Immiserizing Growth

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Man is born free, and everywhere he is in chains.
The Sovereign, having no force other than the legislative power, acts only by means of the laws; and the laws being solely the authentic acts of the general will, the Sovereign cannot act save when the people is assembled.
Every law the people have not ratified in person is null and void — is, in fact, not a law.
The legislative power belongs to the people, and can belong to it alone.

Jean-Jacques Rousseau, Of The Social Contract

Sometimes the “noise” that has come to surround us, as if in perpetuity, because 6 out of the 7 billion peoples, in a world that is not yet flat, have access to mobile phones as the Secretary-General Ban Ki-moon of the United Nations recently affirmed in a Twitter/Google live forum, has a way of jogging our memories.

Jagdish Bhagwati of Columbia University made famous the idea that growth, on rare occasions, can reduce social welfare because of global trade. Immiserizing growth is an interesting concept because the term often shows up widely in economic literature though these days few care to go to the sources.

The Edgeworth-Pareto contract curve question of “How can A be better off without making B worse-off or vice-versa?”, in my view, traces back to the political economy of the French Enlightenment of Jean-Jacques Rousseau’s Of The Social Contract, equity or justice being the purpose of politics and, thereby, of the law and the raison d’être of The State, as elucidated in the Bhagavad Gita circa 776 B.C.E. Then, since 1993, in the context of the proposition of neoclassical trade theory that free trade, on balance, raises social welfare, what have been the welfare effects of global trade ?

Civil Society, mostly by rule of sovereigns until the 18th century or by rule by people since, is once again in critical self-reflection as I have argued in my book review for Amazon of former Clinton Labor Secretary Robert Reich’s Supercapitalism.

The principal cause of the French Revolution was the deterioration in the economic well-being of the commoners since the end of the period of prosperity during the regime of Louis XIV. Louis XVI was beheaded. Had there been a Gini Index in 1789 or its awareness in 1917 5 years after Corrado Gini published his index in 1912, the sovereigns of France and Russia could have saved their civil societies. Monarchies, with the exception of the British gravitating toward a greater role for the commoners in their governance, did not understand what was going on in the 150 years or so since the beginnings of the American revolution in 1763.

We from I – rule of law being the contract of the individual with the society as proposed by Rousseau in France which formed the basis for the French Revolution in 1789 – since the Anglo-Saxon economic model of the Scottish Enlightenment of Adam Smith is being blamed for the rising inequity in societies around the world because of increasing income disparities within nations even though incomes of nations and the per capita (or average) incomes of the world’s peoples as well as their purchasing powers are on the path of convergence.

(Income Disparity Measured By Gini Index Within Nations, 2009: Purple represents least disparity and Crimson most disparity)

The conversation that is the zeitgeist in the order of nations is the relationship between the social equality of human beings born into any society, the founding principle of modern democracy since 1776, and its economic equivalent of national output: that all people are socially, but not biologically, equal at birth does not necessarily imply that their claim to economic output is equal to per capita. The way out of this predicament is to achieve economic justice, also known in economic terms as social welfare. In any society economic justice is feasible if economic liberty is enabled by equal opportunity in health, education and access to financial capital for all the peoples of the world.


Immiserizing Growth

One ploy often used to play down growing inequality is to rely on rather coarse statistical breakdowns — dividing the population into five ”quintiles,” each containing 20 percent of families, or at most 10 ”deciles.”
Paul Krugman, The New York Times Magazine

Bhagwati’s 1958 analysis is applicable to today’s global economic conditions. Counter arguments that immiserizing growth in trade theory is a theoretical construct and, therefore, does not apply in economic practice is a matter of debate between detail (or the granularity of the detail as his student Paul Krugman had written in The New York Times Magazine in 2002 critiquing Alan Greenspan’s Federal Reserve) and averages.

Exogenous technical change, since Robert Solow and the more recent real business cycle theory of Finn Kydland and Edward Prescott, is the explanation that is most valid for national income cycles and their correlation to income distribution within and between countries, notwithstanding earlier theories by Nikolai Kondratieff and Simon Kuznets.

It will be beneficial to take a different perspective to understand income distribution (Piketty and Saez) or the number of tax payers in the various personal income tax brackets since 1993, whether the number of tax brackets be 5 or 10: to explain the Kuznets Curve by Simon Kuznets – the father of National Income and Product Accounts (NIPA) which enabled the establishment of the Bureau of Economic Analysis (BEA) – income disparity rises with technical/structural change and falls as technical/structural change matures in epochs of economic time in democratic, open economies; for example, in the United States, per capita income must continue to rise before the rising income disparity can begin to ease given the rapid pace of technical change since 1983.

