The Unz Review - Mobile
A Collection of Interesting, Important, and Controversial Perspectives Largely Excluded from the American Mainstream Media
Email This Page to Someone

 Remember My Information



=>
Publications Filter?
AKarlin.com Da Russophile
Nothing found
 TeasersRussian Reaction Blog
/
Economic History

Bookmark Toggle AllToCAdd to LibraryRemove from Library • BShow CommentNext New CommentNext New Reply
🔊 Listen RSS

unsolved-socialism-problem

The latest in our series of translations of Russian national-conservative thinker Egor Kholmogorov.

Translated by: Fluctuarius Argenteus; slightly edited by AK.

Original: http://zavtra.ru/blogs/pravoslavnyij-sotsializm

***

Socialism Not Dead: Paradoxes of an Unsolved Problem

It may seem strange that, at the turn of the 21st century, the word “Socialism” is back in the popular political idiom. The final decade of the preceding century seemed to have been the time of its complete (and, so it would seem, irreversible) annihilation.

Soviet-style “Real Socialism” ended in a pathetic disgrace, striking its colors at the sight of a sausage pointed at its heart. Who would have thought that churning out missiles, dams, and factories wouldn’t be enough to sustain a planned economy based on communal property? It was also necessary to grant the Socialist people access to consumer goods at least remotely comparable to those available under Capitalism; otherwise, falling behind not only in living standards but also in technology became inevitable. Soviet Socialism collapsed under the weight of this contradiction, while China enacted reforms so deep that, while looking at Chinese billionaires, one can’t help but wonder whether it’s still Socialism or a “Red Capitalist” oligarchy of the Chinese Communist Party – quite probably no worse than any other oligarchy in history.

Meanwhile, the Capitalist world with its triumphant Liberalism seemed to have scored a doubtless moral victory. Not only did it outpace Socialism, it completely consumed it. All more or less sensible Socialist ideas were incorporated into the structure of the “welfare state”, leaving “Real Socialism” with such dubious achievements as complete socialization of property or pedantic ideological censorship. Socialism appeared to have been entirely devoured and digested by a Capitalism that had reached in this struggle a new stage in its historical evolution.

A quarter of a century after this victory over Socialism, the foundations of the global Liberal order are more and more visibly shaken. Within the US Democratic party, Hillary Clinton’s Liberalism, oriented at racial and sexual minorities, has been challenged by “Democratic Socialist” Bernie Sanders who is cajoling White American workers into rising against the 1%, the Wall Street loan sharks. Socialist? US Presidential candidate? Early 21st century? It seems patently absurd. Meanwhile across the pond, the Labour party in the UK eschewed fine-looking bureaucrats in favour of Jeremy Corbyn, a Socialist, an anti-militarist, and general diehard Leftist. One of his first acts as leader of the Shadow Cabinet was creating a committee for a new economic policy, including such anti-inequality fighters as Thomas Piketty and Nobel Prize winner Joseph Stiglitz.

All of a sudden, we not only see a ressurection of Socialism in two of the leading countries of the Capitalist world, but positioning itself as a powerful political political alternative to the dominant Liberal mainstream. If we take into account that this mainstream is also under attack by right-wing populism of the likes of Donald Trump and Marine Le Pen (the program of the latter replete with anti-Capitalist and anti-Globalist vocabulary), the Liberal “end of history” seems to have ended quite rapidly. If this wave hasn’t reached us yet, it is only because both our Liberalism and our Capitalism are quite peculiar, and our political system doesn’t operate under Western-style rules. However, one cannot completely shut oneself off from a revolution of ideas, and it seems likely we will soon hear the march of a new Socialism here in Russia.

What is the cause of this 2010s Socialist re-revolution? The return of economic conditions that had caused the heyday of Socialism in the 19th century and were drastically changed in the 20th. The driving force of the Socialism of two centuries ago was a contradiction between the ideals of civil liberty and equality brought about by the French Revolution and the Enlightenment, and an absolute economic inequality typical of ancien régime Europe. The latter became more prominent and intolerable at the start of the Industrial Revolution, when hundreds of thousands of proletarians became concentrated in the stench and stuffiness of the working-class suburbs of developed countries.

Liberalism was faced with a monstrous and insoluble contradiction: why, after declaring human rights and liberties in thought and politics, giving equal rights to all social strata and doing away with the feudal ladder of estates, should it remain the guardian of a gap between wealth and misery, the protector of economic inequality? The situation of defending equality in the sphere of ideas, less important for most of the people, and championing inequality in the sphere of the stomach, of much greater everyday importance, seemed entirely ridiculous.

Excuses invented for explaining why some people are poor and some rich pushed those who considered this to be an injustice to certain solutions. “Private property is inviolable, you have no right to infringe upon it, therefore, you dare not touch the wealth of others,” said the wealth apologists. “It simply means that property is theft, and it must be destroyed or redistributed to close the gap between wealth and poverty,” replied the champions of the poor. “Liberty is not the equality of results but that of opportunities. We should be equal at square one, and then let each one gain according to his energy and talents,” said the wealth apologists. “Then we should socialize the work effort, and then we’ll have a common result: From each other according to their ability, to each other according to their needs. Also, let’s create truly equal opportunities, because the prospect of equal chances for millionaires and have-nots is a bald-faced lie,” replied the champions of the poor.

The ideas, methods, and moral high ground of the Socialism of yesteryear stemmed from a European yearning for equality, described by Alexis de Tocqueville, and the angst caused by the monstrous material inequality in the Europe in an age when the gaps between wealth and poverty were insurmountable. These gaps are the subject of a spirited dialogue between a young Rastignac and a cynical, conniving Vautrin in Honoré de Balzac’s Le Père Goriot. Vautrin explains to Rastignac, then a young idealist, that his chances of making good money thanks to learning, personal qualities, and industriousness are equal to zero. The only way of winning a fortune is getting it from somebody who already has it, by way of inheritance or marriage. The only way of becoming rich is being rich.

The world that spawned most Socialist theories, especially those of Saint-Simon, Proudhon, and Marx, was not a liberal world of free competition and equal opportunity. It was a polarized world devoid of a middle class: the 1% of haves and the 99% of have-nots.

What did this mean in practice? All talk of alleged opportunity in life granted by a Liberal version of Capitalism seemed naught but a myth. Big money was a magnet that attracted even bigger money. The lion’s share of national income, regardless of the pace of its growth, was distributed in the same proportion that was fixed in the structure of national capital. Simply put, those who controlled the majority of wealth gained the majority of income while making little to no effort.

America was the sole exception, with a lower concentration of wealth and a higher share of income distributed through free competition. Hence the image of the USA as a Promised Land, a land of opportunity, a magnet for migration. A good way of making money in Europe was moving to America (with the possibility of returning to the Old World with newfound wealth in tow left open).

No industrial growth, no Socialist attacks on the government or the bourgeoisie could change anything in the structure of this world until the start of World War I. This explains the revolutionary character of European socialism and the borderline utopian radicalism of its proposed solutions: Total socialization of industry, expropriation of the ruling classes, dictatorship of the proletariat, dreams of a World Revolution.

piketty-capital-income-ratio-europe

Source: Capital in the 21st Century by Thomas Piketty. Not part of Kholmogorov’s article.

This World Revolution did come to pass – but it started not in 1917, but in 1914. As brilliantly demonstrated by Thomas Piketty in Capital in the 21st Century, the Great War kickstarted a default of old European wealth. The horrors of war, the collapse of world trade, the Russian Revolution with its devastation and expropriation of the wealthy classes, the defeat and hyperinflation in Germany and Austria, the demographic crisis and budget deficit in the UK and France, the impeding dismantlement of colonialism – all of this led to a catastrophic decline in capital concentration in Europe.

piketty-russia-inequality-history

Source: From Soviets to Oligarchs: Inequality and Property in Russia 1905-2016 by Filip Novokmet, Thomas Piketty, and Gabriel Zucman (2017). Not part of Kholmogorov’s article.

The revolutionary role of Russia, whose bourgeoisie was sacrificed at the altar of transformation, consisted not so much in socializing property and launching the Socialist experiment as in crashing the world rent. The enormous Russian debt that had fed millions of rentiers all over Europe turned into dust in the blink of an eye and doomed the rentier civilisation to extinction.

From the 1920s to the 1940s, the level of capital concentration in the world capitalist system continued its decline. Contributing factors included the Great Depression that had finally made its way to America, the devastation of World War II, the post-war wave of nationalisations, and tax deductions for national reconstruction. The ratio of capital to national income fell from 6:1 under the old regime to 2:1, i.e. the entirety of concentrated capital (be it in the form of real estate, shares, or foreign assets) became equal to only two years’ worth of national income.

What were the socioeconomic consequences of this Great Default? The grip of Capital loosened, its magnetic effect wasn’t as far-reaching, and the problem of economic equality was tackled within the framework of global Capitalism, without employing the radical recipes of fin de siècle Socialism. More precisely, those radical recipes were relegated to countries that were lagging behind in industrial development, such as Russia and China. The main goal of this radicalism was a wilful, determined achievement of an industrial breakthrough. Socialism in so-called Socialist countries was most concerned with productivity and not wealth redistribution.

Western countries, however, having no need for a “great leap forward”, were able to afford the luxury of a “Socialism sans Socialism”. Social Democracy, Christian Socialism, Swedish Socialism, Social Reformism all followed the same model. Without abolishing private property as such, without creating a dictatorship of Leftist parties, by limiting themselves to a selective nationalisation, they achieved economic equality by fostering a system of high wages and a well-developed social sphere, ushering in the welfare state. Essentially, it was a huge Ponzi scheme organized according to Keynesian precepts: The state took away a sizable portion of incomes via taxation in order to redistribute this money, also as income but under a more egalitarian distribution.

This was the zeitgeist of the treinte glorieuses of 1945-1975, when all Western governments followed, with slight variations, a single socioeconomic policy targeted at bringing social inequality as far down as possible, raising national income redistributed as salaries to the detriment of rents, dividends, etc., and widening the social responsibilities of the state. It was the age of a rising middle class, the 40% that follow the 10%-strong strata of the wealthy; this class laid claim to 30-40% of national wealth as opposed to just 5% before World War I. The 50% of the poor were stuck with the same 5% as before, but at least they gained a much greater chance of breaking out of poverty by dint of education, good work, entrepreneurial spirit and general savvy.

The social lifts seemed to be working. A peculiar anthem of the era is Chuck Berry’s tongue-in-cheek 1964 song You Never Can Tell, the accompaniment to John Travolta’s and Uma Thurman’s wild gyrating in Pulp Fiction. It’s the story of a young Black couple from New Orleans that makes decent money, buys a house, mail-order furniture, a fridge, a phonograph, even a used jalopy… New capital growth was slow but steady, not in the form of rent or foreign bonds but mostly as real estate, shares and equity.

The most positive Soviet-era memories of those who were impacted by the system are based on largely the same processes, just disguised with red banners and “Glory to the Communist Party” posters. The income levels of Soviet workers were incommensurably lower, as was the quality of consumer goods offered by the market (it took a long time to realise that the Western market of the era was just a mechanism for redistributing wealth that was gained through not entirely market-based means). However, the Soviet system was infinitely more helpful with regards to restoring and accumulating… capital. It was even explicitly called “capital construction.” Most Soviet citizens were granted, entirely free of charge, real estate that was worth many years of individual income and still commands an impressive market price. And so construction proceededly rapidly apace to build the cosy, even slightly bourgeois world of 1970s Soviet comedies.

The Socialist system, like that of the West, followed the route of reconstructive capitalism. Meanwhile, Socialism as an idea gradually fell out of favor over the 20th century as its main raison d’être, inequality, disappeared. The semi-Socialist policies of Western countries created a perfect model village of Capitalism: Low inequality levels, broad opportunities, intensive social lifts, high levels of welfare, a wide availability of consumer goods thanks to a developed and flexible market. All of it seemed like a brilliant alternative to Socialist experiments: Socializing not wealth, not industry, but revenue, redistributing it so that everyone could decide where to spend it within a wide spectrum of options.

An ideal world of freedom and equality finally seemed to be within grasping distance. It also had a place for racial and gender equality, the 1960s becoming a triumph for equal rights activists of all stripes. At the same time, Socialism was quagmired in internal antagonism, the total control of the state eroding all freedom and neutering the enjoyment and variety of everyday life.

piketty-top-income-tax-rates

Source: Capital in the 21st Century by Thomas Piketty. Not part of Kholmogorov’s article.

However, the economic developments of the treinte glorieuses were the gravedigger for both Soviet Socialism and Western Welfare Capitalism. They signed their own death warrants themselves. A natural accumulation of capital was underway, via saving a part of income in the West or direct capital giveaways by the state in the USSR. But a feature of capital is that it “magnetizes” and draws income. The owner of capital tends to rent-oriented, not work-orientated, behavior. This “capitalist” wants to gain interest and rent, to make his capital inheritable, to pay the lowest taxes he can, and thoroughly despises the have-nots whose claims to a share of his income seem to him most outrageous.

