Let’s go back to mercantilism and trade blocs!

 I went to Rana Faroohar’s book party in New York tonight. Faroohar has a new and important book, “Homecomings” that dissects globalization as we know it and looks ahead. I have not read the book, and did not even ask Faroohar for a free copy (which were aplenty at the party tonight): the reason is that I know how authors struggle to write cute dedications in the midst of a party, and I did not feel like imposing this onto Faroohar. (In addition, I think I can afford to buy the book). But I have read her articles in the Financial Times, and was told at the party tonight that she had an important--programmatic—op-ed in today’s issue of the Financial Times. So I bought today’s FT. The link to Faroohar’s article is here.

            Faroohar’s point is not new, but is told with unusual clarity and it comes at the right time. It is that the West should abandon globalization. Instead of it, the West should revert to trade blocs, in this case created between the nations sharing certain political values and geopolitical interests. It should use “friend-shoring”, the new term invented by Chrystia Freeland, the Canadian vice-Premier, whose recent talk at the Brookings Institution in Washington is quoted with approval by Rana Faroohar.

            There are two reasons why the West should abandon globalization. The first is that it was not good, economically, for its middle classes.  The “elephant graph”, originally produced by Christoph Lakner and myself, tells that story in a nutshell: the period of high globalization between 1988 and 2008, was good for Asian middle classes and the global top one-percent, but not for the Western middle classes. Second, geopolitically, globalization helped the rise of China which is already now, but will be even more so in the future, the main military and political competitor of the United States. China today accounts for 21% of global GDP vs America’s share of 16% while in 1988 the percentages were respectively 3.6% and 20%.

            Now, these two arguments do make perfect sense from the point of view of Western political interests why globalization should be scrapped in favor of regional blocs. The idea was, to the great but undeclared chagrin, of the American liberals first raised by Donald Trump. Now the liberals, in this respect like in several others, are happy to follow in Trump’s footsteps.

            The problem is how to explain this volte-face to the rest of the world. The Western narrative has, since 1945, been built precisely on the opposite view: open trade helps all the countries and it leads to peaceful coexistence. While one need not subscribe to the Montesquieu-Bloch-Doyle view of trade as an engine of peace, the economic arguments in favor of open trade were always strong. China and India and Indonesia and Vietnam and Bangladesh have made them even stronger.

Now, the West that was the principal ideological champion of free trade has soured on it because it no longer works in its favor. But whether it does or does not, is, from a global perspective, immaterial: the idea of open trade was not based on particular benefits to one side—as mercantilism was—but to the mutual benefits for most. The gains did not, ever, thought to involve absolutely everybody,  but the idea was that the losing parties would be compensated domestically, or at least that their particular losses will not be allowed to derail the entire process.

            We are now told that we need to go back to the drawing board. But we are not allowed to call these reversals by their real names. Their real name is trade blocs. They have existed before: there were called UK imperial preferences, Japan’s co-prosperity zone, Grosse Deutschland’s Central European area, Soviet Council for Mutual Economic Assistance. They also responded to geopolitical interests of the countries that introduced them. For some eighty years they were held to have been ideologically retrograde, part of “beggar-they-neighbor” quasi autarkic policies. Now, we are to believe that  “friend-shoring” is somehow different. It is not. It just mercantilism under a new name and trade blocs in a different  costume.

            There is a further problem. The West was “in charge” of the dominant economic ideology. That ideology pervaded all international organizations. If the West is now going for “friend-shoring”, how is the IMF to explain to Egypt, Paraguay, Mali and Indonesia that they should continue with open trade? If globalization is (rightly) credited with raising incomes in Asia and with the greatest reduction in global poverty ever, are we now to reverse policies on global poverty and to argue that regional trade blocs should become the economic basis from which to proceed? Who is going to tell this to the IMF, the World Bank and the WTO?

            If the West abandons globalization, this is fully understandable from the mercantilist perspective of national grandeur. Colbert would approve. But one should not delude himself/herself in believing that the rest of the world can just be flipped on the drop of the hat, and would not notice the enormity of the ideological change that this implies. And would not wonder if the initial impulse that advocated economic openness might not have been based on geopolitical concerns that are now found wanting.

            One simply cannot maintain the universal validity of an ideology that one does not follow.

 

Is liberal democracy part of human development?

            After two and a half years of enforced zooming, that is of giving or attending lectures online, I listened today, at UNDP offices in New York, to an excellent book talk, given by Leandro Prados de la Escosura, Professor of Economics and of Economic History at the University Carlos III in Madrid. (The book “Human Development and the Path to Freedom: 1870 to the Present” is here and an article on the same topic is here.)

