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Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession
Since 1988, rapid growth in Asia has lifted billions out of poverty. Incomes at the very top of the world income distribution have also grown rapidly, whereas median incomes in rich countries have grown much more slowly. This posting asks whether these developments, while reducing global income inequality overall, might undermine democracy in rich countries.
The period between the fall of the Berlin Wall and the Great Recession saw probably the most profound reshuffle of individual incomes on the global scale since the Industrial Revolution. This was driven by high growth rates of populous and formerly poor or very poor countries like China, Indonesia, and India; and, on the other hand, by the stagnation or decline of incomes in sub-Saharan Africa and post-communist countries as well as among poorer segments of the population in rich countries.
Anand and Segal (2008) offer a detailed review of the work on global income inequality. In Lakner and Milanovic (2013), we address some of the limitations of these earlier studies and present new results from detailed work on household survey data from about 120 countries over the period 1988–2008. Each country’s distribution is divided into ten deciles (each decile consists of 10% of the national population) according to their per capita disposable income (or consumption). In order to make incomes comparable across countries and time, they are corrected both for domestic inflation and differences in price levels between countries. It is then possible to observe not only how the position of different countries changes over time – as we usually do – but also how the position of various deciles within each country changes. For example, Japan’s top decile remained at the 99th (2nd highest from the top) world percentile, but Japan’s median decile dropped from the 91st to the 88th global percentile. Or, to take another example, the top Chinese urban decile moved from being in the 68th global percentile in 1988 to being in the 83rd global percentile in 2008, thus leapfrogging in the process some 15% of the world population – equivalent to almost a billion people.
When we line up all individuals in the world, from the poorest to the richest (going from left to right on the horizontal axis in Figure 1), and display on the vertical axis the percentage increase in the real income of the equivalent group over the period 1988–2008, we generate a global growth incidence curve – the first of its kind ever, because such data at the global level were not available before. The curve has an unusual supine S shape, indicating that the largest gains were realised by the groups around the global median (50th percentile) and among the global top 1%. But after the global median, the gains rapidly decrease, becoming almost negligible around the 85th–90th global percentiles and then shooting up for the global top 1%. As a result, growth in the income of the top ventile (top 5%) accounted for 44% of the increase in global income between 1988 and 2008.
Fortunes of income deciles in different countries over time
The curve in Figure 1 is drawn using a simple comparison of real income levels at given percentiles of the global income distribution in 1988 and 2008. It is ‘anonymous’ because it does not tell us what happened to the actual people who were at given global income percentiles in the initial year, 1988. In fact, the regional composition of the different global income groups changed radically over time because growth was uneven across regions. A ‘quasi non-anonymous’ growth incidence curve in Figure 2 adjusts for this – the growth rates are calculated for all individual country/deciles at the positions they held in the initial year (1988). The growth rate on the vertical axis (calculated from a non-parametric fit) thus shows how the country/deciles that were poor, middle-class, rich, etc. in 1988 performed over the next 20 years. The supine S shape still remains, although it is now slightly less dramatic.
People around the median almost doubled their real incomes. Not surprisingly, 9 out of 10 such ‘winners’ were from the ‘resurgent Asia’. For example, a person around the middle of the Chinese urban income distribution saw his or her 1988 real income multiplied by a factor of almost 3; someone in the middle of the Indonesian or Thai income distribution by a factor of 2, Indian by a factor of 1.4, etc.
It is perhaps less expected that people who gained the least were almost entirely from the ‘mature economies’ – OECD members that include also a number of former communist countries. But even when the latter are excluded, the overwhelming majority in that group of ‘losers’ are from the ‘old, conventional’ rich world. But not just anyone from the rich world. Rather, the ‘losers’ were predominantly the people who in their countries belong to the lower halves of national income distributions. Those around the median of the German income distribution have gained only 7% in real terms over 20 years; those in the US, 26%. Those in Japan lost out in real terms.
The particular supine S-shaped growth incidence curve (Figure 1) does not allow us to immediately tell whether global inequality might have gone up or down because the gains around the median (which tend to reduce inequality) may be offset by the gains of the global top 1% (which tend to increase inequality). On balance, however, it turns out that the first element dominates, and that global inequality – as measured by most conventional indicators – went down. The global Gini coefficient fell by almost 2 Gini points (from 72.2 to 70.5) during the past 20 years of globalisation. Was it then all for the better?
Probably yes, but not so simply. The striking association of large gains around the median of the global income distribution – received mostly by the Asian populations – and the stagnation of incomes among the poor or lower middle classes in rich countries, naturally opens the question of whether the two are associated. Does the growth of China and India take place on the back of the middle class in rich countries? There are many studies that, for particular types of workers, discuss the substitutability between rich countries’ low-skilled labour and Asian labour embodied in traded goods and services or outsourcing. Global income data do not allow us to establish or reject the causality. But they are quite suggestive that the two phenomena may be related.
A dramatic way to see the change brought by globalisation is to compare the evolution over time of the 2nd US income decile with (say) the Chinese urban 8th decile (Figure 3). Indeed we are comparing relatively poor people in the US with relatively rich people in China, but given the income differences between the two countries, and that the two groups may be thought to be in some kind of global competition, the comparison makes sense. Here we extend the analysis to 2011, using more recent and preliminary data. While the real income of the US 2nd decile has increased by some 20% in a quarter century, the income of China’s 8th decile has been multiplied by a factor of 6.5. The absolute income gap, still significant five years ago, before the onset of the Great Recession, has narrowed substantially.
Political Implications
And even if the causality cannot be established because of many technical difficulties and an inability to define credible counterfactuals, the association between the two cannot pass unnoticed. What, then, are its implications? First, will the bottom incomes of the rich countries continue to stagnate as the rest of China, or later Indonesia, Nigeria, India, etc. follow the upward movement of Chinese workers through the ranks of the global income distribution? Does this imply that the developments that are indeed profoundly positive from the global point of view may prove to be destabilising for individual rich countries?
Second, if we take a simplistic, but effective, view that democracy is correlated with a large and vibrant middle class, its continued hollowing-out in the rich world would, combined with growth of incomes at the top, imply a movement away from democracy and towards forms of plutocracy. Could then the developing countries, with their rising middle classes, become more democratic and the US, with its shrinking middle class, less?
Third, and probably the most difficult: What would such movements, if they continue for a couple of decades, imply for global stability? The formation of a global middle class, or the already perceptible ‘homogenisation’ of the global top 1%, regardless of their nationality, may be both deemed good for world stability and interdependency, and socially bad for individual countries as the rich get ‘delinked’ from their fellow citizens.
Conclusion
In a nutshell, the movements that we witness do not only lead to an economic rebalancing of the East and West – in which both may end up with global output shares close to what they had before the Industrial Revolution – but to a contradiction between the current world order, where political power is concentrated at the level of the nation-state, and the economic forces of globalization which have gone far beyond it.
References
Anand, Sudhir and Paul Segal (2008), “What Do We Know about Global Income Inequality?”, Journal of Economic Literature, 46(1): 57–94.
Lakner, Christoph and Branko Milanovic (2013), “Global income distribution: from the fall of the Berlin Wall to the Great Recession”, World Bank Working Paper No. 6719, December.
The Uneven and Combined Emergence of “Capitalism with Chinese Characteristics”
The People’s Republic of China’s (henceforth named China) development over the past decades has been nothing short of extraordinary. While undergoing constant transformation and recording the world’s second highest GDP ($) in 2017[1], the socialist past appears a distant memory. Put bluntly, since the start of economic reform in 1978, China is booming with a “unique blend of planned economy and unbridled capitalism”.[2] Meisner even contends that the self-proclaimed Chinese Communist Party (CCP) has evolved to become the guardian of Chinese capitalism.[3] At a glance this may appear as a paradox, due to the apparent zero sum game between communism and capitalism that has been continuously perpetuated by the rhetoric of the Cold War.[4] Conversely, this essay will argue that the emergence of specific ‘Chinese characteristics’ within the country’s manifestation of capitalism, can be understood as an outcome of uneven and combined development (U&CD). Through applying Trotsky’s framework of U&CD to China’s development since 1978, the aim is to show that the Chinese economy is not paradoxical in itself, but rather possesses distinct features which materialized as an amalgamation of pre-existing internal socio-political structures and international influences of Western capitalism. The argument will be structured in the following manner. Firstly, an outline is provided of the advantages that are adherent to the theory of U&CD in explaining the particular elements of Chinese capitalism, followed by a section on the important impact of socialist policies on the peasantry under Mao. Next, the essay shifts focus to Trotsky’s theory of U&CD before applying it to the nexus of 1978. Finally, the argument will be sharpened through detailing some of the precise combinations in the context of labor relations and enterprise management that have resulted from the interaction of China with the global capitalist economy. In sum, this essay will show that conceptualizing China’s economic development through the lens of U&CD allows for a specific understanding of the peculiarities in China’s socio-economic spectrum and ultimately elucidates the allegedly paradoxical synthesis of a self-proclaimed communist party adopting a capitalist mode of production for economic gain.
Challenges in Conceptualizing China’s Development
The rather vague nature of the term ‘capitalism with Chinese characteristics’[5] illustrates the difficulty to conceptualize China’s economic development. The extensive reforms throughout previous decades were far from universal in their implementation and thus, some sectors such as Chinese industry were thoroughly reformed, while privatization of land is still largely impossible.[6] Here, we find both bold restructuring as well as rigid attachment to Maoist policy.[7] Huang uses the terminology ‘capitalism with Chinese characteristics’ to refer to a “factual observation of China’s economic and institutional processes”[8]. His work is a detailed analysis of the elements that constitute the special Chinese characteristics. But as Huang himself implies, his work is an analysis aimed at determining the extent to which China is capitalist.[9] While the insight he develops in his work is very valuable, this paper argues that it largely neglects the dynamics of interaction between domestic and international factors in the shaping of specific particularities within Chinese capitalism. Importantly however, an understanding of the international as a performative element and thus as constitutive of development itself, is essential to any notion of developmental processes.[10] Therefore, in order to investigate the origins of distinctive Chinese characteristics, a different approach is required, which factors in the influence of external forces in the developmental process. This endeavor will be undertaken in the last substantive part of this essay.
Maoist Origins of a Strong Peasantry
Before engaging with the capitalist transformation and the economic reforms after 1978, this section will take a closer look at Maoism and identify special features that laid the basis for later rapid capitalist reform. What was perhaps the most distinguishing trait of Maoism as opposed to Stalinist ideology in the Soviet Union, was Mao’s focus on the peasantry’s revolutionary agency.[11] With the absence of a revolutionary proletarian urban working class, following the effective deindustrialization of the coastal regions by the Japanese invasion, Mao famously declared that the Chinese socialist revolution would be “carried from country to town”[12]. In addition, the Chinese Civil War was fought before the revolution and thus, the latter appears as the conclusion of the former and the initial improvements for peasants could be framed as the success of the CCP.[13] Isaac Deutscher further details that during the 1950s, the state commenced an investment policy, aimed at improving the life-expectancy and literacy of the rural communes.[14] An example is the healthcare available to peasants that was offered under Mao, to counterweigh the rigid constraints on rural-urban migration that will be discussed later.[15] One of the resulting initiatives was the ‘barefoot doctors’ programme, which involved the training of health workers to meet the medical requirements of the peasants.[16] Despite challenging circumstances, the programme was widely considered successful in increasing the prompt availability of cheap healthcare and was acknowledged by the WTO for its positive impact on health levels in rural areas.[17] Overall, the improvements in literacy and healthcare under Mao were unquestionably significant and gave China a distinctive position among in comparison to other developing states.[18] What is important to note is that the high health standards posed a critical factor in the immediate availability of the peasants to take on low wage labour, which in turn was a primary reason for the pull that China exerted on foreign industry to invest so quickly, following the reforms of 1978.[19] In short, the origins of China’s ability to instantaneously sustain an ‘army’ of surplus labour can at least partly be traced back to the influence of socialist policies on the peasantry.[20]
The Framework of Uneven & Combined Development
As we have now arrived at the period within which this paper aims to apply the framework of a Trotskyist dynamic of development, a brief introduction to the theory of U&CD is paramount. Leon Trotsky was grappling with a crucial issue when he formulated the basic premises of his theory. Societal development in Russia was drastically diverging from the path that was predicted by Karl Marx and despite the absence of an established bourgeoisie; revolutionary currents in Russia were extremely powerful compared to England, where Marx had anticipated the initial proletarian revolution.[21] On the basis of this observation, Trotsky established two fundamental features of human development. The first of the two is unevenness, which he identifies as the “most general law of the historic process”.[22] Specifically, Trotsky argues that there is an inherent unevenness in development among the various social entities that constitute the world.[23] Secondly, the core dynamic of all human development is the interaction among these uneven formations, which produces particular dialectical developmental trajectories and is therefore a combined form of development and thus, the “key driver of historical development”[24]. Crucially though, combination is not mere repetition by one society of another societies development.[25] Rather, it is the result of an amalgamation of a society’s internal characteristics with external geopolitical pressures and social forces. Moreover, there are two key features that are integral to this procedure. Firstly, Trotsky identified the “privilege of historic backwardness”[26]. In this, he refers to the possibility for a society to skip specific developmental processes by adopting and further enhancing certain features from more ‘advanced’ societies through the aforementioned interaction, thereby accelerating their development.[27] The second factor refers to the social and geopolitical pressure that a more ‘advanced’ society exerts on others through their respective interaction. In turn, this compels a society to accelerate development under said pressure, hence Trotsky labelling this as the “whip of external necessity”[28].
The Conjuncture of 1978
Let us now locate the existing unevenness between China and the so-called advanced capitalist countries (ACCs) of the global economy at the conjuncture of 1978, out of which the powerful ‘whip of external necessity’ arose. Mao’s initial improvements for the rural peasantry that were discussed earlier, quickly faded and the burden of growing international isolation, a devastating famine and the atrocities committed during the totalitarian ‘Cultural Revolution’ became increasingly visible and took their gruesome toll on the Chinese people and the country’s socio-economic structure.[29] Despite the clear focus on heavy industry under Mao,[30] China’s workforce was comprised of about 70% agrarian labor.[31] However, total productivity stagnated and the agricultural output was relatively low, which further aggravated the concern for food security.[32] What added to the urgency of the Chinese situation was the rapid economic development by the so-called East Asian Tigers, all situated in direct proximity to China, thus generating geopolitical pressure as it became clear that China’s economic development was diverging from that of its industrializing neighbors.[33] This also prompted the leadership to acknowledge the necessity of economic reform, which was launched to overcome economic stagnation.[34] There was an explicit sense of importance attached to economic reform among China’s developmental planners, in the sense that “a big effort to catch up [was necessary to] move to the front ranks of the world”.[35] What fostered this visible unevenness and thus the ‘whip of external necessity’ between China and the capitalist countries of the global economy was the fact that at this very same point in time, global markets were at an unprecedented level of openness.[36] Consequentially, disregarding reform, especially in conjuncture with the ‘neoliberal turn’ of the global economy was equated with political and economic decay.[37] Having situated China in an international context, the following section will show how the ‘Chinese characteristics’ of capitalism originated in the process of combined development.
Identifying the Particularities of Chinese Capitalism through U&CD
Davidson argues that China started to experience U&CD most drastically after its incorporation into the global economy in 1978.[38] The analysis by Dunford and Weidong already applies the theory of U&CD to the historical development of China.[39] Yet, this is conducted in a different manner. Rather than searching for specific combinations within China’s economy, their study takes a broader approach and situates China in a wider context of international unevenness. In contrast, the subsequent analysis aims to provide a more specific account of how the internal and external currents formed distinct fusions in China’s economy. Subsequently, this part will examine some specific results of Chinese capitalist development, following the reforms that were initiated by Deng Xiaoping in 1978. Having previously established the existing unevenness between the largely agrarian Chinese economy and the so-called ACCs or the surrounding East Asian Tigers, now the aim is to illustrate the peculiarities within Chinese capitalism that emerged as a result of the interaction between internal factors particular to China and external influences of a westernised market; thereby merging into a combined form of development, aligning with the principles of unevenness and combination of U&CD.
Impact of Hukou and Danwei
The first analysis will focus on labour relations with a specific emphasis on the influence of hukou, (the household registration system), as well as the danwei, (traditional urban working units), on the structure of Chinese wage labour. Both the household registration system and the danwei were institutions that were developed as Maoist policy in the 1950s.[40] However, the following section will outline how both customs still remain an important factor in Chinese capitalism and therefore illustrate its combined nature.
The danwei was a publicly owned unit, integral to urban employment because it served as a lifetime employer, provided housing within the compound and was linked to the distribution of benefits, thus being labelled the “provider of iron rice bowls”[41]. Yet, these values are mostly incompatible with those of a market economy, which was introduced through China’s increased adoption of capitalist relations of production after 1978.[42] As a result, economic reform and the increasing influence of global capitalism have fundamentally altered the makeup of Chinese employment and have effectively ended customs such as lifetime employment or the comprehensive multitude of benefits that previously characterised the danwei.[43] Nevertheless, Xie et al. argue that the danwei continue to be influential.[44] This is apparent through their positive impact on workers’ wellbeing, especially in terms of equal earnings.[45] Given that some of China’s privately owned companies have adopted structures similar to those of the danwei,[46] it is plausible to argue that what remains of the danwei, following the marketization of social services, is still a powerful factor in the alignment of the class structure within China’s urban working class. Importantly however, the impact of the danwei is reliant on low labour mobility and thereby directly linked to the hukou system.[47]
Through the use of a hukou, the second unique trait within Chinese labour relations, the state effectively controls where people work or live and is thereby able to monitor and restrict rural-urban migration.[48] Set up under Mao for exactly this purpose, migration control still remains the central feature of today’s hukou system, despite having undergone liberalisation and restructuring during the period of reform.[49] The system encapsulates the administrative power of the state, as the firm restrictions on transferring permanent residence persist.[50] In addition, the results of market reform have led to the commodification of the urban ‘blue stamp’ hukou, which remains under state control but can now be purchased, thus essentially turning the right to move into a market good.[51] Although the possibility of a temporary residence was introduced by the aforementioned capitalist reforms, any commodified mobility within this system privileges workers with the appropriate financial means or desired qualifications.[52] In fact, the Chinese government is seen to favour temporary migration, as this has a lesser impact on the overall social makeup of cities and in addition reduces the necessary infrastructure requirements for workers.[53] What makes the hukou system such a distinct feature of Chinese capitalism is that it upholds a low wage labour force consisting of migrant workers, who are unable to go the route of formal migration and are compelled to take on jobs in precarious conditions.[54] The difficulty of the official transfer of residence and work rights, combined with diminishing prospects for agricultural employment has resulted in the “largest migration in world history” of peasants into the cities.[55] Thus, what emerges as a product of the remaining hukou system, as well as the economic reforms that attempt to create a capitalist labour market, is a vast number of urban migrant workers without residential rights, often referred to as the “floating population”[56]. This practically indefinite resource of labour made extremely low cost manufacturing on such an unprecedented scale possible.[57] Here, we can clearly observe the element of combined development. On the one hand, we find the introduction of a capitalist mode of production based upon large scale low wage labour, influenced by economic reform and interaction with ‘advanced’ capitalist economies. On the other hand, the hukou system eliminates the most fundamental characteristic of capitalism in itself, namely the “personal independence”[58] of the worker, who, through the hukou system is subject to political subordination, regarding their independence to choose where to work or live. What is more, the control exercised by the state extends much further into personal lives through the repressive measures of censorship and surveillance[59], thereby “disciplining the workforce and keeping social conflicts within bounds”.[60] A recent proposal by the Chinese government exemplifies this approach. Newly planned legislation would require all drivers of the taxi service Didi Chuxing to acquire urban residency permits.[61] In general, many of China’s internet titans such as Ali Baba rely on migrant workers to absorb the demand for low wage labour[62], yet the deliberate obstacle of the hukou system pushes migrant workers further into perilous conditions through essentially limiting workers’ freedom of movement within capitalist labour relations.
Organisational Structure of Enterprises
Chinese enterprises have undergone large reforms and restructuring, mainly aimed at increased privatization.[63] However, the most profitable state-owned enterprises (SOEs) remained under state control.[64] Nevertheless, the privatization of state-owned companies is not necessarily anything unique to China. What is more interesting in this case in the shift of organizational structure in Chinese companies, which will be demonstrated in the following. As we will see shortly, Western education of Chinese management has had an impact on the organizational structure of Chinese enterprises and thereby constitutes another example of combined development. The starting point to this process is the aftermath of the Cultural Revolution, which left China with a significant lack of trained Chinese mangers and staff to facilitate the technology transfer from the West and Japan that accompanied the open door policy of China toward the global economy.[65] Accordingly, especially during the 1990s, managers of SOEs were encouraged to complete Western-style management degrees and frequently visit companies in the West.[66] In their study, Ralston et al. trace the development of organizational structures in SOEs both before and after economic reform. They claim that prior to reforms, SOEs are generally best characterised by a ‘clan’ and ‘hierarchy’ culture, which implies a workplace environment similar to a family, with superiors acting as mentors and a high regard of loyalty trust and tradition, while upholding strong hierarchical structures.[67] However, they also trace a substantial shift in their comparison and argue that the integration into the word economy has led SOEs to embrace a more ‘market’ oriented organizational structure based on the aim to maximize productivity and profits.[68] Importantly however, a majority respondents still selected ‘clan’ culture as the most prominent type, with ‘market’ in second place.[69] Thus, rather than a complete restructuring of enterprise organization, there has been a particular convergence between pre and post reform management styles, which is likely to have been caused by the influence of Western training of Chinese management.[70] Another aspect of this are the vast numbers of Chinese students, who study abroad either in high school and later on at a university. By 2015, over four million Chinese students have studied abroad since 1978.[71] What makes this number even more impactful is the fact that the share of students returning from abroad with graduate degrees is continuously rising, amounting to 79% in the year 2016.[72]
Overall, the examples above illustrate the existing combinations in the Chinese socio-economic landscape. While the marketization of labour power was borrowed from Western capitalism[73], both the hukou and the danwei are notable Chinese characteristics that have undergone reform but remain influential and thereby shape today’s Chinese labour market into an amalgam of internal and external influences. Similarly, the new forms of SOE management also signify a form of combined development, which surfaces through the interaction of a previously dominant ‘clan’ enterprise organisation and Western management education. These examples show that far from posing a paradox, the peculiarities of Chinese development emerged as a result of the process of uneven and combined development.
Conclusion
Before drawing the final conclusion, let us briefly consider a crucial point. This essay has set out to understand the specific impact of U&CD on China. Despite not being the focus of this essay, it is important to keep in mind that by default, the same interaction between China and the global economy has also caused combined forms of development in the latter. In conclusion, this essay has presented the argument that the theory of U&CD provides an effective way to conceptualize the particular outcomes of Chinese economic development. Further, through applying U&CD we can resolve what first appears as a paradox – capitalist development under a self-titled communist regime. This is possible through examining the specific forms of combined development that are a manifestation of the interaction between China and the capitalist world economy, driven by the ‘whip of external necessity’ that was exerted on China in 1978. This was exemplified in this essay through the examples of the impact of the hukou and danwei on capitalist labour relations, as well as the impact of Western education and market integration on Chinese SOE management structures. In sum, we can derive from this analysis that an understanding of ‘capitalism with Chinese characteristics’ requires a thorough examination into the internal and external forces that initially led to their development.
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Notes
[1] IMF – World Economic Outlook Database 2018
[2] Lorenz, A.; Wagner, W. (2007). ‘Red China, Inc. – Does Communism Work After All?’. In: Der Spiegel.
[3] Meisner, M. (1996). ‘The Deng Xiaoping Era – An Inquiry into the Fate of Chinese Socialism, 1978-1994’. Toronto: HarperCollins Canada Ltd, p. xii.
[4] Cohen, M. A. (2012). ‘Argentina’s Economic Growth and Recovery: The Economy in a Time of Default’. New York: Routledge, p. xvii.
[5] Huang, Y. (2008). ‘Capitalism with Chinese characteristics: Entrepreneurship and the State’. New York: Cambridge University Press.
[6] Oi, J. C. (1999). ’Two Decades of Rural Reform in China: An Overview and Assessment’. In: The China Quarterly, No. 159, Special Issue: The People’s Republic of China after 50 Years, p. 627.
[7] Ibid.
[8] Huang, Y. (2008), p. xviii.
[9] Ibid., p. 8.
[10] Rosenberg, J., (2016). ‘Uneven and Combined Development: ‘The International’ in Theory and History’. Chapter 2 in: Anievas, A. & Matin, K. (eds.), Historical Sociology and World History: Uneven and Combined Development over the Longue Durée. London: Rowman & Littlefield International, pp. 18-19.
[11] Meisner, M. (1996), p. 18.
[12] Deutscher, I. (1984). ‘Marxism, Wars and Revolutions’. London: Verso, p. 195.
[13] Ibid., pp. 205-06.
[14] Hung, H. (2013). ‘Labor Politics under Three Stages of Chinese Capitalism’. In: The South Atlantic Quarterly, Vol. 112(1), p. 205.
[15] Hung, H. (2016) ‘The China Boom: Why China will not rule the world’. New York: Columbia University Press, p. 47.
[16] Zhang, D.; Unschuld, P. (2008). ‘China’s barefoot doctor: past, present, and future’. In: The Lancet, Vol. 372, p. 1865.
[17] Ibid., pp. 1865-66.
[18] Meisner, M. (1996), p. 194.
[19] Hung, H. (2016), p. 48.
[20] Boyle, C.; Rosenberg, J. (2018). ‘Explaining 2016: Brexit and Trump in the History of Uneven and Combined Development’. (Unpublished Manuscript, University of Sussex), p.11.
[21] Rosenberg, J., (2016), pp. 21-22.
[22] Trotsky, L. [1932(2007)]. ‘History of the Russian Revolution’. Chicago: Haymarket Books, p. 5.
[23] Rosenberg, J., (2016), p. 17.
[24] Ibid.
[25] Trotsky, L. [1932(2007)], p. 4.
[26] Ibid.
[27] Rosenberg, J. (2013). `Kenneth Waltz and Leon Trotsky: Anarchy in the mirror of uneven and combined development’, In: International Politics Vol. 50(2), p.196.
[28] Trotsky, L. [1932(2007)], p. 5.
[29] Fan, C. (1995). ‘Of Belts and Ladders: State Policy and Uneven Regional Development in Post-Mao China’. In: Annals of the Association of American Geographers, Vol. 85(3), p. 422.
[30] Meisner, M. (1996), p. 199.
[31] Lin, J. (2011). ‘The comparative advantage-defying, catching-up strategy and the traditional economic system’. Chapter 4 in: Demystifying the Chinese Economy. Cambridge: Cambridge University Press, p. 102.
[32] Meisner, M. (1996), p. 201.
[33] Boyle, C.; Rosenberg, J. (2018), p. 12.
[34] Hung, H. (2013), p. 205.
[35] Kerr, D. (2007). ‘Has China abandoned self-reliance?’ In: Review of International Political Economy, Vol. 14(1), p. 83.
[36] Boyle, C.; Rosenberg, J. (2018), p. 8.
[37] Knight, J.; Song, L. (2005). ‘Labour Policy and Progress: Overview’. Chapter 2 in: Towards a Labour Market in China. Oxford Scholarship, p. 20.
[38] Davidson, N. (2017). ‘Uneven and Combined Development: Modernity, Modernism, Revolution’, p. 82.
[39] Dunford, M.; Weidong, L. (2017). ‘A Century of Uneven and Combined Development: The Erosion of United States Hegemony and The Rise of China’. In: Вестник Мгимо-Университета, Vol. 5(56), pp. 7-32.
[40] For Hukou see: Chan, K.; Zhang, L. (1999). ‘The Hukou System and Rural-Urban Migration in China: Processes and Changes’. In: The China Quarterly, Vol. 160, p. 819. For Danwei see: Xie, Y. et al. (2009). ‘Danwei and Social Inequality in Contemporary Urban China’. In: Res Social Work, Vol. 1(19), p. 283.
