A different meaning of “Made in China”

Question answered: 

‘As the ‘post-industrial’ global economy emerges, there is frequent concern in the media and elsewhere that soon ‘there will not be enough work to go around’; such concerns/fears are an important ingredient of the political dynamics we currently see in advanced (Western) democracies. At the same time, however, unemployment in these same countries is  currently very low. To what extent (and how) can theories of trade, labour markets, value chains, and collective action explain what is going on, both economically and politically?’

  1. Introduction

The fears that there’s ‘not going to be enough work to go around’ can be fuelled by two factors, one is technological progress the other is international trade. As the literature overviewed in this essay says, on the long run, the net economic effect of these factors on jobs were either positive or economically negligible. Even though this, throughout the history, both mechanisms were in the centre of political turmoil. The reason to this might be the difficulties of adjustment, including lack of policy solutions, to the new economic order by the low-skilled workforce.

In my essay I build largely on Richard Freeman’s 2008 article in what he argued that the global labour force doubled at the advent of the second millennium as China, India and the former Soviet Union opened their economies up (Freeman, 2008). He argues that the adjustment to this might the greatest challenge for the US economy since the Great Depression. I illustrate his negative prediction with data and conclude that the adjustment might be failing and the emerging markets, especially China aims to compete with the US where it hurts the most, high-tech industries.

The West should not fear robots in general, but robots, which are developed in China and are more productive than their Western counterparts. Continue reading “A different meaning of “Made in China””

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Wealth Inequality and Populism in the West on the Long Run

Introduction

In my essay I will put forward an argument, which should be tested with utmost scientific rigour, however unfortunately the scope of this paper does not make it possible. Therefore, my aim is to spark discussion on the long-term relationship between populism, wealth inequality and the current economic situation in the West. My hypothesis builds on the relative deprivation theory (Smith et al, 2015:2) but in different way as the majority of the already existing literature does. The rise of populism in rich Western countries is a longer process, than just the recently unfolding phenomenon (Mudde, 2017), therefore we need a long-term explanation to fully understand it’s nature. My proposition is that wealth and not income inequality (and other macroeconomic factors, such as unemployment, GDP growth, etc..) can be the main economic pillars of the populist attitude in the last decades. The surge in wealth inequality from the 1970s in Europe and the US (Piketty and Saez, 2014: 839) coincides with the occurrence and rise of populist parties. While developed Western countries, excluding the US, have excessive welfare policies to foster income equality, they completely neglect such equalizing measures concerning the inequality of wealth. However, the vast differences in one’s starting point in life is what cements societal differences through intergenerational inequality (Corak, 2013).This explanation does not fully contradict with the other arguments building on relative deprivation theory. Rooduijn and Burgoon (2017:27) argues that an individual benchmarks its situation to the whole and if the whole is performing better, while the individual perceives his circumstances to be worse, he feels relatively deprived and is more likely to vote for a populist party. Continuously over time being less well off than the whole means that the individual’s relative low prosperity is being solidified, I argue that this happens through the accumulation, or this case in more precisely in the not accumulation, of wealth. Continue reading “Wealth Inequality and Populism in the West on the Long Run”

Reading Blog 9: Corporate Governance, Inequalities and Social Responsibility

Firms maximize profits. To do so they need integrated market and nonmarket strategies (Baron, 1995). Corporate social responsibility and exerting power on stakeholders is part of the nonmarket strategy. While lowering inequality is a surprising side-effect of corporate success.

Are businesses the saviours of our society? Or to ask it more precisely, citing one of the pieces, is the “decentralized correction of externalities and inequality” is? (Benabou and Tirole, 2009:15). Should these problems be corrected independently of democratically elected governments? Do we need governments at all?

This is what we think of when reading about extensive corporate social responsibility programs and lowering inequality due to expanding corporations. If we agree, and say that more decentralization is the better, then how we ensure that the acts performed on behalf of the people by corporations are indeed what people want? Even if we say that yes, this what people want, can we be sure? No, we can’t. Fuchs and Lederer masterfully broadens one’s horizon regarding how business can exert its power. For the mentioned situation, we can say that this is a prime example of the discursive power of business. This approach says that “power not simply pursues interests, but creates them.” (Fuchs and Lederer, 2007:9).

