A couple of people have picked up on the news out of Hong Kong today. Julia and HeeJu have both written on it, and perhaps others as we speak. Several things to consider relate to the discussions we have had. On a very general level, one of the pressing questions about China is whether it will be subjected to the "folk laws" of what we call modernization theory. Basically, as it gets rich and as a middle class emerges, will pressures for democracy arise? Plenty of history suggests yes. And it is amazing to think that the Tiananmen Square uprising was now 25 years ago - a whole generation.
How does that relate to IPE? In many ways we can discuss. Not least is that the basis for legitimacy of the Chinese Communist Party has been rooted in delivering the economic goods. The CCP has claimed that it is uniquely capable of presiding over an economy that features "harmonious development" and the like. This has meant rising wages and increasing consumerism, but also inflation that is kept in check (among many other things), and rather importantly... no political challenge to the CCP's rule.
What is going on in Hong Kong will be a fascinating (albeit tense and nervewracking) test that just may tell us something about where China is going politically and economically... stay tuned.
Tuesday, September 30, 2014
Thursday, September 25, 2014
Wal-Mart and Poverty
Here is a link to the original article noted in class the other day. It is by Sebastian Mallaby. For econ types, this is where the "consumer surplus" hits the "income distribution" argument.
Much more to say about WalMart, and this is not the final word on it, by any stretch, but one worth considering - whether you ultimately agree or not.
Much more to say about WalMart, and this is not the final word on it, by any stretch, but one worth considering - whether you ultimately agree or not.
Comparative advantage and the mobility of factors of production (a follow-up)
In the Wolf-Stiglitz trade discussion the other day, there were several threads going, and in that I lost sight of (or time for) some of the questions others had posed. I will begin today with some observations to bring together some key themes from Wolf and Stiglitz, then we'll move onto the context for the discussion today. Specifically, the impacts of trade on domestic economies in "rich" countries like the U.S.
Two questions from the other day that deserve more than the half-treatment they got the other day. Both are linked to comparative advantage and factors of production. Robert and Amanda raised these questions. Let's discuss them a bit.
Robert asked about page 83 in Wolf. The crux of that quote is the following. If you think about it, comparative advantage matters most when the factors of production (capital and labor) are not really free to spill across borders. That is, when they are confined to their home country. Imagine capital and labor could "flow" anywhere. Capital would move wherever the best profit opportunities are, and if we had totally free migration, laborers could move wherever the best wage-earning opportunities are.
At the extreme, for reasons I can explain in class, we would expect labor's wages (for instance) to converge in all different countries to some global average. No longer would US wages be high and Burkinabe wages be low; Burkinabe and other people would flock to the US, driving down US wages and making labor more scarce in Burkina (thereby raising wages in Burkina) until the wages averaged out (or the "market cleared" or global "equilibrium" was reacted). Again, that's an extreme example, but you see the logic. Similar story with capital. People would put their money wherever the opportunities are, and in the long run (hopefully before "we are all dead") the returns to capital should converge across countries. (There is actually a wrinkle here that takes into account the "Silicon Valley" phenomenon we discussed the other day, and that Ben hinted at on his blog, which is that returns should converge towards the actual productivity of inputs, but let's set that aside momentarily and discuss it in class.) What Wolf is getting at is that comparative advantage matters mainly because these "extreme" conditions do not hold. Labor and (to a lesser extent) capital tend to be somewhat more confined to their homes, for reasons ranging from government policies to language barriers to the fact that geography still matters and it still costs something to move things around (see again Ben's comments). We can follow up as needed.
