Sunday, December 4, 2022

Capital as a historic concept

             In a recent thesis written by Mauricio de Rosa, the last chapter is dedicated to the discussion of what is capital in Marxist and neoclassical worlds Mauricio very carefully translates Marx’s concepts of constant and variable capital into national accounts that we use now, and distinguishes Marx’s rate of profit from the neoclassical rate of return. (I am sitting on his dissertation committee and cannot say anything more).

             That chapter made me think (again) of the definition of capital. In the neo-classical world, capital is the sum of values of productive and financial assets. Because capital is extremely heterogeneous, we cannot express it in physical, but only in value terms. This has led to the Cambridge Controversy which petered out but was never resolved. In our usual work on wealth inequality, we also add the value of non-productive assets like jewelry, paintings etc. And for some assets that do not yield cash return, but are used by their owners (like housing) we add them too at their estimated value.


            Marx’s concept of capital is very different. Consider for example a shoe-maker who works in his own shop. In our usual work as neoclassical economists, we would estimate the value (price) of all the tools that he owns and include this in our national capital. For Marx though this is not capital. Capital is “the characteristic the means of production acquire when they are used to hire labor and generate surplus value”. Our shoemaker does not hire anyone. His machines are simply the means of production, the physical tools. They are not capital until he expands his store, takes over its management, and hires workers to work with the tools he owns. At that point, the tools become capital. For the national accounting, Marx’s concept of capital will therefore exclude the value of all machines and tools owned by either worker-owners (like our shoemaker) or cooperative firms and most of non-incorporated businesses. In countries where owner-worker sector is relatively large like in Latin America, lots of what is today considered “capital” would cease to be so. From household surveys we know that about a third of total income in Latin American countries comes from the owner-worker sector. We can then venture a guess than perhaps (a bit less than) one-third of what is today considered capital will be “lost”. Since that part of capital is less unequally distributed than the “capitalistic” capital, it is very likely that we would empirically find that the concentration of capital à la Marx is significantly greater than currently estimated.


            There is yet another, more difficult, issue. Marx, like all classical authors (Quesnay, Smith, Ricardo), takes wages to be advanced before the process of production begins. It means that if our shoemaker decides to become a capitalist, he not only would have to own the tools (which we already assumed he does), but enough cash on hand to hire workers. This assumption seems much more reasonable than the neoclassical (tacit) assumption that wages are paid at the end of the process of production. Why? Because if wages are paid at the end, then workers are co-entrepreneurs, since their (promised) wage depends on whether our shoemaker-capitalist is able to sell his shoes at the expected price or not. This is clearly unrealistic, or even absurd. Workers do not bear the risk of the enterprise; in fact, the crucial difference between labor and capital owners is that the risk is entirely borne by the latter. If workers’ wages have to be paid before the process of production begins, somebody has to have the wherewithal to do so. That somebody is a capitalist. This is his “variable capital”. Thus, in terms of national accounts and calculations of wealth inequality, we would have to allocate all wage income accrued in capitalist enterprises to their owners.  This means that the wages fund of, say Tesla or Google has to be imputed as capital, in its aliquot proportion, to all owners of shares in Tesla or Google. Marx’s concept of capital would therefore include a significant chunk of what goes under the name of labor income today.  If I am the owner of 1 percent of Google shares, my capital will not be only the current value of these shares (equal, in principle, to the expected discounted amount of profit), but also 1% of the wage-bill paid by Google. The problem here is the time period: should Google’s future wage bill be cumulated as the value of shares is?


Thus while we “lost” one part of capital before because we  did not include  the value of worker-owned tools and machines, we expand the concept of capital now by including all the wages paid by the capitalist sector. These wages are imputed to the owners who have in principle advanced them. Whether this would increase or not the calculated inequality of capital is not clear. Owners of shares in heavily  capital-intensive sectors where the wage-bill (the variable capital) is relatively small, will not register a large increase in their capital. The outcome in terms of  inequality will depend on whether more capital- or less capital-intensive sectors have more concentrated ownership. This is by the way, a topic which, regardless of whether you subscribe to Marx’s definition of capital or not, is worth exploring. It does not seem to have been studied.


