Week 13 Crises or Opportunities? ECON3020 Asian Business Environment
Shrinking capitalism: components of a new political economy paradigm, Samuel Bowles, Wendy Carlin, Oxford Review of Economic Policy, Volume 37, Issue 4, Winter 2021, Pages 794–810, https://doi.org/10.1093/oxrep/grab029
Capitalism: what has gone wrong, what needs to change, and how it can be fixed, Paul Collier, Diane Coyle, Colin Mayer, Martin Wolf, Oxford Review of Economic Policy, Volume 37, Issue 4, Winter 2021, Pages 637–649, https://doi.org/10.1093/oxrep/grab035
Old/new capitalism: three good questions (from week 12)
Ideas about changing the organization of society in the long run are clearly needed, quite apart from strategies for dealing with an immediate crisis.
Sen would separate out three questions from the many that can be raised.
First, do we really need some kind of "new capitalism" or rather we need an economic system that is not monolithic, draws on a variety of institutions chosen pragmatically, and is based on social values that we can defend ethically?
Second, The second question concerns the kind of economics that is needed today, especially in light of the present economic crises.
How do we assess what is taught and championed among academic economists as a guide to economic policy?
More particularly, what does the present economic crisis tell us about the institutions and priorities to look for?
Third, in addition to working our way toward a better assessment of what long-term changes are needed, we have to think—and think fast—about how to get out of the present crisis with as little damage as possible.
Key lessons from the Technological Global Challenge:
the rapid advance in technology (labour-savings/labour augmenting);
the arrival of artificial intelligence (key new global players such as China, Korea, Japan, but also smaller new players in the global scene);
easy digital connectivity across nations, the access to a global audience for achieving the previously considered unachievable in terms of global challenges (see readings for W12);
This has given rise to new social and political problems and challenges for market capitalism.
What kind of economics do we need?
What challenges to understand the role of markers in this new era?
What out-of-the-box policies?
The example of antitrust law, currently inadequate for our digital-platform-based economy, illustrates the need for new forms of regulation.
The ground beneath our feet is shifting
A lesson from Economic History
100 years of first Industrial Revolution: 1750-1850 and its effect
Vastly greater per capita income
Improvements in health, quality of life and life expectancy.
We are now growing 10 times faster than we were before the Industrial Revolution.
But the Industrial Revolution was also possible thanks to
skies darkened by smoke and soot,
labourers, including children as young as 5 years of age,
toiling 12 to 14 hours a day, sound bleak.
Profits were rising, total incomes were rising,
but large segments of the population were suffering and there was climatic damage happening on several fronts.
The role of law changes and regulation
The Factories Act of 1802 we saw one regulation after another altering the way markets functioned. It was capitalism, but capitalism with a new set of rules.
The series of laws, placing restrictions on children’s work (1802 onwards),
putting caps on the hours of work (Factory Act of 1847),
taxing people’s income (1842)
Antitrust laws: the United States’ Sherman Act 1890, antitrust laws have played a major role protecting consumers and deterring firms from some of the worst practices.
The Fourth Industrial Revolution and its challenges
There is now ample evidence that the share of GDP going to workers as wage income is declining in almost all advanced and higher middle-income economies (Karabarbounis and Neiman, 2013; Autor et al., 2020).
The rise of artificial intelligence, robotics, and ever more sophisticated machinery is displacing labour.
But thanks to the revolution being based on digital technology, this time we have labour being displaced not just by capital but by labour in countries that have low wages (Elsby et al., 2013).
If the United States does not use the cheap labour accessible by digital connections in Kenya, Manila, or Santiago, then the United States will be outcompeted in the final goods and services market by other advanced or higher-middle income economies, say Germany or China, that use this cheap labour and cut down the cost of production.
We are also facing an astronomical inequality in income and wealth that we have seen over the last few decades (Bourguignon, 2015; Milanovic, 2018).
We should use our antitrust laws intelligently and be mindful of labourer exploitation.
Automation in the context of development
Basu’s main line: “While these diverse crises have many different proximate causes, they have important common roots.”
