7967 results in Economic theory
Chapter 25 - Neo-Classical Economics: A Trail of Economic Destruction
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- Book:
- The Other Canon of Economics
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- 13 April 2024
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Summary
‘.. .soon or late, it is ideas, not vested interests, which are dangerous for good or evil.’
John Maynard Keynes, closing words of The General Theory (1936).This chapter argues that the international financial crisis is just the last in a series of economic calamities produced by a type of theory that converted the economics profession from a study of real-world phenomena into what in the end became mathematized ideology. While the crises themselves started by halving real wages in many countries in the economic periphery, in Latin America in the late 1970s, their origins are found in economic theory in the 1950s when empirical reality became academically unfashionable. About half way in the destructive path of this theoretical tsunami – from its origins in the world periphery in the 1970s until today's financial meltdowns – we find the destruction of the productive capacity of the Second World, the former Soviet Union. Now the chickens are coming home to roost: wealth and welfare destruction is increasingly hitting the First World itself: Europe and the United States. This chapter argues that it is necessary to see these developments as one continuous process over more than three decades of applying neo-classical economics and neo-liberal economic policies that destroyed, rather than created, real wages and wealth. A reconstruction of widespread welfare will need to be based on the understanding that what unleashed the juggernaut of welfare destruction was not ‘market failure’; it was ‘theory failure’. Being a résumé of a larger research project, the chapter includes references to more detailed studies of these processes of ‘destructive destruction’.
Introduction
Two institutions established soon after World War II provided the conditions for a 30-year period of unprecedented increase in human welfare: The 1947 Marshall Plan, in the end re-industrializing not only Europe but creating a cordon sanitaire of wealthy nations around the communist bloc from Norway via Southern Europe to Japan, and the 1948 Havana Charter which established the rules of international trade that made this industrialization plan possible.
Both institutions were based on a key insight from Secretary of State George Marshall's 1947 Harvard Speech announcing his plan: that civilization had always been built on a particular type of economic structure.
Chapter 1 - Catching-up from Way Behind. A Third World Perspective on First World History
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Summary
Schumpeter once said that ‘the upper strata of society are like hotels which are … always full of people, but people who are forever changing’ (Schumpeter 1934: 156). It is tempting to use the same metaphor on nations. Taking a long view, many nations have in sequence joined the upper strata hotel: Britain, the United States, Germany, Japan and others. Once there, however, they have tended to stay. The country occupying the best suites has changed, but all who ever moved into the hotel, still – compared to the Third World – ‘constitute “the rich”, a class … who are removed from life's battles’, to continue quoting Schumpeter on this issue (Schumpeter 1934: 156). These countries, however, are the home of only a minority of the world population.
The last 10 years have brought about a changing perspective on how economic growth actually happens. This improved understanding, however, has mainly evolved around the countries which are already living in Schumpeter's upper strata hotel – the Triad of Europe, Japan and the United States. In this chapter I shall mentally leave this hotel, and see the world from the Third World point of view. Unfortunately, the focus on the upper strata is somewhat in the spirit of the master himself. Schumpeter's own aristocratic manners, habits and tastes were not exactly compatible with viewing the world from the point of view of the ‘losers’ or laggards.
There is a second, and, less obvious, reason for studying the problems of the Third World. Understanding underdevelopment in the Third World can contribute effectively to a better understanding of the growth process in the industrialized countries. The economic problems of the industrialized world give weak and unclear symptoms, much in the same way that early stages of an illness produce general and unspecific symptoms: a fever or a headache. As the illness advances – as the patient gets sicker – stronger and more specific symptoms appear, making a diagnosis possible. My contention is that the study of the economically very sick nations can significantly contribute to the understanding of the developed world, for example the European Community running a slight fever.
Chapter 18 - Institutionalism Ancient, Old and New: A Historical Perspective on Institutions and Uneven Development
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Summary
Introduction
As a result of the inability of mainstream economics to tackle prominent problems of the global economy, some of its basic assumptions are increasingly being questioned. In this context, the standard emphasis on methodological individualism is gradually being eased in favour of studying the institutional structures necessary for economic development: The social, cultural and political norms and habits economists had come to take for granted. This ‘institutionalist’ approach is most often traced back to the work of Thorstein Veblen in the late nineteenth and early twentieth century. My chapter shows how an acute awareness of the importance of institutions, and more specifically of a certain kind of institutions, in fact has been explicitly present in the history of economic thought and policy at least since the Renaissance. Therefore, in addition to the ‘new’ institutional economics of Douglass North (1991) and the ‘old’ institutional economics of Veblen and Commons, there existed an ‘ancient’ tradition of institutional economics which, among other things, informed the policies responsible for the European economic miracle in the early modern period.