The late 1970s saw the rise of a new Capitalism with many faces, from British Thatcherism to US Reaganomics to the waves of privatization that swept away the Soviet system and its socialist economy. It was a massive uprising of capital that wanted back its right to extract revenue and spend it on itself without sharing with society. Just like the pendulum swinging towards Socialism in the early 20th century, its return towards pure Capitalism at the end of the century was most pronounced and most socially destructive in Russia. A savage, dog-eat-dog oligarchic Capitalism that took sway in the country freed itself from practically all burden of social responsibility. It was a tyranny of wealth limited only by the garrotte in the hands of thugs, be they mafia racketeers or bureaucrat raiders.

However, it would be unreasonable to claim that the nature of the processes that transpired in those decades was drastically different in Russia, Europe, and the US. It was a time of large predatory fortunes, scams and profiteering, social polarization, and growing inequality everywhere. Americans and Western Europeans, accustomed to slogans of “equal opportunity,” suddenly once again found themselves in the era of Rastignac, when the only way to get rich – was to be rich. Also, the very notion of wealth had changed: It was no longer a reasonable, comfortable prosperity, but a blatant, tacky luxury.

In The Price of Inequality, Stiglitz describes the behavior of modern American business as “rent-oriented.” Nobody wants to improve real economic indices, nobody wants to make money, everybody wants to live as a rentier off unfounded bonuses, “golden parachutes,” and other forms of self-financing so common in American corporations. Is it that different from Gazprom cleaning women?[1]

At the other end is the growth of inflamed poverty: according to Stiglitz, the life expectancy of US White men with no college education is plummeting at the rate of 1990s Russia. Over the last 15 years, everyone and their mother have talked about the “death of the middle class.” Piketty projects that at the current rate of increasing inequality, Europe will return to 19th century levels by 2050: 10% of the population will own 80% of capital, and 60% of all income.

The society built by the global anti-Capitalist uprising of the early 1900s is becoming a thing of the past, as is faith in market-based self-regulation of Capitalism, allegedly evolved enough to solve social issues. It turns out that self-regulation played no part whatsoever, and the growth of economic equality occurred due to a catastrophe that had wiped out the “old money,” paving way for a unique Social-Capitalist system. Conversely, growing capital concentration, seemingly normal for a self-regulating capitalism, simply reproduces inequality.

A Neo-Socialism is the natural response of a society that enshrines equality to the emergence of a new inequality. Will it be different from classic Socialism? It will be, and rather strongly so.

Destruction of private property and socialization of the means of production proved to be a rather dubious road to Socialism. In practice, they only led to the creation of a new class – the nomenklatura, a decline in individual initiative, logistic and planning errors leading to shortages and even famines. And, in the long run, they failed to prevent the restoration of Capitalism in its most savage incarnation. In addition, small-scale private property continued to develop even if when it all private property was nominally abolished.

The utopia of complete socialization is opposed by the following fact: As material progress unfolds, a human being demands more, not less space for individual existence and self-expression. The ideal of a normal human, as it turns out, is his own house, not an army barracks. Collectivism invariably leads to a tyranny of mediocrity and dooms the societies that adopt it to backwardness in scientific-technical development.

Under these conditions, Neo-Socialism presupposes, above all, the socialization of income and prohibitive measures on capital concentration. The world of future Socialism is a world where all offshores are annihilated and each and every fatcat is subjected to high income and property taxes, with inheritance laws hampering the transfer of super-wealth. This nullifies the magnetic effect of large capital, and most of income is redistributed as wages in the context of free labor and a free market. From an instrument of optimizing income, the market turns into an instrument of optimizing expenditure.

Here, however, the New Socialism faces several classic pitfalls, already singled out by Joseph Schumpeter in the mid-20th century. The impossibility of super-wealth, limiting unfair and imperfect competition, monopolism, and profiteering lead to the waning of that very entrepreneurial spirit that nurtures the Capitalist economy. There will a dearth of those interested in starting a new business to beat all competitors and make a nice buck. And, needless to say, an “inventor and innovator” certificate[2] is a feeble substitute for super-incomes.

The only remedy to entrepreneurial crisis within Neo-Socialism could be a change in business philosophy: Stop chasing big money and instead take pride in the individuality of your business, its attractiveness and social relevance. This, however, only works for small and middle-sized businesses, while bigger enterprises require investments (including non-returnable ones) and risks so enormous that a small-time businessman can only afford it if he is aiming for a super-income. An alternative is a planned, state-run innovation policy, a “Communism of ideas” that will be of dubious long-term efficacy.

A society that guarantees a relative equality of income would be doomed to low economic growth. However, it is precisely the form of economic growth stabilization – especially within the core of the Capitalist system – envisioned by Neo-Socialist economists, Piketty above all.

Another question inevitably brought forward by Neo-Socialism is its relations with globalization. In a Neo-Liberal world, globalization is a world market system that forces the expenses of wealthy and developed countries on the poor and undeveloped by creating “common markets” that stifle economic development. They confine poor countries to the lower stages of technological chains while keeping the rights to ideas and the final product in the hands of developed countries. This is exactly the principle of the Transatlantic and Trans-Pacific Partnerships, modern attempts to cement the eternal commercial dominance of the US.[3]

An alternative to this economic globalism is economic Nationalism; the greater the drop in economic growth and surge in inequality, the more that will it be visible. Countries with independent industrial potential and inner market resources will isolate themselves from the rest of the world as much as they are able to, from imports to economic immigrants, in order to maintain their development level despite in spite and at the expense of others.

This Nationalist alternative is seen as the greater threat to the Neo-Socialist project. Its defenders keep putting a lot of effort into criticising Nationalist and Protectionist ideas and rallying to the defence of Smithian dogmas of “relative advantage” that lead to international division of labor and creation of common markets.

Nevertheless, preserving global markets under a Neo-Socialist policy would require a serious “leveling of fortunes” everywhere on the planet. Wealthy countries, much like wealthy people, would be compelled to spend most of their wealth to improve the living standards of the poor up to a certain “golden mean.” According to modern GDP per capita statistics, it would be represented by the living standards of a Turkey or a Mexico – probably even lower in reality, because rich countries create much of their GDP and national income by virtue of being rich. Were they to be more modest in their lifestyle, much of their national product simply wouldn’t be produced.

Is it possible to downgrade the living standards of rich countries and prop up the poor ones to even slightly reduce global inequality? One may well doubt this, especially considering that for most of humanity, it is the quality of life in the developed countries that really matters, not the tyranny of averages. Everyone in the world dreams of a Lexus, not a Zaporozhets.[4]

And now we re-encounter a fundamental contradiction within the Socialist dream. It is inspired by a global historical trend towards equality and social justice, but the justice in question turns out to be a tyranny of mediocrity, the erasure of extremes of arrogant wealth and abject poverty. But how is the value of this justice comparable with the imperative of development that presupposes certain extremes? To move forward, one must desire to be the best, which is impossible without a certain, sufficiently wide score chart – even if it comes at the expense of others.

Combining the values of justice and equality with the values of development is a task yet unsolved by the New Socialism.

***

Notes

[1] Allusion to a news item at around the time of this article’s writing featuring a woman employed as a cleaner in the Gazprom office who had reported the theft of her Christian Dior handbag worth $26K.

[2] Allusion to the Soviet practice of rewarding technical and industrial innovators with honorary diplomas and certificates, as opposed to patent rights or other, more substantial awards.

[3] A cheap rear-wheel-drive supermini mass-produced in the USSR (and then, briefly, in independent Ukraine) in 1958-1994 that became a byword for shoddy, uncomfortable, and breakage-prone cars in (post-)Soviet culture.

[4] On January 23, 2017, the US announced its withdrawal from the Trans-Pacific trade agreement.

***

Translator’s Note

The article was written in April 2016 and reflects the political and economic situation of the era.

 
🔊 Listen RSS

At his blog Greg Cochran raises the issue of the Great Stagnation.

decline-in-growth

Basically, GDP per capita growth rates throughout the developed world have plummeted relative to the levels of 1950-1973 (the years of the miracle economy, Wirtschaftswunder, trentes glorieuses, etc).

They are however more or less typical of growth rates earlier in the century, substantially higher than in the 19th century, and still cardinally different from the Malthusian stasis that characterized most of human history (when technology increases led to bigger populations but no improvements in individual wellbeing, at least in nutritional terms).

So the question could also be put as: What made the third quarter of the 20th century so special?

(1) Long-term GDP per capita growth is ultimately a function of growth in total factor productivity, or the “A” part of the Cobb-Douglas production function (where GDP = A*Capital^0.3*Labor^0.7).

(2) Total factor productivity is itself, for the most part, a function of technology, including social technology (otherwise known as institutions); and of aggregate cognitive power, which determines the efficiency with which said technology can be utilized.

Now let us look at each of the above in turn:

(a) Social technology – In general, in most places – within the OECD, at least, as a criterion of inclusion – the best mix of institutions for maximizing economic output has already been found and implemented. There are, to be sure, substantial differences in ease of business and hours worked between, say, Italy and the US; but said differences are marginal, not cardinal, such as those between North Korea and the US.

Incidentally, the idea that in most areas of the world improving institutions further has entered the realm of decreasing marginal returns is hardly a fringe view in economics (e.g. Glaeser 2004).

(b) Cognitive power – Literacy was closing in on 100% by 1900 in the US and “core” Europe. At that same time, the Flynn effect took off in earnest, continuing to around 1970-2000 but tapering off or even going into decline by the turn of the millennium. So aggregate elite cognitive power is now increasing at much more modest rates than before.

(c) Technology – As per Apollo’s Ascent Theory, there is an equilibrium technology level for every level of aggregate cognitive power, with the rate of growth of technology being proportional to the gap between the current and equilibrium state. However, since the equilibrium level of technology is now seeing only very minor gains (relative to the trend for most of the 20th century), technological growth has also become more subdued.

(3) The decline in technological growth leads to a decline in the rate of GDP per capita growth in the advanced countries, which are close to the technological frontier.

(4) Why is China growing very fast? Because its growth is based on mere convergence to the developed world, which it can effect by dint of its First World-quality human capital. At a stroke, the reforms of the 1980s involved a quantum leap in social technology (i.e. abandonment of Maoist economics, an aberration that made Soviet-style central planning look rational) and the removal of barriers to technological diffusion from the developed world.

(5) Why was the 1950-1973 period that of the miracle economy?

The conventional explanation is that the world hit a sweet spot in which many interrelated productivity improvements linked to advances in electro-mechanics, decision theory, etc. in prior recent decades that had been marred by war and instability could now all be implemented at the same time. Another important factor is that back then industry accounted for a larger share of GDP than today, which enabled faster growth because productivity improvements in manufacturing are easier to implement than in services.

However, surely another major factor was that the Flynn Effect and improvements in cognitive technology, or what you could view as technology-to-make-technology (e.g. much better “cognitive sorting,” as described by Charles Murray and Richard Herrnstein in The Bell Curve) was advancing at a very rapid pace during that period.

Also, both Europe and Japan had been wrecked by the war, so they were very much below potential; and Japan especially still had ample scope for pure convergence growth, conveniently protected under the American security umbrella. Hence why most of Europe and especially Japan grew even faster than the US during that period.

There is also a “thermoeconomics” school (e.g. Ayres 2002) which argues that the Great Stagnation is explainable on account of energy conversion efficiency ratios beginning to hit plateaus from the 1970s.

ayres-us-gdp-forecasts1

Potentially, this could even lead to a decline in the level of equilibrium GDP, if technological growth slows down past the point at which it no longer fully counteracts increasing resource depletion.

That said, I don’t know to what extent I buy this thesis, and especially the impicit assumption that GDP must be quite tightly linked to material output.

 
• Category: Economics • Tags: Apollo's Ascent, Economic History 
🔊 Listen RSS

In response to Razib’s post.

Economically, Communist regimes are far from monolithic. You had:

  1. State capitalist/”market socialist” countries like today’s China and Belarus, the NEPist USSR, tradionally Communist-ruled Kerala for that matter. Note that even Western countries, e.g. dirigiste France, have flirted with this.
  2. Central planning as practiced from the late 1920s in the USSR, in which markets are near totally repressed but workers and enterprises still have some incentives to improve productivity.
  3. The complete lunacy that is Maoist economics, with no markets or incentives. You had a statistically bigger chance of dying on your job than getting a transfer.

Likewise these systems differ quite cardinally in the sorts of economic outcomes/per capita output levels they can achieve relative to a free market theoretical maximum.

  1. Probably 80%+. Any differences/problems will only emerge once you start moving into the highest tiers.
  2. Likely no more than 50%, at least beyond the heavy industrialization stage of development. With some help from high oil prices, the USSR reached ~40% of US GDP per capita in the 1970s (or 50% of that of the advanced West European economies), then remained at basically that same relative level until it collapsed. North Korea maintained GDP per capita (PPP) parity with South Korea until the 1970s, then flatlined, and is today no more prosperous than it was 40 years ago. East Germany was at 50% of Western Germany. Hungary did untypically well, but then again, its “goulash communism” was closer to (1); this I suspect is the main reason its post-Communist performance has been fairly unimpressive compared to Poland or Czechia, it having less of a “gap” to close relative to what it “should have been” in the first place.
  3. Maybe 20%.

