Two points on the new developmentalism:   

This is what I have posted as a question to Luiz Carlos Bresser-Pereira's project. So this takes a form of letter addressed to Luiz Carlos Bresser-Pereira.

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I have read two of your papers:

• Reflecting on New Developmentalism and Classical Development.
• Structuralist Macroeconomics and the New Developmentalism.

The pages I refer in the following all stand for those of the first paper.

I agree with almost all diagnoses and policy recommendations that you give for middle income countries. The new developmentalism seems to be composed of

(1) a historical diagnosis of economic development and a criticism of developmentalism as really existing historical phenomenon,

(2) a set of policy principles to be preserved,

(3) a set of theory and methods.

I have no big objection on (1) and (2). Your assessment on (A) classical developmentalism and (B) Keynesian economics is right. Your criticism on dependency theory is just. You also criticize neoclassical economics in a plausible way. You declare that your method is historical-deductive method. The set of policies is mainly derived from historical experience comprising successful growth of recent East Asian countries and failed attempts of many of Latin American countries. These are all precious acquisitions.

Here I want to raise two questions on (3), i.e. theory and methodological arguments. Theoretically speaking, major ingredients of the new developmentalism lie on Keynesian economics and developmental macroeconomics. Of course, you do not accept them blindly. You criticize the vulgar interpretation of Keynesian economics and admit defects of classical developmentalism or structuralist development economics. I have no big objections on these parts. What I want to question is the microeconomics of the new developmentalism. You rightly admit that it remains still in a draft stage (p.333). You criticize the neoclassical economics arguing that it depends on unrealistic rationality assumptions. At the same time, you criticize some of heterodox economics. In particular you wrote

• The 'heterodox' ideas that economics should not deal with equilibrium, ... make as little sense as does the 'orthodox' assumption that meaningful theory can be build on the axiom that economic agents are rational and markets self-regulated. (p.349)

I understand your irritation. Microeconomics that can help the new developmentalism is still quite poor. Heterodox economists criticize the neoclassical economics but do not present their theories in a positive way. However, I have to point out that there is a crucial lack of theory in examining new developmentalist polices. You talk about exchange rate several times and argue that there is a strong tendency toward overevaluation for developing countries. You emphasize that the exchange rate should be controlled at the right value. My point is this: How can you define the right level of the exchange rate without having a good theory of international trade?

This question was impossible to answer at the time you started to formulate the new developmentalism (i.e. at the beginning of our century). In my understanding, the situation changed since then. A new theory of international values has been constructed. One of its theorems says that, given a set of production techniques for each country and a composition of final world demand, there exists in general a unique value (up to scalar multiplication) in which all countries produce only by competitive production techniques and achieve full employment. The value here is a combination of wage rates for each of countries and of prices for commodities. See my working paper (Theorem 3.4 in Section 3 in particular):

The New Theory of International Values: An Overview

https://www.researchgate.net/publication/304717720_The_New_Theory_of_International_Values_An_Overview

I have to avow that theory of the exchange rates is still lacking (Section 6). Although we do not know how the exchange rate is determined in a foreign currency market, we can say that there is only one system of exchange rates in the world with which all countries can realize full employment by engaging in competitive productions.

My theory is based on Ricardian theory of value, i.e. the cost of production theory of value. This is in accordance with your image (p.347, #58, the cost plus the reasonable profit). You do not express your opinion on the law of comparative advantage. You only mention that classic developmentalism “was critical of neoclassical economics and of the classical law of comparative advantages.” (p.336) You refer to “five notable books” after the decline of classical developmentalism. Ha-Joon Chang’s book was a systematic criticism in a sense against comparative advantage theory. He is right in criticizing incoherence of developed countries’ trade policy thought, but he wrongly criticized the Ricardo’s theory itself. We have to admit two points in Ricardo. (1) Ricardo (nor Marx) could not present a theory of international values. What he had shown in Chapter 7 of his Principles is only an illustration of how the gains from trade are obtained even if England is less productive in both commodities they produce than Portugal. (2) It was John Stuart Mill who returned classical theory of value into the law of demand and supply and opened the way to the neoclassical economics in the 4th quarter of the 19th century. For the second point, please see my paper

An Origin of the Neoclassical Revolution: Mill’s “Reversion” and its Consequences

https://www.researchgate.net/publication/305810200_An_Origin_of_the_Neoclassical_Revolution_Mill%27s_Reversion_and_its_Consequences

The new theory of international values is not an apologetic theory that proves only the gains from trade but the possibility of unemployment if a good policy is not taken to increase effective demand (The New Theory, Section 4). As a value theory, the new theory assumes a set of production techniques and this set is assumed to remain invariable for a while, but the new theory comprises logic of choice of production techniques. It can treat dynamical changes caused by technological progress if it is more subtle and difficult.

