Recently in Political Economy Category

Interesting that Christopher Hitchens and the Iraq War "leave" us on the same day. Hitchens wrote a lot about religion being the cause of all bloodshed in the world, but also described himself as a "single-issue voter", with the issue being "defending civilization against its terrorist enemies and their totalitarian protectors". He vowed to "expose and oppose any ambiguity" on that matter. He supported America's wars during the last decade, including the idea of preemptive strikes.

Interesting to see how a man who calls himself an "enlightened" rationalist is so lacking in irony and cannot notice that his own warmongering serves and facilitates all the violent, irrational elements of society that he blamed "religion" for nurturing.

There is no "secularism"; All humans are prone to adopt dogmas and anoint idols. All humans are prone to errors of judgment, guided by fear. Faith is the realisation that the world goes on turning without you and that it is futile to try to control it (and those in it). People with and without Faith can be found in both the secular and religious world. Hitchens, I suspect, was driven by fear. May he rest in peace.
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The newspapers are filled with stories of governments spending money they don't have. Some blame it on work ethic (Greece), historical trauma (Germany), political gridlock (US), or just sheer frivolity (Italy). The assumption is that political change will bring about a change in spending patterns. It won't. Politicians take on obligations they can't afford for one simple reason: Because they can.

Throughout history, kings and politicians used paper derivatives of real money to finance their pet projects and wars. In the past, however, their ability to do so was limited by technological constraints (even paper money takes time and resources to produce), competition (the availability of other, more "solid' currencies), and the fact that large parts of the global economy relied on barter trading or other means of exchange and not on official currencies.

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Throughout history, cities have been at the centre of human development, rising and falling in line with the fortunes of different societies (Hall 1998). Urban life has been studied within a variety of disciplines - anthropology, sociology, politics, architecture, geography, and economics. Scholars have used urban analysis for diverse purposes, from predicting troughs in the business cycle by observing skyscrapers (Thornton, 2005) to writing "personal" biographies of individual cities - most recently Jerusalem (Sebag Montefiore, 2011). Within economic history, the study of cities focuses on the relation between urbanisation and development, and more specifically on the study of factors such as employment, wages, disposable income, access to capital and public goods, as well as more general economies or diseconomies of urban density and agglomeration of industry. 

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The rapid growth of the Asian "Tiger" economies gave rise to the idea of an Asian development model, one which consists, perhaps, of a cultural component that is uniquely Asian. Confucianism, an existential and political philosophy that originated in China and spread through east and southeast Asia, is often mentioned as one such possible component. More broadly, the interplay between culture and development has fascinated economists and sociologists for generations and is addressed in many of the classics of both disciplines1. As two relatively closed societies and as Asia's only two large-scale economies to attain the status of developed countries, Japan and South Korea offer an interesting case study for the examination of the importance of Confucianism.

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Japan and Korea are among a "handful of successes among the world's more than one hundred developing countries" (Kuznets 1994:1) and as such offer a successful development model to emerging economies in Asia and beyond. While both countries completed the transition to a fully-developed economy in the 20th century, it is worthwhile to examine the historical foundations of this transition. By surveying the 19th century roots of Korean and Japanese development, we can draw conclusions that may benefit the 21st century modernization efforts of other countries, most notably China. 

It is beyond the scope of this short essay to address the myriad factors that may have influenced industrialization and further economic growth in these two countries. My aim is to provide an overview of, and perspective on, some of the recurring themes in the relevant literature, namely the role of political stability; advances in agriculture; urbanization and proto-industrialization; formation of human and physical capital; and the impact of institutional change.

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I have been living in London for two months now. Over the past week, two interesting things happened here. First, Muamar Qadaffi, an autocratic ruler, and a man whose messengers were convicted in court for killing British civilians, was welcome (via satellite) as a guest speaker at the London School of Economics, where the moderator referred to him as "the brother leader". The university, to be clear, is partly funded by the British tax payer. 

A few days later, Julian Assange was arrested due to allegations of "sexual crimes", later found out to be alleged misconduct under an exotic Swedish law that prohibits condom-less sex. Such allegations don't normally get a person on the Interpol's "most wanted" list and trigger an arrest in a foreign country. Clearly, the arrest was driven by pressure from various governments and interested parties.

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"The central concept of liberalism is that under the enforcement of universal rules of just conduct, protecting a recognizable private domain of individuals, a spontaneous order of human activities of much greater complexity will form itself than could ever be produced by deliberate arrangement, and that in consequence the coercive activities of government should be limited to the enforcement of such rules, whatever other services government may at the same time render by administering those particular resources which have been placed at its disposal for those purposes"
Friedrich A. Hayek, Studies in Philosophy, Politics, and Economics, 1969. Apart from being one of the longest sentences ever, the above encapsulates Hayek's key ideas about society, politics, and economic planning. I will follow up with a proper explanation when I have a free moment (Sorry for all the quotes this week!).
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"The impulse of acquisition, pursuit of gain, of money, of the greatest possible amount of money, has in itself nothing to do with capitalism. This impulse exists and has existed among waiters, physicians, coachmen, artists, prostitutes, and beggars. One may say that it has been common to all sorts and conditions of men at all times and in all countries of the earth, wherever the objective possibility of it is or has been given... Unlimited greed for gain is not the least identical with capitalism, and is still less its spirit. Capitalism may even be identical with restraint, or at least a rational tempering, of this irrational impulse."