Amanda asked a question (on p. 81) that is related, or has a related answer. Keep in your head the observation above: totally free flow of factors of production (capital and labor) would tend to equalize the returns to each (profits and wages, respectively). As a term of art, you can call this "factor price equalization", a phrase we will see down the line. So what about this, from Wolf: "The shrinking import-competing industry is not competing with imports from foreigners, but with what its own domestic export industry can pay." Let's go to an example to illustrate. North Carolina used to make lots of furniture (around Hickory, e.g.), but now has to compete with Malaysia. It is a "shrinking import-competing industry". You might think, of course North Carolina furniture makers compete with Malaysian furniture makers. (Fair enough.) But Wolf's point is that North Carolina furniture makers fundamentally compete with other American industries for workers. A central issue is that workers in the U.S. command and expect certain average wages, and this is part of what makes North Carolina furniture less competitive. It's not only low wages in Malaysia, it's high wages in the U.S. Look at the previous sentence on p. 81 and fill in some blanks "Opening [the U.S.] to trade moves output in the direction of activities that offer domestic factors of production the highest returns. Read: freer trade with Malaysia will lead the U.S. to produce less furniture and more jet engines because furniture makers can't compete with Boeing in one of two ways:
a) They can't compete in terms of the wages they can pay American workers and still compete with the Malaysians, or
b) If they do pay the same wages as a Malaysian furniture maker, they won't attract capital (Because, well... where would you invest your hard-earned money if you want a return? A Malaysian furniture maker with low costs or an American one with high costs?)
Thus, "industries compete inside countries for the services of [labor and capital]".
We can talk about this more in class, but I wanted to follow up since I left this conversation underdeveloped the other day.
Two questions from the other day that deserve more than the half-treatment they got the other day. Both are linked to comparative advantage and factors of production. Robert and Amanda raised these questions. Let's discuss them a bit.
Robert asked about page 83 in Wolf. The crux of that quote is the following. If you think about it, comparative advantage matters most when the factors of production (capital and labor) are not really free to spill across borders. That is, when they are confined to their home country. Imagine capital and labor could "flow" anywhere. Capital would move wherever the best profit opportunities are, and if we had totally free migration, laborers could move wherever the best wage-earning opportunities are.
At the extreme, for reasons I can explain in class, we would expect labor's wages (for instance) to converge in all different countries to some global average. No longer would US wages be high and Burkinabe wages be low; Burkinabe and other people would flock to the US, driving down US wages and making labor more scarce in Burkina (thereby raising wages in Burkina) until the wages averaged out (or the "market cleared" or global "equilibrium" was reacted). Again, that's an extreme example, but you see the logic. Similar story with capital. People would put their money wherever the opportunities are, and in the long run (hopefully before "we are all dead") the returns to capital should converge across countries. (There is actually a wrinkle here that takes into account the "Silicon Valley" phenomenon we discussed the other day, and that Ben hinted at on his blog, which is that returns should converge towards the actual productivity of inputs, but let's set that aside momentarily and discuss it in class.) What Wolf is getting at is that comparative advantage matters mainly because these "extreme" conditions do not hold. Labor and (to a lesser extent) capital tend to be somewhat more confined to their homes, for reasons ranging from government policies to language barriers to the fact that geography still matters and it still costs something to move things around (see again Ben's comments). We can follow up as needed.
Amanda asked a question (on p. 81) that is related, or has a related answer. Keep in your head the observation above: totally free flow of factors of production (capital and labor) would tend to equalize the returns to each (profits and wages, respectively). As a term of art, you can call this "factor price equalization", a phrase we will see down the line. So what about this, from Wolf: "The shrinking import-competing industry is not competing with imports from foreigners, but with what its own domestic export industry can pay." Let's go to an example to illustrate. North Carolina used to make lots of furniture (around Hickory, e.g.), but now has to compete with Malaysia. It is a "shrinking import-competing industry". You might think, of course North Carolina furniture makers compete with Malaysian furniture makers. (Fair enough.) But Wolf's point is that North Carolina furniture makers fundamentally compete with other American industries for workers. A central issue is that workers in the U.S. command and expect certain average wages, and this is part of what makes North Carolina furniture less competitive. It's not only low wages in Malaysia, it's high wages in the U.S. Look at the previous sentence on p. 81 and fill in some blanks "Opening [the U.S.] to trade moves output in the direction of activities that offer domestic factors of production the highest returns. Read: freer trade with Malaysia will lead the U.S. to produce less furniture and more jet engines because furniture makers can't compete with Boeing in one of two ways:
a) They can't compete in terms of the wages they can pay American workers and still compete with the Malaysians, or
b) If they do pay the same wages as a Malaysian furniture maker, they won't attract capital (Because, well... where would you invest your hard-earned money if you want a return? A Malaysian furniture maker with low costs or an American one with high costs?)