In regards to India’s underdevelopment:

The Licence Raj didn’t help – according to the above schema, India would have been somewhere between (1) and (2) – but that couldn’t have been the main source of India’s development problems. Note that the USSR, North Korea, to some extent even Maoist China, they all managed to achieve basic heavy industrialization under systems far more market suppressive than the License Raj. Surely the main thing holding India back would have been its low level of social, especially human capital (low literacy rates, ~low 80s average IQ), development. Human capital >> institutions so far as economic growth is concerned in almost all cases.

Finally: I am not a fan of Communism in general but The Black Book of Communism is complete ahistorical propaganda dreck.

 
🔊 Listen RSS

In Western popular culture, and to be honest most of the rest of the world, Kazakhstan is most commonly associated with Borat and his putative homeland of slapstick provincial troglodytes. And following Nursultan Nazarbayev’s 98% win in the recent elections, and his reaction to it

I apologize if these numbers are unacceptable for the super democratic countries but there was nothing I could do.

… the casual observer might feel that it has some elements of truth to it. He would be wrong, and in reality, Nazarbayev has nothing to apologize for.

To be sure, the recent Kazakh elections were neither free and fair, and his 98% win was completely made up – no concrete voter numbers were given, just the percentages of turnout per hour by region, which fluctuated in statistically impossible ways. But there’s no question that Nazarbayev would have won regardless. Western opinion pollsters have consistently established his approval ratings at around 80%-90% of the population, which is not that surprising considering the immense progress the country has seen under his stewardship.

It is not at all obvious that it should have been this way in 1992. On the plus side, it had ample oil reserves, though as yet little production. But it was also landlocked, afflicted with the structural economic distortions common to the whole ex-Soviet space, and most worryingly, riven by pent up ethnic divisions and historical resentments. There was no particular good reason why Kazakhstan should not have pursued a politics of vendetta against Russian speakers and its Russian legacy; all the prerequisites for it were there.

Though Cossack penetration dates back centuries, much of what is now northern Kazakhstan had only been settled by Russians (and Ukrainians) from the 1880-90s, when the area was first opened to mass cultivation; this demographic shift was given a further impetus under the Soviet industrialization campaign, which saw the appearance of major new cities like Karaganda on the steppes. A traditionally nomadic people, the forced settling of the Kazakhs into the new cities and farms in the early 1930s might have destroyed as much as a quarter of their population. As with Ukraine, however, it was only during the Soviet period that the Kazakhs truly came into their own as a modern nation, to the extent that there was mass rioting on the part of Kazakh nationalists when Gorbachev appointed an ethnic Russian to head Kazakhstan for the first and last time from 1986 to 1989. What if one of those “activists” had come to power in 1992?

Well, assume that the Russian military would not have set up military surplus stores near the Kazakh borders, and ended up annexing northern Kazakhstan and reducing it to a rump state around Almaty. At a minimum, even more Russians would have emigrated from Kazakhstan in the 1990s, whose population dropped from a peak of 6.3 million in 1989 to 3.8 million by the time of the 2009 Census. At first glance, this might appear to be a good thing, at least from the Kazakh nationalist perspective. The problem is that they would have also lost most of the people staffing critical technical positions in industry; according to a joint study by Richard Lynn and Andrey Grigoriev, the mean ethnic Kazakh IQ is around 82, which would make the Eastern Slavs there a kind of cognitive elite.

The Russians have a mean British IQ of 103.2 and comprise 23.6% of the population; the Kazakhs have a mean British IQ of 82.2 and comprise 63.1% of the population; the Uzbeks have a mean British IQ of 86.0 and comprise 2.8% of the population. Weighting the IQs of these three groups by their percentages of the population gives an IQ of 87.9 for Kazakhstan. These three groups comprise 89.5% of the population. The remaining 10.5% consists of Chuvash, Tartars, Uyghurs and other south Asian peoples. Early studies of intelligence in the former Soviet Union found that these peoples had lower IQs than ethnic Russians (Grigoriev & Lynn, 2009). Their IQ is likely about the same as that of Kazakhs (82.2). On this assumption, adding this fourth group and weighting the IQs of the four groups by their percentages of the population gives an IQ of 87.3 for Kazakhstan.

Without them, their GDP per capita (PPP adjusted in 2011 US dollars) would have likely been closer to that of Uzbekistan ($5,000 and 5% Russian population share) or Tajikistan ($2,500 and 1% Russian population share) than to their current $22,000, which is similar to that of Russia, Poland, and the Baltic states.

kazakhstan-gdp-growth-1990-2014

Above is a graph of GDP per capita (PPP adjusted in 2011 US dollars) in some of the biggest and most representative former Soviet states. Since independence, Kazakhstan has virtually converged with Russia – a not unimpressive achievement, taking into account the population cognitive gap which if anything widened with the large-scale emigration of Russians, Ukrainians, and Germans – and has even overtaken Latvia, one of those Baltic “star reformers” which joined the EU and NATO and gets good scores all the usual democracy and economic freedom NGOs. It has also left Ukraine in the dust, it being evident that hard work and good management are for some reason better for economic growth than quacking about European values and having color revolutions every decade.

kazakhstan-gdp-growth-relative-1990-2014

And here is another graph, showing Kazakhstan’s performance relative to its position in 1990. Barring Belarus, yet another unlikely success story, it has performed better than both Latvia and Russia, and incomparably better than Ukraine. No wonder that Nazarbayev has 90% approval ratings!

What is the secret of his, and Kazakhstan’s, undeniable success?

In short, it is pragmatism over ideology. The narrow-minded nationalist would have demanded Russians learn Kazakh or go home. Nazabayev made Kazakh the official language, but at the same time denoted Russian as “the language of interethnic communication,” a status not unlike that of English in Lee Kuan Yew’s Singapore. Incidentally, and unsurprisingly, Nazarbayev is a big fan of LKY, naming him as one two “eminent founding statesmen” (the other is Charles de Gaulle), and his policies reflect these beliefs: Low level economic liberalism, high level state industrial policy and financial management (the oil windfall has not been squandered, but stored up in an investment fund), and a commitment to intelligent authoritarian leadership that does not however overspill into the tyrannical brutality that you see in neighboring Uzbekistan or Turkmenistan.

The middle class will not emerge without a sustainable economy which cannot exist without a sufficiently strong and wise leadership capable of getting the country out of free-fall.

Unlike LKY’s Singapore, corruption is pretty high; then again, pretty much no strongman apart from LKY ever managed to solve this. Even so, corruption in Kazakhstan is managed and contained – i.e., it is a “known quantity” – so it does not really scare away businessmen and foreign investors. Revolutions bring with them redivisions of the spoils, so elites are very hesitant to commit to long-term development projects in unstable countries like Ukraine or Kyrgyzstan; instead, their incentives are to maximize extraction in the here and now, before new people take their places at the trough. In stable authoritarian polities like Kazakhstan or Belarus, the people in power have more of an incentive to promote development because they have a reasonable degree of confidence that they will still have access to a what would be a much bigger pie a decade hence. It’s basically Mancur Olson’s theory about “roving bandits” vs. “stationary bandits” – the latter tend to be much better, because they are invested in the longterm success of their demesnes.

This pragmatism extends to foreign relations. Kazakhstan is on good terms with pretty much everyone who matters. It is in good standing with Russia; Nazarbayev was, in fact, the first post-Soviet leader to propose something along the lines of the Eurasian Union. But he is no Russian stooge either. Separatism and even talk of separatism are harshly suppressed, and all the more remarkably, this was done with Russia’s willing acquiesence: Eduard Limonov, a National Bolshevik and once Putin opponent, served two years in prison for allegedly trying to raise an army to “liberate” north Kazakhstan in the early 2000s. The capital was moved from Almaty to ethnic majority Russian Astana in the north, which gave Russians more of a reason to feel invested in Kazakh statehood while at the same time filling up a strategic city with ethnic Kazakhs to the extent that it now has a big Kazakh majority. This is a microcosm of changes taking place across the country as a whole, as highly fertile Kazakhs push up their share of the population back to where it was before Stolypin’s time. Over the longterm – i.e., another generation or so – this will likely solve Kazakhstan’s demographic/ethnic Russian northern majority problem in its entirety.

As the incarnadine cherry on the cream and custard pie, this careful equidistancing between Russia and the West, and his economic liberalism, has made Western elites very much appreciative of Nazarbayev. No American NGOs bother pushing for patently ridiculous concepts like free elections, or human rights, while holding them near sacrosanct in less wholesome countries, like Russia or Ukraine.

Here is Dick Cheney in 2006:

A day after scolding Russia for retreating on democracy, Vice President Cheney flew to oil-rich Kazakhstan yesterday and lavished praise on the autocratic leader of a former Soviet republic where opposition parties have been banned, newspapers shut down and advocacy groups intimidated.

Cheney stood next to Kazakhstan’s longtime president, Nursultan Nazarbayev, in a marble hall of the presidential palace in Astana and congratulated him on his country’s vibrant economy. His tone was markedly different from the tenor of his remarks about Russia a day earlier during a stop in Lithuania, when he accused Moscow of violating its citizens’ rights and using “intimidation or blackmail” against neighbors.

In the course of a 395-word opening statement, according to a White House transcript, Cheney pronounced himself “delighted” to be a guest of Nazarbayev, saying “I consider him my friend” and adding that “the United States is proud to count Kazakhstan as a friend.” Cheney professed “great respect” for Nazarbayev and said that “we are proud to be your strategic partner” and look forward “to continued friendship between us.”

Asked about Kazakhstan’s human rights record, he expressed “admiration for all that’s been accomplished here in Kazakhstan” and confidence that it will continue.

Up to 70 striking oil workers killed in 2011.

Who cares? Who even knows about the Zhanaozen massacre? Of course the Russian protesters who threw rocks at the police in the Russian Bolotnaya protests in May 2012 were a much more grievous violation of human rights. After all, Brussels, Washington, and Freedom House all tell us so, and surely they wouldn’t be doing it anything but the most altruistic and humanistic reasons?

Just a couple of days ago in Salon: Our stunted democracy could learn from Kazakhstan: Another Bush/Clinton race doesn’t look free to the rest of the world. There are of course many things Nazarbayev’s Kazakhstan has gotten right, but democracy isn’t one of them… unless you wish to abolish it entirely.

 
🔊 Listen RSS

The map below shows the shifting location of the world’s economic center of gravity. It was compiled by McKinsey and reproduced by The Economist.

All is broadly as one might expect. In pre-industrial times, the world’s economic center of gravity was always basically triangulated between India, China, and the Roman Empire (later North-West Europe). By 1913, the US had became a significant world power, and in mid century it had drawn the center of gravity out into the North Atlantic. Since then the rise of the USSR, Japan, and then China, SE Asia, and India, started shifting the ball east and south at an accelerating pace. Today the speed of this transition is 140km per year. So there you have it: A cartographic representation of The Rise of the Rest.

By 2025, as shown on the map, the ball will be located somewhere in the Altai Mountains of Siberia. After that it will probably take a small dip south as India starts becoming much more prominent. Eventually however it will start going north and west again as the Arctic opens up and countries like Russia and Canada start growing much more rapidly as the century draws to a close. The cycle will retrace its ancient path.

(Republished from AKarlin.com by permission of author or representative)
 
🔊 Listen RSS

Many Communists, leftists, and even patriots (I’m sorry to say) have a pronounced tendency to make out the Soviet economy as not quite the resounding failure it really was – or even to paint it as a success story that was only brought down by perestroika and liberal reforms.

The above chart – based on historical GDP per capita (Geary-Khamis 1990 Int$) by Angus Maddison, compiled by liberal economist Illarionov, popularized online by Lopatnikov, and Starikov – purports to destroy two “myths”: That of (1) Prosperous Tsarism, and (2) The ineffectiveness of the Soviet economy. After all, the average Russian went from being 40% as rich as the average American in 1885, to only 23% by 1917; whereas during the Soviet period, despite the turmoil of two major wars, Russian incomes reaches a relative peak at 40% of American levels during Brezhnev’s “stagnation” period.

These is however a glaring hole in this logic, namely that (1) relatively slow growth under late Tsarism reflected a permanent state of affairs, as opposed to the heavy but temporary burden of a large rural, illiterate population; and (2) that a level of per capita GDP that is a mere 40% of what Americans enjoy was in any way a fulfillment of Russia’s potential during the 20th century. In fact, graphical comparison with other countries shows this to be almost certainly false.

I replicated the graph comparing Russia’s historical performance relative to the US, but adding in another reference – those south European countries that were broadly comparable to Tsarist Russia in terms of economic development at the turn of the century (i.e. both were backward), but were spared from the distortions of central planning. (I could only find figures for the Russian Empire/the USSR as a whole, not Russia specifically, hence the slight disparity from the first graph; but the trends would remain the same). You can click on the graph to view it in higher detail.

