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Vicious and Virtuous Circles

Vicious and Virtuous Circles. Vicious circle of debt Debt  Child Labor  Low Education  Poverty Virtuous circle of development Per capita real GDP  Health  Productivity. Adam Smith’s Glorious Vision. Accumulation + Division of Labor = Cumulative Progress. Adam Smith.

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Vicious and Virtuous Circles

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  1. Vicious and Virtuous Circles Vicious circle of debt Debt  Child Labor  Low Education  Poverty Virtuous circle of development Per capita real GDP  Health  Productivity

  2. Adam Smith’s Glorious Vision Accumulation + Division of Labor = Cumulative Progress

  3. Adam Smith • Accumulation: “capitals are increased by parsimony and diminished by prodigality and misconduct.” • Division of labor: “… natural propensity among men to truck, barter, and exchange one thing for another.” • The division of labor is limited by the extent of the market. Free Trade  Extended Market

  4. Adam Smith:Virtuous Circle of Growth Accumulation | Division of Labor | Productivity | Reduced Cost | Extended Market | Profit

  5. Adam Smith:Limits to Growth Accumulation | Competition Up | Profit Down • Steady State: “that full complement of riches which the nature of [a nation’s] soil and climate, and its situation with respect to other countries, allow it to acquire.” But steady state far off in the future

  6. The Dismal World of David Ricardo and Thomas Robert Malthus • Diminishing Returns to Land - Intensive Margin - Extensive Margin • Rent = Productivity Premium over Marginal Land • Constant Returns to Manufacturing • Iron Law of Wages … subsistence - Wage Fund - Malthusian Law of Population

  7. The Dismal World of David Ricardo Accumulation | Increase Wage Fund | Increased Workforce | Increased Cultivation | Increased Food Cost (Labor Theory of Value) | Increased Rent Share | Reduced Profit Share | Reduced Accumulation

  8. Ricardo’s Prescriptions Free Trade • Import Food • Repeal “Corn Law” Tariff Promote Colonies (J.S. Mill) Abolish Poor Laws Population Growth  Wage Below Subsistence Tax Rents and Luxuries vsMalthus Landlords Consume “Glut”

  9. Modern Malthusians:The Limits to Growth • Lily – Pond S P R A W L • Finite Resources • Environmental Catastrophe • Why not market solution?? • Tragedy of the commons • Why not Tech – Fix ???

  10. Karl Marx:Inherent Contradictions of Capitalist Development • Accumulate, accumulate… That is Moses and the prophets.

  11. Karl Marx:Inherent Contradictions of Capitalist Development Capitalists … own means of production Workers … paid subsistence wage Exploitation  Surplus Value (Profit) Accumulation of profit  Crisis  Monopoly + Immiseration of labor Revolution  Socialism The expropriators are expropriated

  12. Karl Marx:Contradictions of Capitalist Development Flavors of Capitalist Crisis • Falling Rate of Profit • Profit Squeeze • Disproportionality • Uncertainty  Error  Overproduction • Underconsumption Heightened accumulation  Increased Supply + Diminished Demand Crisis: Rush for Liquidity  Breakdown of Monetary Economy

  13. Vlad LeninImperialism: The Highest Stage of Capitalism Viewed from the center, the periphery offers Untapped Markets + Cheap Food + Outlet for Investment (forestall stagnation) | International Competition for Dependencies | Capitalist Wars

  14. Libertarian / Austrian Insights Joseph Schumpeter • Entrepreneur  Progress • Creative Destruction Renews Enterprise Economy • Antidote to Marx Karl Polyani • Market Imposed by State • Substitute for Marx

  15. Karl PolanyiThe Great Transformation • Market Economy is Historically Rare • Laissez Faire is Unnatural • Enforced by Strong, Oppressive State • Resistance to Market is Natural • Reaction to Liberalism … Welfare State • Social Protection vs “Self – Regulating” Market

  16. Karl PolanyiThe Great Transformation Pre – industrial society • Reciprocity: produce & share according to social role • Redistribution via public consumption • Market economy • Behavior “guided” – directed, dictated – by prices • Resistance emerges naturally, quickly

  17. Gunnar Myrdal, 1898 - 1987 1931 Monetary Equilibrium 1933 Chair in Political Economy, University of Stockholm 1934 Elected to Swedish Senate, Social Democratic Party 1938 Carnegie Corp Grant to Study Situation of American Negro 1944 An American Dilemma 1942 Reelected to Swedish Senate: Board, Bank of Sweden/Chair, Post -War Planning Commission/1945 – 1947 Minister of Commerce 1947-57 Executive Secretary, UN Economic Commission for Europe 1957 Rich Lands and Poor 1957-61 Twentieth Century Fund An Asian Drama: An Inquiry Into the Poverty of Nations The Challenge of World Poverty: A World Antipoverty Program 1961 Professor of International Economics, University of Stockholm 1974 Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel (shared with Friedrich von Hayek, opponent of planned economy) Married to Alva Myrdal, Swedish Ambassador to India and Nobel Peace Prize Laureate

  18. Gunnar MyrdalCumulative Causation Thems that gotsgits. For unto everyone that hath shall be given, and he shall have in abundance; but from him that hath not shall be taken away even that which he hath. Matthew

  19. Vicious and Virtuous Circles Vicious circle of debt Debt  Child Labor  Low Education  Poverty Virtuous circle of development Per capita real GDP  Health  Productivity

  20. Gunnar MyrdalCumulative Causation Equilibrium Approach “Harmony of Interests” Laissez – faire Free Trade Critique of Equilibrium Approach • The “other things” that are assumed to remain equal – particularly social and political relations – change with economic outcomes. • They change in ways that lead to divergence, not equilibrium. Thems that gotsgits.

  21. Gunnar MyrdalCumulative Causation • “Spread Effects” • Peripheral regions supply the dynamic center • “Backwash Effects” • Dynamic regions suck the best resources from the backwater • Free trade and free migration hurt the periphery

  22. Vicious and Virtuous Circles Vicious circle of debt Debt  Child Labor  Low Education  Poverty Virtuous circle of development Per capita real GDP  Health  Productivity

  23. Raul Prebisch – Hans SingerUNECLA • Primary goods trap Development  increased demand for manufactured goods • Demands for primary goods are income inelastic • Primary goods prices fall relative to manufactured goods prices over time • Terms of trade move against primary good exporters Prescription: Import Substitution Industrialization (ISI)

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