ICYMI: Economic Growth Over The Very Long Run

I keep meaning to post on this topic, but what with work and all, it’s been on the back burner. In any case, I wrote an article published in the Star last week that covers the main points (excerpt):

Economic growth in an ageing world

MOST people take growth for granted. We expect living standards to increase over time and that our children will enjoy a better quality of life than us.

But growth is not a given and it is driven by economic processes that can and do change. There has been a gradual slowing in global growth over the past couple of decades, and some of this can be pinned on structural factors that form the very foundation of growth itself....

It’s partly secular stagnation, but more in the Hansen sense than in Summers new formulation, and over a larger scope than just what’s going on in developed economies.

Have a read and let me know what you think in the comments.

Dear God, I dearly hope I’m wrong on this.

Natural Resources and the Terms of Trade

I stumbled on this while looking for something else – the Singer-Prebisch thesis. What Singer and Prebisch found (separately and concurrently) is that the terms of trade between primary commodities and manufactures was declining over time. If true, this empirical observation has profound implications for economic development.

Let me explain that in English.

The terms of trade, put simply, is the amount of imports you can “buy” with one unit of exports. In other words, it measures the purchasing power of exports.

If your terms of trade are declining over time, you have to keep producing more and more just to be able to afford the same quantity and value of imports. But commodity production is subject to inelastic supply – it’s extremely difficult to continually ramp up production.

Emerging Markets: No, It Isn’t 1997 Again

It seems to be my day to get beaten to the gun. I was going to write a post on this issue, but Lars got there first (excerpt):

Please don’t fight it – the risk of EM policy mistakes

Emerging Markets are once again back in the headlines in the global financial media – from Turkey to Argentina market volatility has spiked from the beginning of the year….

…Lets take the case of Turkey and lets assume Turkey is operating a pegged exchange rate regime – for example against the US dollar. And lets at the same time note that Turkey presently has a current account deficit of around 7% of GDP. This current account deficit is nearly fully funded by portfolio inflows from abroad – for example foreign investors buying Turkish bonds and equities.

Teaching Economics: More Diversity Please

Students at Manchester University want more than dogma (excerpt):

Economics students aim to tear up free-market syllabus
Undergraduates at Manchester University propose overhaul of orthodox teachings to embrace alternative theories

Few mainstream economists predicted the global financial crash of 2008 and academics have been accused of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing band of university students are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative ways of thinking have been pushed to the margins.

The Paradox Of Plenty

There’s this somewhat understandable idea that because Malaysia is rich in natural resources, we are…well, rich. Or at least we should be, if the government had handled things properly.

If only we could harness our reserves of oil and gas and minerals effectively and efficiently…

If only we had invested in and boosted the productivity of our agricultural sector…

If only we managed our forests and bio-diversity for sustainable development…

If only natural resource extraction wasn’t subject to leakages and corruption…

If only, if only…

But there’s a slight problem with this mindset – the empirical evidence suggests that natural resources alone do not beget wealth or prosperity, that focusing on developing such assets actually undermines the foundation of long term growth and prosperity. In fact, in development circles, it’s more common to speak of natural resources as a “curse”, not a blessing.

Efficient Markets and Perfect Information

Robert Skidelsky on the efficient markets hypothesis and  New Classical economics generally:

Every general crisis involves self deception as well as the deception of others. In Donald Rumsfeld’s immortal phrase, it is the “unknown unknowns” which trip us up. If only one person were perfectly informed, there could never be a general crisis.

But the only perfectly informed person is God, and He does not play the stock market.

[Skidelsky, Robert, “Keynes: The Return of the Master”, Audible Inc, 2009]

News Flash: KL To Suffer Recession Next Week

Hafiz Noor Shams manages to send up the entire economics profession and tells us not to take ourselves so seriously (excerpt):

Chinese New Year to cause a recession in Kuala Lumpur

With the Chinese New Year being just around the corner, many are expected to leave Kuala Lumpur behind to visit families and relatives leaving outside of the city for a week or so. Many of those living or working in the city have left the city.

With the Chinese forming more than 40% of the population of Kuala Lumpur, and possibly with others who may just take the opportunity to travel out, the city is poised to suffer from a massive demand and supply shocks. Without any intervention from the relevant authority, the economy of Kuala Lumpur is expected to go into a recession this week and the next…

The insider jokes are absolutely priceless.