The First Industrial Revolution was a turning point thanks to technological change.
We are today at yet another turning point; and once again we face a challenge of both
science and policy.
The basic change that has brought us to this is once again technology. This is the change brought
about by the rise of digital science.
What are the key dimensions of this technological challenge? See again Week 6 material.
There is now ample evidence that the share of GDP going to workers as wage income is declining in almost all advanced and higher middle income economies (Karabarbounis and Neiman, 2013; Autor et al., 2020).
Declining labour shares: from Benanav (2019), from essential reading in Week 6
“The rise of artificial intelligence, robotics, and ever more sophisticated machinery is displacing labour. But thanks to the revolution being based on digital technology, this time we have labour being displaced not just by capital but by labour in countries that have low wages”
Alongside the slippage in the share of labour income, one broader problem that is causing a lot of pain and distress is the astronomical inequality in income and wealth that we have seen over the last few decades (Bourguignon, 2015; Milanovic, 2018).
See material discussed in Week 4 (the social and labour global challenge)
Labour linking technologies
Thus alongside the labour-saving technology that happened during the Industrial Revolution, this time we have ‘labour-linking technology’ (Basu, 2021a).
Thanks to Global Production Networks and the 4th Industrial Revolution, “(…) It is possible for workers to be based in Bangalore and work for a corporation in Detroit and for customers in London.
The rise in equity and non-equity relationships among firms means that “(…) outsourced work has risen in popularity and there has been a surge in outsourcing over the last three decades.
This is one of key factors behind the take-off of the Indian economy that occurred in the early 1990s. (See Week 5 and Week 8 materials)
Some un-resolvable trade offs (from week 12)
Can single firms adopt Global Labour standards?
High cost of labour may mean this firm cannot compete with other firms;
Can MNE be called responsible for tier 1 and tier 2 firms in their GPN? Yes, but possibly at the expense of involvement in GPN of informal firms that give employment to millions of people globally.
How to address these thorny global challenges?
First and foremost, the need is to understand how dramatically the nature of the economy and the ground beneath our feet, where we make, buy, and sell, has changed.
(Please recommend ECON3020 to your friends!)
What kind of economics? We need data and statistical capacity, but what is fundamental
is the capacity to see, imagine, and visualize, which has come from the seminal breakthroughs in economic theory.
Theory must not be equated with mathematics.
More than ever, there is the need today to take a holistic, multi-disciplinary view of what
Returning to economics, it is clear that our policies are malfunctioning, the normal regulatory framework under which capitalism and its many markets function reasonably effectively, is faltering. What are the hidden assumptions that need to be changed? This is one of the most vexing questions.
Autor et al. (2020)
If globalization or technological changes push sales toward the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms, which have high markups and a low labor share of value added.
We empirically assess seven predictions of this hypothesis:
(i) industry sales will increasingly concentrate in a small number of firms;
(ii) industries where concentration rises most will have the largest declines in the labor share;
(iii) the fall in the labor share will be driven largely by reallocation rather than a fall in the unweighted mean labor share across all firms;
(iv) the industries that are becoming more concentrated will exhibit faster growth of productivity;
(v) these patterns should be observed not only in U.S. firms but also internationally.
Autor works find support for all of these predictions.
The queen of policies: regulation to limit market power
In recent years there is the additional worry of corporations, large MNE leadings GPN armed of extra-ordinary market power.
The example of the Big Tech companies and Big Pharma, gaining control over large markets and earning astronomical profits.
Apart from being undesirable in itself, staggeringly high inequalities do damage to democracy by robbing ordinary people of their voice and by giving a few disproportionate influence over government decision-making.
Our antitrust laws were meant to be a market-respecting form of control over excessive power and profit going into the hands of a few corporations.
Digital platforms as new institutions
With the arrival of the digital platform firms, such as Amazon, Uber, or Alibaba,
these markets have changed in one dramatic way.
The platforms now play the role of the auctioneer allowing for prices (and quantity) adjustments that ideally should be informally performed by competition in the markets.
