries.) Kapstein, now a Prof at Arizona State and a Director of a conflict studies center at Princeton, had previously been a banker and worked for the US Government and the OECD. He therefore had a seat on various front lines in variously troubled economies. This experience illuminates the book’s analysis. I found it a very interesting read.

The book is a history of the ups and downs of the US’s consistent focus on relying on private investment, particularly FDI, as a vector for economic development and a handmaiden to US foreign policy goals – above all, limiting the spread of Communism to developing countries. Starting with postwar Taiwan, the US has insisted on the central role of private enterprise. One explanation is ideological, the deep-seated US reverence for business and the market. Another is simple pragmatism: official aid will never be sufficient to meet the scale of the investment need in low or middle income countries. A third is an implicit theory of change: that multinational FDI builds local supply chains and has multiplier effects, setting down long-term roots for sustained development, and inoculating local people against socialist ideas and undesirable (from the American perspective) other overseas influence.

Of course, the record has been mixed, to say the least, even among the post-Communist countries. The multinationals required to do the investing have their own aims, which are not obviously aligned with long-term national development needs. Some – such as ITT in overthrowing Allende in Chile – played deeply troubling roles. With hindsight, shock therapy was too much shock and not enough therapy – the idea being to create quickly enough people with enough of a stake in the market to prevent a reversal to communism. But heterogeneous local institutional and political conditions turned out to make a big difference to outcomes.

The historical chapters in this book are fascinating. I was stopped short in one of the final chapters by the reflection that times are changing (indeed) and the US is now converging on China’s state capitalism. This seems a bizarre over-interpretation of the shift – more complex than often painted – away from globalisation. And anyway, as this chapter observes, official aid is still absolutely dwarfed by investment need. The private sector will fill the gap, or the investment won’t happen. It would be good to get away from the old chestnut that state and market are opposites, when they succeed or fail together, and for the same reasons. The history of FDI underlines the need for contextual nuance. Still, a very interesting and enjoyable read, gaining much from the author’s personal practical experience.

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Interest rate mysteries

The Price of Time: The Real Story of Interest by Edward Chancellor has generally been very well reviewed (see here and here for example) but sadly didn’t grip me. It has one message, hammered home in every chapter (which are organised more or less chronologically): that too low an interest rate (below the natural rate) is damaging. As a microeconomist, looking at the consequences of massive QE in recent times, this seems a persuasive argument. The case is handily set out in a section discussing John Locke’s view (p43 – I paraphrase a bit):

  • financiers benefit at the expense of ‘widows and orphans’
  • there is redistribution of wealth from savers to borrowers
  • There is inadequate reward for taking risk
  • bankers will hoard rather than lend
  • Too much debt will be incurred
  • money will seek higher returns elsewhere
  • asset price inflation will enrich the rich
  • low rates won’t revive the economy anyway

As someone who has been surprised by the macroeconomics argument that an unnaturally reduced price will make credit markets work better, these points make sense to me. The bulk of the book consists of illustrations of these various points using examples from past and present. It is a polemic: it asserts that low real rates have caused weak growth, asset price bubbles, high debt and financial fragility.

But I don’t think the book really grapples with how to reconcile the micro (interest rates as a market price) vs macro (interest rates for demand management) dilemma. Keynes is described as an unbeliever in a natural rate of interest and dismissed as somebody who never missed an opportunity to argue for lower rates. Nor does the book explain why real interest rates (and so presumably the natural rate) have trended lower for centuries, millennia even (see this Bank of England working paper).  Nor did it help me think about how to reconcile the short-term market clearing role of interest rates with the long term Ramsey formula that would give us now a low social rate of interest (if you take it seriously, zero rate of time preference to respect moral equivalence of future generations, plus an elasticity times a close to zero long-run growth rate).

So, while I largely agreed from the start with the point about monetary policy being too loose for too long post-2008, I ended this feeling like I’d been bludgeoned, and still with some unanswered questions about the interest rate. But it must be me, given the uniformly glowing reviews.

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Insecurity, Disenchantment – and Hope?

A World of Insecurity: Democratic Disenchantment in Rich and Poor Countries by Pranab Bardhan covers territory that will be largely familiar to those of us suckers for punishment who have read books like How Democracies Die or How Democracy Ends. It points out the cynicism of populist leaders who, themselves part of the elite, and busy “conniv[ing] at some pruning of the welfare state” and stacking economic regulation in their own favour, nevertheless blame “elites” for the consequences of their own decisions. It notes the “trampl[ing] of due process and the rules and institutions of representative government.” But it also argues that there has been a growing cultural chasm between liberal professions and blue collar workers, facilitating the blame game played by populists. And observes the massive distributional consequences of massive amounts of QE.

The distinctive aspect of the book is looking at rich and poor countries through the same lens, Modi and India in particular. In all cases, he argues, the way to think about the role of the state is its special role “in pooling and underwriting risk for the masses of people” – a task in which most states have recently failed in the face of immense shocks – with more to come as people go cold and hungry this autumn and winter.

