patterns and sources of modern economic growth market, state and community miscellaneous on...

Patterns and Sources of Patterns and Sources of Modern Economic GrowthModern Economic Growth

Market, State and Market, State and CommunityCommunity

Miscellaneous on Philosophy, Miscellaneous on Philosophy, Methodology and TheoriesMethodology and Theories

Patterns and Sources of Patterns and Sources of Modern Modern Economic GrowthEconomic Growth

Market and StateMarket and State CommunityCommunity Economic SystemEconomic System

Miscellaneous on Philosophy, Miscellaneous on Philosophy, Methodology and TheoriesMethodology and Theories

Evolutionary theoryEvolutionary theory Teleological x Random Teleological x Random

Imre Lakatos and Research ProgramsImre Lakatos and Research Programs

Patterns and Sources of Patterns and Sources of Modern EModern Economic conomic GGrowthrowth


DifferentDifferent CConditions of the Two onditions of the Two Growth PatternsGrowth Patterns The Shift in the The Shift in the Importance of Importance of

TechnologyTechnology Kuznetz Pattern – institutionalization of Kuznetz Pattern – institutionalization of

scientific research and educationscientific research and education The The SShift in the demand structurehift in the demand structure

From mass production to differentiated From mass production to differentiated commodities each demanded in small commodities each demanded in small quantityquantity – increased importance of human – increased importance of human capitalcapital


Investment in education and research Investment in education and research is necessary, but not sufficient, for a is necessary, but not sufficient, for a shift from the Marx to the Kuznets shift from the Marx to the Kuznets patternpattern (increase of the contribution (increase of the contribution of relative total factor productivity)of relative total factor productivity)

Additional Condition: PAdditional Condition: Process of rocess of creative destruction creative destruction mustmust work work (Schumpeter)(Schumpeter) Negative Example: Negative Example: Centrally Planned Centrally Planned

Economies (CPEs)Economies (CPEs)


Borrowed Technology and the Marx-Borrowed Technology and the Marx-Type GrowthType Growth Empirically: Marx pattern tends to Empirically: Marx pattern tends to

emerge more typically and persist emerge more typically and persist longer in rapidly industrializing longer in rapidly industrializing economies based on borrowed economies based on borrowed technologiestechnologies

Possible explanation: workers weaker Possible explanation: workers weaker in wage bargainingin wage bargaining

Is this another additional condition?Is this another additional condition?

Market and StateMarket and State Market is an organization that Market is an organization that

co-ordinates the production co-ordinates the production and consumption through and consumption through voluntary transactionsvoluntary transactionsAt perfect markets, seeking At perfect markets, seeking self-interest increases social self-interest increases social economic welfareeconomic welfare

Market and StateMarket and State State is an organization for State is an organization for

monopolizing legitimate monopolizing legitimate coercive power coercive power State enforces conscription of State enforces conscription of resources, such as taxation, resources, such as taxation, irrespective of an individual’s irrespective of an individual’s will, while taking will, while taking responsibility in providing responsibility in providing some public goodssome public goods

Market and StateMarket and State

Market and State are Market and State are inseparably interdependent at inseparably interdependent at the scale of the nation state – the scale of the nation state – the core organization of the the core organization of the modern world. The question is modern world. The question is just their optimal just their optimal combination.combination.

Market and StateMarket and State Market FailuresMarket Failures - Externalities - Externalities

An externality occurs when a market transaction affects a An externality occurs when a market transaction affects a third party. If the transaction yields negative third party. If the transaction yields negative externalities (externalities (e.ge.g., pollution), the market quantity ., pollution), the market quantity exceeds the socially optimal quantity. exceeds the socially optimal quantity. If the externality is positive (If the externality is positive (e.ge.g., technology spillovers), ., technology spillovers), the market quantity falls short of the social optimum.the market quantity falls short of the social optimum.

Sometimes, people can solve externalities on their own. Sometimes, people can solve externalities on their own. The Coase theorem states that the private market can The Coase theorem states that the private market can reach the socially optimal allocation of resources as long reach the socially optimal allocation of resources as long as people can bargain without cost. In practice, as people can bargain without cost. In practice, bargaining is often costly or difficult, and the Coase bargaining is often costly or difficult, and the Coase theorem does not apply.theorem does not apply.