In other words, the imaginary auctioneer in the competitive market has suddenly come into actual existence and it is not just that.
The auctioneer is itself a profit-maximizing firm.
Clearly, this novel market has to be analysed and regulated in novel ways.
Examples of anti-trust laws
To begin with a relatively narrow matter, let us look at antitrust law. Beginning with the pioneering effort in the United States in the late nineteenth century, when it enacted the Sherman Act 1890, antitrust laws have played a major role the world over, protecting consumers and deterring firms from some of the worst practices.
However, while we should use our antitrust laws intelligently and aggressively and we should cover monopsonies and be mindful of labourer exploitation, I would argue that this in itself will prove to be inadequate in our new digital world.
The reason is a proviso that was already there in the Sherman Act 1890.
Breaking up a firm into many is undesirable when the monopoly is a natural one in the sense that there are such great economies of scale that to break up the firm into several small firms is to do damage to efficiency. It has been recognized that antitrust laws do not apply in such situations.
That is what has happened with the arrival of the digital platform firms, such as Amazon and Uber. Their advantage is their size.
New institutions, new forms of labour exploitation and old anti-trust laws
That is what has happened with the arrival of the digital platform firms, such as Amazon and Uber. Their advantage is their size.
But this same advantage creates the problem of disproportionate power on the part of the platform, thereby creating a deep policy dilemma.
Antitrust laws cannot solve this problem. It can be argued that we are reaching the end of the antitrust century (Basu, 2021a).
Our antitrust laws have helped us a lot and we must continue to use them for a host of sectors, but the big problems of consumer and labourer exploitation that accompany the rise of the digital corporations are beyond what can be solved by these laws.
New institutions, astronomical profits and new forms of profit sharing
If we have to live with large corporations because of the large returns to scale provided by the digital platforms, what we need is to turn our attention to some form of profit-sharing.
We have to bring in new laws to require corporations to have dispersed shareholdings.
More generally, the astronomical market power by star/global firms begs the question:
What responsibilities should be placed on companies that serve millions of businesses and billions of consumers with services that in the eyes of many have become essential?
Going beyond corporate profits, we need steps to curtail overall inequality in society, especially inherited inequality. This means having larger wealth tax and inheritance tax.
Technology, economic growth and the ecological global challenge
However, higher GDP growth does not have to mean a lower chance of long-run sustainability.
Many activists make the mistake of equating the two because they equate higher GDP growth with more cars, more jets, more houses, more carbon emissions, all of which do damage to the environment.
In reality, we can get higher GDP growth because we are consuming better health, longer lives, more music, more art, more philosophy.
What does need to change to make economic growth more compatible with a solution to the ecological global challenge? We need to work on changing the constituents of that growth way from cars, yachts, and houses, to better health and stimulus for the mind.
This change in the composition of growth will need planning and policy and the use of incentives to make the shift happen.
This has to be a major part of our policy effort if we are going to weather the more rapid growth that is bound to come with the ongoing digital revolution.
Proposal for a new form of regulation:
Conventional welfare state policies that centre on education, training, progressive taxation,
and social insurance are inadequate to address labour market polarization, which is capitalism’s most
pressing inclusion global challenge at present.
We emphasize the importance of new institutional arrangements that enable strategic long-term information exchange and cooperation between governments and firms.
Capitalism, the crisis of production and the social/labour global challenge
One of the fundamental problems of contemporary capitalism is its failure to produce adequate numbers of good jobs.
Quantitative indicators of this can be found in measures of
labour market polarization,
rising spatial inequality,
declining job stability,
greater self-reported economic insecurity,
declining middle-class income shares
the collapse in the number of jobs for medium-skill occupations in leading advanced economies.
These dimensions of the labour global challenge are related to a wide variety of social ills such as family breakdown, crime, and substance abuse.
It is even a problem for economic efficiency and growth insofar as it limits households’ ability to support children’s education, and this slows down the dissemination of innovation from the more advanced sectors and firms to the rest of the economy through the creation of more productive jobs in the middle of the skill distribution.