            If we use the following notation, A = value of productive and financial assets used in the capitalist sector, B = value of productive and financial assets used in the owner-workers sector,  C =  non-productive wealth, D = wages paid in the capitalist sector, the current concept of capital is equal to  A + B, the current concept of wealth adds to that C, while Marx’s concept of capital would be equal to A + D.  It then becomes clear that whether neoclassical or Marxist concept of capital will be larger depends on the relationship between B and D. In less developed (capitalist) economies, the size of the self-employed sector may be large, B would consequently be high and D small. But in a hyper-capitalized economy, B might tend toward zero and D would be high.


In other words, as capitalism becomes more “capitalistic” the very size of what is deemed to be capital expands. This seems to make sense. In an economy composed of small producers, say thousands of small land-holders, the overall capital will be small. There will be very few capitalist enterprises (hence A is small) and wages paid by them will be a small share of the overall labor income. Thus we come to the conclusion that what is capital is historically-determined. When we compare capital in France and Cameroon, we are not just comparing how many tools exist in France and in Cameroon: we are really comparing how many tools are put to work to generate profit for their owners. There is, in conclusion, no capital as such, outside of the concrete reality and existing relations of production.


It will be interesting to have empirical estimations of Marx’s concept of capital and find how the capital/income ratios and inequality in the distribution of capital change with the definition of capital.




PS. Perhaps to understand a society, we should add the value of all tools (as neoclassics do), and also the value of all the tools that are used to hire labor (as Marx does). The 1st tells us something about the level of economic development, the 2nd about social relations.


Friday, November 18, 2022

Die Karl Marx Frage

The Karl Marx problem (or Die Karl Marx Frage, to make a nod towards Smith), as called by Philip W. Magness and Michael Makovi, has generated quite a lot of disagreements recently. Rather than summarizing the view of Magness and Makovi who published a recent article in the Journal of Political Economy, let me link to their summary here.

They quote me and my piece published for the bicentenary of Marx’s birth and then included among a dozen of contributions on Marx published by the Deutsche Historische Museum at the occasion of exhibition on Marx’s life and work recently held in Berlin.

The title of my piece is “The unexpected immortality of Karl Marx”. I think it conveys very well what I had in mind. The piece is here and I will not summarize it. I think it is worth reading.

Let me now explain where I agree with Magness and Makovi, and where I strongly disagree with them. I do agree that Marx’s influence, although substantial in the left-wing circles and increasing, even if criticized, in liberal and right-wing circles (e.g. Bohm-Bawerk, Croce, Weber) would not have made Marx the global thinker that he is today. If it had not been for the October revolution, and very importantly, Lenin’s decision to link the proletarian revolutions in the West to the anti-colonial movements in the rest of the world, I think that Marx would be known to us today as one of the theoretical brains behind the rise of the German Social-democracy, but even there his influence would have been “watered down” (as the success of Bernstein’s reformism  showed).  It is the October Revolution  plus Lenin that propelled Marx to the unique role of the global thinker, brought him to India, Japan, China, Africa, Latin America etc. He became probably the most influential social scientist of the past half-millennium. He was the only social scientist whose theories directly inspired revolutions.

Thus, I agree with Magness and Makovi that these, eminently political, events made Marx what he is now. But I see this as a vindication of Marx’s greatness. And this is where I sharply disagree with them. They make a double mistake. They imagine that the greatness of a social scientist is determined by what his/her contemporaries think of him, and this within a narrow circle of like social scientists. Basically, great economists today are those that today’s economic profession thinks are great. They thus make a double mistake: presentism (only the present assessment counts) and exclusivism (only academic opinions matter).