In the context of incompetent populist governments, it’s hard to see how the state will step up to the task. Bardhan places his hopes in labour unions and community organistions. The book ends with a plea not to despair, although it’s a gloomy read. The last sentence is a quotation from the last speech by Rabindranath Tagore: “As I look around I see the crumbling ruins of a proud civilization strewn like a vast heap of futility. And yet I shall not commit the grievous sin of losing faith in Man.”

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Books at a conference

This past week I attended the excellent conference of the International Association for Research in Income and Wealth – 75 years old this year, founded and launched by national income luminaries such as Simon Kuznets, Richard Stone and Milton Gilbert. The papers are well worth a browse by all interested in economic measurement. It’s always interesting to hear what books are referred to at a conference, so here are all the references I picked up, dominated by economic measurement but broader in range than you might expect:

Thinking Fast and Slow – Daniel Kahneman

How to Make the World Add Up – Tim Harford

Trust in Numbers – Theodore Porter

Unto This Last – John Ruskin

Man’s Search for Meaning – Victor Frankl

The Power of a Single Number – Philipp Lepenies

GDP: A Brief but Affectionate History – Diane Coyle

A Brief History of Equality – Thomas Piketty

The Stasi Poetry Circle – Philip Oltermann

A History of National Accounting – André Vanoli

Measuring Social Welfare (1997) and Productivity: Information Technology and the American Growht Resurgence (2005) – Dale Jorgenson

 

Too complicated for tragedy

George Demartino kicks off The Tragic Science: How economists cause harm (even as they aspire to do good) with the strong accusation that, “The economics profession is culpable in the contemporary backlash against democratic governance, civic obligation, and racial and other forms of equality. It is equally culpable in inducing the social conditions that promote the widespread rejection of expertise in policy-making.” He describes economists as ‘harm accountants’ while asserting that the profession ignores many of the harms caused by its advice. What to make of this set of charges?

Well, the blame game for contemporary ills is not a straightforward one. I’d share it around – with politicians, with financiers, with crooks – while agreeing that economics has significantly helped create the intellectual weather enabling others’ actions. I also agree with two key building blocks in Demartino’s argument. One is that economists are entirely wrong to insist that the positive and normative elements of their analysis are separable (see Cogs and Monsters): the concept of economic ‘efficiency’ is absolutely value-laden, and in an undesirable way. The other is that welfare economics needs rebooting (we will hopefully have a symposium out on this soon), and in particular to highlight the central dilemma of irreconcilably multiple dimensions (incomes and jobs but also community and culture) in evaluating policy choices at the same time that decisions are unidimensional (does the government sign the trade treaty or not?) Elizabeth Anderson is my go-to reference on this.

Having said that, I thought the book over-does the anti-econ rhetoric. Cost benefit analysis (CBA) is indeed highly flawed, and does indeed aim to come up with a single number weighing all costs and benefits against the same kind of metric, and with moral assumptions shovelled into its discount rate. But “morally reckless”? The limitations of CBA are well-rehearsed, especially by economists (including me but also titans like Nick Stern and Partha Dasgupta). The alternative to using CBA is – not using it. And then what? What decision making procedure is better? I was surprised the book didn’t make more of the arguments for participatory processes, for procedural justice, in trying to ease the many dimensions versus one dimension dilemma. Sen in particular emphasises this, and it’s a feature of public value approaches, which extend CBA to incorporate non-monetary dimensions of the choice, in a reasoned and evidenced framework.

I wasn’t particularly wowed either by the book’s alternative calculus of harms, a page-long list setting out a taxonomy in which economic harms form a minority group. The list seems to be top-down, and it isn’t clear what the principles of categorisation are. Nor does it help address fundamental questions. For instance, many of the examples of the harms done by economists consist of trade liberalisation treaties. There’s no doubt these harm certain groups of producers and workers, to which the standard economics response is compensation schemes – which never happen adequately. Many economists have rowed back from the view that trade liberalisation is always and everywhere a good thing. And yet increasing trade has – equally without doubt – underpinned post-war rises in living standards in many countries, and the Asian export-based miracle economies. Saying, ‘but the China shock in the Midwest, but Brazil,’ doesn’t imply trade liberalisation is always bad, which seems to be the assertion here.

(Personal gripe – the book also ignores Scitovszky’s 1941 refutation of the Hicks-Kaldor compensation argument. Which in my view restates the existence of fundamental dilemmas in policy choices…. the welfare evaluation all depends whose perspective you look at it from.)

So, is economics too reductionist? Yes. Are economists over-confident in their ability to solve problems? Often, yes. Is economics too paternalistic, assuming a god’s-eye view it cannot possibly have? Indeed. Was the shock therapy approach to post-1989 Russia a disaster? Yes! I agree with all of this. And yet I think it’s much more complicated than this book claims. 71vagYXe2KL._AC_UY436_QL65_