[41] Knight, J.; Song, L. (2005), pp. 26-27.
[42] Ibid., p. 41.
[43] Ibid.
[44] Xie, Y. et al. (2009), p. 283.
[45] Ibid., p. 294.
[46] Ibid., p. 286.
[47] Ibid., p. 294.
[48] Chan, K.; Zhang, L. (1999), p. 830.
[49] Wang, F. (2004). ‘Reformed Migration Control and New Targeted People: China’s Hukou System in the 2000s’. In: The China Quarterly, Vol. 177, p. 116.
[50] Knight, J.; Song, L. (2005), p. 25.
[51] Chan, K.; Zhang, L. (1999), p. 839.
[52] Wang, F. (2004), p. 129.
[53] Knight, J.; Song, L. (2005), p. 22.
[54] Walker, R.; Buck, D. (2007). ‘The Chinese Road: Cities in the Transition to Capitalism’. In: New Left Review, Vol. 46, p. 44.
[55] Davidson, N. (2017), p. 85.
[56] Chan, K.; Zhang, L. (1999), p. 831.
[57] Hung, H. (2013), p. 209.
[58] Marx, K., quoted in Rosenberg, J. (1994). ‘The Empire of Civil Society’. London: Verso, 144.
[59] Hung, H. (2013), p. 204.
[60] Meisner, M. (1996), p. 523.
[61] Clover, C.; Sherry, J. (2016). ‘Didi Chuxing to be hit by rules on migrant drivers’. In: Financial Times.
[62] Ibid.
[63] Walker, R.; Buck, D. (2007), p. 55.
[64] Oi, J. C. (1999), p. 625.
[65] Warner, M. (1987). ‘China’s Managerial Training Revolution’. Chapter 5 in: Management Reforms in China, Warner, M. (ed). London: Frances Pinter, p. 73.
[66] Ralston, D., et al. (2006). ‘Today’s State-Owned Enterprises of China: Are They Dying Dinosaurs or Dynamic Dynamos?’. In: Strategic Management Journal, Vol. 27, p. 833.
[67] Ibid., p. 831-32.
[68] Ibid., p. 839.
[69] Ibid., p. 838.
[70] Ibid., p. 838-39.
[71] Boyle, C.; Rosenberg, J. (2018), p. 14.
[72] ICEF: Increasing Numbers of Chinese Graduates Returning Home
[73] Meisner, M. (1996), p. 493.
Varieties of Capitalism and Rethinking the East Asian Model
In their work on varieties of capitalism (VoC), Soskice and Hall (2001) identified several types of capitalism, such as liberal market economies (LMEs), coordinated market economies (CMEs), and mixed market economies (MMEs). They argue that each type of capitalism is stable and efficient in terms of its economic performance, owing to complementarity among its institutional components. However, Lee and Shin (2018) show that each type corresponds to different economic outcomes in terms of economic growth, unemployment, and equity. They also observe that the change of a country from one type to another has led to the existence of convergence and divergence among countries.
A similar contrast was also made in Acemoglu et al. (2012), when they considered the US model of capitalism and the Western European model as “cutthroat” capitalism versus “cuddly” capitalism, respectively. Cutthroat capitalism is good for innovation but generates inequality, whereas cuddly capitalism is better at redistributing income and protecting employment and health, but worse at producing frontier innovation. Aghion et al (2020) try to compare the US and Western European models again in terms of how they are dealing with and responding to the Covid-19 crisis.
This paper focuses on East Asian economies led by Japan, followed by the Asian Tigers, namely, Korea and Taiwan, to discuss the evolution of their performance and changes in type over time, from the VoC perspective. First, I discuss the interesting puzzle of the emerging convergence of Japan and Korea toward the LMEs or Anglo–Saxon economy, despite the apparent differences in underlying institutions: labour market, corporate governance, and welfare systems. Then, I identify the financialisation of an economy as a force that drives this convergence, signalled by decreasing economic growth rates and rising inequality in East Asia. Finally, I re-evaluate Asian economies in the context of the coronavirus disease in 2019, the ‘Covid-19 pandemic’, which has suddenly halted globalisation and further questioned the superiority of shareholder capitalism, mostly adopted in LMEs and associated with financialisation and globalisation.
I argue that a new balance is needed between shareholder and the stakeholder capitalism in East Asia. I also discuss the implications of the retreat of globalisation for East Asia and other emerging economies in general, in terms of the “globalization paradox” proposed by Rodrik (2011). I argue that the retreat of globalisation is a good opportunity to resolve the paradox or the ‘trilemma’ by restoring autonomy in domestic economic policymaking over interest rates and exchange rates, while imposing some adjustments on formerly excessive capital mobility. These changes in policy stance are required to build a crisis-resilient macro-financial system, given the brewing of the post-pandemic bubble and the increasing mismatch between real and financial sectors around the world.
Varieties of Capitalism, Financialisation, and the End of East Asian Capitalism
Soskice and Hall (2001) have provided an important way to understand and compare economic systems around the world. They focus on how firms enter into a relationship with other actors, such as workers, suppliers, business associations, governments, and other stakeholders. According to Soskice and Hall (2001), an economy is classified as an LME when firms use market institutions, such as competition and formal contracts, to coordinate a relationship. Alternately, an economy is classified as a CME when firms use a non-market relationship, such as strategic interaction among actors, as a form of coordination. Accordingly, they classify the US, the UK, Australia, Canada, New Zealand, and Ireland as LMEs; Germany, Japan, Switzerland, the Netherlands, Belgium, Sweden, Norway, Denmark, Finland, and Austria as CMEs; and France, Italy, Spain, Portugal, Greece, and Turkey as countries with an ambiguous position as MMEs. These classifications are similar to the existing conventional classification, that is, most LMEs are UK or US-offspring countries, whereas CMEs comprise mostly Continental and Northern European countries.
I aim to understand East Asian economies, especially Japan and the Asian Tigers, namely, Korea, Taiwan, given their spectacular achievements in terms of growth and equity. Their economies tended to feature high growth and low inequality during their peak growth, which has earned them the label of East Asian miracles by the World Bank (1993). Kalinowski (2015) shows that East Asian capitalism remains a distinct state-led model that differed from the liberal, neo-corporatist, or welfare state capitalism in the West in terms of its reaction to the global economic crisis in 2008 by using big fiscal stimulus packages. This difference may be associated with a path-dependent transformation of the East Asian developmental state (Kim and Thurbon 2015; Thurbon 2016).
However, these economies have recently been going through radical changes as they record slow growth and rising inequality. The new situations lead to questions on whether we are facing the end of East Asian capitalism (characterised by high growth and low inequality) and convergence toward the LME (characterised by low growth and high inequality). Lee and Shin (2018) confirm this hypothesis by using a quantitative (cluster) analysis. This is different from the VoC literature, which tends to use the variables representing the underlying institutional characteristics of economies. Lee and Shin (2018) use outcome variables to compare economic performance, including the growth rate of GDP per capita, employment rate, and top 10% income share.
As shown in Table 1, a statistical analysis by Lee and Shin (2018) indicate that the LME group is associated with slow growth, high inequality, and a medium level of employment, whereas the CME group has modest growth, low inequality, and sound employment rates. Between these two groups is the MME group, with the lowest rates of employment, which probably reflect labour market rigidity. The East Asian group exhibits the highest growth and lowest inequality but only before the 2000s. In the 2000s and after, Japan and Korea joined the LME group and Taiwan joined the CME group, leaving the former East Asian group empty. Their choices may imply the end of East Asian capitalism. These results are not that surprising because the top 10% share of the national income is currently the highest in the US, at over 45%, followed closely by Korea, reaching 45% in 2010, and Japan with 40% (Lee and Shin 2018). Korea and Japan have experienced disruption, or crisis, such as the bubble and burst of the 1990s in Japan and the 1997 financial crisis in Korea, that led to a liberal and open economy (Shin and Lee 2018; Lee et al. 2020). During the crisis, Korea implemented IMF policy prescriptions in exchange for a bailout loan (Lee et al. 2002). Japan has also experienced a similar change since the burst of its economic bubble in the late 1990s. In particular, the Koizumi administration implemented liberalization policies, such as privatization and deregulation, from 2001.
Table 1: Four types of capitalism and their economic outcomes
Many institutions in Japan and Korea have evolved similarly to those in the US. First, the financial market is liberalised to allow more foreign shares of stocks and to strengthen shareholder capitalism. Second, the labour market is liberalised to promote labour flexibility and weaken the long-term employment system. Consequently, the share of part-time or irregular workers to the total employment rate has rapidly increased in Japan and Korea (Shin and Lee 2018; Lee et al. 2020). In the meantime, the divergence between Korea and Taiwan seems to be driven by the top 10% income share; the top 10% income share has increased gradually in Taiwan but at much slower rates than in South Korea since the late 1990s. This difference in the evolution of inequality between these two economies may be caused by various shocks from the Asian financial crisis, which strongly affected the South Korean economy, but minimally affected the Taiwanese economy, which avoided the crisis (Lee et al. 2020).
The above discussion presents the foundation to argue for the convergence of East Asian capitalism toward Anglo–Saxon capitalism. However, the question remains as to how this convergence can happen despite the continuing differences in underlying institutions, such as labour, financial systems, firm ownership, and governance. For instance, despite some trends toward flexibility, the labour markets in Korea and Japan are still less flexible than those in the US or the UK. Moreover, the nature of firm ownership and government in Asia is also quite different from that in the US or the UK, where ownership is quite dispersed over a large number of individual investors. Consequently, the forces that push these economies toward the LME group in terms of slow growth and high inequality remain unknown. The strong candidate variable must be the tendency for financialisation (Lee et al. 2020).
An increasing volume of literature has focused on the negative aspect of financialisation coupled with shareholder capitalism, which forces firms to pay high dividends to shareholders rather than use profits for reinvestment, which leads to slow growth (Dore et al. 1999; Lazonick 2010, 2014). The growing dominance of financial sectors is related to rising income inequality in developed countries (Alvarez 2015; Godechot 2012; Hacker and Pierson 2010; Kus 2012; Lin and Tomaskovic-Devey 2013; Stockhammer 2013; Tomaskovic-Devey et al. 2015). In the Korean context, Kim and Cho (2008) confirm that firms with high shares of equity owned by foreign shareholders tend to be associated with low investment because they are subject to demands by shareholders for more dividends. In many economies, including the US and Korea, capital markets no longer function as sources of additional funding for listed companies, but rather as a channel for value extraction in the form of stock repurchases and dividends (Lazonick and Shin 2019).[1] Lee et al. (2020) confirm this tendency for value extraction, which is that more money has flowed out of, rather than into, Korean listed firms since 2003, although such firms previously enjoyed a net positive inflow of money.
The macro-level consequences of this situation are the decreasing of fixed capital investment as a share of GDP and the increasing outflow of capital (in the form of repatriated profits and interest payments) in balance-of-payment figures.[2] In other words, the rise of shareholder capitalism, which prioritizes distributing profits as dividends to shareholders rather than funding reinvestment, seems to be slowing down investment, which in turn slows down economic growth rates. This symptom, associated with financialisation, is also a source of increasing income inequality, in addition to effects of skill-biased technological changes, including automation. Shin and Lee (2019) show that increased shares of stockholders in profits or financial resources of non-financial sectors have led to rising inequality, measured by the top 10% income share in OECD countries, whereas the influence of skill-biased technological change (which is perceived to lead to more inequality among labour-based incomes) is not a robust enough variable to explain inequality.
Financial globalisation is argued to cause rising inequality. Stockhammer (2013) finds that financial globalisation, measured by the log of external financial assets and liabilities divided by GDP, is significantly and negatively correlated with labour income share by using country-level data. Distinguishing financialisation and ‘financial development’, meaning ‘better functioning of financial markets’, Lee and Shin (2019) find no support for the argument that financial development, such as the high ratio of stock market valuation to GDP, reduces inequality by relaxing the credit constraints of the poor and see no evidence that financial development aggravates inequality. A simple focus on financial development or high education is not sufficient to reduce inequality (Lee and Shin 2019). Thus, government policies or reform measures, including differentiated taxation on dividends and reinvestments, are necessary to curve financialisation by inducing non-financial firms to focus on productive reinvestment from profits and by discouraging high dividends for shareholders.
Covid-19 and the Rebalance between Shareholder and Stakeholder Capitalism
The Covid-19 pandemic has been a major shock to the world economy and its constituent economies, including the varieties of capitalist economies. A big blunt has been observed in the US, which has not recovered as quickly as Western European economies and Asian economies such as China, Korea, and Japan (Popov 2020). Western European economies have also revealed their weaknesses in their initial responses and thus suffered greatly. One of the common weaknesses of the Western world is its reliance on East Asia for the production of masks and other medical devices, including the test kits. Overall GVC (global production chains) have revealed weakness associated with too widespread a fragmentation over diverse countries. Thus, Covid-19 also signals the retreats of the Anglo–Saxon style shareholder capitalism that has driven globalisation or neoliberalism since the 1980s. Since the 1980s, the efficiency or profit maximisation forced by shareholders seeking short-term profit has resulted in a high degree of globalisation of production chains.
Lazonick (2010, 2014) points out that the US economy maintained manufacturing until the 1980s but the rise of shareholder capitalism and financialisation since then has forced US firms to relocate their factories abroad to meet the demands of shareholders and increase profitability. This change has turned the US economy into a service-oriented economy with the hollowing out of the manufacturing industry. Lee and Shin (2019; table 1) confirm that the LMEs as a group with more than two member economies was only observed in the mid-1980s, and the US joined Canada and the UK to form the LME group only during the late 1980s or the early 1990s. This emergence of the LMEs since the mid-1980s is consistent with neoliberalism being dominant only since the 1980s.
Shareholder capitalism is again being criticised after the Covid-19 pandemic outbreak. For example, Boeing was heavily criticised when the company asked for financial help from the public sector because it paid – before the pandemic outbreak – a huge amount of money to its shareholders (with its top five all PEFs) in the form of dividends and stock buybacks, rather than reserved profits for in-house reserves or reinvestment funds. Even before the pandemic crisis, the top firms and their business leaders declared their desire to reset capitalism toward more consideration for various stakeholders besides just shareholders. These changes have been signaled by a series of occasions, including the August 2019 ‘Statement on the Purpose of a Corporation’ by the top 181 business leaders in Washington DC in the US, which was immediately followed by the initiatives of the Financial Times under the heading of ‘Capitalism: Time for a reset’. These movements culminated in the January 2020 Davos Forum, which endorsed stakeholder capitalism as the vision for the future of capitalism.
The pandemic is the final blow to globalization, or over-fragmented GVC, after the two preceding blows of the 2008-09 global financial crisis (GFC) and the US-China trade war. The GFC was the first blow to financial globalization, followed by the setback against trade globalization of the US-China trade war. Finally, the pandemic outbreak signaled a major setback to production globalization. Just as the pandemic is considered a warning against human destruction of the environment, it is also a call to restore the vitality of the capitalist market economy by rebalancing against over-globalization and over-loaded shareholder capitalism. Shareholder capitalism and globalization have been pointed out in economics literature as the main sources of low growth and high inequality, as discussed in the preceding section.
While the Covid-19 crisis has indicated more advantages toward manufacturing-oriented economies than service-oriented economies, East Asian economies, such as Korea, are also suffering from slow growth and rising inequality that have been exacerbated since the pandemic. One aspect of the necessary reforms is the correction of the tendency of financialisation associated with shareholder capitalism, which includes a practice that provides equal rights to short- or long-term shareholders in terms of rights for voting and dividends. Measures that promote long-term holdings of stocks and thus enhance firm value are also needed to provide privileges to long-term shareholders, which is consistent with the idea of stakeholder capitalism.
The idea of stakeholder capitalism is that firms are to be run in the interests of a broad spectrum of stakeholders that include not only shareholders but also clients, managers, workers, and nearby communities, who are often holders of long-term, firm-specific interests and even stocks. Thus, providing the same voting and dividend rights to those who own stocks for only several years and weeks does not promote enhancement of the long-term value of firms, and it may lead to short-term profits or performance-seeking value.
East Asia may learn from the EU, which has initiated several reforms to curb the negative influence of shareholder capitalism. The EU Parliament passed a law in 2015 that changed its firms’ corporate governance (Stabilini 2015). The new law allows firms to provide more voting rights or more dividends to tenured or long-term shareholders who hold their stocks for more than two years. Following this law, the 2014 Florange Act has been implemented in France. Owing to this Act, many of the firms (or more than 54%) in the French stock market, including Electricite de France, Air Liquide, Credit Agricole, L’Oreal, Lafarge, and Group SEB, have opted to issue stocks that provide special favour to tenured stockholders. These new innovative practices are not possible under the current corporate law in Korea, which follows the idea of shareholder capitalism by sticking strictly to the rule of one share and one vote, regardless of holding period.
East Asian states, such as Korea, may learn from other countries and seriously consider changing their corporate law. Even the US allows its firms to issue dual-class stocks in the initial public offering in NASDAQ, which gives special favour in terms of voting power to the founders of the firms. Using this clause, the founders of many high-tech firms in the US may manage their firms from long-term perspectives and tend to be aggressive in trying innovative new projects. These dual-class stocks are all issued to US firms, including Facebook, Google, and Amazon (Zeiler 2014).
In sum, East Asian economies may take the Covid-19 crisis as an opportunity to turn their economies around by adopting measures that can curb the ongoing tendency of financialisation and restore the original strength of Asian capitalism, such as high growth and good equity. Instead of maintaining the old version of East Asian capitalism, they can also be reborn through hybrid capitalism, rebalancing elements from shareholder and the stakeholder capitalism with East Asian capitalism at its original core.
The Globalisation Paradox and a Crisis-Resilient Macro-Finance System: The Case of Korea
Globalisation has become stalled by a series of events, including the Covid-19 pandemic outbreak. The consequences of this change for emerging economies can be interpreted by the “globalization paradox” raised by Rodrik (2011). In his book, Rodrik (2011) proposes a trilemma that globalization, national sovereignty, and democracy cannot go together, and thus one can have only two out of the three. He argues that globalization tends to suppress either national sovereignty or democracy because it often tends to consider the interests of global businesses the top priority against the interests of the national government or workers. Under globalization, the national government is left with less room or tools for domestic economic policies, including interest rates and exchange rates. With globalization suddenly stalled after the pandemic and affected by the rising protectionism of the Trump government in the US, alternative economic systemic arrangements can be explored to provide autonomy in domestic economic policies for emerging countries. In particular, given the possibility of financial crises that may result from the mismatch between a quick financial recovery versus weak non-financial businesses, owing to the massive release of diverse kinds of emergency loans, subsidies, and the printing of money in some countries as an aftermath of the Covid-19 pandemic outbreak, emerging countries are advised to install a crisis-resilient macro-financial system in preparation for the coming burst of the financial bubble built over the pandemic period.
The globalization trilemma can be compared with the conventional trilemma (or the ‘impossible trinity’) in macroeconomics, such that free capital mobility, autonomous monetary policy (interest rates), and free-floating exchange rates cannot go together and at least one out of the three has to be sacrificed. Thus, advanced economies tend to choose the combination of free capital mobility and autonomous monetary policy. By contrast, some of the emerging economies, such as Korea before its OECD entry in 1993, tend to favour autonomous monetary and exchange rates as trades are extremely important for catch-up stages of economic development. This combination of a twin autonomy of interest rates and exchange rates is implemented well in many emerging economies at their catching-up growth stage, including China. By contrast, premature financial liberalization for free capital mobility has often resulted in a financial crisis, as shown by the Asian financial crisis in the late 1990s. Consequently, even the IMF has become cautious about suggesting full-scale financial liberalization and acknowledged the necessity of active management of the capital account (capital control) under certain conditions (Ostry et al. 2010).
The IMF, the World Bank, or the Washington Consensus (Williamson 1990) used to propose financial liberalization for emerging economies, implying that it would bring in more financial resources for an economy lacking domestic funds. However, more often than not, financial liberalisation is followed by financial crisis rather than steady economic growth, as observed in the 1997 Asian crisis involving Korea, Thailand, and Indonesia. While these economies had to ask for the emergency loans from the IMF, only Malaysia avoided this situation by imposing capital controls. Korea embraced the first wave of radical liberalization of capital accounts as a requirement to join the OECD – which is considered a club of rich countries – in the mid-1990s. The outbound financial liberalization had enabled chaebols (Korean big businesses) to borrow funds nominated in USD at much lower rates in the international market than in the domestic banks. The 1997 Asian financial crisis can be attributed to this “premature” or careless integration “into international financial markets, excessive short-term borrowing abroad with a maturity mismatch, and weak domestic financial sectors” (Nayyar 2019, p. 83).
The post-crisis reform package implemented in Korea is one of the most comprehensive and decisive set of reforms undertaken by any country following a major crisis (Lee 2016, p. 112). Numerous Korean institutions were forced to change or evolve, similarly to those in the US (Lee et al. 2002). For instance, the financial market was liberalized and most restrictions on foreigners’ domestic investments were lifted. Consequently, foreigners’ share of stocks in Korean firms increased rapidly from less than 3% in the mid-1990s to more than 40% in the 2000s, which strengthened shareholder capitalism. Jang-Sup Shin and Ha-Joon Chang (2003) argue that the IMF programme demanded Korea pay an extremely expensive price to follow a neoliberal or Anglo–Saxon model, which is not suitable for a country with newly achieved compressed development.
However, this comprehensive reform and another round of financial liberalization have not been effective in protecting Korea from the risk of another financial crisis in the aftermath of the 2008-09 GFC. During the onset of the GFC, hot money suddenly flew out of Korea to go back to the Wall Street because of a liquidity crisis at the heart of capitalism, and thus the Korean Won again suffered a huge and sudden depreciation (Lee et al. 2020). This situation stopped only after Korea agreed a bilateral currency swap with the US which enabled the supply of dollars to the foreign exchange market in Korea and was ineffective for 15 months. Korea learned a hard lesson from the negative spillover of the crisis in Wall Street in 2008-09. The Korean experience may provide some hint in seeking a blueprint for a crisis-resilient macro-financial system, which would also make sense in this post-pandemic era.
Following Williamson (1999) and Ferrari-Filho and Paula (2008), Lee (2016) proposes a kind of macro-policy framework that can be described as “an intermediate system” with managed capital mobility and an explicit option of Tobin taxes, a version of the managed or flexible BBC (basket, band, crawl) exchange rate system, and with relative independence in monetary policymaking with a new balance between interest-rate and exchange-rate targeting. With regard to specific macro-level measures, fees on short-term financial flow (or Tobin tax) and reserve requirements are suggested, discouraging the buying and selling of foreign exchange for extremely short-term purposes (Lee 2016; Lee et al 2020).[3] At the micro-level, the key task against external shocks is to manage foreign assets and liabilities in corporate and bank dimensions. In particular, the level of and trend in short-term foreign liability need to be managed and monitored, covering not only domestic banks but also domestic branches of foreign banks, and the optimal hedge ratio needs to be used as a sophisticated investment strategy. For example, a minimum requirement in the ratio of foreign liquid assets over total foreign assets is suggested. A core funding ratio, such as foreign loan to foreign deposit, is also recommended. It helps not only reduce currency mismatch but also increases the core funding base, which is relatively stable even in times of financial turmoil.
Some of these measures were adopted by the Korean government in 2011 in the name of ‘three macro-prudential’ measures, including regulations on banks’ positions in forward exchange markets (150% of equity capital), taxes on non-deposit foreign exchange debt, and the LCR (liquidity coverage ratio) which is the regulation of minimum high-liquidity foreign exchange-based assets (e.g., US treasury bonds) to be held against net cash outflow expected for a month (e.g., withdrawal of deposits), in addition to a tax on foreigners’ interests income from holding Korean bonds (Lee 2016, p. 143). Since then, the Korean economy has maintained stability in the macroeconomic sense. However, managing the possibility of sudden inbound or outbound flows of short-term capital remains a challenge. In this post-pandemic recession, all the emerging economies tend to lower their interest rates but this measure may increase the possibility of capital flight whenever an exogenous shock is observed. Following Korea’s policy initiatives associated with the ‘three macro-prudential’ measures, each country is advised to conceive and install its own schemes for macro stability.
These three measures worked again during the economic shock from Covid-19. In March 2020, global financial markets were suffering from the shock of the outbreak of the pandemic. As a precautionary measure, on 19 March, the US federal reserve board extended Dollar swap lines to nine economies – Korea, Brazil, Mexico, Singapore, Sweden, Norway, Denmark, New Zealand and Australia – in addition to the existing swap agreement with the five core advanced economies. This sudden intervention helped to stabilise the foreign exchange market facing the sharp explosion of demand for dollars. In the Korean market, the exchange rates dropped or decreased from about 1,300 Won per dollar to 1,200 Won by the end of June.
Besides this currency swap, the three macro-prudential measures had an additional stabilising role by reducing the possibility of capital flight. First, the Bank of Korea decided that the commercial banks’ position in forward exchange markets was now enlarged from the prevailing 200% to 250% of equity capital for Korean branches of foreign banks, and from 40% to 50% for domestic banks.[4] Second, no taxes will be charged on the increased amount of non-deposit foreign exchange debt incurred to commercial banks during the three months from April to June 2020. Third, the Ministry of Finance of the Korean government announced that the LCR (liquidity coverage ratio) was now reduced from the prevailing ratio of 80% to 70% until May 2020.[5] These cases suggest that these measures can be useful in adjusting the inflow and outflow of hot money during the times of macro-financial uncertainty, particularly for emerging economies without reserve currency.
Summary and Concluding Remarks
As reflected in the expression “East Asian miracle” (World Bank 1993), East Asian economies saw remarkable performance of high growth and low inequality, thereby forming a separate East Asian capitalism group within the VoC typologies. There are strong signs that these economies have recently been converging to the LME group, featuring low growth and high inequality, features shared by East Asian economies since the 2000s. Financialisation is arguably one cause for these outcomes of low growth and high inequality. I re-evaluate East Asian capitalism in the context of the Covid-19 pandemic, which has suddenly halted globalization and further questioned the superiority of shareholder capitalism associated with financialisation and globalization. I propose rebalancing between shareholder and stakeholder capitalism. By doing so, East Asian economies can be reborn as a hybrid capitalism, with East Asian capitalism at its original core, to restore their growth momentum in an inclusive way. I also argue that the post-pandemic retreat of globalisation is a good opportunity to restore autonomy in domestic economic policymaking over interest rates and exchange rates, while imposing some adjustments over formerly excessive capital mobility.
Keun Lee
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Notes
[1] Lazonick (2014) shows that 54% and 37% of US companies’ earnings had been spent on stock buybacks and dividends in 449 firms among the 500 S&P firms from 2003 to 2012, respectively.
[2] Lee et al. (2020) also show that the amount of outflow funds of the Korean economy in the form of dividends and interest income is greater than that of foreign direct investment (FDI) inflow. For instance, Korea gained 26.9 billion USD FDI inflow in 2018 but released 29.7 billion USD in the form of dividends and interest payments to foreign investors in either FDI or portfolio investment (financial investment trading stocks and bonds in capital markets). The dividends payment to GDP ratio is rapidly increasing from less than 1% in the early 2010s to more than 1.3% in 2018. In Korea, the fixed investment to GDP ratio was above 35% during the pre-crisis period in the 1990s. However, it declined to 30% in the 2000s and has continued declining in the 2010s.
[3] Some reserve requirement policies require foreign investors to place some of the funds in a bank for a period. As the fund can be used for investment after a specified period, the long run capitals are not hindered to flow.
