Dynamic Comparative Advantage and Long-run Roots of the Crisis

1. Dynamic Comparative Advantage and Long-run Roots of the Crisis • Institutional Marxian political economy: a basic theory of capitalism, intermediate theories of capitalist world systems, and empirical analyses • 1. Dynamic theory of comparative advantage: dynamic industries and value added per unit of labour (VAL for short) • 2. Evolution of capitalist world system • 3. The Rise and Fall of Bureaucratic Capitalism: cyclical crises in the golden age; the structural crisis that changed the accumulation regime in the 1970s; • 4. Is the subprime loan crisis a systemic crisis?

2. 1. Dynamic Comparative Advantage (1) Dynamic industries, value added per unit of labour (VAL), 1700 1800 1850 1900 1950 2000

3. (2) Cyclical crises and structural Crises • (1) Cyclical crises solve the conflict between capital and labour over the distribution of VAL. • (2) Baumol’s cost disease: when capital accumulation eventually absorbes the available labour of the industrial reserve army , large wage increases in the dynamic sectors spill over into lagging sectors, and are mostly passed on to consumers in the form of higher prices. • (3)When wages surpass VAL, a serious structural crises is caused which destroy the existing capital accumulation regimes.

4. (3) Structural crisis and liner and non-liner development • (1) First strategy and liner development: shifting leading industries to new dynamic industries. • (2) Second strategy: extending the comparative advantage by forcing free trade and market policies to other countries so that they cannot catch up (kicking away the ladder). • (3) Uneven and non-liner development

5. 2. Evolution of Capitalist World Systems Periodization of capitalist world systems (2) Liberalism: British variety of capitalism created complementary institutions, Liberalism as accumulation regime, cotton and railway industries as the dynamic industries, and foreign demand as the engine of demand growth. (3) Imperialism: after the structural crisis, dynamic industries shifted to heavy and chemical industries and centres of economic growth shifted from the UK to the USA and Germany. (4) Market capitalism was finally collapsed by the systemic crisis, the great depression, in the 1930s

6. 3. The Rise and Fall of Bureaucratic Capitalism(1) The rise of the golden age: Welfare State (1) Dynamic Industries: the U.S. mass production system in the machinery and electronics industries. (2) The Welfare State (accumulation regime): the requirements of oligopolistic firms and states established the welfare state. Fiscal, monetary, and ITT policies. (3) International Trade The Bretton Woods system was designed to decrease the external constraints. The USA changed its trade policy from protectionism to liberalism. The USA also controlled supplies and prices of raw materials and fuel.

7. (2) Cyclical Crises in Bureaucratic Capitalism 1) Prosperity started mainly with the increase of investment and consumption. A profit-led accumulation mechanism worked. 2) Boom: both borrowers and lenders’ expectation became progressively moreoptimistic. 3)Recession: monetary authorities tightened credit before crisis actually erupted. It reduced investment, and recession started. 4)Depression: a wage-led accumulation mechanism worked. Increase of real wages together with automatic stabilisers increase aggregate demand. Then the prosperity starts again. Cyclical Crises reinforced the self regulating nature of capitalist economy.

8. (3) The Structural Crisis of Bureaucratic Capitalism and the Fall of the Golden age (1)Uneven development and disorganizing influence on the international relations 1) It decreased the relative strength of US trade. 2) It undermined confidence in the US dollar. 3) It split fixed exchange system. 4) It raised the cost of raw materials, food and energy. (2) Productivity growth slowdown and its disorganizing influence on domestic economic relations 1) It reduced value added per labour hour (VAL). 2) It reduced dynamic comparative advantage. 3) It changed coordinated capital and labour relation into conflictualone. 4) It paralysed Keynesian policy. (3)Structuralcrisis (1974), Depression (1975-78) , and Structural crisis (1979-81)

9. (4) The rise of neo-liberal accumulation regime and business cycles after the structural crisis (1)The Anglo-America neo-liberal accumulation regime solved supply constraints and reshaped capitalist world system after the structural crisis. (2) Neo-liberal financial relaxation (regulatory capture, regulatory relaxation, and regulatory escape ) solved demand constraints. (3) The second globalization: the US model of globalization encouraged investment in, and the transfer of manufacturing know-how to developing countries (4) Boom-bust cycles after the structural crises

10. (5) The Fall of Neo-Liberal Capital Accumulation Regime • (1) The effect of neo-liberal financial relaxation is losing momentum to reduce demand constrains. • Further increase of household debt is difficult. • Further liberalization undermines the safety of financial structure. • Neo-liberal monetary policy has reached its limit at zero interest rate. • (2) Supply side constraints • China and East Asia’s industrializations increased demand for raw materials, energy, and food. • (3) US foreign debt-led growth: The engine of demand growth changed from neo-liberal financial relaxation to US foreign debt after 1997.

11. Is the Sub-Prime Loan Crisis a Systemic Crisis? • (1) Minskian’s view is that it is cyclical crisis. • financial excess is the only problem, and normal growth with cyclical crises will return once that problem is removed. • (2) Structural Keynesians’ view is that it is a structural crisis in the accumulation regime. To restore the link between wages and productivity growth is needed to solve the problem. • (3) Marxian view is that it is a beginning of a systemic crisis that destroy Bureaucratic Capitalism. Industrialisation of China and India may develop a new type of economic system, which is more egalitarian and less depended on markets.