Furthermore, firms made us think that they are more efficient than states. The slow-moving mastodon with high transaction costs is in everyone’s mind if we say state action. However, as we read in the brilliant piece by Mariana Mazzucato last week, this is not that straightforward. Generally, state is needed to make innovation happen, because it’s risk tolerant and funds what private capital is not. So maybe the “decentralized correction of externalities and inequality” is not that efficient either as it might sound.

Also, if we add Ronald Coase’s powerful argument to it, we realize why extended types of governance (states) are needed. Higher the complexity of a situation, higher the transaction costs, higher centralization is needed to deal with the problem. In case of a system where is no state, but transaction costs are present, how would two decentralized actors solve their nuisance? Clearly the rules of the game are essential to it.

Additionally, Davis and Cobb state that higher the concentration of employment, lower the inequality in a country. The question is what makes high concentration of employment possible? According to the actors it’s “likely to depend on several factors … national culture and managerial ideologies” (Davis and Cobb, 2010:51). These are soft, informal factors embedded in individuals. If the wants and decisions of these individuals aggregate up, they yield a national culture. If there’s no discrepancy between formal and informal rules, this national culture is codified in regulations. Therefore, institutions foster corporate expansion and the lowering of inequality.

The point I’m trying to press is the following. As an economist I find the decentralized, market like solutions to externalities and inequality as a beautiful thing. My inner Bernard Mandeville would applaud the findings of Davis, Cobb, Bénabou, Tirole and the others. But if I aim to think as a political economist, I must criticise these solutions. They happen, only due to the institutional environment making it possible. Business, by undermining institutions through exerting different types of power on them and taking up their very roles (CSR), cannibalizes its natural habitat. As Schumpeter put it in “[capitalism] very success undermines the social institutions which protect it” (Schumpeter, 1943:61). Business is not our saviour, however it’s an immensely important part of the system, therefore the delicate balance of the actors need to be kept to make it work on the long run.

Reading blog 8: Division of Labour, Innovation and Value Chains 

Are we progressing? If we do, how? And also, where? These were the questions raised in this week’s pieces. The big picture is the following: most of the researchers are occupied with the first two questions, while Joseph Schumpeter gave his elegant and bold answers to each of them. Yes, we are progressing, capitalism decomposed feudalism, and by the way we are richer than we used to be. We are progressing by the method of creative destruction. To where? Right to the very reality of socialism, to where road is paved with capitalism. In Schumpeter’s argument, the creative destruction process is so powerful it destroys his own child, as well, the capitalist system. If we interpret the welfare state regimes in Scandinavia as Schumpeter’s socialism, we can conclude that he was right. But rather say that it’s a bit more complicated matter, and that’s complexity what the remaining pieces aim to tackle.

Helpman brilliantly demystifies that how growth is measured and what the top macroeconomists regard as economic growth in recent times. Beautifully illustrates the way how technology from an exogenous factor became an endogenous, integral part of growth theory. How we progressed from Solow to Romer, also by incorporating Schumpeter’s notion of creative destruction. The theory Helpman arrives to as being sufficient to describe why there’s a growth in total factor productivity, makes technology innovation endogenous through the private sector. The argument is as follows. Firms are incentivized to invest in R&D because patents can ensure them monopoly profits for a period of time, which can be reinvested to further R&D, which yields further patents, and so on.

All this would be perfectly persuasive, if I haven’t read Mazzucato’s piece right after it. She takes on the dirty, real world side of the innovation debate. By busting the six common myths regarding innovation policy, Mazzucato makes a great service to society. I, personally, believed in each of these myths. She illustrated with scientific evidence, that for instance, why the link between (private) innovation and R&D is not that straightforward. She argues, that: “There are very few studies which prove that innovation carried out by large or small firms actually increases their growth performance. Therefore, macro models (Schumpeter, new growth theory) does not have the micro foundation.” (Mazzucato, 2013:44. She also replaces the enterprising, champion-of-innovation picture of the private sector with a risk-averse, opportunistic one. But, on the other hand she does the same with the state, she aims to establish a view that the sovereign is a potent force in innovation. The state achieves it by investing in projects possessing the attributes of high uncertainty and potential, which are too risky for the venture capitalists and large corporations.  Mazzucato also puts innovation to context, which are the national systems of innovation. Combining all this together, we get her main argument, which is that innovation is not an activity which happens in isolation in certain private enterprises. It is very much a process, which is the product of a system with deep interdependencies between private and public actors.

