Archive for the ‘Political Economy’ Category

definitions of capital

Monday, August 17th, 2015

[T]he economist’s standard definition of capital is at odds with business usage, which makes for confusion. For those who deal with balance sheets, capital is the money advanced by shareholders to start a business. This view of capital was common until Smith decided to change its meaning. His was a very physical perception of the economy — he regarded services as inferior to manufacturing — and he preferred to think of capital as machinery, land and buildings, or assets capable of generating profits. That is the basis of the modern economist’s view of capital as a stock of factors of production that can be expected to yield productive services over time. And now, according to [Geoffrey] Hodgson, we have been deluged with such loose terms as social capital, human capital, religious capital and cultural capital to the point where the word is emptied of meaning.

He [Hodgson] would like to confine capital exclusively to its everyday monetary sense and argues that a form of capital that cannot be used as collateral is simply not capital. The obvious criticism, which he acknowledges, is that of Alice in Wonderland: he is making words mean what he wants them to mean. I would argue that terms like human capital are anyway meaningful and useful. The focus of this linguistic purge is too narrow.

Yet it does highlight an important feature of capitalism that is inherent in the different nature of the assets owned by the capitalist and by the worker. Workers cannot use their labour power as collateral ….

John Plender, “Linguistic purge finds inequality Marx missed“, Financial Times, 17 August 2015 (metered paywall).

FT columnist John Pender is reviewing Conceptualizing Capitalism: Institutions, Evolution, Future by Geoffrey M. Hodgson (University of Chicago Press, 2015). Mr Pender is author of Capitalism: Money, Morals and Markets (Biteback Publishing, 2015). He concludes that Hodgson’s 456-page book “is a stimulating, historically grounded exploration of the subject and a rewarding, if occasionally dense, read.”

China’s currency and economic reforms

Saturday, August 15th, 2015

It is difficult to keep up with rapidly changing economic policies in China. Jamil Anderlini’s column on a key player in this unfolding drama is a must-read. Here is an excerpt. Click on the link below to read the full article (free registration required).

In the early 1980s, a promising PhD student from a prominent political family caught the eye of China’s most senior Communist leaders by urging them to lift price controls and allow imports of televisions.

Three decades later Zhou Xiaochuan, China’s longest-serving central bank governor, is still convincing the country’s authoritarian leaders of the merits of economic reform. In persuading them this week to devalue the currency, he may have pulled off the crowning achievement of his long career — by preparing the way for a free-floating renminbi that can challenge the US dollar as the world’s reserve currency.


“It is clear he [Mr Zhou] sometimes pisses people off, including President Xi,” says Christopher Johnson, a former senior China analyst at the CIA now at the Center for Strategic and International Studies in Washington. “But he has never been so important or so powerful. He is going to retire soon so has nothing to lose and he is absolutely determined to achieve the market reforms he has committed most of his life to.”

Jamil Anderlini, “Zhou Xiaochuan, Beijing’s central radical banker“, Financial Times, 15 August 2015 (metered paywall).

Zhou Xiaochuan (born 1948) received a PhD in Automation and System Engineering from Tsinghua University in 1985. He became governor of the People’s Bank of China in December 2002.

Jamil Anderlini is chief of the FT’s Beijing bureau.

home delivery of the web in Cuba

Monday, August 10th, 2015

Many homes in Cuba have computers, but few are connected to the internet. Private entrepreneurs have seized this opportunity to deliver internet content to customers each week on a memory stick known as “el Paquete” (the Package).

The Paquete is an alternative to the web in a country where, according to some estimates, fewer than 5% of homes are connected.

It consists of a terabyte of data bringing together the latest music, Hollywood movies, TV series, mobile phone apps, magazines and even a classifieds section similar to Gumtree or Craigslist. ….

It’s all carried out outside any legal framework in Cuba – and with seemingly little regard for international copyright law. ….

Ana [Lauren, a 24 year-old journalist from Havana,] … says she looks forward to Mondays when the latest edition of the Paquete is delivered to her door. ….

