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Political economy is back on the centre stage of development studies. The ultimate test of its respectability is that the World Bank has realised that it is not possible to separate social and political issues such as corruption and democracy from other factors that influence the effectiveness of its investments, and started using the concept.

It predates the creation of “economics” as a discipline. Adam Smith, David Ricardo, Thomas Malthus, James Mill, and a generation later Karl Marx and Friederich Engels, explored how groups or classes in society exploited each other or were exploited, and used their conclusions to create theories of change or growth.

Marx’s ideas were taken up in the 1950s by economists and sociologists of the left, such as Paul Baran (The Political Economy of Growth, 1957) and later Samir Amin (The Political Economy of the Twentieth Century, 2000) who linked it to theories of imperialism and neo-colonialism to interpret what was happening in newly independent African countries where nationalist political parties had taken power.

Marx and Engels in their early writings, and Marxist orthodoxy subsequently, espoused determinist theories in which development went through pre-determined stages – primitive forms of social organisation, feudalism, capitalism, and then socialism. But in their later writings Marx and Engels were much more open, and recognised that some pre-capitalist formations could survive, and that there was no single road to socialism. Class analysis, and exploration of the economic interests of powerful classes, and their uses of the technologies available to them, could inform a study of history, but not substitute for it.

That was how I interpreted what happened in Tanzania in the 1970s. The country was built around the economic interests of those involved, and the mistakes made, both inside Tanzania but also outside. It focussed on the choices made by those who controlled the Tanzanian state or negotiated “foreign aid” deals with Western governments—Issa Shivji’s bureaucratic bourgeoisie. These themes are still current today.

I am not alone. Michael Lofchie’s (A Political Economy of Tanzania, 2014) focuses on the difficult years of structural adjustment in the 1980s and 1990s). He argues how the salaried elite could personally benefit from an overvalued exchange rate. From 1979 on, under the influence of the charismatic President Julius Nyerere, Tanzania resisted the IMF and World Bank which urged it to devalue. But eventually, around the mid-1980s, they realised that they had the possibility of making even bigger financial gains if the country devalued and there were open markets, which would allow them to make money from trade or production. They were becoming a productive bourgeoisie.

Lofchie’s analysis can be contested. The benefits of the chaos that resulted from the extremely over-valued exchange rates of the 1980s were reaped by only a few. It is true that rapid growth followed from around 1990 to the present, but that is also due to the high price of gold on international markets and the rapid expansion of gold mining and tourism. There is still plenty of evidence of individuals making money illegitimately – corruption is ever present in the political discourse, and will continue to be so up till the Presidential elections due in October 2015.

A challenge for the ruling class in Tanzania, leaving the 1970’s, was would they be able to convert their economic strategies into meaningful growth and benefits for the population? By 2011 the challenge was even more acute, because very large reserves of gas had been discovered off the coast of Southern Tanzania, so money for investment would no longer be a binding constraint. But would those resources be used to create real assets which would create the prerequisites for rapid expansions in manufacturing, services and especially agriculture? Or would they be frittered away through imports of non-productive machinery and infrastructure (such as the non-existent electricity generators purchased through the Richmond Project in 2006 in which several leading members of the ruling political party were implicated)? Or end up in Swiss bank accounts? The jury is very much still out. To achieve the current ambition of a rapid transition to a middle income country will require much greater understanding of engineering, agricultural science, and much better contracts than have been recently achieved – and more proactive responses to the challenges of corruption. It will need to take its own political economy seriously.

Headline image credit: Tanzania – Mikumi by Marc Veraart. CC-BY-2.0 via Flickr.

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By George F. DeMartino

In a recent editorial in the New York Times Harvard economist N. Gregory Mankiw acknowledged that economists have:

“only a basic understanding of how most policies work. The economy is complex, and economic science is still a primitive body of knowledge. Because unintended consequences are the norm, what seems like a utility maximizing policy can often backfire.”

Mankiw infers from this grave epistemic problem an ethical duty among economists to apply the Hippocratic principle “first do no harm” when assessing policy. On this basis he assails both the Affordable Care Act and new initiative in the US Congress to raise the legislated minimum wage. Both “fail the do-no-harm test”: the Affordable Care Act will lead to the termination of some insurance policies that don’t meet the standards required under the law, while raising the minimum wage “would disrupt some deals that workers and employers have made voluntarily.” But of course, applying the Hippocratic principle consistently would also require Mankiw to assail rather than support those policies to which he has an ideological affinity. Like free trade (which he supports), for instance, the harms of which to US workers surely exceed those of Obamacare. As J.R. Hicks recognized seventy-five years ago, any policy intervention that affects relative prices—which is to say, all interventions —“benefits those on one side of the market, and damages those on the other.” Surely Mankiw knows all this. What is troubling, then, is not Mankiw’s worry about the potential harm of the economic policies he opposes. He is quite right to expose the harms he associates with one policy or another. The problem is the ineptness and obvious bias with which he introduces ethical concerns into policy debate.