These interdependencies, at least the private side of them, are illustrated in the paper of Gereffi, Humphrey and Sturgeon. They argue that the “different ways of dealing with asset specificity and different motivations in building firm-to-firm relationships yield three modes of industrial organization: market, hierarchy and network, but not all networks are alike” (Gereffi, Humphrey, Sturgeon, 2005:82). The theory results in 5 modes, which can help us to understand how the diffusion of knowledge happens in industrial networks. This paper presents the missing modes of governance between markets and hierarchies.

But, not just that. Schumpeter gave us the underlying behavioural pattern of the system (creative destruction), Mazzucato the state’s role and the national system of innovation, Gereffi et al the nature of governance in these systems, Helpman clarified how we should measure the result of the interplay of these parts and Gordon and his critiques provided the historical analysis of the results.

At the end of the day was Schumpeter, right? Are we heading to socialism? Gordon’s explicit answer is no. But even though that Schumpeter might be right. Since the prediction of the Austrian not inherently differs from Gordon’s conclusion.

The Importance of the Alignment of Formal and Informal Institutions in the Dynamics of Aggregation and Behavior. Illustrated by the Example of the Post-Communist Transformation in East and Central Europe.

  1. Introduction

Markets and hierarchies dichotomy (Williamson, 1975) is not useful in capturing the dynamics of aggregation and behaviour. The dichotomy represents two ideal types, which manifest themselves extremely rarely in the real world, however the communist regime in East and Central Europe (ECE) was one of the remarkable occasions when we could witness a nearly pure hierarchy. Additionally, the post-communist transformation is the rare example of a regime change, when countries tried to go from one end of the dichotomy, pure hierarchy, to the other, markets.

The aggregation happens in the following way. Individuals think, decide and act based on the bounded rationality principle (Simon, 1955), they form organizations (Coase, 1937), which act on the behalf of the individuals. The tool to make these arrangements happen, and the whole aggregation process viable, are contracts. Organizations are set of contracts. Beyond these straightforward mechanisms are other forces working to make aggregation from the individual to a national economy happen. These factors are informal rules, what can be debunked into norms, conventions and culture, and formal rules, which are the constitution, laws and their enforcement mechanism like the judiciary system. If formal and informal rules are not aligned in a society, problems arise regarding the explanatory power of the dichotomy. In my example regarding the transformation, introducing market arrangements in the economies of ECE haven’t yielded the results predicted by the markets and hierarchies framework. (Pejovich, 2003, Swatek, 2008, North,1993) Continue reading “The Importance of the Alignment of Formal and Informal Institutions in the Dynamics of Aggregation and Behavior. Illustrated by the Example of the Post-Communist Transformation in East and Central Europe.”

Reading Blog 7: Trade and Migration: Cost, Benefits and the Rules of the Global Game

This week’s pieces touched on the fundamental issue of moving of goods, capital and humans. How to ensure, or to ensure at all, the movement of these factors? This question can be clearly linked to development.

The basic, underlying idea of the article written by Estevez-Abe, Iversen and Soskice is that we should regard humans as rational agents who evaluate the returns of their investments in themselves (education and skills), before making them. This closely corresponds with Pritchett’s view of the human being. He argues, the fact that “we prevent people from moving their human capital for higher returns but allow them to invest their physical and monetary capital elsewhere creates perverse incentives”. (Pritchett, 2006) If we add the “new trade theory” to the equation by Paul Krugman, which states that: “Increasing returns provide an incentive to concentrate production of any one product in a single location, given this incentive to concentrate, transport costs are minimized by choosing a location close to the largest market, and this location then exports to other markets.” (Krugman, 2008), we easily conclude why development is not a piece of cake. To plainly state, people tend maximize their skills to enhance their returns, if those returns can’t be reaped at home (production is concentrated elsewhere), then they wish to move to attain higher returns, but movement is restricted. To solve the problem, we should let people move freely, which is politically contestable in most receiving countries, or establish production at emerging countries where individual returns can be reaped.

Realizing the importance of the problem, Pritchett outlines a solution package, which is in his opinion is both politically acceptable and development-friendly. But admits that the details, which are about to be developed are where the devil resides.