“I can copy whatever I want. …. She adds that she pays between one and two US dollars for the Paquete each week, depending on how much she chooses to copy to her computer.

Emilio San Pedro, “Cuban internet delivered weekly by hand“, BBC News, 10 August 2015.

What surprises me most is not the ingenuity of Cuban entrepreneurs, but the fact that government tolerates their activity. This is a sign that the country is becoming more open.

democracy within a monetary union

Monday, August 10th, 2015

FT columnist Martin Sandbu argues that democracy is compatible with monetary union, even though the eurozone elite believes it is not.

In Greece, opinion polls have been remarkably consistent about two things: most Greeks want to keep the euro as their currency, and most also reject the policies imposed by the creditor institution ….

Yet untold numbers of independent observers have uncritically bought into the “no alternative” [to austerity] rhetoric, without realising that if true, it is a terrible indictment of monetary union. The euro’s goal was to smooth cross-border trade and investment and reinforce the political bonds that prevent a return to past enmities. It was not to remove any choice over the economic models under which different nations wish to live.

The fact that alternatives exist is cause for relief, but also for despair. By pretending they do not — and in Greece, trying to make this true by closing down the banking system rather than forcing its restructuring — Europe betrays its own values. One of the most precious was articulated by Voltaire: to defend someone’s right to express, and to live by, a view one deeply disagrees with.

Martin Sandbu, “Democracy at the heart of fight for Greece“, Financial Times, 10 August 2015 (metered paywall).

One alternative is for Greece to default on its debt, while keeping the euro as its currency. Defaults on municipal bonds are common within at least one large currency union – the United States of America. None of these sub-national governments have been expelled from the US dollar monetary union. Similarly, Greece might conceivably pursue lax fiscal policy, default on some portion of its public debt, and pay a price in terms of higher interest rates on bonds it issues in the future. There is no reason for yields on Greek debt be the same as yields on German debt simply because the two countries happen to be in the same monetary union.

transparent executive pay

Saturday, August 8th, 2015

The US Securities and Exchange Commission (SEC) has begun to require companies to publish the ratio of CEO pay to that of their median employee. Business lobbyists have attacked the policy, while the Financial Times is defending it.

The FT does have reservations related to unintended consequences of the new directive. For example, in many countries publication of executive pay “has helped to fuel the rise in executive pay as companies have felt their bosses, if they are up to the job, should be in the upper quartile of the earnings table”.

[Nonetheless,] companies need to accept that disquiet over executive pay is well-founded. It has become increasingly difficult to defend the growing gap between what people at the top and those lower down earn.

The average US chief executive earned 295.9 times as much as a typical American worker in 2013, compared with 20 times as much in 1965. ….

Whatever criticism is directed at the SEC’s new rule, it is a response to real public concern. The pay gap has not just resulted in anger about corporate excess. The sense that those at the top are appropriating the spoils for themselves has undermined support for the capitalist system itself.

Top US executive pay deserves greater scrutiny“, Financial Times editorial, 8 August 2015 (metered paywall).

socialism with a Uruguayan face

Wednesday, August 5th, 2015

At last, good news from Latin America.

Uruguay is politically stable and the economy is growing. Its two giant neighbours, Brazil and Argentina, in contrast “are teetering on the brink of crisis”, writes FT correspondent Benedict Mander. Uruguay has attracted unprecedented levels of foreign investment since 2004, when a leftwing government first came to power. In the general election of that year, Frente Amplio (‘Broad Front’, a coalition of mostly leftwing political parties) won the presidency and a majority of seats in the Chamber of Deputies and the Senate. The Frente again won the presidency and a narrow majority in both houses in the general elections of 2009 and 2014.

[Economist Ernesto] Talví, who is director of the Brookings Global-CERES Economic and Social Policy in Latin America Initiative, argues that Uruguay is fundamentally a progressive country.

“It is a myth that Uruguay is conservative. It is a sensible country, which is subtly different,” says Mr Talví, pointing to Uruguay’s vibrant democracy, with its strong opposition, independent judiciary and free press. “Change is not easy to implement as you need consensus, which gives the false impression of conservatism. It is simply that we have checks and balances that work.” ….