Max Weber, Author's Introduction to The Protestant Work Ethic and the Spirit of Capitalism.
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"The importance which the certainty of law has for the smooth and efficient running of a free society can hardly be exaggerated. There is probably no single factor which has contributed more to the prosperity of the West than the relative certainty of law which has prevailed here."
Two years into the crisis, the US finds itself with fewer jobs, slower growth, and a higher unemployment rate than expected in the government's worse case scenarios. The current debate concerning America's troubles is focused mainly on monetary and fiscal policy: more or less stimulus, higher or lower taxes, and the expansion or contraction of government programs. 

While the source of America's pain is in monetary and fiscal policy (artificially low interest rates, wars, programs to encourage sub-standard home loans), one of the keys to its recovery lies in a different field: The law.

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A specter is haunting Europe -- the specter of bankruptcy. Just when we thought that things in the old continent are as bad as it gets, it looks like they are about to get much worse. A few weeks ago, Greece practically defaulted on its debtSeveral other European countries, including England, seemed to be heading in the same direction; and global investors were already losing faith in Europe's ability to recover. And now, a highly improbable event is threatening to exacerbate the situation.

An Icelandic volcano erupted on April 15, creating a black cloud that threw Europe's airline industry into chaos: Two thirds of all flights have been canceled over the past weekend, and Europe's largest airline, Lufthansa, cancelled all of its flights. The movement of people and goods in and out of the continent is severely hampered, bringing many industries to a virtual halt. The eruption is far from over, and experts are still unable to predict the end of it. The volcano's last eruption, in 1821, lasted for two years.(!)

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The American media is in combative mood: A year and a half after Lehman's collapse, the pundits are finally waking up to the fact that China bears a significant share of the blame for the current financial crisis. And so, the Krugmans of this world are calling for the US government to 'punish' China through a variety of protectionist measures. 

I have been writing about China's role in creating the current crisis for a long time. And still, I think it is wrong to blame China for America's pains - namely, a collapsing credit bubble, rising unemployment, and a ballooning government debt. 

Yes, the Chinese are manipulating their currency. By doing so, they make it easier for Americans to buy Chinese goods for less and make it harder for Chinese citizens to increase their purchasing power. They are also making it more difficult for Chinese companies to move up in the global supply chain and produce better, more innovative products for higher prices. China's currency manipulation, on its own, damages no one other than the Chinese people. 

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'There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.'
The above quote from Ludwig von Mises's Human Action (1949) pretty much sums up where we are and where we're headed. There are two ways out of this mess: Allowing bad banks and bad companies to go bankrupt and take some pain in the short term; or bail them out through government "creation" of more money and cheap credit.  Looks like the world has opted for the second option. 

This means we will experience a period of illusionary recovery, mostly in real estate prices and equity markets, powered by the huge amount of new money created by government(s). This illusionary recovery can last anywhere between 6 months to 10 years - depending on the amount of money being printed and on external triggers - but will eventually come to a painful stop, when all governments are deeply in debt and there's no one left to bail them out. 

Once we reach that point, governments are most likely to choose the only way out that allows them to divert public attention from their failure and get everyone to work together towards a common goal -  war. Until then, enjoy the ride. 
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The latest financial crisis sparked public interest in economics and rekindled the debate concerning the proper role the dismal science should play in our lives: books by and about dead economists such as Keynes, Hayek, and Schumpeter are in high demand; economic blogs are more popular than ever; and the public is bombarded with introspective monologues by contemporary economists, all the way from Paul Krugman to John Chochrane. The latest contribution is a Wall Street Journal article by Prof. Russ Roberts. Unlike the opposing so-called scientific explanations for the crisis suggested by various economists, Roberts is questioning whether economic science is at all a science and suggests that more than anything, economics might be suffering from a crisis of identity. 

Roberts points out that unlike most sciences - in which progress is steady and concrete - in Economics 'theories that were once discredited surge back into favor' and since it is impossible to control for all the relevant factors in an economic experiment, each effect can be explained by a variety of causes, or a combination of causes. This, in turn, means that the  explanations for economic phenomena change in line with the political climate.

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'The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.'
Paul Samuelson died this week. Samuelson was the first American economists to win the Nobel Prize in 1970, and was one of the most influential proponents of Keynsian economics. His introduction to the field sold millions of copies and was used to train a generation of economists.