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Neoliberalism, the Revolution in Reverse
By any reasonable measure, the neoliberal dream lies in tatters. In 2008 poorly regulated financial markets yielded a world-historic financial collapse. One generation, weaned on reveries of home ownership as the coveted badge of economic independence and old-fashioned American striving, has been plunged into foreclosure, bankruptcy, and worse. And a successor generation of aspiring college students is now discovering that their equally toxic student-loan dossiers are condemning them to lifetimes of debt. Both before and after 2008, ours has been an economic order that, largely designed to reward paper speculation and penalize work, produces neither significant job growth nor wages that keep pace with productivity. Meanwhile, the only feints at resurrecting our nation’s crumbling civic life that have gained any traction are putatively market-based reforms in education, transportation, health care, and environmental policy, which have been, reliably as ever, riddled with corruption, fraud, incompetence, and (at best) inefficiency. The Grand Guignol of deregulation continues apace.
In one dismal week this past spring, for example, a virtually unregulated fertilizer facility immolated several blocks of West, Texas, claiming at least fourteen lives (a number that would have been much higher had the junior high school adjoining the site been in session at the time of the explosion), while a shoddily constructed and militantly unregulated complex of textile factories collapsed in Savar, Bangladesh, with a death toll of more than 1,100 workers.
In the face of all this catastrophism, the placid certainties of neoliberal ideology rattle on as though nothing has happened. Remarkably, our governing elites have decided to greet a moment of existential reckoning for most of their guiding dogmas by incanting with redoubled force the basic catechism of the neoliberal faith: reduced government spending, full privatization of social goods formerly administered by the public sphere, and a socialization of risk for the upper class. When the jobs economy ground to a functional halt, our leadership class first adopted an anemic stimulus plan, and then embarked on a death spiral of austerity-minded bids to decommission government spending at the very moment it was most urgently required—measures seemingly designed to undo whatever prospective gains the stimulus might have yielded. It’s a bit as though the board of directors of the Fukushima nuclear facility in the tsunami-ravaged Japanese interior decided to go on a reactor-building spree on a floodplain, or on the lip of an active volcano.
So now, five years into a crippling economic downturn without even the conceptual framework for a genuine, broad-based, jobs-driven recovery shored up by boosts in federal spending and public services, the public legacy of these times appears to be a long series of metaphoric euphemisms for brain-locked policy inertia: the debt ceiling, the fiscal cliff, the sequestration, the shutdown, the grand bargain. Laid side by side, all these coinages bring to mind the claustrophobic imagery of a kidnapping montage from a noir gangster film—and it is, indeed, no great exaggeration to say that the imaginative heart of our public life is now hostage to a grinding, miniaturizing agenda of neoliberal market idolatry. As our pundit class has tirelessly flogged the non-dramas surrounding the official government’s non-confrontations over the degree and depth of the inevitable brokered deal to bring yet more austerity to the flailing American economy, we civilian observers can be forgiven for suspecting that there is, in fact, no “there” there. For all their sound and fury, these set-tos proceed from the same basic premises on both sides, and produce the same outcome: studied retreat from any sense of official economic accountability for, well, anything.
But the neoliberal flight from public responsibility is actually a tangled, and curiously instructive, tale of strikingly other-than-intended consequences—something akin to the fables of perverse incentives that neoliberal theorists themselves love to cook up in their never-ending campaign against the prerogatives of the public sphere. The world of neoliberal market consensus that we now inhabit would likely strike many of the movement’s founders as a grotesque parody of their own aims and intentions. But because it is a fable of intellectual overreach, as opposed to narrow economic self-interest, the neoliberal saga also bears an oddly hopeful moral. The seemingly impermeable armature of terrible social and economic thought that has bequeathed to us our present state of ruin is really a flimsy and jury-rigged set of market superstitions, and could readily be discarded for sturdier wares.
Open and Shut
To be sure, policy consensus is one of the premier breeding grounds of irony in our time, but the mid-twentieth-century movement that became known to us as the neoliberal rebellion is steeped in the stuff. For starters, the original cohort of neoliberal apostles conceived of themselves as an insulated, elite group of critics who were able to approach the great machinery of government and popular political discourse only at a fastidious remove. They began the project of combining their intellectual labors, oddly enough, out of their shared embrace of The Good Society (1937), a treatise on the limits of state planning by New Republic columnist Walter Lippmann, who, like many of his successors at that “contrarian” journal, advertised his growing disenchantment with New Deal liberalism and the whole endeavor of economic policy-making in the public interest. But Lippmann soon fell afoul of the more doctrinaire members of his new fraternity of mostly European fellow travelers—notably German economist Wilhelm Röpke and French publisher Louis Rougier, who would later come into bad odor as a fascist collaborator. The group’s early association with both Lippmann and Rougier underlined the perils of overexuberant detours into the political arena, and when they made a fresh stab at affiliating as transatlantic defenders of market liberty once the interregnum of the Second World War had passed, their formal alliance, now called the Mont Pelerin Society after a resort in the Swiss Alps, began life as something of a standoffish debating society. The first major irony in the annals of neoliberalism is that a clutch of publicity-averse intellectuals would, within three decades of the group’s founding in 1947, end up running a very big chunk of the Anglophone capitalist world.
The neoliberal flight from public responsibility is actually a curiously instructive tale of strikingly other-than-intended consequences.
The Mont Pelerin faithful congregated around the Austrian anti-Keynesian economist F. A. Hayek, an Old World polymath who was eager to integrate his (strictly theoretical) vindication of individual liberty not merely into the heart of the economics discipline, but also into the full sweep of public life, from moral philosophy to scientific research. With the zeal of the ardent émigré, Hayek embraced the skeptical empiricism of conservative British thinkers such as Edmund Burke and David Hume—and also seconded the broader British reverence for political custom and cultural tradition, which he saw as the outcome of adaptation across the generations. As economic historian Angus Burgin writes, Hayek maintained that “traditions were products of extended processes of competition, and had persisted because in some sense—which their beneficiaries did not always rationally comprehend—they worked.” The focus here remained, as it did throughout Hayek’s career, squarely on the radical limitations on knowledge available to individual human agents. In The Constitution of Liberty, the work he regarded, far more than the bestselling polemic The Road to Serfdom, as the summation of his thought, Hayek wrote that “civilization enables us constantly to profit from knowledge which we individually do not possess”—and thereby the “freedom and unpredictability of human action” were to be tempered by “rules which experience has shown to serve best on the whole.” It speaks volumes about Hayek’s own sense of intellectual tradition that he initially proposed the group be called the Acton-Tocqueville Society—a suggestion overruled on the grounds that these particular avatars of noble European tradition were both too Catholic and too aristocratic for modern tastes.
Like many European intellectuals of the time, Hayek was also haunted by the recent terrors of totalitarianism; both he and his harder-line Austrian colleague, Ludwig von Mises, were exiles from the Nazi regime, and the group of like-minded intellectuals they recruited to form the Mont Pelerin Society shared their sense that market-based liberalism remained the only sure refuge from communism and fascism. It was an obvious corollary of this faith that the philosophic values associated with such liberalism—skepticism, open inquiry, and historical contingency—were the most reliable antidotes to totalitarianism. Hayek, for example, argued that the halting and contingent nature of all human knowledge laid bare the conceits of state economic planning and demand management as so much bitter and destructive farce. In a 1936 lecture called “Economics and Knowledge,” he sounded an early note of epistemological skepticism in public affairs that was virtually postmodern: “How,” he demanded to know, “can the combination of fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess?”
Clearly, nothing about such radical skepticism entailed an ironclad commitment to free-market fundamentalism. Any brand of liberalism that forced humans into free market relations would be self-contradictory, as liberal theorists from Adam Smith and John Stuart Mill to John Dewey, all of whom shared Hayek’s epistemological stance, understood. Indeed, Karl Popper—the thinker who inspired Hayek and many other Mont Pelerin founders—was himself a social democratic defender of the welfare state with decidedly socialist leanings. As Popper explained in a 1994 interview not long before his death, his conception of individual liberty was not antithetical to principles of economic democracy:
In a way one has to have a free market, but I also believe that to make a godhead out of the principle of the free market is nonsense. . . . Traditionally, one of the main tasks of economics was to think of the problem of full employment. Since approximately 1965 economists have given up on that; I find it very wrong.
Clearly, too, the “open society” that Popper famously envisioned permitted ample room for the adoption of egalitarian, even redistributionist, policies. Even as Hayek himself inveighed against the “collectivist” ideology of New Deal economic reforms, he also took pains to distance himself from a devil-take-the-hindmost model of unregulated market competition. The challenge, as Hayek saw it, was not merely to mobilize the resources of the economic policy elite and its intellectual fellow travelers to ratify a complacent, status quo vision of business civilization, but to collaborate on a far more ambitious project. In a 1949 paper called “The Intellectuals and Socialism,” Hayek sketched out a visionary, classically liberal mandate that became the animating mission of the Mont Pelerin Society:
We must be able to offer a new liberal program which appeals to the imagination. We must make the building of a free society once more an intellectual adventure, a deed of courage. What we lack is a liberal Utopia, a program which seems neither a mere defense of things as they are nor a diluted kind of socialism, but a truly liberal radicalism which does not spare the susceptibilities of the mighty (including the trade unions), which is not too severely practical, and which does not confine itself to what appears today as politically possible. We need intellectual leaders who are willing to work for an ideal, however small may be the prospects of its early realisation. They must be men who are willing to stick to principles and to fight for their realisation, however remote. The practical compromises they must leave to the politicians.
There is, of course, a contradiction at the heart of Hayek’s vision: How is a utopian free society supposed to pursue its own ambitious battery of universalized mandates while remaining ostensibly founded on the radically unknowable nature of all human experience? But the real irony of Hayek’s utopian longings is that they were fully realized—albeit, of course, in nothing like the form he envisioned. As Daniel Stedman Jones argues in his incisive study of the neoliberal rise to power, Masters of the Universe, “it is hard to think of another ‘utopia’ to have been as fully realized” as Hayek’s came to be in the powerful neoliberal regimes taking shape in Reagan’s America and Thatcher’s Britain: “The free market became the organizing principle for microeconomic reform, especially through the privatization of state assets, nationalized industries, and public services. Trade unions were vanquished and the power of labor was diluted. Exchange controls were abolished. The financial markets were progressively deregulated. Market mechanisms became the models for the operation of health care.” While it’s true, Stedman Jones notes, that “the purity that Hayek advocated was meant as an optimistic and ideological and intellectual tactic rather than a blueprint,” it was to become that and much, much more: neoliberals went on to erect a permanent edifice of postideological assumptions about the natural predominance of markets and the just as rigid limitations of government. “The results,” as Stedman Jones sums things up, “have been extraordinary.”
Interesting Wishes
In retrospect, Mont Pelerin’s guiding spirits probably should have put a lot less stock in Adam Smith’s comforting policy-fable of the Invisible Hand and heeded instead the counsel of the old Chinese curse “May all your wishes be granted.” That aphorism is also rendered in English as “May you live in interesting times,” and both renderings hold with equal force in the neoliberal case. For as the (fairly recondite and academic) proceedings of the Mont Pelerin set were gaining wider traction in the policy world, multiple crackups of the Keynesian model of coordinated economic planning helped to create an opening for the figure who would be the new economic order’s zeitgeist on horseback: the diminutive University of Chicago monetarist-for-all-seasons, Milton Friedman.
The robustly entrepreneurial Friedman embraced a masscult platform.
When Paul Volcker—Jimmy Carter’s appointee to chair the Federal Reserve—adopted a modified version of Friedman’s theology of the money supply to tame the two-digit inflation of the late 1970s, Friedman was suddenly the policy visionary who could do no wrong. He soon served as an informal adviser to both the Reagan and Thatcher governments (and, less prestigiously, to the dictatorship of Chilean general Augusto Pinochet). He reached a popular audience via a column in Newsweek, a hit series on PBS, and several bestselling tracts of unalloyed free-market sloganeering. While demure Europeans such as Hayek distrusted the allure of popular renown as a temptation to oversimplify their ideas and pander to the public, the robustly entrepreneurial Friedman embraced a masscult platform—and for the most part on the very grounds that aroused Hayek’s suspicion. When he succeeded Hayek as chairman of the Mont Pelerin group, Friedman brought it, and the broader project of neoliberal thought, into its high propaganda phase. As he cultivated a high media profile, Friedman positioned himself at the nexus of an influential new group of transatlantic conservative think tanks that would go on to supply much of the concrete policy agendas for the Reagan and Thatcher revolutions: the Institute of Economic Affairs in London; the Hoover Institution at Stanford (where he would spend the balance of his career after retiring from the University of Chicago); and the Cato Institute, the Heritage Foundation, and the American Enterprise Institute in Washington.
And as the institutional platforms for Milton Friedman’s free-market gospel multiplied, the vaunted intellectual range of neoliberal inquiry vanished into a stagnant pool of confident and absolute assertions of the market’s unchallenged sovereignty as the arbiter of all life outcomes. Friedman converted Adam Smith’s classical doctrine of the invisible hand—whereby all self-interested actions mystically possess a benign or munificent social payoff—into an inverted demonology of the public sphere. There is, he said in an address honoring the two-hundredth anniversary of The Wealth of Nations, “an invisible hand in politics that is the precise reverse of the invisible hand in the market”:
In politics, men who intend only to promote the public interest, as they conceive it, are ‘led by an invisible hand to promote an end which was no part of their intention.’ They become the front-men for special interests they would never knowingly serve. They end up sacrificing the public interest to the special interest, the interest of the consumers to that of producers, of the masses who never go to college to that of those who attend college, of the poor working-class saddled with employment taxes to the middle class who get disproportionate benefits from social security, and so down the line.
It’s hard to imagine a purer statement of the founding principles of neoliberalism as we have come wearily to know it in this advanced stage of market collapse. It is pitched, first of all, in a counterintuitive rhetoric of worldly cleverness, a spirit of seminar-room one-upmanship. Not only is Adam Smith right about the hidden virtues of business interests, but the same paradox operates, by a virtually metaphysical law, to transform every action of every individual putatively serving the public interest into a parody of his or her stated intent. Here is a hermeneutics of suspicion that far outstrips the wildest excesses of the death-of-the-author acolytes of high postmodern critical theory. Not only is it the case that public servants will fail to advance the public’s interest out of some depressingly common shortcoming of character—susceptibility to bribery, say, or short-sighted ideological delusion. No, the central idea here is far more radical than that: government, by its very nature, can’t serve the public interest, because of the innately condescending and imperious character of the act of governing.
Friedman’s claim owed its origins in large part to the work of George Stigler, a colleague at the University of Chicago. Stigler helped pioneer the famous neoliberal doctrine of regulatory capture, which in turn is its own ultra-cynical academic appropriation of what seems, at first glance, like a muckraking Marxist’s indictment of the bourgeois state. Stigler and other advocates of the so-called public choice school of economic theory maintained that regulatory agencies inevitably became hostage to the interests of the industries they oversaw. In a 1971 journal article bearing the deceptively wan title “The Theory of Economic Regulation,” Stigler airily dismissed reformist complaints about regulatory corruption as “exactly as appropriate as a criticism of the Great Atlantic and Pacific Tea Company for selling groceries, or as a criticism of a politician for currying popular support.” Stigler’s disdain for pandering political leaders did not, however, prevent him from summarizing his theory in a policy paper for then-president Richard Nixon. And, like most of the leading lights of neoliberal theory, Stigler went on to win a Nobel Prize in Economics.
To be sure, the problem of industry-captive oversight is a common failing of the modern regulatory state, as any cursory glance at the recent track records of, say, the Securities and Exchange Commission or the National Oceanic and Atmospheric Administration will sadly demonstrate. But in promoting regulatory capture as a bedrock law of public-sector enterprise, the neoliberals performed a neat trick; they posited corruption as a permanent condition of the regulatory state. And in so doing, they casually relegated a fistful of traditional Progressive and New Deal reforms—the cause of good government, upgrades in civil service appointments and public-sector unionizing, the punishment of graft and fraud, and (not least by a long shot) the tighter regulation of corruption in the private sector—to the dustbin of history. Such measures, they preached, could breed only perverse and self-defeating outcomes, and would indeed grievously multiply double-dealing in the public sector. Only by harnessing the superior explanatory power of “profit-maximizing” in public life, Stigler argued, could the sad pieties of reformism be laid aside in favor of the sterner and more confident guidance of the true masters of realpolitik—the lords of the economic profession. Because “reformers will be ill-equipped to use the state for their reforms, and victims of the pervasive use of the state’s support of special groups will be helpless to protect themselves,” Stigler reasoned, “economists should quickly establish the license to practice on the rational theory of political behavior.” Thus was born still another pet piety of the neoliberal counter-reformation: the notion that economics is “the imperial science,” duly licensed to dispense its market-pleasing wisdom in every sphere of life, from crime prevention and education policy to dating and food preparation.
The notion that the public and private sectors both bear “defects” is elevated to a metaphysical affront to the market’s sovereignty.
In the brewing theology of the modern conservative backlash, the moral hazards of the captive regulatory state were entirely the creation of the bad actors in the public sector. The bagmen for the industries seeking to purchase regulatory favors from the agents of the state were, after all, only acting in accord with the sainted Smithian dictates of self-interest. What fault could it be of theirs if the state had provided them with an open market in graft, kickbacks, and influence-peddling? Indeed, Friedman, ever alert to opportunities for rhetorical one-upmanship, floated the proposition that critics of free-market policies were foisting a bad-faith “double standard” on the rightful workings of market self-interest. “A market ‘defect,’” Friedman explained in a tribute to Smith’s Wealth of Nations, “whether through an absence of competition or external effects (equivalent, as recent literature has made clear, to transaction costs) has been regarded as immediate justification for government intervention. But the political mechanism has its ‘defects’ too. It is fallacious to compare the actual market with the ideal political structure. One should either compare the real with the real, or the ideal with the ideal.”
Got that? The notion that the public and private sectors both bear “defects”—a completely banal supposition conceded by any Galbraithian on the economic left—is here elevated to a metaphysical affront to the market’s sovereignty. In fact, the double standard that Friedman calls out is nothing of the sort. No progressive-minded supporter of government intervention had staked out the absurd position that the state is morally immaculate, or itself unsusceptible to any constructive outside intervention when its practices are out of line with the public interest. Friedman writes as though Congress had never appointed an inspector general, passed legislation to reform the civil service, and improved regulatory safeguards—or as though the various federal employees’ unions had never pushed for improved hiring practices or better working conditions to upgrade their work product. And that’s because, for critics in the neoliberal camp, such external controls on the state’s behavior simply cannot exist; the regulatory-capture school of neoliberal theory already ruled out, on principle, the possibility that such interventions could yield anything other than market-distorting outcomes. In other words, Friedman’s lament about the mismatched moral standards of state and market is the phony protest of a card cheat seeking mainly to stoke up the theatrical appeal of an already rigged game.
Who’ll Stop the Rana?
You’d think that our recent bruising encounters with the devastating fallout from the deregulators’ handiwork in the housing market of the early aughts should, by rights, render Friedman’s complaints about the public sector’s assaults on market virtue the deadest of dead letters. But, if anything, the ritual defense of the market’s sovereign prerogative has dug in that much more intractably as its basic coordinates have been discredited. As critics such as Dean Baker routinely point out, the stalled recovery out of the Great Recession is almost exclusively a function of the failure of our neoliberal economic establishment to speak honestly about a collapsed housing bubble that created a yawning shortfall in demand—a shortfall that, amid the paralysis of credit markets in the same recession, could be jumpstarted only by government stimulus.
All sorts of absurdities have flowed from this magisterial breakdown in comprehension. Since the neoliberal catechism holds that stimulative government spending can never be justified in the long run, much of our debate over the recovery’s prospective course has been given over to speculative nonsense. Chief among these talismanic invocations of free-market faith is the great question of how to placate the jittery job creators. At virtually every turn in the course of debate over how steeply to cut government spending in this recession, our sachems of neoliberal orthodoxy have insisted that any revenue-enhancing move the government so much as contemplated would spook business leaders into mothballing plans to expand operations and add jobs. It became the all-purpose worst-case scenario of first resort. If health care reform passed, if federal deficits expanded, or if marginal tax rates were permitted to rise for the vapors-prone investor class, why, then the whole prospect of a broad-based economic recovery was as good as shot.[*]
And since neoliberalism is most notably a global—or properly speaking, the globalizing—ideology, such pat distortions of economic reality are no longer confined to the Anglo-American political economy. Nor are they confined to strictly cognitive errors in policymaking. The collapse of the Rana Plaza garment factory in Bangladesh has yielded commentary from neoliberals that might well merit entry into the psychiatric profession’s DSM-5 as textbook illustrations of moral aphasia. Here, after all, was a tragedy that would appall even the darkest Victorian imaginings of a Charles Dickens or a Karl Marx: factory workers earning a monthly wage of $38 crowded into a structurally unsound multistory facility built on a foundation of sand above a drained pond. Three stories of the factory had been hastily erected on top of an already unsound existing structure just to house the fresh battalions of underpaid workers demanded by bottom-feeding international textile contractors.
Government inspectors repeatedly demanded that the facility be shuttered on safety grounds, but the plant’s proprietors ignored their citations, reckoning that the short-term gains of maintaining peak production outweighed the negligible threat of a fine or safety citation. Nor was there likely to be any pressure from Western bastions of enlightenment and human rights. The ceremonial stream of Astroturf labor-and-safety-inspecting delegations from Western nations made zero note of the cracked and teetering foundations of the Rana Plaza structure. Lorenz Berzau, the managing director of one such industry consortium (the Business Social Compliance Initiative), primly told the Wall Street Journal that the group isn’t an engineering concern—and what’s more, “it’s very important not to expect too much from the social audit” that his group and other Western overseers conduct on production facilities. And, as Dave Jamieson and Emran Hossain reported in the Huffington Post, labor organizers have long since learned that the auditing groups serve largely as pro forma conduits of impression management for consumer markets in the West. The auditing of manufacturing facilities in the developing world “ends up catering more to the brands involved than the workers toiling on the line,” Jamieson and Hossain write.
Yes, factory owners and managers well understand the permissible bounds of discourse in such Potemkin-style inquiries—and instruct their workforce accordingly. “What to say to the auditors always comes from the owners,” a Bangladeshi line worker named Suruj Miah told the two reporters. “The owners in most cases would warn workers not to say negative things about the factories. Workers are left without a choice.” Sumi Abedin, one of the survivors of an earlier disaster—a factory fire in the nearby Tazreen plant that claimed the lives of 112 workers in November 2012—told the Huffington Post that on the day of an international audit team’s visit, management compelled workers to wear T-shirts designating them as members of a nonexistent fire safety committee, and had them brandishing prop fire-extinguishing equipment that plant managers had procured only for the duration of the audit.
What this disaster ought to have driven through the neoliberal consensus’s collective solar plexus is something close to the polar opposite of its cherished, evidence-proof theory of the captive regulator: a largely cosmetic global watchdog effort funded overwhelmingly by private-sector concerns, far from delivering oversight and accountability, has incentivized fraud and negligence. And conveniently enough, it’s the race-to-the-bottom competitive forces unleashed by the global workplace that ritually sanctify all of this routine dishonesty. In their malignant neglect of worker safety measures, local factory managers are able to cite the same market pressures to maximize production and profit that have prevented the ornamental Western groups conducting audits of workplace safety practices from releasing their findings to the workers at risk of being killed by the neoliberal regime of global manufacturing.
Barking Dogmas
Still, the dogmas of neoliberal market prerogative are far sturdier than a collapsing factory or a raging fire on the production line. If the dogmatists have thrown overboard Hayek-era intellectual values like experimentation and skepticism, at least they can stave off their inevitable extinction by shoring up Friedman-era platitudes and, from the mantles of the nation’s most prestigious universities and op-ed shops, try to pass them off as the nation’s highest common sense. So former University of Chicago law professor Richard Epstein, who helped found the influential law and economics movement that essentially transposed the shibboleths of public choice theory into legal doctrine, has patiently explained that the just and measured response to the collapse of Rana Plaza is to seek enforcement of preexisting building codes across the Bangladeshi private sector. Writing on the heels of the disaster, in the Hoover Institution’s web journal, Defining Ideas, Epstein takes pains to rule out the passage of any “new laws” to improve worker-safety standards or international monitoring efforts.
In other words: Bangladeshi workers can either be more safe or starve more rapidly.
But lest even this minimal recourse to regulation sound like too heady a plunge into statist remedies, Professor Epstein also cautions that the aggrieved and grieving workers in the Bangladeshi garment trade must not veer recklessly into unionism or other non-market-approved modes of worker self-determination. After all, he reasons, “in order to stave a shutdown off by improving factory safety, the savvy firm will have to raise its asking price from foreign purchasers . . . and may have to lower wages to remain competitive.” (This is another classic myth of the neoliberal faith—the rational “trade-off” between personal safety and wages that the independent broker makes when he or she contracts with an employer to freely exchange time and skills for wages. Only, of course, the notion of such rational choice has been reduced to a bitter farce in workplaces such as Rana Plaza, where the basic human rights of workers are only acknowledged theatrically, for the purposes of Potemkin auditing tours.) A more activist approach to the crisis in global worker safety would create intolerable distress to Epstein’s utopian vision of the carefully calibrated relations of global market production. Sure, the EU might ban exports of clothes bearing the taint of labor exploitation—but such a measure would just perversely create “undeserved economic protection” for EU economies that are net clothing exporters (and by implication, would deprive consumers of the sacred right to the cheapest possible attire that bullied and undercompensated labor can provide).
And do not get Epstein started on the mischief wrought by unions, which are all but certain to multiply calamities like the Rana Plaza disaster:
It is not as though the only thing that a union does once it gains its dominant position is to advocate for the safety of its workers, even if that item is at the top of its agenda. Unions also bargain over wages, work rules, seniority, pensions, benefits, and other conditions of employment. In dealing with these issues, they exert a monopoly clout that can easily raise wages and reduce productivity. In a market with many firms, they can exert that force only if they are prepared to take retaliatory action against the firms that refuse to bow to their conditions. And they can only do so if they induce the government to take measures to restrict the entry of non-union firms that could underbid them.
In other words: Bangladeshi workers can either be more safe or starve more rapidly. But according to Epstein, they assuredly aren’t entitled to earn a living wage without the threat of being crushed or burned to death at any given moment. The pertinent market trade-offs simply won’t permit it. Indeed, if you want to know the truth, Epstein claims, “labor agitation was . . . one of the contributing causes to the collapse at Rana Plaza.” Even the threat of union-related disruptions to established work discipline can be Kryptonite to the beleaguered clothes barons of Bangladesh. We find ourselves confronted yet again by the torments of the heroic job creator. Prospective labor agitation, Epstein contends, “places enormous strains on the firms that have to deliver goods to foreign purchasers in order to remain in business. The threat of a repeat protest has led many firm bosses to step up the pace of work in the factories, which in turn means longer shifts, more workers, more extensive use of heavy equipment in order to make up for lost production, and stockpiling goods. That maneuver turned into a fatal insurance policy against future labor disruptions.”
You see? One minute you’re protesting for a wage increase or a work regime less likely to injure you, and before you know it, you’ve frightened your employer into stockpiling inventory at such a frenetic pace that he kills you. Could the tonic discipline of market preferences really be any clearer? One can only hope that future no-goodnik labor agitators will heed this tragic lesson and recognize “foreign purchasers” as the remote, punitive, and awesome deities that the market meant them to be.
Trapped in the Moneybox
It is not all that surprising, in light of the trajectory of neoliberal ascendancy, to see rigidly orthodox market apologists like Professor Epstein driven to such extremities to tease out a neoliberal moral from the bloody, smoldering squalor of the Rana Plaza disaster. But the neoliberal consensus has long since transcended conventional divisions of party and ideology; the axiomatic assertion of market dominance is a conditioned reflex among nearly all established pundits.