Thus, "industries compete inside countries for the services of [labor and capital]".
We can talk about this more in class, but I wanted to follow up since I left this conversation underdeveloped the other day.
Tuesday, September 23, 2014
Stiglitz on the P in IPE
Page 63: "In principle, the winners could compensate the losers; in practice, this almost never happens."
An important quote to keep in mind if you are trying to figure out why some scholars (economists and/or political scientists) seem to talk past one another on the politics and policy of international trade. We got at this a bit in class the other day: there is a big difference between arguments for what trade might do in terms of aggregate income and what it might do in terms of the distribution of income. Put in other terms familiar to some of you, it is akin to the difference between the two sides of the "efficiency-equity" tradeoff, with Wolf (most often) focused on the former, and Stiglitz (often, but not always) on the latter.
Just to be clear: this difference in emphasis is not simply to concede one or the other side of this debate. In fact, historical evidence that we can discuss suggests that free trade might not always maximize aggregate income, and evidence might also suggest that free trade often does improve the distribution of income. So the distinction above between aggregate income and income distribution does not simply mean that free traders win on the former count and free trade skeptics win on the latter. But it is worth noting that they are often talking about slightly different outcomes.
An important quote to keep in mind if you are trying to figure out why some scholars (economists and/or political scientists) seem to talk past one another on the politics and policy of international trade. We got at this a bit in class the other day: there is a big difference between arguments for what trade might do in terms of aggregate income and what it might do in terms of the distribution of income. Put in other terms familiar to some of you, it is akin to the difference between the two sides of the "efficiency-equity" tradeoff, with Wolf (most often) focused on the former, and Stiglitz (often, but not always) on the latter.
Just to be clear: this difference in emphasis is not simply to concede one or the other side of this debate. In fact, historical evidence that we can discuss suggests that free trade might not always maximize aggregate income, and evidence might also suggest that free trade often does improve the distribution of income. So the distinction above between aggregate income and income distribution does not simply mean that free traders win on the former count and free trade skeptics win on the latter. But it is worth noting that they are often talking about slightly different outcomes.
Inequality and Irrationality
Having settled into a discussion about two contrasting views on globalization - by Martin Wolf and Joseph Stiglitz - I am struck by the variety of ways that several people are questioning the underpinnings of Wolf's argument. I say this understanding that many are raising these questions even as they may be fundamentally sympathetic to Wolf's pro-market perspective that advocates for liberalism and its economic corollaries (such as open trade, private markets and exchange with limits on government intervention, and the like).
There are two themes that emerge across several blogs today. The first draws on Stiglitz's concern and is about inequality in outcomes between countries. This is raised in distinct - yet related - ways. HeeJu saying that Wolf is "tolerant of the disparity" between countries, Lauren's worries about the "magnitude of loss", and Robert's thoughts about a "deadly cycle" due to a number of conditions. (And again, each of these three also has words to the effect that globalization is or can be beneficial, so these are not one-sided positions.) This question about inequality, incidentally, is also evoked by Stewart's title to her previous post, which is a clear allusion to a recent major book by Thomas Piketty about inequality. (It's 600+ pages, but if anyone wants to pick it up as your book for week 8, be my guest!) We can talk somewhat more about the extent to which inequality constitutes a damning critique of globalization - I hinted at the idea of Pareto optimality in class the other day, and you can probably imagine that there are quite distinct well-grounded moral perspectives on the salience of inequality as a critique of modern capitalist economies.
The second theme I want to draw out is one that Julia has addressed the most directly in a recent post. It is the question that gets to the validity of some of the basic theoretical underpinnings of the free-market argument, namely arguments about rationality. As she notes, recent research in economics (along with neuroscience and psychology) has really questioned whether we can operate on the assumption that human beings act rationally. Or conversely, if their behaviors and choices are shaped by other processes (such as "irrational" worries about "not losing" or simply using heuristics and mental short cuts). The "invisible hand", operating on each person making their own rational self-interested decision, is clearly not the whole story (as Adam Smith knew well).