“We may have a leftwing government here, but the rules of the game haven’t changed at all for businesses. They have remained exactly the same,” [says Oscar Costa, CEO of Uruguay’s largest private company.]

Benedict Mander, “Uruguay tries to hang on to its buzz“,, 4 August 2015 (metered paywall).

Uruguay is well-known for legalisation of marijuana, while its policies to discourage use of a more addictive substance (tobacco) are seldom noticed.

Free podcast with FT journalists

Friday, July 31st, 2015

As I have mentioned before, blogs can be downloaded without limit from the Financial Times (free registration required). What I have not mentioned is that podcasts can also be downloaded freely. I recently discovered the Alphachat podcast. I have not yet listened to a podcast in the series, but will do so very soon. Here is a description of the latest episode.

The 40 minute podcast, and all previous 19 episodes, can be downloaded from iTunes and Stitcher, or from

This episode was recorded on Wednesday, 29 July. You can find Alphachat on iTunes and Stitcher. Thanks for listening!

Topic 1: Nikkei buys the FT. Now what?
01:42 – 17:20
Guests: Gillian Tett and Ben McLannahan

Topic 2: Gillian’s upcoming book, The Silo Effect
17:25 – 34:45
Guest: Gillian Tett

Topic 3: An Alphavillain returns from vacation in Greece
34:53 – 40:30
Guest: Matt Klein

Cardiff Garcia, “Alphachat: Nikkei buys the FT, Gillian Tett’s forthcoming new book, and an Alphavillain returns from Greece“,, 31 July 2015.


rewarding innovation

Thursday, July 23rd, 2015

Tim Harford, Financial Times “undercover economist”, wrote a superb column on innovation for last weekend’s newspaper. He ends it by asking: should rewards for innovation be higher or lower? Here is Mr Harford’s conclusion:

There is a balance to be struck. When innovators keep too much money, the benefit of using or recombining new ideas spreads too slowly. But if innovators make no money at all, then they will end up creating for the love of creation rather than for any financial reward. That may be fine for pop songs and poetry but less so for nuclear fusion or an HIV vaccine. Costly research programmes will not be funded.

The right balance depends on the innovation in question, and how expensive it is to develop. We probably need better incentives to create some new medicines. Yet our intellectual property system gives too much protection to ideas that would have been created anyway, such as simple software, business methods and Mickey Mouse. It is no surprise that the Venetian doges tried to keep the glassmakers in Murano. We should be grateful that they failed.

Tim Harford, “It’s tough turning ideas into gold“, Financial Times, 18 July 2018 (posted 21 July to this ungated link).

Read the full column. You won’t regret it. And, you will learn about the fascinating history of glassmaking, an early innovation. Mr Harford’s past articles, including this one, are archived at his home page,

Thomas Piketty at lunch with the FT

Friday, June 26th, 2015

This is one of the best weekly “lunch with the FT” interviews that I have seen. French economist Thomas Piketty (born 1971) has achieved ‘rock-star’ status’ with the success of his 2013 bestseller Capital in the Twenty-First Century, so is a particularly appropriate choice for inclusion in this series.

“Too often, economists build very complex mathematical models to look scientific and impress people. I have nothing against mathematics — I initially trained as a mathematician — but it’s usually to hide a lack of ideas. What pleases me is that this book reaches ‘normal’ people, a rather wide public. My mother is one example,” he says, adding that she rarely reads big academic books yet understood everything in his. ….

Piketty says his interest in inequality crystallised after the collapse of the Berlin Wall and the first Gulf war. He recalls visiting Moscow in 1991 and being struck by “the lines in front of shops”. He came back vaccinated against communism — “I believe in capitalism, private property, the market” — but also with a question central to his work: “How come those people had been so afraid of inequality and capitalism in the 19th and 20th century that they created such a monstrosity? How can we tackle inequality without repeating this disaster?”

