How amusing. Ha-Joon Chang proves that fiscal expansion won\’t work

So, as we know, the great shout from the left is that if we just spend more money through hte government then everything will be peachy once again. And then along comes a lefty econopmist to prove that this won\’t actually work. Not that he says so out loud you understand, but it is the essence of what he\’s saying:

All of this means that, without addressing the underlying decay in productive capabilities, Britain cannot fix its ailing economy.

And I\’m sorry, but that does, really, screw the idea of fiscal stimulus. For that only works if there is unused capacity. By getting the government spending more money we then get that unused capacity back into use and everything is indeed peachy. But if there isn\’t any unused capacity then things don\’t become lovely: the extra spending feeds straight through into inflation instead.

This is just the old point that you can\’t have it both ways. Either we\’ve capacity which stimulus would inspiure the use of or we don\’t. If we don\’t, as is being asserted here, then you can\’t go around arguing for stimulus. Because your very point being made means that stimulus won\’t work.

And as to this:

To deal with this problem, it urgently needs to develop a long-term productive strategy through a broad-based public consultation involving not just the government and private sector firms, but trade unions, educational institutions and research institutes.

The strategy should first carefully identify the industries, and the underlying technologies, that will be the future motor of the economy and then provide them with the necessary support. This could be in the form of subsidies for R&D, loan guarantees for small firms, or preferences in government procurement, and should be targeted at \”strategic\” industries, although they could also be in the form of policies that are apparently not industry-specific.

We come up against two problems here. The first is the theory one. Government just cannot collect the information about what those wondrous new sectors are going to be, cannot identify who will be good at them and will not be able to direct the cash to those that are. There\’s just no way it can: this is the socialist calculation problem writ small. BTW, preferences in government procurement is illegal under EU law.

The second problem is, well, look at the people we\’ve actually got who will be making those decisions. Yeo, Deben and Caroline Lucas (Jonny Porritt n\’all) will make up a vile cabal that will identify windmills as just such a strategic industry. Melchett will insist upon organic farming (along with many of the former). Polly will be screaming that actually, insisting that all the people changing nappies at day care must have PhDs will do the trick. And so on and on.

Absolutely none of the people who will be making such decisions have any idea about business at all. They\’ve no more clue about it than a pig does about why farts smell. They\’re not just ignorant on the subject, they\’re congenitally incapable of understanding it.

Even if planning the economy could concievably work it wouldn\’t simply because of the fuckwits who would be doing the planning.

And that\’s without even thinking about the orgy of rent seeking that would take place. Look at the one part of our current economy that the government really does currently plan. Energy. And you want the idiots responsible for that to be in charge of the whole shebang?

19 thoughts on “How amusing. Ha-Joon Chang proves that fiscal expansion won\’t work”

  1. I thought we’d finished with this crap circa 1980 when we had finally found out gov’t couldn’t run a motor industry after all. But no, that proved nothing, that would be taking an objective view of the factsa nd as we all know objective/subjective is made-up neo-liberal conspiracy. Sigh, despair.

  2. One of the problems with politicians is that they like to do cool shit, or what the French call “grand projets”.

    There was little demand for Concorde, to fly the Atlantic in a few hours at the price of a year’s mortgage. What people wanted was to just get across the Atlantic. Making a transatlantic plane is cool.

    Likewise, the NHS pissed away billions on unnecessary new hospitals and a gigantic IT system, instead of making do, and gradually improving the IT.

  3. The NHS IT project problem is a fascinating example. Tim Almond is right, that they spent staggering amounts on the NHS Connecting for Health system.

    I still have to ferry a piece of paper between surgery and pharmacy for a recurring prescription for a relative (or I can ring the pharmacy to send someone to collect it, except at weekends), which takes two days to approve and issue.

    All that money taken in tax, and even more borrowed, and nothing to show for it.

  4. Further to the point made by CHF, I can now order a repeat prescription on line, but I still have to traipse down to the Surgery and physically transfer the paper scrip to the Pharmacist.

    Whereas if I buy something from Amazon, it can be delivered to me in the post within 48hrs

  5. CHF, Arthur.
    I live in…a country in Northern Europe. When I go to the doctor he keys in my prescription to a datbase. I can go to any pharmacy in the country and give my name and they have my prescription online. In many pharmacies they have a kind of giant carousel with the thousand or so most common prescription drugs, so the pharmacist literally just turns round and reaches for the drugs. It takes only seconds.

  6. 2 questions. Does anyone accept that for some countries (some of the time?) a degree of state planning/control of industry has worked? I’m thinking maybe post war Korea and France.