In a now-infamous April 24 write-up of the Bangladeshi catastrophe, Slate’s Moneybox columnist Matt Yglesias—an eager Democratic partisan brandishing pious Washington credentials from The American Prospect and the Center for American Progress—tried his own hand at an Epstein-style vindication of the market’s undeviating wisdom. In a post bearing the reassuring free-to-be-you-and-me headline “Different Places Have Different Safety Rules and That’s OK,” Yglesias framed his defense of the status quo regime of erratic standards for worker safety in the hoary rhetoric of the public choice “trade-off.” “While having a safe job is good,” Yglesias chirped, “money is also good.”
OK, then! But note again the pinched moral universe in which employees are permitted only to have a safe job or a (barely) sustenance income, and never both at the same time. It seems a modest social goal to demand that the exchange of labor value for a paycheck in non-mortal conditions be accepted as an incontrovertible human right. If a rapidly globalizing market order is unable to secure that baseline personal and financial security, its support for wildly varying models of job safety should be regarded precisely as the problem—and not as the taken-for-granted standard for phony assertions about what individual workers (let alone “the Bangladeshis,” tout court) are purported to be choosing.
“While having a safe job is good,” Yglesias chirped, “money is also good.”
But Matt Yglesias, like many of Washington’s market-besotted, faux-contrarian pundits on the notional left side of the partisan aisle, will not be rushed into stating the morally obvious. Yes, he concedes, there could well be an abstract case here for collective action aimed at upgrading the safety conditions of Bangladeshi workplaces—but like Epstein, he frets that the collective-action models of richer, Western workplaces create prohibitive costs of doing business and therefore may not fall within the ambit of choices that workers in Bangladesh should reasonably be permitted to make. “Bangladesh is a lot poorer than the United States, and there are very good reasons for Bangladeshi people to make different choices in this regard than Americans,” Yglesias writes. “Safety rules that are appropriate for the United States would be unnecessarily immiserating in much poorer Bangladesh.”
So, not to worry, Mr. Moneybox confidently asserts. The trade-offs have yielded optimal gains in each diverse market setting, in this, the best of all possible neoliberal worlds: “American jobs have gotten much safer over the past 20 years, and Bangladesh has gotten a lot richer.” As an authority for this sweeping claim—which, by the way, is untrue in what Yglesias sees as the argument-clinching “safer” U.S. end of the spectrum; Bureau of Labor Statistics data on workplace fatalities show steady increases over the past five years, with right-to-work states such as Texas leading the grisly toll—Yglesias cites the work of Robert Frank, a public-choice enthusiast who, in his recent book The Darwin Economy, seeks to lay the groundwork for a terrifying entity he calls the “libertarian welfare state.”
Social media scourges wasted little time in calling out Yglesias’s smug, fatuous, and opportunistic effort to advertise his market contrarianism on the ruins of the Rana Plaza collapse. Eventually the scribe was hounded into publishing a passive-aggressive follow-up post averring that he’d been misread and unfairly castigated by his critics. The stalwart wonk remained unbowed, however; Yglesias wrote that he still “absolutely” stood by the conclusion that, in matters of workplace safety, it’s “appropriate for rich countries to have more stringent standards than poor ones.”
Now, Matt Yglesias is not a doctrinaire neoliberal thinker—certainly not in the sense that a disciplined propagandist like Milton Friedman was (even though he longs, absurdly, for a revival of “Friedman-style pragmatism” to bring the economic right to its senses).[**] But that’s precisely the point. Neoliberal orthodoxy has leached so deeply into the intellectual groundwater of the nation’s political class that it’s no longer a meaningful descriptor of ideological difference. That’s why Yglesias’s erstwhile American Prospect colleague Ezra Klein, over at his prestigious post atop the Washington Post’s economic blog shop, can marvel at the tough-minded budget “seriousness” of serial Randian liar Paul Ryan—or why the Obama White House can confidently slot offshore billionaire Penny Pritzker as its second-term commerce secretary while it continues to mouth empty platitudes about saving the nation’s middle class.
All Friedmans Now
It was Milton Friedman himself who famously announced, during his tour as an informal adviser to Richard Nixon, that “we’re all Keynesians now”—but that oft-quoted maxim has been badly truncated from its full context. What Friedman actually said, in a 1968 interview with Time magazine, was “in one sense, we are all Keynesians now; in another, no one is a Keynesian any longer.” He went on to spell out the paradox more fully: “We all use the Keynesian language and apparatus; none of us any longer accepts the initial Keynesian conclusions.”
Now, more than four decades on, Friedman’s savvy rhetorical dodge is the watchword of all mainstream macroeconomic thought. Even putative liberals who pay lip service to the efficacy of government intervention dig in behind their own pet postulates about the market’s transcendent wisdom and beneficence—about the need to temper the alleged excesses of the social-democratic usages of social wealth with sterner, more austere pieties about the real-world trade-offs mandated by the lords of neoliberal market liberation.
It is an undeniable species of gibberish, one that would have likely appalled even as firm a market stoic as Hayek, who, whatever his other intellectual handicaps, well understood the mischief wrought by a glib and self-seeking centrism. During the Mont Pelerin group’s tenth anniversary gathering in 1957, Hayek delivered a controversial speech called “Why I Am Not a Conservative.” It was designed, among other things, to distance the group from the steady accretion of self-insulated and untested right-wing bromides that would later be the hallmark of Friedman’s successor reign. Today, however, Hayek’s oration sounds a much more sobering note of prophecy for our political culture at large. “Advocates of the Middle Way with no goal of their own, conservatives have been guided by the belief that the truth must lie somewhere between the extremes—with the result that they have shifted position every time a more extreme movement appeared on either wing,” Hayek announced.
The one true road to intellectual serfdom, in other words, was the one that Hayek correctly saw lurking within the heart of the neoliberal revolution.
Chris Lehmann
[*] Meanwhile, the actual state of the labor economy told a different story—that corporate profits had spiked to record highs and that, instead of scaling back entirely on job expenditures, employers were in fact adding hours to the average employee workweek, rightly calculating that they could continue getting more value out of the existing workforce in an artificially slack job market with anemic, and declining, union representation. (Once again, Dean Baker was virtually alone among economic commentators in noting this important shift.) Never mind, as well, that when significant provisions of the allegedly business-killing health care law finally began to kick in, health care spending in the private sector started to slow and stabilize on what looked to be a permanent and structural basis, with a projected decline of $770 billion over the next decade. In other words, government intervention in the economy—even via a mechanism as compromised and graft-riddled as the 2010 Affordable Care Act—was showing a striking capacity to even out and stabilize one of the most stubborn and devastating inequalities in the American economy, access to affordable health care. And far from producing a steeper drag on broader conditions for recovery, the stabilization of health care spending occurred amid a pronounced spike in health care hiring, and indeed a long overdue (if still altogether too weak) rebound in the labor economy generally.
[**] Yglesias has offered qualified support for the Obama stimulus plan and health care overhaul, and on this past May Day, even ventured a classically coy Slate post where he pretended to flirt with Marxism. (Hipster-trolling headline: “Capitalism is looking pretty shabby.”)
The Fatal Flaw of Neoliberalism: It’s Bad Economics
Neoliberalism and its usual prescriptions – always more markets, always less government – are in fact a perversion of mainstream economics.
As even its harshest critics concede, neoliberalism is hard to pin down. In broad terms, it denotes a preference for markets over government, economic incentives over cultural norms, and private entrepreneurship over collective action. It has been used to describe a wide range of phenomena – from Augusto Pinochet to Margaret Thatcher and Ronald Reagan, from the Clinton Democrats and the UK’s New Labour to the economic opening in China and the reform of the welfare state in Sweden.
The term is used as a catchall for anything that smacks of deregulation, liberalization, privatization or fiscal austerity. Today it is routinely reviled as a shorthand for the ideas and practices that have produced growing economic insecurity and inequality, led to the loss of our political values and ideals, and even precipitated our current populist backlash.
We live in the age of neoliberalism, apparently. But who are neoliberalism’s adherents and disseminators – the neoliberals themselves? Oddly, you have to go back a long time to find anyone explicitly embracing neoliberalism. In 1982, Charles Peters, the longtime editor of the political magazine Washington Monthly, published an essay titled A Neo-Liberal’s Manifesto. It makes for interesting reading 35 years later, since the neoliberalism it describes bears little resemblance to today’s target of derision. The politicians Peters names as exemplifying the movement are not the likes of Thatcher and Reagan, but rather liberals – in the US sense of the word – who have become disillusioned with unions and big government and dropped their prejudices against markets and the military.
The use of the term “neoliberal” exploded in the 1990s, when it became closely associated with two developments, neither of which Peters’s article had mentioned. One of these was financial deregulation, which would culminate in the 2008 financial crash and in the still-lingering euro debacle. The second was economic globalization, which accelerated thanks to free flows of finance and to a new, more ambitious type of trade agreement. Financialisation and globalisation have become the most overt manifestations of neoliberalism in today’s world.
That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that centre-left politicians – Democrats in the US, socialists and social democrats in Europe – enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization and individual enterprise? Much of our contemporary policy discussion remains infused with principles supposedly grounded in the concept of homo economicus, the perfectly rational human being, found in many economic theories, who always pursues his own self-interest.
But the looseness of the term neoliberalism also means that criticism of it often misses the mark. There is nothing wrong with markets, private entrepreneurship or incentives – when deployed appropriately. Their creative use lies behind the most significant economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism’s useful ideas.
The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. A proper understanding of the economics that lie behind neoliberalism would allow us to identify – and to reject – ideology when it masquerades as economic science. Most importantly, it would help us to develop the institutional imagination we badly need to redesign capitalism for the 21st century.
Neoliberalism is typically understood as being based on key tenets of mainstream economic science. To see those tenets without the ideology, consider this thought experiment. A well-known and highly regarded economist lands in a country he has never visited and knows nothing about. He is brought to a meeting with the country’s leading policymakers. “Our country is in trouble,” they tell him. “The economy is stagnant, investment is low, and there is no growth in sight.” They turn to him expectantly: “Please tell us what we should do to make our economy grow.”
The economist pleads ignorance and explains that he knows too little about the country to make any recommendations. He would need to study the history of the economy, to analyse the statistics, and to travel around the country before he could say anything.
But his hosts are insistent. “We understand your reticence, and we wish you had the time for all that,” they tell him. “But isn’t economics a science, and aren’t you one of its most distinguished practitioners? Even though you do not know much about our economy, surely there are some general theories and prescriptions you can share with us to guide our economic policies and reforms.”
The economist is now in a bind. He does not want to emulate those economic gurus he has long criticised for peddling their favourite policy advice. But he feels challenged by the question. Are there universal truths in economics? Can he say anything valid or useful?
So he begins. The efficiency with which an economy’s resources are allocated is a critical determinant of the economy’s performance, he says. Efficiency, in turn, requires aligning the incentives of households and businesses with social costs and benefits. The incentives faced by entrepreneurs, investors and producers are particularly important when it comes to economic growth. Growth needs a system of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments. And the economy must be open to ideas and innovations from the rest of the world.
But economies can be derailed by macroeconomic instability, he goes on. Governments must therefore pursue a sound monetary policy, which means restricting the growth of liquidity to the increase in nominal money demand at reasonable inflation. They must ensure fiscal sustainability, so that the increase in public debt does not outpace national income. And they must carry out prudential regulation of banks and other financial institutions to prevent the financial system from taking excessive risk.
Now he is warming to his task. Economics is not just about efficiency and growth, he adds. Economic principles also carry over to equity and social policy. Economics has little to say about how much redistribution a society should seek. But it does tell us that the tax base should be as broad as possible, and that social programmes should be designed in a way that does not encourage workers to drop out of the labour market.
By the time the economist stops, it appears as if he has laid out a fully fledged neoliberal agenda. A critic in the audience will have heard all the code words: efficiency, incentives, property rights, sound money, fiscal prudence. And yet the universal principles that the economist describes are in fact quite open-ended. They presume a capitalist economy – one in which investment decisions are made by private individuals and firms – but not much beyond that. They allow for – indeed, they require – a surprising variety of institutional arrangements.
So has the economist just delivered a neoliberal screed? We would be mistaken to think so, and our mistake would consist of associating each abstract term – incentives, property rights, sound money – with a particular institutional counterpart. And therein lies the central conceit, and the fatal flaw, of neoliberalism: the belief that first-order economic principles map on to a unique set of policies, approximated by a Thatcher/Reagan-style agenda.
Consider property rights. They matter insofar as they allocate returns on investments. An optimal system would distribute property rights to those who would make the best use of an asset, and afford protection against those most likely to expropriate the returns. Property rights are good when they protect innovators from free riders, but they are bad when they protect them from competition. Depending on the context, a legal regime that provides the appropriate incentives can look quite different from the standard US-style regime of private property rights.
This may seem like a semantic point with little practical import; but China’s phenomenal economic success is largely due to its orthodoxy-defying institutional tinkering. China turned to markets, but did not copy western practices in property rights. Its reforms produced market-based incentives through a series of unusual institutional arrangements that were better adapted to the local context. Rather than move directly from state to private ownership, for example, which would have been stymied by the weakness of the prevailing legal structures, the country relied on mixed forms of ownership that provided more effective property rights for entrepreneurs in practice. Township and Village Enterprises (TVEs), which spearheaded Chinese economic growth during the 1980s, were collectives owned and controlled by local governments. Even though TVEs were publicly owned, entrepreneurs received the protection they needed against expropriation. Local governments had a direct stake in the profits of the firms, and hence did not want to kill the goose that lays the golden eggs.
China relied on a range of such innovations, each delivering the economist’s higher-order economic principles in unfamiliar institutional arrangements. For instance, it shielded its large state sector from global competition, establishing special economic zones where foreign firms could operate with different rules than in the rest of the economy. In view of such departures from orthodox blueprints, describing China’s economic reforms as neoliberal – as critics are inclined to do – distorts more than it reveals. If we are to call this neoliberalism, we must surely look more kindly on the ideas behind the most dramatic poverty reduction in history.
One might protest that China’s institutional innovations were purely transitional. Perhaps it will have to converge on western-style institutions to sustain its economic progress. But this common line of thinking overlooks the diversity of capitalist arrangements that still prevails among advanced economies, despite the considerable homogenisation of our policy discourse.
What, after all, are western institutions? The size of the public sector in OECD countries varies, from a third of the economy in Korea to nearly 60% in Finland. In Iceland, 86% of workers are members of a trade union; the comparable number in Switzerland is just 16%. In the US, firms can fire workers almost at will; French labour laws have historically required employers to jump through many hoops first. Stock markets have grown to a total value of nearly one-and-a-half times GDP in the US; in Germany, they are only a third as large, equivalent to just 50% of GDP.
The idea that any one of these models of taxation, labour relations or financial organisation is inherently superior to the others is belied by the varying economic fortunes that each of these economies have experienced over recent decades. The US has gone through successive periods of angst in which its economic institutions were judged inferior to those in Germany, Japan, China, and now possibly Germany again. Certainly, comparable levels of wealth and productivity can be produced under very different models of capitalism. We might even go a step further: today’s prevailing models probably come nowhere near exhausting the range of what might be possible, and desirable, in the future.
The visiting economist in our thought experiment knows all this, and recognises that the principles he has enunciated need to be filled in with institutional detail before they become operational. Property rights? Yes, but how? Sound money? Of course, but how? It would perhaps be easier to criticise his list of principles for being vacuous than to denounce it as a neoliberal screed.
Still, these principles are not entirely content-free. China, and indeed all countries that managed to develop rapidly, demonstrate the utility of those principles once they are properly adapted to local context. Conversely, too many economies have been driven to ruin courtesy of political leaders who chose to violate them. We need look no further than Latin American populists or eastern European communist regimes to appreciate the practical significance of sound money, fiscal sustainability and private incentives.
Of course, economics goes beyond a list of abstract, largely common-sense principles. Much of the work of economists consists of developing stylised models of how economies work and then confronting those models with evidence. Economists tend to think of what they do as progressively refining their understanding of the world: their models are supposed to get better and better as they are tested and revised over time. But progress in economics happens differently.
Economists study a social reality that is unlike the physical universe. It is completely manmade, highly malleable and operates according to different rules across time and space. Economics advances not by settling on the right model or theory to answer such questions, but by improving our understanding of the diversity of causal relationships. Neoliberalism and its customary remedies – always more markets, always less government – are in fact a perversion of mainstream economics. Good economists know that the correct answer to any question in economics is: it depends.
Does an increase in the minimum wage depress employment? Yes, if the labour market is really competitive and employers have no control over the wage they must pay to attract workers; but not necessarily otherwise. Does trade liberalisation increase economic growth? Yes, if it increases the profitability of industries where the bulk of investment and innovation takes place; but not otherwise. Does more government spending increase employment? Yes, if there is slack in the economy and wages do not rise; but not otherwise. Does monopoly harm innovation? Yes and no, depending on a whole host of market circumstances.
In economics, new models rarely supplant older models. The basic competitive-markets model dating back to Adam Smith has been modified over time by the inclusion, in rough historical order, of monopoly, externalities, scale economies, incomplete and asymmetric information, irrational behaviour and many other real-world features. But the older models remain as useful as ever. Understanding how real markets operate necessitates using different lenses at different times.
Perhaps maps offer the best analogy. Just like economic models, maps are highly stylised representations of reality. They are useful precisely because they abstract from many real-world details that would get in the way. But abstraction also implies that we need a different map depending on the nature of our journey. If we are travelling by bike, we need a map of bike trails. If we are to go on foot, we need a map of footpaths. If a new subway is constructed, we will need a subway map – but we wouldn’t throw out the older maps.
Economists tend to be very good at making maps, but not good enough at choosing the one most suited to the task at hand. When confronted with policy questions of the type our visiting economist faces, too many of them resort to “benchmark” models that favour the laissez-faire approach. Kneejerk solutions and hubris replace the richness and humility of the discussion in the seminar room. John Maynard Keynes once defined economics as the “science of thinking in terms of models, joined to the art of choosing models which are relevant”. Economists typically have trouble with the “art” part.
This, too, can be illustrated with a parable. A journalist calls an economics professor for his view on whether free trade is a good idea. The professor responds enthusiastically in the affirmative. The journalist then goes undercover as a student in the professor’s advanced graduate seminar on international trade. He poses the same question: is free trade good? This time the professor is stymied. “What do you mean by ‘good’?” he responds. “And good for whom?” The professor then launches into an extensive exegesis that will ultimately culminate in a heavily hedged statement: “So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone’s wellbeing.” If he is in an expansive mood, the professor might add that the effect of free trade on an economy’s longterm growth rate is not clear either, and would depend on an altogether different set of requirements.
This professor is rather different from the one the journalist encountered previously. On the record, he exudes self-confidence, not reticence, about the appropriate policy. There is one and only one model, at least as far as the public conversation is concerned, and there is a single correct answer, regardless of context. Strangely, the professor deems the knowledge that he imparts to his advanced students to be inappropriate (or dangerous) for the general public. Why?
The roots of such behaviour lie deep in the culture of the economics profession. But one important motive is the zeal to display the profession’s crown jewels – market efficiency, the invisible hand, comparative advantage – in untarnished form, and to shield them from attack by self-interested barbarians, namely the protectionists. Unfortunately, these economists typically ignore the barbarians on the other side of the issue – financiers and multinational corporations whose motives are no purer and who are all too ready to hijack these ideas for their own benefit.
As a result, economists’ contributions to public debate are often biased in one direction, in favour of more trade, more finance and less government. That is why economists have developed a reputation as cheerleaders for neoliberalism, even if mainstream economics is very far from a paean to laissez-faire. The economists who let their enthusiasm for free markets run wild are in fact not being true to their own discipline.
How then should we think about globalisation in order to liberate it from the grip of neoliberal practices? We must begin by understanding the positive potential of global markets. Access to world markets in goods, technologies and capital has played an important role in virtually all of the economic miracles of our time. China is the most recent and powerful reminder of this historical truth, but it is not the only case. Before China, similar miracles were performed by South Korea, Taiwan, Japan and a few non-Asian countries such as Mauritius. All of these countries embraced globalisation rather than turn their backs on it, and they benefited handsomely.
Defenders of the existing economic order will quickly point to these examples when globalisation comes into question. What they will fail to say is that almost all of these countries joined the world economy by violating neoliberal strictures. South Korea and Taiwan, for instance, heavily subsidised their exporters, the former through the financial system and the latter through tax incentives. All of them eventually removed most of their import restrictions, long after economic growth had taken off.
But none, with the sole exception of Chile in the 1980s under Pinochet, followed the neoliberal recommendation of a rapid opening-up to imports. Chile’s neoliberal experiment eventually produced the worst economic crisis in all of Latin America. While the details differ across countries, in all cases governments played an active role in restructuring the economy and buffering it against a volatile external environment. Industrial policies, restrictions on capital flows and currency controls – all prohibited in the neoliberal playbook – were rampant.
By contrast, countries that stuck closest to the neoliberal model of globalisation were sorely disappointed. Mexico provides a particularly sad example. Following a series of macroeconomic crises in the mid-1990s, Mexico embraced macroeconomic orthodoxy, extensively liberalised its economy, freed up the financial system, sharply reduced import restrictions and signed the North American Free Trade Agreement (Nafta). These policies did produce macroeconomic stability and a significant rise in foreign trade and internal investment. But where it counts – in overall productivity and economic growth – the experiment failed. Since undertaking the reforms, overall productivity in Mexico has stagnated, and the economy has underperformed even by the undemanding standards of Latin America.
These outcomes are not a surprise from the perspective of sound economics. They are yet another manifestation of the need for economic policies to be attuned to the failures to which markets are prone, and to be tailored to the specific circumstances of each country. No single blueprint fits all.
As Peters’s 1982 manifesto attests, the meaning of neoliberalism has changed considerably over time as the label has acquired harder-line connotations with respect to deregulation, financialisation and globalisation. But there is one thread that connects all versions of neoliberalism, and that is the emphasis on economic growth. Peters wrote in 1982 that the emphasis was warranted because growth is essential to all our social and political ends – community, democracy, prosperity. Entrepreneurship, private investment and removing obstacles that stand in the way (such as excessive regulation) were all instruments for achieving economic growth. If a similar neoliberal manifesto were penned today, it would no doubt make the same point.
Critics often point out that this emphasis on economics debases and sacrifices other important values such as equality, social inclusion, democratic deliberation and justice. Those political and social objectives obviously matter enormously, and in some contexts they matter the most. They cannot always, or even often, be achieved by means of technocratic economic policies; politics must play a central role.
Still, neoliberals are not wrong when they argue that our most cherished ideals are more likely to be attained when our economy is vibrant, strong and growing. Where they are wrong is in believing that there is a unique and universal recipe for improving economic performance, to which they have access. The fatal flaw of neoliberalism is that it does not even get the economics right. It must be rejected on its own terms for the simple reason that it is bad economics.
Dani Rodrik
The Fall and Rise of Economic History
“Irritated, one shoos it out the door, and almost immediately it climbs in through the window.” Without the concept of capitalism, the late French historian Fernand Braudel once wrote, it was impossible to study economic history. But the reverse is equally true: We can’t understand capitalism without economic history.
Once a mainstay of history departments, economic history was, with historians’ complicity, seized in the mid-20th century by economists who sucked the culture and chronology out of it and turned it into an obscure province of mathematical formulas. There it languished. The field became increasingly uncool. By the 1990s, to be a materialist in the age of Michel Foucault and Pierre Bourdieu was to be “deterministic”—in other words, a dinosaur. So economic history further retreated to economics departments, where many self-described economic historians had already been gathering under the banner of the “new economic history.”
The past decade has exposed some fundamental problems with that division of disciplinary labor. The now-old “new” economic history either fizzled or has become so technical, so unrecognizable to anyone who cannot wield its finely tuned analytics, that few historians can engage with it. Meanwhile, fewer and fewer economics departments now consider history—including the history of economics itself—a relevant domain of disciplinary inquiry, with many of the top departments having eliminated economic history from their programs altogether.
Lately historians have started to take it back, spurred by a demand to better understand the roller coaster of capitalist life, particularly how inequality and globalization factored into the recession. The economic crisis pushed courses on the “history of capitalism” to the top of the charts in history departments around the country, even making front-page news in The New York Times. With conferences, courses, and book series, the history of capitalism, one of the few areas of inquiry where job postings are growing, is on the verge of becoming an established subfield. The runaway success of Thomas Piketty’s Capital in the Twenty-First Century (Harvard University Press)raised even higher the political and intellectual profile of capitalism and its history.
In this way, a prodigal-son subfield has returned. Historians do not leave political history to political scientists, or social history to sociologists. Why should economic history be left to economists, especially when they ignore it? Besides, the humanities might well benefit from the revival of a field that once served as a bridge to the social sciences.
The history of capitalism performs heroic service, but bereft of a broader grasp of the history of economic life, it can’t provide deep insights into the makings of systems of production, circulation, and distribution. Capitalism is a latecomer in that story, and, like all latecomers, more reliant on its precursors and alternatives than its apostles and critics like to admit. There can be no history of capitalism without an economic history near its explanatory core.
Like democracy or modernity, capitalism is a historical problem, specific to time and place. If only because it eludes easy definition, it must be studied from different perspectives, with different historical methodologies. There are social histories of democracy, intellectual histories of democracy, and, of course, political histories of democracy. The economy could be the subject of similar multiple approaches. But it is not. It has been treated as a realm apart.
This is a surprising state of affairs. Looking back to 1960 or even 1980, one would not have predicted the eclipse of economic history. From the Progressive Age (1900 to 1930) onward, it was almost de rigueur to proclaim the material roots of everything and to tie one’s research to the broad spirit of reform. Capitalism’s postwar “golden age” was good for economic history, as it was for the world economy. The pairing of “social and economic history” was the fallback working methodology of many professional historians. The works of Eric Hobsbawm, Thomas C. Cochran, and Braudel himself were touchstones. Even books by the first generation of new economic historians, such as Robert Fogel and Stanley Engerman’s Time on the Cross: The Economics of American Slavery (Little, Brown and Company, 1974), were read and reckoned with by noneconomic historians. Surely globalization, the ascendance of China, and the rise of Apple should have continued to fuel the field.
A confluence of several forces broke things up. By the 1960s, economic history was increasingly associated with development economics, at a time when that field was seen as running out of steam. It often took the likes of Alexander Gerschenkron and R.H. Tawney as departure points and was preoccupied with identifying (or debunking) catalytic factors in the “takeoff,” as W.W. Rostow put it in The Stages of Economic Growth, to modern economic growth. Here the importance of the economy—while often disaggregated into various sectors, industry almost always the leading one—was taken as a given. Further, many economic historians concerned themselves with the economic growth of nation-states—bounded entities in space, which grew (or not) across a nation’s chronology. Postwar economic history became a modern enterprise aimed at explaining how to expand the pie.
Behind the scenes, though, the consensus was coming apart. Some say a change took place in 1960, when the editing of The Journal of Economic History passed to William Parker and Douglass North, two economists with deep interests in historical processes but also commitments to sophisticated statistical methods. The English Economic History Review, the French Annales d’histoire économique et sociale, and even Past & Present stayed true to their narrative roots but eventually suffered from dwindling readership, or chose to diversify or rebaptize themselves.
The features of what was dubbed “the new economic history” are well known. Chiefly there were three—an evidentiary style that preferred numbers to narratives, an effort to disaggregate variables to test causal claims about growth, and a reliance on the methodological individualism of neoclassical economics to make inferences about behavior, even of groups. William H. Sewell Jr. has charted the rise of quantitative styles and the demise of narratives in economic-history journals. In 1965-66, only 8 percent of Journal of Economic History articles boasted mathematical equations. By 2008 the count was 62 percent, by which time 90 percent of the articles contained statistical tables.
The preference for numbers was less troublesome than the assumptions hitched to them. The neoclassical economics behind the new approach claimed to hold the keys to both current and future equilibrium states. But it did not have a theory about time, about how to move from one state to the next. That posed problems because grappling with time is what historians do. While the “cliometricians,” as they dubbed themselves without irony, offered findings that fit an all-purpose economic theory, they collapsed history into a static formula, a global equilibrium for a world of possessive individualists. Coincidentally, if less consciously, the prospect of intervening for the purposes of reform faded away.
