Alternative Economics: The Other Canon

Three introductory video clips on "The Other Canon":

Introduction to the work of The Other Canon featuring a talk by Prof. Erik Reinert positing an historical alternative to neoclassical economics.

Part one:

Stewart Brand: "Is Density Our Destiny?"

In last week's episode of the TED Radio Hour, the topic was The Future of Cities. In the first part of the radio hour, we come across the environmentalist Stewart Brand who I have discussed last year in my article on Ecopragmatism.

Agricultural paradoxes

Agriculture presents some unexpected paradoxes

1. Shortage of food and famines mostly occur in countries that specialize in producing foodstuffs. The smaller the percentage of agriculture as a percentage of gross domestic product, the smaller the odds are of famine. In fact, the risk in countries with practically no agriculture is dying of eating too much.
2. The most effective agriculture in the world, in the USA and Europe, is unable to survive without subsidies and protection.
3. In 1970 Norman Borlaug received the Nobel Peace Prize for the 'green revolution in agriculture, for having produced new species that increased harvests and productivity immensely. This enormoous explosion of agricultural productivity has not drastically changed the number of poor and hungry in the world.

-- "How Rich Countries Got Rich" by Erik S. Reinert p. 149 - 150

Reinert's Critique on Modern Economics (2)

"The equality assumption [in international trade theory]: Assuming away all differences -between human beings, between economic activities, among nations - [...] all factors qualitatively differentiating a twelve-year-old and his shoeshine 'firm' based in a Lima slum from Microsoft as a firm have been eliminated. The two of them have been averaged out as 'the representative firm'."

"The core assumption of 'perfect information' in reality implies that humankind must consist of individuals that are all alike [...] ."

"The conclusion so proudly reached by standard international trade theory, that a world trade will provide 'factor-price equalization' is in fact already built into the basic assumptions of the theory itself; a theory in which all the elements are equal and identical cannot produce anything but equality of outcome."

-- "How Rich Countries Got Rich" by Erik S. Reinert p. 35 - 36

Aid as a pyramid game

Theory development led to what Schumpeter calls 'the pedestrian view that capital per se propels the capitalist engine'. The West started thinking that by sending capital to a poor country with no entrepreneurship, no governmental policy and no industrial system, they could produce capitalism. The consequence is that today we virtually stuff money down the throat of countries with no productive structure - where this money could be profitably invested - because they are not allowed to follow the industrial strategy all the presently rich countries followed. 

Developing countries are given loans they cannot profitably utilize, and the whole process of development financing becomes akin to that of chain letters and pyramid games. Sooner or later the system breaks down, and the ones who designed it, standing close enough to the door when everybody rushes out, are able to make good financial profits, while the poor countries themselves are the losers. This is part of the mechanism that often creates larger flows of funds from the poor to the rich countries than the other way around, one of Gunnar Myrdal's 'perverse backwashes' of poverty. 

-- "How Rich Countries Got Rich" by Erik S. Reinert p. 124

More:

• Dead Aid: counter proposal
• Development and under-development: a note on the mechanism of national and international economic inequality (Gunnar Myrdal)
• Rich lands and poor; the road to world prosperity (Gunnar Myrdal)
• Production Capitalism vs. Financial Capitalism - Symbiosis and Parasitism. An Evolutionary Perspective (Erik S. Reinert & Arno Mong Daastøl)
• Development and Social Goals: Balancing Aid and Development to Prevent ‘Welfare Colonialism’ (Erik S. Reinert)
• How rich countries got rich... (Erik S. Reinert)

Education, a key to development or to emigration?

Education is increasingly regarded as the key to expanding wealth in the Third World. In countries like Haiti, which specialize in non-mechanized production - in technological dead-ends - raising the level of education of the population will not help to increase the level of wealth in the population. In such countries the demand for educated personnel is minimal. Education is more likely to increase the propensity to emigrate. 

A strategy based on education succeeds only when combined with an industrial policy that also provides work for educated people, as happened in East Asia. 

-- "How Rich Countries Got Rich" by Erik S. Reinert p. 114

More:

• How rich countries got rich... (Erik S. Reinert)
• Voting with your feet (Paul Collier)

Reinert's Critique on Modern Economics

Standard textbook economics is created as an abstraction from an economic scenario in the same way that the game of chess is created as an abstraction of a war scenario. But just as the war in Iraq is not solved by referring to the rules of chess, the problems of world poverty are not solved by referring to an economic theory that does not contain key variables from factual knowledge. 

-- "How Rich Countries Got Rich" by Erik S. Reinert p. 34

Sombart's driving forces of capitalism

Werner Sombart considers capitalism as a kind of historic coincidence, in which factors are brought together by a whole range of circumstances. Economic wealth is a result of its being willed, a result of a conscious policy. the driving forces of capitalism, which create both the foundation and the conditions for the system, are, according to Sombart:

1. The entrepreneur, who represents what Nietzsche calls the 'capital of human wit and will', the human agent who takes the initiative to have something produced or traded.

