An Economics Blog Written By A Student, For Fellow A-Level Students. Putting Economic Theory Into Real Life Perspective. I have three types of article, CURRENT AFFAIRS, ESSAY BLOG and ECONOMIC HISTORY.
This second section to my essay addresses why the majority of economist’s oppose nationalism, and how this is reflected in their views of migration and labour mobility.
Economic Nationalism is further viewed cynically by economists due to its implications for international labour mobility. The basis of economic nationalism is its prioritisation of domestic socioeconomic interests over foreign interests. To this extent, increased regulation of inward immigration to a country is under the umbrella of economic nationalist policy. However, most economists view this branch of economic nationalism to again be harmful to the country’s overall development. Theoretically, as labour is a factor of production, increasing its supply would increase the country’s productive potential, therefore allowing for more short term economic growth with reduced threat of demand-pull inflationary pressures. On the reverse, reducing a country’s immigration would mean a reduction in labour supply and the labour market skill pool. The country equally loses out on potential entrepreneurial individuals, who could have been greatly advantageous to the economy in the long run.
Another economic nationalist argument supporting immigration restriction would be that increased immigrant density within an area pushes down wages, as labour supply increases relative to labour demand. However, counterintuitively, Professor Jonathan Wadsworth of Royal Holloway found “no distinct correlation between local average wage growth and share of immigrants in a local workforce.” This suggests that inward immigration does not impact local wage growth, but rather positively contributes to the labour skill set and entrepreneurial value of the area.
Populists may claim that nationalist economic policies solve the problems of globalisation, however these so called problems can be solved through other means that are mutually beneficial to other economies also. For instance, in order to increase employment from jobs that are lost to more efficient foreign producers, rather than increasing import tariffs to protect infant industries and create jobs, the policy makers can instead subsidise research and development for infant industries so that they develop more efficiently and become internationally competitive, without increasing import tariffs andthreatening protectionist retaliation.
In summary, in order to deviate from the negative connotations of “nationalism”, certain enthusiasts of the populist policy have opted instead to call it “economic rationalism”. However, the majority of economists would agree that the counterproductive nature of anti-globalisation and anti-migration policies should deem the practice to be “economic irrationalism.” The devolution of globalism towards isolationism disregards the importance of specialisation within economies, which can lead to maximisation of output, competition and consumer choice when combined with free trade. The consequent retaliation of foreign markets to economic nationalism is in itself detrimental to export led growth. In terms of migration, expansion of the labour market is fundamental to improving labour skills and productivity, whilst having no recorded negative impact on local wages.
Ultimately, Economic Nationalism is a branch of political Populism that is not grounded by economic theory, but rather intended to appeal to the “ordinary person,” parallel to the intended demographic of Populism. However the majority of economists understand that, contrary to the flawed basis of economic nationalism, modern economies are intertwined such that creating inclusively beneficial policies that generate international prosperity, such as free trade and movement of people, does not come at the trade off of sacrificing your own nations welfare.
Ha-Joon Chang’s “Kicking Away The Ladder” is a damning retaliation against the Now-Developed-Countries (NDCs) imposition of apparently “disadvantageous” policy and institutional standards onto developing countries. Chang argues that the practice of recommending blanket Anglo-American “good policies” and “good governance” is indeed counterproductive to the developing countries growth opportunities, and hypocritical seeing that the NDCs developed under institutions and policies that would be considered “bad policies and governance” by international organisations today.
In order to understand the fundamental hypocrisy of the NDC’s economic imperialism, it is first important to understand the climate and situation of the NDC’s own development. Chang focuses on this in the first half of the book, by analysing the growth patterns of the developed countries and concluding that growth was actually achieved in a climate of protectionism and technological espionage. The stealing of patents, tariff wars, and mercantilism provided the basis for infant industry protection, which allowed for the development of Industry, Trade and Technology (ITT). However, Chang then uses this basis as a platform to promote his own heterodox approach to development economics, by defying the notion that free trade which encourages the Law of Comparative advantage is indispensable to promoting economic growth within developing nations. He argues instead that because the NDCs were able to develop economically under protectionist policies, they should not encourage the same level of globalism to nations who are currently at the equivalent stages of development.