The government can attempt to remedy the problem. It The government can attempt to remedy the problem. It can internalize the externality using corrective taxes. It can internalize the externality using corrective taxes. It can issue permits to polluters and establish a market can issue permits to polluters and establish a market where permits can be traded. Such policies often protect where permits can be traded. Such policies often protect the environment at a lower cost to society than direct the environment at a lower cost to society than direct regulation.regulation.

Market and StateMarket and State Market FailuresMarket Failures – Private Goods – Private Goods

A good is excludable if someone can A good is excludable if someone can be prevented from using it. A good is be prevented from using it. A good is rival in consumption if one person’s rival in consumption if one person’s use reduces others’ ability to use the use reduces others’ ability to use the same unit of the good. same unit of the good.

Markets work best for private goods, Markets work best for private goods, which are excludable and rival in which are excludable and rival in consumption. Markets do not work consumption. Markets do not work well for other types of goods.well for other types of goods.

Market and StateMarket and State Market FailuresMarket Failures – Public Goods – Public Goods

Public goods, such as national defense Public goods, such as national defense and fundamental knowledge, are and fundamental knowledge, are neither excludable nor rival in neither excludable nor rival in consumption. consumption.

Because people do not have to pay to Because people do not have to pay to use them, they have an incentive to free use them, they have an incentive to free ride, and firms have no incentive to ride, and firms have no incentive to provide them. provide them.

Therefore, the government provides Therefore, the government provides public goods, using cost-benefit analysis public goods, using cost-benefit analysis to determine how much to provide. to determine how much to provide.

Market and StateMarket and State Market FailuresMarket Failures – Common – Common

ResourcesResources Common resources are rival in Common resources are rival in

consumption but not excludable. consumption but not excludable. Examples include common grazing land, Examples include common grazing land, clean air, and congested roads. clean air, and congested roads.

People can use common resources People can use common resources without paying, so they tend to overuse without paying, so they tend to overuse them. them. Therefore, governments try to limit the Therefore, governments try to limit the use of common resources. use of common resources.


Government activities to correct Government activities to correct market failures market failures are are public goodspublic goods

Another role for government is Another role for government is the redistribution of incomethe redistribution of income

Efficiency x EquityEfficiency x Equity

Market and StateMarket and State Government FailuresGovernment Failures - Examples - Examples

If a government activity to correct If a government activity to correct a market failure entails higher a market failure entails higher budgetary costs than social gain budgetary costs than social gain from the corrective measure, it from the corrective measure, it represents an oversupply of public represents an oversupply of public goodsgoods

Principal-Agent Problem in Politics Principal-Agent Problem in Politics Rent SeekingRent Seeking and and Interest Groups Interest Groups


Correcting Government FailuresCorrecting Government Failures OpennessOpenness gives information about gives information about

failures and this can be a base for failures and this can be a base for corrective measures. Domestic corrective measures. Domestic orientation does not give this orientation does not give this information.information.

The long-term stable employment The long-term stable employment of bureaucrats with high social of bureaucrats with high social prestige decreases moral hazardprestige decreases moral hazard

Community Community

Community – a group of people Community – a group of people tied by mutual trust based on tied by mutual trust based on intense personal interactionsintense personal interactions Tribes, villages, workplace, Tribes, villages, workplace,

university, church…university, church… Communities Communities supply informal supply informal

institutions, e.g. trust and institutions, e.g. trust and local public goodlocal public good

Community Community

Market by means of Market by means of competition based on egoism, competition based on egoism, state by means of command state by means of command based on coercive power and based on coercive power and community by means of community by means of cooperation based on mutual cooperation based on mutual trust, coordinate division of trust, coordinate division of labor among people towards a labor among people towards a socially desirable actionsocially desirable action

Community Community

Trust as aTrust as ann informal institutioninformal institution – decreases transaction costs – decreases transaction costs in community, promotes in community, promotes collaborative relationships collaborative relationships within the wider communitywithin the wider community

Trust increases flexibility in Trust increases flexibility in business plans, cooperative ex-business plans, cooperative ex-post renegotiation possiblepost renegotiation possible