Now, it’s good to see an economist of Mankiw’s stature recognize in public view that economic science and policy analysis are fraught with uncertainty, and that there are risks of unintended harm to those whom economists purport to serve. Indeed, all professional practice entails a potential for harm to those whom professionals seek to serve, and to third parties. This is true in clinical medicine and public health, of course, but also in social work, engineering, law, and many if not most other professions. Partly in recognition of this fact some professions have established bodies of professional ethics in hopes of promoting responsible behavior by their members—behavior that minimizes the avoidable harms and that helps them manage appropriately the unavoidable harms that arise in the context of their practice. The medical profession is exemplary in this regard. In medical ethics we find the term “iatrogenesis” (from the Greek, “doctor-originating”) or “iatrogenic harm” which refers to the adverse effects or complications associated with medical treatment. The concept of iatrogenic harm captures physician- or clinic-induced harms ranging from those that are associated with malpractice to the unpreventable consequences of well-intentioned and expertly delivered medical interventions.

Economists, on the other hand, generally do not give sufficient attention to the ways that their own practice induces harm. We even lack the language to discuss economist-induced harm. There is no parallel in economics to the concept of medical malpractice, of course; economists are not held legally liable for their mistakes, no matter how severe the effects. More broadly, there is no economic analogue to the concept of iatrogenesis. There should be. We need a concept, and a corresponding term, to name what is as-of-yet unnamed. Let us refer to the harm economists cause with the term ‘econogenic harm.’

Why do we economists fail to examine sufficiently economic harm and econogenic harm, and why do they make such basic ethical errors when they do? First, economists recognize that harm is a regular and, likely, ineradicable feature of economic practice, as Hicks understood. It needs to be said plainly: economists are in the harm business. Almost always we cause harm as we try to do good. Hence, the Hippocratic directive “first, do no harm,” if taken as an inviolable mandate or a decision rule, has no relevance in economics since it would imply that economists can do nothing at all. Moreover, for over a century the economics profession has remained stubbornly uninterested in ethical matters.

The allergy to ethics manifests in part as a mistaken presumption that one can easily bifurcate economics into its ‘positive’ and ‘normative’ components, and that the economist should privilege positive science over normative speculations. But by its nature harm does not permit such a bifurcation. This is because all questions pertaining to harm—such as ascertaining when harm has occurred, the severity of harm, who or what is responsible for the harm, and which forms of harm are morally indictable and which are morally benign—all of these involve normative judgments. For instance, is a relatively poor person harmed by an economic policy like financial deregulation that overwhelmingly benefits the wealthy and exacerbates economic inequality (even if it doesn’t reduce her own income)? She may very well think so, and at least some economists such as Joseph Stiglitz, Amartya Sen, Thomas Piketty and Jamie Galbraith would validate her view on the matter. But many economists, including Mankiw, are apt to argue that the policy has not harmed anyone in any real sense provided no one’s income has been reduced. Who’s right in this case? Answering that question requires normative decisions about whether severe inequality induces harm to the disadvantaged and, if so, whether that harm is ethically worrisome; and about who should have the authority to answer that question—those actually affected by the policy, or the economist?

Finally, economics has been particularly dismissive of the idea of professional ethics. This attitude isn’t just unfortunate, it’s dangerous. Academic economists tend to think that their ethical duties are obvious—such as not stealing the ideas of others, not fabricating research results, and the like. Many don’t generally trouble themselves with the fact that the simplified blackboard economics that they use to instruct students in economic principles, which often presumes ideal background conditions, informs the simplistic manner in which many policymakers think about economic policy; and the related fact that their work can be misinterpreted and misapplied, with damaging consequences for others. Moreover, the large majority of economists in the United States today work outside of academia where they engage in applied work that bears directly on policy formation, regulation, and other government interventions; affects the outcome of legal disputes; entails consulting to private actors; influences financial market developments; etc. In all these areas the well-meaning economist can do substantial harm while trying to do good.

Yet, we have no professional economic ethicists, or any texts, journals, newsletters, curriculum, regular conferences, or other forums that explore systematically what it means to be an ethical economist, or what it means for economics to be an ethical profession. Unfortunately, the absence of professional economic ethics deprives us of a tradition of careful inquiry into the nature of and responsibility for econogenic harm.

This can’t be the proper attitude of a responsible profession that is committed to enhancing the welfare and freedoms of others. Instead, the prevalence and severity of econogenic harm carries an ethical burden for the economics profession to attend more carefully to the nature and distribution of the harms that its practice causes.