The second section of the book focuses on the institutional development of NDCs from a historic perspective. He argues that the level of institutional development in developing countries is much more advanced than when the NDCs (now developing countries) were at the equivalent levels of development.In terms of “per capita income band”, the UK in 1750 was at a similar level level of economic development as India in 1992. However, in the UK in 1750, there was no male suffrage (1918), established central bank, Income Tax (1842), Modern Patent Law (1852) or Child Labour Regulation (1802). Whereas India, at the same level of economic development, had established all of these institutions over the last century. Could it be that institutions within developing countries are too advanced for the respective levels of development? Chang supports this theory by arguing that the capital used to maintain expensive WTO laws could instead be used to support issues more appropriate to the developing country’s specific needs, such as training teachers or subsidising new agricultural technologies.
However, it is important to understand that the NDC’s delayed adoption of “modern” inclusive institutions occurred as these institutions were a result of development, rather than a cause of initial development. Indeed, the evolutionary process of finding the optimum level of central banking intervention in Britain occurred over generations of trial and error. This level of intervention is different to that of Japan, due to differing economic culture and circumstance. However, Britain and America seem intent on imposing the “Anglo-American” standard of institutions on developing countries, whether or not this is simultaneous with their growth situation. Therefore, surely it would be beneficial if these developing nations were to develop their own unique brand of institutions, that fits their idiosyncrasies, as a result of their style of economic growth, rather than being encouraged to adopt concrete Anglo-American systems that may be completely incompatible with that country’s situation.
In a dramatic conclusion, Chang concludes that developed countries are indeed “kicking away the ladder” in terms of preventing developing countries from developing, due to a toxic cocktail of “unequal treaties”, and aid given on the condition of crippling hypocritical policies, such as free trade for infant industries. The external imposition of these “Neo-Liberal Policies” have done little to encourage sustainable growth, and therefore the developed countries are preventing the developing countries from following in the same path that they themselves developed in. The stark contrast between the path of growth of the UK, and that of say Kenya is extremely clear. Britain developed under very lax institutional and social standards (development occurred without centralised bank, child labour laws, patent lawetc.) , whilst utilising asymmetrically beneficial trade policies such as mercantilism (1700s-1830s), in order to protect its infant industries until it was firmly the technological centre of the world. On the other hand, Kenya does not have the same opportunity to develop in this fashion, because international bodies expect “world standard” institutions within Kenya (that may or may not be beneficial to Kenya’s idiosyncrasies), whilst the WTO places Kenya in a myriad of Free Trade agreements, that turn out to be disparaging to infant industries development.
The comparison between NDC’s development 200 years ago, and modern development today, shows the hypocrisy of modern nations in their neo-colonial economic intervention towards developing countries. The modern push for “good policies” and “good governance” from NDCs is the equivalent of “do as I say, not as I do.” As such, the gap between the majority of developing nations and NDCs is growing at an alarming rate, which amounts to effectively “kicking away the ladder” of economic development.
Although I thoroughly enjoyed the book and would recommend it to anyone interested in development economics from a historical context, the heretical nature of Chang’s claims leaves the book more susceptible to criticism. The frequent use of sweeping statements such as “As a result to this switch to protectionism, the Swedish economy performed extremely well in the following decades,” suggests that the correlation must imply causation, which often can give way to oversimplifying complex relationships, for the sake of moulding evidence to fit an argument.
I would disagree with Chang on certain aspects of his argument also- yes, it makes sense that infant industries are protected with high import tariffs to encourage domestic consumption of said product, but an increase in tariffs across the board would only encourage economic nationalism, and would do nothing to help the long term growth of said industry. Indeed, Chang seems to disregard the fact that these policies are working to encourage prosperity. During Britain’s Industrial Revolution, a growth average of 1-1.5% was achieved, whereas currently developing nations such as Brazil have achieved an average growth rate of 2.6% in the last 35 years. These policies, even if they are hypocritical and seemingly selfish from the NDCs, are working to encourage prosperity and growth.
Indeed, it is a grim fact of international economics that currently, it is the NDCs that possess the bargaining power and hence “call the shots”. If a richer country demands that a poorer country change their policies against their will, then often they must abide by these demands to receive increased aid or win more preferential trade deals. I would say that this modern day institutional imperialism of developed countries towards poorer countries is not a far cry from the European colonialism of the 16th and 17th centuries, and may well act to further hinder the growth potential of these stagnating nations.
Within economics, the concept of rationality is an idealistic deviance from real life, and a tool used that grossly oversimplifies the complex irrationality of man. The assumption that consumers are rational allows economists to group together non-autonomous individuals into one singular organism, whose prime reason for existence is to maximise utility. However, this presumption is more of a convenience than a reflection of real life, as the recent development of “behavioural economics” driven by academics such as Richard Thaler, combine psychology and economics to theorise that humans are not indeed rational in the sense that idealistic economists previously portrayed them to be.