 

            Prados has just completed a seminal book that extends the Human Development Index (HDI), originally “invented” by Amartya Sen and now for several decades produced by the UN Development Program, in time all the way back to the early 19th century, and in scope. The index, as the aficionados of development know, includes three dimensions  of welfare: income (proxied by the GDP per capita), education (number of years of schooling) and health (life expectancy). The HDI has generated a huge literature: does adding up or multiplication of such components make sense, how to introduce inequality in each of the components, should some components be included at all (last Summer, Nuno Palma argued, rather vociferously but not unreasonably, that education should be dropped: it is a means toward achieving income, not a good in itself. I have to admit that I thought so for a long time but was reluctant to enter into that discussion). Leandro Prados’s book is extremely rich and powerful as it charts the evolution in human welfare across countries and regions over two centuries, but it is also provocative because Prados uses a somewhat different metric for the three original components and, importantly, introduces the fourth component or dimension: human freedom. The new Prados’s “augmented” HDI is possibly the most important development since HDI was first defined. (Another candidate for this title is taking into account the inequality with which the three components are distributed, done some 15 years ago.)

 

            It is the proposed inclusion of the political component that I wish to discuss here. Prados’s view is well-grounded in the theory of “development as freedom” popularized by Sen. Political rights are seen as inseparable part of human freedom because they give individuals agency to exercise their choices in general, and even their choice over the three key dimensions in particular (perhaps that people would prefer better health to higher income). The fourth, political, components consists, as Prados explains, of two parts: negative freedoms (that is, absence of coercion and control over one’s ability to express opinions and participate in public life) and the way that such freedoms are politically “bundled”, namely existence of democracy and of political checks and balances.

 

            Now, the agency or voice part of the political variable can be associated with “development as freedom”; the “democracy” part is, in my opinion, much more problematic. Increasing individual’s agency, provided that it does not limit the agency of others, is indeed an improvement in one’s condition, the same as greater longevity. Being able to access information, to express one’s opinions, to participate in political life are valuable in themselves. The exercise of individual agency must not come at the expense of others exercising the same agency. This is of course the well-known rule that our freedom is limited only by the same freedom for others. Agency therefore already includes a notion of equality. A country where 90% of the population have full agency and voice, but 10% are slaves is abhorrent even if a statistic of 0.9 may not be too different from that of an alternative country where everybody has one-tenth of their maximum freedoms abrogated. This implicit egalitarian bias in agency is something that I would leave at this point, but that can be developed further.

 

            Another argument in favor of introducing agency is to check empirically if it tends to be associated with increases in other dimensions of human welfare. It seems so at first. But it is also possible that more agency, more freedom to voice opinions leads to political polarization, even to anarchy, and then to lower income growth and higher mortality. Whether one or other direction is more likely is something that we should discover empirically and this is why adding agency/voice is, in my opinion, very useful.

     

            My concern is with the inclusion of a particular way to aggregate the opinions of the public: democracy. Democracy is just one way of such aggregation of preferences: other ways are not only possible but have existed, and continue to exist. Preferences can be aggregated through corporatist or representative bodies; a single party system via intra-party debate; by consultative monarchy; oligarchic or elite rule with popular consultation, by theocracy etc. The best way to rule a society is a topic old, in the West, at least 4,500 years. Plato, who was among the first to think about it, was not a great friend of the specifically democratic way of rule. We are very unlikely to ever agree on the best way to rule, and the introduction of liberal democracy as implicitly the ideal toward which humankind strives, brings a very specific political view of the world into an index that at least in its other components is free from excessive politicization. (I do not mean here only the direct politicization that such a component would bring into an international organization, composed of governments whose legitimacies are widely different--this is obvious—but even the politicization that it would introduce among the academic practitioners or users of the new augmented HDI.)

 

            While agency proper can be, however imperfectly, measured, democracy cannot. Regarding the former, one could look at countries that allow full access to sources of information, those that do not, and others in-between. One could also look at the freedom to express one’s opinion: how many people are fined or jailed for that? Finally, one could look at the freedom to participate in protests and marches and petitions. While agency may never  be measured as well as the other three components of the HDI, it is susceptible of at least imperfect measurement.

 

            This is not the case with democracy. As I mentioned, it is just a particular way to “bundle” people’s preferences; its measurement intrinsically depends on our subjective estimates. This is obvious from almost all currently existing indexes of democracy: what are the checks on the executive power cannot be adequately reduced to a number, nor can inequality in real political power be readily measured. How do we account for the fact that the rich “buy” policies they like by supporting electoral campaigns of these who would do their bidding? How do we account for the creation of “the correct” opinion by the media owned by the rich? All of these, immeasurable, factors often decisively influence the translation of preferences into actionable policies, and yet they are difficult or impossible to measure.