Since we’re on the subject, you might also enjoy this tongue-in-cheek discussion of the impact of dragons on macroeconomic policy.

Masters of Money Part III

[I’m on annual leave from 17-21 November. This post is scheduled as a filler]

There’s a three-part documentary on the BBC entitled the Masters of Money, looking at the lives, ideas and times of three great economic thinkers – John Maynard Keynes, Friedrich August Hayek and Karl Heinrich Marx.

This is part III on Marx:

[H/T: The Social Democracy For The 21st Century: A Post Keynesian Perspective blog]

Masters of Money Part II

[I’m on annual leave from 17-21 November. This post is scheduled as a filler]

There’s a three-part documentary on the BBC entitled the Masters of Money, looking at the lives, ideas and times of three great economic thinkers – John Maynard Keynes, Friedrich August Hayek and Karl Heinrich Marx.

This is part II on Hayek:

[H/T: The Social Democracy For The 21st Century: A Post Keynesian Perspective blog]

Masters of Money Part I

[I’m on annual leave from 17-21 November. This post is scheduled as a filler]

There’s a three-part documentary on the BBC entitled the Masters of Money, looking at the lives, ideas and times of three great economic thinkers – John Maynard Keynes, Friedrich August Hayek and Karl Heinrich Marx.

This is part I on Keynes:

[H/T: The Social Democracy For The 21st Century: A Post Keynesian Perspective blog]

Changing The Teaching Of Economics

There’s been a lot of criticism about the economics profession in the last 5-6 years. Why didn’t we forsee the Great Recession coming? Why is there continued debate on the best way out of this mess? Why is there such disagreement over specific policies, and for that matter, what has happened and is happening now? Is there in essence, something fundamentally wrong with economics?

There’s a new debate on VoxEU that aims to realise that old adage – physician, heal thyself – especially with reference to the teaching of economics and young economists (excerpt; emphasis added):

What’s the use of economics? Introduction to the Vox debate
Diane Coyle, 19 September 2012

If economics emerges from the Global Crisis unchanged, it will lose all credibility. That is certainly not the view of all economists, but many do think so…

…However, it is not obvious what shape an effective response to even well-founded criticisms could take…

…One starting point…is the teaching of economics, beginning with the undergraduate level…

Global Growth: One Moment In Time

Bob Gordon argues that the past two centuries or so represent a unique period in human history (excerpt):

Is US economic growth over? Faltering innovation confronts the six
Robert J. Gordon, 11 September 2012

It is time to raise basic questions about the process of economic growth, especially the assumption – nearly universal since Solow’s seminal contributions of the 1950s (Solow 1956) – that economic growth is a continuous process that will persist forever.

• There was virtually no growth before 1750;
• There is no guarantee that growth will continue indefinitely.

The Policy Relevance Of Economics

My old boss, Radzuan Halim, on why economics remains relevant (The Edge; excerpt):

Re-appreciating economics

THE economics profession has been much criticised, maligned and parodied in recent years over its failure to predict the US mortgage-cum-economic crisis of 2008/09 and the ongoing Greek-euro crisis. Two reasons have been suggested for the failure. First is the economics methodology itself, which is based on the "rationality of man" assumption and its over-mathematisation — the takeover by quantitative-types not grounded in empirical reality and historical perspective.

Second, the profession has become so riddled with ideology that it determines an economist's findings and prescriptions…

…Of course, economics is by no means the only profession to be caught up in ideological partisanship and posturing…

…With respect to methodology, many economists do acknowledge the weakness of excessively quantitative approaches and have sought improved methods…

…Given the controversies and perceived weaknesses in the profession and methodology, my view is that present-day economics still offers good and sometimes, extremely good, approaches to the study of man's economic, social and political problems. Basic economic concepts and tools provide powerful, insightful analysis of situations, causes and policy prescriptions. By the same token, the absence or neglect of basic economic tools in analysing economic situations could lead to stagnation, deterioration and crisis, such as the situation found in present-day Greece and many other countries…

It’s a fairly long essay, with some good points and a few (from my point of view) bad ones – governments are not like households. But on the whole it offers a defense for using economic concepts and ideas to evaluate policy and in public discourse. Not a bad read, considering he’s not an economist.

