Achieving Growth as a Constraint

TRANSCEND MEMBERS, 12 Jun 2023

Howard Richards – TRANSCEND Media Service

Let us take a closer look at the systemic imperative to do whatever must be done to achieve growth.[i]

Dani Rodrik, Ricardo Hausmann, and Andres Velasco co-authored a chapter on ‘Growth Diagnostics’ in the previously mentioned book cited by the commissioners who wrote South Africa’s National Development Plan.[ii] We cite their views as typical and emblematic.  The three authors start by asserting that while ‘development’ is a broad concept, its heart is economic growth.  They claim that growth is the most direct route to raising a country’s scores on social and human indicators.[iii]

‘Reform strategies should be principally targeted at raising rates of growth – that is, they should be growth strategies.’

Development requires growth and growth requires getting entrepreneurs excited about doing what needs to be done to increase the level of economic activity (i.e. increase sales). Here we meet again the dependence of economic activity on profit, and the dependence of profit on sales, analysed in chapter two above. To keep this discussion in perspective, remember that UO advocates both complying with the requirements of regimes of accumulation to the extent that it is necessary to do so to cope with economic reality as it now is, and also freeing humanity from the constraints of regimes of accumulation by building a plural economy.   Number One on anybody’s list of reasons why attempts to transform social structures do not work is that the dominant (highly unsatisfactory) set of incentives to undertake production is undermined before it is possible to pick up the slack with other motives and other institutions.

RHV continue:  To design public policies that will get entrepreneurs excited they propose a decision tree. The purpose of the decision tree is to identify the ‘binding constraints’ that are holding growth back, and then step by step, to create public policies to loosen those constraints.  The decision tree begins by stating that generically there are three constraints to growth: ‘We start by asking what keeps growth low. Is it inadequate returns to investment, inadequate private appropriability of the returns, or inadequate access to finance?’[iv]

These are the three basic questions.  Once it is decided which of these three constraints is most binding, the next step is to analyse how to loosen it.  If, for example, the binding constraint is the second (the difficulty of achieving what Marx called ‘the private appropriation of the social product’), then the decision tree goes on to ask why, in a given nation at a given time, is it hard to pocket the profits from the investment:  ‘If it is a case of poor appropriability, is it a case of high taxation, poor property rights and contract enforcement, labour-capital conflicts, or learning and coordination externalities?’  If, on the other hand, it is the first constraint (low profits) that is the binding constraint, then the problem may be inadequate public investment in complementary factors of production such as human capital or infrastructure.  Or it may be a case of poor access to imported technologies.

Let us consider what the mainstream RHV diagnostic of what growth requires follows from and what it leads to.

RHV follows from accepting what we called in chapter two the dependence of the economy on the confidence of investors and entrepreneurs SF1.   If SF1 is treated as a given of the problem (rather than as UO treats it – as a problem to be solved), then RHV follows. SF 1, in turn, is a consequence of the basic social structure.   It is a consequence of the cultural rules that define material relations (as Porpora puts it).   In other words RHV does not, as we do, seek a solution to excessive dependence on private capital accumulation as the motor to drive the economy by (1) recognizing and encouraging other ways to mobilize resources to meet needs, such as for examples (but only for examples, since on an unbounded approach the number of ways to solve a problem is infinite, not finite)  the people’s economy, the public sector,  the social or cooperative economy, or as in CWP using public employment as a catalyst to mobilize community resources; and (2) deliberately building a plural economy, as is now being attempted in Bolivia[v] and Ecuador[vi] and (3) Etc. (to be continued).

To avoid misunderstanding, let it be noted now that recognizing that SF 1 follows from the social structure, and therefore changing it requires changing the social structure, does not imply violence and extreme solutions.   Social structures (examples will be given below) can be tweaked and adjusted by consensus, by education and by an in principle unlimited number of peaceful decision-making processes

RHV follows from treating SF1 as a given.  If it is postulated that only profit-driven entrepreneurial decisions generate the activities that produce everybody’s daily bread, beer, and meat then the next question must be how to excite the entrepreneurs.  The answer to the question does not have to be precisely the three items on the RHV short list (high returns, keeping the returns, access to capital to invest to get the returns) but it has to be something similar.

