As far as I can see, mainstream economists generally believe:
- Policy changes that raise the level of growth of the economy are more important than one over changes to the level of output1.
- Free trade is a desirable policy.
- This policy preference falls out of the theory of comparative advantage.
- Abolishing protectionist tariffs will result in a one-time increase of the level of output of the economy, but not the rate of growth.
As I understand it, Post Keynesians generally think theories of growth cannot be neatly be separated from theories of business cycles - that is, theories of short run fluctuations in the level of output. This intertwining complicates policy recommendations. Nevertheless, one can look back to Keynes2 to see a concern with economic growth.
It is hard to see how the two beliefs in the list above are consistent. Why should mainstream economists these days care much about whether countries put in place so-called free trade agreements? Maybe the question is one of who should govern. Anyways, economists in the public sphere should strive to be clear on what they advocate, and why they do.
Footnotes- Robert Lucas famously said (that is, I do not know where), "Once you start thinking about growth, it's hard to think about anything else". I do know that in Lucas (1987), he estimated that consumers "would surrender 42 per cent across the board [in consumption] to obtain an increase in the growth rate from [3 per cent] to [6 per cent." On the other hand, to eliminate aggregate consumption variability of the magnitude seen in the USA from the end of the Second World War to the 1980s would be worth "something less than a tenth of a percentage point" in average consumption.
- Keynes wrote this paean to economic growth in the midst of the Great Depression:
"The modern age opened; I think, with the accumulation of capital which began in the sixteenth century... From that time until to-day the power of accumulation by compound interest, which seems to have been sleeping for many generations, was re-born and renewed its strength. And the power of compound interest over two hundred years is such as to stagger the imagination.
For I trace the beginnings of British foreign investment to the treasure which Drake stole from Spain in 1580. In that year he returned to England bringing with him the prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the syndicate which had financed the expedition. Out of her share she paid off the whole of England’s foreign debt, balanced her Budget, and found herself with about 40,000 [pounds] in hand... Thus, every 1 [pound] which Drake brought home in 1580 has now become 100,000 [pounds]. Such is the power of compound interest!
If capital increases, say, 2 per cent per annum, the capital equipment of the world will have increased by a half in twenty years, and seven and a half times in a hundred years. Think of this in terms of material things--houses, transport, and the like.
At the same time technical improvements in manufacture and transport have been proceeding at a greater rate in the last ten years than ever before in history. In the United States factory output per head was 40 per cent greater in 1925 than in 1919. In Europe we are held back by temporary obstacles, but even so it is safe to say that technical efficiency is increasing by more than 1 per cent per annum compound. There is evidence that the revolutionary technical changes, which have so far chiefly affected industry, may soon be attacking agriculture... In quite a few years-in our own lifetimes I mean-we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed.
...All this means in the long run that mankind is solving its economic problem. I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day. There would be nothing surprising in this even in the light of our present knowledge."
- John Maynard Keynes (1931). "Economic Possibilities for our Grandchildren", in Essays in Persuasion, W. W. Norton.
- Robert E. Lucas, Jr. (1987). Models of Business Cycles, Basil Blackwell.
- Dani Rodrik (4 May 2015). The War of Trade Models
A long delayed comment as I have been trying to rephrase an earlier comment on the critical role of mineral/fossil energy in a better way, relating it to the labor theory of value.
ReplyDeleteLet me summarize the "vulgar" theory of value this way:
"If a product costs N hours of total labour to produce, it will likely have an exchange value around N hours or labour because if the value is less than N it won't be produced and if it is much greater than N then it is cheaper to make it than buy it"
Now there is a special category of goods like mineral/fossil energy that are an extraordinarily large exception: because it costs N hours of labour to extract, and thus tends to have an exchange value around N, but incorporates many more times than N hours of labour.
The amount of mineral/fossil fuel that takes 1 hour of lavour to extract may deliver 100s of hours of labor of use value.