Larry Summers On Public Investment And Debt

Larry Summers has a reputation. He was a key figure in the deregulation of US finance in the late 1990s, as Treasury Secretary under the Clinton administration, that ultimately led to the banking crisis of 2007-2008. As President of Harvard, he was accused of sexism, conflict of interest, and carried responsibility for the university’s nearly US$2 billion in losses from derivatives trading. Professionally, he’s known as being acerbic and dismissive towards others – arrogant is one of the kinder words used. His academic work tends towards supporting free market, Republican views, despite serving two Democratic presidents.

A Layman’s Guide To The History of Economic Thought

This shouldn’t be taken as definitive or even remotely accurate, and I’m probably going to ruffle a few feathers with this. It’s just me having some fun (over the next few days you’ll see why), and who knows, this post might be useful to somebody. There’s not a few in-jokes here, which I hope my fellow economists might enjoy…I’ve probably missed a few, so feel free to add to my list in the comments, or suggest any changes.

With that, here’s my extremely concise history of economic thought:

Imagine an economy is a bucket of water…

A Different Perspective

Peruvian economist Hernando de Soto has an unconventional perspective on the causes of the Great Recession (excerpts):

The Destruction of Economic Facts

During the second half of the 19th century, the world's biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. If you wanted to know who owned land or owed a debt, it was a fact recorded locally—and most likely shielded from outsiders...

Revisiting Vision 2020 (Updated)

This morning I attended a speech by Tun Mahathir on the Vision 2020 that he introduced way back in 1991. The event was organised by the Institute of Marketing Malaysia (freebie plug here) on the subject of Vision 2020 and what progress we’ve made in achieving its goals.

The grand old man of Malaysian politics was in fine fettle, cracking jokes, most of which were at his own expense (like, having to reread the Vision 2020 document because he couldn’t remember what was in it, and making constant references to mega projects).

I want to touch on a few things he mentioned in his speech, some good, some not so much.

The Perils Of Having A Little Knowledge

James Kwak at The Baseline Scenario has a post that fits my own educationalo experience to a “T”:

The Perils of Studying Economics

Patrick McGeehan at the New York Times recently wrote about a New York Fed study finding that studying economics makes you a Republican. The headline conclusion is that the more economics classes you take, the more likely you are to be a Republican...

...Studying economics also affects your position on several public policy issues. Of seven issues, economics courses were significantly associated with the five following positions (Table 6):

-Tariffs are bad.

-Trade deficits are not so bad.

-The government should not cap oil prices in response to a supply shock.

-Raising the minimum wage increase unemployment for low-wage workers.

-Income distribution should not be more equal.

These are all pro-free market, anti-government intervention positions.

What I thought was particularly interesting, however, was that on some issues people who study undergraduate economics are more doctrinaire free marketers than professional economists...The Ph.D. economists were more likely than economics majors to hold the textbook position on tariffs or the minimum wage. However, they were also more likely than economics majors (or, frankly, any majors) to think that income inequality should be reduced and that government spending should not be reduced, and they were somewhat less worried about federal budget deficits.

This is something I’ve mentioned in passing often. I think that basic economics, the way it is taught today, tends to give people reflexive pro-free market, anti-government positions — positions that are not held by people with a deeper exposure to economic thinking. When your understanding of government finances is based on reading the newspaper, it’s somewhat eye-opening to come to college and learn that free markets lead to maximum societal welfare and taxes impose a deadweight loss on society — the pictures are so simple and compelling. That’s why a little bit of economics makes you more likely to be a Republican.

But when you learn more about principal-agent problems, information asymmetries, and so on, you learn that those simple pictures are simplistic to the point of being misleading. That’s why Joseph Stiglitz argues in Freefall that understanding economics is crucial to understanding why free markets often lead to suboptimal outcomes. The problem isn’t knowledge per se; it’s a little bit of knowledge.

Notwithstanding my position on subsidies, I’m not in the camp that says that all government intervention is bad, and all policies that create freer markets is good. It depends very much on how intelligently government policy is designed.

