Schumpeterian Heterodox Economics: Attempting to Define an Alternative Approach to Development Theor

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Schumpeterian Heterodox Economics Attempting to
Define an Alternative Approach to Development
Theory.

• Erik S. Reinert
• Aalborg, May 6, 2008

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SINCE 1990 THE WASHINGTON INSTITUTIONS HAVE
PROVIDED A STRING OF RED HERRINGS
get the prices right get the property rights
right get the institutions right get the
governance right get the competitiveness
right get the entrepreneurship right get the
education right get the climate right get
the diseases right get the culture
right Missing dimensionGET THE ECONOMIC
ACTIVITIES RIGHT
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Not necessary to reinvent wheels much useful
theory in now forgotten history of economic
policy

• Lack of Conceptual Novelty (1485-1947)
  continuity of principles and toolbox with varying
  degrees of sophistication

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Important Continental criticism of (English)
Classical Economics - deals with quantities
void of any qualitative characteristics
(qualitätslose Grössen)- blind to structural
connections/ synergies (Strukturzusammenhänge)
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The Knowledge- and Production-Based Other Canon
of Economics
Tudor Economic Policy in England 1485
Realökonomisch Mercantilism Growth as
Activity-Specific
Alexander Hamilton US 1791
Daniel Raymond US 1820
M. H. CareyUS 19. Century
US Industrial Policy
E. PeshineSmith
Veblen and the Institutional School
Japan Asian Tigers 1945
Giovanni Botero 1588 Antonio Serra 1613
Friedrich List 1841
Japan 1860
Evolutionary Economics
Renaissance
Schumpeter
Barthélemy de Laffemas 1597 Jean Baptiste Colbert
1651
SchmollerSombart
Classical Devp. Econ. 1945
The Other Canon
Von Hornick Germany 1684
German Cameralism Anti-Physiocracy
German Historical School 1848 Verein für
Sozial-politik 1872-1932
Marx
Keynes
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Three Times Rise and Fall of Physics-based
Economics

• School Starting point Peak Death
• Physiocracy Quesnay 1758 1760s ca. 1770
• (Rule of Nature)
• Classical Ricardo 1817 1840s ca. 1895
• Economics
• Neoclassical Samuelson 1948 1990s ????
• synthesis
•  

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Colonialism as a Technology Policy.That all
Negroes shall be prohibited from weaving either
Linnen or Woollen, or spinning or combing of
Wooll, or working at any Manufacture of Iron,
further than making it into Pig or Bar iron That
they be also prohibited from manufacturing of
Hats, Stockings, or Leather of any Kind Indeed,
if they set up Manufactures, and the Government
afterwards shall be under a Necessity of stopping
their Progress, we must not expect that it will
be done with the same Ease that now it may.
Joshua Gee, Trade and Navigation of Great
Britain Considered, London, 1729.
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Delft, Holland, 1650s An Innovation System
Based on Diversity
NAVY MERCHANT MARINE
Supply new species from afar to study
Supply canvas, linseed oil
Demand artists for drawing new specimens
ART
SCIENCE
Supply lenses and brass for binoculars maps
Supply lenses for camera obscura Demand
luxury painting
Supply lenses brass for microscopes
INDUSTRY Textile production uses glass
lenses Printing copper for printing
plates Pottery tiles for export
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The Circular Flow of Economics
The real economy
Financial/money economy
Black Box Production of goods and services
Money/capital
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USA Learning Curve of Best-Practice Productivity
in Medium Grade Mens Shoes
USA Learning Curve of Best-Practice Productivity
in Medium Grade Mens Shoes.
Man-Hours Required by Best-Practice Methods of
Producing A Pair of Medium-grade Mens Shoes at
Selected Dates in the U.S. Year
Man-Hours Per Pair 1850 15.5 1900 1.7 1923 1.1
1936 0.9
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Capitalism is about rent-seeking

• The trick has been to make capitalism
• a) into dynamic (Schumpeterian) rent-seeking
  that increases the size of the pie.
• b) insure a fordist wage regime, i.e. that
  dynamic rents are divided between entrepreneur
  (higher wages), workers (higher wages),
  government (larger tax base).

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The Mechanics of Economic Development

• Activity-specific
• Dynamic imperfect competition
• Synergy-based (within labour market)
• Induces institutions
• Emulation, then Comparative Advantage

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Industrial Policy Ideas from Europe.