There is also much to say about this, of course. Note that scholarship in economics and politics as disciplines often depart from the rationalist assumption as a "first pass" in explaining why human beings do what they do (whether it's someone making a private economic decision about buying or selling or investing, or someone making a choice about the costs and benefits of different votes or deciding how to run for office). "Rationalist" thinking is clearly a useful theoretical tool to understand how "many" people behave "often" (not "all" people behave "always"). And prominent economist Milton Friedman famously argued that we don't need the assumption of rationality to actually describe how we make decisions, but rather we build a theory upon it because it is a good approximation that allows us to predict how people will typically behave. In any event, it is clear that rationality describes only a part of our thinking and decision making. And it is also clear - as Stiglitz has shown, among others - that markets do not operate seamlessly under ideal conditions of transparency and free flows of information, costless transactions, and so on. This should lead us to question the premise that free markets and individual rationality (as captured by the "invisible hand") leads inevitably to betterment for all. We are well-served to question not simply with a view to reject, but rather to test the limitations of the theories offered by Wolf and other advocates of free market economics. When it comes to the role of market economics, suffice it to say, other things matter too.
There are two themes that emerge across several blogs today. The first draws on Stiglitz's concern and is about inequality in outcomes between countries. This is raised in distinct - yet related - ways. HeeJu saying that Wolf is "tolerant of the disparity" between countries, Lauren's worries about the "magnitude of loss", and Robert's thoughts about a "deadly cycle" due to a number of conditions. (And again, each of these three also has words to the effect that globalization is or can be beneficial, so these are not one-sided positions.) This question about inequality, incidentally, is also evoked by Stewart's title to her previous post, which is a clear allusion to a recent major book by Thomas Piketty about inequality. (It's 600+ pages, but if anyone wants to pick it up as your book for week 8, be my guest!) We can talk somewhat more about the extent to which inequality constitutes a damning critique of globalization - I hinted at the idea of Pareto optimality in class the other day, and you can probably imagine that there are quite distinct well-grounded moral perspectives on the salience of inequality as a critique of modern capitalist economies.
The second theme I want to draw out is one that Julia has addressed the most directly in a recent post. It is the question that gets to the validity of some of the basic theoretical underpinnings of the free-market argument, namely arguments about rationality. As she notes, recent research in economics (along with neuroscience and psychology) has really questioned whether we can operate on the assumption that human beings act rationally. Or conversely, if their behaviors and choices are shaped by other processes (such as "irrational" worries about "not losing" or simply using heuristics and mental short cuts). The "invisible hand", operating on each person making their own rational self-interested decision, is clearly not the whole story (as Adam Smith knew well).
There is also much to say about this, of course. Note that scholarship in economics and politics as disciplines often depart from the rationalist assumption as a "first pass" in explaining why human beings do what they do (whether it's someone making a private economic decision about buying or selling or investing, or someone making a choice about the costs and benefits of different votes or deciding how to run for office). "Rationalist" thinking is clearly a useful theoretical tool to understand how "many" people behave "often" (not "all" people behave "always"). And prominent economist Milton Friedman famously argued that we don't need the assumption of rationality to actually describe how we make decisions, but rather we build a theory upon it because it is a good approximation that allows us to predict how people will typically behave. In any event, it is clear that rationality describes only a part of our thinking and decision making. And it is also clear - as Stiglitz has shown, among others - that markets do not operate seamlessly under ideal conditions of transparency and free flows of information, costless transactions, and so on. This should lead us to question the premise that free markets and individual rationality (as captured by the "invisible hand") leads inevitably to betterment for all. We are well-served to question not simply with a view to reject, but rather to test the limitations of the theories offered by Wolf and other advocates of free market economics. When it comes to the role of market economics, suffice it to say, other things matter too.
Monday, September 22, 2014
Thursday, September 18, 2014
Aye or Nae?
Much to say today, and I know many people are following the referendum in Scotland. We can talk a bit about that in class. In Scotland recently, as I mentioned briefly, I was struck by the ways in which economic arguments and historical-cultural arguments "talked past" one another to an extent. Many people engaged in the politics of persuasion - especially on the side of "No" (or "Better Together", i.e., stay in the UK) - simply use a logic and rhetoric that is on a different register than the one many people are voting on.