Averages tell the story of rising per capita incomes around the world, while the details betray the unsavory entrails of the economic process in open economies. The former tells the story of rising social welfare and the latter the story of the quality of that rise in social welfare.

—–Low regulation–|—High regulation–>;
—–Low quality social welfare increase–|—High quality social welfare increase–>;
(Hypothetical Kuznets Curve, Real Empirical Curves Are Not As Smooth. X-Axis Explanations Are Mine At Transformations LLC.)

The degree of income disparity, more importantly, depends on the extent of government intervention in the economy: lower regulation implies greater disparity and higher levels of regulation smaller disparity. Often, regulatory regimes change over the course of the income disparity cycle and it is likely that regulations are less intrusive earlier in a cycle and more intrusive later in the cycle, the cycles being caused by the market participants’ Stiglerian tendency to circumvent Depression-era regulations, for example through financial innovation by increasing the financial depth in the unregulated space since 1993.

The structure of regulation also has impact on the degree of disparity. When regulation enables equal opportunity in health, education (including on the job training) and access to financial capital, disparity is mitigated during times of technical/structural change.

How regulation enables equal opportunity in health, education and access to financial capital delineates the rest from the Anglo-Saxon model: does the government provide, in competition with the private markets, health, education and financial capital (for example, Western and Northern Europe, Japan, and India) or does it direct private markets to provision health, education and access to financial capital under equal opportunity (United States in principle though not in practice)?

In countries where the government provisions health, education and financial capital in competition with the private markets, cycles of income disparity are less pronounced.

The cycles of income disparity elsewhere, such as in the United States, are worse because regulation is a schizophrenic political exercise (see my critique in the Federal Register of the Volcker Rule) for it does not commit to giving clear signals to the private markets, leaving it to the judgment of market participants to make their choices of the economic structure pertaining to the society’s equal access to health, education and financial capital. Market participants’ judgments on these matters are reflected in their global allocation of financial capital (or in international trade) which, in turn, is reflected in the terms of trade of nations – the ratio of any country’s price of exports to price of imports.

From the data it is abundantly clear that both the principal actors in the global economy with terms of trade that are literally reciprocal of each other, United States and China, are experiencing similar episodes of income disparity, all else staying the same. The world as a whole has been experiencing incremental but rapid technical change since American recovery from stagflation in 1983.

The rest of the world is less unequal in comparison to United States and China, with the exception of the transitioning post-apartheid South Africa, Latin America since the currency crises of the 1990s, and some troubled, conflict-ridden and underdeveloped African countries.


The Global Economy

Terms of trade in any dynamically balanced economy where exports are equal to imports or in a theoretically closed Solovian economy are always unity or 1.

Immiserizing growth is not material for global economic output as a whole because trade, on net, is always zero. More importantly, economic growth in historical time has always been upward sloping, the cycles being intrinsic to the growth dynamics of any country or the world, always raising social welfare. This observation from data can lead analysts to argue mistakenly that the concept of immiserizing growth is flawed which, however, is not true.

The production function of Solow, assumes the presence of finite resources over time, continuously rendered finite and available by Schumpetrian technical and, hence, structural change in a manner not controlled by the model. The resource constraint, albeit acknowledged by first principles of economic science since Thomas Malthus, does not play any role in the Solow model.

Economic growth, however, is always immiserizing, trade or no trade, technical change or no technical change, because of continuously diminishing natural resource stocks, only the rate of depletion of non-renewable resources diminishing if continuously better resource-efficient technologies become available (See my paper and the basis for my book “Sustainability”).

Then, why grow? Why reproduce? (see permalink)

Quality of consumption is reflected in higher prices and, hence, as higher consumption in GDP accounting but will be more than offset by economies of scale if higher quality is broadly available and if the rate of growth of global population is near zero.

The purpose of technical change is to increase the quality of consumption not the quantity, primarily by stalling population growth.

Promethean Man, otherwise, is chained by nature of which he is a part.


About Chandrashekar (Chandra) Tamirisa
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One Response to Immiserizing Growth

  1. “Why grow?” is about holding aggregate national output at a constant level. If the level, not the rate (rate is always zero at the desired level), falls below an economy must return to that level by achieving a certain growth rate.

    Endogenizing technical change can, to a large extent, minimize fluctuations around the mean growth level.

    The how of achieving it this outcome is a matter of monetary policy vis-a-vis endogenization of technical change.

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