On the other hand, Hoekman and Kostecki’s piece aims to describe the existing solution we have for the other part of the story (trade and industry policy). They state that openness, and most importantly the depth of that, is what leads to economic growth (in my argument to the individual’s rent realization at home). However, they also state that it’s a complicated issue, with almost more constraining factors than dynamics working in favour of that. But they emphasize one important point, which leads back to many of our past readings, the rules of the game of global trade. They argue that rules should be laid in order to provide legal security and property rights in the system. Therefore WTO, which can be seen as a mechanism for exchanging trade commitments and also as a code of conduct, is a necessary, and constantly evolving, institution for development. Furthermore, the five basic principles of WTO serve as an insurance for participants than no member will take advantage of the other in the system, and no strong country will exploit others, which is essential to make development happen.

While the global rules of the game regarding trade are set, the same should be done for migration, the other way of individual return maximization. However, other rules of the game are in play, which are the rules of the home labour markets of countries. Based on Estevez-Abe, Iversen and Soskice it’s possible to argue that these are endogenous to the former two in a globalized economy. Since the welfare production regime in a country is conditional on the median voter, which are those who are most favoured by the system in place. As we know trade liberalization always has winners and losers, just as migration, as well. For instance, if unskilled labour is let to flow freely in a country of general skill orientation wage inequalities will emerge and the skilled middle-class is becoming the favoured, therefore the median voter, determining further political outcomes.

As we see there’s a high degree of interdependence between the global regime of trade, migration and the welfare production regime in a given country, but it’s important to see that the interplay of these will either make or break development in emerging markets.

Sources:

  • Paul Krugman – Prize Lecture, 2008
  • Estevez-Abe, Iversen, Soskice – Social Protection and the Formation of Skills: a Reinterpretation of the Welfar State, 2001
  • Hoekman and Kostecki – The Global Trading System, 2001
  • Lance Pritchett – Accomodating Forces and Ideas to Achieve Development-Friendly Labor Mobility, 2006

Reading Blog 6: Labour Market, Human Capital and Economic Competitiveness

To this point we aimed to gain, mostly theoretical, knowledge and formulate a view about what the market exactly is, and how it works. As I understand, now, armoured with this new body of knowledge, we take on the parts of the system. The first one is the labour market. My thoughts about the labour market, before I read the pieces, were quite straightforward. Market solves it all, rigidities and distortions are bad for efficiency, growth and employment. Needless to say, my view has been challenged.

Baldwin and Wyplosz presented the basics, the labour market economics 101. But one of their points is exceptionally important: “Labour markets are very special, people’s time, talent and effort is what exchanged, which are not standard goods.” (Baldwin, Wyplosz, 2009). This view is substantially and explicitly reflected in the humanist pieces of Kwon Dae-Bong and Amartya Sen. While Sen is more theoretical and philosophical about the question, differentiating between the human capital and human capability, and tracing back his analysis to Adam Smith’s work.  On the other hand, Kwon Dae-Bong’s is more operational and practical, but builds on the same, not so, underlying argument that humans are not mere factors of production, but strive to live lives they have reason to value. Both authors emphasize the importance of broader organizations and institutions (education, healthcare), in addition to economic growth to develop human capability, and therefore to live a fuller, freer life. An interesting picture emerges here from the arguments. If we consider what Sen writes: “Human beings are not merely means of production but also the end of the exercise.” (Sen, 1997), we realize that the system is interdependent. This interdependence is present not just between the narrow notion of human capital and economic growth, but in the broader sense between human capability and institutions/organizations and consequently between the social order. By getting back to the cited statement from Baldwin and Wyplosz, we understand, that this interdependent complexity is what makes the labour markets very special.

While the previous paragraph, in this reading blog, concerns an attribute of the labour market, and the questions, what is the labour markets main purpose and why is it complex. This paragraph, and the last two pieces by Kuttner and Freeman aim to tackle the issue that how should it be governed. Trying to answer the how question results in the authors discussing more specific labour market institutions, rather than the broad societal ones (education, healthcare).