In light of this ‘ancient’ institutionalism, I wish to explore its relevance for economic development. Whereas today's literature tends to discuss institutions independent of the type of productive structure they support, both the ‘ancient’ and the ‘old’ institutional schools saw institutions as an integral part of a particular production system. Different technological systems, or modes of production, were seen as requiring different institutions, and an institution per se could not change the technological system. Whereas institutions like property rights and universal suffrage today often are seen as promoting economic development, I wish to show that the arrows of causality historically have been considered going in both directions. In fact, the institution of insurance came about after the need for it developed out of risky long-distance trade, and modern democracies, in any meaningful sense, were the fruits of literate urban artisan and working classes rather than of feudalism.
It is therefore not entirely clear that the Masaai are poor and stuck in subsistence agriculture because they lack property rights. Perhaps, I would argue, they lack property rights because they are poor and stuck in subsistence agriculture.
Chapter 31 - Renewables, Manufacturing and Green Growth: Energy Strategies Based on Capturing Increasing Returns
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Summary
Energy futures and the case for renewables and cleantech can be framed in terms of their contribution to mitigation of climate change, as well as cleanliness and absence of carbon emissions. By contrast, energy security is generally discussed in terms of access to fossil fuels. In this chapter we make a different case for renewables: we contrast the extraction of energy (fuels), which – in spite of technological change – takes place under diminishing returns, with the harvesting of nature's renewable energy, which takes place in a process utilizing manufactured devices, where manufacturing generates increasing returns and costs decline along steep learning curves. This gives a fresh perspective on both renewables and energy security. We argue that energy choices can be framed as choices in favour of increasing returns (based on manufacturing), vs. choices in favour of diminishing returns activities, which usually involve extraction of fossil fuels. Such a framing does not entail assumptions as to whether the entire energy system can be converted to renewables, but simply as choices made at the margin – whose effects will cumulate over time. Energy security through renewables manufacturing therefore promises to be a fruitful area of futures studies.
Introduction
Energy policy and the discussion of energy futures have moved to the centre-stage of political and policy debate – driven by concerns over global warming and the impact of the continued burning of fossil fuels. The case for renewables and cleantech is usually given in terms of contribution to mitigation of climate change, as well as cleanliness and absence of carbon emissions. Energy security too is widely discussed, and usually in the context of securing access to fossil fuels, either of the traditional kind (oil, gas, coal) or the new non-traditional fuels (coal seam gas, shale oil).
In this chapter we link the two and thereby make a quite different case for renewables, couched in terms of their contribution to energy security. Renewable energy systems embody technological change, manufacturing, learning curve effects and the capture of increasing returns. Because they are produced by manufacturing activities, which can be conducted virtually anywhere, they offer prospects of long-term energy security for the countries that adopt them. Renewables may be viewed as a developmental strategic choice – and the effects on climate change mitigation, energy security and environmental cleanliness are useful and desirable adjuncts.
Chapter 27 - Economics and the Public Sphere: The Rise of Esoteric Knowledge, Refeudalization, Crisis and Renewal
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Summary
After receiving the National Bank of Sweden's 1973 ‘Nobel’ Prize in economics – shared with development economist Gunnar Myrdal – Friedrich von Hayek (1899–1992) held an unusual dinner speech where he quite explicitly criticized the prestigious prize he had just received: ‘…if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it. One reason was that I feared that such a prize … would tend to accentuate the swings of scientific fashion.’ Hayek believed that economics was different than other sciences, and his 1973 speech shows a degree of humility towards the complexities of economics which, in my view, differs profoundly from today's professional attitudes.
An insight from a 1952 book by Hayek strengthens the argument: ‘Never will man penetrate deeper into error than when he is continuing on a road which has led him to great success.’ In other words: when being right and successful, Mankind will ‘overshoot’ into error.
