Serbian-American. PhD in economics. Professor of economics at CUNY, LSE and IBEI (Barcelona)
1. Why does economics matter?
This is a huge and difficult question. Perhaps I can give two different answers. I would like to start with the one that I would have used when I was young and studied Marxist economics. Economics matters because it enables you to look at the grand political and economic changes in history and to explain them using economic factors. In other words, it is, if I can say so, a branch of historical materialism. Decisions driven by economic factors shape societies and make them change.
A neoclassical view of economics would be more pragmatic. It would be to argue that economics matters - and to use Alfred Marshall’s definition there - because it deals with our ordinary life and its objective is to improve that ordinary life, to make our incomes higher, to allow us to have more free time, and to make poverty disappear so that we can enjoy other activities that we like while having a satisfactory standard of living.
2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?
This is even more difficult. I would say that, rather obviously, economics used in academia is more abstract and very often responds to internal requirements of academic promotion, or to what people think is the most interesting topic at a gven time. Or even perhaps it may be driven by what may be the most difficult topic to be solved mathematically whereas economics that are used in policy are driven by everyday problems of policy-making.
But let me just say that I believe that no great economist was dividing these two approaches very sharply. If you look at the lives of all great economists, they were both technical economists and practitioners, or rather they used technical economics to achieve pragmatic political objectives. I will start with Quesnay. He created Le grand tableau économique, the first integrated look at economic flows. It seems very theoretical, but it was driven by his interest in policy. Indeed he wanted to influence French economic policy very concretely, including support for agriculture, laissez-faire and laissez-passer policies, and politically to promote a society governed by an enlightened elite.
Or, what better example to take than of Adam Smith or David Ricardo, who were also clearly interested in policy? For Ricardo, this is more than obvious. He wrote the entire book, The principles of political economy, and created the first class-based model of economics because he wanted Britain to get rid of the Corn Laws. And Marx as well was interested in policy, not necessarily to improve policy in a capitalist society, but to use economics to tell us which way capitalist society would develop, that is, what triggers the crises, whether polarization of incomes will increase and the like. The same is true for Keynes–almost unnecessary to mention it—because Keynes was in and out of policy-making throughout his life.
And others, more contemporary economists. For example, Milton Friedman was very much interested in policy. Whether one likes what he did, for example, in Chile or doesn’t like it, that’s irrelevant for this point, because here we are dealing with the absence of a sharp division between so-called theoretical and policy-geared economics. So I don’t think that in real life we have to make a big distinction between the two, and most important economists, as I tried to show here, did not. And I think that if you want to be really a great economist, you have to have an interest in how economic policy is being made and how it is prosecuted.
3. What role does economics play in society? Does it serve the common good?
I think that its role has been increasing for the past two centuries because societies have become very capitalistic. One thing that more capitalistic societies have in common is numeracy: you cannot be successful in a capitalist society unless you are numerate. And economics, after all, deals with quantities and prices, and even when these quantities and prices are expressed in more abstract way mathematically, as in formulas, equations etc., underlying all of that are still “numbers.” I think that if you compare the numeracy of modern societies, it is much greater than the numeracy of past societies, and if you just take a cross-section of today’s societies, numeracy and economic way of thinking are much more advanced in rich than in poor countries. I have for a long time thought that one of the ways to accelerate development is to improve awareness of an economic way of thinking. I remember how impressed I was when in Kuala Lumpur, some thirty years ago, I saw big neon sigs showing the growth rate of the economy in that quarter or month
Being numerate is one of the prerequisites for understanding economics. So economics does play an increasing role in society. Moreover, as you know, some people even accuse economics of its “economic imperialism”, whereby its methods are being applied in other social sciences like political science, sociology etc. perhaps indiscriminately. There is, I think, some truth in it. There are limits to what economics can usefully tell us. At times, it might play too big of a role because the methodology that is used by economics is inappropriately applied to the issues where much more historical approach would make more sense.
4. Economics provides answers to problems related to markets, efficiency, profits, consumption and economic growth. Does economics do a good job in addressing the other issues people care about: climate change and the wider environment, the role of technology in society, issues of race and class, pandemics, etc.?