Kuttner argues, in a more ideologically laden, but scientific way, that full employment is a desirable, but in today’s world not necessarily attainable, goal for a society. He argues that welfare capitalists got the whole picture wrong when they assumed that it’s possible to put together a system without full employment, which will be just and equal. So, his conclusion is that a welfare state with full employment solves the centuries old dilemma of equality or efficiency, which inarguably has to be solved. Through this view he establishes a strong relation to Keynes, Sen and the second paragraph of this writing.

Freemans more evidence based approach yields a less radical answer to the how question. Based on a methodological study of the literature on the matter, he argues that labour market institutions do have distributional effect. The country with more labour market institutions has higher income equality. On the other hand, he argues that the presence of labour market institutions can’t be directly linked to the aggregate performance of the economy.

In conclusion, my view has changed. Now I see the labour market as a more complex and interdependent system, where the market approach should not be trivial and where the labour market and broader societal institutions are key to a great performance. By great performance I mean economic growth and well-being of citizens.

Sources:

  • Baldwin and Wyplosz – The Economics of the European Integration, 2009
  • Dae Bong Kwon – Human Capital and its Measurement, 2009
  • Amartya Sen – Editorial: Human Capital and Human Capability, 1997
  • Robert Kuttner – The Economic Illusion: False Choices between Prosperity and Social Justice, 1984
  • R. Freeman – Labor Market Institutions around the World, 2007

 

Reading Blog 5: Development, Economic Openness and Democracy

I just need to press again what I wrote in the previous reading blog that everything starts to culminate in a coherent understanding of how markets function. However, the first two readings for this class present the phenomenon more from a macroeconomic and historical point of view, while the solid theoretical microeconomic/collective action foundations are underlying each piece.

Charles Tilly argues, with brilliance and sometimes considerable wit, based on the European history, that war making, state making and capital accumulation are mutually reinforcing processes. Additionally, he argues that the size of the government is the function of the effort devoted to extraction, state making, protection and war making. In general, his argument favours Underhill’s proposition that governance is endogenous to the markets, but Tilly’s theory adds another layer, the role of violence and wars in this process.

The second reading (North, Wallis and Weingast, 2009) goes on with elaborating on the role of violence in the making of social orders, and in a broader sense on the different developmental trajectories of countries. North et al differentiates three social orders, the foraging order, the natural state and the open access order. Their main proposition is that the open access order has several institutional characteristics, which favour growth and welfare. They argue that open access order societies have not just the most developed economic apparatus and highest degree of welfare, but also the most articulate and democratic political institutions, therefore political and economic development is closely interrelated. They argue that in order to attain this degree of development violence has to be curbed, which is done through institutions, which embody the rules of the game. The goal of these institutions is to support complicated and sophisticated contractual organizations, both inside and outside the state, therefore control violence. Development is the function of the number and sophistication of these organizations and institutions. But it’s important to note that this process is not teleological, the internal dynamics of elites, can yield multiple equilibria and create a constant instability. This point is vividly illustrated in the third chapter, that even Britain lingered back and forth between the different developmental stages.  The book’ underlying argument intersects and builds on the insight of Buchanan, that individual act the same, but outcomes are determined by the institutional framework. The proposition that rent-seeking is a natural behaviour, present in all systems, but institutions can tame it and make it beneficial to the society. Implicitly arguing that the inherent logic of markets does not make a country more developed, institutions are needed to make it happen.

Brousseaue and Glachant also underpin what has been said before, that markets need institutions and they are closely interrelated, but from the microeconomic point of view. They argue that markets are manufactured, therefore imperfect, before they are made by humans (who are boundedly rational), therefore they need governance. But on the other hand governance is also imperfect due to the short-sightedness of collective action. Based on this they argue that market as a system is difficult to and is rarely the result of an optimization process.

In the last piece, the great A. O. Hirschman revisits exit and voice. The main argument related to our inquiry is on the end of the third essay. He argues that public goods increase loyalty in a society, and understood complexity is the ultimate factor preventing exit. So, he implicitly argues that a developed institutional framework and a historically developed social order in a society can serve to prevent one from “voting with his feet”. This also corresponds to the conclusions of the other three readings, institutions are key in the success of a society.

