On development blueprints and Kalecki

Philip Pilkington on Naked Capitalism sketches “an alternative approach for developing economies.” It’s an insightful piece, and one with which I agree in several respects, but although admirably unorthodox I think it succumbs to one of the major drawbacks of mainstream development economics, namely its tendency to promote the same answer in lots of different countries.

The approach is based on Modern Monetary Theory (MMT), which says that government shouldn’t necessarily balance its books but should respond to how the economy behaves. If unemployment is high the state might need to spend more, but if demand outpaces economic capacity the budget should move closer to balance or even into surplus. This theory, popularised by the economist Abba Lerner, is the opposite of what the Tories are currently doing in Britain, which is cutting spending even while unemployment climbs.

Fans of the MMT approach argue that as long as the exchange rate floats freely a government can print as much money and issue as many government bonds as it wants. Government can keep on spending until inflation begins to kick in.

Pilkington points out that as government spending leads to higher incomes people will buy more stuff, making devaluation and inflation likely. But to mitigate this problem he says that government can manage investment, ensuring that the new goods and services demanded are bought at home. Policies aimed at raising incomes, like a jobs-guarantee programme, will help improve living standards as well as stabilising prices and the currency.

He imagines a country which imports a lot of furniture from Scandinavia. The government should incentivise and subsidise high quality furniture companies, cutting taxes and handing money to start-up entrepreneurs. Carpentry and other training programs should be built into their jobs guarantee scheme. “All that is needed is good researchers and planners and a sensible government willing to incentivise investment that serves the public purpose. ”

Pilkington labels this approach as ‘dirigisme’, and says that it succeeded in post-war France. I agree with him (and Keynes) that the government should take more responsibility for investment. He’s also correct that governments should respond by spending more when economies deteriorate and rein in when they overheat. I find this sort of Post-Keynesian approach appealing.

He reckons the approach would work in Argentina, Venezuela, Bolivia and Peru; countries making the transition away from centrally planning (especially Cuba); and “Eastern and Middle-Eastern countries that already run their economies in a somewhat similar fashion to a dirigisme system (Egypt, Kazakhstan, Iran etc.)”

I don’t know much about these countries, but even I can see that his grasp of geography slips somewhat here. The last time I was in Almaty it most definitely wasn’t in the Middle East.

But that’s the least of the problems. In my view the approach suffers from similar methodological problems to neoliberal programmes like the Washington Consensus. It’s universalist, meaning that it proposes a one-size-fits-all solution for different contexts. As I write in my book Reflexivity and Development Economics, there are major methodological difficulties with trying to propose the same approach in most countries.

Usually the particular theory proposed just reflects the author’s biases and predispositions. Pilkington is unusual in proposing the need for a strong state. American and British economists normally tend to promote small government, competition and individualism since these features dominate their own societies. The private sector is supposed to fix everything because, as it happens, in Britain or the US, we’ve experienced two decades of neoliberalism. Japanese and north European development economists tend to be more statist because they’ve got bigger governments.

But broadly the  proposals of developed-world academics and policy specialists tend to be more free-market orientated because their own economies have already passed through a stage of heavy state involvement in the economy and are now robust enough to trade with the outside world. Their proposals may have little to do with the actual conditions in developing countries. Development is littered with examples of well-meaning but flawed blueprints being forced on to poor populations.

I suspect that it’s one-size-fits-all methodologies that are the problem, not primarily the content of policy prescriptions (although I too have my policy preferences). We need to move to a world that recognises the influence of external values and norms; the role of context; the possibility that policies can backfire; and the need to revise policies and theory as circumstances change. In a sentence: we’re all human and our answers are often wrong, and the sooner economists recognise this the better will development policies be.

That’s not a blueprint. It’s a set of principles for how we might think about development, and it underscores the importance of considering methodology first before proposing  solutions. It is possible to think at a higher level than that of theory or policy — we need to think about how we do economics, rather than just plunging in and doing theory. Mainstream economists have long refused to think about methodology, in some cases actively criticising those who do so.