Both are wrong approaches for the assessment of social scientists in general and for Marx especially so. The greatness of social scientists is shown by their “durability”, that is, by the ability to be relevant over the long haul. This has  been the case, in economics, for Adam Smith, Ricardo, Marx, and probably Walras and Keynes. (One could go into other social sciences and bring up Rousseau, Machiavelli etc., but we do not need to do that). Why are such thinkers relevant? Because their way of thinking, the system they have designed, is found congenial, or has an explanatory power given the circumstances we face today. We search in their writings for explanations of  our current ills. The longer the social scientist is relevant, the more important he/she is. I do not think that anyone who has read even one chapter of Plato’s “Republic” or Aristotle’s “Politics” was  not struck by how extraordinary relevant they are. This is greatness. And this is what Marx has in abundance.

The fact that Marx’s fame was caused to a large extent by the October Revolution and Lenin’s decision that I mentioned is no different than how any social scientist becomes famous. It is the political, external events which suddenly reveal the importance of the work that we might not have appreciated. The latest financial crisis has brought Hyman Minsky from obscurity. If there is another crisis, he will be even more famous. The concern with the role of slavery in the development of capitalism has brought up W.E. D. DuBois’ writings to the fore. Malcolm X is also going through a revival. Their writings suddenly seem relevant. Had we solved the problem of depression as Robert Lucas promised to us, Keynes’ relevance for economics and policy-making would be minimal.  But as soon as the economy sputters (as now), economists rush back to the General Theory. It would be silly to claim that Keynes is famous just because “external” events are favorable to him.

Now, let me go to over why “presentism” and “exclusivism” are particularly inappropriate as the judgment criteria in the case of Marx. Whoever has read Marx must know that his program was much wider than the transformation of economics. The critique of political economy, as the subtitle of Capital says, is just one part of that overall program. His program was to propose an entirely new understanding of human history in which economic forces play an important, and perhaps, key role. Once the meaning of history discovered, this knowledge needs to be coupled with conscious action to bring about the change that history “reveals” to us. Our actions bring that historical evolution, discovered intellectually, to fruition. This is where the key Marxist concept, praxis, appears: it is the unity of theory (idea) and practice. It is at that point that that ideas (if they indeed are “correct” in the sense that they have seized the key determinants of evolution of human society) become material forces. Idea is then as much of a tool of change as a demonstration, the barricade, or the invention of a new machine.

Why do I need to go through this long explanation of Marx’s system (which of course is something that has been hinted at since Gramsci and Lukacs but became much better known after Marx’s manuscripts were published in the 1960s)?  Because it shows that reducing Marx’s objective to influencing economists like J. S. Mill and others is totally misunderstanding Marx. Marx was in the business of influencing the world history and social sciences as a whole. This was supposed to be done through the workers’ movement which imbued with the “correct” ideology becomes the instrument that changes history, brings about classless society, and lets us enter “the realm of freedom”. Marx was not in the business of applying for a job at the University of Cambridge, or writing refereed papers.

People whose highest aspiration is the latter cannot understand it.  Our own age is the age of pettiness and if our objectives are petty, we cannot even begin to conceptualize that somebody looks beyond that. The situation was not too different even in Marx’s time and this is why he was so mercilessly scathing of McCullochs of this world. They were just not on the same wavelength, they were not his peers.

It is true, as was mentioned by many, including Isaiah Berlin in his biography of Marx, and Schumpeter in The History of Economic Analysis and Capitalism, Socialism and Democracy,  that there was a lot of prophet in Marx and that our problem with him is that he transcends the confines of science. The ambition and comprehensiveness of his program is something only religions allow themselves to go in. And indeed criticizing Jesus for having had only a dozen disciples, not writing down his ideas, and not applying to join the Academy in Athens or perhaps a synagogue in Judea, is similar to criticizing Marx for not caring to convince McCulloch.  