In any event, we can discuss, but since Tommy Joe posted a video that was "in favor" (ahem...) of independence, I thought I would bring equity to the debate with a video below that articulates some arguments against independence. (To be fair, he gave a hearing to such arguments himself, though he was surely won over by the rhetorical appeals of the great Scot statesman and orator whose video he posted.) Not exactly from leaving the UK, but I think you will see the analogy. I am also trying to mind the gap in this debate, thinking not only about what the future holds for the Scottish economy, but also what its history has been.
In any event, we can discuss, but since Tommy Joe posted a video that was "in favor" (ahem...) of independence, I thought I would bring equity to the debate with a video below that articulates some arguments against independence. (To be fair, he gave a hearing to such arguments himself, though he was surely won over by the rhetorical appeals of the great Scot statesman and orator whose video he posted.) Not exactly from leaving the UK, but I think you will see the analogy. I am also trying to mind the gap in this debate, thinking not only about what the future holds for the Scottish economy, but also what its history has been.
Friday, September 12, 2014
Sant'lli tore the New York Times up into pieces...
One of the three books we are looking at together this term is by Paul Krugman. As the cover of the book notes, he was a Nobel-Prize winning economist before he became a New York Times columnist. (Actually, he may have won the Prize after becoming a columnist, but the point is his research earned the prize before he went into more regular punditry.)
It may be worth following his op-eds, which come out a couple of times a week. Fortunately, perhaps, he almost always writes on the same things. Over and over. (I am only half-critical of this, because given our national attention span and rapidly-spinning news cycles, there is a good case for repeatedly stressing the same fundamentals with some frequency.)
Main themes of his work include monetary policy and fiscal policy, both of which we will discuss at length. (He is also partisan in his politics, in ways I will leave to you to reflect upon.)
A fascinating thing is how overtly political monetary policy has become in recent years. As we will discuss later, this is basically the amount of "money" that circulates in the economy, as shaped in lage part by the rate of interest charged by the central bank (the Federal Reserve) uses to anchor the banking system. Sounds like relatively technical stuff that won't keep many Americans up at night. Except it is hugely influential and hugely divisive.
Krugman has been a big proponent of very "loose" monetary policy and has been critical of many others (famously, Rick Santelli of CNBC, though he is not the only one) who have been critical of the Federal Reserve for begin too loose. This means basically that Krugman favors very low interest rates and substantial action by the Fed to respond to economic weakness, while Santelli and others would favor interest rates being increased (preferably yesterday, if not earlier). Have a look at Krugman's post today. There is more we could say about this, but maybe the best is just to discuss on Tuesday.
It may be worth following his op-eds, which come out a couple of times a week. Fortunately, perhaps, he almost always writes on the same things. Over and over. (I am only half-critical of this, because given our national attention span and rapidly-spinning news cycles, there is a good case for repeatedly stressing the same fundamentals with some frequency.)
Main themes of his work include monetary policy and fiscal policy, both of which we will discuss at length. (He is also partisan in his politics, in ways I will leave to you to reflect upon.)
A fascinating thing is how overtly political monetary policy has become in recent years. As we will discuss later, this is basically the amount of "money" that circulates in the economy, as shaped in lage part by the rate of interest charged by the central bank (the Federal Reserve) uses to anchor the banking system. Sounds like relatively technical stuff that won't keep many Americans up at night. Except it is hugely influential and hugely divisive.
Krugman has been a big proponent of very "loose" monetary policy and has been critical of many others (famously, Rick Santelli of CNBC, though he is not the only one) who have been critical of the Federal Reserve for begin too loose. This means basically that Krugman favors very low interest rates and substantial action by the Fed to respond to economic weakness, while Santelli and others would favor interest rates being increased (preferably yesterday, if not earlier). Have a look at Krugman's post today. There is more we could say about this, but maybe the best is just to discuss on Tuesday.
Thursday, September 11, 2014
Handy quick reference
I used to maintain a list of different "terms" in IPE: actors, concepts, and the like. We can still do that, but it has occurred to me recently that there are already plenty of other handy quick reference sources online, and that I may be reinventing the wheel. So here is something for those of you who may be new to the study of economics, politics, and the interactions between the two. It is a primer from the Federal Reserve Bank of Dallas (one of 12 branches of the country's central bank), simply called "Globalization".