The origins of what colleague Mark Thoma refers to as the ‘Great Disconnect’ between professional economics and the public sphere can be better understood by taking a closer look at Hayek's propositions. Observing the economics profession over time, it indeed appears to be subject to cycles of fashion as Hayek suggests: apparent theoretical success overshoots the scientific fashion into error and irrelevance
Other economists have contributed, from different angles, to describing this ‘overshooting’ phenomenon. Norwegian-American economist Thorstein Veblen (1857–1929) suggests that knowledge exists on two different levels. Highly abstract and esoteric knowledge, like that of high priests, carries much prestige, but is – in practice – often fairly useless. On the other hand there is exoteric knowledge – useful knowledge – based on facts and experience that carries little prestige. Using Veblen's terminology, we can argue that Hayek's overshooting of scientific fashion corresponds to Veblen's idea that irrelevant education may contaminate healthy instincts of useful and exoteric knowledge.
In this chapter I shall provide examples of historical instances where esoteric knowledge has created crises, and how these crises were only solved by resurrecting alternative, sometimes near-defunct, paradigms of knowledge.
Chapter 19 - European Eastern Enlargement as Europe’s Attempted Economic Suicide?
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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- 13 April 2024
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Summary
We argue that the process of European economic integration has made a qualitative shift: from a Listian symmetrical economic integration to an integrative and asymmetrical integration. This shift started in the early 1990s with the integration of the former Soviet economies into the economies of Europe and the world as a whole, reached its climax with the Eastern enlargement of the Union in 2004 and now forms the foundation of the renewed Lisbon Strategy. This change is measurably threatening European welfare: the economic periphery in the first instance, and potentially the core countries as well. Two parallel processes aggravate this development: the timing of the enlargement at this particular phase of the evolving techno-economic paradigm; and the creation of the European Monetary Union along the so-called Maastricht route towards convergence and fiscal stability.
Introduction
Economic integration can take many forms. Some are more conducive to wealth and freedom than others. Colonialism was probably the first form of international economic integration. Intuitively, we understand that what the European Union has attempted to achieve is something qualitatively very different from colonialism. Successful economic integrations are win-win situations that extend and develop capitalism to new areas. On the other hand, unsuccessful ones are forms of integration where one or both parties lose or are prevented from dynamic economic structures conducive to wealth creation.
In this chapter we argue that European economic integration has made a qualitative shift from one type of economic integration to another: from a Listian symmetrical economic integration to an integrative and asymmetrical integration. This shift started in the early 1990s with the integration of the former Soviet economies into the European and world economies, reached its climax with the Eastern enlargement of the Union in 2004 and currently forms the foundation of the renewed Lisbon Strategy. This change is measurably threatening European welfare: the economic periphery in the first instance, and potentially the core countries as well. Two parallel processes aggravate this development: first, the timing of the enlargement in the present phase of the techno-economic paradigm under conditions of normal circumstances characterized by deflationary and downward pressures on wages, like in the 1930s (Perez 2002, 2004, 2006);
Chapter 26 - Modernizing Russia: Round III. Russia and the Other BRIC Countries: Forging Ahead, Catching Up or Falling Behind?
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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- 13 April 2024
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Summary
Report for the Global Policy Forum ‘The Modern State: Standards of Democracy and Criteria of Efficiency’, Yaroslavl, Russia, 9–10 September 2010.
Introduction. Modernizing Russia: The Context
‘Despite many currents and cross currents, continuity is perhaps the most impressive phenomenon in the history of economic doctrines.’1 These words by a very experienced economic historian are still extremely relevant, also for economic policy. But continuity in economics is of a peculiar and cyclical kind. It does not manifest itself in smooth incremental transitions, but rather in the recurrence of similar sets of ideas in similar contexts over time.
The economics profession and what is considered ‘best practice’ economic policy is, then, decidedly cyclical. Its cyclicality appears to follow the same type of mechanisms of ‘destabilizing stability’ described by US economist Hyman Minsky as leading up to financial crises. In the financial sector, when things are stable and improving over long periods of time, bank routines of risk evaluation grow increasingly lax, and in the end credit is given to people who are not even able to pay interest on the loans they are given (‘Ponzi financing’, as with subprime loans). In other words, long periods of stability lead to increasing vulnerability: to Minsky's ‘destabilizing stability’.