The first Gulf war, he believed, demonstrated the cynicism of the west: “We are told constantly that states can’t do anything, that it’s impossible to regulate the Cayman Islands and the other tax havens because they are too powerful, and all of a sudden we send a million soldiers 10,000km from home to allow the emir of Kuwait to keep his oil.”

Anne-Sylvaine Chassany, “Lunch with the FT: Thomas Piketty“, Financial Times, 27 June 2015 (metered paywall).

There is much, much more in the full interview.

CEO pay is scandalously high

Wednesday, May 20th, 2015

writes FT columnist Michael Skapinker.

Chief executive pay is a scandal. It is too high, too complicated and has badly damaged the image of business. Even fervent defenders of free markets think top pay is out of control.

Simon Walker, head of the UK’s Institute of Directors, whose members are rarely heard humming “The Red Flag”, has said: “What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.” ….

Defenders of the current set-up may seize on Mr Walker’s jibe about rewards for failure and say: “Ah, but what about all those successful CEOs who deserve their pay?” The … riposte is that there is little evidence that performance-related pay schemes are, in fact, rewarding performance. ….

There is no need for US chief executives to earn 296 times as much as the average worker or UK bosses 120 times. [Emphasis added.]

Michael Skapinker, “CEO pay: it is time for one brave leader to ask for less“, Financial Times, 20 May 2015 (metered paywall).

When corporate management worries about the gap between executive pay and the wages of workers, we have a problem. I wondered if corporate America has voiced similar concern. The Wall Street Journal (WSJ) is the US equivalent of London-based Financial Times (FT), so I searched for WSJ columns decrying high CEO compensation. I was unsuccessful, but I did find a column arguing that the gap is small, so nothing to worry about! (See the extract below.)

I seldom read the WSJ. Can a reader please pass on to me any WSJ article or op-ed that expresses concern with the gap between executive compensation and the pay of workers? Does one exist?

[T]he AFL-CIO and its aligned think tanks have made hay of the huge difference between the pay of CEOs and employees.

One of the most widely cited measures of the “gap” comes from the AFL-CIO’s Executive Paywatch website. The nations largest federation of unions laments that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the rest of us. As proof, it points to a 331-to-1 gap in compensation between Americas chief executives and the pay of the average worker.

That’s a sizable number. But don’t grab the pitchforks just yet.

The AFL-CIO calculated a pay gap based on a very small sample—350 CEOs from the S&P 500. According to the Bureau of Labor Statistics, there were 248,760 chief executives in the U.S. in 2013.

The BLS [Bureau of Labor Statistics] reports that the average annual salary for these chief executives is $178,400, which we can compare to the $35,239-per-year salary the AFL-CIO uses for the average American worker. That shrinks the executive pay gap from 331-to-1 down to a far less newsworthy number of roughly five-to-one.

Mark J. Perry and Michael Saltsman, “About That CEO/Employee Pay Gap“, Wall Street Journal, 12 October 2014 (free access).

Wow! That is impressive shrinkage of the reported wage gap. I am not convinced, though. What counts is the gap between total executive compensation and the compensation of workers (who generally receive no compensation other than wages and salary). For highly-paid CEOs, income from salaries is a fraction of total compensation, which includes bonuses and company stock. Also, few are concerned with CEO compensation in companies that employ few workers, so the S&P 500 is not an irrelevant sample of firms to examine.

Perry and Saltsman were motivated to write an op-ed by introduction in Congress of the CEO-Employee Paycheck Fairness Act, a piece of Democrat legislation referred to the House Committee on Ways and Means at the end of January 2015.

The Act, in words of Perry and Saltsman, “would prevent a public company from deducting executive compensation over $1 million unless it also gives rank-and-file employees raises that keep pace with the cost of living and labor productivity”.

Mr Perry is a resident scholar at the American Enterprise Institute and blogs at Carpe Diem. Mr Saltsman is research director at the Employment Policies Institute (EPI), a front group created by Berman and Company, a Washington, D.C. public relations organization that lobbies for the restaurant, hotel, alcoholic beverage and tobacco industries. The EPI has no employees of its own, other than Mr Saltsman, who is also economist and researcher for Berman and Company.