| the most
unrealistic of them – tend to exercise
a disproportionate influence upon policies that
affect the lives of many millions of people.
This is only one of the reasons why Erik S.
Reinert's new book ("How rich countries
got rich and why poor countries stay poor",
London, Constable & Robinson 2007) is so
important. As evident from his title, Reinert
asks the most fundamental questions about economic
development, and proceeds to answer them with
clear logic, a sweeping grasp of history and
an immensely readable style. In the process,
he comprehensively shatters a number of prevailing
myths within the mainstream economics profession
about the process of economic development and
what societies must do to achieve that elusive
goal of "developed country" status.
Reinert begins with an acute assessment of what
is wrong, methodologically and axiomatically,
with the long stream of economic thinking that
traces its origins in David Ricardo's
work. He argues that Ricardo's theory
of comparative advantage, which is the lynchpin
of so much economic thinking, was deeply unreal
in its assumptions. It even provided a foundation
for colonialism, by making it morally defensible
to keep some countries as producers of raw materials
only.
The large number of simplifying assumptions
that make standard theories less relevant to
the actual world are probably well known. But
Reinert hones in on some of the most crucial,
such as "the equality assumption",
which effectively assumes away all differences
between human beings, between economic activities
and between nations. One classic example of
this is the concept of the "representative
firm", which equates the giant firm Microsoft
with a twelve year old self-employed shoeshine
boy in a Lima slum.
Other assumptions, such as that of "perfect
information" are equally suspect, while
the totality of assumptions leads to the theoretical
loss of both time (history) and space (geography).
This in turn means that, despite some recent
attempts to partially incorporate these elements,
there is a tendency to downplay the importance
of increasing returns, technological change
and synergies.
In consequence, four important economic concepts
for understanding the process of economic development
were lost to economics, despite the fact that
early thinkers emphasised all of these. The
first is the concept of innovation (which, it
is worth noting, is the key focus of policy
makers in China today). The second is the insight
that economic development results from synergistic
effects, and that people sharing a job market
with innovative industries will have higher
wages than others. The third is that different
economic activities can be qualitatively different
carriers of economic development, so that it
matters which specialisation is chosen. Reinert's
final concern is that the labour theory of value
posits a system of exchange whereby labour hours
are void of any other qualities, which according
to him disregards the important connections
between mode of production, technology and institutions
that underlie the labour embodied in commodities.
The main problem is that the ahistorical theorising
generated by all this has replaced and therefore
lost a far richer tradition of social and economic
thought, which Reinert characterises as "The
Other Canon". As he puts is, "before
Adam Smith it was often understood that economic
development was based on collective rent-seeking,
originating in synergies of increasing returns,
innovations and division of labour that were
found clustered only in the cities." (page
79)
Thus, the origins of the concept of increasing
returns are not to be found in Adam Smith's
all-too-famous example of the division of labour
in a pin factory, but in the writings of Xenophon,
whose book Oeconomicus in the 4th century B.C.
Greece gave economics its name. In 1613 the
Italian Antonio Serra described the positive
effects of increasing returns with greater clarity
than Smith, while the early 18th century German
economist Ernst Ludwig Carl used the same pin
factory example first. In the same vein, Reinert
shows that many of the so-called novelties of
modern economic modelling are more than the
partial resurrection of earlier insights of
the Other Canon, dusted off to be displayed
in spangling new colours to a profession that
has lost its own history.
So how does the Other Canon provide an answer
to the basic question posed in this book? Reinert
argues that the key concept is not comparative
advantage or free trade, but rather what Enlightenment
economists called emulation. The toolbox of
emulation contains a number of instruments,
and there is a useful listing of the main ones.
(pages 82-83) They include:
• recognition of wealth synergies around
increasing returns activities and conscious
targeting, support and protection to these activities,
including temporary monopolies and patenting,
tax breaks, export bounties and cheap credit.
• maximising the division of labour through
a diversified manufacturing sector.
• relative suppression of landed nobility
and other groups with vested interests based
in the production of raw materials.
• strong support for the agricultural
sector, combined with restraints on export of
raw materials.
• emphasis on learning and education.
• attracting foreigners to work in targeted
activities.
All this was understood by more than the thinkers
of the Other Canon. Indeed, according to Reinert,
history's first deliberate large-scale
industrial policy - the promotion of wool production
in 15th century England - was based on an observation
of what made the richer areas of Europe rich:
that technological development in one field
in one geographic area could extend wealth to
an entire nation. Subsequently, there have been
systematic attempts to suppress this basic insight:
"wealthy nations keep poor countries poor
based on theories postulating the non-existence
of the very factors that created their own wealth."
(page 79)
The book provides numerous examples of how success
was achieved, along with more depressing examples
of how the opposite has been foisted on too
many countries that remain poor. In fact, the
process is not simple marginalisation or exclusion
from benefits of development. Rather, in many
countries there has been the opposite of progress,
that is retrogression and primitivisation, because
of policies that have not only prevented the
virtuous cycle resulting from emulation but
actually destroyed existing production economic
activities. The chilling examples of Mongolia,
Rwanda and Peru are examples of diminishing
returns at work, created by exposure to external
economic forces that destroyed the capacity
for diversification, innovation and technical
change within these societies.
This in turn leads to a comprehensive critique
of the "Washington Consensus" policies
and their slightly modified descendants. Reinert
demolishes each of the maxims that are now so
routinely recited to developing country policy
makers, such as getting prices right, getting
property rights right, getting institutions
right, getting governance right, getting competitiveness
right, and so on.
In another powerful chapter, he shows how the
arguments in favour of globalisation –
especially those of economies of scale, technical
change and synergies – are also the arguments
against globalisation when the process prevents
some economies from achieving these. This leads
to a critique of what Reinert calls "palliative
economics" as exemplified in the Millennium
Development Goals, which are aimed at easing
the pains of poverty rather than making the
fundamental structural changes that result in
true economic development.
The real aim, according to Reinert, should be
to focus on the lost art of creating middle-income
countries, where all inhabitants have a purpose
and claim on the necessities of life and at
least some of its pleasures. This requires "getting
the economic activities right", since
the only way that vicious circles of low development
can be broken is by first changing the productive
structure itself.
Reviving these old but crucial insights in a
contemporary context and in an effective and
stimulating way is no mean task. Erik Reinert's
intellectual lineage has been described as "neo-Schumpeterian".
But in this book he shows that his work extends
beyond such simplifying categories to be in
the best tradition of heterodox economics: historically
informed, conceptually powerful and compelling
on policy matters.
June 14, 2007.
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