Similar cycles are at work as regards our understanding of economics and industrial policy: long periods of economic progress in the core countries lead to increasingly abstract and irrelevant economic theories. ‘Bad’ theories – particularly as they are applied outside the economic core – are allowed to dominate the discipline for long periods of time because the underlying economy is strong enough to withstand their poisonous influences, but, eventually, reality catches up and disaster ensues. This brings less abstract and more relevant economic theories and practices back; mindless laissez-faire is abandoned and more active economic governance again becomes acceptable. These turning-points can, after their most famous manifestation, be referred to as ‘1848 moments’, and they tend to be caused by economic crises, just as the 1848 turning point followed upon the severe financial crisis of 1847.
Index
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Chapter 6 - Economics: ‘The Dismal Science’ or ‘The Never-ending Frontier of Knowledge’? On Technology, Energy and Economic Welfare
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
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- The Other Canon of Economics
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Summary
‘Smith and Ricardo were our best allies in the cold war against central planning – but that battle is over and won, and we are now facing other challenges where other prophets will better serve Society's needs.’
‘Neo-classical economics fundamentally lacks a theory of economic development beyond seeing it as a process of adding capital to labour.’
‘The “Green Movement” has done us all a great favour by pointing to the severity of the problems of environment and sustainability. But, although they are not aware of it, their solutions to these problems are framed in the static and barter-centred theories of Smith, Malthus and Ricardo.’
‘All levels of knowledge carry with them their own limits to ecological sustainability. For this reason, the habit of making predictions holding the level of knowledge constant produces curious and overly pessimistic results.’
The work of the 1997 Bergo Commission is based on today's standard economic theory, the economics of Adam Smith and David Ricardo. The theories of Smith and Ricardo were our best allies in the cold war against central planning but that battle is over and won, and we are now facing other challenges in areas which these authors ignored. We shall argue in this chapter that today's mainstream economic theory – because of its basic structure – contains important ‘blind spots’ when it comes to the role of knowledge, technology and energy for the welfare of nations. We further argue that the monopoly of this type of economic theory, based on the ‘dismal science’ of Adam Smith, Thomas Malthus and David Ricardo, is a fundamental source of inspiration for the techno- and eco-pessimism which dominated the Zeitgeist of the late 1990s. The same production functions predicting diminishing returns which gave birth to Malthus’ dismal predictions of disaster, are still at the very core of the tool-box of today's standard economic theory.
We here suggest an alternative tradition in economic theory which can help us find our place in the knowledge-based society of the future. Where Smith and Ricardo focused on barter and exchange, other economists have focused on knowledge, production and the harnessing of energy, and produced theories which in our opinion will better serve us as guides for today's challenges.
Contents
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Dedication
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
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Chapter 4 - Competitiveness and Its Predecessors - A 500-Year Cross-national Perspective
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
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Summary
Competitiveness - ‘corporate graffiti’ invades economic theory
Even a casual observer of the practice and science of management will not fail to notice how a continuous flow of new concepts are born, become fashionable and then disappear from management jargon. A recent article in Financial Times (Ref. 1, p. 10) suggests the term ‘corporate graffiti’ - or ‘management graffiti’ - to describe the unthinking use of buzz-words. Management language is ‘opaque, ugly, and cliché-ridden’, FT claims. ‘Management graffiti’ is intended as the catch-phrase to end all catch-phrases.
Clearly these ‘corporate graffiti’ are important not only to the world of business but also to the rest of society - largely due to the influence wielded by the people who employ them. Michael Porter, himself a contributor to corporate graffiti, has issued a warning to managers against paying too much attention to the fads - against what he calls single-issue management. Luckily, most management graffiti live and die without ever leaving the spheres of management. Exceptionally, however, the term competitiveness has taken the leap from management theory to the field of economics and public policy. Does this mean that public policy theory is starting to be subject to the same fads as management theory? Apparently, some mainstream economists are of this opinion. However - although most of the time ill-defined - the term competitiveness seems to fill a need in public discourse. Does the need for such a concept reflect a new situation in the world economy? Do we need the term competitiveness in order to come to grips with increasing globalization (another graffiti term), or is this a new term for a set of problems which have been around for a long time?
In this chapter I shall argue that, although often misused and mostly ill-defined, the term competitiveness properly used does describe an important feature in the world economy. This concept scratches the surface of important issues which are central for understanding the distribution of wealth, both nationally and globally. In spite of its fairly recent appearance on the scene, the term competitiveness in my view addresses issues which have been central in public policy at least during the last 500 years, albeit under different headings.
