And yet maybe Krugman is not really an economist — at least not according to the definition offered more than a century ago by Francis Amasa Walker, the first president of the American Economic Association, who wrote that laissez-faire “was not made the test of economic orthodoxy, merely. It was used to decide whether a man were an economist at all.”
Invisible Handcuffs- Robert Frank reviews Robert Reich
The supply of moral outrage is limited. When we aim it at the wrong targets, we squander a valuable resource. In “Supercapitalism,” Robert B. Reich argues that the current political debate in the United States is drowning in misdirected moral outrage. We cannot hope to solve our problems, he says, without first understanding the forces that have caused them.
Reich, a public policy professor at the University of California, Berkeley, and formerly President Clinton’s secretary of labor, is quick to concede that rising inequality, environmental degradation and a dysfunctional health care system are problems worth worrying about. But he argues that social critics are wrong to attribute them to increased greed and corruption. Today’s corporate and political leaders are no different, he says, from their earlier counterparts. What has changed is that new technology has made the economic environment dramatically more competitive.
As Adam Smith first described clearly, individuals who pursue only their own narrow interests in a competitive system often inadvertently create widespread social gains. But not always. Unlike many of his modern disciples, Smith was keenly aware of the invisible hand’s limitations. Individual and social interests often diverge, he realized, and in such cases, greater competition makes matters worse. If a firm can cut costs by removing the filter from its smokestack, for example, it will feel greater pressure to do so when competition intensifies.
If our social ills are indeed rooted in increased competition, our only recourse, Reich argues, is to change the rules. Denouncing greed is simply wasted energy. If we want less inequality, we must make taxes more progressive. If we want cleaner air and water, we must adopt more stringent environmental laws.
Rethinking development policy: A new consensus
By Keun Lee, John Mathews, and Robert Wade
There are three main problems with the Washington Consensus. First, the prescriptions emerged not out of the record of what demonstrably has worked, but out of what policy professionals in and around Washington would like to see, derived from simple economic theory. To this day, there is remarkably little good evidence that countries which adopted the Washington Consensus more have enjoyed better growth and poverty-reduction performance than those which adopted it less, at least if one excludes states which are barely able to do anything. Haiti over the past decade scores well by Washington Consensus criteria, Vietnam scores badly; but Vietnam has by far the better performance.
Second, by focusing on an entity called ”the market”, the prescriptions ignore the task of building the capacity of industries and firms, including the capacity to compete in international trade. They also ignore the macro task of changing the economy’s production structure both to intensify input-output links and to diversify production towards sectors with faster growing demand and higher rates of profit. They assume, wrongly, that there are no serious ”market failures” in these processes in developing countries, for which state action potentially can be a corrective.
Third, the prescriptions are couched as valid for countries at all stages of development. They ignore the ”late development effect”, the idea that countries which begin to industrialise when other countries are already highly developed have to use different policies and institutional arrangements to those used by earlier developers, in order to compensate for the disadvantages and capture the advantages of coming late - advantages such as the potential to use more advanced technologies already used elsewhere.
The most successful region of the developing world since the Second World War is East Asia. The development policy precepts followed in Japan, South Korea, Taiwan and China have a lot in common, and are substantially different in emphasis to the microeconomic core of the Washington Consensus. These precepts have the advantage of having worked on the ground. We call these precepts the Beijing-Seoul-Tokyo Consensus for development, or the BeST Consensus for short.
The Nobel Prize: What is mechanism design and why does it matter for policy-making?
A Global Tax Credit
While foreign aid works in some situations, it has two huge problems. First, there is never enough money to go around. Last year, the United States provided $23 billion of development aid to foreign countries. This was more than any other donor, but it still resulted in very little for the billion people who live on less than $1 per day.
The second problem is that the money that does get distributed doesn’t always reach the people who need it. As the economist Jeffrey Sachs has noted, of every dollar given to sub-Saharan Africa, only about 40 cents is actually directed toward economic development. The rest goes to debt service, consultants and humanitarian emergencies. And after those expenses are subtracted, the remaining money is further reduced by mismanagement and corruption.
A solution to both problems would be to give tax credits to American companies that invest in qualified developing countries. A similar program that focuses on domestic poverty has been a resounding success. In 2000, Congress created a program giving businesses that invest in poor communities within the United States a tax credit equal to 39 percent of the cost of the investment. The theory was that poverty and joblessness in poor communities could be ended only by developing local businesses, not by an aid check. Seven years later, so many businesses want to invest in poor areas that only a quarter of the companies that applied for tax credits in 2006 received them.
The World Bank, the Little-Noticed Big Money Manager;
On the seventh floor of an office building near the White House, dozens of traders are sitting at computer terminals, studying global trends in currencies, commodities and interest rates, looking for ways to maximize returns for one of the world’s biggest money market funds.
But this is the trading floor at the World Bank, best known for tapping government coffers to fight poverty. Less well understood, the bank also oversees $55 billion in readily tradable assets in its own portfolio and those of governments and groups that have asked the bank to manage their assets.
Like any big corporation’s treasury department, the bank employs modern Wall Street hedging techniques like currency and interest rate swaps to protect its own funds. Increasingly, it also helps poor countries by supplying risk-management services or acting as a partner in their hedging activities — sometimes in competition with Wall Street banks.
Global development and the World Bank
Rules versus discretion in monetary policy
The fruitless search for exact knowledge
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A new book* by Roman Frydman and Michael Goldberg coins the phrase “imperfect knowledge economics” to describe this world of fundamental uncertainty. They use the systematic failure of attempts to analyse exchange rate swings to illustrate the hopelessness of a search for economic explanations that transcend time and place. Frequent discontinuities and transitions in the ways market participants view events mean that economic models, like historical narratives, are context specific. The search for “sharp prediction” – the mantra of the modern scientific economist who seeks to replicate the successes of physics for social science – is doomed to failure.
The best that economists and their clients can do is identify qualitative regularities and patterns in events – as historians do – and, like historians, they can say a lot when they accept their inability to make “sharp predictions”. We will never know what an exchange rate will be two years from now, or what the weather in England will be on July 15 next year, but we can look to purchasing power and capital flows for guidance, just as we recognise that on that day it will not snow and may rain. In a world of imperfect knowledge and irresolvable uncertainty – of unknown unknowns – the quest for exact knowledge gets in the way of useful knowledge.
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