• Renaissance Economics (1200s-1600s).
• Wealth as a product of urban synergies
• Switching the meaning of innovations
• Schumpeterian institutions getting the prices
  wrong
• Maximising diversity and division of labour
• The real gold mines are not the gold mines
• Enlightenment Economics (1700s).
• Productivity explosions and activity-specific
  growth
• Synergies between industry and agriculture
• Taxonomies Good and Bad Trade

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Creating rent-seeking institutions by getting
the prices wrongPatents and modern tariffs
were created at about the same time, in the late
1400s. Patents Promoting new
knowledgeTariffs bringing new knowledge to new
areas.
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How the wage differentials between rich and poor
nations were created through sequences of
productivity explosions translated into wage
rents.
Malthusian activities
Textiles
Shoes
Radio
TV
Schumpeterian activities
Electronics
1750
2000
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Institutions as agents of changeIt is not
sufficient to inquire whether an institution of
the state is attested to have been founded by our
ancestors. Rather it is necessary that we
understand and explain why it was instituted. For
it is by knowing a cause that we gain knowledge
of a thingLeonardo Bruni (1369-1444), 1413.
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Manufacturing as the real gold mines...such is
the power of industry that no mine of silver or
gold in New Spain or Peru can compare with it,
and the duties from the merchandise of Milan are
worth more to the Catholic King than the mines of
Potosí and Jalisco. Italy is a country in which
there is no important gold or silver mine, and so
is France yet both countries are rich in money
and treasure thanks to industry. Giovanni
Botero, Ragion di Stato, 1588
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Wealth as a product of synergies Wealth as a
ben comune or common weal Brunetto Latini (ca.
1210-1294), Chancellor of Florence. il ben
comune fa grandi le città. Niccolò Machiavelli
( 1469-1527 ) Policy Maximize the division of
labor.
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How innovations spread

• Classically as lowered prices to the consumers.
  Typically in agriculture and process innovations
  (perfect competition) Using ICT
• Collusively as higher profits, higher wages
  and higher tax base for the producing country.
  Typically in product innovations, Ford
  Microsoft. (dynamic, Schumpeterian imperfect
  competition, market failure (?)) New products
  based on ICT.

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How the use of ICT reduces value added

• Tourism internet bookings reduce margins for
  hotels in Venice and Costa del Sol, Spain.
• Used books instead of finding books through
  catalogues, customers now find them on the web.
  Result a precipitous fall in prices for used
  books. Book descriptions on the web reduce need
  for high-skilled cataloguers.

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First Listian Principle Abandoned

• Listian principle A nation first industrialises
  and is then gradually integrated economically
  into nations at the same level of development.
  Symmetrical integration win/win situations.
• Neoclassical principle Free trade is a goal per
  se, even before the required stage of
  industrialisation is achieved. Risk of lose/lose
  situation factor-price polarization.
• .

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Second Listian Principle abandoned

• Listian principle The preconditions for wealth,
  democracy and political freedom are all the same
  a diversified manufacturing sector subject to
  increasing returns.
• Neoclassical principle all economic activities
  are qualitatively alike, economic structure does
  not matter.

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Third Listian Principle abandoned

• Listian principle Economic welfare a result of
  synergy. 13th century Florentine Chancellor
  Brunetto Latini (1210-1294) explains the wealth
  of cities as a common weal (un ben comune).
• Neoclassical principle There is no such thing
  as society, Margaret Thatcher (1987).

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• Asymmetrical integration creates the
  Vanek-Reinert effect
• When two nations at widely different
  technological levels integrate, the first
  casualty is the most advanced economic activity
  in the least advanced nation. This in turn
  contributes to factor price polarization and
  migration of skilled labor

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Peru Increasing Exports and Falling Wages
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Theorising by Inclusion The qualitative
differences between manufacturing and
agriculture as perceived over time as ideal
types or stylised facts.
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Two Ideal Types of Protectionism Compared
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What is a technological revolution?
A powerful cluster of new and dynamic
technologies, products and industries
An interrelated set of generic technologies and
organisational principles
Explosive growth and structural change
Quantum jump in potential productivity for all
Change in techno-economic paradigm(New best
practice common sense)
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The invention of innovation. 1277 Roger
Bacon arrested in Oxford for suspicious
innovations. Innovations heresy. 1605
Francis Bacon writes An Essay on Innovations.
Innovations becomes the essence of progress.