Classically, an economist would portray man to be rational. A rational choice, by definition, is a choice that grants the choice maker the greatest benefit. However, the subjective term “benefit” cannot be easily measured. Hence, economists apply an arbitrary measurement to benefit, so that utility can be valued. This arbitrary measurement of benefit is generally simplified as “highest potential monetary value obtained after transaction”. To an extent, this makes sense ; surely if a consumer had the choice between receiving two monetary values for the same work, the so-called “rational” consumer would choose the greater value, in order to obtain the largest value of money after the transaction.
However, the use of money as an arbitrary measurement of happiness is in itself an oversimplification of the complexities of the human psyche. The assumption that utility=money obtained, is in itself not compatible with human behaviour. For example, in Dan Ariely’s book “Predictable Irrational” he surmised : “People will work more when they have to work for a cause than for cash,” which contradicts the assumption that man’s prime motivation is derived from money obtained, but rather man can be susceptible to be more greatly driven by the immaterial concept of “cause”.
Therefore, if man can be more greatly motivated by “cause than cash”, then we cannot assume that utility is solely derived from money obtained. Hence, the classical application of human rationality (that man will act to purchase the best valued feasible good) cannot be assumed in such a broad-brush fashion.
Ultimately, the notion of rationality in economics is more a tool of convenience, rather than a real life reflection of human behaviour. To assume man’s rationality is to assume that consumers will collectively act as a mechanism driven purely to maximise their own utility/money obtained post transaction. However, rationality in this broad sense breaks down when economists must take into account that consumers have differing motivations, and hence differing interpretations of the subjective term “utility.” Therefore, humans may appear to be self-serving rational creatures, but in reality, man is driven by our own complex idiosyncrasies; which cannot be applied to a model or theory based upon the notion that man will always act rationally.
In Paul Collier’s “The Bottom Billion” (2008) Collier advertises the text as a guide on how to design the most effective G8 agenda in terms of reducing global poverty. To do this, he splits the world’s economies into three categories. Developed, Developing, and the Bottom Billion. The book is unsurprisingly aimed predominantly at helping the latter category. The Bottom Billion refers to the combined population of the worlds so called “failing states”, that are caught in a cycle of political unrest, economic stagnation, and falling levels of prosperity. From this point, the Oxford University professor highlights the causation for economic failure, the potential for globalisation as a saviour for these states, and an evaluation of the effectiveness of potential instruments that may be able to alleviate the level of poverty within these nations.
The first half of the book focuses on the reasons for why the poorest countries are failing. These reasons are split into four categories : Conflict traps, natural resource traps, landlocked with bad neighbours, and poor governance. To me, this section of the book was the least personal. Collier laid out the statistics of how much a typical civil war costs a country ($64), as well as describing the economic phenomenon of “Dutch Disease” (the negative impact of an inflow of foreign currency into a domestic market), and the importance of protecting economic reformers within failing states. However, at this point the chapters seemed more like a text book, rather than the personal plea that was so passionately argued in the preface.
The latter half of the book focuses on the plausibility of developed countries using instruments that may be able to create an economic climate more suited to growth within failing states. Unlike various other texts such as Jeffrey Sachs’ “The End of Poverty”, Collier does not take a clear political agenda that overshadows the book. He neither takes the left’s perspective of blindly throwing international aid at failing nations as a means of increasing social welfare regardless of its hinderance towards economic growth, nor the right’s perspective of aid being part of the problem of poverty as vehicle for “welfare payments to scroungers and crooks”.Instead of choosing sides, Collier focuses on case studies of prior uses of instruments to reduce poverty, then evaluates their successes and relates these to their situation. For instance, the controversial instrument of military intervention within a failing state was analysed through two different case studies : the failure of Iraq, and the success of Sierra Leone, ultimately arguing that military intervention is an invaluable tool to maintaining post-conflict peace and therefore encouraging the economic security that is necessary to attracting private investment.