The capital that uses that fuel is *worthless* without that fuel: an excavator which enables 1 man driving it to do the work of 100 men with shovels is just scrap metal without the fuel.
Put another way, mineral/fossil fuels is fabulously cheap compared to the benefits it delivers. It is a treasure immensely greater than that of the Golden Hind.
Therefore when I read JM Keynes saying:
«technical efficiency is increasing by more than 1 per cent per annum compound. There is evidence that the revolutionary technical changes, which have so far chiefly affected industry, may soon be attacking agriculture... In quite a few years - in our own lifetimes I mean - we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed.»
I wonder how much of that "a quarter of the human effort" is due to the effect of ther accumulation of physical and intellectual capital, and how much instead it is due to greater use of mineral/fossil fuel that has such a gigantic multiplicative effect on the ratio between hours of labor and production delivered in so many sectors, notably agriculture, where a combine harvester turns fuel into the output of dozens of farm hands at the cost of the labour of one driver.
Looking at graphs of mineral/fossil fuel extraction over the past 2 centuries suggests that a very large part of "growth" has been due to the nearly-magical labor-multiplying effects it has.
In that case the growth in productivity has not been due that much to capital accumulation, but on the contrary to capital liquidation.
Because in effect mineral/fossil fuel extraction is equivalent to using up the "fertility" of the "land".
Plus it may be of questionable value eventually to have accumulated huge capital stocks in the form of for example excavators (but also roads and cars, or tracks and trains) that are essentially worthless without fabulously cheap fuel.
«an excavator which enables 1 man driving it to do the work of 100 men with shovels is just scrap metal without the fuel.»
ReplyDeleteA vital detail here: the 100 shovels instead are not scrap metal instead because their fuel is inside the men using them, that is they are muscle-powered.
The 100 shovels become just scrap metal only if there are not enough men to power them.
BTW that may be how "elites" in the past saw workers: as power sources for tools like shovels.
«The amount of mineral/fossil fuel that takes 1 hour of lavour to extract may deliver 100s of hours of labor of use value.»
ReplyDeleteAnother possibly better wording:
* As a rule for most of humanity's time 1 hour of work has delivered 1 hour of motive power. Perhaps with some animals 1 hour of work has delivered N (single digit N probably) hours of motive power, but not too sure, because some hours of work had to be devoted to feeding the animal too.
* But as an exception humanity has discovered that 1 hour of work extracting minerals with a high energy-density can deliver hundreds of hours of motive power.
So a lot of the improvement in capital mentioned by JM Keynes has been in capital that takes advantage of this phenomenal once-only free gift of motive power from nature. Capital that is nearly worthless if mineral fuels become scarce.
That improvement in the ratio between hours of works and hours of motive power has been probably more important than everything else in the study of the political economy. Everything else has probably been a trivial sideshow, however intellectually fascinating it is.
In the past a man to enjoy the benefit of 100 hours of motive powers for every one of her hours of work had to afford 100 slaves. Currently she has to afford just a can of petrol.
BTW apologies for the repetitions, just trying to find the best way to word something that to me (and some others) seems a very big deal.
BTW I may have already mentioned these about the role of JB Clark in "disappearing" the role of "land"/"mineral" resources from Economics:
ReplyDeletehomepage.ntlworld.com/janusg/coe/cofe02.htm
«Clark's capital being deathless it is just like land, and theorists after Clark have made land just another kind of machine. The economic world was thenceforth divided into just two elements, labour and capital. "... that destroys the equality of capital to accumulated savings, and dismisses all Ricardian and Malthusian problems in one fell swoop" (Tobin, 1985).»
worthwhile.typepad.com/worthwhile_canadian_initi/2013/08/why-taxes-should-be-either-inefficient-or-unpopular.html
«If anything, there was probably significant regress in the early 20th century, as the marginalists, especially J B Clark, fought valiantly to completely expunge finite resources as a production factor from economics, leaving just labour and capital (totally mutable "jelly"). This also coincided with the invention of the "long run" as the period after which all resource constraints magically disappear.»