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The 2008 global economic crisis has been the most severe recession since the Great Depression. Notwithstanding its dramatic effects, cross-country analyses on its heterogeneous impacts and its potential causes are still scarce. By analysing the geography of the 2008 crisis, policy-relevant lessons can be learned on how cities and regions react to economic shocks in order to design adequate responses.

The post Austerity and the slow recovery of European city-regions appeared first on OUPblog.

In the 1983 movie The Right Stuff, during a test of wills between the Mercury Seven astronauts and the German scientists who designed the spacecraft, the actor playing astronaut Gordon Cooper asks: “Do you boys know what makes this bird fly?” Before the hapless engineer can reply with a long-winded scientific explanation, Cooper answers: “Funding!” If an economist were asked, “Do you know what makes this economy fly?” the answer, in one word, would be “trust.”

The post The wrong stuff: Why we don’t trust economic policy appeared first on OUPblog.

There are hundreds of investment products in the market that claim to outperform. The idea is that certain information is identified that allow us to pick stocks that will do better than average and those that will do worse than average. When you buy the stocks that will do better and short sell the ones that you think will do worse, you have potentially identified a strategy that will ‘beat the market.’

The post Separating investment facts from flukes appeared first on OUPblog.

The way most economists organize their ideas about the development of macroeconomics says that 1968 was a crucial year in the demise of old-fashioned Keynesianism. That was the year of the publication of Milton Friedman’s Presidential Address for the American Economic Association. Friedman argued that if policymakers caused a bit of inflation, this would temporarily reduce unemployment, but the effect would only be temporary, so that in due course, unemployment would return to its previous level and the inflation would remain. The reason he gave was that wage-bargainers’ expectations would adjust to the occurrence of inflation, they would incorporate their expectations into their bargain, and inflation would consequently lose its beneficial effect.

I am always surprised anyone believes that. The argument itself amounts to saying that expectations adjust to reality. Well, yes. But how could it be that economists did not know that until 1968?

That, though, is only the beginning, because Friedman’s supposed innovation is the beginning of a story about a whole revolution of thought in macroeconomics. Supposedly, up to 1968, policymakers had believed that a policy of inflation would be effective in lowering unemployment – an idea often labelled ‘the Phillips curve trade-off.’ After 1968, apparently, they had to rethink this.

That again, supposedly, led to a great debate at the end of the 1960s and into the 1970s about whether Friedman was right. In due course, says the story, with inflation seeming to rise ever higher, Friedman’s side was seen to have won that debate. This was a great intellectual victory of ‘monetarism’ and a defeat for ‘Keynesianism’. All these things can easily be found in undergraduate textbooks of macroeconomics, and make pretty frequent appearances in bulletins of central banks as well.

It sounds like an important story, and makes Friedman’s Address a key moment in the history of economics. But it sounds like an unlikely story as well. Not only did no one think of expectations adjusting until 1968, but when it was suggested, apparently they denied it. What else was that great debate about?

There is an interesting resolution. The argument Friedman made was very old news in 1968. Everyone already knew it. There a number of earlier statements, plenty of them by prominent authors in highly visible places. Moreover, Friedman’s own statement gave it no fanfare at all; he stated it just as if it were a well known argument. But more than that, Friedman himself had already made the argument on four previous occasions, the first of them a decade before the supposedly crucial lecture.

People write that Edmund Phelps had the same argument in print before Friedman. But that was in 1967, so it hardly makes a difference. There are two much more interesting things than that though. One is that Phelps did not even use the argument – as Friedman did – to say that inflationary policy was a bad idea. He was just using it – mathematical-economics-style – to work out how quickly inflation should gradually be raised to bring the biggest benefit. But the other interesting thing is this: he even said the argument was not original, naming some of those who had made it before. For some reason, that fact has made no impact at all on all the authors who quote him as joint-originator of the argument.

The fact that the Friedman/Phelps argument was so well-known is the first clue that the rest of the story about the Phillips curve is all wrong as well. The idea that policymakers thought that a policy of inflation would reduce unemployment is a long way from the truth. The idea that there was any argument about whether expectations would adjust to reality has almost nothing going for it – of course they do. On the other hand, there were arguments that the association of slow inflation with lower unemployment had nothing to do with mistaken expectations, but rather everything to do with overcoming various sorts of frictions. The same thing is widely believed today, so it was certainly not the subject of any revolution started by Friedman. The debate in the 1970s was about other, much more interesting matters entirely.

Not only have we all been teaching a story about the Phillips curve which just is not true, but we have been teaching one which makes economists look very foolish as well. It is a strange thing what a bit of actual reading of old arguments in economics can turn up.