On examination, several things became clear:

(1) While it is true that Russia was losing ground relative to the US under late Tsarism, or at least until 1905 (see first graph) – the same was true for all other backward European economies. In fact, the Russian Empire tracked Portugal almost exactly. But bear in mind that Russia in 1870 was 90% rural and illiterate, a state of affairs utterly nonconductive to industrial development; and agriculture’s potential for productivity gains is extremely limited, especially in the context of the system at that time. In contrast, the US was almost universally literate and embarking on its great industrial boom. It is no wonder then that the relative gap between the US and Russia increased from 1870 to 1905 (why the gap existed in the first place can be traced back centuries and is far beyond the scope of this post). Notice that the same thing was happening in all the other similarly backward countries: Portugal, Spain, Ireland, to a lesser extent (but more developed) Italy also all lost ground to the US from 1870-1913.

(2) The Soviets inherited Tsarist infrastructure, hence the period until 1925 was simply one of restoration. It should also be noted that the literacy rate by 1916 was around 50%, i.e. in terms of human capital development, much of the legwork had already been done; that is, the country was ALREADY ripe for a faster rate of industrialization, that would have happened regardless under any political regime. Nonetheless growth began to flag by the late 1920′s, as Tsarist-era production levels were restored. It was only further turbocharged from 1930 on by forced savings via collectivization and consumption repression, and German and American investment. But even so note that the sharp rise in the early 1930′s was in large part an artifact of the Great Depression that wracked the US, and that in that period ALL countries rose upwards, and that the USSR failed to make substantial gains on the US standard of living following the mid-1930′s; indeed, Soviet GDP actually fell in 1940. Needless to say this growth was also achieved at much higher human cost than elsewhere.

(3) Everybody suffered from the wars and the collapse of trade during the 1940′s. The USSR did start recovering earlier, showing strong growth relative to the US during the 1950′s and to a lesser extent during the 1960′s; it also held its own against what were still the weakest West European economies, that is Portugal, Greece, Spain, and Ireland – although Italy sprinted far ahead. The fast growth during this period was structurally similar to the US some fifty years prior: The large-scale shift from agriculture to industry, which is a one-off in historical terms.

(4) Once this process started exhausting itself by the 1970′s, relative growth flat-lined at a base only 35% of America’s (or slightly more than 40%, taking into account only the RSFSR). By 1990, it dipped below 30%. Note that it is a linear downslope from 1975, well before perestroika or “reforms”. From 1970 a sharp gap began to develop with Portugal, Greece, Spain, and Ireland; by 1990, for instance, the weakest of this group, Portugal, was at 50% of US GDP per capita. European nations that a century ago were overwhelmingly rural, undeveloped and superstitious just like the Russian Empire had now pulled decisively ahead of Soviet Russia; during the 2000′s, Ireland briefly almost converged with the US! While as we all know, during the 1990′s, the Russian economy fell into a precipitous collapse…

(5) Yes, on the one hand, this collapse wouldn’t have happened had the USSR retained political authority and central planning. On the other hand, there does not appear to be any good reason that the USSR should have experienced a productivity spurt relative to the US; if anything the reverse as demographic prospects were deteriorating by the 1980′s (especially the pool of surplus rural labor was drying up) and resources for higher investment rates were hard to find (due to the demands of the MIC, and falling oil prices). Indeed, Goskomstat planners in the late 1980′s assumed growth to the end of the millennium would be around 1.5% per annum, i.e. even further decline relative to the US. In the big picture, Russia exchanged a very punishing transitional depression for the prospect of normal market growth, which has predominated since 1998, and the longterm possibility of real convergence.

fennoscandia-russia-gdp-usa-compared

Another interesting set of countries Russia can be compared to are Fennoscania, though with a word of caution – Sweden, Norway, and to a lesser extent Finland were in literacy (human capital) terms far ahead of the late Russian Empire. Note that Finland, relatively backward nonetheless, declines more relative to the US than its Nordic neighbors; again, presumably a function of its initial backwardness (highly rural, can’t grow fast). Its performance in the 1930′s is every bit as impressive as Russia’s, and unlike the USSR, it continues to rapidly converge with US living standards from the 1960′s onwards. Note that Finland was only a modestly richer subject of the Russian Empire in 1913 than the national average.

russia-gdp-historical-compared

The final graph shows Russia’s historical performance relative to the US, Finland, Greece, and Portugal all in one. It is particularly telling that plotted against Finland, it is a story of almost inexorable decline during the Soviet period. While Russia did makes massive gains vis-a-vis Portugal and Greece under Stalinism, both the latter grew far more quickly during the 1950′s and 1960′s, with the result that they overtook the USSR in per capita terms at around 1970 and held a substantial lead by the 1980′s. This substantial gap became an awning abyss during the catastrophic nineties, however it is important to emphasize that the economy of the 1990′s was for the most part still a continuation of (well, the dissolution of) the stagnant Soviet command economy.

There are of course many caveats. Some might argue that what the USSR suffered from in inefficiency it made up for in more focus on developing human capital (which is the single most important factor for long-term productivity growth). I don’t see this as convincing. As mentioned above, literacy rates by the 1910′s were above 40%; the school enrollment figures of the mid-1910′s would only be reattained in 1925. It is simply wrong to say that the Tsarist regime neglected human capital, it was just developing it from a lower base and the Soviets merely took over that process.

The two biggest problems were that (1) the Soviet economy was seemingly unable to develop to more than 40% of the US per capita level, due to its inefficiency – that was its ceiling; and what’s worse, (2) it could not be dismantled without incurring a hyper-depression in the meantime. That second point is the reason why many Russian leftists continue to insist that the Soviet economy was a good thing, at least it held steady relative to the Americans under Brezhnev as opposed to collapsing in the 1990′s (which is in actuality the collapse of the Soviet economy), and being on the retreat throughout late Tsarism (for aforementioned structural reasons, but whose negative influence was weakened from the 1900′s); they also for some reason think that a GDP per capita at 40% of the US level is something to be proud of.

Addendum 6/22: I noticed Sergey Zhuravlev makes much the same arguments in his article Wily Lines

(Republished from Da Russophile by permission of author or representative)
 
🔊 Listen RSS

Pomeranz, Kenneth – The Great Divergence: China, Europe, and the Making of the Modern World Economy (2001)
Category: economy, history, world systems; Rating: 5*/5
Summary: Brad DeLong’s review; The Bactra Review; Are Coal and Colonies Really Crucial?

great-divergence-pomeranz It’s a rare book that not only vastly informs you on a particular issue, but in so doing overturns many prior conceptions you had on the general subjects. Now, Pomeranz is not a good writer. The text is slow and turgid, and readable only by dint of my interest in the subject. Many potential counter-arguments go unanswered (which is not to say that they sink the overall theory, as I will try to prove in this review). All that said, I have little choice but to give it a 5*/5, as this a truly counter-intuitive and deeply contextualizing work that overturns many of the triumphalist post hoc narratives of Western chauvinism.

This book attempts to answer the big question of world economic history: Why Europe? It does this by systematically comparing Europe with other leading world regions in the pre-industrial age such as Qing China, Tokugawa Japan, and India. The first big finding is that – contrary to the conventional wisdom – there were far more similarities than differences, at least between Britain and the most advanced Chinese region, the Yangtze Delta.

Essential Similarities Between Old World Cores

It is sometimes argued that special European demographic patterns, such as marrying late and a celibate clergy, had the effect of lowering its fertility and mitigating the Malthusian impoverishment held to be prevalent elsewhere. Another, often complementary, view is that European consumption markets were already far more developed than in China, which allowed it to hit the ground running (so to speak) once the preconditions for industrial revolution were fulfilled. However, China also saw fertility postponement, and there is ample evidence that at least until the mid-19th century the average quality of life in China as measured by life expectancy, median incomes, availability of consumer goods, etc. was at least as good as in Europe, probably higher, and as good as Britain in its most advanced region, the Yangtze Delta.

Although Europe was technologically ahead in some spheres – most visibly, guns, clock making, optics – China had a clear lead in irrigation, soil preservation and land management, and medicine (yields per acre in Europe only approached Chinese levels by the late 19th century). This is of no small consequence in pre-industrial societies hewing to the laws of Malthus. As in China, per capita food and fuel availability declined in Europe up until the mid-19th century century; only in Britain was this in significant part mitigated from 1800 by the windfall of “coal and colonies” (much more on this later).

Finally, there’s the argument that European capitalist institutions and markets were better developed and thus kick-started its growth. But again, the evidence Pomeranz marshals convinces that, if anything, China was substantially more “capitalist” (in the laissez-faire sense) than Europe. There were far fewer monopolies, and no internal trade barriers – contrast this, for example, with ancient regime France – and as a consequence, the volume of trade flows (in grains, sugar, timber, etc) were far higher within China than in continental Europe. The civil service was professional and meritocratic, whereas in Europe this only came to be in the 19th century. Markets for labor and products were freer in China; guilds had much less political influence than in Europe. Bound labor and feudal obligations remained prevalent far longer in Europe (and India) than in China, where it had long ago become marginal; for instance, the settlement of Taiwan for the cultivation of sugar – China’s equivalent of the Caribbean islands – was done by free labor. Though credit was cheaper in Europe – or, at least, in Holland and Britain – but to cut a long story short, there is (1) no evidence that this made crucial industrial activities unprofitable or impeded further pro-industrial mechanization, and (2) the credit system was more developed in India relative to China and Japan, although it was far more backward in general.

One major factor that Pomeranz glosses over is the impact of the Scientific Revolution. Though Chinese scientific achievements are under-appreciated – for instance, it matched Western mathematical achievements up to and including those of 16th century Italy – it is undeniable that Europe took a commanding lead from about the mid-16th century. There was to be no Chinese Kepler or Newton. But impressive as it was, you do not need calculus or laws of planetary motion to produce coal and iron (“as late as 1827 and 1842, two separate British observers claimed that Indian bar iron was as good or betterthan English iron”), and you certainly don’t need them to more efficiently produce textiles. As first textiles, and then coal and iron, constituted the first stages of the Industrial Revolution – up to the 1860′s or so – the European scientific base was almost entirely incidental to the initial industrial takeoff. Now obviously this scientific base did become vastly more important by the late 19th century, which saw the flowering of the electric, chemical, and international combustion engine industries; and those countries with particularly powerful research establishments, such as the US and Germany, did very well, catching up to Britain. However, by then China was already hugely behind.

Addendum 7/31: I almost forgot to mention this. This is probably obvious, but Pomeranz says nary a word about the contribution of cultural differences to the Great Divergence (in contrast to people like Landes who make it a centerpiece of their analysis, waxing poetic on the influence of the Renaissance, the Reformation, distinctive Western values of separation of church and state, etc). And rightly so. Culture is an intangible, and has very little explanatory power; furthermore, such explanations are frequently contradictory in time and place (for instance, whereas “Confucian values” may be cited as holding Chinese society back, they are now frequently invoked to explain the meteoric rise of the Asian tigers; you can’t have it both ways, folks).

The European “Miracle”: Coal and Colonies

Why then did Europe, and more specifically Britain, industrialize while China fell into an ecological impasse in which food production barely kept up with population growth? Pomeranz argues (convincingly, IMO) that the crux of the matter was a fortunate conjunctures and contingencies that overwhelmingly favored Europe.

First, colonies. Many recent scholars have dismissed their contribution; according to one article, overseas coercion could not have been responsible for more than 7% of gross investment in late 18th century Britain (and far less in Europe). But this neglects the vital role of the New World colonies – with their near endless land and natural resources – at relieving ecological bottlenecks in Europe, and in particular Britain. These included sugar (which acted as an additional source of calories as well as a hunger suppressant) and cotton (for clothing, and indirectly relieving pressure on pastures and timber for heating), and later in the 19th century, massive grain exports. All this “ghost acreage” allowed the British isles to support a far larger population than its existing carrying capacity could have, a highly urbanized one and relatively comfortable too (hence no Malthusian stress as in late Qing China, with its debilitating effects on political and social cohesion).

(Furthermore, even the aforementioned 7% figure could have been significant in a pre-industrial world. Due to high rates of capital depreciation, the net accumulation in capital stock then was only a small fraction of the overall savings rate. For instance, according to one calculation, that hypothetical 7% in “super-profits” – an increment to gross savings not purchased at the expense of consumption – could have significantly increased an otherwise minimal rate of net capital accumulation.)

And these goods – cotton, sugar, etc. – could be imported at very favorable terms of trade, because of another set of favorable conjunctures. The decimation of Native Americans due to European epidemiological superiority cleared the way for settlers, who supplied the Caribbean colonies with food and Britain with timber (thus relieving its Malthusian stress). Furthermore, the slave labor on the Caribbean islands – apart from the implicit coercion (and “super-profits” it enabled) – prevented them from developing their own proto-industrial sectors that could undercut British exports.