My theory is in part highly mathematical. My second objection is your attitude on mathematics. You wrote:

• The hypothetical-deductive method is properly adopted by the methodological sciences like mathematics, statistics, econometrics, and economic decision-making theory, whereas the empirical deductive method or the historical deductive method are appropriate to the substantive sciences, that is, the natural and the social sciences. (p.350)

There seems some misunderstandings vis-à-vis hypothetical-deductive method. Mathematics is a logical science and its deduction is always hypothetical. The neoclassical economics is wrong not because it adopted hypothetical-deductive method, but because it adopted wrong hypotheses. If we adopt good assumptions on behaviors of economic agents, hypothetical-deductive method and simulation may become highly useful methods for economics.

What we have to do is to refute Milton Friedman’s positivism. He argued that unrealistic assumptions are acceptable as far as they produce a good prediction. Friedman’s thesis is doubly wrong. First, most of assumptions in economics are observable propositions and verifiable. We can choose more realistic assumptions and they lead us to understand the deeper structure of the phenomena. Second, it ignores the internal coherence of a science and the important logic of science development. Modern science emerged not only with experiments but also with analysis including mathematical ones.

To sum up, my argument can be summarized in two points. (1) We have already a good theory of value which is applicable to the international trade situation. (2) A theory requires some times a mathematical analysis. As it is hypothetical-deductive method, we should not refute this method as a whole. The neoclassical economics is based on a bad hypothetical-deductive method and kept inspired by a wrong science philosophy.

Working Paper The New Theory of International Values: An Overview

Working Paper An Origin of the Neoclassical Revolution: Mill's "Reversion"...

• In the section The New Developmmentalism: A Problematic Paradigm? in

Ian R. Carrillo (2014) The New Developmentalism and the Challenges to Long-Term Stability. http://journals.sagepub.com/doi/pdf/10.1177/0094582X1454379

Carrillo points out as first of the problematics of New Developmentalism (ND) that

• a discussion of the materiality of production and the way in which Brazil engages the international market is largely absent in the new developmentalist framework.

His assessment supports my concern about the theoretical basis of the ND, especially in the internationa trade field.

This is a comment that I made on  Victor Cruz e Silva Marcelo Curado's conference paper:

Post-Keynesianism and Developmental Macroeconomics: contact points and divergences in their economic diagnoses, objectives and policy prescriptions

https://www.researchgate.net/publication/281819726_Post-Keynesianism_and_Developmental_Macroeconomics_contact_points_and_divergences_in_their_economic_diagnoses_objectives_and_policy_prescriptions

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This is a good introductory paper to the New Developmentalism (ND). I came to know this "theory" or perhaps a "set of policies." In my opinion, the ND is equipped with good macroeconomics, but microeconomics part seems very weak. Without having a good microeconomics, it is difficult to dress right policies. Of course, we cannot rely on the neoclassical microeconomics. Luiz Carlos Bresser-Pereira, the main promoter of the ND declares that the ND must stand on the classical political economy. Admitting this fact, I want to point out two problems.

(1) This is practically equivalent to proclaim that he does not endorse neoclassical economics. Classical political economy designates in the standard understanding all economists and their economic thought between Adam Smith and the arrival of the marginal or neoclassical revolution. Therefore, it includes Thomas Robert Malthus, Jean-Baptiste Say, and others who never understand Ricardo's cost of production theory of value (not labor theory of value). Simply speaking, Malthus and Say are two main precursors of the neoclassical theory of value. If Bresser-Pereira does not distinguish Ricardo and Say, the classical political economy comprises every kind of later economic theories.

If Bresser-Pereira wants to find a true theory, he have to chose one coherent theory which can serve to the ND. Fortunately there is a good theory for this purpose. It is the classical theory of value that is a modern development of Ricardo's cost of production theory of value. The main idea of this theory is that

• the cost and value of a thing should be the same; --- it is, if he [Mathus] means by bocost, "cost of production" including profits. (Ricardo, Principles, Footnote to Section VI, Chapter 1.)

This is in accordance with summery point #58 of the Bresser-Pereira's (2016) Reflecting on New Developmentalism and Old Developmentalism. 

• Prices vary according to the demand and supply around the value of the good or service, which is defined by the social labor required. Or, more simply, defined as the cost plus reasonable profit involved in its production. (Bresser-Pereira, 2016, p.347)

As for the modern form of classical theory of value, please read my paper:

The Revival of Classical Theory of Values

https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

This is the chapter of a book which is already published, but you can read the draft (there is no big differences).

(2) The ND owes much to Keynesian economics. Bresser-Pereira denounces the so-called "Keynesian policy" as vulgar interpretation of Keynes's General Theory. It is necessary to distinguish between theory and policy. However, Bresser-Pereira is ambiguous about the principle of effective demand.

Bresser-Pereira is much influence by American Post Keynesians and seems not well versed to other trends of post Keynesians. He is quite optimistic and affirmative on the present state of post Keynesian economics, but this is doubtful. Keynes's theories of Interest and Money have no sound foundations. This is the main reason why Keynesian economics was so easily defeated by the neoclassical anti-Keynesian counterrevolution in 1970's. We should learn from history.