Pilkington’s approach even starts from one of the main misplaced universals of the Washington Consensus: “One of the main concerns with implementing economic policy in developing countries is inflation”. When John Williamson coined the phrase in 1989 inflation reduction was his primary target.

But many of the most successful examples of development, like South Korea, experienced high inflation for many decades as potential output raced ahead. In none of the couple of dozen developing countries i’ve worked in is inflation a problem. An obsession with inflation has afflicted mainstream economics for decades; yet global conditions have tended toward disinflation, a result of the debt explosion, the ‘China effect’ and weak demand in many big developed countries, such as Japan and periodically several European nations. The global economic crisis heralds a long-term reduction in demand, not overheating. That’s not to suggest that inflation will never happen again, and it is a problem in some countries, but things have generally swung far too much to the extreme of inflation-paranoia.

I don’t mind a bit of dirigisme (a word that encompasses much more than MMT) but I suspect that many governments would struggle to supply the necessary ingredients: “All that is needed is [sic] good researchers and planners and a sensible government willing to incentivise investment that serves the public purpose. ” Is that all?

Loads of countries have tried to incentivise and subsidise companies in desired areas, but with mixed results. Cutting taxes and handing money to start-up entrepreneurs doesn’t always work. Even in Singapore, normally seen as having a government full of heroic experts on an infallible march to prosperity, things went wrong from time to time.

In his autobiography Lee Kuan Yew discusses the failure of early government schemes. During the 1960s the Economic Development Board invested in joint ventures in paper recycling with a businessman who had no experience in the industry. A similar lack of experience underlay the failure of a ceramics business. A joint venture in shipbuilding failed because Singapore had to import steel plates and engines.

Kalecki’s approach

One of my favourite development economists, Michal Kalecki, shunned blueprints and  promoted a much more context-sensitive and open version of economics. Although he gets far less attention than John Maynard Keynes, he pre-empted him by three years, in 1933 publishing work outlining the theory of effective demand later put forward by Keynes. Both were, as it happens, influenced by chartalism, the precursor to MMT.

The following passage draws on chapter 4 of my book.

Although much of Kalecki’s work was devoted to socialist or developed capitalist economies, he wrote an important series of essays on development with important implicit methodological underpinnings. He would have considered the universalism of the Washington Consensus misplaced and inappropriate.

In his Essays on Developing Economies, a collection published posthumously in 1976, he showed a distinct style of thinking which would have precluded him from an essentialist or determinist approach. Moreover, with respect to development economics his approach had certain advantages over Keynes’s. As Joan Robinson puts it in the introduction to the Essays: “Kalecki had never learned the orthodox doctrine, and had no need to escape from it” (Kalecki 1976: 7).

Kalecki used an open systems methodology and believed that a model’s assumptions should be realistic (Steve Keen is probably a fan). He understood that the kind of economics appropriate in the developing world was different to that in developed economies. He recognised the importance of politics. He never used the concept of utility and rarely employed the idea of equilibrium.

Kalecki appeared to believe a final ‘answer’ to the problems of development was unlikely. As one of his collaborators puts it:

Kalecki was always suspicious of too sweeping formulations and excessive reliance on one single ‘miracle’ solution. He would always emphasise the importance of analysing concrete solutions and bringing into the picture all relevant factors be they economic or not (Sachs 1977: 54).

This approach can be seen in the differing advice he gave to the four main countries with which he was involved: Israel, India, Cuba and Bolivia. Kalecki identified two main models of the economy – one for developed countries and one for developing – rather than a multitude of ways of thinking about development.

