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«The Economics of Ignorance, Slippery Concepts, and Diversity. With Reflections on China and the European Union. Erik S. Reinert The Other ...»

The Economics of Ignorance,

Slippery Concepts, and Diversity.

With Reflections on China and the

European Union.

Erik S. Reinert

The Other Canon Foundation, Norway &

Tallinn University of Technology, Estonia

Forgotten economic understanding:

important for the EU periphery

‘There is the illusion that the New Germany left

after the annexations can be reduced to a pastoral

state (i.e. without industry). It cannot be done unless

we exterminate or move 25,000,000 people out of it’.

Herbert Hoover, Report from Germany to President Truman, March 18, 1947.

This was probably the key argument that created the Marshall Plan. How could Hoover know this and how did he arrive at the number 25 Million??

Ignorance: The Worst Kind?

“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so”.

Mark Twain, Hucleberry Finn (1884).

“The first world war also destroyed the

foundations of the 19th century economy:

free trade and the gold standard.” Martin Wolf, Financial Times, January 14, 2015.

Martin Wolf ignores a monumental case of «theoriestörende Empirie»:

The 19th Century was a period of massive industrial protection everywhere!

Hayek’s ’overshooting’ mechanism.

’Never will man penetrate deeper into error than when he is continuing on a road which has led him to great success’ Friedrich von Hayek, 1952.

Compare Hyman Minsky’s ’destabilizing stability’ as a mechanism behind financial crises.

The two types of economics:

’One of the nice things about economics is that it is only a way of thinking, factual knowledge does not exist’.

Victor Norman, Norwegian economist, 1994.

(based on Friedman 1953) ’The root of everything we can call theory is to observe things as they are’.

Hans-Georg Gadamer, Lob der Theorie. Reden und Aufsätze, 1991.

The persistent Myth of Free Trade:

«Although it looks as though free market fundamentalism has been relegated to the dustbin of history, the second pillar of neoliberalism – free trade – is not only still standing but has been reaffirmed as «indispensable» by political and economic elites around the world».

Manfred Steger & Ravi Roy, Neoliberalism. A very short Introduction, Oxford University Press, 2010, p. 137.

European and US economic strategy since 1485 First EMULATION: emulate the economic structure of the leading nation(s)

And only then:


In other words: the TIMING of free trade is a crucial variable.

Three «slippery concepts»

• «Competetiveness».

“Merkel pushes for boost to Greek competitiveness”

• «Productivity».

“Productivity isn't everything but in the long run it is almost everything”, Paul Krugman

• «Innovation».

“Our objective is to develop policy initiatives aiming at the modernization of the EU industrial base through accelerating the uptake of innovation.” Competetiveness.

OECD Definition 1992:

“Competetiveness may be defined as the degree to which, under open market conditions, a country can produce goods and services that meet the test of foreign competitions while simultaneously maintaining and expanding domestic income” (italics added). In Technology and the Economy, page 237.

OECD Definition 2015:

“Competitiveness is a measure of a country's advantage or disadvantage in selling its products in international markets Context: The OECD Secretariat calculates two different measures of competitiveness based on the differential between domestic and competitors’ unit labour costs in manufacturing and consumer prices both expressed in a common currency” (webpage).

Productivity I The potential for productivity increases are highly activity-specific: How much productivity increase you can achieve largely depends on what economic activity you are in.

Verdoorn’s Law: The key link between growth in output and growth in productivity.

Baumol’s Law: In some economic activities productivity increases are virtually impossible without reducing quality (symphony orchestras) Source: Solomon Fabricant, Employment in Manufacturing, 1899‐1939, New York, National Bureau of Economic Research, Inc, 1942. pp 90‐91.

Productivity II.

The fruits of increased productivity will spread

in the economy in two different modes:

The Classical Mode: as lower prices to the consumers (in perfect competition markets as in agriculture, process innovations) The Collusive Mode: as higher profits and higher wages to the producers («The Fordist wage regime»). In high barriers to entry/ increasing returns activities (manufacturing), product innovations.

Reinert 1994, Catching up from way behind… Innovation.

As with productivity increases, the windows of opportunity for innovation will vary vastly from one economic activity to the other.

It is entirely possible for a nation to locked into technological dead-ends bereft of any possibilities for increasing returns and innovations.

Haiti: Baseballs. US: Golf balls.

Systemic effects: Haiti & Moldova vs. Germany Innovations & new  The Quality Index of Economic Activities technologies Dynamic imperfect competition Characteristics of high‐quality activities (high‐quality activity) •new knowledge with high market value

•steep learning curves

•high growth in output Shoes (1850‐1900) •rapid technological progress

•high R&D‐content

•necessitates and generates learning‐by‐doing Golf balls •imperfect information

•investments come in large chunks/are divisible (drugs)

•imperfect, but dynamic, competition Automotive paint •high wage level

•possibilities for important economies of scale and scope

•high industry concentration

•high stakes: high barriers to entry and exit

•branded product

•produce linkages and synergies

•product innovations

•standard neoclassical assumptions irrelevant

–  –  –

Financial Economy vs. Production Economy (i.e. the need to control finance) Increasing Returns vs. Diminishing Returns (i.e. increasing returns, manufacturing, as key to wealth) The Cecchini Report (1988)

- “Economic gains from the 1992 programme could rise to 200 billion ECU or more, together with a substantial boost to employment.”

- Most of the benefits were seen as coming from increasing returns to scale (in manufacturing).

- BUT: It was never considered that manufacturing could die out in certain EU countries, so that the benefits of the single market WOULD ACCRUE




Economic structure and population carrying capacity Hunting and gathering soc. 1-2 persons / km2 Agricultural societies 40 persons / km2 Industrial soc (ex. Holland) 400 persons / km2 OR, Antonio Serra at Lampedusa: If the wish is to make it possible for as many Africans as possible to live well in Africa, the only viable way forward is to (re)introduce manufacturing.

Understanding the link between lack of industry and religious extremism.

“From manufacturing you may expect the two greatest ills of humanity, superstition and slavery, to be healed”.

Ferdinando Galiani (1728-87), Italian economist.

Two types of metaphors for Economics Metaphors from physics

• The invisible hand of the solar system (from the Enlightenment)

• The equilibrium metaphor (from physics of the 1880s) Metaphors from biology

• The human body as a metaphor for society (Ancient Greece, Roman Law from about year 400, through the Renaissance to German economist Albert Schäffle (1880s)

• Darwin’s and Lamarck’s theories – evolutionary (Schumpeterian) economics, Nature: A system of Increasing Diversity

Delft, Holland, 1650s:

An Innovation System Based on Diversity

–  –  –

High Andes: Potatoes.

Far Northern Europe: Reindeer herding.

Diversity and Competition between states as the source of Europe’s success

Werner Sombart:

• War and Capitalism (1913)

• Luxury and capitalism (1913) Diversity as source of freedom Christian Wolff (1723) Ousted from University of Halle under death penalty, received with honours in the University of Marburg Will we be able to maintain a highdiversity system?

Low Complexity vs. High Complexity Evolutionary Systems.

Source: Gould, Stephen Jay, Full House. The Spread of Excellence from Plato to Darwin, p. 171.

Europe: checks and balances Florence: members of la signoría elected for two months.

Venice: administrators elected for 6 months.

Mario Draghi elected until 31/10-2019.

Russia serves as an example of the risks of an overvalued exchange rate.

Compare to the Euro in the EU peripehery.

Russia: Exchange rate (right axis), real wages and production,  1992‐2001

–  –  –

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