Tag: Ricardo Hausmann

Must-Read: Ricardo Hausmann: Overdosing on Heterodoxy Can Kill You

Posted on by Brad DeLong

Must-Read: The very sharp Ricardo Hausmann on the catastrophe of Venezuelan Peronismo. Peronismo is, in a nutshell, manipulating market prices to affect the distribution of wealth and attempting to use government controls and commands to guide the pattern of economic activity. This commits both market prices and the government commands to focus on their competitive disadvantages, and ends badly.

I have scattered thoughts on why Peronismo is popular–why the descamisados–whether voting for Peron, for Chavez, or for Trump–would much rather have the government take steps to boost the incomes they receive via labor and capital than rely on the stinking charity of a sensible social-insurance system. But I think I should leave them for another day…

Ricardo Hausmann: Overdosing on Heterodoxy Can Kill You: “Venezuela’s current catastrophe…. A country that should be rich is suffering the world’s deepest recession, highest inflation…

…and worst deterioration of social indicators. Its citizens, who live on top of the world’s largest oil reserves, are literally starving and dying for lack of food and medicine. While this disaster was brewing, Venezuela won accolades from the United Nations Food and Agricultural Organization, the Economic Commission for Latin America, British Labour Party leader Jeremy Corbyn, former Brazilian President Luiz Inácio Lula da Silva and the US Center for Economic Policy Research, among others….

Venezuela is the poster child of the perils of rejecting economic fundamentals.
One of those fundamentals is the idea that, to achieve social goals, it is better to use–rather than repress–the market… [which] is essentially just a form of self-organization whereby everyone tries to earn a living by doing things that others find valuable. In most countries, people buy food, soap, and toilet paper without incurring a national policy nightmare, as has happened in Venezuela.
But suppose you do not like the outcome the market generates. Standard economic theory suggests that you can affect it by taxing some transactions–such as, say, greenhouse-gas emissions–or giving money to certain groups of people, while letting the market do its thing.

An alternative tradition, going back to Saint Thomas Aquinas, held that prices should be ‘just.’ Economics has shown that this is a really bad idea, because prices are the information system that creates incentives for suppliers and customers…. Making prices ‘just’ nullifies this function, leaving the economy in perpetual shortage. In Venezuela, the Law of Just Costs and Prices is one reason why farmers do not plant… agro-processing firms shut down… incentives to flip goods into the black market. As a result, the country with the world’s most extensive system of price controls also has the highest inflation–as well as an ever-expanding police effort that jails retail managers for holding inventories….

In Venezuela, subsidies for gasoline and electricity are larger than the budget for education and health care combined…. With one daily minimum wage in Venezuela, you can buy barely a half-pound (227 grams) of beef or 12 eggs, or 1,000 liters (264 gallons) of gasoline or 5,100 kWh of electricity–enough to power a small town. With the proceeds of selling a dollar at the black market rate, you can buy over $100 at the strongest official rate….

After former President Hugo Chávez was reelected in 2006, he expropriated farms, supermarkets, banks, telecoms, power companies, oil production and service firms, and manufacturing companies producing steel, cement, coffee, yogurt, detergent, and even glass bottles. Productivity collapsed in all of them…. Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money. This caused the currency to lose 98% of its value in the last three years. By the time oil prices fell in 2014, the country was in no position to take the hit….

Progress requires identifying errors, which in turn calls for heterodox thinking. But learning becomes difficult when there are long delays between action and consequences, as when we try to regulate the water temperature while in the shower. When reaction times are slow, exploring the heterodox is necessary, but should be done with care. When all orthodoxy is thrown out the window, you get the disaster that was the Chinese Cultural Revolution–and that is today’s Venezuela.

Must-Read: Ricardo Hausmann: The Import of Exports

Posted on by Brad DeLong
Photo of container stacks and port cranes by Andrey Kuzmin, veer.com

Must-Read: There is an interesting argument to be made here about how the speed of innovation in a sector is related to the extent of the market and thus of potential competition. And there is a very interesting argument made here about the export sector as the key link:

Ricardo Hausmann: The Import of Exports: “To pay for what they want from out-of-towners…

…they must sell them some of the things that they do know how to make…. The goods and services that a place can sell to non-residents have a disproportionate impact on its quality of life–and even its viability. A mining town becomes a ghost town when the mine closes, because the grocery store, the pharmacy, and the movie theater no longer have the capacity to buy the ‘imported’ food, medicine, and films they need. In contrast to non-tradable activities, a place’s export activities need to be pretty good to convince out-of-town customers–who have ample other options–to buy…. The higher the productivity and the quality of export activities, the higher the wages they can pay and still remain competitive….

To survive and thrive, societies need to pay special attention to those activities that produce goods and services they can sell to non-residents. Indeed, the need to act on new export opportunities and remove obstacles to success is probably the central lesson from the East Asian and Irish growth miracles.
Non-tradable activities are akin to a country’s sports leagues: different people like different teams. Those engaged in tradable activities are like the national team: we should all root for them–and organize ourselves to make sure they succeed.

Lunchtime Must-Read: Ricardo Hausmann: Technological Diffusion and Economic Theory

Posted on by Brad DeLong

Ricardo Hausmann: Technological Diffusion and Economic Theory: “One idea about which economists agree almost unanimously is that…

…huge income difference between rich and poor countries [are] attributable to neither capital nor education, but rather to “technology”… [which] sounds more meaningful than confessing our ignorance, [but] it really is not…. Devices can be put in a container and shipped around the world, while recipes, blueprints, and how-to manuals can be posted online…. So the Internet and free trade should make the ideas and devices that we call “technology” available everywhere…. Daron Acemoglu and James Robinson’s book Why Nations Fail… [argues] essentially that technology does not diffuse because the ruling elite does not want it to…. I am also struck by how often governments that embrace the goal of shared growth–post-apartheid South Africa is a good example–fail to achieve it. Such governments promote schooling, free trade, property rights, social programs, and the Internet, and yet their countries’ economies remain stuck. If technology is just devices and ideas, what is holding them back?

The problem is that a key component of technology is knowhow, which… neither involves nor can be acquired through comprehension… tacit knowledge… an ability to recognize patterns and respond with effective actions…. Knowhow moves to new areas when the brains that hold it move there. Once there, they can train others. Moreover, now that knowhow is becoming increasingly collective, not individual, diffusion is becoming even slower…. Progress happens by moving into what the theoretical biologist Stuart Kauffman calls the “adjacent possible”… technology does not diffuse because of the nature of technology itself.