It is difficult for me to actually break it down into what areas economics does really very well and what not. I think that economics does a fairly good job when it comes to the issues of race and equality between genders, and even climate change. That does not mean that the economics alone is able to solve climate change, because we have to realize that the control of climate change depends on cooperation between governments, and on people’s willingness to trade off some of economic gains for less CO2 emissions. So even if all economists were to come up with one solution, I mean even if there were no disagreement among the economists, it would still need a political decision.
I do have a particular quibble with neoclassical approach to inequality in the last fifty years, or more exactly before it became a big topic a decade ago. It was undeservedly left aside. There was some ideological reasons in the form in which economics was taught, and political reasons which had to do with the Cold War. In the way it was studied, the mistakes were many: there was a sharp distinction between production side –with its ultra-limited definition of economics as the science of allocation of scarce resources to different uses—and the distribution side that is supposed to be subject to political decision-making only. If you make such a sharp delineation between production and distribution, then the latter will be de facto thrown out of economics. This is what happened. Topics of distribution became “muted” or diluted in the form of welfare economics, the first and second welfare theorems, which are, I think, the most unhelpful ways to look at the questions of inequality. A chapter of my forthcoming book deals precisely with that—why were neoclassical economists indifferent to the issues of distribution—so I think I will have more to say about it.
5. As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?
I think they become accountable for the advice once they are in politics. Like, for example, Mario Draghi is today accountable and he was accountable when he was the head of the ECB. But when he was a professor, this was not so, and I think basically rightly. It is more difficult to hold people accountable when their possible mistakes cannot be directly related to bad outcomes. In addition, even if they do make mistakes it is not really their direct responsibility. It was somebody else who made the decision to follow that particular route. Of course, in some sense they do remain accountable as others are quick to point out these mistakes. But we cannot have a tribunal where we are going to exorcise economists who have been wrong.
6. Does economics explain Capitalism? How would you define Capitalism?
Let me start with the second part of your question. I define capitalism as I did in my book Capitalism Alone, and I think it is a very simple definition. And precisely because it is simple and succinct, it captures the essence of capitalism. It is the definition used by Marx and Max Weber. And even Schumpeter, although he added a detail that I will come to in a minute. The definition has three parts. The first part is that most production is done using privately-owned means of production. The second part of the definition is that labour is hired labor. This simply means that labor does not play the entrepreneurial role. So it is not workers - like in the case of worker cooperatives - that decide what to produce and how to produce it. They are simply hired by owners of capital who decide things. This hiring part, the treatment of the worker as a thing, is of course at the origin of Marx’s famous “alienation”. So alienation is inseparable from capitalism.
The third part of the definition is that coordination is decentralized. There is no central authority that decides what should be done. Differently said, it is “spontaneous order” of which Hayek wrote. Schumpeter added in the definition that most fixed investment be made by the private sector. So overall this is, I think, a fairly economical definition of capitalism.
And if you look at many countries nowadays, including China, they do satisfy that definition of capitalism. So this is for me what capitalism means, or rather what I find to be the best definition of capitalism. But of course, other people have different definitions. Sometimes I believe they are too complicated, too fanciful, or maybe too remote from the historical reality.
Now, does economics explain capitalism? Yes, I think it does. Especially if you look at the rise of capitalism where economic history studies are using economic tools to explain its emergence, its rise and what I would regard today, its full dominion of the world. I have in mind the work which has been done in the pastten or fifteen years by various economic historians, including Bob Allen, Peter Lindert, Jeffrey Williamson, Kenneth Pomeranz, Leandro Prados de la Escosura, Jan Luiten van Zanden, Jane Humphries, Peer Vries, Şevket Pamuk, Steve Broadberry, then economic historians who have worked on slavery and colonialism, and the Great Divergence between western Europe and Asia. The work of many of them owes a lot to Angus Madison’s original contribution. Madison, who spent lots of his active life in OECD, created the income dataset that goes back to the 18th century (and in some versions even back to the Roman Empire). This is now being expanded both temporally and geographically. These are all attempts to understand our modern civilization using quantitative methods. Without them, it would be very hard to move forward: if you do not have income and wage data for England and other countries, for example, how are you going to decide when the Industrial Revolution began, and then, how to explain it? These are not only questions of economic history, and that is important to underline. They help us explain current inequality in countries’ incomes and also look at the ways that that inequality could be reduced, that is how to achieve economic convergence. The ultimate objective of economic development still remains that there should be no systematic differences in income between any two places in the world.