To me, the final chapter of the book was the most compelling. Here, Collier links the policy instruments described in the second half of the book, with their potential for effectiveness in alleviating the traps laid out in the first half of the book. The bringing together of the first and second halves of the book, culminated in the ultimate argument of the book – currently, governments are not fully utilising their whole arsenal of instruments that would be beneficial to encouraging development within the bottom billion. In other words, the over reliance on aid is a dangerous pit to fall into, as often blindly giving aid without conditions or targets does nothing to encourage domestic industry, as the injection is leaked out of the economy through imports. For the nations most in need of assistance such as Somalia, increased aid conditions, military and international organisation presence, and mutually beneficial trade deals will provide the ideal climate to encourage growth that will work to lift the nation out of disorder and into self-sufficiency. If governments want to see the level of change expected from the UN Millennium Development Goals, they should not measure the extent of their altruism by the GDP percentage dedicated to foreign aid, but rather measure their success by the actual progress that these countries are making. It is only then that these failing nations will begin to see true development.
The science of Economics is at its truest sense when its theories are used to help improve and sustain quality of life. To me therefore, the study of Development Economics is the single most important area of economics, that deserves more weighting in the A-Level syllabus. Currently, only the surface of Development Economics is scratched during A-Level, as development is either paired with globalisation, or “Ways of Measuring Development”. Neither of these provide sufficient depth to understand the essence and importance of Development Economics, as a vehicle to reduce international inequality and poverty within developing countries.
Over the last 30 years, there has been an unprecedented high level of growth within developing nations. Nations such as Botswana, China, and Brazil have seen their GDP per capita’s increase vastly, to the point where they have become self-sufficient, and not reliant on developed countries’ aid. These are the developing countries, but are not the countries that deserve the most attention in Development Economics. In Paul Collier’s “The Bottom Billion,” international economies are split into three categories : developed, developing, and the bottom billion. He argues that currently, there are a selection of economies that are stagnating, caught in a cycle of conflict, myopic policies, and resource deprivation. These “Bottom Billion” countries are in need of the most research and study to escape their vicious cycle; and in order to encourage the new generation of economists to develop theories on how to help these countries, it is vital that Development Economics is given increased significance on the A-Level syllabus.
Indeed, as well as teaching Development Economics as a separate element to the course, it would also be important to implement aspects of Development Economics into pre-existing sections of the course. For instance, currently a great deal of the macro-economic section of the A-Level course focuses on different policy tools, and their usage and effectiveness. Perhaps when evaluating the effectiveness of said policy, the syllabus should also discuss its relative success when implemented in a developing economy, and the factors necessary for its potential benefit. This would allow the syllabus to become multidimensional, as students would learn about the necessary conditions for policy success through the lens of various economies and their various levels of development.
Therefore, the promotion of Development Economics is imperative to encouraging sustainable growth within the “bottom billion” countries, and thereby reducing international inequality and poverty. In order to encourage the next generation of economists to further deepen our understanding of Development Economics, it is vital that students are made aware of the challenges that developing countries face, as well as being receptive to discussion on how different economies may develop given their circumstance. If syllabi do not encourage this research, then the science of Economics will be poorly positioned to provide sufficient intellectual aid to developing countries, which may be detrimental to global efforts to help developing economies escape social stagnation.
After analysing both crises individually, it is now important to compare their similarities in terms of causation, effects and response, and therefore conclude whether or not the crises are comparable. This will allow us to hence understand to what extent policy makers were justified in their response to 2007/8, and whether or not they actually learnt from the failures and successes of the response to the Great Depression.
The causation for both crises shares many similarities. For instance, the policy climate created in the 1920s were meant to encourage people to take out loans to fund stock investment, through maintaining low interest rates, and providing the ability to ‘Buy on the Margin’, which allowed the general public to access the overvalued blue chip stocks. This is similar to the situation in 2008. Throughout the 1990s, the Bush administration had been pushing home ownership through ‘help to buy’ schemes. The combination of this as well as cheap mortgages meant that people were easily able to gain credit to buy homes and fuel the bubble.
Both crises are also similar in terms of the overconfidence and over speculation placed in asset values. Namely, the 1920s Stock Market, and the 2000’s housing market. Both markets had been growing in value exponentially over the prior decade, and market speculation from investors suggested that the rise would not stop. Consequently, both the housing market and the stock market became overvalued, which contributed to the extent of effect for the crash.
The economics responses to the crash also share similarities. Namely, both Presidents initiated expansionary fiscal policy to boost growth. Hoover commenced the “Hoover Reconstruction Finance Corp” which allowed him to bail out the stock brokers and collapsing banks, so that they were able to provide necessary credit to cater for loans to encourage growth. This led to an increase in national debt, but an expansion in AD. Obama similarly initiated his “Jobs Bill”, which was intended to alleviate unemployment and therefore encourage consumption to kickstart short term economic growth.
