In Which I Call for a More Optimistic Martin Wolf…

Live from Lima, Peru: Martin Wolf, can I get you to say something optimistic?

The last four times I have been in the same room with Martin Wolf, he has left me profoundly depressed. He has just done it again–by reminding me how many of the lessons of the 1930s have been lost, and how much the Federal Reserve needs to assume the role of global Kindlebergian hegemon that it is currently refusing. So I had a question to ask that I hoped would elicit an optimistic answer…

Alas! I did not get to ask it. But here it is:

Let me see if I can get you to agree with an optimistic view of emerging markets’ future–if and after we can resolve all the difficulties that Ken Rogoff calls the ongoing hangover of the debt supersupercyle…

Back before 1970 we had not just non-convergence but divergence: the Matthew 25:29 global economy, as the rest of the world grew much more slowly than the North Atlantic core plus the East Asian and Peripheral Europe convergence club. Since 1970 we have had China, and now India, plus on average not divergence but relatively stasis elsewhere. Does not this suggest that we would be seeing “convergencence” in the emerging world if not for the fact that China is bigfooting everybody else out of the niches for export-led convergence growth? And that the future looks relatively bright for emerging-market convergence as China transitions to a different growth model, and open up the export-led convergence growth space?

Can I get you to agree with that?

Very Sorry That I Missed: Charles C. Mann and Annalee Newitz: From the Neolithic Era to the Apocalypse: How to Prepare for the Future by Studying the Past

Very Sorry That I Missed: Charles C. Mann and Annalee Newitz: From the Neolithic Era to the Apocalypse: How to Prepare for the Future by Studying the Past: “Thursday, October 8, 2015 5:00 – 7:00 pm 3-270…

…For thousands of years, humans have experienced cycles of empire building and retreat, from the neolithic settlers of Levant and the Indus Valley to the ancient Cahokia and Maya civilizations. What can new discoveries teach us about how to plan our next thousand years as a global civilization?… How ancient civilizations shed light on current problems with urbanization, food security, and environmental change.

Charles C. Mann is the author, most recently, of 1493, a New York Times best-seller, and 1491, winner of the National Academies of Science’s Keck award for best book of the year. His next project, The Wizard and the Prophet, is a book about the future that makes no predictions. An early version of the introductory chapter was a finalist for a National Magazine Award.

Annalee Newitz writes science nonfiction and science fiction. She’s editor-in-chief of and founding editor of She’s the author of Scatter, Adapt, and Remember: How Humans Will Survive a Mass Extinction, which was a finalist for a Los Angeles Times Book Award. Her work has appeared in publications from The New Yorker and Technology Review to 2600 and Lightspeed Magazine. Her next book is a novel about robots, pirates, and the future of property laws.

Must-Read; Weijia Li: Party-State Relationships in One-Party Regimes

Must-Read: Weijia Li: Party-State Relationships in One-Party Regimes: “Although China and Soviet Union are both Communist regimes…

…they… feature very different party-state relationships. In contemporary China, the party secretary exerts political leadership, but fiscal and economic power is delegated to the governor. In the Soviet Union, the party secretary retained substantial and comprehensive economic power. I argue that the difference can be attributed to the discrepancy between market economy and planned economy. Using a simple growth model, I derive economic consequences of fiscal delegation that are consistent with empirical regularities. The delegation of fiscal power drastically reduces central authority’s concern about local officials’ loyalty… solves a major dilemma between loyalty and competence in autocracy… promotes political stability and meritocracy in China…

Must-Read: Noah Smith: Star Trek Economics: Life After the Dismal Science

Must-Read: Noah Smith: Star Trek Economics: Life After the Dismal Science: “I grew up watching ‘Star Trek: The Next Generation’ (easily the best of the Star Trek shows)…

…There’s one big, obvious thing missing from the future society depicted in the program. No one is doing business…. Food and luxuries are free, provided by ‘replicators’…. Scarcity… seems to have been eliminated. Is this really the future?… Current world annual gross domestic product per capita… is only about $13,000–enough to put food on the table and a roof over one’s head. What happens when it is $100,000, or $200,000?… This is the basic Star Trek future. But actually, I think that the future has a far more radical transformation in store for us. I predict that technological advances will actually end economics as we know it, and destroy scarcity, by changing the nature of human desire…. Instead of a world defined by scarcity, we will live in a world defined by self-expression. We will be able to decide the kind of people that we want to be, and the kind of lives we want to live, instead of having the world decide for us. The Star Trek utopia will free us from the fetters of the dismal science.