George F. DeMartino is the author of The Economist’s Oath: On the Need for and Content of Professional Economic Ethics. He is Professor of Economics at the Josef Korbel School of International Studies at the University of Denver. He writes widely on ethics and economics, as well as labor issues and political economy theory. The arguments that appear here are developed much more fully in  “‘Econogenic Harm’: On the Nature of and Responsibility for the Harm Economists Do as they Try to Do Good,” to appear in George DeMartino and Deirdre McCloskey, eds., The Oxford University Press Handbook on Professional Economic Ethics (forthcoming).

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By Marius R. Busemeyer and Torben Iversen

Inequality has been on the rise in all the advanced democracies in the past three or four decades; in some cases dramatically. Economists already know a great deal about the proximate causes. In the influential work by Goldin and Katz on “The Race between Education and Technology”, for example, the authors demonstrate that the rate of “skill-biased technological change” — which is economist speak for changes that disproportionately increase the demand for skilled labor — has far outpaced the supply of skilled workers in the US since the 1980s. This rising gap, however, is not due to an acceleration of technological change, but rather to a slowdown in the supply of skilled workers. Most importantly, a cross-national comparison reveals that other countries have continued to expand the supply of skills, i.e. the trend towards rising inequality is less pronounced in these cases.

The narrow focus of economists on the proximate causes is not sufficient, however, to fully understand the dynamic of rising inequality and its political and institutional foundations. In particular, skill formation regimes and cross-country differences in collective wage bargaining influence the quantity and quality of skills and hence also differences in inequality. Generally speaking, countries with coordinated wage-setting and highly developed vocational education and training (VET) systems respond more effectively to technology-induced changes in demand than systems without such training systems.

Yet, there is a great deal of variance in the extent to which this is true, and one needs to be attentive to the broader organization of political institutions and social relations to explain this variance. One of the recurrent themes is the growing socioeconomic differentiation of educational opportunity. Countries with a significant private financing of education, for example, induce high-income groups to opt out of the public system and into high-quality but exclusive private education. As they do, some public institutions try to compete by raising tuition and fees, and with middle- and upper-middle classes footing more of the bill for their own children’s education, support for tax-financed public education declines.

This does not happen everywhere. In countries that inherited an overwhelmingly publicly-financed system only the very rich can opt out, and the return on private education is lower because of a flatter wage structure. In this setting the middle and upper-middle classes, deeply concerned with the quality of education, tend to throw their support behind improving the public system. Yet, they will do so in ways that may reproduce class-based differentiation within the public system. Based on an analysis of the British system, one striking finding is that a great deal of differentiation happens because high-educated, high-income parents, who are most concerned with the quality of the education of their children, move into good school districts and bid up housing prices in the process. As property prices increase, those from lower socio-economic strata are increasingly shut out from the best schools.

Even in countries with less spatial inequality, in part because of a more centralized provision of public goods, socioeconomic inequality may be reproduced through early tracking of students into vocational and academic lines. This is because the choice of track is known to be heavily dependent on the social class of parents. This is reinforced by the decisions of firms to offer additional training to their best workers, which disadvantages those who start at the bottom. There is also evidence that such training decisions discriminate against women because firm-based training require long tenures and women are less likely to have uninterrupted careers. So strong VET systems, although they tend to produce less wage inequality, can undermine intergenerational class mobility and gender equality.

The rise of economic inequality also has consequence for politics. While democratic politics is usually seen as compensating for market inequality, economic and political inequality in fact tend to reinforce each other.  Economic and educational inequality destroy social networks and undermines political participation in the lower half of the distribution of incomes and skills, and this undercuts the incentives of politicians to be attentive to their needs. Highly segmented labor markets with low mobility also undermine support for redistribution because pivotal “insiders” are not at risk. Labor market “dualism” therefore delimits welfare state responsiveness to unemployment and rising inequality. In a related finding, the winners of globalization often oppose redistribution, in part because they are more concerned with competitiveness and how bloated welfare states may undermine it.

Economic, educational, and political inequalities thus also tend to reinforce each other. But the extent and form of such inequality vary a great deal across countries. This special issue helps explain why and suggests the need for an interdisciplinary approach that is attentive to national institutional and political context oppose redistribution.

Marius R. Busemeyer is Professor of Political Science at the University of Konstanz, Germany. Torben Iversen is Harold Hitchings Burbank Professor of Political Economy at Harvard University. They are Guest Editors of the Socio-Economic Review April 2014 special issue on The Political Economy of Skills and Inequality which is freely available online until the end of May 2014.

Socio-Economic Review aims to encourage work on the relationship between society, economy, institutions and markets, moral commitments and the rational pursuit of self-interest. The journal seeks articles that focus on economic action in its social and historical context. In broad disciplinary terms, papers are drawn from sociology, political science, economics and management, and policy sciences.

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