‘ get the prices right’ ‘ get the property rights right’ ‘ get the institutions right’ ‘ get the governance right’ ‘ get the competitiveness right’ ‘ get the entrepreneurship right’ ‘ get the education right’ ’ get the climate right’ ’ get the diseases right’ ‘ get the culture right’ Missing dimension: ‘GET THE ECONOMIC ACTIVITIES RIGHT’ SINCE 1990 THE WASHINGTON INSTITUTIONS HAVE PROVIDED A STRING OF RED HERRINGS
Not necessary to reinvent wheels: much useful theory in now forgotten history of economic policy: <ul><li>’ Lack of Conceptual Novelty’ (1485-1947): continuity of principles and toolbox with varying degrees of sophistication </li></ul>
Important Continental criticism of (English) Classical Economics: - deals with quantities void of any qualitative characteristics ( qualitätslose Grössen) - blind to structural connections/ synergies ( Strukturzusammenhänge )
The Knowledge- and Production-Based Other Canon of Economics Renaissance Tudor Economic Policy in England 1485+ Realökonomisch Mercantilism: Growth as Activity-Specific Alexander Hamilton US 1791 Daniel Raymond US 1820 M. & H. Carey US 19. Century US Industrial Policy Giovanni Botero 1588 Antonio Serra 1613 Barthélemy de Laffemas 1597 Jean Baptiste Colbert 1651+ Von Hornick Germany 1684 German Cameralism & Anti-Physiocracy German Historical School 1848+ Verein für Sozial-politik 1872-1932 Friedrich List 1841 E . Peshine Smith Japan 1860+ The Other Canon Veblen and the Institutional School Japan + Asian Tigers 1945+ Evolutionary Economics Schumpeter Schmoller Sombart Marx Keynes Classical Dev p . Econ . 1945+
Three Times Rise and Fall of ’Physics-based’ Economics <ul><li>School Starting point Peak Death </li></ul><ul><li>Physiocracy Quesnay 1758 1760s ca. 1770 </li></ul><ul><li>(’Rule of Nature’) </li></ul><ul><li>Classical Ricardo 1817 1840s ca. 1895 </li></ul><ul><li>Economics </li></ul><ul><li>Neoclassical Samuelson 1948 1990s ???? </li></ul><ul><li>synthesis </li></ul><ul><li> </li></ul>
Colonialism as a Technology Policy . ‘ That all Negroes shall be prohibited from weaving either Linnen or Woollen, or spinning or combing of Wooll, or working at any Manufacture of Iron, further than making it into Pig or Bar iron: That they be also prohibited from manufacturing of Hats, Stockings, or Leather of any Kind … Indeed, if they set up Manufactures, and the Government afterwards shall be under a Necessity of stopping their Progress, we must not expect that it will be done with the same Ease that now it may ’ . Joshua Gee, Trade and Navigation of Great Britain Considered, London, 1729.
Delft, Holland, 1650s: An Innovation System Based on Diversity NAVY & MERCHANT MARINE ART INDUSTRY Textile production uses glass lenses Printing: copper for printing plates Pottery: tiles for export SCIENCE Supply: canvas, linseed oil Supply: new species from afar to study Supply: lenses + brass for microscopes Supply: lenses for camera obscura Demand: luxury painting Supply: lenses and brass for binoculars + maps Demand: artists for drawing new specimens
The Circular Flow of Economics ” Black Box” Production of goods and services Money/capital The real economy Financial/money economy
USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’ Man-Hours Required by Best-Practice Methods of Producing A Pair of Medium-grade Men’s Shoes at Selected Dates in the U.S. Year Man-Hours Per Pair 1850 15.5 1900 1.7 1923 1.1 1936 0.9 USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’.
Capitalism is about rent-seeking <ul><li>The trick has been to make capitalism </li></ul><ul><li>a) into dynamic (Schumpeterian) rent-seeking that increases the size of the pie. </li></ul><ul><li>b) insure a ’fordist wage regime’, i.e. that dynamic rents are divided between entrepreneur (higher wages), workers (higher wages), government (larger tax base). </li></ul>
The ’Mechanics’ of Economic Development <ul><li>Activity-specific </li></ul><ul><li>Dynamic imperfect competition </li></ul><ul><li>Synergy-based (within labour market) </li></ul><ul><li>Induces institutions </li></ul><ul><li>Emulation, then Comparative Advantage </li></ul>
Industrial Policy: Ideas from Europe. <ul><li>Renaissance Economics (1200s-1600s). </li></ul><ul><li>Wealth as a product of urban synergies </li></ul><ul><li>Switching the meaning of innovations </li></ul><ul><li>‘ Schumpeterian ’ institutions: ‘ getting the prices wrong ’ </li></ul><ul><li>Maximising diversity and division of labour </li></ul><ul><li>The real gold mines are not the gold mines </li></ul><ul><li>Enlightenment Economics (1700s). </li></ul><ul><li>Productivity explosions and activity-specific growth </li></ul><ul><li>Synergies between industry and agriculture </li></ul><ul><li>Taxonomies: ‘ Good ’ and ‘ Bad ’ Trade </li></ul>
Creating rent-seeking institutions by ‘ getting the prices wrong ’ Patents and modern tariffs were created at about the same time, in the late 1400s. Patents: Promoting new knowledge Tariffs: bringing new knowledge to new areas.