The Other Canon of Economics
- Essays in the Theory and History of Uneven Economic Development
- Erik Reinert
- Edited by Rainer Kattel
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Other Canon Economics: Essays in the Theory and History of Uneven Economic Development brings together key essays on development economics from one of the most prolific and important development economists and historians of economic policy today. Erik S. Reinert argues through essays ranging from 1994 to 2020 that neo-classical economics damages developing countries, mostly via adherence to the theory of comparative advantage. Based on a long intellectual tradition - started by the Italian economists Giovanni Botero (1589) and Antonio Serra (1613), Reinert shows that the country which trades increasing returns goods - e.g. high-end manufacture - has advantages over the country which trades diminishing returns goods - e.g. commodities. This has important implications for today's development strategies that, Reinert argues, should be seen as industrial strategies.
Chapter 13 - Benchmarking Success: The Dutch Republic (1500–1750) as Seen by Contemporary European Economists
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Summary
This chapter looks at the Dutch Republic from the vantage point of the economists of the period. These pre-Smithian economists are normally grouped together in the history of economic thought under the decidedly derogatory label of ‘mercantilists’. Under its standard Whig conception, any idea in the history of economic thought – as identified almost a century ago by English historical economist Ashley – instead of being judged by its relevance in a given context, is either hailed as a surprising early anticipation of a healthy neoclassical economic principle or as an example of hopelessly ill-conceived theories (Ashley 1920: II, 381).
I would argue that as a tool in order to understand the rise and fall of the Dutch Republic, mercantilism had some clear analytical advantages over neoclassical economics. Not only was the mercantilist or pre-Ricardian economists’ toolbox much larger than today’s, the pre-Ricardian system already included a large number of economic factors which the profession presently attempts to re-introduce to mainstream economics. Examples of what gradually was left out of economics starting with Adam Smith are innovations – part of English economics from Francis Bacon (1561–1626) until and including James Steuart's important work (1767) – technology, increasing returns, institutions, geography, synergies, path dependency, that economic activities are qualitatively different as carriers of economic growth, the idea that economic policy should be context-specific, and the whole fundamental question of why economic development is by nature so uneven. With the English classical economists economic theory gradually lost its previous understanding of the vicissitudes of technology and production, and came to concentrate upon trade and prices. The contemporary mercantilists are therefore likely to provide a much richer analysis of the Dutch Republic than what is found in the works of the later classical economists.
Mercantilism can productively be seen both as state- and nation-building (Schmoller 1897/1976) and as a strategy of industrial import substitution (Perrotta 1993), which at the time was seen as two sides of the same coin.1 To the laggard countries of Europe, the Dutch Republic provided important inspiration on both these accounts. That inspiration did not come from Dutch policies, but by asking what policies would have to be created in order to achieve the same results as those observed in the Dutch productive system, but under very different circumstances and conditions; in very different contexts.
Chapter 5 - Diminishing Returns and Economic Sustainability: The Dilemma of Resource-based Economies under a Free Trade Regime
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Summary
‘And the land was not able to bear them, that they may dwell together …’
Genesis XIII, 6.
(quote used by Alfred Marshall, Principles of Economics, London, 1890, in order to emphasize the role of Diminishing Returns as a fundamental factor in human history.)
‘I apprehend (the elimination of Diminishing Returns) to be not only an error, but the most serious one, to be found in the whole field of political economy. The question is more important and fundamental than any other; it involves the whole subject of the causes of poverty;.. .a nd unless this matter be thoroughly understood, it is to no purpose proceeding any further in our inquiry.’
John Stuart Mill, Principles of Political Economy, 1848.
This chapter explores the impact of Diminishing Returns on world poverty and sustainable growth. Diminishing Returns is an economic factor which not only heavily influences the behaviour of costs, wages and standard of living in any resource-based economy - particularly in Third World economies - but, I shall argue, this factor is the key to understanding the concept of sustainability. This chapter argues that the strong warning from John Stuart Mill quoted above is as valid today as it was almost 150 years ago. Mill's warning has, however, been largely ignored, almost completely so in the period following World War II.
