Blog: Economics in Action

Karl Marx was an unwitting world changer. Unlike his predecessor Adam Smith, Marx saw and believed in the inequality that capitalism could bring. This inequality would lead to a revolution of the oppressed workers leading to the formation of a Communist state.  However, like the rest of his economist kin, Marx loved to write, his principal works, Das Kapital could make claim to be one of the longest (and most boring) books ever written. However his ideas when teamed up with accomplished writers were haunting.

A leaflet called the ‘Communist Manifesto’, which was distributed to the masses in London contains several passages which to this day remain a part of the canon of political economy.

“A spectre is haunting Europe — the spectre of communism”

“ The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a communist revolution. The proletarians have nothing to lose but their chains. They have a world to win.”

Despite the attractions of Marxism, it never really took hold in the US and Western Europe. Economists were just too enamored with the free market orthodoxy of classical economics. Just to remind you, these economists differed little from the original ideas postulated by Adam Smith.

However in the 1930s free market economics was to face an impossible challenge – The Great Depression. With it came mass unemployment, bankruptcies and falling output. Western democracy itself was threatened. The result of this was a new way of thinking about economic problems and the end of blind optimism that economists held that in the Long Run everything would be OK.

Thus it was in the middle of the great depression that J.M.Keynes rose to prominence retorting to orthodox economists that “In the Long Run we are all dead” Keynes saw no point in waiting a couple of decades for the depression to come to an end. Keynes argued for immediate intervention and by that he meant that in particular the government should spend, spend, spend.

We will look more at Keynes next week.

The Economist is running a feature article on how the world is, gradually and unevenly, becoming more prosperous and peaceful. Yes, wars and genocides are happening right now. Yes, huge numbers live in extreme poverty and millions of children die each year from preventable disease. However, the figures brought together in this article show that, while those things are horrible, far fewer people are experiencing them than in previous decades. Public health, birth control, immigration and Middle East conflict are among the issues touched on.

It’s not easy being a pirate on the high seas. There is always a possibility that your crew will kill you and take your share of the loot. Since piracy is criminal by definition, you can’t call on the police or courts to enforce contracts. So a pirate ship needs a way of keeping order, just as a country does.

Economist Peter T. Leeson of West Virginia University has released a working paper arguing that 17th Century pirates actually used constitutional democracy, achieving this before either the USA or England. This is is an important recurring theme in economics: how self-interested individuals can work together to achieve a common good.

Read More: An-arrgh-chy: The Law and Economics of Pirate Organization (Abstract of the paper on Social Science Research Network)

Peter T. Leeson (2007) An-arrgh-chy: The Law and Economics of Pirate Organization (full paper in PDF format)

Volatile Bangladesh pins hopes on an economist Associated Press proclaimed this month, headlining the story of how the country’s former central bank head Fakhruddin Ahmed was called in to lead its interim government and rescue scheduled elections.

In fact, Bangladesh turned not once, but twice, to an economist to resolve its political deadlock. Dr Ahmed, who worked at the World Bank after his economics PhD from Princeton, took the job after it was turned down by Professor Muhammad Yunus, awarded this year’s Nobel Peace Prize for pioneering micro-credit at the Grameen Bank.

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How can we help the developing countries of Africa? This three-minute BBC radio interview (RealPlayer required) features an interesting take on the issue from Paul Collier, an Oxford Professor of Economics.

Collier points out that Africa has some fragile democracies which are at real risk of falling to a military coup or descending into civil war. The security that comes from stable government makes it more feasible to escape the cycle of poverty. Hence the rich European countries could help by supplying some of their military power, if backed with a legitimate authority.

The UK has the fourth cleanest water in the world, and the fourth highest per capita military spending. A coffee from Starbucks involves resources from up to nineteen different countries. These are some of the hundreds of facts presented in interesting visual summaries by the International Networks Archive. Topics include The Global Arms Trade, the Coming Water Wars and the global success of McDonald’s.

Hatred of immigrants, sometimes translating into violence, is not only harmful to the immigrants themselves but is damaging the South African economy, reports the South African Human Rights Commission.

Immigrants workers and traders not only help the economy by providing skilled labour, but also spend money on goods and services. Traditional prejudices about immigrants from the rest of Africa contribute to an incorrect perception that they are contributing to crime and abusing social services.

Read more: “Xenophobia has an economic cost”, IRINNews.org, 31 July 2006.

Reference: “Report of the Open Hearings on Xenophobia and problems related to it”, SAHRC, 15 June 2006.

Listen to the interview

Does lack of freedom result in greater support for rebellion in countries like China or Saudi Arabia? And if so, what is the cost of buying off the potential threat of greater instability via faster economic growth?

Research by Robert MacCulloch and Silvia Pezzini suggests that a policy of buying off trouble by going for growth when freedoms continue to be denied requires close to unattainable rates of sustained economic growth. Instead, more should be done to promote political rights and democracy, where revolutionary fervour is strongly increased by lack of freedom.

MacCulloch and Pezzini have analysed the results of a large international survey of the taste for revolution of over 100,000 people to assess the relative impact of economic development and political freedoms on reducing support for revolt. Their research reveals that:

Controlling for the characteristics of people and countries, both the level of political and civil freedoms as well as the pace of economic development have marked effects on decreasing the taste for revolt.