Indeed, both responses were similar also in their shortcomings. Unemployment under Roosevelt rose to 21%, which lead Henry Morgentyav to argue “we are spending more than we have ever spent before, and it does not work.” This is simultaneous to Obama’s policies, which saw unemployment rise from 8%-10%, despite his stimulus packages.
What is also clear is that increasing taxation paid for both eras’ stimulus packages. To pay for Roosevelt “New Deal”, the top marginal income tax rate reached 94% for those earning over $200,000 a year, which leads to large disincentives for companies to expand, and workers to earn more. Obama similarly raised taxes, but he instead levied the taxes on demerit goods, for instance increasing taxes on cigarettes and liquor, in order to reduce over consumption, and raise necessary revenue for his Jobs Bills.
In essence, it becomes clear that both economic situations leading up to the 1929 crash and 2008 crash were similar. They were both consequences of overconfidence and speculation in an accessible market, which resulted in said market becoming overvalued, and prior investments being lost as soon as the market turned. This in turn led to the collapse of banks, a reduction in economic growth, and subsequent derived unemployment. Both era’s responses were equally similar, in their initiation of Keynesian policies to increase government intervention and boost growth through injections. However, the extent to which an economist would judge that policy makers learnt the lessons of the past depends on whether or not you believe Roosevelt and Hoover’s policies were successful. William Hazlitt criticised Roosevelt by saying that for each dollar of tax spent, it must first be raised, and increasing taxes contributes towards worsening Keynesian “animal spirits” through dis-incentivising the labour force, which can be more harmful towards economic growth.
In my judgement, 2008 policy makers did learn the lessons of the past, through their effective implementation of expansionary fiscal policy, which ultimately reduced unemployment and boosted growth. However, this is not to say that policy makers should always fall back on preconceived methods of escaping economic crises. One crash in one époque will never be a carbon copy of a previous crisis, as there will always exist some kind of individuality about every crash, either in terms of causation or effect. Hence, policy makers should not become complacent and presume that just because expansionary fiscal policy helped to resolve the 1929 crash, it will do the same in 2008. To this extent, policy makers must always develop and evolve their theories to fit with that period’s idiosyncrasies, as over-reliance on previously successful policies and falling back on the notion of “learning from history” to then apply history step by step in an incompatible era, is a sure recipe for disaster.
The causation of the 2007 recession is well documented by academics. However, in order to discuss whether or not politicians did in fact learn the lessons of history from the 1929 Crash, it is important to analyse to what extent the two crashes were similar. Therefore, without going into too much detail, I shall quickly evaluate the causation, effects, and response to the 2007 Financial Crash.
Throughout the late 90s and early 2000s, the American housing market has been booming, exponentially growing in value from year to year, fuelled by cheap mortgages and help to buy schemes. As we have discussed before, this unsustainable growth creates a climate of overvaluation, resulting in the creation of a housing bubble. Therefore, as soon as the housing market crashed and subprime loans expired; households were unable to pay back expensive mortgages, meaning that huge established banks (such as Leheman Brothers) went bust. Consumer and investor confidence evaporated, which combined with the bank’s lack of credit, resulted in a credit crunch. The consequent contraction of the US economy had economic repercussions across the world, which stimulated the “global financial crisis.”
The initial impact of the crash first hit America. Stock wealth in the U.S fell by $7.4 trillion from July 2008 to March 2009. Within 18 months, unemployment grew by 4.5% (5.5 million), as labour demand is derived from RNO. American households lost an average of $5800 in 2008 as a result of the crash and loss of income.
In terms of response, Obama initiated expansionary fiscal policy. Namely his controversial “Jobs Bill”, which included a $62 billion injection for a Pathways Back to Work Program for expanding opportunities for low-income youth and adults, in order to reduce the recessive nature of increased unemployment. The Federal Reserve were able to counteract the issue of major financial institutions collapsing with the assistance of bailouts (preventing a complete liquidity crisis), but were unable to prevent the stock market from plummeting.
From this analysis, we can begin to identify similarities between both crises in terms of their causation, effects, and response, which I will do in my next article on economics history. This will ultimately allow us to the question as to whether or not the two crises are comparable, and therefore to what extent politicians were able to learn from the past to avoid / reduce the effects of economic crashes.