(I wrote this post about two weeks ago, but then took a while getting the Substack actually launched. Going forward, hopefully the content will be more timely. All substack content is free; you can subscribe to the newsletter version here. Hopefully the content will be more timely in the future!)
Sometimes I think being a normal economist must be like one of those classic office jobs. You drive to work, park in the garage, take the elevator up to your office. You take some papers from your inbox and put them in your outbox. There’s the research frontier; ok, we’ve advanced it a little bit. Then the bell rings, quitting time. Whereas here in the heterodox world, it’s like you’ve let yourself in through a gap in the fence and you’re wondering, is this place a construction site, or is something being demolished, or is it an archaeological dig? I think this is my desk, but it could be some weird art object, or possibly part of the ventilation system. This person in the hallway — are they the boss, or a customer, or maybe someone in need of emergency medical assistance? Am I sure I have a job? Am I even supposed to be in here?
Well then. Back to work!
The question of the moment is industrial policy. Not so long ago, the consensus on climate policy, at the high table at least, was that carbon pricing was it. Government provides the public interest with an abstract monetary representation, and then private businesses (or “markets”) will translate that representation into whatever concrete changes to production are called for. In recent years, though, the debate seems to have been shifting rather rapidly towards what I have called an investment-focused approach. The passage of the Inflation Reduction Act (along with other similar measures) seems to mark a decisive turn toward industrial policy, in the US at least. This is not only about climate — the disruptions to global supply chains during the pandemic and, more worryingly, a renewed sense of rivalry with China, have strengthened the case for support for key sectors of the economy.
(Full disclosure: When someone mentioned to me early in the Biden administration that there was interest in dealing with the chip shortage by fostering a US industry, I thought it was a silly idea that would go nowhere. This was, it seemed to me, about the worst case for policy — a problem that was at once both extraordinarily hard for government to solve, and likely to take care of itself on its own before long. Shows you how much I know! — or perhaps, how much things have changed.)
The case for industrial policy, obviously, involves a reevaluation of the capacity of government and the problems it is expected to solve — what Keynes, in an essay whose title can be repurposed today, called the line between agenda and non-agenda. But it also, a bit less obviously, involves a shift in how we think about the economy. An economy where industrial policy makes sense is not one that can be usefully described in terms of a unique, stable equilibrium toward which decentralized decisionmakers will converge. Industrial policy only makes sense in a world where increasing returns and learning by doing create significant path dependence — what we are good at today depends on what we were doing yesterday — and where an uncertain future and the need for large, irreversible investments, and the prevalence of complementarity rather than substitution, creates coordination problems that markets are unable to solve. I don’t know that the drafters of the IRA were conscious of it, but they were implicitly endorsing a very different model of the economy than the one that one finds in textbooks.
Supply constraints. My big recent publication, coauthored as usual with Arjun Jayadev, is an article in the Review of Keynesian Economics called “Rethinking Supply Constraints.” It addresses exactly this issue. The one-sentence summary is that it makes more sense to think of the productive capacity of the economy in terms of a speed limit — a limit on the rate at which output and employment can grow — rather than an absolute ceiling, as in conventional measures of potential output. This, we argue, fits better with a wide range of empirical phenomena. Equally important, it fits better with a vision of the economy as an open-ended collective transformation of the world, as opposed to the allocation of an existing basket of stuff.
There’s a summary in this blogpost, and video of my presentation of it at the University of Massachusetts is here. (I start around 47 minutes in.) I will try to write more about it in this newsletter soon.
Low rates and bubbles. My latest Barron’s piece (I write one more or less monthly) was on whether the post-2007 decade of low interest rates can be blamed for Sam Bankman-Fried and financial bubbles and frauds more generally. As always, when the headline is a question, the answer is no.
I don’t think I quite stuck the landing with this one. The big point I should have hammered on is that if abundant credit ends up supporting projects that are socially and privately worthless, that’s a problem. But it is a problem with the institutions whose job it is to allocate credit, not with low interest rates or abundant credit as such. If banks and bank-like institutions can borrow at lower rates, it’s easy to see why they’d lend to projects with lower returns. It’s harder to see why they’d lend to projects with negative returns. The idea, evidently, is that for some reason when interest rates are too low financial-market participants will make choices that are not only socially costly but costly to themselves as well. The low rates-cause-bubbles arguments almost amount to a kind of financial terrorism — give us the risk-free returns we were counting on, or we’ll blow up our portfolios, and some chunk of the economy along with it.
The connection to industrial policy? If we don’t trust financial markets to make investment decisions, that strengthens the case for a bigger public role.
Biden, Brenner, and Benanav. Robert Brenner’s frequent collaborator Dylan Riley wrote a piece in the NLR blog Sidecar, drawing on Brenner’s work to argue that industrial policy is hopeless because of global overcapacity; you’ve got to seize the commanding heights or stay home. I don’t agree. I think there are ways that the socialist project can be advanced via Biden administration initiatives like the IRA, and wrote a piece for Jacobin explaining why.
Some people liked it — Adam Tooze gave it a nice mention in one of his newsletters. Others did not. Aaron Benanav wrote a long and rather irritated rebuttal in New Left Review. I disagree with a lot of what he wrote, which is fine; he, as he made very clear, disagreed with what I wrote. As the protagonist of James Salter’s great Korean War novel The Hunters says, “You shoot at them, they shoot at you. What could be fairer?” But I am a little annoyed that my jaunty Hamilton reference, intended to warn against the danger of imagining that you are in a position of power, got turned into evidence that I myself dream of being in the “room where it happens.” That seems unsporting.
I talked about my piece and the larger debate with Doug Henwood on his excellent Behind the News podcast. I will also be writing a piece for NLR that will be in part a response to Benanav but mostly, I hope, an intervention to move the debate in a more positive direction.
Speaking of Korea. I was on an English-language Korean news show recently, talking about the IRA. The video is here; a twitter thread summarized the points I was trying to make is here. An implicit background point, also very relevant to my objections to the Brenner-Riley-Benanav position, is that trade flows respond mostly to income, not relative prices. How much the US imports from Korea is to a first approximation a function of US GDP growth; subsidies (and exchange rates) are distinctly secondary.
What I am reading. I just finished the novel Variations on Night and Day, by Abdelrahman Munif. It’s the third novel in the Cities of Salt trilogy, though the first chronologically. The first novel, also called Cities of Salt, is about people in a fictional Middle Eastern Country (more or less Saudi Arabia) in the early days of the oil boom. It’s an extraordinary book in many ways, including its use of mostly collective protagonists — large parts of the narration are from the point of view of “the villagers”, “the workers” and so on. The second book, The Trench, moves up the social scale, focusing on the various schemers, strivers, climbers and entrepreneurs – business and political – who accrete around the monarchy’s capital. It’s got an ensemble, rather than collective cast, with one central character and an endless number of minor ones – it would make a great tv show. (Think a gulf-monarchy version of Hillary Mantel’s Cromwell novels.) The third book — Variations on Night and Day — moves up the social scale again, and back in time, to the earlier life of the sultan whose death occurs at the very beginning of The Trench. It’s a great book, gripping as narrative and morally serious. It provides what science fiction and fantasy promise but very seldom deliver, an immersive experience of a world very different from our own. Still I have to say, I somewhat preferred the first two books. At the end of the day, sultans are just not that interesting.
ETA: As it happens, I went to graduate school with Munif’s son Yasser. He was in the sociology department while I was in economics and we used to hang out quite a bit, tho I haven’t seen him in some years.