Let me not be remiss—since I have just mentioned many names, not in any particular order—I should also mention Paul Bairoch, who worked, as you know, in the UN and who is also one of the pioneers in quantitative historical economic research. And the Annales school, including of course the incontournable Braudel.
7. No human system to date has so far been able to endure indefinitely - not ancient Egypt or Rome, not Feudal China or Europe, not the USSR. What about global Capitalism: can it survive in its current form?
In my book, I am pretty optimistic on that. I argue that capitalism is now at the apogee of its influence. Of course, we do not know if this is a global maximum, so it would go down from this point on, or if it is a local maximum, and it can go up again even further.
I make this argument based on two elements. The first is that capitalist economies are geographically (as I mentioned in the previous answer) covering a greater portion of the surface of the earth than ever before. This is because of China and Vietnam, and of course due to the fall of communism, and the Soviet Union’s and East European countries turning to capitalism.
But also, and it is the second point, because capitalism is increasingly entering into new activities, including “invading” our private lives and our leisure time, and transforming things that in the past were just personal assets into capital. Our cars used to be personal assets: we could use them to drive to work, or for pleasure. But now they have become capital because we can rent them out for profit, or we can even double up as drivers for a couple of hours when we have nothing else to do. Our homes have also become capital. They are now income-generating assets. And our time has acquired a shadow price more than ever.
This is something that goes back to a discussion that in the early twentieth century started with Rosa Luxemburg. Luxemburg argued that capitalism, in order to expand, needed to move into non-capitalistic forms of production and to basically “invade” them. Capitalism, by definition, was always expanding (because in search of profit), and so long as it had new areas where to go, it would survive. But once it runs out of them, it is in trouble. But this, let’s call it, “horizontal” expansion is not the only way capitalism can expand. As Schumpeter wrote, capitalism expands by creating new ways of producing things, combining the things which already exist, and creating new commodities. And in that sense, capitalism recently has been able to create new commodities because it has both commercialized things which already existed, and created many new commodities. This is what I would call its “vertical” expansion.
In conclusion, I would say that as of now, I do not see any serious ideological contenders to capitalism. However, I want to just finish with that note: I am very much of the “historical school” in the sense that I do not believe there is one, “natural” mode of production that will last forever. I could definitely imagine the situation where one or two elements that I mentioned before in the definition of capitalism are no longer valid. But as I said, I do not see this right now.
8. Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?
That’s really a difficult question. It is a difficult one because we can always imagine things to be better. But the question is, are such imaginations or utopias realizable? In other words, let me take, for example, climate change as an example where I had a disagreement with Kate Raworth and Jason Hickel. We can imagine a world where we are all happy with having a reasonable, minimal standard of living which is compatible with planetary boundaries.
Yes, we can imagine that. And you can actually put that on a piece of paper and calculate that that particular world would produce sufficient amount of calories, shelter, clothing and so forth such that all human beings would be able to survive while using much less energy than today. But the question is, can such a world ever be brought into existence? And that’s where you really encounter problems. You encounter problems because such a world would imply that many people who live in rich countries, or whose income level is higher than the world mean income, would lose 50 to 60 percent of their income. That is not likely to ever be acceptable to them. This is rather obvious when you look at the fact that even a small slowdown in growth, of 1 or 2 percent, often leads to massive political problems. Try arguing that many people in the middle class of Western countries should lose half of their income!
And then you also have to admit that the human condition is such that we generally want more. So there would be a significant percentage of us who would not be satisfied by having this set of quasi-subsistence minimums.
But then I have to say that there is another danger: to go into the Panglossian world and to say whatever is now is actually the only possible solution, the best one and nothing can be changed. We thus have two opposite dangers. One danger is to imagine worlds of utopia which are unrealisable and, at the other extreme, to believe that whatever now exists - by the virtue of its existence - confirms that it is the only possible way of life. And I think both of these approaches are wrong for opposite reasons, which means that we have to accept life as it is, but try to improve it.
I know that it doesn’t seem very grandiose or profound. It is limited in its objectives. But I think this is the way that progress has often been made, incrementally.
(AoE): Is it a policy of small steps?
