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Reflections on Richard R Nelson, Evolutional Economics, Trade, Climate and Conflict

by on 2015/12/02

At the Globelics Conference in Havana, Cuba (September 2015), well-known innovation systems scholar Richard Nelson from Columbia University, New York, gave a keynote address on economic development from an evolutionary economics standpoint.

Columbia University has the following to say about Richard. He “heads the program on Science, Technology, and Global Development, at the Columbia Earth Institute, and is George Blumenthal Professor of International and Public Affairs, Business, and Law, at Columbia, Emeritus, and Visiting Professor at the University of Manchester. He has served as research economist and analyst at the Rand Corporation, and at the President’s Council of Economic Advisors. His central interests have been in long-run economic change. Much of his research has been directed toward understanding technological change, how economic institutions and public policies influence the evolution of technology, and how technological change in turn induces institutional and economic change more broadly. Along with Sidney Winter, he has pioneered in trying to develop a way of economic theorizing that recognizes explicitly that the economy is almost always undergoing change, most of it unpredictable, and that theories that assume that economic agents understand well the context in which they are operating, and that the system is in equilibrium, are inadequate for analysis of many important economic questions.”

Let me say at the outset that I am wholly in accord with this general approach, and in general I am a fan of Nelson’s work. However, in Cuba, Nelson reiterated that Economic Development is an ‘evolutionary process and a collective learning process, and developed this argument. I reacted to his Cuban presentation at the time, as follows.

I felt that Nelson’s presentation made this ‘evolution’ sound like a benign process filled with well-meaning actors, with equal power in the system, in which there were no path dependencies, power relations, conflicts, and selfish or even ‘bad’ people, in which the ‘best’ solutions to everything would always rise to the top. On the other hand, I argued, long term path dependencies, unequal (political and economic) power, current hegemonies, alter the course of economic development and distort the decisions of current actors, and the consequences of these decisions. The most powerful current hegemony that affects us all is neo-liberalism in all its manifest guises. It is about the triumph of the market over the State, and the melding of the State to the interests of capital.

In such a context, one must ask about the nature of the ‘evolution’ and associated ‘learning’ that is taking place. We used to talk about the ‘middle’ way represented not by what Mr Blair, advised by Tony Giddens, termed the ‘third way’, but the ‘third or middle way’ as represented by the Scandinavian countries and their social democracies, the paths to which were laid down in the 19th Century and before. We are forced to ask (despite Bernie Sanders’ recent efforts) whether there is such a ‘middle way’ any more, except in the small countries of Iceland, Norway and Denmark? Do any other countries, or indeed the economists within them, pay any attention to the lessons from these countries except to write them off as either irrelevant or stuck in the past? In Cuba, especially, the question is surely one of the most important to be faced in the coming years, with giant US breathing down its neck from a few hundred kilometres north, and the generally very right wing Cuban Americans playing a prominent and growing role in Cuban investment (especially in property). Although recent political changes in Tanzania are hopeful, can one be optimistic that the ‘middle way’ option will be seriously considered in most of Africa, or even India or other Asian countries?

As a political economist who has also studied development economics and worked as an economist in the global ‘south’ as well as the ‘north’, I continue to be both amazed by and frustrated by the grip that neo-classical and neo-liberal economics has on the national and international decision making systems, for example on Climate Change, on Trade, on Aid, on customs unions, etc. Bad economics make the world worse. We are not evolving into anything better. As Picketty’s work demonstrates clearly, inequalities have grown nearly everywhere during this period of neo-liberal hegemony, while climate change continues to threaten our existence, desperation and terrorism linked to inequalities and climate changes continue to grow, and politicians in the rich countries continue to pretend that they can solve these and associated problems by border fences and bombs.

A new ‘middle way’ is certainly needed if the world is to survive in a habitable and civilised way for future generations. A start could be made in several areas, and International Trade, and its links to both ‘development’ and climate change, must be one of these. The present regime and the ideologies and theories underpinning it make no sense at all! It has never been the case that all parties to a free trade regime have benefited equally, and has normally been the case that the most powerful partners benefit, while the weakest lose. There were very good reasons why most currently rich countries, as well as those that were at one time rich and are no longer, had periods of protection for their (infant) industries or those that held the ‘commanding heights’ of national economic systems. But, even within the shaky constructs of neo-classical economics, there are also sound theoretical reasons for scepticism about the results of free trade when this occurs without free movement of people but with free movement of financial capital. This last is the typically dominant pattern of international or multilateral trade agreements, such as NAFTA or WTO, TTIP, etc.

Now let us add ‘climate change’ and ‘environment’ as a factor to be considered, which it obviously must be and indeed, at least in rhetorical terms, is! Some countries obviously have introduced much stricter regulatory regimes over environmental damage (to the level of greenhouse gases, to air pollution, water pollution, biodiversity damage and so on) than others. As a result, industries that have damaging outcomes in these respects have moved to countries with less strict regimes. The pollution, and the damage to climate etc, still occurs, but only in a different place, and ‘goods’ remain ‘cheap’. Freer trade and capital movement regimes encourage this process, and make it happen faster. The ‘solution’ to climate change, however, is seen in greater regulation and taxation of producers, and commonly through complex market based schemes such as CO2 credits, Carbon markets, and so on that also tend to shift problems from rich to poorer countries and regions. To me, the obvious solution to the key environmental issues (climate change, other pollution, is to tax the consumption of products that embody environmental costs, including CO2 and other forms of health-threatening pollution, at global level, and to use the revenues to tackle the problems that have been caused by the regime to date, including those of global inequality and climate change in particular. Since consumers in rich countries, and rich consumers in poor countries, are those ultimately responsible for the increase in climate gas emissions and other pollution, they should obviously pay, and this would also help with the growing income inequalities at global levels.

Of course such a regime would require differential taxes on goods produced under different regimes (not consistent with current free trade ideology), and quite a sophisticated system of assessing the values (environmental costs) that would form the tax base. Nevertheless, with all the work that has now been done – and is being done – on ‘whole chain’ impacts of different products on our climate gases, this is becoming much easier.

Such a regime would be both much fairer and much more effective than the contemporary set of policies, and may be the only way to secure international agreement which is sufficiently tough to actually stop the still growing anthropogenic impacts of consumption on our climate. But it is centrally about changing trade policies in the first instance, and recognising that global free trade regimes are not commonly ‘good for everyone’, that they have implications for both global inequality and for climate, and hence on mass migrations of people, and, ultimately on conflict. So we also need ‘joined-up thinking’.

John Bryden, 2/12/2015

  1. Incidentally, taxing consumption at global level would also tax incomes (tax havens) that currently escape taxation. What a great idea that would be!

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