This is in contrast to what happened naturally in China, largely by dint of its free labor markets (as opposed to New World slavery or East European serfdom). The inner provinces began to expand their handicrafts and textiles industries, thus undercutting the (more advanced) proto-industrialization of the Yangtze Delta. This was a form of “import substitution,” and economically natural in those times because of far higher transport costs than is the case today. This was accompanied by a growing population in the inner regions. Unable to increase its industrial exports, and facing declining imports of rice, timber, etc., the most advanced Chinese regions, the Yangtze Delta and Lingnan, had to increase the labor intensity of their agriculture so as to keep food production abreast of their own population.

Obviously, the conditions did not exist for a Caribbean turn towards import substitution. The slaves themselves had no choice, and neither did the owners; they needed to produce commodities for export in order to pay for replacing slaves. And this all provided a growing (as opposed to declining) demand stimulus for British industry.

One additional New World advantage covered in some length by Pomeranz is the windfall of New World silver – which was, in large part, a free gift to Europe on account of the slave labor and monopolies used in its extraction. This allowed it to easily balance the books with trade in China for silk, porcelain, etc., which in turn could be used to pay for African slaves and New World resources. And Chinese demand for silver was huge, since it was remonetizing its economy to run on silver during the early modern period. Indirectly, it contributed to the formation of the Atlantic economy.

The second great British advantage was coal – that is, as an alternative to wood, located close to its main industrial centers (China too had coal, but it was far away from its main industrial centers, and transport costs were prohibitive). Coal relieved pressure on woodlands, which were in rapid decline, and – due to its virtually limitless nature – unbound the production possibilities of iron. Steam power was crucial to this expansion, not only by powering other processes but by permitting a huge expansion of coal-mining itself. “The Chinese had long understood the basic scientific principle involved – the existence of atmospheric pressure – and had long since mastered (as part of their “box bellows”) a double-acting piston/cylinder system much like Watt’s, as well as a system for transforming rotary motion to linear motion that was as good as any known anywhere before the twentieth century. ll that remained was to use the piston to turn the wheel rather than vice versa.” So the relevant technical skills were not unique to Europe. In fact, northern China had a huge coke and iron complex as early as the 11th century under the Song dynasty, though it was brought low by the multiple perturbations of the 12th-15th centuries (Jurchen and Mongol invasions, etc). The rest is worth quoting in extenso:

However, a number of factors militated against widespread Chinese (re)adoption of coal as a major fuel source. First, the reorientation of the center of Chinese development to the east and south meant by the Qing dynasty meant that its industrial cores were now located far from the big coal deposits in the north-west; the advantages of linking these regions by transport are only evident ex ante. Second, the best artisans were concentrated in the (low coal) Yangtze Delta or along the south-east coast, and serving a huge public demand for clocks and other mechanical toys. Third, “even if mine operators had seen how to improve their mining techniques, they had no reason to think that extracting more coal would allow them to capture a vastly expanded market.” Finally, and most importantly, the technical nature of extracting Chinese coal was profoundly different from that of extracting British coal; in fact, it made the deep extraction that enabled Britain to boost its output all but impossible.

English mines tended to fill with water, so a strong pump was needed to remove that water. Chinese coal mines had much less of a water problem; instead they were so arid that spontaneous combustion was a constant threat. It was this problem – one that required ventilation rather than powerful pumps – that preoccupied the compiler of the most important Chinese technical manual of the period… Even if still better ventilation had ameliorated this problem—or if people wanted coal badly enough to pay for this high level of danger – ventilation techniques would not have also helped solve the problem of transporting coal (and things in general) as the steam engines that pumped out Britain’s mines did. Thus, while overall skill, resource, and economic conditions in “China,” taken as an abstract whole, may not have been much less conducive to a coal/steam revolution than those in “Europe” as a whole, the distribution of those endowments made the chances of such a revolution much dimmer.

In contrast, some of Europe’s largest coal deposits were located in a much more promising area: in Britain. This placed them near excellent water transport, Europe’s most commercially dynamic economy, lots of skilled craftspeople in other areas, and – to give the problems of getting and using coal some additional urgency – a society that had faced a major shortage of firewood by 1600 if not before. And although timber and timber-based products were imported by sea, this was far more expensive than receiving logs floated down a river, as the Yangzi Delta did; the incentives to use (and learn more about) comparatively accessible coal were correspondingly greater.

Much of the knowledge about how to extract and use coal had been accumulated by craftsmen and was not written down even in the nineteenth century… Harris shows that French attempts to copy various coal-using processes foundered, even when they reproduced the equipment, because the production of, say, a heat-resistant crucible required very detailed knowledge and split-second timing acquired through experience – and the financial losses from making a mistake could be very large… Only when whole teams of English workers were brought over (mostly after 1830) was the necessary knowledge effectively transferred.

Thus we see that technological expertise was essential to Europe’s coalbreakthrough, but the development of that expertise depended on long experience (and many failures along the way) with abundant, cheap supplies. This experience was possible because artisan skill, consumer demand, and coal itselfwere all concentrated near each other. Without such geographic good luck, one could easily develop lots of expertise in an area with a limited future (e.g.,in using and improving wood furnaces) and not proceed along the track that eventually led to tapping vast new supplies of energy.

Furthermore, the adoption of the steam engine – whose synthesis with coal was what really generated the Industrial Revolution – was also highly contingent. It was the result of 200 years of use on British coal fields, which was both economical (free coal due to zero transport costs) and proximate to mechanics-minded artisans which could offer improvements. Nonetheless, it took until 1830 for the costs of energy per unit of power for steam-run textile machinery to decline precipitously; until then, water remained competitive with steam engines!

Take away some of the incremental advantage conferred by skill transfers from nearby artisans in other fields, the learning by doing made possible by the application to nearby coal fields, and the low cost of coal itself, and – as incredible as it seems to us today – the steam engine could have seemed not worth promoting.

So, in conclusion, Britain enjoyed two major advantages that the Yangtze Delta, the Lingnan region, and Japan did not: (1) a colonial system that allowed it to massively increase its effective carrying capacity while simultaneously stimulating its industrial production, and (2) conveniently located coal reserves in damp places.

Apart from Britain, Europe as a whole was nowhere close to an industrial takeoff at the dawn of the 19th century; and though the relative inefficiency of its land usage – and the gains from ameliorating that – allowed it to avoid a crisis for a few decades after 1800 (what Pomeranz calls the ecological “advantages of backwardness”), it was nonetheless approaching an an ecological bottleneck as in China (the 1840′s in particular are known as a time of dearth). This was at a time when the Industrial Revolution had scarcely began on the mainland, and if it had continued it would have required the diversion of more and more labor to working the land intensively, instead of industry. Could industrialization then have been sustained without coal, New World surpluses, and the already existing industrialization of Great Britain?

The general impression one gets is that not only was the “European miracle” in fact just a matter of fortunate conjunctures and contingencies, but that there was nothing especially preordained about the Industrial Revolution. No colonial surpluses; no easily-reachable coal or mechanical culture; perhaps, even no slavery (to enhance the efficiency with which colonial surpluses were extracted) – no industrial revolution. At least, not a few more centuries.

Additional Thoughts for Consideration

(1) Needless to say, I now largely reject my previous theory Walled Off By Complexity: Did China Stagnate Because Of Its Writing System? I don’t think the hieroglyphics system did China any good, but they certainly can’t explain The Great Divergence.

(2) One important factor that I didn’t see Pomeranz mention – the Atlantic is much narrower than the Pacific! China was building ships as advanced as that of the European Golden Age of Navigation as early as the 15th century, and in huge numbers far exceeding the capacity of any single European state. Navigation itself wasn’t a problem either (note that it was China that invented the compass, topographic maps, etc). But it didn’t practice overseas slave-trading, and those Chinese that settled new lands – be they in Taiwan, or the inner provinces – tended to develop their own proto-industrial economies, which in the presence of conditions of free trade and free markets for labor and products eventually undermined the volume of trade.

(3) The “rise of the West” was in large part built on systems – mercantilism, military-fiscal competition, etc. – that universal Western ideology now condemns. Ironically, the BRIC’s (including most prominently China) are the ones using mercantile strategies to catch up to the West.

(4) What’s even more curious is that it wasn’t only Britain, and then the rest of Western Europe that overtook China; so did Russia. Now Russia was undoubtedly far, far behind both China and the West practically since its inception until (relative to China) about the late 19th century. It had serfdom, very small urban class, a very de-commercialized economy, with luxury consumption being indulged in by a tiny elite, etc. Nonetheless, despite this backwardness – an inevitable one, due to ecological reasons I have written a lot on this blog about – the state did nonetheless successfully leverage what meager surpluses it had to maintain a rough military parity with the West and play the role of a Great Power. So, yet more evidence that strict adherence to neoclassical economic development isn’t all that it’s hyped up to be.

(5) An interesting counter-factual to consider – what if there had been no easily accessible coal in Britain or the Rhineland, and if Columbus had found no New World and instead sunk somewhere in the middle of a globe-spanning World Ocean? Could there have been an industrial revolution? Is industrial revolution contingent on “coal and colonies”?

Or would Europe instead have become something like Qing China in the 19th century, increasingly politically debilitated, and economically stagnant – any improvements in land management and increasing labor intensity swallowed up by an inexorably growing population? Could it, indeed, have collapsed, perhaps after it grew critically weak and was invaded by the Russian Army much like China was by the Jurchens, the Mongols, the Manchus, etc., and pillaged by British pirates much like Japanese pirates preyed on a weak China in the 17th century Ming twilight? Indeed, could it eventually have collapsed into yet another Dark Age as followed the Roman Empire, in which much of the vaunted knowledge of the Scientific Revolution would be lost to memory, with the 18th century to early 19th century coming to be seen as a bygone “Golden Age”?

PS. H/t to Doug M. for bringing this book to my attention in the first place.

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

The standard view of the American economy is one of exponential growth: even if interrupted by a recession once a decade and a Depression once every two generations (the 1890′s, the 1930′s, the 2010′s?), the engines of industry would always come back roaring again. Output per American could always be expected to increase as it has from 1790 until the present day. There has never been a decade, even during America’s two Depressions, when US GDP was lower at the end than at the beginning.

However, another point of view on the US economy can be developed by drawing on observations of factors such as median income, energy consumption and inequality. Broadly speaking, this picture is one relative stagnation from 1890-1940, and again from 1973-today, punctuated by the truly remarkable “miracle economy” of the post-war boom. Furthermore, the US is now about to transition to a new phase: economic stagnation and anarchic stasis, to be followed by oligarchic Caesarism. This first post will be, for now, just a series of observations that I believe to be inextricably linked, but lack the theoretical foundations to put on a sound footing. Feel free to skip it, as it might be hard to follow and I’m mostly writing it to get greater understanding for myself. More polished version(s) to follow.

1. Median incomes (the ones that matter to ordinary Americans) tell a radically different story from the GDP figures. As shown below, they remained at a virtual plateau from 1914 to 1940. During the WW2 mobilization, spare capacity filled up, as factories began to produce the tanks, ships, planes, jeeps and misc. that played a crucial role in the Allied victory. After the war, what might have been a new plateau from the 1940-50 base accelerated, literally driven by the automative revolution; it is during this time that the US became a suburban, oil-based civilization.

ave-us-income-saez

However, the oil shocks of the 1970′s threw a jackhammer into that arrangement. Since then, the only discernible rise took place in the 1990′s: a period that saw the opening up of the Chinese “reserve army of labor” and the Soviet resource base to global markets. These began creating powerful deflationary effects in the US. But things went into reverse altogether during the past “lost decade“.

The median household income in 2008 was $50,303. The median household income in 1999, expressed in 2008 dollars, was $52,748.

You’ve got to figure 2009 will see another decline in income, in which case Americans will end the decade significantly less well off than when they started it. We’re not just treading water. We’re going backwards. …

Still, the 2000s have been especially barren. Median income rose only in three years—2005, 2006 and 2007, and even at the cyclical peak in 2007 it was below the levels of 1999 and 2000.

2. More on the energy developments during the period. During 1950-70, the US enjoyed very rapid growth both in absolute energy consumption and the energy efficiency of its techno-industrial base. Therefore, the quantity of “useful work” available for exploitation by American labor and capital increased very rapidly.

But this growth moderated since the 1970′s. Given the continuing reduction in the EROEI of oil, the peaking of the net energy flowing into the US economy from coal in 1998, and the turn to costly shale gas to maintain natural gas production volumes observed within the last decade, this trend must have only strengthened in the 2000′s. Graphs are taken from Economic Growth and Cheap Oil (Robert Ayres).

us-exergy-services-supply

The growth in the”technical efficiency” with which exergy is converted to “useful work” by the American economy has been flattening since the 1980′s (probably due to diminishing returns to investments into more efficiency: see Tainter, etc). Though Obama’s drive to increase energy efficiency is laudable, it will be hard to achieve big results given that most of the low-hanging fruit have already been picked.

technical-efficiency-us-exergy-services

If further improvements in technical efficiency are low, then the US will be going into a permanent hyper depression in the years ahead according to Ayres’ calculations. As of today, the observed results match the Low forecast.

ayres-us-gdp-forecasts

There’s little reason for hope. The potential for squeezing more “useful work” – the single biggest factor in GDP growth – out of the current US energy base are very limited. Coal, oil and natural gas are roads to nowhere. While nuclear and renewables are far more sustainable in the long-term (for maintaining an industrial base), they need 1) several decades to be build up and 2) given the same investments in K and L generate less useful work than today’s hydrocarbons because of their low EROEI’s.

