Fri Jun 6th, 2008 at 10:55:32 AM EST
I've long complained about the lack of any economic models which weren't predicated on capitalist principles.
Even when the government of a country claims to be "communist" or "socialist" the individual enterprises are run along capitalist lines. All that changes is where the source of capital comes from and where the "profits" go.
So it is encouraging to see this first essay by a well-known economist questioning the need for capital formation as a prerequisite for economic growth.
Gambler's Ruin - Brad DeLong
From Adam Smith (1776) until 1950 or so, capital was considered by economists to be absolutely essential for economic growth.
For Smith and his successors over the first 175 years, any episode of sustained economic growth overwhelmingly required investment capital. We economists were by and large capital boosters, and our magic formula for economic development was saving, investment, thrift, and wealth accumulation.
The problem is that for poor economies, raising the capital needed to relax binding growth constraints is difficult. That's why the world took the neo-liberal bet in the 1990's: international capital mobility would come to the rescue by relaxing capital constraints where they were binding, and by reducing the scope for corruption and rent-seeking, which was often a more significant binding growth constraint.
But we all know the outcome: while international capital flows soared, the large net flow of capital from rich to poor countries simply never materialized. [my emphasis]
Read the whole essay it is short.
The essential point is that now, at last, someone is willing to admit that access to capital is not the "answer".
As I've long maintained capitalism only works when resources are readily available and the externalities of depletion and pollution are ignored. The borrowed money is paid back, with interest, by extracting value from resources which aren't accounted for. The continual existence of resources is also assumed which allows for permanent growth. An impossibility.
Now that the first person has acknowledged that capital is not the key to development how long will it be until the next economist admits that growth has to be replaced by a steady-state social state?