Yes, I would say so. It is a pragmatic policy of small steps. One thing I really would like to avoid is grandiose utopias. And, on the other hand, to avoid a belief that we have a natural system where practically nothing can be improved. Overall, it means being aware that capitalism is a system that may not last forever, even if we do not have a blueprint in front of us how to change it.
I also think that having a blueprint (even it existed, and, as I said, I do not see it at all) is a wrong way to think of the issue. This is because if you look at the past and at how different systems have evolved, they have won over because they were economically more efficient. They have prevailed through the desire of people to adopt such more efficient ways of production. In other words, it is clear that serfdom was in terms of output less efficient than the system of free labor hired by capital. And it is clear that communism failed because it was less efficient than capitalism.
This is not an abstract statement. What it means is that a more efficient system was able to provide better standard of living to people and they wanted it. There is thus an activist element which I do not want to minimize. It is not only because something is more efficient that it will triumph. You have also to fight for it. But without the underlying efficiency, the fight becomes an exercise in voluntarism like, for example, Mao’s Great Leap Forward.
It could happen that changes in the size and the relative power of capital vs labor make certain features of capitalism go away. Let me just give an example. If you have a significant increase for half a century or longer of capital (financial and in physical assets), while, on the other hand, there is the plateauing of the global population at 10 or 11 billion people, you would certainly have a change in the relative abundance of capital and labor, and thus in the bargaining power of capitalists vs workers (or more broadly, people who do not own significant property).
It could be similar to what we see nowadays with start-ups. Individuals essentially put together a plan. They borrow the money and the entrepreneurial function belongs to them. So that could be one way that capitalism could be changed. I am not against this sort of thinking ahead. But I am just careful, not to jump to some big blueprints, especially the ones that seem to me quite unrealistic like degrowth.
(AoE): Maybe one just follow up question from me in response to COVID. There’s obviously been a lot of ideas on how we transform the system and the lessons we learn. And always it’s not very pragmatic in the sense that we want to transform systems, but there’s often a lot less emphasis on how we actually could pay for this or what are the implications in terms of how states can raise revenues? And do you have any kind of ideas in this arena? Because, you know, many would argue that we need a more progressive tax and benefits system to address things like inequalities. But do you do you have some thinking in this area that could be useful?
I think that there are several lessons that that we might have learned. I would say “for now” because the pandemic, unfortunately, is not over yet. Parenthetically, it seems to me like the virus is playing games with us: whenever we have the feeling that we are seeing the light at the end of the tunnel, something happens that pushes us back. But let me go over what we have learned.
One, there is a need for much greater state role, particularly when it comes to health in general and the prevention on infectious diseases. This is not new, but it has been forgotten. The pandemic reminded us of that. Many countries have regain control over the production of the essential goods that are needed in the case of epidemics.
The second thing which I think is going to stay with us is that we have realized that many of the jobs can be done remotely. That will have implications for the global labor market because the ability to work remotely is affecting many occupations. The post-pandemic labor market would begin to mimic the global labor market even without physical migration of workers.
This is a big change because you would have people living in countries where the price level is lower and nominal wages are lower, but they would be able to do the same job that people in France or the US or England are able to do now. This would lead to an interesting situation that you would have, from an employer perspective, cheap labor, but that so-called cheap labor might have higher real income than the so-called expensive labor.
Why? Because in a much poorer country the price level may be relatively lower than is the ratio between nominal wages. So there would be a very bizarre, and entirely new, situation that a person hired in a poor country would be a much cheaper worker, but the standard of living of that worker would be higher than the standard of living of an equivalent worker in the West (had that equivalent worker been hired). This is an interesting issue from the welfare point of view, because the price differentials really play a big role there. And this is absolutely new. We didn’t have such cases in the past.
Finally, the third element. In my Capitalism Alone, I took a relatively dim view of the Universal Basic Income (UBI), and I still stand by the objections and the problems that I identified there. But I have to admit that if the UBI had been in existence during the pandemic, it would have smoothened things significantly because you would not need to go through the enormous and time-costly political decision-making, bringing the issues of income support during the pandemic to parliaments and trying to distribute massive amounts of money to people. UBI would have done that automatically. So this is for me one area where I have somewhat changed my opinion. Now, of course, I do hope that we will not have emergencies like covid-19 every five years. So if we happen to have them once in a century, the arguments against UBI would remain strong.