There is a good case for saying that, by definition, government policy cannot in fact ever be as truly efficient or effective relative to a free market-based solution. But if market solutions themselves result in suboptimal social welfare outcomes – not unreasonable since few if any real world markets have the necessary characteristics for full efficiency; nor do market solutions always have a moral or social welfare dimension – then government intervention is a valid second-best solution.

Too much of undergraduate economics is based on basic neo-classical/neo-Keynesian theory, which while necessary as a foundation, doesn’t go into the nuances that colour the application of these theories in a real world context. Nor is there any exposure (even at the graduate level) on alternative/heterodox schools of economic thought – you have to discover those on your own.

Spreading knowledge of economics is good, as I’ve always thought of basic economic theory as thought at the undergraduate level as primarily a framework for thinking and discussing policy issues. We’d have a better public discourse on policy and social issues. But as James says, a little knowledge is more dangerous than ignorance – the last thing we need is a revival of the Washington Consensus.

What Kind Of Economist Am I?

WY asks what school of economic thought I support. The answer in a nutshell is...whatever works.

Here's the story - strike that, here's my summary of the history of economic thought:

The classical school - Adam Smith, David Ricardo, Hume, Bentham, Marx, Marshall and many others - really set the foundations of economic thought. They gave rise to many competing ideologies which didn't necessarily agreed with each other. For instance libertarianism and the Austrian school take freedom as the sole guiding principle of economic organisation, while Marx suggests the diametric opposite. Both are considered on the lunatic fringe in modern economics.

The classical school eventually gave way to the neo-classical school, which attempted to describe economics within a mathematical framework. The Great Depression and the rise of the Keynesian revolution derailed this movement momentarily, but it revived and assimilated Keynesian thought under the neo-classical synthesis starting with John Hicks (the ever popular and still relevant IS-LM model).

The 1970s brought stagflation and the breakdown of heretofore established macro-relationships, bringing about a resurgence of classical ideas, with an emphasis on micro-foundations for macro analysis - the new classical school.

The 1960s-70s also coincided with the rise of monetarism, which combined some of the ideas of the Austrian school with the neo-classical synthesis. Also known as the Chicago School from its identification with Milton Friedman, monetarism reduced economic policy management to essentially one tool: "2% money supply growth" (see Goodhart's law to see why this failed).

The new keynesian school essentially takes a cue from the new classical school by applying micro-foundations to keynesian macro analysis. These two competing schools of thought comprise mainstream economics today.

Then there is the heterodox school. Well not really a school per se, but rather a loose term covering economists who don't fall under a convenient label. These include people like Joseph Schumpeter and JK Galbraith.

The reason why you see economists disagree in the current crisis on seemingly basic questions like the effectiveness of fiscal stimulus or its structure, or whether it will work at all, goes back to their basic ideologies:

1. New classicals believe in complete markets and rational agents, and that government is less efficient in allocating resources. As such fiscal stimulus is less likely to be effective, and if stimulus has to be done, tax cuts are preferred.

2. New keynesians believe that markets can fail and prices are sticky, in which case there is a strong case for government to step in. Inefficient allocation of resources is better than no use of resources at all.

3. Monetarists don't believe fiscal stimulus works. All we need is 2% money supply growth.

4. Austrians and libertarians don't believe in government. All we need to do is go back to the gold standard and abolish all the central banks.

5. Marxists believe capitalism is doomed to fail. All we need is...never mind.

Where do I stand in this milieu? I admit I began my career a monetarist, with some leanings toward libertarianism. Age and (hopefully) some wisdom now puts me somewhat left of centre - markets do fail, frequently in fact. I also have some sympathy for some of Galbraith's and Schumpeter's ideas, which while often in conflict, do a better job of describing the real world then either mainstream school. It's hard to accept the efficiency of price signals, when competitors are essentially oligopolistic.

Having said that, I think my approach to economics is purely pragmatic. Some ideas work at some times, but not at others. It is a mistake to take a one-size-fits-all approach, especially when contemplating a developing country with immature markets and institutions. Just as important, I lean on empirical evidence rather than relying purely on the dictates of theory.

Theory only provides a framework for thinking, and it pays to listen a little to all the schools of thoughts - even Marxists and Austrians occasionally have something worthwhile to say.