Interesting question for the weekend

So, we have those who say that economic development can only come from government picking winners, from infant industry protection, from high tariff barriers and the like.

The Ha Joon Chang\’s of this world and the like: you know, War on Want, Action Aid, various points left.

And it\’s certainly true that some countries which have done such things have had economic growth. S Korea (Dr. Chang\’s homeland and an oft used example of his).

OK, now, let\’s add a further condition to this.

Can anyone point me to a democracy which has managed this feat?

That sort of picking winners, tariff barriers and infant industry protection leading to strong economic growth in a real and true democracy? By which I mean universal adult franchise and real changes in who is in power?

Nowhere really comes to mind, at least not immediately.

I tend to think that such government control of who is allowed to make what and where people can buy what they want from is actually incompatible with democracy.

Clearly, it\’s incompatible with liberty, but that\’s not quite what I mean. In a democratic system the way in which special interests can capture the decision making process about who gets to do what means that even if we concede (which we don\’t, but will for the purpose of this argument) that the governor telling the governed what to do produces economic growth, it needs to be a hard headed (and hard hearted: it might well be necessary to shoot a number of people) auithoritarian doing so, for he needs to be able to tell the rent seekers to fuck off. Only an autocrat has the power to insist that people do the economically viable things, assuming that the governmernt has taken to itself the power to tell people what to do economically.

An example perhaps: one way to increase capital accumulation is to deliberately depress the workers\’ wages. Profits are higher and thus there is more capital to invest in the next round of building more factories etc. But in a democracy you\’re inevitably going to have a political party which (claims at least) to represent the workers. And they\’re not going to stand for such a policy. So that policy can only be followed in an authoritarian political system (Stalin deliberately did this for example, although he then wasted the capital having killed millions doing it).

Another: S Korea quite simply told business people \”You go build ships, you cars and you cement. And you\’re banned from doing anything else.\” It worked, sure, but would this be possible in a democratic system (which S Korea wasn\’t until what, the mid 90s?)?

See what I\’m getting at?

So, can anyone disprove the contention: that this sort of directed economic growth is incompatible with democracy?

 

24 thoughts on “Interesting question for the weekend”

  1. Only logical – the less control a government has over dissenters with its programme the less it can effect. Governments that wish to do more things directly and actively have either to have massive public support with negligible dissent or the means to suppress dissent. Not just economics, but any other area.

    I’m not an expert but there may be an argument that social homogeneity (a general popular belief that we’re all in it together) such as in Scandinavia/Finland/Netherlands up until recently, minimises dissent and enables active and interventionist non-authoritarian govt.

  2. So, we have those who say that economic development can only come from government picking winners, from infant industry protection, from high tariff barriers and the like.

    There are those that say non-capitalist economies are full of distortion that only a strong state can remove. Like 18th England for example. The tool, a strong state, has been integral to every developed countries development, but the instruments are not always the same.

    I don’t really like it when you vulgarise perfectly respectable arguments.

    Btw, how many democracies can you name that transitioned to capitalism? Not the UK, Netherlands, Swiss or most of C19th Europe. How democratic was the slave owning US when it changed from agrarian marketish economy to capitalist in the mid-1850s?

    The protectionist North won the civil war against the free trade south. Which was more “democratic”?

    Creating capitalism sucks. There are tons of losers. I’m not sure a democratic developmental state of any form would work without an incredibly well informed and selfless electorate.

    “We’re going to pay substitence wages until we reach the lewis frontier, now stitch those shoes faster.” etc.

    An example perhaps: one way to increase capital accumulation is to deliberately depress the workers’ wages. Profits are higher and thus there is more capital to invest in the next round of building more factories etc.

    That the primitive accumulation that Marx wrote about as integral to capitalist development, btw.

  3. South Korea had a leader who picked winners and happened to pick the right winners at the time. It’s going to happen occassionally that a dictator makes the choices and picks the right one.

    He also did lots of good things like let the businesses run with little regulation, and had a workforce making ships that were earning far less than the workforce in Glasgow. The “protecting industries” bit doesn’t really make that much difference in all of this because you’re already at a massive advantage on cost.

    People used to say the same thing about Japan, especially about tariffs on cars and whisky. But it’s just a rounding error compared to the fact that Toyota, Honda and Sony just made far better products than their US and British competitors.

  4. Not so sure about this bit-

    An example perhaps: one way to increase capital accumulation is to deliberately depress the workers’ wages. Profits are higher and thus there is more capital to invest in the next round of building more factories etc.

    Factories aren’t built out of money. The limiting factor on new investment goods is available resources, which ultimately comes down to available appropriate labour. Diverting national income from one to t’other isn’t going to change that.