How the wage differentials between rich and poor nations were created through sequences of ’productivity explosions’ translated into wage rents . 1750 2000 Textiles Shoes Radio TV Electronics Schumpeterian activities Malthusian activities
Institutions as agents of change ‘ It is not sufficient to inquire whether an institution of the state is attested to have been founded by our ancestors. Rather it is necessary that we understand and explain why it was instituted. For it is by knowing a cause that we gain knowledge of a thing ’ Leonardo Bruni (1369-1444), 1413.
Manufacturing as the real gold mines. “..such is the power of industry that no mine of silver or gold in New Spain or Peru can compare with it, and the duties from the merchandise of Milan are worth more to the Catholic King than the mines of Potosí and Jalisco. Italy is a country in which there is no important gold or silver mine, and so is France: yet both countries are rich in money and treasure thanks to industry.” Giovanni Botero, Ragion di Stato , 1588
Wealth as a product of synergies: Wealth as a ben comune or ’common weal’ Brunetto Latini (ca. 1210-1294), Chancellor of Florence. ‘… il ben comune fa grandi le città.’ Niccolò Machiavelli ( 1469-1527 ) Policy: Maximize the division of labor.
How innovations spread: <ul><li>Classically : as lowered prices to the consumers. Typically in agriculture and process innovations (perfect competition) Using ICT </li></ul><ul><li>‘ Collusively ’ : as higher profits, higher wages and higher tax base for the producing country. Typically in product innovations , Ford & Microsoft. (dynamic, Schumpeterian imperfect competition, ‘ market failure ’ (?)) New products based on ICT. </li></ul>
How the use of ICT reduces value added <ul><li>Tourism: internet bookings reduce margins for hotels in Venice and Costa del Sol, Spain. </li></ul><ul><li>Used books: instead of finding books through catalogues, customers now find them on the web. Result a precipitous fall in prices for used books. Book descriptions on the web reduce need for high-skilled cataloguers. </li></ul>
First Listian Principle Abandoned: <ul><li>Listian principle : A nation first industrialises and is then gradually integrated economically into nations at the same level of development. Symmetrical integration: win/win situations. </li></ul><ul><li>Neoclassical principle: Free trade is a goal per se, even before the required stage of industrialisation is achieved. Risk of lose/lose situation & factor-price polarization . </li></ul><ul><li>. </li></ul>
Second Listian Principle abandoned: <ul><li>Listian principle : The preconditions for wealth, democracy and political freedom are all the same: a diversified manufacturing sector subject to increasing returns. </li></ul><ul><li>Neoclassical principle : all economic activities are qualitatively alike, economic structure does not matter. </li></ul>
Third Listian Principle abandoned: <ul><li>Listian principle : Economic welfare a result of synergy. 13 th century Florentine Chancellor Brunetto Latini (1210-1294) explains the wealth of cities as a common weal (‘un ben comune’). </li></ul><ul><li>Neoclassical principle : ‘There is no such thing as society’, Margaret Thatcher (1987). </li></ul>
<ul><li>Asymmetrical integration creates the Vanek-Reinert effect: </li></ul><ul><li>When two nations at widely different technological levels integrate, the first casualty is the most advanced economic activity in the least advanced nation. This in turn contributes to factor price polarization and migration of skilled labor </li></ul>
Theorising by Inclusion: The qualitative differences between manufacturing and agriculture as perceived over time as ideal types or stylised facts. Export of raw materials and import of manufactured goods is ‘bad trade’ for a nation (King 1721) Export of manufactured goods and import of raw materials, but also exchanging manufactures for other manufactures, is ‘good trade’ for a nation (King 1721). Only farmers who share a labour market with manufacturing activities are wealthy: market for products, market for excess labour, access to technology (US/Europe 1800s) Important synergies between city and countryside: Only farmers near manufacturing cities produce efficiently (Europe 1700s to George Marshall 1947) Increased population a problem because of diminishing returns and no new land (Malthus) Increased population a necessity in order to create scale/markets for manufactures (European pre-Malthusian population theory) Specialisation will meet the flexible wall of diminishing returns and increasing costs/falling productivity (From Bible’s Genesis to Ricardo and John Stuart Mill). International specialisation leads to increasing returns/ economies of scale, producing falling costs, barriers to entry and higher profits (Serra 1613) Traditionally only a minimum of diversity and very little division of