Sources:

  • Charles Tilly – War-making and State-making as Organized Crime, 1985
  • North, Wallis and Weingast – Violence and Social Order, 2009
  • Brousseau and Glachant – Introduction: Manufacturing Markets – what it means and why it matters, 2014
  • Hirschmann – Around Exit, Voice and Loyalty, 1981

Reading Blog 4: Diversity and Market Integration

The whole literature of this seminar builds on the observation of Adam Smith that economic agents sometimes stick together to “widen the market and narrow the competition”. This motive is also present at Fligstein (Fligstein, 2001), when he argues that the goal of entrepreneurs is not profit maximization but survival, which implies the pursuing of stability, which results in continuous efforts to attain a monopolistic position on the market. I think the starting point of this argument is arguable since the underlying motivation to pursue stability is profit maximization. If the firm is profitable in a stable manner for a longer period, it constitutes to the overall return to the entrepreneur, therefore a stable environment serves profit maximization. However, this argument does not change the fact that economic agents aim to become monopolists, the sole players on the market.

The previous readings and this seminar’s papers (Tullock, 1967, Krueger 1974 and Peltzman 1989) culminate in Underhill’s beautiful paper as a big picture and interdependent model of how markets work.

In the first reading Gordon Tullock argues that tariffs, thefts and monopoly have additional welfare costs to those observed in the classic analysis of welfare effects (Harberger’s triangle). The paper not just urged me to rethink my bicycle lock buying habits, but additionally refined the picture why such behaviour (monopolies and cartels) outlined by Smith and Fligstein should be overcome more efficiently by means of control. Plainly stated, Tullock made it clear why a “Third Order” (Underhill, 2016) of governance is needed.

Krueger’s argument is similar to Tullocks, she deals with the welfare costs of competitive rent-seeking in the case of import licenses. Both authors arguing in favour of free trade or the correct type of policies (Third order governance). But pure, neo-classical free trade is something, which slowly has become overly simplistic, unrealistic and not sufficient as an answer. It lacks institutions, the essential manner of those is proven in the following paragraphs.

Peltzman’s overview and update of the economic theory of regulation offers valuable insights into why regulations emerge (or disappear). We should consider three of Peltzman’s arguments, one is, which comes from Olson (Olson, 1982), that “Compact, well-organized groups will tend to benefit more from regulation than broad, diffuse groups.” (Peltzman, 1989), the other is that incumbents favour regulation until the point it favours them, and the third is that regulation usually emerges as an answer to a crisis.

Since Coase we know that due to transaction costs being greater than 0, free market yields two co-ordination mechanisms, and therefore the emergence of firms. From Smith and Fligstein we know that once firms are in the system they aim to become monopolists. Additionally, from Buchanan we know that acting this way is not that straightforward, since some goods can be attained only in partnership with other economic agents (Buchanan, 1965). Adding all this together we arrive at Underhill’s theory, which states that “Governance is endogenous to the self-interested and rational utility-maximising behaviour of economic agents.” (Underhill, 2016).

All in all, I must say that this the point when everything starts to make a truly interconnected and coherent sense. The fragments were put together in these readings perfectly to make a theory of markets and society going from micro to macro and back.

Sources:

  • Gordon Tullock – The Welfare Costs of Tariffs, Monopolies and Theft, 1967
  • Anne Krueger – The Political Economy of the Rent-Seeking Society, 1974
  • Sam Peltzman – The Economic Theory of Regulation after Decade of Deregulation, 1989
  • Geoffrey Underhill – Markets Institutions, and Governance: the Endogeneity of Governance, 2016

Why I do what I do?

As a business bachelor and a business oriented person why I am pursuing an Msc. in Political Economy?

  • It is interesting and intellectually challenging, I think it’s quite an important criterion regarding one’s studies.
  • It teaches you to think. To think independently, critically and in a structured way about anything in the World.
  • Throughout my business administration bachelor studies, internships and the year I spent in the investment banking industry I had to realize that businesses don’t exist in a vacuum. I want to understand what’s outside the firm and the industry, make a step beyond Michael Porter’s beautiful frameworks, the discounted cash flow model and the trading comparable valuations. I believe it’s essential to understand the broader working environment of a firm to be able to navigate and make sense of a business organization in a successful manner.

After finishing my graduate studies, armed with plethora of new knowledge, I plan to return to the world of business, most preferably investments (venture capital & private equity) and NOT plan to pursue any career in politics or international relations. If you think I could add value to your company please do not hesitate to hit me up with a message here in LinkedIn.