Thursday, November 10, 2022

Disciplining workers in a workers’ state

 When I reviewed yesterday Fritz Bartel’s excellent new book “The Triumph of Breaking Promises” where he describes how governments in both the West and East in the late 1970s and early 1980s had to break tacit promises (of economic growth and welfare state) with their citizens, he speaks of “disciplining labor.” In a capitalist context, it is clear what it means: reduce the power of trade unions, make the labor market more flexible (i.e. firing easier), reduce the duration and amount of unemployment benefits etc. Almost everyone understands it.

            But some people wrote to me: they did not understand what “disciplining labor” meant in the East European (and probably Soviet) context in those years. To understand what it meant one has to start with the position of labor in socialist societies. In those societies, and in those years (because it was different under high Stalinism), workers were seen as the “privileged” class in theory. While they were not high in income distribution, they benefited from many egalitarian policies, and it is them, and their position, that provided the legitimacy to the communist party rule. Since that rule could not legitimated through elections, it had to be legitimated through the claim that it ensured the “dictatorship of the proletariat”, i.e., made workers, rather than capitalists, the ruling class. Obviously, they were not the ruling class in truth: party and government bureaucracy was, but the ideological claim of “the dictatorship of the proletariat” could not be openly ignored and it meant that a special social contract did exist between the powers-that-be and the working class.

            The contract included the following items:  (1) low intensity of work effort, (2) guaranteed employment, (3) low wage differences between skilled and unskilled workers, (4) less hierarchical plant-level relations than under capitalism, (5) social benefits linked to jobs.

            The most important thing to realize is that work effort was much less, and the number of hours of effective work probably even less than in an equivalent capitalist-run firm. There were several reasons for it. Socialist enterprises were organized much less efficiently. There were no real owners who cared about profitability and in consequence they did not either care if labor was employed eight hours per day or four. On top of that, the overall system was less efficient: so often raw materials would not show on time and there would be no work to do. Then, there was surplus labor within companies hired just in case they needed it to fulfill the plan quota (or, as in Yugoslavia, which was not a planned economy, just in order to hire family and friends). Companies were encouraged to increase hirings because local politicians were afraid of unemployment in their area and under their watch. They wanted companies to hire as many people as possible regardless of whether it made economic sense or not (the soft budget constraint will somehow mop all of this up: somebody else will pay). Finally, hours and hours were lost in political meetings, or as in Yugoslavia, in interminable discussions of workers’ assembly or workers’ councils.

            All of these things combined meant for an individual worker that he or she effectively worked much less than in a corresponding capitalist firm: the intensity of work was less, the duration of work was less, the idling was much greater. Worker’s shop-floor position was stronger than in an equivalent capitalist firm because it was almost impossible to fire them. So he/she was both more powerful and worked less.

            Comes the need for reform. “Breaking promises” under socialism meant principally disciplining labor along that the three dimensions: make them work harder, reduce their shop-floor powers, and allow (timidly) for possibility of firing. As a careful reader might have noticed, discipling labor had mostly to do with “internal” elements of the shop-floor organization, and establishment of stricter rules and hierarchy, not with the usual “external” elements as in capitalism (amount of unemployment benefit etc.).

I remember observing clearly these differences during the years when, to complement my student income, I worked with Yugoslav trade unions. They had very close relations with French Trade Unions  (CFDT in particular) and I knew them well. When the French Trade Unions would visit Yugoslavia, they would be taken to the management of the company and to the plant-floor to chat with workers. When Yugoslav trade unions went to France, they would meet in trade union offices (very nice, by the way), but they would never meet the management (obviously the management would ignore us), nor would they ever be allowed to the shop-floor. The internal organization of work was entirely the “province” of capitalists and managers. Of course, unions may be consulted, or could strike, but the rules of work organization, the pace of work, the hierarchy within the company were not the object (or were seldom the object) of negotiations.

It is that very hierarchical work organization that technocrats, or reformers, in socialism wanted to establish so the system would be more efficient.  Consequently, they had to fight the acquired rights of workers. This was ideologically  difficult because workers were the “ruling class”. If they are the ruling class, how—and for what purpose—can you force them to work harder, be less consulted, and even face unemployment?