On a related note, I have sometimes thought that if I had to remake this into a 100- or 200-level course, "Globalization" might be a decent alternative name. But "International Political Economy" - while having less of a ring, perhaps - probably signals more of what we want to talk about and how.
- jtd
On a related note, I have sometimes thought that if I had to remake this into a 100- or 200-level course, "Globalization" might be a decent alternative name. But "International Political Economy" - while having less of a ring, perhaps - probably signals more of what we want to talk about and how.
- jtd
IPE Fall 2014 - Initial Thoughts
Greetings all. I thought I would start out with a few thoughts on the way we will approach "IPE" in the coming weeks. One way to do that is to illustrate a main point that I want to make over the course of the term, using a few major items from the news today. My point to follow...
The first item is what is going on in Ukraine, where pro-Russian (and by most indications, Russian-backed) rebels in the east are fighting the central government, in the hopes of either independence or annexation by Russia. This follows the actual annexation by Russia of the historically important and culturally Russian Crimean Peninsula earlier this year. My initial point about this event is that it looks simply like old fashioned power politics, focused on security rather than economics, yet... notice that much of the actual debate between the US, the European Union, and Russia is taking place in the economic sphere. It is all about sanctions and counter-sanctions, import bans and export bans, and so on. That is, it is really difficult to disentangle the international relations of power politics from the role of the international economy in this day and age.
The second item might seem even more tenuously related to "political economy" (whatever that is, and we will discuss in class). It is the activity of the Islamic State in Iraq and Syria (ISIS or ISIL). Yet a case can be made that this too loops back pretty quickly to economic relations, from oil investment conditioning much politics in the Middle East to the role of Russia (again) and France in Syria. This is not to deny the primacy of issues that are not purely political-economic, such as the Sunni-Shia split in Islam or the simple reaction to Islamist fundamentalism (among other major issues), but it is again to say that there are few issues where economics doesn't enter the picture quickly and with some degree of decisiveness.
The third item: I am just back last night from Scotland...
...where on September 18th, the Scots will tell the Brits once and for all that for centuries, they may have taken their lives, but they will never take our Freeeeeeeeeeeeedom. (Or maybe not.) Anyway. The fascinating thing about the debate there, for me, was the combination of two things: on the one hand, raw emotion about identity and who people are (Scottish, British, or both); and on the other, massively important conversations about implications for monetary policy, fiscal transfers, membership in the European Union, and so on. In other words, two different sides of "who will we be?" and "what will our country be like?"
The unifying factor is clear by this point. "IPE" is never - at least in my view - far from the surface of virtually anything going on in current events around the world today. We can talk another time about how this is true of American domestic politics, as well, of course. But that in due time.
- jtd
The first item is what is going on in Ukraine, where pro-Russian (and by most indications, Russian-backed) rebels in the east are fighting the central government, in the hopes of either independence or annexation by Russia. This follows the actual annexation by Russia of the historically important and culturally Russian Crimean Peninsula earlier this year. My initial point about this event is that it looks simply like old fashioned power politics, focused on security rather than economics, yet... notice that much of the actual debate between the US, the European Union, and Russia is taking place in the economic sphere. It is all about sanctions and counter-sanctions, import bans and export bans, and so on. That is, it is really difficult to disentangle the international relations of power politics from the role of the international economy in this day and age.
The second item might seem even more tenuously related to "political economy" (whatever that is, and we will discuss in class). It is the activity of the Islamic State in Iraq and Syria (ISIS or ISIL). Yet a case can be made that this too loops back pretty quickly to economic relations, from oil investment conditioning much politics in the Middle East to the role of Russia (again) and France in Syria. This is not to deny the primacy of issues that are not purely political-economic, such as the Sunni-Shia split in Islam or the simple reaction to Islamist fundamentalism (among other major issues), but it is again to say that there are few issues where economics doesn't enter the picture quickly and with some degree of decisiveness.
The third item: I am just back last night from Scotland...
The unifying factor is clear by this point. "IPE" is never - at least in my view - far from the surface of virtually anything going on in current events around the world today. We can talk another time about how this is true of American domestic politics, as well, of course. But that in due time.
- jtd
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