1. The modern state, which creates the institutions enabling improvements in production and distribution, and creates the incentives that make the vested interest of the entrepreneur coincide with the vested interests of society at large. Institutions encompass everything from legislation to infrastructure, patents to protect new ideas, schools, universities, and standardization of units of measurements, for example.

1. The machine process, i.e. what was long called industrialism: mechanization of production creating higher productivity and technological change with innovations under economies of scale and synergies. This concept is very close to what we today call the 'national innovation system'.

-- "How Rich Countries Got Rich" by Erik S. Reinert p. 120 - 121

How rich countries got rich... (review)

image from Anthem Press India

As mentioned before, I have been working on a short review of Erik S. Reinert's book "How Rich Countries Got Rich ... and Why Poor Countries Stay Poor"

Tomorrow morning there will be a small seminar and discussion on the book's topic within the UMB. The review is publicly available and can be read by clicking this link.

Basically, Reinert's book (and his The Other Canon Foundation) is a critique on neo-liberalism from within capitalism rather than from the left. As he points out, there is 'another canon' within capitalism that doesn't fully agree with the current trend of globalization and opposes the abstract 'one-size-fits-all' model that is being spread by the Washington institutions.


Unconditional free trade has up to now only widened the gap between rich and poor. Instead of a convergence of world income, we find that while the rich nations enjoy sustained growth, ninety of the world's nations were poorer in 1997 than in 1990.

This is the risk of the current view on globalization, the value chains of production are broken up in such a way that the rich countries take all the high-skilled jobs while the activities of lower pay are given to the poor countries: poor countries end up specializing in being poor and rich countries specialize in being rich.

To break this trend, just 'making the market' free is not the right answer. Economic growth is a joint product of synergies, a large division of labour, increased returns and new knowledge.

I would recommend all to read the book and form your own opinion.

I have found one incorrect reference though: in chapter 2 "The Evolution of the Two Different Approaches" talks about "post-authistic economics" on page 45, footnote 32 gives a link to Edward Fullbrook's website. This link is misprinted and should be http://www.paecon.net/ , I hope this will be corrected in newer editions.

References:

• My review
• Some excerpts from the first chapter
• Reviews: Jayati Ghosh, Jeremy Williams, Matt
• How Countries Get Rich by C. Peter Timmer of the Center for Global Development
• 23 Things They Don't Tell You About Capitalism by Ha-Joon Chang
• Cracking the Code: Unlocking Africa’s Secret to Wealth
• The Other Canon

More:

• Sacred Economics
• Dead Aid: counter proposal
• The Credit Crisis visualized (by Jonathan Jarvis)
• Reconstructing the theory of Uneven Economic Development (Other Canon)

Update:

• Review in Dutch by Franky Aelbrecht

How rich countries got rich...

image from
Anthem Press India

Today I started reading Erik S. Reinert's book "How Rich Countries Got Rich ... and Why Poor Countries Stay Poor". The title is already thought provoking, Reinert will discuss that the concept of a free market is actually a luxury, and that the currently rich countries have become that way exactly through a combination of government intervention, protectionism and strategic investment.

Update: review available

Visiting Peru in July 1967, during his last high-school summer vacation, he wondered why the country is so poor:

Most of the people I observed at work - the luggage handlers at the airport, the bus drivers, the hotel personnel, the barbers, the shop attendants - did not seem to be any less efficient than the people performing the same tasks back in Norway.

What is it about this "market" that rewards people with the same level of productivity with such different real incomes in different countries?

Just as now, economists were already claiming in 1967 that free trade would elevate all people out of poverty, that the allowance difference for rich and poor would be leveled out. This 'proven' economic theory has been repeated from 1760s, the 1840s and the 1990s:

If high-tech engineers and people who make a living washing dishes are placed in two different countries and start trading, they will suddenly obtain the same real wages?

I am about to find out, I have just started to read his book, but these starting theories sound already very promising.

In his own words:

If you take anything from this book, let it be this: if you want to understand the causes of American and European prosperity, study the policies of those who created it, not the advice of their forgetful successors.

I have found one incorrect reference though: in chapter 2 "The Evolution of the Two Different Approaches" talks about "post-authistic economics" on page 45, footnote 32 gives a link to Edward Fullbrook's website. This link is misprinted and should be http://www.paecon.net/ , I hope this will be corrected in newer editions.

More:

• Review by Jayati Ghosh (IDEAs)
• The Other Canon
• Cracking the Code: Unlocking Africa’s Secret to Wealth
• Sacred Economics
• Dead Aid: counter proposal
• The Credit Crisis visualized (by Jonathan Jarvis)
• Reconstructing the theory of Uneven Economic Development (Other Canon)