    Isn’t this a Keynesian style economic-arithmetic-with-money-aggregates fallacy?

  5. Danged lack of an edit function…

    In fact, isn’t there some evidence that western societies are accumulating too much capital, which goes into useless boom investment (and thus subsequent crunches)? Your first pound of Investment Capital is going to be better spent than the subsequent ones (going to the obviously good investments first) leading ultimately to spending it on useless crap. Seems unlikely that more investment capital will lead to more growth, from that perspective.

  6. South Korea had an advantage in picking winners, because it started out so far behind (lower gdp per capita than Ghana). So it already had an idea what the winners might be because it was playing catch-up. Can a country which is more or less up at the top predict the optimum path? Probably not.

  7. Is it pertinent also to point out that S. Korea’s position as the post-war USA’s most favoured nation also had something to do with it?

  8. Germany (and to a less successful extent France) regulates its economy (and pretty much everything) to the n-th degree, has done for decades, and it seems to work pretty well, because the Germans are not quite as selfish as the Brits and accept that there is such a thing as ‘the common good’. In other respects, they are pretty libertarian (booze and fags are cheaper and nude sun bathing is acceptable).

    NIMBYism in Germany is not very common – incumbents just shrug their shoulders and say ‘Ah well, I live in a house, who am I to deny others a house?’

    In theory, Germany should be a basket case (and maybe the Eastern bit is), but on the facts it isn’t.

  9. Wadders, do you think that perhaps the Germans actually say “Ah well, this is only a rented flat, so we can just move”?

  10. D, in real life, both owner-occupiers and renters shrug their shoulders. Most renters are fairly long term and there’s not such a distinction between the two groups in terms of mentality.

    When I was there (in the village/suburb) where I used to live) last year, I commented on the enormous number of new buildings which had appeared since my previous visit, and only one person said “It’s a real shame that they’re ripping down [some lovely old house]”.

    I reminded him that in place of that one little house with a big garden where maybe a little old lady lived there’ll be a block with five or six flats for young people to rent (we were young once, and glad to find somewhere to rent), and that given the choice between higher density or building on ‘green belt’ a mile from the train station, the former was better.

    He thought about it for half a minute and then agreed with me. I’ve never managed to de-NIMBYise any English person as quickly (if ever).

  11. Everyone seems to be going overboard on the theories that “economic growth can only come if…”
    Economic growth can sometimes come despite …
    The USA is still highly protectionist in a number of areas but it does so well in enough non-unionised sectors of the economy (most farmers are self-employed or work for their Dad, managing investment analysts and/or managers is traditionally compared with herding cats and computer programmers are too intelligent to be conned into believing that a union serves their personal interests) that it can carry the waste/extra costs caused by protectionism.

  12. “Winners” emerge from among competitors. Ideally, that would occur in a fair game.

    Right off, if a government is engaged in picking winners it is not engaged in ensuring a fair game.

    Also, where do competitors come from in the first place? Must government create them, too?

  13. To anyone desirous of understanding this matter more fully, I recommend Mises’ HUMAN ACTION, Chapter XVIII, “Action in the Passing of Time.” It addresses the “infant industries” argument completely (and the rest of the chapter is very informative, as well, though the “infant industries” argument is only pages 508-509).

  14. As far as wealth creation is concerned, the “people telling people what to do” bit only differs with the party of the first part being government (authoritarian or otherwise), to it being private enterprise. History shows that the latter option generates far more wealth. It is not a question whether authoritarianism “works” better than democracy, because the ideal alternative is not to have government control at all.

  15. One fallacy after another,all joined up. Left to itself investment piles into the fixed supply of land and inflates its price,causing the catastrophes that have overwhelmed Japan ,Spain,Ireland and to an unobserved extent UK.
    The whole tone of the original article and subsequent chorus of approval is that we are living in a dirigiste society “that picks winners”
    (always seen by right-wingers as impossibly difficult for the government but not the lone investor) and that it is up to a few “weal webels” (of impeccable public-school background) to break out into a world of free investment opportunities and cheap credit.
    We have had the rolling-back of the state since Thatcher.We are living in the free-market Utopia now. Old people’s homes,care homes
    council housing,the railways have all been privatised. And things are no better,in fact measurably worse.How come ?
    There is too much of the” one more push “rhetoric of First World War generals amongst privatisation- happy right wingers.
    Laissez faire economics can only begin to work after basic government intervention :to stop credit inflating land values, raising bubbles and causing crashes. The things that beset the UK ,not in theory,but in fact.