But it is very expensive in terms of income to buy off those who want a revolution when their freedoms are taken away. Losing one standard deviation of freedom equivalent to a shift from Argentina to the United States increases support for revolt by around 3 percentage points. To reduce support by the same amount requires adding 14 percentage points onto the GDP growth rate.

In terms of personal characteristics, the most likely to want a revolt are men, the young and the unemployed.

These results are robust to considering the possible endogeneity of the effects. This means that the researchers measure the effect of freedoms and growth on taste for revolt while taking into account that when many people want to revolt, they in turn are likely to affect the level of freedom and growth.

The researchers note that one of the suspected causes of civil conflict has been the denial of democratic freedoms to a nation’s people. Whether or not to support regimes whose legitimacy is questioned for this reason has posed a foreign policy dilemma for the United States.

For example, in the case of Saudi Arabia, rather than push for political reform, one view argues that successive administrations have indulged Riyadh’s penchant for buying off trouble as long as the regime also paid its huge arms bills, purchased Boeing aircraft, kept the price of oil within reasonable bounds, and allowed the United States to use Saudi air bases (Martin Indyk, former US Ambassador to Israel, in Foreign Affairs, Jan-Feb 2002).

But the absence of freedom in Saudi Arabia has not been without its costs though these have been difficult to directly quantify. Some trace the origins of the September 11th World Trade Center attacks to a perceived lack of legitimacy of the Saudi regime among groups of its people. This research confirms the significance of lack of freedom on the taste for revolution, and quantifies the impact.

Notes

The Role of Freedom, Growth and Religion in the Taste for Revolution by Robert MacCulloch and Silvia Pezzini was presented at the Royal Economic Society’s 2003 Annual Conference.

Silvia Pezzini is a research associate of the University of Namur in Belgium. Robert MacCulloch is at Imperial College London.

Related information

You can find other publications by these authors, related research and citations from IDEAS and you can search for more Internet resources on the topic of Political Economy on SOSIG.

Economics in Action is a collaboration between the Royal Economic Society, the Economics Network of the Higher Education Academy and SOSIG, the Social Science Information Gateway. It forms part of the Why Study Economics initiative.

Listen to the interview

In trying to reduce serious political conflicts within countries, it may be more effective to be tougher on the causes of discontent than on the unrest itself. That is the implication of research by Dr Patricia Justino, presented at the Royal Economic Society’s Annual Conference.

Her work suggests that, in unstable socio-political environments, social redistributive policies may be an important means of conflict management. For example, analysis of rioting in India over the past 30 years show that public expenditure on social services has contributed significantly towards the reduction of conflict, whereas the accumulated use of police over time is associated with increases in rioting.

A large number of developing countries have experienced serious socio-political conflicts in the last decades, ranging from large-scale civil wars to recurrent rioting and civil unrest. Those conflicts have affected millions of people and have led to significant lost opportunities in terms of economic growth and human development.

The general tendency of governments in conflict-prone economies is to resort to the use of police and military forces to counteract civil and political upheavals. But this can be a counterproductive measure since it does not address the direct causes of conflict and may leave sufficient resentment in the population to trigger further conflicts.

This research investigates the possibility of using pro-poor redistributive policies, in the form of public expenditure on social services, as a way of preventing conflict and diffusing existing conflicts.

The study shows that such policies can be an important factor in the dispersion of conflict when the causes of conflict lie in the discontent of some population groups with persistent poverty, increasing inequalities and deteriorating living conditions. These conclusions are based on an analysis of the determinants of riots in India in the period 1973-2000.

Many economists and other social scientists have suggested that persistent poverty and inequality may affect society’s propensity for engaging in riots, insurrections and other forms of social upheavals, including civil wars, if they result in the accumulation of discontent to a sufficiently high level to break social cohesion.

This research takes these findings one step further and asks whether pro-poor redistributive policies may have a role to play in the reduction and prevention of conflicts in developing countries. Dr Justino compares and contrasts the impact of the use of police and the use of social policies on the level of riots in 14 major Indian states over the last three decades.

The results show that public expenditure on social services has contributed towards the reduction of rioting in India, whereas the use of police has had mixed results. In particular, the accumulated use of police over time seems to be associated with increases in rioting.

This suggests that, in unstable socio-political environments, social redistributive policies may be an important means of conflict management. These policies will also contribute to improving the living standards of the poor, as well as encouraging the establishment of more stable socio-economic environments.

Although these findings are country-specific, they have wider implications for countries that combine high income inequalities and high potential for conflict such as parts of Latin America as well as countries where previously successful social development policies have shown signs of breakdown such as Cuba and Sri Lanka.

Notes

Redistribution, Inequality and Political Conflict by Patricia Justino will be presented at the Royal Economic Society’s 2004 Annual Conference at the University of Wales Swansea on Wednesday 7 April.

Dr Justino is at the Poverty Research Unit at Sussex, Department of Economics, University of Sussex, Falmer, Brighton BN1 9SJ.

For Further information contact Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).

Related information

You can find other publications by these authors, related research and citations from IDEAS and you can search for more Internet resources on the topic of Poverty and Inequality on SOSIG.

Economics in Action is a collaboration between the Royal Economic Society, the Economics Network of the Higher Education Academy and SOSIG, the Social Science Information Gateway. It forms part of the Why Study Economics initiative.