Tuesday, April 08, 2014

Capacity focus, 79: Using a modified "Austrian" production possibilites frontier and propensity to save approach in macroeconomics-based policy thinking (from Roger Garrison of Auburn University)

Series: 78, 79, 80, 81, 82, b/g

Last time, as a sort of "one-shot heart of Macroeconomics 101 in a nutshell," we looked at the AS-AD approach and how it allows us to see into the core of several macroeconomics issues and policy challenges/ choices connected to economic growth and sustainability of development.

But, there is a bit of a heretical school of thought, the famous Austrian School of von Mises, Hayek and co, which also has some very useful pointers.  Especially, on the structure of investment in the productive chain and on the implications of the production possibilities frontier -- as in, sometimes we really have to choose between alternatives -- that is more usually presented as "guns vs butter," rather than as a broad, macro-scope insight into how an enhanced propensity to save can help accelerate economic growth and development . . . whatever the neat algebra of the paradox of thrift may say. (Cf. critiques here and Hayek's classic from 1929 here.)

That is, sometimes, the heretics have something worth listening to.

Here, let me excerpt from a slideshow by Roger Garrison of Auburn University, on . . . 

(It would be very helpful to watch Garrison's 2006 animated slideshows here. [Libre or Open Office will enable you to view the shows, if there is any problem with accessing PowerPoint.])

A video lecture by Garrison:

Some steps of thought:
1 --> Once we see that savings and investment on one hand and consumption on the other may form a production frontier at the limit of an economy, we then have to consider trade-offs and consequences, which may be all the more harsh in a poor country where as my father (now retired, once one of the best macro economics practitioners in the Caribbean region) once warned me, the choice may be between 400 people starving this year and 800 the year after next. (Or, in less stark terms, being so debilitated that diseases they should have been able to resist carry them off.)

2 --> Indeed, there is a horror story in economic history, on how in order to save up to invest in heavy industries, Stalin simply starved the peasants by the millions, especially those in the Ukraine -- the Holodomor. (And, too many progressive journalists, starry eyed with the thoughts of a glorious workers paradise, failed to tell the world the truth.)

3 --> In that context, the issue of an induced consumption drop in order to finance a development programme is sobering.  There has to be a better way, when that is at stake. 

4 --> And, Development agency and government interventions, in partnership with targetted foreign investment plainly have too good a track record to be dismissed out of hand because of the problems that often crop up. (And, like it or lump it, that extends to agencies that are so often made into targets for ire, such as the International Monetary Fund.)

5 --> But at the same time, a self indulgent ostentatiously opulent and self-centred consumer lifestyle (especially when linked to corruption and exploitation of workers and their families) is patently not justifiable in a region that is facing serious development challenges.

6 --> Indeed, such behaviour may become socially destabilising, an invitation to uprisings and crime triggered by the sense that disaffected youth have no stake in the upliftment of the community as a whole, so why not join a predatory wolf pack.

7 --> That points first to a priority on education, linked welfare and public health backed up by reasonable health care services. Which are the first steps in productive development.

8 --> Likewise, there is need for social support of research and development, including enterprise incubation and micro or small venture capital financing.

9 --> Where in our region, obvious priority targets would be tourism, renewal of some agricultural sectors, small scale manufacturing, arts and artistic crafts,  and digital productivity that includes application or app development, support for computerised control of industrial and agricultural production processes, point of sale and inventory management, manufacturing process and control systems, and of course multimedia and entertainment.

10 --> It also includes digitalisation of education and of curricula that are now frankly antiquated. (Think of a tablet based approach to schooling, textbooks/course reader-workbooks, reference resources, lab instrumentation etc.)

11 --> Then, that will help transform the production triangle wedge, as Garrison pictured. Indeed, I suspect that this would help release resources for further savings and investment.

12 --> Where innovation and agility are now keys to getting Schumpeter's gale of creative destruction to work in our favour.
Let's ask: why not now, why not here, why not us? END

PS: To dig a bit more deeply into Austrian macro-oriented thought, kindly cf. here, here and here. (The introduction to economics from an Austrian point of view here may be helpful. The famous essay, here, on economic calculation in a socialist commonwealth by von Mises, written c. 1920 proved decisive in the end, 60 years later. )