Headline image: Saturn envy by woodleywonderworks. CC BY 2.0 via Flickr

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By Vladimir Popov

Development thinking in the second half of the twentieth century can hardly be credited for “manufacturing” development success stories. It is difficult, if not impossible, to claim that either the early structuralist models of the Big Push (financing gap and basic needs of the 1950-70s), or neoliberal ideas of Washington consensus (that dominated the field since the 1980s), have provided crucial inputs to economic miracles in East Asia or elsewhere. On the contrary, it appears that development ideas, either misinterpreted or not, contributed to a number of development failures. The USSR and Latin America of the 1960s-80s demonstrated the inadequacy of import-substitutions model. Later every region of developing world that became the experimental ground for Washington consensus type theories, from Latin America to Sub-Sahara Africa to former Soviet Union and Eastern Europe, revealed the flaws of neoliberal doctrine by experiencing a slowdown, a recession or even a severe depression in the 1980s-90s.

Neither development theories nor policies of multilateral institutions can be held responsible for engineering development successes. Japan, Hong Kong, Taiwan, Singapore, South Korea, South East Asia, and China achieved high growth rates without much advise and credits from International Monetary Fund (IMF) and the World Bank. Economic miracles were manufactured in East Asia without much reliance on development thinking and theoretical background — just by experimentation of the strong hand politicians. The 1993 World Development Report “East Asian Miracle” admitted that non-selective industrial policy aimed at providing better business environment (education, infrastructure, coordination, etc.) can promote growth, but the issue is still controversial. Structuralists claim that industrial policy in East Asia was much more than creating better business environment, whereas neoliberals believe that liberalization and deregulation should be largely credited for the success.

It is said that failure is always an orphan, whereas success has many parents. No wonder, both neoclassical and structuralist economists claimed that East Asian success stories prove what they were saying all along, but it is obvious that both schools of thought cannot be right at the same time. There is a lack of understanding why government intervention sometimes results in spectacular failures and what particular kind of government intervention is needed for manufacturing fast growth (2000 – onwards).

Why did a gap emerge between development thinking and development practice? Why were development successes engineered without development theories? Why did development theoreticians fail to learn from real successes and failures in the global South? It appears that development thinking in the postwar period went through a full evolutionary cycle — from dirigiste theories of Big Push, to neoliberal deregulation wisdom of “Washington consensus” (1980-90s), to the understanding that catch up development does not happen by itself in a free market environment.

The confusion in development thinking of the past decade may be a starting point for the formation of new paradigm. Without mobilization of domestic savings and industrial policies there may be no successful catch up development. National development strategies for countries at a lower level of development should not copy economic policies used by developed countries; in fact, it was shown more than once that Western countries themselves did not use liberal policies that they are advocating today for less developed countries when they were at similar stages of development.

Most development economists share the general principle that good policies are context dependent and there is no universal set of policy prescriptions for all countries at all stages of development. But when it comes to particular policies, there is no consensus. The future of development economics may be a theory, explaining why at particular stages of development (depending on per capita GDP, institutional capacity, human capital, resource abundance, etc.) one set of policies (tariff protectionism, accumulation of reserves, control over capital flows, nationalization of resource enterprises, etc.) is superior to another. The art of the policymakers then is to switch the gears at the appropriate time not to get into the development trap. The art of the development theoretician is to fill the cells of “periodic table of economic policies” at different stages of development.

The emerging theory of stages of development would hopefully put the pieces of our knowledge together and will reveal the interaction and subordination of growth ingredients. A successful export-oriented growth model à la East Asian tigers seems to include, but is not limited to:

• Building strong state institutions capable of delivering public goods (law and order, education, infrastructure, health care) needed for development
• Mobilization of domestic savings for increased investment
• Gradual market type reforms
• Export-oriented industrial policy, including such tools as tariff protectionism and subsidies
• Appropriate macroeconomic policy – not only in traditional sense (prudent, but not excessively restrictive fiscal and monetary policy), but also exchange rate policy (undervaluation of the exchange rate via rapid accumulation of foreign exchange reserves).

If this interpretation of development experience is correct, the next large regions of successful catch up development would be MENA Islamic countries and South Asia – these regions seem to be most prepared to accept the Chinese model. Eventually Latin America, Sub-Sahara Africa and Russia would be catching up as well. If so, it would become obvious in the process of successful catch up development that the previous policies that the West recommended and prescribed to the South (deregulation, downsizing the state, privatization, free trade and capital movements) were in fact  hindering rather than promoting their development.

Vladimir Popov is an adviser in the Department of Economic and Social Affairs of the United Nations and professor emeritus at the New Economic School in Moscow. He is the author and editor of 12 books and numerous articles that have been published in the Journal of Comparative Economics, Comparative Economic Studies, World Development, Post-Communist Economies, New Left Review, and other academic journals, as well as many essays in the media. His most recent book is Mixed Fortunes: An Economic History of China, Russia, and the West.

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