3. Another interesting thing is that the period of stagnant US median incomes is linked with rising inequality. (This explains the continued moderate growth in consumption and GDP – its just that since 1973 a very large portion of it has been accruing to the guys at the top of the pecking order).

Now in stagnant systems – e.g. overpopulated agrarian societies – this is explained (Turchin) by the fact that land, food and credit prices have a tendency to go up, benefiting the elites (landowners, financiers, etc) relative to the rest of the population. While similar processes apply to industrial societies (see Marx), its effects can be combated by the powerful redistribution mechanisms available to the modern state (that were lacking in the agrarian states of yore). Hence, despite the fact that since the 1980′s Western Europe has been on much the same vastly lower growth trajectory, inequality in states such as France and Germany has remained low.

On the other hand, the US – having progressively deregulated the financial sector and knocked down marginal tax rates – has experienced a massive increase in inequality that may now be approaching the levels of the Gilded Age.

marginal-tax-rates

4. Fertility rates are linked to economic conditions. One of the many explanations for the post-war baby boom in the US is that soldiers were returning home, social conservatism, etc. But none of them are very convincing as comprehensive explanations.

us-fertility-rate

Instead, one may interpret the above graph as follows:

  • 1900-1940: stagnant median incomes; TFR approaches replacement level rates as the US ceases being an agrarian society.
  • 1940-1970: the baby boom as US middle class living standards expand rapidly. Populations tend to expand rapidly when their resource base expands. Interesting why TFR expansion started dropping in early 1960′s, though: perhaps looking at cohort TFR’s (which adjust for average age of childbearing) would yield a better fit with the economic stats?
  • 1970-2010: roughly replacement level TFR’s, stable median incomes.
  • 2010+: if median incomes begin to fall in the future, due to energy constraints and/or fiscal collapse, we might well see the TFR drop to something like 1.5.
  • A comparison: Russia completed its post-agrarian fertility transition by the mid-1960′s; after that, the TFR remained stable at around 1.9-2.1 until 1990 (as we know this was a time of zastoi / stagnation, esp. in the later part of this period). But in the 1990′s Russia’s TFR fell off a cliff, along with real living standards (not only did average incomes fall, soaring inequality made most people’s income fall even faster). The nadir was reached in 1999 (TFR=1.16) and has since risen up to 2009 (TFR=1.56).
  • Of course, non-material factors also play a big role: e.g., why is German TFR so much lower than France’s? etc…

5. Preliminary speculations. The reason I’m very skeptical on the Keynesian / Krugman vs. Austrian / Tea Party “debate” is that both positions, though ostensibly opposite, are based on the same presumption: that further economic growth is still possible, if only their policy prescriptions were to be followed. (In a recent Oil Drum posting Gregor MacDonald laid out my thoughts very well in Hollow Men of Economics.

So, Krugman draws many simplistic graphs showing how growth was bigger during the (Keynesian) 1950′s-1960′s than during the (monetarist) 1980′s-2000′s, ergo, the government should throw more and more money at the economy, the deficits and debts be damned. Then there his ridiculous “invisible” bond vigilantes argument: if the US can sell debt so cheaply, why should we worry about exploding budget deficits? Only a few things wrong with this theory…

  1. It’s a complete strawman! By the time the bond vigilantes take off their invisibility cloak, the costs of servicing debt – much of it now in short-term bonds which have to be frequently rolled over – will begin to spike, leading to an irreversible death spiral.
  2. Makes the questionable assumption that the US will grow at 2-3% in the future, whereas 1) the necessity of deleveraging, 2) the exergy situation and 3) the fragile geopolitical situation makes this highly unlikely.

Of course, the Austrians / WSJ are no less insane. If only the rich could get more tax breaks, if only banksters and oil corporations could be coddled even more than they are already, everything would be fine and dandy and we’ll be growing our way into a Randian paradise of abundance.

Both sides UTTERLY fail to consider the vital factor of useful work to economic growth. Useful work is a function of exergy & technical efficiency. Exergy is likely to peak and go into decline within the decade, given the trends in the energy base; technical efficiency appears to have a trend of flattening out. If investors were to suspect there are no prospects for future growth, the credit system – the economic equivalent of fertilizer in agriculture – as it exists today would collapse (why give out loans if there’s little prospects they will be repaid?), and the consequent drop off in investment will lead to depreciation overtaking and the capital stock beginning to contract. Finally, while the labor force will continue to expand, its quality will not because American IQ has been flat since around the 1980′s because of the cessation of the Flynn effect. (The *only* positive, productivity enhancing trend at work is the continued informatization of the economy, which may gain a boost with the appearance of ubiquitous, specialized and highly effective AI’s by the 2020′s.)

This is not an attractive view to take, because it basically means that whatever the government does or doesn’t do, GDP decline is inevitable. But the alternatives aren’t rosy either:

  • If Krugman “wins” the debate: the economy sputters along for a few years, never getting onto a sustainable growth trajectory. Awning budget deficits and ballooning of the public debt (which is now at 140% of GDP if you also count local/municipal debt and Freddie Mac/Freddie Mae liabilities). The result: an Argentina 2000/Latvia 2009-style collapse, probably sometime around 2012-15 (might be triggered by a “geopolitical shock”). End-result: some kind of American Caesarism.
  • If Austrians “win” the debate: the decline is grinding and gradual, rather than sudden and catastrophic.

Instead, it would perhaps be a better idea to craft policies in such a way as to minimize the harm done for (as I suggested in my abortive “Collapse Party” project) and at the same time make the foundations of the American state stronger.

  • Reintroduce the high marginal tax rates of the 1950′s-60′s to reduce inequality and shift the burden to those able to shoulder it. Might prevent the soaring inequality / corruption / resentment that leads to crony Caesarist outcomes. Problem: ACHTUNG SOCIALISM!
  • Allow the financial system to contract / collapse as needed. Today, it is a rotting dead weight on the US – both economically (there’s no need for such a huge financial sector in the first place) and morally (they are a class apart from normal Americans). Problem: institutional capture means same banksters wield immense influence over both parties of power.
  • Reduce military expenditures. There’s a lot that can be cut. First, the metastasized “war on terror” apparatus. Second, the expeditionary/naval component can be cut. There’s no long-term hope of containing China, but the Western US itself is secure. The Pacific Fleet can be reduced. Get out of Afghanistan. On the other hand, maintaining dominance in the Atlantic (core US interest) and the Middle East (oil) is useful. Third, saved money can be used to 1) continue research into next-generation military technologies, 2) reducing deficit. It’s not really a choice, actually. Military contraction is inevitable in the next decade: the only question is whether it will be uncontrolled (as during 1990′s Russia, when c.70% of Soviet military assets depreciated into junk) or controlled (with the result that core strengths will be preserved). Problem: suggesting reductions in military spending is unpatriotic & goes against the powerful defense & MIC lobby.
  • Obamacare is imperfect, but one of the administration’s best achievements. Leave as is.
  • Use savings from cutting off subsidies to the MIC & financial mafias – and the bigger tax intakes – to launch a coordinated restructuring of the US energy base. To accelerate the transition to sustainability, start planning and building lots of new nuclear power plants, and renewables. Start phasing out coal. First, makes a positive contribution to helping the world avoid catastrophic climate change. Second, this transition is in any case inevitable once the EROEI of hydrocarbons dips to lower levels – but by then, switching will harder because there’ll be many other challenges on the plate (e.g. mitigating the increasing effects of global warming; coping with the dearth of capital). So make a head start now. Problem: requires the kind of forward thinking that institutions are chronically incapable of.
  • How do solve all these problems? Obama needs to take a gamble, revolutionize his leadership, launch an all out political assault against the enemies of progress. Problem: not going to happen.

And that’s the story of it.

If I had to bet on it, I’d say US GDP per capita will be 5-25% lower in 2020 than it is now – even though we’re in recession. (Unlike with the 1930′s Depression, there’s no abundant, very high-EROEI energy subsidy on the horizon waiting to propel the US to another level). Inequality will be no lower than today, because of the power of today’s stakeholders in the system, hence – coupled with lower output and the waning of the credit system – median incomes will be a lot lower; hence, many more people in outright destitution. The center of gravity (economy, population) shifting back to the north and east (above all the Great Lakes region) from the south and west. The Presidency will have transitioned to some kind of Caesarism, served by a clique of politically-connected oligarchs. Any imperialist adventures now confined to the Western hemisphere. The citizenry too atomized, apathetic and preoccupied with quotidian concerns to do much about it.

I appreciate your thoughts and criticisms of this post, but do note that it is not meant to be final or “serious”; more like a strange mix of relatively obscure economic concepts, lazy extrapolations and personal impressions. As I said at the beginning, I hope to refine and connect these ideas into a more rigorous and logical framework in the future.

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

It is now nearly 20 years since market reformers began liberalizing the economies of Eastern Europe, or as some smart-ass put it, trying to revive the fish in the centrally planned fish stews. These stews, cooked to diverse recipes from goulash socialism to Soviet “structural militarization“, were subjected to a wide spectrum of overlapping treatments ranging neoliberalism (the Baltics), market socialism (Belarus), and mercantile corporatism (Russia). Other fish stews just stagnated in anarchic stasis (Ukraine). Twenty years on, it is time to observe the oft-surprising results.

I used Angus Maddison’s historical statistics, CIA figures for 2009 growth except where available the results from national statistical services (Belarus & Russia), and the IMF projections for 2010 (adjusted upwards for non-Baltic nations with sharp recent falls in GDP to account for their stronger-than-expected recoveries) to create GDP (PPP) per capita indices for post-Soviet nations and Poland (generally representative of Visegrad) where the output levels of 1989 – the year of peak Soviet GDP – are set to 100.

So which national ponds look like they’ve been subjected to grenade fishing, and which ones have the liveliest fish? Drumroll…

Belarus! At least amongst the industrialized nations, this market socialist economy – mocked and despised by proponents of the Washington consensus – is now substantially more productive than it was in 1989, beating out all its peer competitors. Furthermore, unlike the Baltics or Russia, it remains one of the most equal societies on Earth. Belarus suffered less of the “catabolic collapse” observed in neighboring Russia and Ukraine in the 1990′s, and strong growth resumed earlier. This included growth in manufacturing – Belarus did not suffer from the widespread deindustrialization from which Russia has only recently, and just barely, recovered from in 2007 (and then lost again in 2009!) – and the country even developed a competitive micro-electronics industry. Interestingly, Belarus is also the only CIS nations with whom Russia had a negative migration balance (until 2005). It seems that the stability and benefits offered by Bat’ka outweighed his collective-farm-boss chique.

That said, Belarus’ relative success – shocking as it would be to neoliberal ideologues – should not be overstated. First, in 1989 it was one of the poorer members of the “industrialized nations”, and in standard macroeconomic theory, faster economic growth is, ceteris paribus, easier when you are further behind. Second, whereas Belarus is great for ordinary workers and pensioners, the more talented find it unpromising, even oppressive. Intertwined with an authoritarian political structure, the economic system is largely closed to those who don’t like toeing the party line.

Despite its economic depression from 2007, Estonia seems to have performed very well too. Enfused with post-independence optimism, it carried out its liberal reforms earlier and more completely than any other post-Soviet nation. As a result, it enjoyed a fast revival of growth from 1993, giving it a 2-year head start over Belarus and a 5-year one over Russia. Estonia is far richer and more transparent than Belarus, has a vibrant hi-tech sector, and more political freedoms (with the important exception of disenfranchised Russophones). Latvia has been somewhat less of a miracle economy. After the recent economic collapse, its economic output is now little bigger than the Soviet-era peak, and is much less equitably distributed.

In the bubbly days of 2006-2007 (and by bubbly, I do mean bubble), these economies became known as Baltic Tigers. Their liberal economic policies, balanced budgets, favorable geography, and low-wage skilled labor attracted huge credit inflows. This enabled a debt-fueled consumerist orgy, resulting in awning current account deficits. As the 2008 global credit crisis unfolded, investors took fright and capital inflows turned into capital flight. The house of cards fell down. The Baltics embarked on brutal wage deflation and budget cuts, especially in the worst-hit Latvia, to maintain their currency pegs against the Euro, acquire much-needed IMF financing, and reattain competitiveness. This is projected to take years – and that’s discounting both further shocks to the global financial system and political discontinuities (e.g. after the last Great Depression the Baltic nations became soft dictatorships).

The Balts cannot rely on a renewal of the old bubble, rising foreign protectionism precludes an export-led recovery, and the prospects for strong domestic consumption are dim because of the huge rise in debt levels. The IMF now forecasts prolonged below-trend growth, with GDP per capita only approaching their 2007 peaks by 2014 for all three Baltic nations (the same projections show Russia and Belarus converging to or overtaking the Baltic economies by that date). Just as for the old chasm between Marxism and “actually existing socialism”, whatever the merits of neoliberalism as a theoretical construct – its proponents will have to answer for its real-world disappointments.