Economic history seceded from the study of history generally. After all, the point of going cliometric was to subject the study of the past to the more-rigorous scientific norms of economics and formal models. True, the occasional historian has dared venture into the domain of economic theory. But if Niall Ferguson’s recent pitfall into Keynesian economic theory is any indication, it’s not a game for the faint of heart. Or the humble.
A second consequence was less perceptible and took more time to play out. The rise of cultural history in particular, and the engagement with more-interpretive social sciences in general, turned more and more historians away from structures and statistics and toward meanings and mentalities. Among the meanings to be dissected using that interpretive approach were categories that economists used with happy abandon, like “labor,” “credit,” and “industry.” Institutions and innovations, rather than the results of individual and group responses to incentives, were studied as social and cultural constructs. For some, especially those influenced by Foucault, the drive to modernity was less about a grand narrative of making plenty and more about micronarratives of power and alienation.
So, one side went causal while the other went cultural. After Fogel and North won the 1993 Nobel Memorial Prize in Economic Sciences, the economic historian Claudia Goldin remarked on the extinction of economic history from history departments, worrying that the prize served as a kind of elegant epitaph for an alliance that once crossed disciplinary boundaries. “The new economic historians,” she noted, “extinguished the other side”—a side that had moved on of its own accord. By the turn of the millennium, what we got was a de facto agreement for each side to bask in the glow of its unexamined assumptions about the other.
There is always, of course, more to the rise and fall of academic fields than their internal history. So much of what economic history had become was, in fact, attached to the capitalism question. Capitalism, in postwar economic history, was the present industrial stage in nations’ grand and irreversible march through time. It was also communism’s evil twin; the term “capitalism,” after all, was coined by late-19th-century socialists to name the enemy. In a sense, economic history thrived as long as there were rivals to capitalism.
The question of the “origins of capitalism” was so hotly debated in part because so many historians—and not just the Marxists among them—were concerned with the threats it faced. Rostow’s Stages of Economic Growth, an unapologetic defense of capitalism, laid its cards on the table with its subtitle, A Non-Communist Manifesto. It was a manifesto precisely because it claimed to distill what we knew about how capitalism could (as befitted the jet age) “take off” and bring abundance to all. This was especially relevant in 1960, when much of the third world was up for ideological grabs and listening to the siren calls of socialism and revolution. Rostow himself would soon leave the halls of MIT for the White House, carrying his lessons from economic history to the defense of the free world.
As the romance with revolution wore off, so did the urgency to understand the mystique of capitalism. By the time Francis Fukuyama’s The End of History and the Last Man (Free Press, 1992) declared the triumph of liberal-capitalist democracy over all possible alternatives, many people had lost interest in capitalism’s origins and consequences. Questions gravitated to what kind of capitalism rather than how or why. Big books in post-Cold War economic history, like David Landes’s The Wealth and Poverty of Nations (W.W. Norton, 1999), read like the rise of the capitalist West and the travails of the catching-up rest. The story line had a moral: Nations that do not conform, whether to the narratives of economic historians or to the dictates of the 1990s Washington consensus, were doomed to misery.
It did not help that economics, the discipline tasked with giving us the clues to understand the economy, was moving further and further from reach, not just from historians but also from the rest of the social sciences, let alone the broader public. Many veteran economists today complain that they can’t fathom the math of their younger colleagues. Increasingly, technical economic history follows the cues (not to say the incentives) of its master discipline to simulate natural experiments, relying upon the narrowest of behavioral assumptions about homo economicus, mining data excavated and stylized from the past.
Without historians in their midst, the new new economic historians were unaccountable to those who shared different understandings of what a preference is. Political or personal choices were siphoned as the outcomes of a timeless economic calculus. Some have taken matters a step further to make the case for the application of game theory, as if traditional narratives were simply “facts arranged chronologically.” Since this type of social scientist doesn’t write for historians, even if they wring them for data, historians’ basic assumptions about the contested nature of narratives, and the craft that must go into constructing them, do not get through. No wonder, then, that many historians take one look at what passes for cutting-edge economic history, shrug, and move on.
Then came 2008. With the crisis, pessimism about capitalism’s present and future came storming back, and the topic returned center stage to American history departments.
As the pie shrank, the publishing world was flooded with big, noise-making books. Histories of financial crises, like Carmen M. Reinhart and Kenneth Rogoff’s This Time Is Different (Princeton University Press, 2009), became best sellers. As the fate of the American middle class became more uncertain, as Europe entered fiscal crisis, as China took over the solar-panel business, and as some parts of the world seemed to fall into a tailspin, liberal capitalism seemed less assured and its history more confusing—or, as historians like to say, more “contingent.”
Grand narratives of the rise of the West have continued to appear, Daron Acemoglu and James Robinson’s Why Nations Fail (Crown Publishers, 2012) chief among them. But the tone is altogether different. Divides, disparities, and divergences have elbowed aside miracles, takeoffs, and growth. Acemoglu and Robinson’s choice to swap out the 20th-century obsession with growth for the 21st’s fixation on failure is a giveaway.
As a couple of historians interested in the economy, we’re happy to see American history departments welcome the topic of capitalism back into the fold. (Outside the United States, subfields didn’t fork in such opposite directions, so the rift has been less of a problem.)
Our joy might seem out of place amid so much economic gloom, but the trend was evident even before the recession. Globalization and competition were already bringing to the fore economic factors in daily life. Consider Kenneth Pomeranz’s The Great Divergence: China, Europe, and the Making of the Modern World Economy (Princeton University Press, 2000). Pomeranz asked an old question—why did the Industrial Revolution happen first in Europe and not Asia? To answer it, he appealed to multiple spatial scales, above and below nation-states, from regions to empires. He employed numbers, but for the purpose of old-fashioned counting, not modeling, and he made those figures part of the story. Furthermore, by pointing to the ecological windfall of New World frontiers, Pomeranz enlisted a sibling field, environmental history. Finally, while his account was primarily about causality, he nodded to an array of historical processes and showed sensitivity to the perspectives of the diverse participants in his tale. As Westerners grew nervous about the rise of China, and the hegemony of the West seemed less given, the global dimension of The Great Divergence struck a nerve.
While economic history’s stock rose with globalization, the new economic history’s stock fell because of doubts about its behavioral assumptions. Even before the recession, the heroic figure of the utility-maximizing homo economicus appeared less infallible. Rational actors? Not even the Federal Reserve’s chairman at the time, Alan Greenspan, could find them. Irrationality, passion, and greed stormed the stage. Subprime mortgage loans, hedge-fund quants’ calculations, moral hazards, tech start-up and IPO crazes made for much better drama.
To their credit, some economists and other social scientists had already recognized the problem, as evidenced in Amartya Sen’s 1977 paper “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory” and Albert O. Hirschman’s “pendular” man, swinging between self-interest and concern for others.
But those were the exceptions. Daniel Kahneman, the behavioral psychologist known for his studies of decision making, was shocked to discover that “the agent of economic theory is rational, selfish, and his tastes do not change.” He added: “My economic colleagues worked in the building next door, but I had not appreciated the profound difference between our intellectual worlds. To a psychologist, it is self-evident that people are neither fully rational nor completely selfish, and that their tastes are anything but stable.”
Historians were no less shocked. Cultural historians for decades had been writing about “market cultures” and what they called “subjectivity.” But because they no longer imagined themselves in conversation with economists in the building next door, they had no chance to be heard. Lately, though, historians have explored the cultures around money, statistics, and finance, to take just a few examples.
The production, distribution, and consumption of value are common descriptors of what constitutes the economy, with economists normally treating value as synonymous with prices. But market prices can’t be the only gauge of value, as demonstrated by a recent spate of philosophical books, among them Debra Satz’s Why Some Things Should Not Be for Sale (Oxford University Press, 2010) and Michael Sandel’s What Money Can’t Buy (Farrar, Straus and Giroux, 2012). Historians have a lot to contribute to such discussions—now that they realize they’re a part of them.
Even the very idea of “the economy” is the source of revitalized attention. Instead of isolating variables, we can tell the histories of variables and categories of economic life. We can give homo economicus a real, historically conditioned life. It’s the equivalent of turning a computer-modeled Pinocchio into a real boy. This does not mean being antiquantitative, or anticausal, but it does mean understanding that the numbers and agents live in time, and, by implication, that socioeconomic trends are open to intervention and change.
What’s the evidence behind our optimism? The first is the rekindled interest in the history of economic ideas. No longer a subset of intellectual history engrossed in controversies over, say, whether Adam Smith had a concept of marginal utility, the history of economics has found kinship with the history of science and politics. Albert Hirschman and Emma Rothschild have worked to place political economy back into the tapestry of discussions of human nature and the pursuits of power and wealth. More recently, historians like Mary Morgan have charted how political economy evolved from a verbal science, steeped in rhetorical traditions as a branch of literature, to a model science, grounded in reasoning tools that render the subject into a manipulable object that can be simulated, graphed, and spliced into separable equations. From a subject that could be understood through a few general, usually hidden laws, the economy, she argues, became an amalgamation of discrete, increasingly ornate, miniaturized models.
The work of Timothy Mitchell and others has already demonstrated that the economy is not a thing waiting out there to be measured by economists (or economic historians), but the result of a long historical struggle over warfare, empire, and welfare. Indeed, the idea of the calculable economy, like the offshoot capitalism, is a Johnny-come-lately, forged by national and international statecraft and polished only in the 20th century. Its origins extend at least as far back as William Petty’s attempt in 1665 to enumerate the incomes and expenditures of England and Wales, in preparation for war against the Netherlands. Petty anticipated the 20th-century quest for national accounting systems, which culminated in the invention of the statistical aggregate of gross domestic product in 1941, in the midst of another war.
The postwar world demonstrated that this intellectual history was inseparable from the manufacture of economic structures themselves. So much of the development-economics enterprise after 1945 was about creating an economy out of what was seen as a tapestry of loosely strung-together pre-market patches. This attitude saturated the World Bank’s catalog of “missions” (the evangelical tone is hard to miss) to the newly branded third world to forge a modern economy out of the fragments of “backwardness” and “inertia.” Behind Rostow’s manifesto was a mental concept.
Now it is the economy that needs explaining. Economic concepts and tools appear less as a framework for analyzing history than the other way around. We might call this inverted relationship between the economy and history not economic history, but the history of economic life.
Rather than an economic history that takes for its object a timeless given, divorced from other domains of life, a history of economic life historicizes the economy itself, in part by attending to the fuzzy and shifting boundaries between the economic and noneconomic. Rather than confining our studies to market prices and production determined by assumptions about rationality, we can treat these activities across a variety of scales, from the intimate to the global, and through a variety of structures, from the contingent to the durable, and within a broader context of subjectivities and values.
The global dimension is crucial. The trajectories of the production of wealth and of social disparities were global long before capitalism; some might say they laid the groundwork for capitalism. The most recent and intense global turn has disrupted the history of capitalism in at least two ways. First, narratives about the triumph of the West now seem relics of a more confident era. That’s one reason Niall Ferguson’s recent Civilization: The West and the Rest (Penguin, 2011) struck many critics as, well, quaint. Seen over the long run, systems come and go; so do their geographic bearings.
Moreover, seen globally, the economy is the product of more than just the attributes of one particular place (the West) or time (the modern age). Recent and pipeline works will push historians of American capitalism to think in more global, transnational, and comparative terms, and to be mindful that what appear today to have been outdated, precapitalist formations—slavery, household economies, ennobled magnates—had essential places in the story and have not faded away so easily or tidily. In some cases, as anyone attentive to current social inequality can attest, they acquired a new lease on life.
The study of capitalism requires scope and imagination. It needs an economic history reconnected to the broad trunk of history and the humanities. Then, who knows—rather than historians imitating economists, perhaps we’ll see the reverse.
Capital, Science, Technology
Understanding the way in which contemporary capitalism—which Samir Amin insightfully characterized as the era of generalized monopolies—organizes productive forces is crucial to grasping both the forms of domination defining imperialism today and the profound metamorphoses that monopoly capital has undergone during the last three decades.1
The concept of general intellect, put forward by Karl Marx, is a useful starting point for the exploration of the organization of productive forces. Let us take the example of one of the most “advanced” innovation systems today: Silicon Valley’s Imperial System. Our analysis seeks not only to reveal the profound contradictions of capitalist modernity, but also to highlight the significant transmutation that today’s monopoly capital is undergoing. Far from acting as a driving force for the development of social productive forces, it has become a parasitic entity with an essentially rentier and speculative function. Underlying this is an institutional framework that favors the private appropriation and the concentration of the products of general intellect.
Capital, General Intellect, and the Development of Productive Forces
Capitalism is characterized by the separation of the direct producers from their means of production and subsistence. This separation broke violently into the embryonic phase of capitalist development with the process that Marx referred to as “so-called primitive accumulation” (more correctly translated as “so-called primary accumulation”). It is not just a foundational process, external or alien to the dynamics of capitalism, but one that reproduces itself over time and is accentuated through new and increasingly sophisticated mechanisms with the advent of neoliberal policies, so much so that David Harvey proposed the category “accumulation by dispossession” in his book The New Imperialism to refer to this incessant phenomenon.2
Importantly, the primal separation of the direct producer that Marx describes in chapters 14 and 15 of the first volume of Capital is only formal. In the early stages of industrial capitalism, even if the direct producers did not own the means of production—which they considered foreign property and an external force of domination—they maintained some control over their working tools in the production process. Thus, the separation was not wholly complete until the appearance of large-scale industry in the second half of the twentieth century, which radically changed the situation. The production of machines by machines—that is, the use of an integrated machinery system, as a totality of mechanical processes distributed in different phases moved by a common motor—gave way to a complete separation between workers and their tools. This brought the optimal conditions for a second and deeper dispossession, relegating labor to a subordinated role in the production process and converting the worker into an appendage of a machine. It is worth mentioning, however, that the use of this metaphor by Marx does not mean that the direct producer is unable to eventually contribute to the attainment of an improvement or a technological innovation. There are several historical examples that account for this possibility.
Nevertheless, in terms of the theory of value, there is a general movement toward the predominance of dead labor, objectified in the machine, over living labor—in other words, the prevalence of relative surplus value in the dynamics of capitalist accumulation. The emergence of machinery and large-scale industry meant that capital managed to create its own technical mode of production as the foundation of what Marx conceives in the unpublished sixth chapter of Capital, volume 1, as the real subsumption of labor under capital; in other words, the “specific capitalist mode of production.” As Marx wrote, “the historical significance of capitalist production first emerges here in striking fashion (and specifically), precisely through the transformation of the direct production process itself, and the development of the social productive powers of labour.”3
This process originated during the second half of the First Industrial Revolution and deepened during the Second Industrial Revolution (1870–1914), where science and technology appear as engines of production, forcing development as the so-called first globalization was occurring. Since then, the growth of capital has been directly associated with the development of production forces and the consequent expansion of surplus value, mainly in the form of relative surplus value. At the same time, this is marked by the continuous increase in the organic composition of capital (the relation between capital invested in the means of production and that invested in the labor force), where “the scale of production is not determined according to given needs but rather the reverse: the number of products is determined by the constantly increasing scale of production, which is prescribed by the mode of production itself.”4 This inherent contradiction in the specifically capitalist mode of production is related, in turn, to (1) the trend of concentration and centralization of capital that accompanies accumulation dynamics and (2) the concomitant tendency toward absolute impoverishment of the working class, in what Marx conceives as the general law of capitalist accumulation:
The greater the social wealth, the functioning capital, the extent and energy of its growth, and, therefore, also the absolute mass of the proletariat and the productiveness of its labor, the greater is the industrial reserve army. The same causes which develop the expansive power of capital also develop the labor power at its disposal. The relative mass of the industrial reserve army increases, therefore, with the potential energy of wealth. But the greater this reserve army in proportion to the active labor army, the greater is the mass of a consolidated surplus population, whose misery is in inverse proportion to its torment of labor. Finally, the greater the growth of the misery within the working class and the industrial reserve army, the greater the official pauperism.5
The trend toward the complete separation of the worker from the means of production is consolidated into what Victor Figueroa described as follows:
The factory offers us the image of a production center that does not demand workers’ awareness or knowledge of the production process.… As if the factory, being itself the result of the productive application of knowledge, demanded for the knowledge to be developed outside and, therefore, independently to the workers it houses, where immediate labor is presumably a mere executor of the progress forged separately by science.6
In Labor and Monopoly Capital, Harry Braverman described this fissure as an essential part of the scientific and technological revolution that detached the subjective and objective content of the labor process.
The unity of thought and action, conception and execution, hand and mind, which capitalism threatened from its beginning, is now attacked by a systemic dissolution employing all the resources of science and various engineering disciplines based upon it. The subjective factor of the labor process is removed to a place among its inanimate objective factors. To the materials and instruments of production are added a “labor force,” another “factor of production,” and the process is henceforth carried on by management as the sole subjective element.… This displacement of labor as the subjective element of the process, and its subordination as an objective element in a productive process now conducted by management, is an ideal realized by capital.7
In the face of these circumstances, derived from the technical and social division of labor inherent to the specifically capitalist mode of production, it is worth asking ourselves: In what way does capital, beyond the immediate work that is deployed in the factory, organize the development of the productive forces? What kinds of workers, universities, and research centers participate in this process? What is the role of the state and other institutions? What role do accumulated social knowledge, basic and applied science play? What types of intangible and tangible products are generated? What are the mechanisms and mediations involved in the transformation of scientific and technological work to productive forces? What kind of profit enters the scene and how does it affect the dynamics of social surplus value distribution, concentration, and centralization of capital?
Although Marx does not explicitly address this issue in Capital except in marginal footnotes, in the Grundrisse’s “Fragment on Machines,” he coined the category of general intellect and made some considerations, in the form of notes, that provide important clues to help us understand the subject.
Nature builds no machines, no locomotives, railways, electric telegraphs, self-acting mules etc. These are products of human industry; natural material transformed into organs of the human will over nature, or of human participation in nature. They are organs of the human brain, created by the human hand; the power of knowledge, objectified. The development of fixed capital indicates to what degree general social knowledge has become a direct force of production, and to what degree, hence, the conditions of the process of social life itself have come under the control of the general intellect and have been transformed in accordance with it. To what degree the powers of social production have been produced, not only in the form of knowledge, but also as immediate organs of social practice, of the real-life process.8
From this, we can infer that fixed capital, or constant capital, is condensed into past material and immaterial labor (dead labor). Consequently, accumulated social knowledge is objectified in the means of production and becomes an immediate force of production. In other words,
general intellect is a collective and social intelligence created by accumulated knowledge and techniques. This radical transformation of the workforce and the incorporation of science, communication and language within the productive forces has redefined the entire phenomenology of labor and the entire global horizon of production. General intellect means that the general form of human intelligence becomes a productive force in the sphere of global social labor and capitalist valorization. The power of science and technology are put to work.… With the concept of general intellect, Marx refers to science and consciousness in general, that is, the knowledge on which social productivity depends.9
With the advent of the capitalist mode of production, a new and particularly significant division was created between what could be called immediate labor and scientific-technological labor. While the former unfolds in the factory, the latter is carried out separately and under different, although complementary, forms of organization, with both converging in the critical function for capitalist development: the increase of surplus value. If immediate labor is actually subsumed by capital, scientific and technological labor can only be, at best, formally subsumed, becoming what Figueroa calls a workshop of technological progress to distinguish it from the way immediate labor in the factory is organized.10 However, the way general intellect is structured, in its quest to accelerate the development of productive forces, acquires increasingly sophisticated and complex modalities, as in the paradigmatic case of the Silicon Valley Imperial Innovation System.
The growing importance of immaterial work in the production process does not imply a “crisis” of the law of value, as suggested by Antonio Negri.11 Rather, it implies that an increasing proportion of the social surplus value and the social surplus fund captured by capital and the state is redistributed toward activities aimed at promoting the development of productive forces. In other words, immediate labor and scientific-technological labor interweave dialectically to broaden the scope of capital valorization through the deepening of exploitation. In this sense, under the prism of the theory of value, the general intellect contributes to increasing the organic composition of capital with a powerful leitmotif: the appropriation of extraordinary profits, that is, profits greater than the average profit, commonly conceived as technological rents. In this aspect, the Ecuadorian-Mexican philosopher Bolívar Echeverría specifies that there are
two poles of monopoly property to which the group of capitalist owners must acknowledge rights in the process of determining the average profit. Based on the most productive resources and provisions of nature, land ownership defends its traditional right to convert the global fund of extraordinary profit into payment for that domain, in other words, into ground rent. The only property that is capable of challenging this right throughout modern history and has indefinitely imposed its own, is the more or less lasting domain over a technical innovation of means of production. This property forces the conversion of an increasing part of extraordinary profit into a payment for its dominion, in other words, into a “technological rent.”12
It is worth noting that Echeverría brackets the notion of technological rent, associating it with ground rent—or surplus associated with the ownership of a monopolizable good that does not derive from incorporated labor during the production process. Under the new forms of general intellect organization, monopoly capital appropriates profit through the acquisition of patents, without implying investments in the promotion and development of the productive forces, behaving in this sense as a rentier agent.
Unlike immediate labor, the subordination of scientific and technological labor to capital is extremely complex, especially because the value that the scientific and technological labor force incorporates into the production process is not immediately objectified; it is the product and result of social knowledge expressed in the market once new commodities, new production processes, and new ways of organizing and increasing labor productivity are concretized. Pablo Míguez refers to this phenomenon not as “a simple subordination to capital, but an independent relation to labor time imposed by capital, making it increasingly difficult to distinguish working time from production time or leisure time.”13
From the theory of value perspective, the process of valorization of scientific and technological labor is materialized in the production and circulation sphere, but in the distribution sphere of valorized capital, that social surplus value, mediated by intellectual property, is issued in the form of a rent. In this sense, it is important to emphasize the fundamental role held by states in the distribution of social surplus to promote basic and applied science, supporting public and private universities, as well as research centers. The state also contributes to creating institutions and policies that allow for the private appropriation of rent to come out of the general intellect. These institutions become crucial to the dynamics of accumulation and uneven development characterizing contemporary capitalism and imperialism.
The transformation of the general intellect into an immediate productive force, materialized in new commodities and new ways of organizing the labor process, requires the mediation of patents and a patenting system. In the capitalist mode of production, the creation of intellectual property through patents or patenting systems acquires a strategic importance in relation to the control and orientation of productive forces. This becomes a key element both for the private appropriation of products that emanate from the general intellect, and for the organization of innovation systems. In this sense, national and international patent legislations constitute a mechanism that enables the privatization and commodification of common goods, hindering potentially beneficial innovations for society.14 For example,
The legal mechanisms for the private appropriation of scientific-technological labor, with the patent as a nodal part in the restructuring of innovation systems, becomes a basic piece for the withholding of extraordinary profits made possible through global corporate regulation in tune with the imperial State policies.… Hence, international law functions as a core piece of private control of scientific-technological labor through a series of intellectual property and international trade regulatory agreements.15
Following this idea, Míguez argues that, in the context of contemporary capitalism, “intellectual property is reinforced as it is the only mechanism that allows for the private appropriation of increasingly social knowledge in its incessant quest to valorize capital.”16
The development of the productive forces in contemporary capitalism—and the course followed by the general intellect—cannot be understood separately from the contemporary domination of monopoly capital. This hegemonic fraction of capital—ubiquitous in contemporary capitalism—finds its raison d’être in the appropriation of extraordinary profits and technological rents through monopoly prices, among other processes. According to Marx, monopoly appropriation of profit through prices refers to prices that rise above the cost of production and the average profit together, enabling monopoly capital to appropriate a relatively greater portion of social surplus value than the one that would correspond to conditions of free competition.
Another fundamental feature of monopoly capital, as a sine qua non condition for obtaining profits, is its need to maintain lasting advantages over other possible participants in a particular branch or branches where it operates. Such advantages can be natural or artificial, depending on the combination of forms of surplus profit, which, in turn, configure particular monopolistic practices. One of these forms is related to capitalism’s revolutionary development of productive forces, as envisioned by Marx: technological change. In this regard, Joseph A. Schumpeter—far from intending to identify his vision of technological change with that proposed by Marx in Capital—sets forth the existence of a positive relationship between innovation and monopoly power, arguing that competition through innovation or “creative destruction” is the most effective means of acquiring advantages over potential competitors. Furthermore, Schumpeter argues that innovation is both a means of achieving monopoly profit and a method of maintaining it.
It should be noted, however, that in the Marxist conception, there is no mechanical or direct identification of technological change with a positive vision of progress. On the contrary, being governed by the law of value and the necessity of capital to broaden accumulation, technological change does not escape the contradictions of capitalist modernity, which, as Echeverría emphasizes, “leads itself, structurally, by the way in which the process of reproduction of social wealth is organized…to the destruction of the social subject and the destruction of nature where this social subject affirms itself.”17
The appropriation of extraordinary monopoly profits produced by means of intellectual property is accompanied in contemporary capitalism by a profound restructuring of this hegemonic fraction of capital, through a process of hyper-monopolization, where three additional forms of profit appropriation stand out:18
- The formation of monopoly capital global networks, commonly known as global value chains, through the geographic expansion of corporate power by transferring parts of production, commercial, and financial service to peripheral countries in search of cheap labor.19 Basically, it is a new nomadism in the global production system based on the enormous wage differentials that persist between the Global North and the Global South (the global labor arbitrage). This restructuring strategy has deeply modified the global geography of production to the degree that just over 70 percent of industrial employment is currently located in peripheral or emerging economies.20
- The predominance of financial capital over other factions of capital.21 In the absence of profitable investments in the productive sphere due to the overaccumulation crisis triggered in the late 1970s, capital began moving toward financial speculation, creating strong distortions in the sphere of social surplus value distribution through the financialization of the capitalist class, which has led to an explosion of fictitious capital—financial assets without a counterpart in material production.22
- The proliferation of extractivism by monopolizing and controlling land and subsoil by monopoly capital.23 In addition to accentuating the dynamics of accumulation by dispossession, the growing global demand for natural resources and energy has led to an unprecedented privatization of biodiversity, natural resources, and communal goods benefiting mega-mining and agribusiness. This implies the appropriation of huge extraordinary profits in the form of ground rent (unproduced surplus value) that translates into greater ecosystem depredation, pollution, famine, and disease with severe environmental implications, including global warming and worsening extreme climatic events that jeopardize the symbiosis between human society and nature.24
The predominance and metamorphosis of monopoly capital under the neoliberal aegis has brought about far-reaching transformations in the organization of production and the labor process. These transformations are integral to the global capitalist system’s geography, leading to a fall of the welfare state, an increase in social inequalities, and the emergence of a new international division of labor, where the labor force becomes the main export commodity. This, in turn, gives way to new and extreme forms of unequal exchange and transfer of surplus from the periphery to the core economies of the system. In this context, the irruption of the technoscience revolution has generated new ways of promoting scientific and technological creativity, of organizing the general intellect on a global scale and of appropriating its products.