Community Community

Creation of trust: third-party Creation of trust: third-party enforcement, long-term and enforcement, long-term and multiple multiple cooperationcooperation

Prisoner´s Dilemma Prisoner´s Dilemma Both coercion and cooperation Both coercion and cooperation

present in modern hierarchical present in modern hierarchical organizations (firms, organizations (firms, government agencies,…)government agencies,…)

Community Community

Supply of local public goods – Supply of local public goods – community effective in community effective in preventing free-riderspreventing free-riders

Gross undersupply of local Gross undersupply of local public goods in communities public goods in communities with low accumulation of trust with low accumulation of trust capital (government is not so capital (government is not so effective in supplying local effective in supplying local public goods)public goods)

Community Community

Community failureCommunity failure – Example 1 – Example 1 Often rivalry or hostility against Often rivalry or hostility against

outsiders, therefore market outsiders, therefore market transactions supported by the transactions supported by the community relationship tend to community relationship tend to be limited to a small areabe limited to a small area

Community Community

Possible Possible CorrectionCorrectionssDeployment of an ethnic Deployment of an ethnic community across regions (Jewish community across regions (Jewish or Chinese traders,..)or Chinese traders,..)

Trade associations (guilds in the Trade associations (guilds in the medieval Europe..)medieval Europe..)

ThTheseese correction correctionss areare inevitably inevitably accompanied by the formation accompanied by the formation of monopolyof monopoly

CommunityCommunity

Community failure – Example 2Community failure – Example 2 Often causes Often causes mutual cover-up and back-mutual cover-up and back-

scratchingscratching Possible correction is based on thePossible correction is based on the

existence of contestable market existence of contestable market Example: In Japanese firms, community Example: In Japanese firms, community

mechanism of cooperation operates in mechanism of cooperation operates in the direction of mutual work the direction of mutual work enforcement. Not in the Chinese state enforcement. Not in the Chinese state enterprises – both management and enterprises – both management and workers motivated to mutually cover up workers motivated to mutually cover up shirking.shirking.

Economic SystemEconomic System

Market + State + CommunityMarket + State + Community Basic question is their optimal Basic question is their optimal

combinationcombination Some combinations in the Some combinations in the

history have been disastershistory have been disasters What is „optimal“ changes in What is „optimal“ changes in

time and spacetime and space

Economic SystemEconomic System

Example 1: Example 1: Utopian state (Thomas Utopian state (Thomas Moore, Utopia, 1516)Moore, Utopia, 1516) BBased on community principle of ased on community principle of

mutual help and cooperation, denies mutual help and cooperation, denies the market principle of competition as the market principle of competition as the system of exploitation by the rich the system of exploitation by the rich and powerfuland powerful

Failures of many attempts to build Failures of many attempts to build Utopia stemmed from oversight on the Utopia stemmed from oversight on the failures of state and community that are failures of state and community that are bound to become serious in the absence bound to become serious in the absence of market competitionof market competition

Economic SystemEconomic System Example 2: State Capitalism Example 2: State Capitalism

EconomiesEconomies After achievingAfter achieving the catch-up goal, the catch-up goal,

the positive role the positive role of many of many governmental policies endsgovernmental policies ends. Failures . Failures in planning and coordination tend in planning and coordination tend to multiply (the reference to the to multiply (the reference to the experience of advanced economies experience of advanced economies is lost). is lost). Will these economies Will these economies transform transform to market liberalism to market liberalism (with all the problems of the (with all the problems of the institutional changes)institutional changes)??

Economic SystemEconomic System Even before catching-up, serious Even before catching-up, serious

international economic frictions international economic frictions can can occuroccur

Danger of escalating the economic Danger of escalating the economic problem to ideological confrontationproblem to ideological confrontation

Valuable is understanding that Valuable is understanding that liberal liberal market economies and state market economies and state capitalism economies do not have to capitalism economies do not have to be dbe discontinuousiscontinuous, the hope is that , the hope is that state capitalism economies willstate capitalism economies will move move toward democracy and liberalismtoward democracy and liberalism

New TendenciesNew Tendencies Change of Kuznetz PatternChange of Kuznetz Pattern Communities on WebCommunities on Web

patterns and sources of modern economic growth market, state and community miscellaneous on...

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