Now we come to Russia, which has the region’s biggest and most important economy by far. It’s post-transition history is also highly complex. First, it cannot be stressed enough that the USSR did not collapse economically because of its inherent internal contradictions. It collapsed because Gorbachev aborted central planning, or more accurately ditched the coercive mechanisms that made central planning work (though granted the observable evidence of worker unrest and economic stagnation may have tipped his hand). In the absence of evolved market mechanisms, the “dictator’s surrender” only led to ruinous insider plunder, asset stripping and managerial misappropriation, all under the slogan of “liberalization” (true liberalizing reforms were far less wide-raging and generally implemented much later than in the Baltics). Output plummetted as barter arrangements replaced late Soviet scientific socialism.

As a result, Russia’s new capitalism developed in the most anarchic and perverse ways; indeed, it arguably had a greater resemblance to old Muscovite patrimonialism. A weak Tsar (President Yeltsin) bestowed rent-gathering rights unto his new boyars (the oligarchs) in exchange for their political support – a compromise he was driven to by the combination of 1) state weakness and 2) the perceived need to prevent the Communists coming to power at all costs. Putin’s cardinal achievement in his first term was to decisively shift the balance of power between Tsar and boyars back to the former, a fact confirmed by the arbitrary arrest and imprisonment of Khodorkovsky – the power-hungry robber baron who didn’t realize that the days of oligarch rule had passed. The economic crisis of 2008 led to the further reassertion of Kremlin power over the oligarchs – bailed out by a Russian state grown cash-rich from foreign energy sales, many are now little more than its glorified, well-compensated servants.

In the past decade, Russia has been in flux, metamorphosing from the chaotic, boyar-dominated, “appanage” atmosphere of the 1990′s, to the brave new world of Kremlin modernization dreams that are opening up the 2010′s. Three trends are now becoming dominant: 1) the state is becoming much more central in pushing Russia’s modernization through mercantilism (e.g. industrial tariffs), industrial policy (e.g. economic zones), and targeted investments in strategic and “sunrise” economic sectors (e.g. nanotechnology), 2) there is a concurrent, measured economic liberalization – from the 2001 flat tax reform to the raising of internal energy prices, and 3) there is a renewed attempt at social mobilization to fulfill the state’s development plans. In sum, a latter-day replay of the Petrine “revolution from above” (albeit one altered with the benefit of hindsight – Putin is careful to emphasize, even exaggerate, his Russian cultural patriotism, so as to avoid recreating the social divisions and unrest that tends to occur when a ruler is popularly seen as being in thrall to foreigners).

Russia’s post-1990 performance was far from stellar, though it should be noted that in overall per capita welfare it is still comparable to Belarus and only slightly behind Latvia (possibly ahead now) – not that much changed from the late Soviet period. Russia essentially lost two decades, like Latvia or Lithuania – and performed worse than Belarus, Estonia, and Poland (included in the graph for comparison).

This is not too surprising, since 1) Russia spent much of the 1990′s in “anarchic stasis”, a semi-failed state that had trouble maintaining any meaningful monopoly on violence, tax collection, and monetary emissions (the three vital functions of a state), 2) like the Baltics, Russia started from a relatively high base (it was already an industrialized nation), so it could hardly expect particularly rapid growth, and 3) the Kremlin only really began to focus on modernization as a priority in the mid-2000′s, as before it had been too preoccupied with consolidating the Russian state.

As I wrote in an earlier post on the Russian economy at the dawn of its late-2008 crisis (which was basically correct with the exception of the far too optimistic 2009 GDP forecast), Russia’s greatest weakness during the credit crunch was that its major corporations, the vast majority of them state or quasi-state, had come to rely on Western intermediation for accessing cheap credit. When the global credit wheel ground to a halt in late 2008, the first countries to be cut off were the emerging markets. (Having access to deep indigenous credit systems, nations like Brazil and China weathered the storm far better than Russian corporations and consumers who were suddenly cut off from cheap credit). Though the initial economic collapse was steep, Russia does not possess the long-term ailments of the Baltic states – debt has nowhere near the same level of penetration, the state remains incredibly cash-rich, and its strategic depth makes it largely invulnerable to any further retreat of globalization. Many forecasts now say that Russia will grow by 4% to 6% in 2010. In the longer-term, it has a comprehensive development plan and arguably good prospects for effecting an economic catch-up to the West.

Finally, far and away the worst post-Soviet performer amongst the industrialized nations is Ukraine. It never managed to reattain its Soviet-era level of per capita output, and that goal is now further away than ever. Comparable in its level of economic development to Belarus, Poland, and Russia in the late 1980′s, it is now far behind all three. Why? True, Russia had the gas reserves, but until the mid-2000′s Ukraine received vastly subsidized gas anyway. Furthermore, unlike Russia, Ukraine was nowhere near as burdened by “structural militarization” at the time of the collapse of the Soviet Union, nor did it retain prodigally expensive military forces or Great Power ambitions. It was also closer to Europe, directly bordering Poland. And besides, Belarus was in a similar position to Ukraine, but landlocked and shunned by the West to boot; but it nonetheless managed to do incomparably better.

I think the only good explanation for this retrogression is that Ukraine simply never left its 1990′s conditions of anarchic stasis. Its Tsar (or Hetman?) was always weak, Ukraine’s cultural cleft between Russian Orthodox East and Uniate West putting a glass ceiling to any ruler’s level of popular support at around 50% of the population. This constant problem with political legitimacy, experienced by both pro-Western and pro-Russian Presidents, stymied reform efforts and attempts to reign in oligarch power. Ukraine lagged well behind Russia, not to even mention the Baltics, in its economic liberalization, and its politicians remain representatives of oligarchic clans, not their puppet-masters as in Russia. Any sustained state-backed modernization scheme (e.g. on Putin’s Russia model) is doomed from the outset, while private investors and entrepreneurs are scared off by the unending political instability and lack of liberalization (in this respect, if Russia or Belarus is purgatory, Ukraine is hell). Long-term development is thus impossible under Ukraine’s conditions of anarchic stasis.

Below is a graph plotting the economic fortunes of the USSR’s less-developed nations (again per capita).

Azerbaijan‘s success is almost entirely tied up with the massive expansion of its oil production, especially from the mid-2000′s. Azerbaijan’s oil output rose from 0.2mn barrels a day between 1992 and 1998, to 0.4mn in 2005, and skyrocketed to 1.0mn by 2009, and as shown in the graph, the years of rapid increase were accompanied by amazingly high rates of GDP growth (up to 20-30% in a couple of years). A similar explanation would probably hold for why Kazakhstan‘s post-Soviet performance was substantially better than Russia’s, despite the many similarities between their economic systems – Kazakh oil production was 0.4mn barrels from 1992-95, 0.6mn in 1999, and 1.5mn by 2008.

(Russia produced only 22.6% more fuel energy in 2008 than in 1992. Its oil production went from an all-time peak of 11.5mn barrels in 1988, to 7.9mn in 1992, 6.0-6.5mn during 1994-99, 9.3mn in 2004, and 9.8mn by 2008 – i.e., correlated with general growth trends in its real GDP. Whereas the recovery in oil production accounted for a very substantial share of its GDP growth / recovery from 1999 to 2004, these effects became small after increases in oil production flattened out post-2004 due to geological factors (i.e. peak oil) and the political factors (the YUKOS affair); from the mid-2000′s, the main drivers of growth became retail, construction, transportation, manufacturing, and finance.)

Summation – Russia was recovering lost ground in oil production; Kazakhstan and Azerbaijan were gaining massive new ground. Translated into GDP growth over the entire transition period, Kazakh and Azeri growth appears much more impressive, even though it was much more narrowly based on increasing resource extraction.

Armenia showed impressive growth, despite that it has no such resource windfall and is a mountanous, landlocked nation bordered by unfriendly Turks to the west, the hostile Azeris to the east who are closely related to Turks (with whom it fought a war in the early 1990′s), a Georgia up north that dislikes its alliance with Russia, and with Iran to the south, which is friendly, but is an international pariah. How the Armenians managed this I don’t know, but kudos to them!

Despite the pro-Saakashvili rhetoric, Georgia is not that impressive on objective terms. The average, post-Rose Revolution 2004-2008 growth was 8%, which although ostensibly impressive was not exceptional by regional standards. Furthermore, it doesn’t mean very much for a nation 1) starting from a low economic base and 2) recovering from a massive prior GDP collapse. True, somewhat better than trainwreck Moldova, but left in the dust by its Caucasian neighbor Armenia (likewise wracked by blockade and the occasional war), and only slightly better than Russia – a nation that has a GDP per capita that is three times bigger than Georgia’s.

According to an alternate, non-rosy view, The Georgian Economy Under Saakashvili (Irakli Rukhadze and Mark Hauf), much of Georgia’s recent growth was one-off, being based on state asset sales and government lay-offs. This was accompanied by accelerating deindustrialization, continued emigration and poverty, and the destruction of all remaining safety nets. The authors say the government acquired the habit of pressuring independent businesses to provide “voluntary contributions” in return for not bankrupting them under corruption prosecutions. This is not to singularly condemn Georgia’s weak rule of law. After all, politicized interference in the economy, widespread corruption, and corporate raiding are the rule rather than the exception throughout the former USSR. The only thing that’s special about the Georgian economy is the chasm between the gushing, star-speckled rhetoric emanating from Saakashvili and his neocon cheerleaders – and the actually existing reality.

Finally, we can note that Uzbekistan saw much better growth than Tajikistan. Uzbekistan is an unreformed economy, as well as land-locked, poor, and truly authoritarian (i.e. an extreme version of Belarus). But starting from a low base really helps, I guess. On the other hand, Tajikistan saw a devastating civil war between Communists and Islamists that killed 100,00 people during the early 1990′s, and it is the post-Soviet republic that is least advanced in the demographic transition (capital diverted to sustain new mouths and remember that we are measuring GDP per capita in this post). Growth performance in Kyzgyzstan was in between Uzbekistan and Tajikistan, whereas Turkmenistan’s was as good as Uzbekistan’s.

What to Expect?

Russia has a comprehensive modernization plan, the human, administrative, and financial resources needed to implement it, and the Kremlin’s siege mentality should give it the impetus to force it through. Thus, I am reasonably confident that Russia, Belarus, and Kazakhstan will continue to see relatively fast growth. These countries have relatively high human capital (a necessary prerequisite for economic catch-up), and their recent customs union will enable bigger economies of scale. As I said before, there are many reasons to suppose that Ukraine will (re)join this Eurasian space within the next few years, at which point its anarchic stasis will finally end.

As I observed above, economic openness and transparency are not as important to economic catch-up as they are sometimes made out to be (this is NOT to imply they’re bad, however – obviously, imitating North Korea’s Juche principle or Equatorial Guinea’s kleptocracy is not the way forwards). However, they shouldn’t be treated as the be all and end all of things either. Moderate levels of corruption are nothing more than an additional tax, and it is even possible to think of situations where it can be positive (for instance, nations with impossible, idiotic regulations). Meanwhile, excessive economic openness can leave one too open to the vagaries of global casino capitalism – observe Latvia today, or Argentina 2001, for good examples. Furthermore, the next decade will likely see the retreat of globalization in tandem with peak oil and the waning of Pax Americana. In this new environment of “scarcity industrialism“, states that carve out self-sufficient dominions will fare best. Russia is aware of this, and has begun to regather its former Empire, and so is China with its fevered buyout of mines, land, and political elites around the world.

The Baltics may slowly recover under business-as-usual, though in the more globally pessimistic scenarios favored by S/O the general pattern will be stagnation, political unrest, and authoritarian reaction (especially possible in the most vulnerable member, Latvia). Central Asia does not really have the capacity for generating its own sustainable development. Far from potential markets and tyrannized by extreme climes and distances, the region is doomed to perpetual backwardness, except in so far as outside Powers like Russia or China find it in their interests to subsidize their development. In the Caucasus, the threat of instability and violence hangs permanently in the air, making any attempts at prediction even more of a futile endeavor.

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

Chang, Ha-JoonKicking Away the Ladder: Development Strategy in Historical Perspective (2002)
Category: economy; history; industrial policy; Rating: 5/5
Summary: Kicking Away the Ladder:How the Economic and Intellectual Histories of Capitalism Have Been Re-Written to Justify Neo-Liberal Capitalism (Ha-Joon Chang)

Much has been said of the smug arrogance, cultural aloofness and end-of-history conceit characterizing the neoliberal Washington Consensus, the philosophy that a one-size-fits-all set of “good policies” (e.g. privatization, liberalization, deregulation) and “good institutions” (e.g. patent and IP protection system, etc) can – and must – be transplanted onto any country, irrespective of its historical or cultural traditions, if it were to ever join the developed “international community’. The general bankruptcy of this approach is evident from the facts on the growth, with global GDP growth during the 1960-1980 period of “bad policies” substantially higher than during the “good policies” 1980-2000 period. After seeing high growth during the earlier period, Latin America stagnated, and Africa and Eastern Europe declined during the latter; the major exception was mercantilist China.