Untangling Silicon Valley’s Imperial Innovation System
A strategic dimension of capitalist development in the era of generalized monopolies corresponds to the extraordinary dynamism that the development of productive forces achieves through a rampant rate of patenting. Hence, it is vital to understand the characteristics of the most advanced innovation system today, hegemonized by the United States and georeferenced in Silicon Valley, which operates as a powerful patenting machine and has tentacles in various peripheral and emerging countries. The organizational architecture of the general intellect in this complex economic terrain enables corporate control over scientific and technological labor of an impressive mass of intellectual workers trained in different countries around the world, both in core and periphery economies. In this system, a wide range of agents and institutions interact to speed up the dynamics of innovation, reducing the costs and risks associated with inventors and independent entrepreneurs—organized through innovative embryonic companies known as startups—to be capitalized by large corporations through the acquisition or appropriation of patents.25
Some of the most outstanding features of what we conceive as the Silicon Valley Imperial Innovation System are:
- The internationalization and fragmentation of research and development activities under “collective” methods of organizing and promoting innovation processes: peer to peer, share economy, commons economy, and crowdsourcing economy, through what is known as Open Innovation. These are forms of scientific and technological inventions produced outside the boundaries of multinational corporations, which involve the opening and spatial redistribution of knowledge-intensive activities, with the increasing participation of partners or external agents to large corporations, such as startups that operate as privileged cells of the new innovative architecture, venture capital, clients, subcontractors, head hunters, law firms, universities, and research centers.26 This new form of organizing the general intellect has given way to the permanent configuration and reconfiguration of innovation networks that interact under a complex interinstitutional fabric commanded together by large multinational corporations and the imperial state (see Chart 1). This networked architecture has deeply transformed previous ways of driving technological change. It is worth noting that, in this context, scientific and technological labor carried out by startups is not formally subsumed to capital as inventors are not direct employees of large corporations. Hence, subsumption is subtle and indirect, backed by an institutional framework established by the Patent Cooperation Treaty of the World Intellectual Property Organization (WIPO) and a sophisticated ecosystem network that fosters the collective development of products emerging as part of the general intellect on a planetary scale and its private appropriation through patents and other proprietary mechanisms mediated by law firms responding to large multinational corporation interests. As a result, accumulated social knowledge—a collective drive accelerated by networks of scientists and technologists—ends up in corporate hands through juridical mechanisms.27
- The creation of scientific cities such as Silicon Valley in the United States and new “Silicon Valleys” recently established in peripheral areas or emerging regions, mainly in Asia, where collective synergies are created to accelerate innovation processes. As Annalee Saxenian highlights, it is a new georeferenced paradigm that moves away from the old research and development models and opens the way for a new culture of innovation based on flexibility, decentralization, and the incorporation, under different modalities, of new and increasingly numerous players that interact simultaneously in local and transnational spaces.28 Silicon Valley became the pivot point of a new global innovation architecture, around which multiple peripheral links are woven to operate as a sort of scientific maquiladora located in regions, cities, and universities around the world. This gives rise to a new and perverse modality of unequal exchange, through which the costs of forming and reproducing a highly skilled workforce involved in the dynamics of scientific innovation are transferred from core economies to peripheral and emerging countries, generating extraordinary profits via monopolistic technological rents.
- New forms of control and appropriation of scientific labor products by large multinational corporations, through various forms of subcontracting, associations, and management and diversification of venture capital. This control is established through a two-way channel. On the one hand, it is established through specialized teams of lawyers thoroughly familiar with the institutional framework and operating rules for patents imposed by the Patent Cooperation Treaty and WIPO, serving the interests of large corporations. Under this complex and intricate regulatory framework (see Chart 2), it is practically impossible for independent inventors to register and patent products on their own. On the other hand, this is done through teams of lawyers who operate as headhunters, contractors, and subcontractors working though “strategic investment” to appropriate and gain control over general intellect products.29
The way in which large multinational corporations participate in the dynamics of innovation incubated and deployed through the Silicon Valley matrix reveals that, more than development driven to facilitate social productive forces, monopolistic capital operates as a rentier agent that appropriates the products of the general intellect without participating in the production process of its development. In other words, the extraordinary profits that constitute the leitmotif of monopoly capital become technological rents in accordance with the meaning that Marx attributes to ground rent: the possibility of demanding a significant portion of social surplus value by virtue of owning a product, in this case the patent, though not acquiring it through a production process that incorporates value through labor. Hence, in the era of generalized monopolies, monopoly capital ceases to be a progressive agent in the development of the productive forces and becomes a parasitic entity that even decides, as owner of intellectual property, which products are potentially significant in the market and which will remain petrified in the freezer of social history.30 - A North-South horizon expansion of the workforce in areas of science, technology, innovation, and mathematics, and increasing recruitment of a highly skilled workforce from the peripheries through outsourcing and offshoring mechanisms. In this sense, highly skilled migration from peripheral countries plays an increasingly relevant role in global innovation processes, generating a paradoxical and contradictory dependence of the South on the North, where patent inventors more often reside in peripheral and emerging countries. In fact, this trend can be seen as part of a higher stage in the development of global value chains—what we prefer to call global monopoly capital networks—as the new international division of labor moves up the value-added chain to the scientific and technological sphere, and while monopoly capital moves to capture profit derived from productivity and knowledge contributed by a highly qualified workforce from the Global South.31 This trend can be found in different sectors of the global economy, including agricultural biotechnology and biohegemony in transgenic crops, as well as the appropriation of Indigenous knowledge related to seed technology.32
Chart 1. Graphic Representation of the Silicon Valley Innovation System
Source: Produced based on information gathered from Strategic Business Insights.
Chart 2. World Intellectual Property Organization Patent Cooperation Treaty
Source: Image adapted from the World Intellectual Property Organization Patent Cooperation Treaty, 2015, http://www.wipo.int.
A key piece that supports the new geopolitics of innovation is the creation of an ad hoc institutional framework aimed at the concentration and appropriation of general intellect products through patents under the tutelage and supervision of the WIPO in agreement with the World Trade Organization (WTO).33 Since the late 1980s, there has been a trend toward generating legislation in the United States, in tune with the strategic interests of large multinational corporations in the field of intellectual property rights.34 Through rules and regulations promoted by the WTO, the scope of this legislation has been significantly expanded. The Office of the U.S. Trade Representative has taken on the role of promoting the signing and implementation of free trade agreements, since intellectual property disputes within the WIPO/WTO tend to be enormously complex due to their multilateral nature. The U.S. strategy also includes bilateral free trade agreement negotiations as a complementary measure to control markets and increase corporate profits. The regulations established by the Patent Cooperation Treaty, amended in 1984 and 2001 within the framework of the WIPO and WTO, have contributed significantly to the strengthening of this trend.
In addition, according to the nature and characteristics of the Imperial Innovation System, the United States appears as the leading capitalist power in innovation worldwide, absorbing 23.9 percent of the total patent applications registered in the WIPO from 1996 to 2018. However, in the same period, China surpassed the United States in patent applications, with 23.1 percent compared to the U.S. 21.7 percent (Table 1).
Table 1. Requested and Granted Patents: Total and 10 Main Countries, 1996–2018
| Patents: Granted | Requested | Distribution (%) | Granted | Distribution (%) | Percent Granted | Rank |
| Total | 45,361,224 | 100.0 | 19,447,764 | 100.0 | 42.9 | |
| Subtotal | 37,412,593 | 82.5 | 15,696,151 | 80.7 | 42.0 | |
| China | 10,497,318 | 23.1 | 3,138,160 | 16.1 | 29.9 | 3 |
| U.S.A. | 9,862,774 | 21.7 | 4,646,826 | 23.9 | 47.1 | 1 |
| Japan | 8,627,834 | 19.0 | 4,093,992 | 21.1 | 47.5 | 2 |
| Korea | 3,534,255 | 7.8 | 1,811,789 | 9.3 | 51.3 | 4 |
| Germany | 1,406,340 | 3.1 | 357,246 | 1.8 | 25.4 | 7 |
| Canada | 842,421 | 1.9 | 388,204 | 2.0 | 46.1 | 6 |
| Russian Federation | 831,702 | 1.8 | 622,539 | 3.2 | 74.9 | 5 |
| India | 652,043 | 1.4 | 130,933 | 0.7 | 20.1 | 13 |
| United Kingdom | 601,246 | 1.3 | 165,056 | 0.8 | 27.5 | 12 |
| Australia | 556,660 | 1.2 | 341,406 | 1.8 | 61.3 | 8 |
Source: SIMDE-UAZ. Estimations using data by WIPO, 1996–2018.
In the era of generalized monopolies, the development of productive forces has entered a point of no return in which the contradictions between progress and barbarism embodied in capitalist modernity have become more evident than ever before. The historical mission of progress attributed to capitalism in the development of the productive forces of society has turned into its opposite: a regressive path that threatens nature and humanity. In this context, the current dispute between the United States and China is uncertain. While there are signs that the United States still maintains leadership in strategic fields of innovation, China has been gaining ground and contesting the U.S. scientific-technological preeminence and global hegemony. Under the conditions of this disputed scenario, the COVID-19 pandemic opens a great question, where the only certainty is uncertainty.
Notes
- ↩ David Harvey, A Brief History of Neoliberalism (Oxford: Oxford University Press, 2005).
- ↩ Karl Marx, chap. 6 in El capital (1867; repr. Mexico: Siglo XXI, 1981), 60.
- ↩ Marx, chap. 6 in El capital, 76.
- ↩ Karl Marx, El capital, tomo 1, vol. 3 (1867; repr. Mexico: Siglo XXI, 2005), 804.
- ↩ Victor Figueroa, Reinterpretando el subdesarrollo: Trabajo general, clase y fuerza productiva en América Latina (Mexico: Siglo XXI, 1986), 40.
- ↩ Karl Marx, Elementos fundamentales para la crítica de la economía política 1857–1858 (Grundrisse), tomo 2 (1858; repr. Mexico: Siglo XXI, 1980), 229–30.
- ↩ Antonio Gómez Villar, “Paolo Virno, lector de Marx: General Intellect, biopolítica y éxodo,” SEGORÍA: Revista de Filosofía Moral y Política 50 (2014): 306.
- ↩ Figueroa, Reinterpretando el subdesarrollo: trabajo general, clase y fuerza productiva en América Latina, 41.
- ↩ Antonio Negri, Marx más allá de Marx (Madrid: Akal, 2001).
- ↩ Bolívar Echeverría, Antología: Crítica de la modernidad capitalista (La Paz: Oxfam, Vicepresidencia del Estado Plurinacional de Bolivia, 2011): 78–79.
- ↩ Pablo Míguez, “Del General Intellect a las tesis del Capitalismo Cognitivo: Aportes para el estudio del capitalismo del siglo XXI,” Bajo el Volcán 13, no. 21 (2013): 31.
- ↩ Guillermo Foladori, “Ciencia Ficticia,” Estudios Críticos del Desarrollo 4, no. 7 (2014): 41–66.
- ↩ Julián Pinazo Dallenbach and Raúl Delgado Wise, “El marco regulatorio de las patentes en la reestructuración de los sistemas de innovación y la nueva migración calificada,” Migración y Desarrollo 27, no. 32 (2019): 52.
- ↩ Míguez, “Del General Intellect a las tesis del Capitalismo Cognitivo,” 39.
- ↩ Echeverría, Antología, 173.
- ↩ Francisco Javier Caballero, “Replanteando el desarrollo en la era de la monopolización generalizada: Dialéctica del conocimiento social y la innovación” (PhD dissertation, Universidad Autónoma de Zacatecas, Mexico, 2020).
- ↩ Raúl Delgado Wise and David Martin, “The Political Economy of Global Labor Arbitrage,” in The International Political Economy of Production, ed. Kees van der Pijl (Cheltenham: Edward Elgar, 2015), 59–75.
- ↩ John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna, “The Global Reserve Army of Labor and the New Imperialism,” Monthly Review 63, no. 6 (November 2011): 1–15.
- ↩ Walden Bello, “The Crisis of Globalist Project and the New Economics of George W. Bush,” in Critical Globalization Studies, ed. Richard P. Appelbaum and William I. Robinson (New York: Routledge, 2005),101–9.
- ↩ Robert Brenner, The Boom and the Bubble: The U.S. in the World Economy (New York: Verso, 2002); John Bellamy Foster and Hannah Holleman, “The Financialization of the Capitalist Class: Monopoly-Finance Capital and the New Contradictory Relations of Ruling Class Power,” in Imperialism, Crisis and Class Struggle: The Enduring Verities and Contemporary Face of Capitalism, ed. Henry Veltmeyer (Leiden: Brill, 2010).
- ↩ James Petras and Henry Veltmeyer, Extractive Imperialism in the Americas (Leiden: Brill, 2013).
- ↩ Guillermo Foladori and Naina Pierri, ¿Sustentabilidad? Desacuerdos sobre el desarrollo sustentable (Mexico: Miguel Ángel Porrúa, 2005).
- ↩ Raúl Delgado Wise, “Unraveling Mexican Highly-Skilled Migration in the Context of Neoliberal Globalization,” in Social Transformation and Migration: National and Local Experiences in South Korea, Turkey, México and Australia, ed. Stephen Castles, Derya Ozkul, and Magdalena Arias Cubas (Basingstoke: Palgrave MacMillan, 2015): 201–18; Raúl Delgado Wise and Mónica Guadalupe Chávez, “¡Patentad, patentad!: Apuntes sobre la apropiación del trabajo científico por las grandes corporaciones multinacionales,” Observatorio del Desarrollo 4, no. 15 (2016): 22–30; Míguez, “Del General Intellect a las tesis del Capitalismo Cognitivo.”
- ↩ Henry Chesbrough, “Open Innovation: A New Paradigm for Understanding Industrial Innovation,” in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (Oxford: Oxford University Press, 2008), 1–14.
- ↩ Guillermo Foladori, “Teoría del valor y ciencia en el capitalismo contemporáneo,” Observatorio del Desarrollo 6, no. 18 (2017): 42–47.
- ↩ AnnaLee Saxenian, The New Argonauts: Regional Advantage in a Global Economy (Boston: Harvard University Press, 2006).
- ↩ Titus Galama and James Hosek, S. Competitiveness in Science and Technology (Santa Monica, CA: RAND, 2008).
- ↩ Foladori, “Teoría del valor y ciencia en el capitalismo contemporáneo.”
- ↩ Raúl Delgado Wise, “El capital en la era de los monopolios generalizados: Apuntes sobre el capital monopolista,” Observatorio del Desarrollo 6, no.18 (2017): 48–58; Rodrigo Arocena and Judith Sutz, “Innovation Systems and Developing Countries” (DRUID Working Paper 02–05, Danish Research Unit for Industrial Dynamics, Aalborg, 2002).
- ↩ Laura Gutiérrez Escobar and Elizabeth Fitting, “Red de semillas libres: Crítica a la biohegemonía en Colombia,” Estudios Críticos del Desarrollo 7, no. 11 (2016): 85–106; Pablo Lapegna and Gerardo Otero, “Cultivos transgénicos en América Latina: Expropiación, valor negativo y Estado,” Estudios Críticos del Desarrollo 6, no. 11 (2016): 19–44; Renata Motta, “Capitalismo global y Estado nacional en las luchas de los cultivos transgénicos en Brasil,” Estudios Críticos del Desarrollo 6, no. 11 (2016): 65–84.
- ↩ Wise and Chávez, “¡Patentad, patentad!”
- ↩ Peter Messitte, “Desarrollo del derecho de patentes estadounidense en el siglo XXI. Implicaciones para la industria farmacéutica,” in Los retos de la industria farmacéutica en el Siglo XXI: Una visión comparada sobre su régimen de propiedad intelectual, ed. Arturo Oropeza and Víctor Manuel Guízar López (Mexico: UNAM–Cofep, 2012),179–200.
Trade Liberalisation, Comparative Advantage, and Economic Development: A Historical Perspective
I. Introduction
This article critically analyses the theoretical and empirical basis of trade liberalisation and finds that the arguments of many mainstream economists concerning the static and dynamic gains from free trade are based on weak theoretical grounds. I will also discuss here the historical experience of trade liberalised regimes. It also discusses the impact of trade liberalisation on the industrial and agricultural sectors and shows how the performance of both sectors has a long-term impact on local industrialisation, food security, employment and the well-being of people in developing countries.
Global policies under the WTO (World Trade Organisation) are based on what are claimed as universal advantages of open economies and trade liberalisation (WTO, 2013). This paper shows this regime is in fact heavily biased towards the demands of rich and powerful countries and against the needs of developing countries (Reinert, 2007, Rodrik, 2004). Furthermore, this regime undermines elected legislatures and their democratic decision-making processes through constraints imposed by neoliberal treaties and associated mechanisms for the settlement of international disputes. The article further examines the theoretical and empirical basis of trade liberalisation and argues that the claimed benefits of free trade are based on weak grounds. An analysis of free trade in historical perspective highlights its negative implications for future development and suggests that the prosperity of the developing countries could be more dependent on their ability to act in concert to challenge the unbalanced rules-based system of the Western neoliberal order than on their willingness to submit to the strictures of the Bretton Woods institutions and the World Trade Organisation (Acemoglu and Robinson, 2012; Sen, 2005).
Free trade theory finds widespread support among the international financial institutions, namely the IMF (International Monetary Fund), World Bank, and WTO (Siddiqui, 2016a). This free trade approach deepens the process of uneven development and unequal exchange as seen, for instance, in the Trump Administration’s attempts to hinder China’s economic development by means of disadvantageous trade agreements. At present, Chinese developmental policies challenge US global corporations such as Boeing and Microsoft because they require some control over the nature of the US investment by granting China a degree of technology transfer. Existing WTO-enforced intellectual property rights, from which US corporations benefit, provide, among many other things, exorbitant patent rights for medicines and grant Microsoft Windows an effective monopoly on operating systems (Siddiqui, 2020a; also see 2018a). With genuine free trade consumers in the US and elsewhere could get cheaper medicines and have more choice in operating systems, but US corporations would not have the levels of profit guaranteed by current arrangements (Siddiqui, 2018a).
II. Late Developers and Free Trade
In the 19th century, Friedrich List in Germany argued for building of the national economy to help the late-developers such as Germany and the US against British imperialism. According to him, due to the historical problems of the late industrialising countries, who were behind in industries and technology compared to Britain and Netherlands and according to him, this could be addressed through strategies of state-led industrialisation and tariff protection (Siddiqui, 2021a).
The List theory was not so much in favour of freedom for colonies and in fact he argued reproducing colonial relations so as a late industrialising country like Germany could become industrially advance and join industrial core of the world economy. The British economy by the second quarter of the 19th century had become imperial economy i.e. industrial-financial centre and its colonies were forced to specialise in the production of agricultural commodities. As Gallagher and Robinson (1953:9) argued that “the British strategy was to transform the colonies into complementary satellite economies, which would provide raw materials and food for Great Britain, and also provide widening markets for its manufacturing.” List advocated that Germany must emulate the British path to industrialisation through protection and government intervention. For example, in the 17th and 18th century England had protected woollen industries by banning exports of raw wool to Netherlands and at the same time concluding treaties to open foreign markets for English products and supported shipping through its Navy.
However, once England secured superiority in industries and technologies, its rulers discovered the free trade doctrine was useful to maintain Britain’s domination. As Reinert (2005: 60) explains: “Britain not only made it politically clear that she saw it as a primary goal to prevent other nations from following the path of industrialization, but also ….possessed an economic theory [in the economics of Smith and Ricardo] that made this goal a legitimate one.” List argued that in order to escape Britain’s domination, Germany should ‘emulate the pragmatism and ruthlessness egoism of the English people’ and by extending support to state-led-industrialisation i.e. protecting infant industries through tariffs and duties on imports. Once competitive edge is acquired by domestic producers then slowly exposes them to foreign competition and resumption of free trade. The list was not in favour of Germany’s isolation but national equalisation and giving later-developers the opportunity to assume a dignified place in the world. However, List did not oppose European colonisation of non-European nations. He advocated that ‘civilised nations’ had to attain ‘balance of the productive powers in industry, commerce and agriculture’ (List, 1983: 51).
The colonizers denying any possibility of independent national development to the rest of the world led to the decolonisation struggles against European imperialism.
List deplored nations like Russia in the 19th century as overwhelmingly agrarian, which according to him consisting of ‘primitive peasants who simply cultivate soil’ and lacked capital and technology and competitive spirit necessary to promote ‘division of labour’ and as a result did not create surplus to be invested in industries (List, 1983: 54). In the 18th – 20th century, the European discourse of so-called ‘civilising mission’ assumed that their colonies as economically stagnated and backward. And in the colonies, they imposed policies of forced specialisation in agricultural and mineral production for exports, especially in India, into de-industrialisation and repeated famines (Siddiqui, 2020b; also 2020c). Britain colonial rule of two hundred years led to the turning India into economic stagnation and mass poverty and a dramatic fall in life expectancy and per capita food consumption. The colonizers denying any possibility of independent national development to the rest of the world led to the decolonisation struggles against European imperialism. As Goswami (2004: 221) notes, “it was precisely the promise of formally replicable, self-engendered, and territorially delimited economic development, which underwrote Listian national developmentalism that helped propel its increasing popularity, while the success of Listian strategies in the USA, Germany and Japan certainly reinforced their appeal to anti-colonial and post-colonial developmental ambitions”.
The economies of the advanced countries were founded on state activitism and protectionism and once they became technologically advanced, rich and prosperous, then their leaders could afford to talk about the so-called benefits of ‘free trade’, but they perfectly ignore their real history of how their nations became rich.
Trade and investment liberalisation was initiated by the IMF and the World Bank during the debt crisis of the 1980s under the loan-conditions ‘Structural Adjustment Programmes’. This strengthened further after the signing of the WTO in 1994. The ideology of free trade began with Adam Smith and David Ricardo; both theorists were from Britain and wrote at a time their country was colonising other countries and grabbing resources of other nations (Siddiqui, 2018b). This was also the period when Britain was launching the world’s first industrial revolution and needed raw materials and resources to support it and thus forcing its colonies to only specialise on the production of agriculture and minerals for its industries. That was also the period when Britain created its own monopoly trade company ‘The East India Company’ to trade with the Indian subcontinent and China. Adam Smith in his book The Wealth of Nations strongly opposed the policy of developing industries in the USA and advised to rely on importing manufacturing from Britain. Adam Smith (1986: 466) notes: “It has been the principal cause of the rapid progress of our American colonies towards wealth and greatness that almost their whole capitals have been employed in agriculture. They have no manufactures…. the greater part both of exportation and the coasting trade of America is carried on by merchants who reside in Great Britain… to stop the importation of European manufactures, and by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their products and would obstruct instead of promoting the progress of their country.”
However, in 1776 after becoming independent the US leaders did quite opposite and ignored Adam Smith’s advice and erected protective barriers and increased tariffs to protect domestic manufacturing. As a result, the US in the early 20th century emerged as a leading industrial nation. If the US leaders would have followed Adam Smith’s model of ‘free trade’ it would have been at most like Egypt (Siddiqui, 2020c).
The mainstream (also known as neoclassical) economists argue that free trade is a good thing for everyone participating in trade (Siddiqui, 1989a). Modern international trade theory is associated with David Ricardo model of ‘Comparative Advantage’. His theory focuses on specialisation in trade necessarily leads to mutual benefit to both trading nations as long as relative cost differences in producing goods exist, even if a country may produce all goods at lower costs than the other (Siddiqui, 2018b). David Ricardo in his book, Principles of Political Economy and Taxation (1817) wrote about his theory of ‘Comparative Advantage’. He presented the trade in wine and cloth between England and Portugal. He argued that even though Portugal to be more efficient than England in the production of both goods i.e. wine and cloth. However, he argued that it could still be mutually beneficial for both countries to specialise and trade if Portugal and England specialised where it was relatively most efficient compared to the other country. The problem with the Ricardian model is that it does not allow the possibility that after specialisation one country’s production may get caught in the spiral of diminishing returns and increasing production costs (e.g. in wine production) while another country might find the production costs falling as production increased due to increasing returns (e.g. cloth production) (Ricardo, 2004).
On the issue of ‘free trade’, Karl Marx argued that with increased competition, free trade will drive down workers’ wages. However, he questioned that the supporters who according to him failed to understand how “one country can grow rich at the expense of another.” Marx, emphasised that the related the differences in factor endowment to unequal economic development of the trading nations as his ideas of international trade was firmly based on the trade between unequal partners. He further elaborated, trade, whether home trade or foreign trade, produced exchange-value which was inseparable from the creation of surplus through exploitation of surplus labour. According to him, it was inherently unequal exchange. His theory explains the phenomena of colonial trade i.e. trade between Europe and their colonies. In the Communist Manifesto, he notes: “by the exploitation of the world market, the bourgeoisie has given a cosmopolitan character to production and consumption in every land. To the despair of the reactionaries, it has deprived industry of its national foundation. The old local and national self-sufficiency and isolation are replaced by a system of universal intercourse, of all-round interdependence of the nations…” Engels at Brussels Free Trade Congress said: “It was a strategic move in the Free Trade Campaign then carried on by the English manufacturers. Victorious at home, by the repeal of Corn Laws in 1846, they now invaded the continent in order to demand, in return for the free admission of continental corn into England; the free admission of English manufactured goods to the continental markets”. Engels further explained, “it was under the fostering wing of protection that the system of modern industry developed in England during the last third of the 18th century. England supplemented the protection she practised at home by the free trade she forced upon her possible customers abroad.”
The theory of ‘comparative advantage’ on which the classical theory of international trade is based on, it does not depend for its validity and on the inequality of status or economic strength of the trading partners or the degree of their economic development. The essence of this theory was the fact of reciprocal exchange of natural or acquired advantage in particular branches of production on the principle of international division of labour. Marx’s saw it as trade between unequal partners. Trade, whether home trade or foreign trade, was inseparable from the creation of surplus profit through exploitation of surplus labour. It was thus inherently unequal exchange. Marx noted on the colonial trade, i.e. trade between Europe and their colonies, as, “Commercial profit not only appears as out bargaining and cheating, but also largely originates from them.” Apart from the fact that the merchant abstracted the difference in prices over space, he appropriated the major part of the surplus-product emerging in a pre-capitalist society by mediating between societies and regions in which the marketed surpluses of commodities were of secondary importance and in which the trader could take advantage of the extravagant luxury consumption of landed proprietors and despotic rulers. Thus “merchant’s capital when it holds a position of dominance, stands everywhere for a system of robbery”. He referred to India’s vast home market that was “sufficient to support a great variety of manufactures”, and particularly to Bengal, “which commonly exports the greatest quantity of rice, but has always been more remarkable for the exportation of a great variety of manufactures than for that of grain”.
Marx indentified capitalism’s two inherent problems i.e. demand problem and tendency of the rate of profit to fall. He identified the source of surplus value by differentiating labour and labour power and presented how competition brings values down to their ‘socially necessary level’. Marx emphasised that capitalism was not eternal but a historically specific mode of production and due to its inner contradictions, it is inherently volatile and unstable David Ricardo claimed that free trade benefitted all countries; by this he justified colonisation and colonial pattern of trade, when the European powers sought to externalise their market crisis by exporting their excess production to colonies or unprotected markets, which destroyed any prospects of industrialisation there. Rosa Luxemburg in her book The Accumulation of Capital argued that ‘purely capitalist’ society consist of only workers and capitalists could not be self-contained and for its own survival requires non-capitalist societies to sell its excessive production and try to resolve demand deficits problems, which is a major contradiction of capitalism. She paid serious attention to the impact of occupation on the colonies. Later on Marxist economists analysed how surpluses drained from formally or informally from colonies or semi-colonies have critically aided industrialisation in Europe and how expanding markets for imperial products de-industrialised colonies. Moreover, how core countries monopolies on higher value production are secured and maintained in a wider system of unequal exchange and by various means formally or informally discouraging peripheries from improving their productive capacities (Chang, 2002).