Kalecki’s approach was to model a real situation as best as possible, drawing tentative conclusions with a particular aim in mind. He rarely talked of economic ‘laws’ and did not believe himself to have arrived at a concrete developmental truths valid for all time. His

theorising was usually directed towards some fairly immediate purpose, such as the explanation of economic fluctuations, the level of unemployment etc. … and his abstractions and assumptions were related to the concrete conditions of the world he sought to explain” (Sawyer 1985: 147) and “… in most of his theorising, Kalecki had a clear objective in mind… and whilst the assumptions would be attuned to the purpose at hand they were also based on observations of the real world. Thus assumptions are specifically chosen for their apparent relevance and importance. (Sawyer: 271).

Kalecki distinguished between the economics appropriate to developing and developing economies. Like Albert Hirschman he disputed the notion of a ‘monoeconomics’ which would work everywhere. He pointed out that a government-induced increase in effective demand would be less likely to reduce unemployment in developing economies, which are constrained by capital rather than by labour. In a developed economy the government may borrow to increase expenditure, with the aim of raising employment, which can then be put to effective use alongside previously underutilised capital equipment. This he termed a “sort of financial trick” (Kalecki 1976: 21).

However given the shortage of capital stock in developing countries, the main task was to increase productive capacity rather than to raise employment (although he acknowledged that a lack of effective demand was possible), “the main problem here being the deficiency of productive capacity rather than the anomaly of its underutilisation” (ibid.: 23). The difficulty thus lay with the supply side of the economy rather than the demand side.

Kalecki, although an advocate of trade, would have had no truck with the export-oriented model of the Washington Consensus, which concentrated on the elimination of barriers to trade including tariffs and non-tariff barriers. Because of the Consensus’s neoclassical belief in the substitutability of capital and labour and its advocacy of privatisation, its exponents believe that markets in poor countries will automatically adjust to the increased market access that came with trade liberalisation. Companies would produce more of the desired type of goods and services, leading to a more efficient overall outcome. According to supporters of the Washington Consensus, since the market would take care of things, there was thus little point in enacting measures aimed at developing the supply side.

Theoretical solutions, Kalecki realised, were all very well, but their implementation would encounter political difficulties. “At no time would Kalecki indulge in what might be called pure economics. The adjective ‘political’ weighed high in his brand of political economy” (Sachs, op. cit.: 55).

The need for planning to bring about the desired long-term increase in investment in agriculture was, Kalecki understood, likely to bring political opposition. Feudal landowners would be unlikely to give up their rights quickly and they often held significant power in government. Increasing the rate of investment should not be achieved by taxing the poor, so taxes have to be levied on the rich – which is often politically unpalatable.

For Kalecki, government spending to restore a higher rate of effective demand could be on poverty reduction, an objective which may conflict with the priorities of industrialists. In the United Kingdom it has been argued that one of the reasons for the acceptance of Keynes was the need to expand arms spending for the second world war. “Overcoming the resistance to such institutional changes by the privileged classes is a much more difficult proposition than the financial trick which solves the problem of effective demand crucial for the develop economies” (ibid.: 26).

Neither Kalecki nor Keynes were utilitarians, but one of their key differences was that Kalecki performed analysis at the level of the social class rather than the individual. Keynes’s approach was more easily adapted by those who wished to use utility functions. Kalecki saw that social classes influenced individual behaviour, and that individual agency both affects and is conditioned by social interaction.

Because of his emphasis on social ties rather than autonomous individual behaviour, Kalecki rarely used the concept of equilibrium, preferring a picture in which competition was always imperfect and prices the product of the relative changes in the degree of monopoly and costs. Capitalist economies were in constant flux, their dynamism their interesting characteristic.

Unlike Keynes, Kalecki saw little role for Marshallian supply and demand, believing perfect competition to be so unrealistic as to be barely relevant to the analysis of either developed or developing economies. Again, he had no need to escape the orthodox doctrine.

Ultimately i’ve got very little against MMT or the kind of approach suggested by Pilkington, at least in some contexts. Kalecki and MMT also clearly overlap in some areas. But I doubt this approach would work everywhere and in my experience countries have lots of different problems. Kalecki shows us, amongst other things, that one size doesn’t fit all.