Must-Read: Dani Rodrik: Trade within versus Between Nations

Must-Read: Dani Rodrik: Trade within versus Between Nations: “The proper response to the question ‘is free trade good?’…

…is, as always, ‘it depends.’… Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous… particularly in the developing world…. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up…. But it does mean that a knee-jerk free trader response is faith-based…. OK then, what about trade restrictions within nations? If I am a skeptic on free trade between nations, should I not be a skeptic on trade within a nation as well?

No…. The set of circumstances under which free trade within a nation may be undesirable is substantially smaller than the set of circumstances under which free trade between nations is undesirable…. Consider a case where a region loses out from trade within a nation–say because it de-industrializes rapidly and ends up specializing in technologically non-dynamic primary activities…. The workers in that region can migrate…. There is an overarching state that will engage in transfer payments and other policies that aid the lagging region. The region will have political representatives…. A third–particularly important–feature is that a nation shares a common set of regulations (in labor, product, and capital markets). Changes in inter-regional trade patterns are unlikely to be the result of what many people feel are ‘unfair trade practices’ or ‘tilted playing fields.’… The boundaries of a nation are defined by shared sense of collective purpose, as embodied, in part, in that nation’s common laws and regulations and in its instruments of solidarity…. So the national market and the international market are different….

A libertarian might view much of the regulatory apparatus of the nation-state as superfluous at best and detrimental at worst. For me, the apparatus is what makes capitalism feasible and sustainable at the national level–and problematic at the global level.

Must-Read: Brink Lindsey: Reviving Economic Growth: Policy Proposals from 51 Leading Experts

Must-Read: Brink Lindsey, ed.: Reviving Economic Growth: Policy Proposals from 51 Leading Experts: “If you could wave a magic wand and make one or two policy or institutional changes…

…to brighten the U.S. economy’s long-term growth prospects, what would you change and why? That was the question asked to the 51 contributors to this volume. These essays originally appeared in conjunction with a conference on the future of U.S. economic growth held at the Cato Institute in December 20014. Brink Lindsey, Vice President for Research at the Cato Institute and editor of this volume, is pleased to share this insightful and provocative collection with a new audience.

The motivation for asking that question should be clear enough to anyone who has been following the dreary economic news of the past few years. Since the Great Recession of 2008–2009, the U.S. economy has experienced the most stubbornly disappointing expansion since World War II. Reviving Economic Growth offers a wide-ranging exploration of policy options from an eclectic group of contributors. Think of this collection as a brainstorming session, not a blueprint for political action. By bringing together thinkers one doesn’t often see in the same publication, the editor’s hope is to encourage fresh thinking about the daunting challenges facing the U.S. economy—and, with luck, to uncover surprising areas of agreement that can pave the way to constructive change.

Albert Hirschman’s linkages, economic growth, and convergence yet again…

When you think about it, broadly speaking, the question of why we have seen such huge rises in the real wages of labor–of bare, unskilled labor not boosted by expensive and lengthy investments in upgrading what it can do–is somewhat puzzling.

We can see why overall productivity-per-worker has increased. We have piled up more and more machines to work with per worker, more and more structures to work in per worker, and develop more and more intellectual blueprints for how to do things. But why should any of these accumulated factors of production be strong complements for simple human labor?

Karl Marx thought that they would not: he thought that what more accumulation of capital would do would be to raise average production-per-worker while also putting strong downward pressure on the wages and incomes of labor, enriching only those with property. Yet the long sweep of history since the early 18th century invention of the steam engine sees the most extraordinary rise in the wages of simple, unskilled labor.

There are, again broadly speaking, two suggested answers:

The first is that the accumulated intellectual property of humanity since the invention of language is a highly productive resource. Nobody can claim an income from it by virtue of ownership. Therefore that part of productivity due to this key factor of production is shared out among all the other factors. And, via supply and demand, a large chunk of that is shared to labor.

The second is that there is indeed a property of the unskilled human that makes its labor a very strong complement with other factors of production. That property is this: our machines are dumb, while we are smart. Human brain fits in a breadbox, draws 50 W of power, and is an essential cybernetic control mechanism for practically everything we wish to have done, to organize, or even to keep track of. The strong and essential complementarity of our dumb machines and our smart brains is the circumstance that has driven a huge increase in labor productivity in manufacturing. And, by supply and demand, that increase has then been distributed to labor at large.

Both have surely been at work together.