David Ricardo’s theory has been claimed to be beneficial not only the trade between nations of equal economic strength e.g. intra-industry trade between rich countries, but also between economically unequal countries e.g. colonisers and their colonies, inter-industry trade. On this assumption, the Europeans imposed ‘free-trade’ on colonies to specialise in agriculture and minerals, while the European powers specialised in manufactures. Consequently, India being the world’s largest exporter of cotton textiles in the pre-colonial period, India turned into an importer of cotton textiles from Britain and an exporter of agricultural commodities such as raw cotton, opium, indigo, jute, tea etc. (Siddiqui, 2020d; also 2020e)
The mainstream economists ignore in their discussions that in the 19th century if ‘free trade’ was beneficial then why European powers had to use military force to induce countries like India, China and Indonesia to accept it (Siddiqui, 2019a; also 2018b). Ricardo’s theory is based on incorrect premises. As Professor Utsa Patnaik (1999: 6) argues: “In the case of the comparative theory applied to the Northern trade with warmer lands, the premise itself is incorrect. The premise is that in the pre-trade situation (assuming the standard two-country two commodity model) both countries can produce both goods. Given this, then it can be shown that both the countries gain by specializing in that good which it can produce at a relatively lower cost compared to the other country, and trading that good for the other good: for compared to the pre-trade situation, for a given level of consumption of one good a higher level of consumption of the other good results in each country… The reality was that the tropical or sub-tropical regions with which Britain, Netherlands, France etc. initiated forced to trade using military power, where bio-diverse could, and did, produce a much larger range of goods than the Northern European countries could…”
Since 19th century the ideology of free trade has been propagated via textbooks, print, and electronic media that any criticism or alternative opinions which examine the costs of ‘free trade’ is hardly ever heard. The free trade model is now modified and presented as – the labour-abundant country e.g. poor countries produce labour intensive goods (agricultural commodities) while capital abundant country e.g. rich countries produce capital intensive high value products (Siddiqui, 1989b). In fact, the crops such as raw cotton, jute, indigo, rubber, tea, coffee, cocoa, banana, sugarcane and rice cannot be produced in cold European climate hence the premise that both countries could produce both goods does not hold. Historically we could see that specialisation and enforced free trade led to very negative social and economic development in the colonies. For example, the nutrition levels and life expectancy fell sharply during the colonial period in India, Indonesia, the Philippines, and Kenya (Siddiqui, 2018c; also 2018d).
In the past, the cost of ‘free trade’ in the colonies had been de-industrialisation and the forcible trade liberalisation led to the destruction of traditional manufactures and increased dependence of the production of primary commodities (Siddiqui, 2015a). As Patnaik (1999: 12) further notes: “This resulted in one-way free trade, viz, a situation where the North protected its own industry by various means and opened up the subjugated markets of the Third World countries, …. Keynes had once used, describing a situation where a country insists on exporting another the good that second country also produces, thereby the North ‘exported its unemployment’ to other counties. That agenda too remains unchanged: market access is a price objective of the earlier and ongoing loan conditional liberalization and of the present WTO regime….” Moreover, the demands for tropical crops in rich countries have increased further in recent years and the WTO regime insists that tropical countries to increase the production and export of the primary commodities (Siddiqui, 2015b, also 2015c).
Free trade theory emphasises that if protections are removed resources should flow from high-cost to low-cost products resulting in an increase in productivity. David Ricardo’s theory of comparative advantage provides a foundation for understanding the nature of so-called mutually advantageous international free trade and forms the basis of arguments generally used to defend a laissez-faire approach (Siddiqui, 2018b). Protection is seen as interference in the free play of beneficent market forces (Kruger, 1996). Ricardo’s model assumes that all resources are fully employed, but in reality we find that in developing countries mass unemployment and mass poverty have often existed alongside vast but under-exploited resources. During the British colonial period, for example, the imposition of free trade policy on India made it possible for the Lancashire cotton industries to prosper while hand loom production in India was systematically destroyed by the active intervention of the British authorities (Bagchi, 2000). Another notable example could be cited here: in 1699 with the Wool Act, Britain banned the export of woollen cloth from the colonies to other countries. This proved to be a severe blow to the Irish wool industry.
Free trade theory emphasises that if protections are removed resources should flow from high-cost to low-cost products resulting in an increase in productivity.
Britain adopted “free trade” policies in the 19th century when it possessed relatively more advanced technologies and industries compared with those of other European countries. These policies were extended to the colonies to further Britain’s business and trade interests. From the mid-19th century, Africa and Latin American countries were also integrated into the world economy as suppliers of primary commodities, as envisaged by the “comparative advantage” model. (Siddiqui, 2019b and also 2019c)
At the same time that colonies were encouraged to specialize in the production and export of primary products rather than manufactured goods, Britain abolished import duties on raw materials produced in the North American colonies. Thus, Britain slowed, or completely prevented, modern industrial development in the colonies and in other territories in which it enjoyed pre-eminent influence. As Bagchi (2000: 403-4) observes: “In the victory of private enterprise, the construction of a state fostering its growth played a critical role, and free trade as a policy did not gain ascendancy until Britain had already emerged as the most powerful nation in the world economically, militarily and politically … it had begun preaching the doctrine of free trade to others, even enforcing it with gunboats and soldiers, as in the case of opium war”.
It is claimed that if all countries adopt free trade policies then it is claimed by the proponents that the world economy can achieve a more efficient allocation of resources and a higher level of material well-being than it can without trade. In contrast, Bieler and Morton (2014: 40) found: “Trade liberalisation has often implied deindustrialisation and import dependence. An analysis of the consequences of trade liberalisation in Africa and Latin America during the 1980s and1990s, for example, reveals widespread job losses, increasing unemployment and declining wages in both continents”.
In the late 1980s and 1990s, at the behest of the World Bank and the IMF and as a condition for their loans, most of the Latin American countries adopted Structural Adjustment Programmes or SAPs (Siddiqui, 1998; also 1994) (i.e. neoliberal reforms), while China, which was then not a member of the WTO, was able to maintain greater control over both trade and foreign capital investments (Girdner and Siddiqui, 2008). The Chinese government was able to encourage foreign investors to establish joint ventures with local companies that included agreements on technology transfer. In China rapid urbanisation and higher growth also resulted in a sharp increase in the scale of the domestic market. By 2010, China became a net importer of food, the largest importer of soya, and accounted for half of the world’s total food imports.
III. WTO and Trade Liberalisation
The WTO aims to liberalise trade in goods, capital and services, and more recently also in world’s agricultural markets. In the agriculture sector, the WTO wants to liberalise trade in agricultural commodities by eliminating subsidies to inefficient producers, tariffs, and the practice of holding food stocks by governments (WTO, 2013). This policy is supposed to increase agricultural commodity prices through a de-regulated market and benefit farmers. At the same time, increased competition is supposed to generate greater efficiency and thus bring down prices to the benefit of consumers. However, such assumptions ignore the fact that agricultural trade is in fact characterized by large economic, social, and political inequalities. Since 1991, with the collapse of the Soviet Union and East European regimes, many more countries have adopted trade liberalisation policy and thus global economy more integrated than ever in the past and global trade as a percentage of global GDP has risen sharply, as Figure 1 indicates. And the major trading countries in goods are largely developed economies apart from China (see Figures 2 and 3).
In agricultural commodities, due to climate limitations developed countries cannot produce coffee, rubber, sugarcane, cocoa, bananas or tea but want these commodities for their food processing industries and they want to acquire these from deregulated markets. In the cotton and sugar markets, however, distortions exist because of subsidies given to producers in both the United States and the European Union and therefore these products are protected from liberalisation. With the signing of the WTO’s international treaty Agreement on Agriculture (AoA) in 1995 developing countries were granted little access to new markets in the developed countries but were required to accept significantly more imports. This depressed local investment and production ultimately exacerbated food deficits and undermined food security in developing countries (Siddiqui, 2021b).
The agricultural sector plays an important role not only in maintaining a healthy rural environment and ecology but also in the economic development of a country. It makes a significant contribution to per capita income and employment, especially in developing countries. Neoliberal policy reforms in agriculture alter the situation in this sector and restructure the economic fabric of the society. Food security and self-sufficiency are important contributing factors to the stability and economic growth of regional and international economies (Siddiqui, 1990). Accordingly, we should examine the impact of trade liberalisation (i.e., free trade) on the agricultural sector and food security issues in developing countries.
The WTO wants to introduce the idea that agriculture and food production should be treated as any other form of production and be subjected to the rules of competition in deregulated and open markets similar to those in the industrial sector. The supporters of this approach claim that if such policies are followed in the developing countries they will increase output under competitive conditions and achieve levels of surplus and prosperity similar to those enjoyed by Europe and North America even though those regions do not, in fact, apply such policies in their domestic markets. The developing countries as a group would be wise therefore to defend their interests and seek reform of the WTO in order to protect their agriculture, manufacturing and service sectors and their interests in general.
IV. Conclusion
The proponents of ‘free trade’, which is based on David Ricardo’s ‘Comparative Advantage’ model, choose to forget that in the 18th and 19th centuries the transition of European and North American agriculture towards greater use of technology and capitalist large-scale production took place at the same time their industrial sectors were expanding and their surplus populations were migrating to the Americas, Australia, New Zealand, and South Africa. These developments resulted in the largest land-grabbing and resource-extraction exercises in human history, during which indigenous populations were eliminated or enslaved and their land and natural resources expropriated. Because developing countries have no such possibilities and hence, the adoption of the WTO’s agriculture neo-liberal reform policy inevitably leads to greater poverty and to ecological destruction exacerbated by climate change.
In fact the rich countries have advanced through a combination of tariff protection, government intervention, strategic investment and use of military force, however, when it comes to today’s poor countries, the benefits of so-called ‘comparative advantage’ is being insisted by the international financial institutions and the rich countries.
The WTO has become as an important international multilateral institution, not only by bringing liberalisation of trade in agriculture, manufacturing and services but also through its dispute settlement mechanism. In particular, the WTO’s negotiations at Doha in 2001 resulted in policies made largely to protect the interests of agro-business corporations based in the West, while offering few benefits to farmers in the developing countries (Stiglitz and Charlton, 2006).
In the developing countries, farmers are often forced to sell their products soon after harvest due to difficulty with storage and the need for money to repay debts, which is known as stressed sales.
This study has found that the free trade approach (i.e. trade liberalisation) will deepen the process of uneven development and unequal exchange between poor and rich countries. And free trade in agriculture undermines food sovereignty and adversely affects the possibilities for autonomous development and food self-sufficiency in developing countries. For example, the WTO’s 1994 Agreement on Trade-Related Investment Measures (TRIMs) do not allow the use of local content specification to increase linkages between foreign investors and local manufacturers or restrictions on the outflows of capital by investors. Other WTO policies such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) further allow privatisation and concentration of knowledge in the hands of global corporations (Siddiqui, 2016a).
Unlike manufacturing, agricultural production cannot take place throughout the whole year, and therefore prices cannot be lower during the harvest season than during the rest of the year (Siddiqui, 2021b). In the developing countries, subsidies were aimed at reducing production costs by providing inputs lower than market prices, but in the developing countries farmers are often forced to sell their products soon after harvest due to difficulty with storage and the need for money to repay debts, which is known as stressed sales (Siddiqui, 2019d). To ensure prices governments buy agricultural commodities at prices higher than markets to protect farmers from market fluctuations. Additionally, during shortages, governments release agricultural products from storage to stabilise prices in the market. Under WTO rules, such food stock holdings are prohibited and farmers in the developing countries are left entirely at the mercy of the market (Siddiqui, 2015a).
The farmers in North America and the European Union operate highly mechanised capital-intensive agriculture and productivity range between 10,000 and 20,000 quintals of cereals per farmer per year. In developing countries, especially in Africa and Asia, farming is far less mechanised and capital intensive and productivity ranges from just 100 to 500 quintals per farmer per annum (Siddiqui, 2018b).
In 1991with the adoption of neoliberal reforms in India the government reduced its investment in irrigation and extension services in agriculture and for the last two decades the crisis in rural communities has deepened (Siddiqui, 2016a). In addition to cuts in government spending and greater emphasis on market forces farmers have had to suffer the demonetisation and cash crisis of 2016. This was done soon after monsoon harvest and due to lack of banknotes farmers were unable to sell their products or buy inputs to sow winter crops. The agrarian crisis has been reflected in the increasing number of farmers’ suicides and forced migration to the cities. Over the same period the availability of institutional finance to farmers has been reduced, meaning that the cost of borrowing has risen and also global agricultural commodity prices have declined, particularly since 2017. As a result profitability in the agriculture sector has decreased. India is the largest producer of wheat and second largest producer of rice. In 2017, the production of wheat in India was nearly 96.6 million tonnes and consumption was about the same. However, India still exported nearly 3 million tonnes from government stocks. In the same year, rice production was 105 million tonnes and consumption was 103 tonnes, but India exported 11 million tonnes of rice from government stocks. The balance between global food prices, food security, and the living standards of the poor is thus extremely precarious under neoliberal policies, even in an economy as large as that of India.
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The Physics of Capitalism
People tend to think of capitalism in economic terms. Karl Marx argued that capitalism is a political and economic system that transforms the productivity of human labor into large profits and returns for those who own the means of production.1 Its proponents contend that capitalism is an economic system that promotes free markets and individual liberty.2 And opponents and advocates alike most often measure capitalism’s impact in terms of wealth and income, wages and prices, and supply and demand.
However, human economies are complex biophysical systems that interact with the wider natural world, and none can be fully examined apart from their underlying material conditions. By exploring some fundamental concepts in physics, we can develop a better understanding of how all economic systems work, including the ways that the energy-intensive activities of capitalism are changing humanity and the planet.
This article will explain how the fundamental features of both our natural and economic existence depend on the principles of thermodynamics, which studies the relationships between quantities such as energy, work, and heat.3 A firm grasp of how capitalism works at a physical level can help us understand why our next economic system should be more ecological, prioritizing long-run stability and compatibility with the global ecosphere that sustains humanity.
Such an understanding requires a glance at some central concepts in physics. These include energy, entropy, dissipation, and the various rules of nature that bind them together. The central features of our natural existence, as living organisms and as human beings, emerge from the collective interactions described by these core physical realities. Although these concepts can be difficult to define without reference to specific models and theories, their general features can be outlined and analyzed to reveal the powerful intersection between physics and economics.
The exchange of energy between different systems has a decisive influence on the order, phase, and stability of physical matter. Energy can be defined as any conserved physical property that can produce motion, such as work or heat, when exchanged among different systems.4 Kinetic energy and potential energy are two of the most important forms of energy storage. The sum of these two quantities is known as mechanical energy.5 A truck speeding down the highway packs a good amount of kinetic energy—that is, energy associated with motion. A boulder teetering at the edge of a cliff has great potential energy, or energy associated with position. If given a slight push, its potential energy transforms into kinetic energy under the influence of gravity, and off it goes. When physical systems interact, energy is converted into many different forms, but its total quantity always remains constant. The conservation of energy implies that the total output of all energy flows and transformations must equal the total input.
Energy flows among different systems represent the engine of the cosmos, and they happen everywhere, so often that we hardly notice them. Heat naturally flows from warmer to colder regions, hence our coffee cools in the morning. Particles move from high-pressure areas to low-pressure areas, and so the wind starts to howl. Water travels from regions of high potential energy to regions of low potential energy, making rivers flow. Electric charges journey from regions of high voltage to regions of low voltage, and thus currents are unleashed through conductors. The flow of energy through physical systems is one of the most common features of nature, and as these examples show, energy flows require gradients—differences in temperature, pressure, density, or other factors. Without these gradients, nature would never deliver any net flows, all physical systems would remain in equilibrium, and the world would be inert—and very boring. Energy flows are also important because they can generate mechanical work, which is any macroscopic displacement in response to a force.6 Lifting a weight and kicking a ball are both examples of performing mechanical work on another system. An important result from classical physics equates the quantity of work to the change in the mechanical energy of a physical system, revealing a useful relationship between these two variables.7
Although energy flows can produce work, they rarely do so efficiently. Large macroscopic systems, like trucks or planets, routinely lose or gain mechanical energy through their interactions with the external world. The lead actor in this grand drama is dissipation, defined as any process that partially reduces or entirely eliminates the available mechanical energy of a physical system, converting it into heat or other products.8 As they interact with the external environment, physical systems often lose mechanical energy over time through friction, diffusion, turbulence, vibrations, collisions, and other similar dissipative effects, all of which prevent any energy source from being converted entirely into mechanical work. A simple example of dissipation is the heat produced when we rapidly rub our hands together. In the natural world, macroscopic energy flows are often accompanied by dissipative losses of one kind or another. Physical systems that can dissipate energy are capable of rich and complex interactions, making dissipation a central feature of the natural order. A world without dissipation, and without the interactions that make it possible, is difficult to imagine. If friction suddenly disappeared from the world, people would slip and slide everywhere. Our cars would be useless, as would the very idea of transportation, because wheels and other mechanical devices would lack any traction with the ground and other surfaces. We would never be able to hold hands or rock our babies. Our bodies would rapidly deteriorate and lose their internal structure. The world would be alien and unrecognizable.
Dissipation is closely related to entropy, one of the most important concepts in thermodynamics. While energy measures the motion produced by physical systems, entropy tracks the way that energy is distributed in the natural world. Entropy has several standard definitions in physics, all of them essentially equivalent. One popular definition from classical thermodynamics states that entropy is the amount of heat energy per unit of temperature that becomes unavailable for mechanical work during a thermodynamic process.9 Another important definition comes from statistical physics, which looks at how the microscopic parts of nature can join to produce big, macroscopic results. In this statistical version, entropy is a measure of the various ways that the microscopic states of a larger system can be rearranged without changing that system.10 For a concrete example, think of a typical gas and a typical solid at equilibrium. Energy is distributed very differently in these two phases of matter. The gas has a higher entropy than the solid, because the former’s particles have far more possible energy configurations than the fixed atomic sites in solids and crystals, which have only a small range of energy configurations that will preserve their fundamental order.11 We should emphasize that the concept of entropy does not apply to a specific configuration of macroscopic matter, but rather applies as a constraint on the number of possible configurations that a macroscopic system can have at equilibrium.
Entropy has a profound connection to dissipation through one of the most important laws of thermodynamics, which states that heat flows can never be fully converted into work.12 Dissipative interactions ensure that physical systems always lose some energy as heat in any natural thermodynamic process, where friction and other similar effects are present. Real-world examples of these thermodynamic losses include emissions from car engines, electric currents encountering resistance, and interacting fluid layers experiencing viscosity. In thermodynamics, these phenomena are often considered irreversible. The continuous production of heat energy from irreversible phenomena gradually depletes the stock of mechanical energy that physical systems can exploit. According to the definition of entropy, depleting useful mechanical energy generally implies that entropy increases. Formally stated, the most important consequence of any irreversible process is to increase the combined entropy of a physical system and its surroundings. For an isolated system, entropy continues to rise until it reaches some maximum value, at which point the system settles into equilibrium. To clarify this last concept, imagine a red gas and a blue gas separated by a partition inside a sealed container. Removing the partition allows the two gases to mix together. The result would be a gas that looks purple, and that equilibrium configuration would represent the state of maximum entropy. We can also relate dissipation to the concept of entropy in statistical physics. The proliferation of heat energy through physical systems changes the motion of their molecules into something more random and dispersed, increasing the number of microstates that can represent the macroscopic properties of the system. In a broad sense, entropy can be seen as the tendency of nature to reconfigure energy states into distributions that dissipate mechanical energy.
The traditional description of entropy given above applies in the regime of equilibrium thermodynamics. But in the real world, physical systems rarely exist at fixed temperatures, in perfect states of equilibrium, or in total isolation from the rest of the universe. The field of non-equilibrium thermodynamics examines the properties of thermodynamic systems that operate sufficiently far from equilibrium, such as living organisms or exploding bombs. Non-equilibrium systems are the lifeblood of the universe; they make the world dynamic and unpredictable. Modern thermodynamics remains a work in progress, but it has been used to successfully study a broad spectrum of phenomena, including heat flows, interacting quantum gases, dissipative structures, and even the global climate.13 There is no universally accepted meaning of entropy in non-equilibrium conditions, but physicists have offered several proposals.14 All of them include time when analyzing thermodynamic interactions, allowing us to determine not just whether entropy goes up or down, but also how quickly or slowly physical systems can change on their path to equilibrium. The principles of modern thermodynamics are therefore essential in helping us understand the behavior of real-world systems, including life itself.
The central physical objective of all life forms is to avoid thermodynamic equilibrium with the rest of their environment by continuously dissipating energy, as the physicist Erwin Schrödinger suggested in the 1940s, when he used non-equilibrium thermodynamics to study the key features of biology.15 We may call this vital objective the entropic imperative. All living organisms consume energy from an external environment, use it to fuel vital biochemical processes and interactions, and then dissipate most of the energy consumed back to the environment. The dissipation of energy to an external environment allows organisms to conserve the order and stability of their own biochemical systems. The essential functions of life critically depend on this entropic stability, including functions like digestion, respiration, cell division, and protein synthesis. What makes life unique as a physical system is the sheer variety of dissipation methods that it has developed, including the production of heat, the emission of gases, and the expulsion of waste. This sweeping capacity to dissipate energy is what helps life to sustain the entropic imperative. Indeed, physicist Jeremy England has argued that physical systems in a heat bath flooded with large amounts of energy can tend to dissipate more energy.16 This “dissipation-driven adaptation” can lead to the spontaneous emergence of order, replication, and self-assembly among microscopic units of matter, providing a potential clue into the very dynamics of the origin of life. Organisms also use the energy they consume to perform mechanical work by, for example, walking, running, climbing, or typing on a keyboard. Those organisms with access to many energy sources can do more work and dissipate more energy, satisfying the central conditions of life.
The thermodynamic relationships among energy, entropy, and dissipation likewise impose powerful constraints on the behavior and evolution of economic systems.17 Economies are dynamical and emergent systems compelled to function in certain ways by their underlying social and ecological conditions. In this context, economies are non-equilibrium systems capable of rapidly dissipating energy to some external environment. All dynamical systems gain strength from some energy reservoir, reach peak intensity by absorbing a regular supply of energy, then unravel from internal and external changes that either disrupt vital energy flows or make it impossible to keep dissipating more energy. They can even experience long-term undulations by growing for some time, then shrinking, then growing again, before finally collapsing. Interactions between dynamical systems can produce highly chaotic results, but energy expansions and contractions are the core features of all dynamical systems. The energy consumed by all economic systems is either converted into mechanical work and the physical products derived from that work, or is simply wasted and dissipated to the environment. We can define the collective efficiency of an economic system as the fraction of all energy consumed that goes into creating mechanical work and electrical energy. Economies that increase the amount of mechanical work they generate can produce more goods and services. But however important it may be, mechanical work represents a relatively small fraction of total energy use in any economy; the vast majority of the energy consumed by all economies is routinely squandered to the environment through waste, dissipation, and other kinds of energy losses.
Throughout history, economic growth has depended heavily on people consuming more energy from their natural environments.18 When humans were hunters and foragers, the primary asset that performed mechanical work was the human muscle.19 Our nomadic way of life lasted for some 200,000 years, but underwent significant disruptions after the Ice Age. Over millennia, changing ecological conditions around the world compelled numerous groups to adopt pastoralist and agricultural strategies. Agrarian economies relied heavily on cultivated plants and domesticated animals to help generate surpluses of food and other goods and resources. These agrarian modes of production and consumption dominated human societies for almost ten thousand years, but were eventually replaced by a new economic system. Capitalism emerged and spread through colonial expansion, waves of industrialization, the proliferation of epidemic diseases, genocidal campaigns against indigenous populations, and the discovery of new energy sources.
The global economy has since become an interconnected system of finance, computers, factories, vehicles, machines, and much more. Creating and sustaining this system required a major upward transition in the rate of energy throughput from our natural environments. In our nomadic days, the daily rate of per capita energy consumption was around 5,000 kilocalories.20 By 1850, per capita consumption had risen to roughly 80,000 kilocalories per day, and has since ballooned to about 250,000 kilocalories today.21 From a physics perspective, the fundamental feature of all capitalist economies is an excessive rate of energy consumption focused on boosting economic growth and material surpluses. The collective deployment of capital assets can generate incredible levels of mechanical work, allowing people to produce more, travel great distances, and lift heavy objects, among other tasks. Capitalism is far more energy-intensive than any previous economic system, and it has wrought unprecedented ecological consequences that may threaten its very existence. It remains uncertain how long humanity can sustain capitalism’s energy-intensive activities, but there is no doubt that the fantasy of endless growth and easy profits cannot continue. All dynamical systems must eventually come to an end.
Over the last two centuries, inefficient capitalist economies have unloaded large amounts of energy losses to their natural environments in the forms of waste, chemicals, pollutants, and greenhouse gases. The aggregate effect of all this waste and dissipation has been fundamentally to alter critical energy flows throughout the ecosphere, triggering a major social and ecological crisis in the natural world. This socioecological crisis is still in its early phases, but has already spawned calamities like deforestation, global warming, ocean acidification, and substantial losses in biodiversity.22 Barring revolutionary changes to our socioeconomic system, this crisis will only continue and intensify. As this occurs, accumulating problems in the natural world will threaten the long-term viability of global civilization. The products we dissipate to the environment may be useless to us, but they often serve as energy reservoirs for other dynamical systems. Energy losses often have an amplifier effect on human civilization, meaning their true costs are far greater than may be visible or superficially understood. Consider the unsanitary conditions in cities throughout much of human history. Cities in pre-modern economies were typically filthy, with trash and waste overwhelming many public spaces. Yet these energy losses were a critical source of food and nourishment for a wide variety of other living organisms, especially insects and other small animals that could survive in the midst of human civilization. When these creatures became hosts to deadly diseases, human waste helped to concentrate their numbers in precisely the worst places: high-density areas like cities. As a consequence, epidemic diseases usually generated far larger death tolls than they would have otherwise, with the unimaginable carnage of the Black Death as a primary example.23
Today we face our own versions of this ancient problem, but on a much bigger scale. There are several kinds of gases in the atmosphere, known as greenhouse gases, able to absorb outgoing heat radiation.24 When these gases in the atmosphere trap and emit radiation back to the surface of the planet, large numbers of photons excite the electrons, atoms, and molecules on the surface to higher energy states, in a process called the greenhouse effect. These additional excitations and fluctuations at the microscopic level collectively represent the warmth we experience at the macroscopic level. The greenhouse effect is critical because it makes the Earth warm enough to be habitable.25 Over the last two centuries, however, wealthy and industrialized nations have been reinforcing this natural process by pumping vast amounts of new greenhouse gases into the atmosphere, in turn causing more global warming. This artificial reinforcement of the greenhouse effect has already had profound consequences for our species and others. Thermal excitations from an amplified greenhouse effect often act as a powerful energy reservoir for other dynamical systems and natural phenomena, including storms, floods, droughts, cyclones, wildfires, insects, viruses, bacteria, and algae blooms.26
A warming planet could also reinforce positive feedback mechanisms in the climate capable of inducing even more warming, beyond that already caused by our greenhouse gas emissions. These mechanisms, such as melting sea ice and thawing permafrost, would allow the planet to absorb more solar energy while naturally emitting vast quantities of greenhouse gases.27 The resulting chaos would render any human attempts to mitigate global warming futile. This is precisely what should worry us: the chaos we are unleashing on the planet through the capitalist system will find a way to produce a new kind of order, one that threatens human civilization itself. As capitalism expands, the ecological crisis will worsen. The intensifying dynamical systems of nature will increasingly interact with our civilizations and could severely disrupt the vital energy flows that support social reproduction and economic activities. Regions with high population densities subject to recurring natural disasters are especially vulnerable. Cyclone Bhola killed about 500,000 people when it struck East Pakistan in 1970, triggering a series of massive riots and protests that culminated in a civil war and contributed to the establishment of a new country, Bangladesh.28 Numerous studies have concluded that the worst drought to strike Syria in almost a thousand years was partly responsible for the social and political tensions that culminated in the current civil war.29 The climate is a resilient dynamical system capable of assimilating many different physical changes, but this resilience has its limits, and humanity will be in deep trouble if it keeps trying to transgress them.