RHV leads to constraining the welfare state.  It leads to what four decades ago, James O’Connor called ‘the fiscal crisis of the state.’[vii]  On the one hand R, H and V observe that high taxes on profits discourage growth. On the other hand, they also observe that growth is discouraged when states fail to provide adequate complementary factors of production in the forms of infrastructure and an educated work force. O’Connor (and also Jürgen Habermas, citing O’Connor, in The Legitimation Crisis) points out that the state loses income, because it dares not impose high taxes on the investing classes. Over time, as (in Schumpeter’s phrase) facts hammer logic into men,[viii] the state shifts its tax base to consumption taxes like VAT.  At the same time, state expenses go up, because public money must be spent to create the conditions that attract private money.

Further, one who reads between the lines when RHV observe that labour-capital conflict is in some cases a binding constraint on growth, will discern that maximizing growth means tilting the dividing of the revenues of firms to increase the capital shares and decrease the wage shares.  And so on.

Let us compress the two phases of our argument.  (Phase I:  SF1 leads to RHV.  Phase II:  RHV leads to fiscal crisis of the state, favouring capital over labour, and so on.) We conclude:  Excessive dependence on private capital accumulation to drive the economy leads to the fiscal crisis of the state, favouring capital over labour, and so on.    The RHV growth diagnostic drops out as an unnecessary middle term. Structural un-governability follows directly from the constitutive rules of the system, from the constitution of what Charles Taylor has called a bargaining society[ix], i.e. from the basic social structure.  We will see this melancholy logic work itself out over time in post-war Sweden.

Further, we read in the NDP and elsewhere that the word ‘growth’ is commonly used to sing a song of la vie en rose about why all South Africans should voluntarily work together to grow a larger pie, so there will be more pie for all South Africans to share.  In grim reality, systemic imperatives strengthen the already strong stranglehold of capital over government and over labour.

Similar points could be made about counting on exports to fund a welfare state.    Living by exports requires living by the rules of the global economy, not by local rules.  Democracy only makes local rules. Competitiveness means bringing costs, including wage costs, down to the levels of the costs of competitors, which means Swedish wages descend toward the level of Chinese wages – but which does not mean that Chinese wages rise toward the level of Swedish wages.

Arthur Okun gave the world an example of bounded in-the-box thinking regarding inflation, another key issue in Sweden after World War II, with his concept of trade-offs.[x]  Among the features of the then (1975)prevailing common-sense that Okun reflected, was the common idea that right-of-centre political leaders are willing to trade off more unemployment to get less inflation, while left-of-centre political leaders are willing to trade off more inflation to get less unemployment. Milton Friedman later eclipsed Okun with his view that increasing the money supply beyond what is needed to keep pace with a steadily growing economy only temporarily appears to create employment.  In the last analysis, Friedman showed, a so called ‘Keynesian stimulus’ where the government steps in to loosen wallets by filling them with money, only increases inflation while failing to decrease unemployment. In his Nobel Lecture, Friedman argued that governments create inflation not because they want inflation, but because they want full employment and a welfare state.  For Friedman the solution was the one he favoured anyway on other grounds:  abandon full employment and a welfare state as goals.

An unbounded approach, on the other hand, calls for moving parameters mainstream economics see as unmoveable.  UO steps out of the dilemmas.  Its la vie en rose song sings aligning with the societal enterprise, enhancing livelihoods presently existing, and creating new ones in an unlimited number of ways. Among those unlimited ways, those that are inflationary can be ruled out, while still leaving an infinite number remaining. UO is all in favour of the rosy rhetoric of the NDP calling on all South Africans to align together for the common good.  It calls for making the rhetoric sincere by backing it up with an ethic of care put into practice..

The unfortunate conclusions following from this analysis of RHV’s version of standard growth theory – which are tragic conclusion when translated from abstract terms into the flesh and blood suffering of human beings, and the heat and stench suffering of ecosystems – are conclusions that the Swedish Model appeared for a time to have successfully avoided.

NOTES:

[i] We adopt Ellen Meiksin Wood’s phrase ‘systemic imperative’ to rephrase Keynes’ demonstration that balancing the books of a capitalist economy requires investments (and therefore growth) year after year to compensate for chronic insufficiencies of effective demand.