    If so, why are they better at it than UK? (Before anyone asks, I agree british attempts at champions, Leyland etc have been pretty dismal, the only exception I can think of being the decision to rescue Rolls Royce.)

  7. Luke>

    It’s not impossible for a piece of central planning to work. The problem is knowing which piece of central planning that’ll be.

    It’s perfectly possible for any given central planner to be competent, but what experience has shown is that central planning is not a good system for deciding who’s competent; a market economy works much better.

    In theory, planned economies ought to work much better. In practice, though, they don’t because the planning is impossible to get right.

  8. Dave, I agree entirely that state planningis difficult and nearly always fails, for the reasons you state, and maybe more.

    But, take the Korean steel industry. That has been a success, and was the result of government planning. Was that a fluke, or something to do with Korea, or how developed (or not) it was at the time? Or what?

    (I don’t really agree with the original CIF post on the remedy for Britain btw.)

  9. Luke>

    I don’t think Korea’s a good example. The country’s basically a plutocracy with a thin veneer of democracy thrown over the top. The chaebols and the government are much the same thing. The government was not doing the planning except insofar as they did what they were told to do by the industrial conglomerates.

  10. Central planning can always succeed. Throw enough resources at something and it will eventually become successful against some measure or another.

    East Germany won loads of gold medals, and that was central planning at its best.

    But at what cost? What parts of the economy suffers as a result?

    Often, this is difficult to measure and those losing out arent in a position to complain because (among other things) they dont miss what they could have had but didn’t. They may even live in poverty, but don’t realise the misallocation of resources is contributing to it.

  11. So Much for Subtlety

    Robbo – “I live in…a country in Northern Europe. When I go to the doctor he keys in my prescription to a datbase. I can go to any pharmacy in the country and give my name and they have my prescription online.”

    Which is excellent. The only problem being the Government now has a record of every single medical procedure you have ever had.

    You may not be worried about the implications of this, but I think you ought to be.

    The centralisation of medical records is one of the most intrusive extensions of government power this century but it is going forward without a peep of protest.

  12. Right. Well if I didn’t think there was spare capacity (such as unemployed workers) I wouldn’t advocate stimulus. And?

  13. Luke,

    “2 questions. Does anyone accept that for some countries (some of the time?) a degree of state planning/control of industry has worked? I’m thinking maybe post war Korea and France.”

    I’m really not at all sure about France. You can include the rescue of Renault (which was a success), and possibly the TGV (still hasn’t covered the cost, but faster rail has other economic benefits), but France does a lot of projects that are a disaster, with all the same claims of politicians here (economic boosts, tourism).

    The problem of all state involvement is that it relies on a wise leader who not only understands what products people want, refuses to look after special interests, has some luck and adapts to necessary change, and those are all rare.

    Most politicians have a vision of building something that they think people should have, or to look after special interests, something that no-one else in the private sector has wanted to spend money on, based on no data, and once decided upon, do not want to change course.

    The government can’t even run the military properly and that’s one of its core competencies, so why anyone thinks they should be running car making or sporting events, I don’t know.

  14. So Much for Subtlety

    Luis Enrique – “Right. Well if I didn-t think there was spare capacity (such as unemployed workers) I wouldn-t advocate stimulus. And?”

    Except not all unemployed workers are spare capacity. They have to want to work. We have no idea what the real level of unemployment is, but given that we had to import 3 million Eastern Europeans during the Blair years, the level back then probably represents the real frictional level. The rest are “discouraged” and will not work no matter what the incentive.

  15. Korea is very directly relevant here, what with Chang being Korean and all.

    The point of most of his academic work, which is entirely true as far as it goes, was that a protectionist, dirigiste and completely non-free market regime is what took South Korea from being the poorest country in the world to (admittedly the lower end of) the rich country scale. When a country has achieved that transformation within your parents’ lifetime, it’s not surprising that it’ll shape your outlook on the world.

    However, he’s far more solid on development economics (Q: “how do you get from poor-and-starving to OKish?” / A:”The IMF model is just as failed as the socialist model, and every non-city-state that’s ever succeeded followed some protectionist and interventionist policies), than on how to deal with stagnation in developed economies.

    Which, when you look at South Korea’s significant and ongoing growing pains in moving from mid-income to wealthy, is not altogether surprising. State-steered capitalism is great for catch-up growth, not least because you do actually have a roadmap of what everyone who’s currently rich did to get there. But it’s lousy when you’re creating new things: a bureaucrat couldn’t have invented Google or Apple.

    In this piece, Chang is being a Dawkins or Chomsky: believing that because he knows a lot about one thing, his not-very-well-researched attempt to apply his specific conclusions to a completely different area will pay off.

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