 

            What are the conclusions? First, I think that the introduction of agency proper in the HDI should be applauded. It is clear what it means, it is measurable, and it is a good in itself. Second, the introduction of democracy as currently defined would represent the introduction of one particular way of political process which is both geographically and historically limited. This is a conceptual reason for leaving it out. But in addition (my third point), it is impossible to measure “democracy”: even if we could agree on what it is, and even more, if we could agree that it should be introduced into the HDI, it will remain measured by subjective “expert opinions”, it will remain heavily politicized, and hence it would never reach the acceptability of measures such as health or income outcomes.

 

Reading David Ricardo’s letters

        While redrafting the chapter on Ricardo in my forthcoming book “Through the Lens of Inequality”, I reread, and also read many for the first time, his letters published in the excellently edited (by Piero Sraffa and Maurice Dobb) and handsomely printed and bound volumes of Ricardo’s collected writings. Ricardo’s letters take four volumes and run from 1810 to 1823, the year of his death. The Sraffa and Dobb edition includes both letters written by Ricardo and those sent to him, with very useful notation as to which letter replies to which so that the correspondence can be easily followed. The letters are not corrected for orthographic or spelling errors.

The letters exchanged between Ricardo and Malthus have been often cited, but less so those between him and James Mill, John Ramsey McCulloch and Hutches Trower. The latter are perhaps the most interesting and they were published in a separate volume that contains only Ricardo’s letters. Trower was Ricardo’s friend from business, from the stock market, where Ricardo made his enormous fortune before deciding to dedicate more time to other activities, including political economy and politics (he became Member of Parliament, by buying the seat in 1818 and remained in the Parliament until his death).

            The letters only sporadically deal with mundane personal matters; practically all are discussions of economic and political issues. A lot of space is taken by the discussion of the theory of value or by the search for a commodity unchangeable in value such that all other prices could be reflected in it. Ricardo correctly criticizes Malthus who decided that such a standard of value should be the average of wage level and price of corn. We know that this search for an unchangeable standard of value ultimately led to Sraffa’s “standard commodity”. Some of Ricardo’s letters that deal with it are very hard to read, and make Principles which too are in parts excessively abstract and dry seem easy by comparison.

            But there are also some lighter parts: “our Princes have certainly not refrained from marriage from the consideration of Malthus’ prudential check, and from a fear of producing redundant royal population. If they had they would be now actuated by different motives and we might expect that the great demand for royal infants be followed by so ample supply as to occasion a glut” (Letter to Trower, 10 December 1817).  

            I find very interesting Ricardo’s discussion of the Poor Laws. As is well-known, Ricardo was in favor of abolishing Poor Laws on the grounds that, by entitling poor people to an open-ended assistance, they promoted idleness and,  here partly agreeing with Malthus, improvident behavior by the lower classes who might marry earlier and have more children than otherwise. There is still a perceptible difference in tone between Malthus and Ricardo even if both were against the Poor Laws. While Ricardo expresses sympathy for the poor and, to some extent, believes that they may be, in the longer-term, better off without the Poor Laws, Malthus shows an almost undisguised disdain, and perhaps even hatred, for the lower classes.

            I think that one could make a case that Ricardo’s rejection of Poor Laws and his championing of capitalists (as against the landlords) have the same origin: Ricardo’s view of political economy as preeminently concerned with economic growth. It is, at first, strange to think that the person who famously wrote on the first page of the Principles that the most important problem in political economy is one of distribution should be a champion of economic growth above all. But, as I write in my chapter, this is not surprising if one realizes that for Ricardo change in distribution, that is lower income for landowners and higher income for capitalists, was precisely the indispensable condition for economic growth. It is only capitalists who are regarded as active agents of change and economic growth—since all investments come from profits.

Similarly, I think, one could argue that high spending on the poor (what we would call today high expenditures on social programs) would ultimately detract from profits and hamper economic growth. One can easily recognize in these views today’s standard right-wing policy position, but I think that in Ricardo, who obviously had many left-wing continuators, from Marx to Ricardian socialists to Sraffa’s neo-Ricardians, the pro-capitalist position was not motivated by class interest, but by the single-minded focus on economic growth.

