Increasing and Diminishing Returns – Africa’s Opportunity to Develop

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‘This tendency to Diminishing Returns was the cause of Abraham’s parting from Lot, and of most of the migrations of which history tells’ wrote the founder of neo-classical economics, Alfred Marshall, in the first edition of his textbook Principles of Economics (1890). In a footnote he refers to the Bible’s Genesis xiii : 6: ‘And the land was not able to bear them that they might dwell together; for their substance was great so they could not dwell together’. (Marshall 1890: 201)

Marshall’s observation also applies to today’s migration patterns: from countries where most activities are subject to constant or diminishing returns to countries whose key economic activities are subject to increasing returns to scale. Diminishing returns occur when one factor of production is limited by nature, which means that it occurs in agriculture, mining, and fisheries. Normally the best land, the best ore, and the richest fishing grounds are exploited first, and – after a point – the more a country specialises in these activities, the poorer it gets. OECD (2018) shows how this occurs in Chilean copper mining: every ton of copper is produced with a higher cost than the previous ton.

In Alfred Marshall’s theory, the ‘Law of Diminishing Returns’ is juxtaposed with ‘The Law of Increasing Returns’, also called economies of scale. Here we find the opposite phenomenon; the larger the volume of production, the cheaper the next unit of production becomes. Traditionally economies of scale were mainly found in manufacturing industry, and increasing returns combined with technological change has for centuries been the main driving force of economic growth. Increasing returns creates imperfect competition, market power and large barriers to entry for challengers – companies or nations – making it difficult for them to enter these industries. In contrast to the rents produced under conditions of increasing returns, raw materials – commodities – on the other hand, are subject to perfect markets, and productivity improvements spread as lowered prices. This is the essence of the theory which explains why former World Bank Chief Economist Justin Yifu Lin was correct hen he asserted that ‘Except for a few oil-exporting countries, no countries have ever gotten rich without industrialization first’ (Lin 2012 : 350).Read More »

Keynes or New-Keynesian: Why Not Teach Both?

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For economists, the Great Recession, the worst crisis the world economy has seen since the Great Depression of the 1930s, has highlighted the need for plurality in macroeconomics education. Ironically, however, there is a move towards greater insularity from alternative or contrasting points of view. Where as, what is required for vibrant policy making is an open-minded academic engagement between contesting viewpoints. In fact, there does not even exist a textbook which contrasts these contesting ideas in a tractable manner. This blog post is as an attempt to provide certain pointers towards developing macroeconomics in a unified framework.

Macroeconomics as a subject proper came into existence with the writings of John Maynard Keynes[i]. There were debates during his time about how to characterise a capitalist economy, most of which are still a part of the discussion among economists. Keynes argued that capitalism is a fundamentally unstable system so the state needs to intervene to control this instability.Read More »

Free Trade Free for All: Market Romanticism Versus Reality

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The drama surrounding President Trump’s decision to impose import tariffs on steel and aluminum has roiled the Republican Party and wide swathes of the corporate elite. The tariff decision comes on the heels of political bluster about the US being treated “unfairly” by other countries. This accusation of “unfairness” when it comes to US trade deficits is well worn. In a previous era, Japan was the alleged culprit of “unfair” trade practices because of its persistent trade surpluses with the U.S.Read More »

Market Forecasting: A Sensitive Practice at the Heart of Neoliberal Capitalism

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This article was originally posted on The Economic Sociology and Political Economy community blog.

Since the emergence of modern financial markets, financial analysts have played a critical role in producing visions of “the economy” and its future development. As experts, they analyze market developments and predict future scenarios that enable other financial market participants to speculate on the rise or fall of stock prices, the success or failure of particular investment products, and the growth or decline of entire national economies. The substance of the analysts’ valuation and forecasting practices is, however, heavily disputed among economists. In neoclassical economic theory, the assumption that markets are informationally efficient has challenged the legitimacy of the work of financial analysts since the establishment of the efficient market hypothesis as a central paradigm in the mid 1960s. Alternative schools of thoughts – such as new institutional or behavioral economics – have criticized this paradigm. However, they have also argued that the degree of uncertainty, which is inherent to financial markets, makes prediction impossible.Read More »

Towards a better understanding of convergence and divergence: or, how the present EU strategy – at the expense of the economic periphery – neglects the theories that once made Europe successful

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This new working paper attempts to address some of the main problems of the European Union today. The main thesis is that the Weltanschauung and the economic narrative on which the European project has been based have changed radically since the inception of the European Project, from one conducive to convergence and cohesion to another which is conducive to divergence and, in the last instance – I shall argue – to a form of internal colonialism towards the economic periphery.

The field of Science and Technology employs the term sociotechnical imaginary [1] about the collective narratives and visions of social futures and of the common good. I shall argue that the European Union has moved away from the sociotechnical imaginary, or narrative, that dominated after World War II. I shall argue that this post WW II Marshall Plan Narrative (MPN) gave way to an equilibrium-based Neo-Classical Economics Narrative with an added innovation rhetoric, which I shall argue is based on a fairly shallow understanding of innovation (which I shall call NC+I).Read More »

Advancing a Research Agenda of Scarcity, Abundance, and Sufficiency

Sidor från Daoud, thesis  with cover.jpgThe marginalist revolution in the late nineteenth century marked the beginning of the end of classical political economy and the birth of what came to be known as neoclassical economics (Sandelin et al. 2002). All three pioneers of marginal utility theory—Carl Menger (1871), William Jevons (1888), Léon Walras (1954) —referred to scarcity as the starting point for economic analysis. Through the work of these pioneers, especially Menger’s, the centrality of scarcity became a core premise for the advancement of contemporary neoclassical economics (see Hayek 2004:19; Robbins 1998:277). As a result, virtually every neoclassical economic textbook refers to scarcity—even though the field of economics is becoming increasingly differentiated.

I have argued in my research that scarcity problems are, and will remain, an important sub-set of problems, but we need to include sufficiency and abundance problems as well (Daoud 2007, 2010, 2011a, 2011b, 2015, 2017). Under scarcity, economics will give us insights about how people optimize their behavior to get as much as possible out of their limited resources. Neoclassical economics is mainly interested in what we can call allocation problems under a scarcity assumption. If actor A has a set of resources R, that is scarce in relation to fulfilling a set of wants W. Neoclassical economics tells us that a rational actor will optimize his or her resources in such a way that person can derive as much utility U as possible given the circumstances. These types of problems are central to many social science issues—they face governments allocating a limited budget to a myriad of popular demands, they face the individual in deciding if he or she should go to university or take a job. As social scientist, we need to keep analyzing these situations.Read More »