Samuelson was a big fan of government management of monetary affairs (printing money, setting interest rates), and so it is no surprise that the list of economists that saw him as their mentor includes contemporary "superstars" such as Ben Bernanke and Larry Summers. 
 
The above quote is taken from the 13th edition of Samuelson's introduction to economics, published in 1989. A few months later, the Soviet Union collapsed. 

Samuelson lived with the times and his error is excusable. The real question is why, twenty years later, contemporary economists still preach soviet-style policies. May Samuelson rest in peace. Communism, for now, is still alive and well. 
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One of the most popular memes repeated by mainstream media since the collapse of Lehman Brothers last year is the idea that China will manage to avoid the consequences of the economic downturn by shifting from an export-based economy to one based on local consumption. 

Back in the middle of 2008, many publications, most prominently The Economist magazine, suggested that a downturn in developed countries might not have any significant effect on developing economies, since the latter have already "decoupled" and are no longer heavily dependent on demand from consumers in rich countries.

Within a few months, the "decoupling" theory proved to be false: The downturn in the developed world had a significant impact on China's economic well-being, causing a dramatic rise in unemployment and a sharp slowdown in economic growth. The Chinese government, just like the American one, responded with massive stimulus spending and expansion of cheap credit.
 
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"People are always shouting they want to create a better future. It's not true. The future is an apathetic void of no interest to anyone. The past is full of life, eager to irritate us, provoke and insult us, tempt us to destroy or repaint it. The only reason people want to be masters of the future is to change the past"
History is written by the winners. The above is taken from Milan Kundera's Book of Laughter and Forgetting and refers to the consistent efforts of Soviet officials in Eastern Europe to rewrite history. Soviet communism is a thing of the past, but the battle to control the future in order to rewrite the past is far from over. 

In the midst of a global financial crisis, it is interesting to see how our understanding of the Great Depression, 80 years ago, shapes current attitudes. It is even more interesting to examine the discrepancies between actual facts and the history currently taught at elementary schools and published in mainstream newspapers. 

We can summarize the common view of the Great Depression as follows:

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"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some... As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauce the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
John Meynard Keynes wrote the above in 1919, in an essay about Inflation and Deflation. This is the same Keynes whose theoretical work and policy recommendations serve to justify current calls for increased government spending, money printing, and cheap credit. How does one reconcile his views on the peril of inflation with the solutions that are being proposed in his name? More on this next time. 
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"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil. "
Frederick Bastiat wrote the essay That Which is Seen, and that Which is Not Seen in 1850. Today, as government is increasing its involvement in economic matters in unprecedented ways in order to "cure" the economy of its ails, it is important to remember that the goals of politicians - producing "measurable" and "communicable" results - are not necessarily the goals of society, especially when it comes to economic policy. The "recovery" we see in the newspapers today, is the foundation for the bigger, longer crisis of tomorrow. More on this soon. (I am traveling for the next couple of weeks)
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"Has it ever occurred to you, Winston, that by the year 2050, at the very latest, not a single human being will be alive who could understand such a conversation as we are having now?...The whole climate of thought will be different. In fact, there will be no thought, as we understand it now. Orthodoxy means not thinking--not needing to think. Orthodoxy is unconsciousness."
In 1984, George Orwell introduced Newspeak, a new language being gradually adopted by citizens of a fictional country called Oceanaia. As Orwell notes, the intention was that once Newspeak had been fully adopted, 'a heretical thought should be literally unthinkable, at least so far as thought is dependent on words'. This was done through the invention of new words and, more importantly, by 'eliminating undesirable words and by stripping such words as remained of unorthodox meanings.'

Words, of course, don't change their meaning by coincidence. As Orwell points out in his 1946 essay Politics and the English Language, the 'decline of a language must ultimately have political and economic causes'. Of course, if we think foolish thoughts, our language would become full of foolish words, but the effect becomes a cause and the new language encourages more foolish thoughts. But what exactly does it mean that the decline of language has political and economic causes? Well, since the civilized world happens to be in the middle a severe ideological crisis, we can use a contemporary example to show how this process works. 

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We live in a time of immense confusion. Words that used to mean one thing suddenly mean another. The values which made us prosperous and free are being questioned and trampled on. We are in a mess, and our instinctive reactions seem to make things worse. 

In 1989, following the collapse of the Soviet Union, Francis Fukuyama declared "The End of History" and noted that 'The triumph of the West, of the Western idea, is evident first of all in the total exhaustion of viable systematic alternatives to Western liberalism'. Twenty years later, the ideological appeal of classic liberal values  - free markets, property rights, civil liberty, and individual responsibility - is in decline, following an economic meltdown in developed countries and the perceived success of the authoritarian-socialist model, most notably in the People's Republic of China. Capitalism as we know it is dying. Some say it already died a long time ago. 

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Note: The views and observations expressed on this web site are published for the sake of public discussion and do not represent my personal opinion or the opinion of my companies, clients, and/or employers. If you would like to get my opinion on anything, ask me.

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