Part one of the chapter traces how Diminishing Returns disappeared from economic theory as neo-classical economics and general equilibrium analysis took over from other, less abstract, economic paradigms. Part two discusses the impact of Diminishing Returns vs increasing returns if they were to be reintroduced in international trade theory. Part three describes how ‘The Triple Curse’ of Diminishing Returns, perfect competition and price volatility combine and mutually reinforce each other in maintaining vicious circles of poverty and unsustainable growth. Part four describes how a few resource-rich nations - Australia and Canada taken as examples - managed to escape the ‘Triple Curse’ which threatens all resource-based economies. The concluding part discusses the need for a wide-ranging overhaul of the World Economic Order, an overhaul which once again incorporates the lock-in effects created by Diminishing Returns in resource-based economies.
Introduction
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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Summary
These volumes represent the second and last installment of my collected papers and chapters on economics. The first installment – The Visionary Realism of German Economics. From the Thirty Years’ War to the Cold War – was published in 2019, also then kindly collected and edited by Prof. Rainer Kattel of the Institute for Innovation and Public Purpose, University College London.
¡Viva el tercer extremismo! was once the only text in a mail I received from a Latin American friend: ‘long live the third extremism’. My friend and I are both what you can call children of the Cold War, born at its start in the late 1940s and spending many formative and active years under its reign until 1989. His point was that my form of extremism, instead of becoming a rigid ideology, was a rather extreme attention to historical facts and the tools and mechanisms they revealed. Indeed, I was very pleased when I found that an influential German economist, Gustav Schmoller, had referred to communism and what was to become neoliberalism as ‘twins of an ahistorical rationalism’1. My ‘extremism’ was intended to be the opposite, hopefully a ‘historical rationalism’, which by necessity had to be more complex than the simplistic solutions of the ‘ahistorical twins’ which dominated the Cold War view.
With time, I found that several approaches qualified as not belonging to any of the ‘ahistorical twins’ that dominated Cold War economics. I came to think of these as ‘reality economics’, but a philosophical discussion started within the group around ‘reality’ and we decided to adopt the term The Other Canon of Economics: the study of the economy as a real object, not defined in terms of the adoption of core assumptions and techniques. The end of this introduction provides a comparison between standard economics and The Other Canon, listing many economists who have provided input to The Other Canon. A family tree of The Other Canon is found here http://othercanon .org /family -tree/
The beginning of the Cold War brought a massive theoretical contradiction to the surface. We could call it Marshall vs. Samuelson. On June 5, 1947, US secretary of state George Marshall presented what was originally called ‘The European Recovery Plan’, later the ‘Marshall Plan’.
Contents
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- The Other Canon of Economics
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Chapter 34 - Industrial Policy: A Long-term Perspective and Overview of Theoretical Arguments
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
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- The Other Canon of Economics
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Summary
The aim of this chapter is to give a brief overview of the historical arguments that have been used to argue for industrial policy in its widest sense, that is, that what a nation (or region) specializes in producing may be of key importance to the wealth and welfare of its inhabitants. Historically it has been generally agreed that symmetrical trade – trade in similar goods between nations at similar levels of technological development – has tended to be beneficial to both trading partners. In these cases, employing Ricardian trade theory has not been detrimental to the trading partners. This chapter explains the situations when Ricardian trade theory is not beneficial to one of the trading partners, and – at the same time – the economic mechanisms which have been identified as making industrial policy desirable. That manufacturing matters has, in various forms, been presented as a main reason for industrial policy, at least since England's import-substitution policies during the 1400s: adding value to English wool by spinning it into woollen cloth and garments. This was mainly achieved by raising export duties on raw wool, making English wool cheaper for domestic manufacturers than for foreign ones. However, the reasons why manufacturing matters have varied. And that understanding has gone from intuitive inferences to scientific evidence. This chapter will historically present this process and the most common arguments for industrial policy over time.
Wee felt it before in sense; but now wee know it by science.
Edward Misselden, The Circle of Commerce or the Balance of Trade, London, Dawson for Nicholas Bourne (1623: 130)New Perspectives on Cold War Economic Theory: Adam Smith, David Ricardo and Paul Samuelson Revisited
INITIALLY it is of some importance to gain a broader perspective of what has developed into ‘general truths’ of the neoclassical economics during the Cold War.