These arguments highlight one of the deepest flaws in modern economic theory: it lacks a scientific foundation. Orthodox economic philosophies, from monetarism to the neoclassical synthesis, focus on describing the transient financial features of capitalism, mistaking these for immutable and universal laws of nature. Capitalist economics has largely been transformed into a metaphysical philosophy whose goal is not to provide a scientific foundation for economics, but to produce sophisticated propaganda designed to protect the wealth and power of a global elite. Any scientific explanation of economics must begin with the realization that energy flows and ecological conditions—not any “invisible hand” of the market—dictate the long-term macroscopic parameters of all economies. Important contributions along these lines have come from the field of ecological economics, especially in seminal works by the economists Nicholas Georgescu-Roegen and Herman Daly, but also from the systems ecologist Howard Odum.30 Marx himself incorporated ecological concerns into his economic and political thought.31 The contributions of these and other thinkers revealed that the economic features of the world are emergent properties shaped by underlying physical realities and ecological conditions, making an understanding of these conditions critical to any basic understanding of economics.
Ecological thought differs from the orthodox schools of economics in fundamental ways. Most importantly, ecological theory contends that we can no longer treat waste and dissipative losses as “externalities” and “costs of doing business,” given how important these energy losses can be in shaping the dynamical evolution of economic systems. What mainstream economists call “externalities” include the physical products we dump into the environment—everything from pollutants and plastic trash to toxic chemicals and greenhouse gases. The consequences of extreme energy losses can have a profound effect on the future evolution of dynamical systems. As scientists continually stress, the energy losses from our modern economies are so large and intense that they are starting to fundamentally alter the energy flows of the entire ecosphere, from the reinforcement of the greenhouse effect to the changing chemistry of the oceans. Some of these new concentrations of energy then act as reservoirs that power the formation and operation of other dynamical systems, which often disrupt the normal activities of civilization. Hence the fundamental reason our economic actions cannot be decoupled from the natural world: if the effects associated with our energy losses become powerful enough to destroy the normal functions of our civilizations, then no number of ingenious economic policies will save us from the wrath of nature.
Most people in power today believe we can carefully manage capitalism and prevent the worst effects of the ecological crisis. A popular strain of technological optimism holds that innovation can solve the fundamental ecological problems that humanity faces. Several different solutions have been proposed to fix our ecological woes, from the adoption of renewable energy sources to more outlandish programs like carbon storage and sequestration. All these ideas share the presumption that capitalism itself does not have to change, because technological solutions will always be available to deliver more economic growth and a healthier environment. From Beijing to Silicon Valley, technocapitalists are fond of arguing that capitalism can keep humming along through gains in energy efficiency.32 The ultimate reason why this strategy will fail over the long run is that nature imposes absolute physical limits on efficiency that no extent of technological progress can overcome. The recent breakdown in Moore’s Law because of quantum effects is a notable example.33 Another is the efficiency barrier that the Carnot cycle poses for all practical heat engines.34
But our most pressing concerns have to do with the underlying relationships between technological innovation and economic growth. Faith in technological solutions helps to foster further technological innovation and economic growth, increasing the overall demands placed on the biophysical world and the dissipation associated with the capitalist system. We can examine these relationships by first looking at how people and economic systems respond to efficiency gains. For a sense of whether capitalism can deliver major improvements in efficiency, we need to develop a general theory that explains how the collective efficiency of our economic systems changes over time.
When fuel efficiency improves, we often drive longer distances. When electricity becomes cheaper, we often power more appliances. Even those who proudly save energy at home through recycling, composting, and other activities are more than happy to jump on an airplane and fly halfway around the world for a vacation. People often take savings in one area and exchange them for expenses in another. What we end up doing with efficiency gains can sometimes be just as important as the gains themselves. In ecological studies, this phenomenon is generally known as the Jevons Paradox, which reveals that the intended effects of efficiency improvements do not always materialize.35 First formulated in the mid-nineteenth century by the British economist William Stanley Jevons, the paradox states that increases in energy efficiency are generally used to expand accumulation and production, leading to greater consumption of the very resources that the efficiency improvements were supposed to conserve. Boosting efficiency leads to cheaper goods and services, which encourages more demand and more spending, leading to the consumption of more energy.36 Jevons first described this effect in the context of coal power and steam engines. He observed that efficiency improvements in steam engines had encouraged more consumption of coal in Britain, implying that increased energy efficiency did not actually yield energy savings.
Variations of this paradox are known in economics as the rebound effect. Most economists accept that some versions of the effect are real, but disagree over the size and the scope of the problem. Some believe rebound effects are irrelevant, arguing that efficiency improvements do encourage lower levels of energy consumption in the long run.37 In a comprehensive review of the literature on the subject, the UK Energy Research Centre determined that the most extreme versions of the rebound effect probably no longer apply to developed economies. However, they also argued that large rebound effects across our economies can still occur. They reached the following conclusion: “it would be wrong to assume that…rebound effects are so small that they can be disregarded. Under some circumstances (e.g. energy efficient technologies that significantly improve the productivity of energy intensive industries) economy-wide rebound effects may exceed 50% and could potentially increase energy consumption in the long-term.”38 The fact that significant economy-wide rebound effects are possible should give us pause about the utility of efficiency strategies in combating the ecological crisis and climate change. In fact, this entire argument obscures a more important uncertainty: the problem of whether efficiency improvements can come fast enough to alleviate the worst consequences of the ecological crisis, which are still ahead of us. Given the mechanics and incentives of capitalism, we should beware the current infatuation with efficiency optimism.
To clarify these arguments, we need a theory that explains the role of efficiency in the wider context of technological progress. The rebound effect and the Jevons Paradox focus on understanding how people and economic systems behave in response to efficiency gains. More fundamental, however, is the task of understanding the general evolution of collective efficiencies over long periods of time. The dominant theme of technological innovation throughout history has been the effort to shift the burden of energy use from human muscles to other physical and biological systems, such as animals, machines, and computers. Consider cars, bicycles, airplanes, microwaves, dishwashers, vacuum cleaners, and virtually all the “wonders” of modern life: their central goal is to exploit energy and perform tasks that would normally require the exertion of human muscles. Robots and artificial intelligence have recently become all the rage, ready to swoop in and perform menial tasks that we have no desire to do. The expansion in mechanical output facilitated by technological progress typically leads to more energy-intensive societies where those who control the means of production can generate greater surpluses and profits. Technological innovation under capitalism in particular has boosted the collective amount of mechanical work that economies can generate, and has also ballooned the rate of energy consumption from our natural environments. But it has not fundamentally changed collective efficiencies, implying that higher rates of economic growth have usually been accompanied by larger energy losses.
Economic systems typically use new sources of energy to expand production, consumption, and accumulation, not to fundamentally improve efficiency. From the cultivation of plants and the domestication of animals to the burning of fossil fuels and the invention of electricity, the mastery and discovery of new energy sources has generally produced more energy-intensive societies. Although any economic system may make efficiency gains, these are incidental and secondary to the wider goal of accumulation. The overall efficiency of an economic system is highly inertial, changing at a glacial pace. We see this very process playing out now with greenhouse gas emissions, although the ecological crisis extends far beyond this problem. Political and business leaders have hoped for years that technological progress will somehow deliver both higher rates of economic growth and a sharp reduction in greenhouse gas emissions. Things have not gone according to plan. The year 2017 saw a substantial global rise in harmful emissions, defying even the modest goals of the Paris Agreement.39 Even before that, the United Nations had warned of an “unacceptable” gap between government pledges and the emission reductions needed to prevent some of the worst consequences from climate change.40 The challenges of boosting efficiency are more apparent when we view capitalism on a global scale: although many developed nations have made modest but measurable improvements in their collective efficiencies, these gains have been undercut by developing economies still in the process of industrialization.41 Evidently, substantial changes in the collective efficiency of any economic system rarely materialize in short periods of time. Technological growth under the regime of capitalism will deliver some additional progress on efficiency, but certainly not enough to prevent the worst consequences of the ecological crisis.
One of the best ways to understand the inertia of collective efficiencies is to compare energy efficiencies under capitalism with those of humanity’s nomadic days, more than ten thousand years ago. Recall that human muscles performed most of the work in nomadic societies, and the efficiency of our muscles is roughly 20 percent, perhaps much more under special circumstances.42 For comparison, most gasoline-powered combustion engines have an efficiency of roughly 15 percent, coal-fired power plants come in at a global average of about 30 percent, and the vast majority of commercial photovoltaics are somewhere around 15 to 20 percent.43 All these figures vary depending on a wide array of physical conditions, but when it comes to efficiency, we can safely conclude that the dominant assets of capitalism hardly do better than human muscles, even after three centuries of rapid technological progress. Cost and convenience are the main reasons why technological innovation works this way, emphasizing mechanical output and the scale of production at the expense of efficiency. Large gains in efficiency are extremely difficult to achieve, in both physical and economic terms. From time to time, a James Watt or an Elon Musk comes along with an amazing invention, but such products do not represent the entire economy. The Watt steam engine was a major improvement over previous models, but its thermal efficiency was only 5 percent at best.44 And although Musk’s Tesla motors have a phenomenal operating efficiency, the electricity needed to run them often comes from much more inefficient sources, such as coal-fired power plants. If you drive a Tesla in Ohio or West Virginia, the dirty sources of energy powering it mean that your amazing technological product produces roughly the same carbon emissions as a Honda Accord.45 The collective efficiency of capitalist economies remains relatively low because these economies are interested in growing their profits and production levels, not in making the enormous investments needed for significant improvements in efficiency.
In November 2017, a group of 15,000 scientists from more than 180 nations signed a letter sounding the alarm on the ecological crisis and what awaits us in the future.46 Their prognosis was grim, and their proposals—intentionally or not—amounted to a wholesale repudiation of modern capitalism. Among their many useful recommendations was a call for “revising our economy to reduce wealth inequality and ensure that prices, taxation, and incentive systems take into account the real costs which consumption patterns impose on our environments.” Our fundamental problem is easy to state: modern civilization uses far too much energy. And the solution to this problem is equally easy to state, but very difficult to implement: humanity must reduce the rate of energy consumption that has prevailed in modern times. The best way to drive down that rate is not through messianic delusions of technological progress, but rather by breaking the structures and incentives of capitalism, with their drive for profits and production, and establishing a new economic system that prioritizes a compatible future with our natural world.
Governments and popular movements around the world should develop and implement radical measures that will help to move humanity from capitalism toward ecologism. These measures should include punitive taxes and caps on extreme wealth, the partial nationalization of energy-intensive industries, the vast redistribution of economic goods and resources to poor and oppressed peoples, periodic restrictions on the use of capital assets and technological systems, large public investments in more efficient renewable energy technologies, sharp reductions in work hours, and perhaps even the adoption of mass veganism among industrialized nations that no longer rely on animals for food production. The economic priorities of the ecological project should focus on improving our existing quality of life, not on trying to generate high levels of economic growth to boost capitalist profits. If human civilization is to survive for thousands of years, and not just a few more centuries, then we must drastically scale back our economic ambitions and focus instead on improving the quality of life in our communities, including our community with nature. Rather than trying to dominate the natural world, we should change course and coexist with it.
Notes
- ↩ Karl Marx, Capital, vol. 1 (London: Penguin, 1976), 929–30.
- ↩ Edward W. Younkins, Capitalism and Commerce (New York: Lexington, 2002), 57.
- ↩ Peter Atkins, Four Laws That Drive the Universe (Oxford: Oxford University Press, 2007), preface.
- ↩ Robert L. Lehrman, “Energy Is Not the Ability to Do Work,” Physics Teacher 11, no. 1 (1973): 15–18.
- ↩ Larry Kirkpatrick and Gregory E. Francis, Physics: A Conceptual Worldview (Boston: Cengage, 2009), 124
- ↩ Atkins, Four Laws That Drive the Universe, 23.
- ↩ Debora M. Katz, Physics for Scientists and Engineers, vol. 1 (Boston: Cengage, 2016), 264.
- ↩ William Thomson, “On a Universal Tendency in Nature to the Dissipation of Mechanical Energy,” in Proceedings of the Royal Society of Edinburgh 3 (Edinburgh: Neill and Company, 1857), 139–42.
- ↩ Douglas C. Giancoli, Physics for Scientists and Engineers (London: Pearson, 2008), 545.
- ↩ John M. Seddon and Julian D. Gale, Thermodynamics and Statistical Mechanics (London: Royal Society of Chemistry, 2001), 60–65.
- ↩ Seddon and Gale, Thermodynamics and Statistical Mechanics, 65.
- ↩ Atkins, Four Laws That Drive the Universe, 53.
- ↩ For the famous reciprocal relations that describe heat flows, see Lars Onsager, “Reciprocal Relations in Irreversible Processes I,” Physical Review Journals 37 (1931): 405–26. It was mainly for this work that Onsager won the Nobel Prize in Chemistry in 1968. For a study of bosonic quantum gases in a one-dimensional trap, see Miguel Ángel García-March et al, “Non-Equilibrium Thermodynamics of Harmonically Trapped Bosons,” New Journal of Physics 18 (2016): 1030–35. For an exhaustive review of modern thermodynamics and an explanation of dissipative structures, which earned Ilya Prigogine his Nobel Prize, see Dilip Kondepudi and Ilya Prigogine, Modern Thermodynamics (Hoboken: Wiley, 2014), 421–41. In 2009, Alex Kleidon wrote an important theoretical study and review of the climate system using non-equilibrium thermodynamics. See Alex Kleidon, “Nonequilibrium Thermodynamics and Maximum Entropy Production in the Earth System,” Science of Nature 96 (2009): 1–25.
- ↩ A notable idea from the physicist Phil Attard looks at entropy as the number of particle configurations associated with a physical transition in a given period. See Phil Attard, “The Second Entropy: A General Theory for Non-Equilibrium Thermodynamics and Statistical Mechanics,” Physical Chemistry 105 (2009): 63–173. Perhaps the most technically rigorous model of entropy imagines it to be a collection of two functions that describe the changes happening among a restricted class of non-equilibrium systems. See Elliott H. Lieb and Jakob Yngvason, “The Entropy Concept for Non-Equilibrium States,” Proceedings of the Royal Society A 469 (2013): 1–15. The physicist Karo Michaelian has provided an intuitive definition of entropy, viewing it as the rate at which physical systems explore available energy microstates (“Thermodynamic Dissipation theory for the origin of life,” Earth System Dynamics (2011): 37–51).
- ↩ Erwin Schrödinger, What Is Life? The Physical Aspect of the Living Cell (Ann Arbor: University of Michigan Press, 1945), 35–65.
- ↩ Natalie Wolchover, “A New Physics Theory of Life,” Quanta Magazine, January 22, 2014.
- ↩ Carsten Hermann-Pillath, “Energy, Growth, and Evolution: Towards a Naturalistic Ontology of Economics,” Ecological Economics 119 (2015): 432–42.
- ↩ Numerous studies from around the world have revealed a powerful relationship between energy use and economic growth. For a review of the statistical relationship between energy use and GDP growth worldwide, see Rögnvaldur Hannesson, “Energy and GDP growth,” International Journal of Energy Management 3 (2009): 157–70. For a major study on the link between energy and income in certain Asian countries, see John Asafu-Adjaye, “The Relationship Between Energy Consumption, Energy Prices, and Economic Growth: Time Series Evidence from Asian Developing Countries,” Energy Economics 22 (2000): 615–25. For a general overview of the ways energy use has shaped human history, see Vaclav Smil, Energy and Civilization (Cambridge: MIT Press, 2017).
- ↩ Vaclav Smil, Energy in Nature and Society (Cambridge: MIT Press, 2008), 147-49.
- ↩ Jerry H. Bentley, “Environmental Crises in World History,” Procedia – Social and Behavioral Sciences 77 (2013): 108–15.
- ↩ Bentley, 113.
- ↩ Robert Falkner, “Climate Change, International Political Economy and Global Energy Policy,” in Andreas Goldthau, Michael F. Keating, and Caroline Kuzemko, eds., Handbook of the International Political Economy of Energy and Natural Resources (Cheltenham: Elgar, 2018), 77-78.
- ↩ Edward Humes, Garbology: Our Dirty Love Affair with Trash (London: Penguin, 2013), 30.
- ↩ W. J. Maunder, Dictionary of Global Climate Change, (New York: Springer, 2012), 120.
- ↩ Maunder, Dictionary of Global Climate Change, 120.
- ↩ One of the major papers linking climate change to forest fires in the United States came out in 2016; see John T. Abatzoglou and A. Park Williams, “Impact of Anthropogenic Climate Change on Wildfire across Western US Forests,” PNAS 113 (2016): 11770–75. For a comprehensive guide to some recent research on hurricanes and climate change, see Jennifer M. Collins and Kevin Walsh, eds., Hurricanes and Climate Change, vol. 3 (New York: Springer, 2017). For a review of the role of climate change plays in the spread of infectious diseases, see Xiaoxu Wu et al., “Impact of Climate Change on Human Infectious Diseases: Empirical Evidence and Human Adaption,” Environment International 86 (2016): 14–23. For the relationship between climate change and algae blooms, see Daniel Cressey, “Climate Change Is Making Algal Blooms Worse,” Nature, April 25, 2017.
- ↩ Jonathan A. Newman et al., Climate Change Biology (Oxfordshire: CABI, 2011), 220–21.
- ↩ Alan H. Lockwood, Heat Advisory: Protecting Health on a Warming Planet (Cambridge: MIT Press, 2016), 103.
- ↩ Bruce E. Johansen, Climate Change: An Encyclopedia of Science, Society, and Solutions (Santa Barbara: ABC–CLIO, 2017), 19–20.
- ↩ For one of the first major works attempting to ground economics in physics, see Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (Cambridge, MA: Harvard University Press, 1971). Georgescu-Roegen’s initial arguments have been refined and developed by subsequent generations of thinkers who recognize that economic activity is constrained by physical laws. Among them was Herman Daly, a leading exponent of the idea that economic growth will not last forever, whose works have had a profound influence on the ecological movement. For a succinct overview of his thought, see Herman E. Daly, Beyond Growth (Boston: Beacon, 1997). Perhaps the greatest ecological systems theorist was Howard Odum, who did a masterful job explaining the mechanisms that link human societies to their natural environments. For an explanation of his theories, see Howard Odum, Environment, Power, and Society for the Twenty-First Century (New York: Columbia University Press, 2007).
- ↩ John Bellamy Foster, Marx’s Ecology (New York: Monthly Review Press, 2000), 9–10.
- ↩ For a formal academic explanation of this view, see Lea Nicita, “Shifting the Boundary: The Role of Innovation,” in Valentina Bosetti et al., eds., Climate Change Mitigation, Technological Innovation, and Adaptation (Cheltenham: Elgar, 2014), 32–39.
- ↩ Tom Simonite, “Moore’s Law Is Dead. Now What?” MIT Technology Review, May 13, 2016.
- ↩ Atkins, Four Laws That Drive the Universe, 51-52.
- ↩ John Bellamy Foster, Ecology Against Capitalism (New York: Monthly Review Press, 2002), 94.
- ↩ Foster, Ecology Against Capitalism, 94.
- ↩ Evan Mills, “Efficiency Lives—The Rebound Effect, Not So Much,” ThinkProgress, September 13, 2010, http://thinkprogress.org/.
- ↩ Steven Sorrell, The Rebound Effect (London: UK Energy Research Centre, 2007), 92.
- ↩ Jeff Tollefson, “World’s Carbon Emissions Set to Spike by 2% in 2017,” Nature, November 13, 2017.
- ↩ Fiona Harvey, “UN Warns of “Unacceptable” Greenhouse Gas Emissions Gap,” Guardian, October 31, 2017.
- ↩ Nijavalli H. Ravindranath and Jayant A. Sathaye, Climate Change and Developing Countries (New York: Springer, 2006), 35.
- ↩ Zhen-He He et al, “ATP Consumption and Efficiency of Human Single Muscle Fibers with Different Myosin Isoform Composition,” Biophysical Journal 79 (2000): 945–61.
- ↩ On the efficiency of internal combustion engines, see Efstathios E. Stathis Michaelides, Alternative Energy Sources, (New York: Springer, 2012), 411. For coal-fired power plants, see R. Sandström, “Creep Strength of Austenitic Stainless Steels for Boiler Applications,” in A. Shibli, ed., Coal Power Plant Materials and Life Assessment (Amsterdam: Elsevier, 2014), 128. On the efficiency of photovoltaic cells, see Friedrich Sick and Thomas Erge, Photovoltaics in Buildings (London: Earthscan, 1996), 14.
- ↩ Robert T. Balmer, Modern Engineering Thermodynamics (Cambridge: Academic Press, 2011), 454.
- ↩ Will Oremus, “How Green Is a Tesla, Really?” Slate, September 9, 2013, http://slate.com.
- ↩ William J. Ripple et al., “World Scientists’ Warning to Humanity: A Second Notice,” BioScience 20, no. 10 (2017): 1–3.
Mr. Rows Namoura Coffee 
The Greatest Reshuffle of Individual Incomes since the Industrial Revolution
The effects of of globalization on income distributions in rich countries have been studied extensively. This column takes a different approach by looking at developments in global incomes from 1988 to 2008. Large real income gains have been made by people around the median of the global income distribution and by those in the global top 1%. However, there has been an absence of real income growth for people around the 80-85th percentiles of the global distribution, a group consisting of people in ‘old rich’ OECD countries who are in the lower halves of their countries’ income distributions.
The effects of trade, or more broadly of globalization, on incomes and their distribution in the rich countries have been much studied, beginning with a number of works on wage distributions in the 1990s, to more recent papers on the effects of globalization on the labour share (Karabarbounis and Neiman 2013, Elsby et al. 2013), wage inequality (Ebenstein et al. 2015), and routine middle class jobs (Autor and Dorn 2010).
In joint work with Christoph Lakner (Lakner and Milanovic 2015) and in a recently published book, Global Inequality: A New Approach for the Age of Globalization (Milanovic 2016), Milanovic take a different approach of looking at real incomes across the world population. This is made possible thanks to the data from almost 600 household surveys from approximately 120 countries in the world covering more than 90% of the world population and 95% of global GDP. Since household surveys are not available for all countries annually, the data are ‘centred’ on benchmark years, at five-year intervals, starting with 1988 and ending in 2008. I report the results for up to 2011 in Milanovic (2016), while Lakner has an unpublished update for 2013. The updates confirm, or reinforce, the key findings for 1988-2008 that I discuss here.
The advantage of a global approach resides in its comprehensiveness and the ability to observe and analyze the effects of globalization in many parts of the world and on many parts of the global income distribution. While the true or putative effects of globalization on working class incomes in the rich world have become the object of fierce political battles – especially in the wake of the Brexit vote and the rise of Donald Trump to political prominence in the US – the overall effects of globalization on the rest of the world have received less attention, and when they have, were studied separately, as if independent, from the effects observed in the rich word.
Figure 1 – dubbed by some ‘the elephant graph’ because of its shape – shows real income gains realized at different percentiles of the global income distribution between 1988 and 2008. Income is measured in 2005 international dollars and individuals are ranked by their real household per capita income. The results show large real income gains made by the people around the global median (point A) and by those who are part of the global top 1% (point C). It also shows an absence of real income growth for the people around the 80-85th percentile of the global distribution (point B).
Who are the people at these three key points? Nine out of ten people around the global median are from Asian countries, mostly from China and India. Their gains are not surprising, given that Chinese and Indian GDP per capita has increased by 5.6 and 2.3 times, respectively, over the period. Thus, for example, the person at the median of the Chinese urban distribution in 1988 was then also at the global median, but rose to the 63rd global percentile in 2008 and was above the 70th percentile in 2011. She thus leapfrogged, in terms of income, some 1.5 billion individuals. Such dramatic changes in relative income positions, over a rather short time period, have not occurred since the Industrial Revolution two centuries ago.
The people around the global median are, however, still relatively poor by Western standards. This emerging ‘global middle class’ is composed of individuals with household per capita incomes of between 5 and 15 international dollars per day. To put these numbers into perspective, one should recall that the national poverty lines in rich countries are often higher than 15 dollars per person per day.
The global top 1% is composed overwhelmingly of the people from the advanced economies – one half of the people in that group are Americans, or differently put, 12% of Americans are part of the global top 1%. China and India have many billionaires (in effect, according to the 2015 Forbes list, China and India have more than 300 billionaires versus more than 500 for the US), but compared to the ‘old rich’ world, Asian countries still do not have sufficient numbers of ‘comfortably rich’ or affluent households. In 2008, the threshold for being in the global top 1% was 45,000 international dollars per person per year which, translated into a traditional family structure of two partners and two children, implies an after-tax income of $180,000 (or, using the approximate tax rates of the rich countries, a before-tax income of more than $300,000).
The point that attracts most attention is B. Seven out of ten people at that point are from the ‘old rich’ OECD countries. They belong to the lower halves of their countries’ income distributions, for in effect the rich countries’ income distributions start only around the 70th percentile of the global income distribution. (For some especially rich and egalitarian advanced economies, that start-up point is even higher – Denmark’s distribution begins around the 80th global percentile.)
The contrast between the unambiguous success of people at point A and the relative failure of people at point B allows us to look at the effects of globalization more broadly. Not only can we see them more clearly when thus juxtaposed, but it enables us to ask whether the two points are in some sense related: is the absence of growth among lower middle classes of the rich world the ‘cost’ paid for the high income gains of the national middle classes in Asia? It is unlikely that one can provide a definitive answer to that question, since establishing causality between such complex phenomena that are also affected by a host of other variables is very difficult and perhaps impossible. However, the temporal coincidence of the two developments and the plausible narratives linking them, whether made by economists or by politicians, make the correlation in many people’s mind appear real.
In addition to looking at the global reshuffle of income through the nation-state lenses (are the ‘losses’ of UK working class related to the gains of the Chinese?), we can look at it through a purely cosmopolitan lens where all individuals are treated equally, and the same-percentage income gains realized by the poorer people are valued more than those made by the rich. With such a perspective in mind, it would be hard to dismiss the period 1988-2008 (and as our results for up to 2013 confirm, the period all the way to the present) as being one of failure. One could, despite the rising income share of the global top 1%, argue the opposite by pointing to the close to doubling of real incomes realized by some one-fifth of the world population that lies between the 45th and 65th global percentiles. It is their real income growth that has driven the first decline in global inequality since the Industrial Revolution (Milanovic 2016, Chapter 1).
The issue, however, is that such a cosmopolitan approach is a very abstract way to look at the matters of distribution. Most people are concerned with their incomes as compared to their national peers. Milanovic and Roemer (2016) show that what seems a very positive development (that is, lower global inequality) when individuals are assumed to be concerned solely with their absolute incomes becomes much less positive when we also include in their welfare functions a concern with relative positions in national income distributions. Then the dominant feeling across the world, reflecting increasing national income inequalities, becomes one of a relative loss.
The political implications of a global ‘elephant graph’ are being played out in national political spaces. In that space, rising national inequalities, despite being accompanied by lower global poverty and inequality, may turn out to be difficult to manage politically.
References
Autor, D. and D. Dorn (2010), “The growth of low-skill service jobs and the polarization of US labor market”, American Economic Review 103(5): 1553-97.
Ebenstein, A., A. Harrison, M. McMillan and S. Phillips (2014), “Estimating the Impact of Trade and Offshoring on American Workers Using the Current Population Surveys”, Review of Economics and Statistics 96(4): 581–595.
Elsby, M. W. L., B. Hobijn, and A. Şahin (2013), “The Decline of US Labor Share,” paper prepared for the Brookings Panel on Economic Activity, September 2013.
Karabarbounis, L. and B. Neiman (2013), “The Global Decline of the Labor Share”, Quarterly Journal of Economics 129(1): 61–103.
Lakner, C. and B. Milanovic (2015), “Global income distribution: from the fall of the Berlin Wall to the Great Recession”, World Bank Economic Review 30(2): 203-232.
Milanovic, B. (2016), Global Inequality: A New Approach for the Age of Globalization, Harvard University Press.
Milanovic, B. and J. Roemer (2016), “Interaction of global and national income inequalities”, Journal of Globalization and Development, forthcoming.
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