labour. Generalised wealth caused by a large diversity/large division of labour/maximising the number of professions (Serra 1613) Few windows of opportunity for innovation (until very recent history) Windows of opportunity for innovation concentrated in few activities (all urban: Botero 1589) (Perez and Soete 1988) The experience of 1500s Spain: de-industrialisation and return to agriculture creates increased poverty: a nation is better off with a relatively ineffective manufacturing sector than with none The experience of 1500s Spain: The real gold mines are the manufacturing industries, because the gold from the Americas ends up in the manufacturing cities outside Spain (generalised knowledge 1600s) Traditionally very little systemic effects, no ben commune (common weale) Generalised wealth only found in cities with artisans and manufacturing, and explained as a systemic effect: il ben comune (Florence 1200s). ‘ Agriculture’ ‘ Manufacturing’
Creates few synergies Creates large synergies (linkages, clusters) Terms of Trade tend to deteriorate over time compared to industrial products Terms of Trade tend to improve over time compared to agriculture Technological change leads mainly to lower prices in the consuming countries (Singer 1950) Technological change leads to higher wages, profits and taxes in the producing countries (’a Fordist wage regime’) Dominated by process innovations, product innovations for agriculture are made outside the agricultural sector (Ford’s tractors, Monsanto’s seeds, biotechnology) Dominated by product innovations which, when products mature, turn to process innovations Reversible wages and payment in kind Creates bargaining power for labour and irreversible wages: ‘stickiness’ of wages in money Generally creates a feudal class structure Creates a middle class and conditions for democracy (‘City air makes free’) Large price fluctuations. Timing of sales often more important for income than production skills Stable prices Cyclical production/overproduction (no possibility of storing semimanufactures) Stable production that can be fine-tuned to demand. Overproduction avoided by storing raw materials and semimanufactures. Slow growth in productivity until after World War II. Subject to ’productivity explosions’ since the 1400s Activities with low income elasticity of demand Activities with high growth in demand as income grows/Verdoorn’s Law ties increase in demand to increase in productivity ‘ Agriculture’ ‘ Manufacturing’ Perfect competition ( commodity competition ) Dynamic imperfect competition
Two Ideal Types of Protectionism Compared Regulation of technology transfer oriented towards avoiding ‘traps’ Regulation of technology transfer oriented towards maximizing knowledge transferred Confrontation between producers and local suppliers Intense cooperation between producers and local suppliers Profits created through static rent-seeking Profits created through dynamic ‘Schumpeterian’ rent-seeking Uneven income distribution restricted scale of home market and decreased competitiveness of local industry Even income distribution increased home market for advanced industrial goods Mixed record on land distribution Equality of land distribution (Korea) Nepotism in the distribution of capital, jobs and privileges Meritocracy – capital, jobs and privileges distributed according to qualifications Less emphasis on education/type of industries created did not lead to huge (East Asian) demand for education. Investment in education therefore tends to feed emigration Massive investment in education/industrial policy created a huge demand for education. Supply of educated people matched demand from industry. Core technology generally imported from abroad/assembly of imported parts/‘superficial’ industrialization Core technology locally controlled Little domestic competition Domestic competition maintained Based on a more static view of the world – planned economy Based on a dynamic Schumpeterian view of the world – market-driven ‘creative destruction’ Learning that lags behind the rest of the world Very steep learning curves compared to the rest of the world Permanent protection of mature industries/products for the home market (often very small) Temporary protection of new industries/products for the world market Latin American: ‘Bad’ East Asian: ‘Good’
What is a technological revolution? A powerful cluster of new and dynamic technologies, products and industries Change in techno-economic paradigm (New best practice “common sense”) An interrelated set of generic technologies and organisational principles Explosive growth and structural change Quantum jump in potential productivity for all
‘ The invention of innovation’. 1277: Roger Bacon arrested in Oxford for ‘suspicious innovations’. Innovations = heresy. 1605: Francis Bacon writes ‘An Essay on Innovations’. Innovations becomes the essence of progress.