This was the perennial battle between technocrats, often company directors, and the working class. Whenever crisis would hit, technocrats would gain the upper hand. They would make temporary inroads, but would be thwarted and pushed back by a coalition of bureaucrats in the party and workers. It was a battle that was for ideological reasons impossible to win by technocrats. “Disciplining labor” was thus much more difficult in  Eastern Europe in the 1970s that in the West, and especially so, in the United States, where the power of labor (and the ideology legitimating that power) was always weak.    

Western money and Eastern promises

           The turning point in the economic fortunes of the First and Second Worlds happened in the years 1973-75 when oil prices increased by six times (in real terms), economic growth decelerated, and the social contract between the governments and citizens based on ever increasing real incomes and cradle-to-grave social protection, broke down. This is not an original statement: dozens if not hundreds of books have been written with this thesis. What distinguishes Fritz Bartel’s impressively well-researched “The Triumph of Broken Promises” is his parallel analysis of how the crisis was handled in the democratic West and the authoritarian East, and how it ultimately led to the end of the Cold War and the fall of communism. It is this unified framework, plus its implications for several eminently political events: the break up of the Soviet Union and other Communist federations, the unification of Germany etc. that represents, in in my opinion, the book’s greatest strength.

            The book can be summarized as follows. Faced with unprecedented economic shocks that made the continuation of post World War II policies impossible, both types of government had to resort to discipling of labor and “breaking of promises” with the citizenry.  Western government were able to weather the storm because they had the support of capitalist money and  enjoyed domestic legitimacy obtained through elections. Eastern government that heavily borrowed in order not to have to break promises, couldn’t repay the loans in the 1980s and found themselves at the mercy of world capitalism, and by extension of capitalist governments that controlled the international financial system.  

Now, why were communist governments so keen not to break promises, while Thatcher and Reagan did break them? And survived. The answer is politics. Governments in communist countries knew that their legitimacy could be maintained only so long as they provided numerous social services and did not insist too much on hard work. But that equation “we pretend to work and they pretend to pay us” could not continue forever. The economies sputtered, the rate of growth declined, social services deteriorated. The only answer was disciplining labor. In the West, that medicine was applied by Margaret Thatcher as she repressed organized labor and in particular the miners’ union (Scargill, any memories?); in the East by Edward Gierek and his numerous successors in Poland. Margaret Thatcher won because she had the support of other segments of society and labor found itself isolated. Communist governments could not exact concessions from labor since society at large did not see the governments as legitimate.

Poland and the UK provide almost template cases of the two systems  and Bartel follows them closely. They are a natural experiment where many variables are the same, but one, crucial (political legitimacy) is different. It did not escape the attention of Mieczyslaw Rakowski, the last (and ultra reformist) Prime Minister of communist Poland that under Tadeusz Mazowiecki, the first non-communist Prime Minister, workers accepted without demurring such significant cuts in real wages and the standard of living that could not be imagined by any communist government. In fact, the reforms tried by the Vice Premier Sadowski in Poland in 1987, and those of Leszek Balcerowicz in 1989-90 were almost identical in their macroeconomic aspects: drastic cut in subsidies, mopping up of the so-called “liquidity overhand”, increased unemployment, liberalization of the exchange rate. But the Sadowski reforms floundered at the first step; the Balcerowicz reforms survived the difficult period, and established the basis for  Poland’s future growth. It was indeed, in a famous phrase attributed to Balcerowicz, the short window of “extraordinary politics” that made it possible.

There is one aspect however that Bartel overlooks in his search for parallelism between the West and the East. Communist government were theoretically workers’ governments. This was their most important, and often sole, claim to legitimacy. Western governments were/are, despite all democratic sugarcoating, governments dedicated to the preservation of private property, and hence de facto capitalist governments. It was ideologically very difficult for communist governments to go against labor. The fact that Poland’s government had to fight its own workers showed its ideological bankruptcy. But for Western governments to go against labor was ideologically acceptable, even when it was politically difficult in countries where trade unions and socialist and communist parties were strong (France, Italy).