But to the extent that the second has carried the load, the rise of the robots—the decline in the share of and indeed the need for human labor in manufacturing—poses grave economic problems for the future of humanity, and poses them most immediately for emerging market economies.

So let me give the mic to smart young whippersnapper Noah Smith, playing variations on a theme by Dani Rodrik:

Noah Smith: Will the World Ever Boom Again?: “Let’s step back and take a look at global economic development…

…Since the Industrial Revolution… Europe, North America and East Asia raced ahead… maintained their lead… confound[ing] the predictions of… converg[ance]. Only since the 1980s has the rest of the world been catching up…. But can it last? The main engine of global growth since 2000 has been the rapid industrialization of China… the most stupendous modernization in history, moving hundreds of millions of farmers from rural areas to cities. That in turn powered the growth of resource-exporting countries such as Brazil, Russia and many developing nations that sold their oil, metals and other resources to the new workshop of the world.  The problem is that China’s recent slowdown from 10 percent annual growth to about 7 percent is only the beginning….

But… what if China is the last country to follow the tried-and-true path of industrialization? There is really only one time-tested way for a country to get rich. It moves farmers to factories and import foreign manufacturing technology… the so-called dual-sector model of economic development pioneered by economist W. Arthur Lewis. So far, no country has reached high levels of income by moving farmers to service jobs en masse…. Poor nations are very good at copying manufacturing technologies from rich countries. But [not] in services…. Manufacturing technologies are embodied in the products themselves and in the machines… used to make the products…. Manufacturing is shrinking… all across the globe, even in China… a victim of its own success…. If manufacturing becomes a niche activity, the world’s poor countries could be in trouble…

By “a niche activity” I read “does not employ a lot of workers”–the value added of manufacturing is likely to still be very high and growing, certainly in real terms, just as the value of agricultural production is very high and growing today. But little of that value flows to unskilled labor. Rather, it flows to capital, engineering, design, and branding.

Noah’s points about economic development are, I think, completely correct.

The point is, however, one of very long standing. The mandarins of 18th-century Augustine Age Whitehall had a plan for the colony that was to become the United States. They were to focus on their current comparative advantages: produce, I’m slave plantations and elsewhere, the natural Reese source intensive primary products that the first British Empire wanted in exchange for the manufactured goods and transportation services the first British Empire provided that made it so relatively ridge for its time.

Alexander Hamilton had a very different idea. Hamilton believed very strongly that the US government needed to focus on building up manufacturing, channels through which savings be invested in industry, and exports different from those of America’s resource-based comparative advantage. The consequence would be the creation of engineering communities of technological competence which would then spread knowledge of how to be productive throughout the country. Ever since, every country that has successfully followed the Hamiltonian path–that is kept its manufacturing- and export-subsidization policies focused on boosting those firms that do actually succeed in making products foreigners are willing to buy and not havens for rent-seekers–have succeeded first in escaping poverty and second in escaping the middle-income trap.

The worry is the China will turn out to be the last economy able to take this road–that after China manufacturing will be simply too small and require too little labor as computers substitute for brains as cybernetic control mechanisms to be an engine of economy-wide growth. And the fear is that a country like India that tries to take the services-export route will find that competence in service exports does not more than competence in natural-resource exports to produce the engineering communities of technological competence which generate the economy-wide spillovers needed for modern economic growth that achieves the world technological and productivity frontier.

Very interesting times. Very interesting puzzles.

Must-Read: Mariana Mazzucato: Jeremy Corbyn’s Necessary Agenda

Mariana Mazzucato: Jeremy Corbyn’s Necessary Agenda: “We must drop the false dichotomy of governments versus markets…

…and begin to think more clearly about the market outcomes we want. There is plenty to learn from public investments that were mission-oriented, instead of focused on ‘facilitating’ or ‘incentivizing’ business. Policy should actively shape and create markets, not just fix them when they go wrong. Indeed, policies traditionally considered ‘business friendly,’ such as tax credits and lower tax rates, can be bad for business in the long run if they limit governments’ future ability to invest in areas that increase innovation-led growth…. Moreover, we need more patient, long-term finance. Most existing finance is too speculative and too focused on short-term outcomes. Exit-driven venture capital might be appropriate for gadgets; but technological revolutions have historically required patient, committed public financing…. When the public sector takes key risks along the innovation chain… we should think more creatively about the kinds of contracts that enable the public to share not only the risks, but also some of the rewards. We must also shape a new narrative on debt. Rather than focus on budget deficits, we should concentrate on the denominator of debt-to-GDP ratios…