    Tim adds: “(always seen by right-wingers as impossibly difficult for the government but not the lone investor) and that it is up to a few “weal webels” (of impeccable public-school background) to break out into a world of free investment opportunities and cheap credit.”

    No, the argument is not that those wondrous private individuals will be better at picking winners. It’s that markets are better at killing losers. It’s the natural selection that makes it all work, not the mutations and combinations.

  16. That is precisely – the market doesn’t pick the winners it kills off the losers efficiently, and what are left standing are the winners, by default.

    That is also the problem with the State trying to pick the winners, it lacks the ruthless capacity to close the failures. For mostly political reasons – ‘Lets bung a failing car manufacturer loads of cash because there’s an election coming and we have seats to defend in Birmingham’

  17. DBC Reed,

    Laissez faire economics can only begin to work after basic government intervention :to stop credit inflating land values, raising bubbles and causing crashes. The things that beset the UK ,not in theory,but in fact.

    But we actually have a planned economy when it comes to land and building. You can’t buy a bit of land and stick a house on it (and there is “good planning” like making sure that you don’t take away other’s light or access).

  18. @TW
    Private capital is going to be pretty good at,if not killing off ,then causing pointless investments to wither and die.But state investment can be arbitarily switched off too in periodic government retrenchments.The quite sensible plan for a London airport at Foulness/Maplin (foreshadowing the current-ish artifical island in the Thames proposal) was ditched during a change of government and the Limits to Growth panic.Some projects involving tricky, maybe scientific issues, such as nuclear energy ( fusion!) require long ,patient lead times
    which the short-term market is not going to bother with.(It is a truism that
    nuclear energy will not be developed if left to the private sector).Can’t see the Hadron Collider operating on a market basis when the tempation for market operators is to stick the money into property, a fatal flaw in the market system you never face up to in debates such as this.
    @JT Biggest myth of the lot: that low house building and high property prices are caused by planning. The daddy of all radical land taxers (though by no means the earliest),Henry George, found that land prices were out of hand in(19th California which was under totally unplanned, literally Wild West ,economic conditions with masses of land available and a tiny population. (Coolie labour squads were drafted in to do the work).
    Jim Clayden of the Royal Town Planning Institute worked out in 2007 using annual developers’ reports to share holders that there was enough land banked in the S.E and ready to build on to supply six years of building at optimum levels.So why was n’t it being built on?He wrote,
    “All landowners including housebuilders maintain land values by managing supply.It is not in their interests to release large quantities of land because this deflates its value ”
    There is a kind of risk averse, negative capitalism that makes money by restricting supply.

  19. @Left Outside: Btw, how many democracies can you name that transitioned to capitalism? … How democratic was the slave owning US when it changed from agrarian marketish economy to capitalist in the mid-1850s?

    What’s non capitalist about an agrarian economy? I thought an agragrian economy was one that relied on farming, and thus also could be capitalist or feudual, or communist, or whatever.

    Perhaps it would be best if you defined capitalism, so we could answer your questions?

    Anyway, the US is, thanks to the Constitution giving Congress the right to regulate commerce amongst the states, one of the bigger free-trade areas internally (there are some state laws of course that are protectionist).

    Creating capitalism sucks. There are tons of losers.

    Yes, all those people who like servants, the people holding monopoly rights, the guilds who lose their ability to exclude competition, the nobility who lose their rights to levy taxes on trade through their areas, etc.

    I’m not sure a democratic developmental state of any form would work without an incredibly well informed and selfless electorate.

    Yes, getting the rich and politically-well-connected not to lobby for subsidises and trade-protection is incredibly difficult.

  20. @Mark Wadsworth, Germany ranks 23 in the world on the Heritage Foundation’s Index of Economic Freedom – see http://www.heritage.org/index/Country/Germany.

    I also don’t understand your comment about the Germans, unlike the British, accepting “that there is such a thing as the ‘common good'”. Most Brits do support taxation, which presumably they believe is there to provide things for the common good, as well as protection for the poorest (I haven’t gone round and surveyed each Brit, I’m doing this judging by who they vote for, and what the politicians promise). I suspect you’re just being typically British in under-estimating your own country (or, if you personally are not British, you’ve been listening to Brits too much – lovely country, one place in the world where you can go around winding up the locals by dishing out truthful compliments, all the pleasures of being terribly cruel without saying a single word your mum could criticise you for).

  21. To answer the original question, France during the “trente glorieuses” was pretty much centrally planned (largely through state ownership of large companies) and worked.

    You could argue that France wasn’t a “real” democracy because of the power of the enarques and the fact the Gaullists always won, but that is taking you a long way into No True Scotsman territory

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