Though always disabused by reality, from 1998 Russia to the 2008 crisis, the neoliberals retain their intellectual underpinnings by continuing to claim, like Marxists, that history itself is ultimately on their side – after all, did not Britain and the United States, the world’s greatest economic successes, rise to global preeminence through the virtues of minimal government and free trade? Not at all, argues Ha-Joon Chang in this excellent book.

Britain: From Mercantile Struggle to Kicking Away the Ladder

Take the example of Britain, alleged to be the historical laissez-faire state par excellence, in stark contrast to the stultifying dirigisme of Colbertist France. This is actually an inversion of the truth, for the French state was generally laissez-faire and backward-looking in the period between the end of Napoleon’s Continental System and the post-WW2 years (after which the state began large-scale interventions in the French economy, which experienced burgeoning growth that saw it overtake Britain’s GDP by the 1970′s). On the other hand, Britain was highly protectionist up until it established and cemented its global industrial predominance by the middle of the 19th century.

British protectionism has a long history, stretching back to medieval import substitution designed to foster an indigenous wool manufacturing industry, instead of being reliant on raw wool exports to Europe. Henry VII tried to change this by taxing raw wool exports and poaching skilled workers from the Low Countries. This kick-started the industry that would come to constitute the key element of British industrial supremacy in the 19th C.

In 1721, Walpole expanded on previous Navigation Acts to encompass mercantile measures like lower tariffs on raw materials imports, duty drawbacks on the imported raw materials used for exports, the removal of export duties, the raising of duties in imported manufactures, export subsidies and a system of quality control to maintain the reputation of British exports. The colonies were treated as captive markets and resource appendages to fuel the commerce and industry of the mother country, by measures such as the 1700 ban on (better-quality) Indian calicos, which (possibly) stifled an incipient Indian industrialization. Britain fine-tuned the terms of trade between the US colonies itself to discourage industrialization in the latter, even resorting to overt illiberal measures like outlawing rolling and slitting steel mills on the American continent.

This is how Friedrich List, a leading economist of the German Historical School, described Britain’s rise to industrial dominance in his The National System of Political Economy in 1841:

Having attained to a certain grade of development by means of free trade, the great monarchies [of Britain] perceived that the higher degree of civilization, power, and wealth can only be attained by a combination of manufactures and commerce with agriculture. They perceived that their newly established native manufactures could never hope to succeed in free competition with the old and long-established manufactures of foreigners… Hence they sought, by a system of restrictions, privileges, and encouragements, to transplant on to their native soil the wealth, the talents, and the spirit of enterprise of foreigners. …

It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.

Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development than no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she ha hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.

Even the 1846 repeal of the Corn Laws protecting domestic agriculture were justified by its British supporters on protectionist terms, e.g. Robert Cobden of the Board of Trade:

The factory system would, in all probability, not have taken place in America and Germany. It most certainly could not have flourished, as it has done, both in these states, and in France, Belgium, and Switzerland, through the fostering bounties which the high-priced food of the British artisan has offered to the cheaper fed manufacturer of those countries.

It was only in 1860, by which time Britain’s status as the workshop of the world was unquestioned, that it truly transitioned to a free-trade regime with the Cobden-Chevalier Treaty with France. Yet during the next fifty years it was undermined by German technological prowess and American economies of scale, and was obliged to reintroduce substantial tariffs in 1932 under the stress of the Depression-era protectionism scramble.

[International tariff rates 1820-1950, taken from Google Books].

The Protectionist Roots of Pax Americana

What about the US, then, today’s champion of free trade? This is an ironic position for it to take up, given that in the years after the Civil War and prior to the Second World War, America was the protectionist nation par excellence.

The “infant industry” theory was invented by Alexander Hamilton, the first Treasury Secretary, and the American economist Daniel Raymond. With its history of being held as a resource appendage and captive market by the British and spurred on by the War of 1812, protectionism was firmly established from 1816. A US Congressman, a contemporary of Friedrich List, said of British liberal trade theory, “like most English manufactured goods, [it] is intended for export, not for consumption at home”. President Ulysses Grant, a Civil War hero, remarked of it, “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”. So the populist right-wing politician Pat Buchanan makes a perfectly valid point when he condemns free trade as being un-American.

Ha-Joon Chang stresses the importance disputes over the proper level of tariffs played over the start of the US Civil War. The crux of the matter was that northern industrial interests wanted high tariffs to protect themselves from British competition, whereas the South, which had no industries of its own and an idle, rapacious elite, wanted lower tariffs to make British goods more affordable. There were frequent spats on this matter from the 1830′s; slavery only provided the fuse. (Chang points out that Lincoln was deeply racist by modern standards and only emancipated the northern slaves in 1862 as a strategic move against the South). Lincoln’s top economic advisor, Henry Carey (described by Marx as the only American economist of any significance), argued that British free trade was an imperialist ploy to consign the US to a future of primary production.

Following the North’s political and military triumph, US tariffs between the Civil War and World War Two remained the highest amongst those of any industrial power, with the sole exception of Russia. As with its British imperial predecessor, the American superpower only ditched free trade once it achieved a global industrial dominance made possible by the wartime devastation of its European competitors. Though tariff rates are now very low, the US somewhat compensates with voluntary export constraints, (textiles) quotas, agricultural subsidies, and unilateral sanctions against countries suspected of dumping, so it remains far more protected than Britain was during the Victorian Golden Age of globalization. Likewise there is extensive state support for R&D, which enabled US success in hi-tech areas like computers, the Internet, aerospace, and biotech.

State Intervention Critical to Economic Sovereignty

The vast majority of other now-developed countries (NDCs) also employed extensive protectionism and state intervention during their periods of successful economic convergence. Though Germany eschewed the kind of “blanket protectionism” used in mercantile Britain and the pre-superpower US, the state was far more active in promoting modern technology, industrial espionage, technological “demonstrations”, teaching science at its world-class universities, and pioneering social welfare by the late 19th C to defuse social tensions. Though Japan was actually forbidden from raising its tariff rates above 5% in the first decades following the Meiji Restoration, it compensated by investing heavily in infrastructure, education, and the acquisition of foreign technologies and institutions. Sweden had high tariff rates (especially in the early 20th C), an unrivaled record in public-private cooperation, and “strategically used tariffs, subsidies, cartels, and state support for R&D to develop key industries, especially textile, steel, and engineering”. It also preserved social harmony through the Saltsjöbaden agreements of 1936, in which labor committed to restraining wage demands in return for the employers committing to building one of the world’s most comprehensive welfare states. As for some of the smaller nations:

There were some exceptions like the Netherlands and Switzerland that have maintained free trade since the late 18th century. However, these were countries that were already on the frontier of technological development by the 18th centuries and therefore did not need much protection. Also, it should be noted that the Netherlands deployed an impressive range of interventionist measures up till the 17th century in order to build up its maritime and commercial supremacy. Moreover, Switzerland did not have a patent law until 1907, flying directly against the emphasis that today’s orthodoxy puts on the protection of intellectual property rights (see below). More interestingly, the Netherlands abolished its 1817 patent law in 1869 on the ground that patents are politically-created monopolies inconsistent with its free-market principles – a position that seems to elude most of today’s free-market economists – and did not introduce another patent law until 1912.

Contrary to the conventional wisdom, it was the open economies that failed to develop rapidly. Not much chance for European colonies / captive markets to develop an indigenous industrial base under the constant, unchecked pressure of superior European competition. Semi-independent countries like China and the Ottoman Empire were paralyzed by “unequal treaties” capping tariffs at a 5% flat rate and loss of tariff autonomy (Ha-Joon Chang points out that today the World Bank recommends a maximum 15-25% tariff rate, low and uniform, despite that the development differential between today’s poor and rich countries are vastly greater than they were a century ago). Finally, industrial leader nations (like Britain) tried to stymie the growth of competitors by preventing the outflow of skilled workers in the 18th century, machines in the 19th century, and enforcing intellectual property rights in the 20th century.

Institutions aren’t Everything

The author also points out that institutions today are far better in the developing world today, in most cases, than of NCDs at an an equivalent stage of development. For instance, despite the fact that Britain in 1820 had a similar level of development to India in 2000:

[Britain] did not have universal suffrage (it did not even have universal male suffrage), a central bank, income tax, generalised limited liability, a generalised bankruptcy law, a professional bureaucracy, meaningful securities regulations, and even minimal labour regulations (except for a couple of minimal and hardly-enforced regulations on child labour).

As such, the rich would should moderate their unrealistic demands for the developing nations to instantaneously reform their institutions to world standards. It is a difficult process that took centuries in the NDCs themselves, and besides in some cases the poor countries would be better off spending that money on other things. For instance, would it be better for Gabon to spend its (very limited) resources on hiring legions of (foreign) intellectual property lawyers to ensure a modern IP environment, or should it spend them on training its own primary school teachers? Tough choice, right?

As Tainter teaches us in The Collapse of Complex Societies, complexity isn’t always all it’s cracked up to be.

Conclusions & Lessons for the Present

The “official history” of capitalism has been highly distorted by neoliberals with little appreciation of economic history, either maliciously, or because of their ideological blinkers. The reality is that even today’s stalwarts of free trade and liberalization only got to the top though blanket protectionism and intelligent state intervention, a tradition that has been carried on by the East Asian tigers (Korea, Taiwan, etc) – the only major non-Western nations to successfully industrialize after Japan. After they had industrialized, the new leader nation – in modern times, the US – has an interest in creating a global free trade system which could reinforce its hegemony. The poachers become the gamekeepers. The climbing followers become leaders kicking away the ladder.

However, uninterrupted free trade does eventually undermine even its guarantors. Last century, it was Germany challenging Britain. Today, it is China challenging the US.

Leveraging its cheap, docile and decently-educated labor force, China used the window of opportunity thrown open by US trade policy to build up the world’s premier industrial base – as of now, it produced around half the world’s steel and cement. Though it’s economy is ostensibly relatively free-wheeling, China having ditched central planning three decades ago, in practice the state remains extremely active in building up infrastructure, improving human capital and industrial espionage. It couldn’t care less about intellectual property rights, given that it has almost none of its own to protect (you don’t need innovation when you’re at the point when you can just buy or steal the next technological levels), giving it a further competitive advantage. The sheer comparative advantage it has built up in manufacturing means that overt protectionism is simply unnecessary for it.

Open trade has led to the steady deindustrialization and “hallowing out” of the US industrial base, which no longer maintains a positive balance of trade in any manufactured goods category, with the marginal exception of (heavily-subsidized) aerospace. (The effects in some European countries have been as bad, e.g. Italy’s traditional artisanal manufacturing destroyed by cheaper Chinese competition). The US machine tool industry, the heart of any industrial ecosystem, has been decisively buried by European and Asian competition. From 1999 to 2008, US automobile production declined from 13.0mn to 8.7mn units, while in the same period this figure rose amongst its main competitors like Japan (9.9mn to 11.6mn), Germany (5.7mn to 6.0mn), Korea (2.8mn to 3.8mn), and China (1.8mn to 9.3mn).

The shifting winds of history are steadily unraveling Pax Americana‘s center of gravity, threatening to send the global system into a chaotic tailspin. The paradox is that though globalization sustained US hegemony, it also contained within it the seeds of its own destruction. America has overstayed in laissez-faire land, blinded by its own instruments of success to the dangers they pose to itself.

Russia has an exceptionally strong need for protectionism and state intervention, on account of its traditional economic backwardness, highly unfavorable geography, and innate tendencies towards illiberal anarchy (in which nothing gets done at all). Hence the reason for the forward-looking, dirigiste industrial policy pursued under the Putin administration (special economic zones, clauses obligating foreign automobile companies to source a percentage of their parts from Russian suppliers, nanotechnology, etc) – and the likelihood that the state will resume its old rule as the main driver of the Russian economy in the unstable decades to come.

A few criticisms of the book. It makes the blanket statement that growth was higher during the “statist” 1960-1980 period than the “open” 1980-2000 period, but fails to consider other possible factors behind it, such as: a) the end of hyperbolic growth in oil extraction, and more generally, energy production (energy and natural resources are indispensable and highly-neglected factors of economic growth) – i.e. the appearance of limits to growth to the global economy, b) the ebbing of the electro-mechanical / petrochemical cycle and c) the end of the Flynn effect (end of IQ rise), especially pertinent given that education is the elixir of growth. In other words, the scope of the book is rather narrow – state industrial policy as the be all and end all of economic development. That said, his arguments are intuitive and convincing, if not fully complete; though then again, I doubt comprehensiveness would have been one of his aims in a book of just 140 pages.

(Republished from Sublime Oblivion by permission of author or representative)
 
No Items Found
Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.


PastClassics
The “war hero” candidate buried information about POWs left behind in Vietnam.
What Was John McCain's True Wartime Record in Vietnam?
The evidence is clear — but often ignored
Are elite university admissions based on meritocracy and diversity as claimed?
A simple remedy for income stagnation