[ii] Chapter Two, ‘Growth Diagnostics,’ of Dani Rodrik, One Economics, Many RecipesPrinceton NJ: Princeton University Press, 2007.  (While the book as a whole has one author, this chapter has three.) The word ‘excited’ comes from the previous chapter written by Rodrik alone.

[iii] There is a large literature disagreeing with Rodrik, Hausmann and Velasco on this point, holding either that there is no clear relationship between economic growth and social welfare or that if there is one it is the other way around: social welfare causes economic growth more than economic growth causes social welfare.  See Richard Wilkinson and Kate Pickett, The Spirit Level. op. cit.;   Krishna Mazumdar, ‘Causal Flow between Human Well-Being and Per Capita Real Gross Domestic Product’  Social Indicators Research.  Volume 50 (2000) pp 297-313, and the sources cited by these authors.  Amartya Sen takes the view that whatever the answers may be, the questions should be better framed.  The Idea of Justiceop. cit.

[iv] RHV´s implicit premise that growth is achieved through investment-for-production-for-sale-for-profit is not idiosyncratic.  In general, standard growth models do not consider other ways to mobilize resources to meet needs.  That capital accumulation must happen for growth to happen is assumed in the concept of a balanced growth path where capital, labour, consumption, and output all grow at constant rates. See for example Roy Harrod´s seminal ‘An Essay in Dynamic Theory,’ The Economic Journal’.  Volume 49 (1939) pp. 14-33; Robert M. Solow, A Contribution to the Theory of Economic Growth.  op. cit. The necessity for capital accumulation, and consequently our first Staggering Fact, remains intact when human capital and endogenous change are considered.  Charles Jones, Introduction to Economic Growth.  New York:  Norton, 1998; Paul Romer, ‘Endogenous Technological Change.’  Journal of Political Economy.  Volume 98 (1990) pp. S71-S102.  These last ways of thinking have the real-world consequence of leading to a crusade to protect the profitability of intellectual property rights rationalized as necessary to keep the growth engine going by making private investment in research and development profitable, which leads, for examples, to pricing needed medicines out of the reach of the poor and to farmers losing control of seeds.  In some versions they also lead to a pro-natalist bias against stabilizing population growth.  Julian Simon, The Ultimate Resource 2.  Princeton: Princeton University Press, 1996.

[v] On Bolivia see Gabriel Loza, Bolivia: El Modelo de Economia PluralLa Paz: Ediciones Vinculos, 2013.  This book and many other books can be faulted for lumping very different things together in the omnibus category ‘private sector.’   It is available as an e-book.

[vi] On Ecuador see José Luis Corragio, Economia Popular Solidaria en Ecuador  2007 (http://coraggioeconomia.org/jlc/archivos%20para%20descargar/La_economia_popular_solidaria_en_el_Ecuador.pdf – )  In both countries principles of plural economy have been written into new constitutions.

[vii] James O´Connor, The Fiscal Crisis of the StateNew Brunswick NJ: Transaction Books, 1973.

[viii] Joseph Schumpeter, The Theory of Economic Development.  New Brunswick: Transaction Books, 2007 (1911) p.80.

[ix] Charles Taylor, Interpretation and the Sciences of Man, Review of Metaphysics.  Vol. 25 (1971) pp. 3-51. P. 48.

[x] Arthur Okun, Equality and Efficiency: The Big Tradeoff.  Washington: The Brookings Institution, 1975.

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Prof. Howard Richards is a member of the TRANSCEND Network for Peace, Development and Environment. He is Research Professor of Philosophy at Earlham College and he also currently teaches in the University of Cape Town`s EMBA programme. He was educated at Redlands High School in California, Yale, Stanford, UC Santa Barbara, University of Toronto, Harvard and Oxford. His books include: The Evaluation of Cultural Action, a study of an application of Paulo Freire´s pedagogical philosophy in rural Chile (London Macmillan 1985); Letters from Quebec; Understanding the Global Economy; The Dilemmas of Social Democracies; Gandhi and the Future of Economics; Rethinking Thinking; Unbounded Organizing in Community; and The Nurturing of Time Future. His new book, written with the assistance of Gavin Andersson, Economic Theory and Community Development: Why Putting Community First Is Essential for our Survival, is available from the publisher, Dignity Press, and from Amazon and other major booksellers, as a print book and as an eBook. Email: howardrichards8@gmail.com and howardri@earlham.edu


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