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Home , Manchester Liberalism

POLITICAL ECONOMY AND ITS FUTURE CLASS 1

Dani Rodrik & Roberto Mangabeira Unger Spring 2021 This course

• A discussion of the institutional arrangements that best serve the goals of inclusive prosperity under our current technological trajectory • A debate on the nature of ideas, especially economic ideas, that can take us there Logistics

• TF: Rohan Sandhu • review sessions on Friday for undergraduate students only • Course requirements differ according to program • explained in syllabus • first weekly writing assignment for HKS students (due next Monday) will be posted later today on Canvas • Auditors welcome • do not have to do writing assignments • get in touch with Jessica De Simone for access to Canvas page Zoom norms

• Keep video open (and audio muted, unless speaking) • Update your screen name with full name and affiliation (e.g., “John Smith, HKS”) • To ask a question or make a comment, use “raise hand” feature • You can jot down comments and questions also in chat box, which will be moderated by TF (Rohan Sandhu) • Use chat box only for comments/questions directly related to the discussion Outline

• Different conceptions of : a whirlwind historical tour • the institutions and ideas behind different conceptions of political economy • , classical , , socialism, , populism • Key trends and facts • inequality • global and national • COVID impacts • labor market polarization • technology: convergence and divergence A. Mercantilism

• Claim: a nation’s economic well-being requires maximizing bullion (gold) in Sovereign’s coffers • All economic activity must be in the service of the Sovereign • private greed is bad • market activity and international trade are highly regulated and monopolized • Maximize exports, minimize imports of manufactures • trade surpluses good; trade deficits bad • Politics organized along absolutist or corporatist lines • with Sovereign handing out privileges at its discretion • Dominant in Britain and rest of Europe prior to the B.

• ’s claim: the market and private initiative are the economic engine that create prosperity • Economic well-being is measured not by wealth (or gold) per se but satisfaction of individual preferences (e.g., consumption) • Textbook renditions (still common) presume it requires a minimal state • national defense, protection of property , and the administration of justice • markets should be as free as possible “ liberalism” • not necessarily Adam Smith’s own view • Close correspondence with contemporary libertarian vision • markets are separate and disembedded from politics • limited role for the state • because of both lack of knowledge and likelihood of political capture C. The welfare state

• Claim: markets are not self-creating, self-regulating, self-stabilizing, or self- legitimizing • the Great Depression and interwar turmoil • labor organization, expansion of franchise, mass media • Therefore they need to be embedded in a wide range of institutions • regulatory institutions, redistributive institutions, monetary and fiscal institutions, institutions of conflict management, … • In practice: Keynes + the welfare state + industrial policy • with variants: “liberal” vs. “coordinated” market economies (US vs. Europe) • A national system of , not a global one • postwar Bretton Woods regime made the system work by throwing lots of “sand in the wheels” of international commerce and finance • controls plus a highly permissive GATT • a thin layer of global rules, leaving considerable room for maneuver for domestic policy makers D. Socialism

• Claim: capitalism is based on exploitation of labor (even though it generates technological innovation) • History is history of class struggle • from individuals-states to classes and class domination • Public ownership of the “means of production” is the end goal • “from each according to his ability, to each according to his needs” • Claim: socialism is not incompatible with markets • markets provide useful price signals about relative scarcity and valuations • Claim: socialism is not incompatible with democracy • even though dictatorship of the proletariat may be necessary in the interim • Various versions in postwar Eastern Europe and USSR E. “Neoliberalism”

• Antecedent: postwar economic boom followed by oil crisis and stagflation (‘70s) & debt crises (1980s) • Claim: Keynesianism does not work, markets are over-regulated, and states are overextended • Must: • stabilize (fiscal austerity; central bank independence) • privatize • deregulate (labor market “flexibility”; financialization; removal of price controls, trade barriers, entry restrictions) • Developing country version: “Washington Consensus” • A new model of : “hyper-globalization” • financial globalization + World Trade Organization + RTAs • euro zone and single market in Europe F. “Populism”

• Antecedents: growing economic, cultural, regional divides within countries • Claim: leader must represent and speak for “the people” • unified by a common interest • and against the “enemies of the people” • right-wing variant: foreigners, immigrants, racial/ethnic minorities • left-wing variant: large , big banks, big tech • Rejection of restraints on the use of political power • as long as political executive represents “people’s will” • Two dimensions • political • aversion to institutions of political liberalism, independent judiciary and media, separation of powers • economic • aversion to restraints on conduct of economic policy, such as independent regulatory agencies, independent central bank, and external restraints, such as global trade rules Rising populist vote shares

Source: https://popu-list.org/ Initial take-aways

• Capitalism (or the ) is an evolving, malleable system • each version a reaction to the previous shortcomings of previous one • pieces of each remain in our current practices • Different models of political economy are rooted in different: • conceptions of human nature: selfishness vs sociality • normative frames: individual well being/autonomy vs collective outcomes • ideas of how markets work: self-stabilizing and benign vs inherently unstable and/or exploitative • conceptions of politics: narrow versus broad; “low- vs high-energy” • There are mutually reinforcing interactions between • ideas (or “narratives”) and institutions (or “rules of the game”) • ideas and (vested) interests (of key actors) • Which can make (new) ideas powerful, especially in periods of flux and uncertainty Key trends and facts The winners and losers in the global economy

Source: World Inequality Report (2018) Inequality within advanced economies…

Source: World Inequality Report (2018) Polarization in the labor market

Changes in employment and wages by skill/wage category

8

6

4

2

0 bottom middle top -2

-4

-6

-8 Change in employment share (%) Change in real median wage (%)

Source: MGI (2020). Average for France, Germany, Japan, Italy, Spain, Sweden, United Kingdom, and United States. COVID impacts across countries

Source: Deaton (2021) COVID impacts across different occupations

Source: https://www.vox.com/2020/4/10/21207520/coronavirus-deaths-economy-layoffs-inequality-covid-pandemic The innovation-productivity paradox: pervasive innovation yet slow economy-wide productivity growth

Total factor productivity (TFP) Labor productivity Growing productive dualism in advanced nations

Source: OECD (2015) How do we create a more inclusive prosperity?

• as usual • “Neo-liberalism-plus” • market flexibility + compensation/transfers • Global governance • global networks/alliances aiming for better rules on taxes, finance, labor and environmental standards • More radical national solutions: new classes, new settlements • /isolationism • nationalization • “developmentalism” • democratizing the innovation economy