The fact that David Ricardo's theory of comparative advantage in international trade dates back to 1817 conveys an impression that this principle has been ruling economic theory since then. It is also assumed that David Ricardo merely solidified the free-trade principles of Adam Smith. However, the following quote from the young Adam Smith shows how far away his principles were from the logic of comparative advantage and neo-liberalism:
Chapter 23 - Industrial Restructuring and Innovation Policy in Central and Eastern Europe since 1990
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- Book:
- The Other Canon of Economics
- Published by:
- Anthem Press
- Published online:
- 13 April 2024
- Print publication:
- 13 February 2024, pp 677-708
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Introduction
For a long time, economic development in Central and Eastern European (CEE) countries has been seen by most analysts in both academic and policy circles as a largely positive if not a very positive story. For example, at the end of 2005, Business Week ran a cover story titled ‘Central Europe – Rise of a Powerhouse’. It has become commonplace to argue that the success of CEE development is mainly due to neo-liberal economic policies (liberalized markets, balanced public budget, price stability, low tax burden and strongly market-oriented reforms in all socio-economic sectors) pursued by these countries since the early 1990s. In other words, CEE countries have been poster countries for Washington Consensus policies. Indeed, as we show below, during the entire decade of the 1990s, industrial restructuring and embryonic innovation policies in CEE were largely dominated by Washington Consensus thinking. We aim to show that, first, these policies have been a double-edged sword: on the one hand enabling fast and furious industrial restructuring while, on the other hand, locking CEE economies into economic activities with low value added/productivity growth and thus undermining future sustainable growth. However, the impact of accession into the European Union (EU) has been equally pivotal for industrial restructuring and innovation policy making in CEE countries in the 2000s and this process can be summed up as a strong Europeanization of innovation policy in CEE. We aim to show, second, that Europeanization has been largely a double-edged sword for CEE countries. Since joining the EU in 2004 or 2007, and already during the accession process, there is a strong change in innovation policies in many CEE countries towards a much more active role of the state. In this change there is a clear and strong role of EU's structural funding, particularly the negotiations and planning that comes with it. However, these changes come with specific problems: first, there is an over-emphasis in emerging CEE innovation policies on a linear under-standing of innovation (from lab to market) that is based on the assumption that there is a growing demand from industry for R&D (which is not the case because of the structural changes that took place in the 1990s via the Washington Consensus policies); and, second, increasing usage of independent implementation agencies in an already weak administrative capacity environment lacking policy skills for networking and long-term planning.
Chapter 15 - Development and Social Goals: Balancing Aid and Development to Prevent ‘Welfare Colonialism’
- Erik Reinert, Tallinna Tehnikaülikool, Estonia
- Edited by Rainer Kattel
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- Book:
- The Other Canon of Economics
- Published by:
- Anthem Press
- Published online:
- 13 April 2024
- Print publication:
- 13 February 2024, pp 475-499
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‘… just as we may avoid widespread physical desolation by rightly turning a stream near its source, so a timely dialectic in the fundamental ideas of social philosophy may spare us untold social wreckage and suffering.’
Herbert S. Foxwell, Cambridge economist, 1899The Millennium Development Goals (MDGs) are noble goals for a world sorely in need of urgent action to solve pressing social problems. They rest, however, upon completely new principles whose long-term effects are neither well thought through nor well understood. In this chapter, I shall attempt to explain why the MDGs do not represent good social policy in the long run.
One novelty of the MDG approach lies in the emphasis on foreign financing of domestic social and redistribution policies rather than on domestic financing by the developing countries themselves. Disaster relief, which used to be of a temporary nature, now finds a more permanent form in the MDGs. In countries where more than 50 per cent of the government budget is financed by foreign aid, huge additional resource transfers are being planned. This raises the question of the extent to which this approach will put a large number of nations permanently ‘on the dole’, a system similar to ‘welfare colonialism’, which will be discussed at the end of the chapter.
The pursuit of the MDGs may appear as if the United Nations institutions have abandoned the effort to treat the causes of poverty and have instead concentrated on attacking its symptoms. In this chapter, I shall argue that palliative economics has, to a considerable extent, taken the place of development economics. Indeed, the balance between development economics (radically changing the productive structures of poor countries) and palliative economics (easing the pains of economic misery) is key to avoiding long-term negative effects.
How we used to deal with problems of development
In less than one generation, a stark contrast has emerged between the type of economic understanding underlying the Marshall Plan, on the one hand, and the type of economic theory behind today's multilateral development discourse and the Washington institutions, on the other. The Marshall Plan grew out of recognition of the flaws of its precursor, the Morgenthau Plan.