 On the other end of the world, Paul Volcker’s “disciplining” caused a deep recession in the United States and hurt labor. But by increasing confidence of capital owners that the US would be willing, and able, to take a strong stance against labor and in favor of capital, they brought back confidence of the financial markets and stimulated large international capital inflows into the United States (“Volcker’s willingness to impose unprecedented economic discipline on the American people showed global capital holders that American policy makers could, and would, ultimately protect the interests of capital over the interests of labor”, p. 340). Those money inflows allowed the US to run forty years of uninterrupted current account deficits —a thing no other country in the world can dream of.

The structural difficulties, described in the case of Poland above, were magnified for the USSR. Because the USSR not only had to deal with similar internal economic problems as other East European countries, but also bore the burden of an inefficient empire. In several fast-pacing chapters Bartel describes the dilemma of Gorbachev and the Soviet leadership. They realized that there was a trade-off between domestic economics on the one hand, and military spending and subsidization of the Empire on the other (“We are at the limit of our capabilities”, told Gorbachev the Politburo in 1986, p. 178). Gradually, they reconciled themselves to the loss of the Empire provided they could “sell it” for hard currency with which to shore up domestic economy. But Gorbachev, Bartel argues, never really bit the bullet by reforming the economy. He talked and talked, promising that if money were forthcoming, he would use it to deepen and accelerate the perestroika. But even when the money came (as in the case of West Germany giving to the USSR aid and loans to the tune  of 15 billion DMs), the reforms were not undertaken, and the fate of money is unclear.

(The end of Chapter 10 which tells the story of this unseemly bargain is riveting. It is a grand bazaar. Gorbachev begins by asking DM 20 billion in order to remove Soviet troops from East Germany. Kohl comes with only DM 5 billion. He asks Americans to help: they refuse. Kohl then scrambles to find a total of DM 8 billion, the offer that Gorbachev rejects as a “dead end”. Kohl moves to DM 12 billion. Still no good. In desperation, Kohl offers an additional DM 3 billion of interest-free loans. Deal.)

The last chapters leave us with tantalizing questions, particularly today. Why was Gorbachev so inept, both in negotiations and policy-making? Why was there such a disconnect between what Gorbachev rightly saw he needed to do and what he did? If the empire was to be sold, why was bargaining so badly done? Was it the lack of knowledge and sophistication from the leaders, shortage of time, inability to grasp consequences? It is unclear, but Bartel’s book, particularly in the  chapters on the Soviet Union, will prompt many readers to ask these questions. When comparing Gorbachev endless chatter followed by begging for money with the exceedingly rational, cool, and measured Kohl (as well as George Bush senior) one is struck by the difference in the quality of statecraft. But surely individual differences cannot be a full answer for what happened. Gorbachev worked under the conditions where (perhaps because of the policies he adopted too) the ground was constantly shrinking: his room for maneuver was getting tinier and tinier by the day. Kohl, on the other hand, buoyed by the inflow of East German citizens, quasi bankruptcy of GDR, and “deep pockets” (to quote James Baker) of the Federal Republic, had a permanently expanding space for negotiation.

The book ends with a pertinent reflection on the two empires: the American Empire was/is a net gain to the United States, as the US managed to have members of the Empire fund its deficits and increased military spending. For the USSR, on the other hand, the empire was a net cost: it had to subsidize it, keep its military ever poised to intervene, and trade it off for domestic prosperity. (“After 1980, the American empire became an enormous material asset to Washington, while the Soviet empire remained an enormous burden for Moscow.”, p. 341). One empire was/is composed mostly of voluntary adherence,  the other was composed of countries that were roped in. But the real difference was that one was economically successful and the other was not.  

Tuesday, October 18, 2022

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.


Saturday, October 15, 2022

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.