            In fact, when in a latter to Trower, Ricardo describes his 1822 European continental tour and his dinner with Sismondi, the famous underconsumptionist, this pro-growth concern readily comes through. Ricardo writes:

M. Sismondi who has published a work on political economy, and whose views are quite opposed to mine, was on a visit at the Duke's [de Broglie] house… Notwithstanding my differences with M. Sismondi on the doctrines of political economy, I'm a great admirer of his talents, and I was very favorably impressed by his manners. I did not expect from what I've seen of his controversial writings to find himself so candid and agreeable. M. Sismondi takes enlarged views, and  is sincerely desirous of establishing principles which he conceives to be most conducive to the happiness of mankind. He holds that the great cause of the misery of the bulk of the people in all countries is the unequal distribution of property, which tends to brutalize and degrade the lower classes. The way to elevate men, to prevent him from making inconsiderate marriages, is to give him property and an interest in the general welfare—thus far we should pretty well agree, but when he contends that theabundance of  production caused by machinery, and by other means, is the cause of the unequal distribution of property, and that the end he has in view cannot be accomplished while this abundant production continues, he, I think, entirely misconceives the subject. and does not succeed in showing the connection of his premises with his conclusions. (Letter to Trower, 14 December 1822, pp. 195-96).

            I would like to finish with two remarks made in passing by Ricardo which, when “unpacked” are pregnant of deep meaning and have a thoroughly contemporary ring to them. The first is made in connection to James Mill’s “History of India” that Mill was in the process of writing during the period of correspondence. (By the way, James Mill who was the same age as Ricardo appears in the letters as a benevolent elder on whose unerring advice Ricardo much depends). There, Ricardo reflects on our inability of ever fully comprehending other cultures, not because they are irrational and not because we are not smart enough, but because our worldview is fashioned by our experience which may be entirely different from that of people from other cultures.

However well we may have examined the end to which all our laws should tend, yet when they are to influence the actions of a different people we have to acquire a thorough knowledge of the peculiar habits, prejudices and objects of desire of such people, which is itself an almost unattainable knowledge, for I am persuaded that from our own peculiar habits and prejudices we should frequently see these things through a false medium, and our judgment would err accordingly. (Ricardo to James Mill, 9 Nov 1817. p. 204.)

 

This penetrating observation should give us pause, I think, when we too readily pronounce on matters we do not know sufficiently or on cultures with which we are only superficially acquainted. (One can, of course, imagine that the observation was influenced also by Ricardo’s own past, rejection of Judaism, and conflict with his parents.)

            The second note is on the role of political economy. Ricardo writes:

Political economy would teach us to guard ourselves from every other revulsion, but that which arises from the rise and fall of states—from the progress of improvement in other countries than our own, and from the caprices of fashion—against these we cannot guard. (Letter to Trower, 3 October 1820.)

There are, he says, three exogeneous changes that even the best economics cannot deal with. The first are exogeneous political changes that affect economic matters. What better example than today’s war in Ukraine—from the point of view of domestic economics, whether in the US, Russia , Ukraine or the European Union—an entirely exogeneous shock with, nevertheless, huge economic repercussions.

            The second exogenous shock is the arrival of new technologies. Here, interestingly, Ricardo seems to say that the exogeneity occurs only if the shock is externally-generated, that is, comes from abroad. That could be, for example, the development of synthetic rubber in Germany in the 1910s, or the agricultural revolution in Asia in the 1960s, or the invention of “just-in-time” system in Japan in the 1980s: all were exogenous technological shocks for the American producers. But circumscribing exogeneity of technology only to abroad, Ricardo seems to be saying that domestic technological development is endogenous, that is, is determined by  domestic policy instruments (say, interest rate, exchange rate, subsidies and taxes) and that technology is not a manna from heaven but the outgrowth of economic management. However, since we do not have control over foreign countries’ economic management, technological developments there (which are from their point of view endogenous) appear to us as exogeneous, and hence as something that we cannot control.

            The third exogeneous element is “the caprice of fashion” or what in today eco-lingo would be called “change in preferences”. This of course is a very wide field. It could include many things, from ordinary fashions to a change in taste for working long hours and making money. Today’s still marginal but growing “culture of withdrawal” that we observe in Japan and China can be one such change in fashion. There too, Ricardo is right, economics cannot do much. If you want to stimulate growth but people are content with their incomes and just wish to work less, economic policy will, in the end, be powerless to change it.

            It is often in these dispersed observations made in his letters that we can better appreciate Ricardo, the man and the fundamental decency and gentleness of his character, and Ricardo, not only as one of the founders of political economy, but a deep thinker about the limits of power of economics and our own knowledge.