Measures against inequality in the OECD area
A 21st century view of the labour global challenge in the face of shortage of middle class jobs.
The assumption is that good middle-class jobs will be available to all with adequate
education and skills.
We need a different—or at least complementary—approach when inequality and economic insecurity are structural problems, and when the inadequacy of good middleclass jobs is driven by secular trends such as technology and globalization.
Preparing young workers for the labour market and reskilling older workers for newer occupations will not work if firms are not supplying an adequate quantity of good jobs.
This calls for targeting the middle cell of the matrix, focusing on direct interventions in the productive sphere with the goal of expanding the supply of middle-skill jobs.
New labour market policies for the labour global challenge
This new form of regulation would be aimed directly at the productive sphere of the economy and targeting an increase in the supply of ‘good jobs’.
The main elements of this strategy are:
active labour market policies linked to employers;
industrial and regional policies directly targeting the creation of good jobs;
innovation policies that incentivize labour-friendly technologies;
international economic policies that facilitate the maintenance of high domestic labour/social standards.
New active labour market policies
There is an opportunity to enhance training and active labour market policies by transforming them into vehicles of sustained engagement and collaboration with local
(and prospective) employers.
The provision of customized services to both job-seekers and employers can help achieve multiple objectives.
It makes training and job placement more effective. It makes it possible to reach workers who might otherwise drop out of the labour market because of particular circumstances.
It might not only enhance the productivity of local firms through qualified employees, but also induce them to adapt their employment and human resources practices to the needs of local labour markets.
Industrial policy (think of examples drawing upon the 4 country specific experiences)
Industrial strategy consists of a collaborative process of ‘discovery’ involving business and agencies of the state, where the objective is to identify the constraints and opportunities over time, and to design interventions appropriately.
In the broader context of the four focal economies we have dealt with (China, India, Japan and Vietnam), industrial policies would need to consider some of the following groups:
Small and medium enterprises;
Subsidiary and affiliated firms linked with equity relationship to MNE.
International companies partners in GPNs.
“Humans are under-rated” (Musk, Tesla CEO)
The direction of technological change depends on several conditions that may be
amenable to policy influence.
First and most directly, government-funded and –directed innovation programmes make decisions about what kind of innovations to promote.
Defence-related and green technologies are examples. Employment-friendly technologies— those that augment rather than replace labour—could be part of those priorities, though they are not at present.
Furthermore, most advanced economies tax capital income more lightly (through depreciation allowances and various incentives of the type we discussed previously) and tax labour more heavily (through personal income taxes, social insurance contributions, and payroll taxes).
An unintended consequence of such a tax system is to make it more attractive to firms to economize on labour by investing in machinery, to an extent that may be socially suboptimal (Acemoglu et al., 2020).
Finally, the direction of technological change also depends on the balance of power between employers and employees.
A new way of thinking about technological change
The gap between skills and technology can be closed in one of two ways:
either by increasing education to match the demands of new technologies, or by redirecting innovation to match the skills of the current (and prospective) labour force.
The second strategy, which gets practically no attention in policy discussions, is
worth taking seriously.
It may be possible to direct technology to better serve the existing workforce’s needs, in addition to preparing the workforce to match the requirements
More labour-augmenting technological change/AI
Acemoglu and Restrepo (2018) have argued that it is possible to countervail present
technological trends and push innovation in a direction that creates new, labour-augmenting
They cite three areas.
First, they suggest artificial intelligence (AI) could be used in education in order to create more specialized tasks for teachers, personalize instruction for students, and increase effectiveness of schooling in the process.
Second, they note a similar potential in healthcare, which is perhaps closer to realization. AI tools would allow ‘less skilled’ practitioners to perform tasks that only physicians with many more years of professional education
have traditionally undertaken.
Third, Acemoglu and Restrepo (2018) mention the use of augmented and virtual reality technologies in manufacturing, enabling humans and robots to work together in performing precision tasks
Governance issues to create high quality
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