The main reason of Keynesian economics failure originates from Keynes's reliance to Marshallian economics, which is but a variant of neoclassical economics. We should also learn from history. In the quarter century since 1990, low rate of interest (and quantitative easing) did not increase investment in the developed countries. We have enough reason to doubt Keynes's theory of investment which mainly examines the relation between the rate of interest and the marginal rate of investment.

Keynesian macroeconomics has accumulated enormous amount of historical lessons but stands on fragile theoretical foundations. It is necessary to build a new theory. At that time, classical theory of value is the most hopeful microeconomic theories.

Conference Paper The Revival of Classical Theory of Values

Conference Paper Post-Keynesianism and Developmental Macroeconomics: contact ...

 I wonder why there is no reaction from the people who are proponents of the New Developmentalism.

[I am reposting here my reply to Professor Shiozawa with minor changes in order to allow those who follow the discussion to read it]

Dear Professor Shiozawa,

I read your feedback and I believe you have fair arguments in a series of points.

ND indeed lacks a sound microeconomics. I believe new developmentalists inherited that from the post Keynesians. Post Keynesians usually answer to microeconomic questions on Marshallian grounds (and Keynes himself was, undeniably, a Marshallian). There is, to my knowledge, no independent or refined post Keynesian microeconomics. Accordingly, I have never identified deep interest in microeconomic matters either from post Keynesians or from new developmentalists. I believe that, from the microeconomic standpoint, the great divide between neoclassical economists follows the lines enunciated by De Vroey as the Marshall-Walras divide.

I have a position regarding ND that separates the analysis in two steps: a methodological one and a theoretical one. Anyway, I believe that, among NDs, especially, Bresser is a wonderful methodologist. His views on neoclassical methodology and his project for the methodology of ND seems to me truly coherent and effective. On policy grounds, however, I believe the theory is not yet complete. It demands further debate and it demands further developments.

Regarding your considerations about the modern form of classical theory of value, I would have to bring the subject to my scrutiny before I manage to issue my views on the subject

Anyway, this version of the essay is an early draft. We are still working on it in order to refine our impressions.

 Dear Victor Cruz e Silva,

thank you for your post. I am happy to find a sincere researcher who wants to fill the lacking micro foundations of the New Developmentalism.

I totally agree with you that Bresser is a wonderful methodologist. The policies he proposes are sound by and large.

I am questioning micro foundations of the ND as I think we should avoid repeating the same errors of the Old Developmentalism. Influential economists such as Raul Prebisch, Celso Furtado, Fernando Henrique Cardoso, Andre Gunder Frank, and Samir Amin thought in the framework of the Dependency Theory. I highly respect all of those people. I learned much from them. Their structural analysis are in general right. But they lacked a good theory of international trade. They simply thought in terms of "terms of trade." Some of them accepted unequal exchange rhetoric and substituted economic analysis with political accusations. The failure of import substitution industrialization is deeply rooted in this theoretical weakness.

If you like it or not, we are now living in a globalized economy. International trade theory is crucial. Bresser seems to be not thinking much about international trade even though he emphasizes the importance not to over-evaluate the exchange rate.

Keynesian policies also needs micro foundations. I will post my opinions on these points later.     

Luis Carlos Bresser-Pereira is very cautious about fiscal policy and budget deficit. It is understandable, because Latin American countries suffered for a long time for the chronicle high rate of inflation. I am not sure how he is thinking on this point. It is possible that he is thinking that inflation occurs by the budget deficit. (Another important route of inflation was devaluation of the national currency)

In my impression, this understanding is too much influenced by the monetarism, not only of the Milton Friedman kind, but of the more mild monetarism. However, as the Modern Monetary Theory made it clear, the budge deficit and the increase of the monetary base or even of the money stock do not directly induce inflation. Inflation occurs when in some product markets the demand  exceed the production capacity or when labor demand exceeds the labor supply. The budge deficit and the increase of the monetary base or stock may cause these situations but there is one cushion between the two. This may open a wider margin of fiscal policy.

Of course, in a democratic country, it may not be easy to control budget deficit withing the non-inflation range. But, it is at least necessary to clarify the true mechanism of inflation. Without such a theory, we cannot really control the inflation.

Any theory of economics, classical, contemporary or futuristic, if it tends to function properly, it has to have social values, values that give wider functioning domain for properness and longevity, as economies give more meanings and  best served when they incorporate the populous. This is true in mathematics, as the value of an integral of a function of higher length over a tiny domain is much smaller than the  value of an integral of a function of a proper height over a wider domain. Theories fail when they fail to do what they tell and intend to do, economies of the past failed periodically and therefore classical economic theories failed. There is a thread about two economists who received Nobel prize not for creating a theory that fixes repetitive failures but for creating buzz words - 'asymmetric information'- which literally is cheating or deception. 

Largely missing is the business cycle which predates the present era by a few centuries. From time to time market makers sabotage an economy by excess buying or selling, restricting credit or promoting careless lending. It is more of a tradition than a conspiracy, but largely missing from economic market and growth theories. A concerted effort is made to mislead the public, and avoid government interference.

Dear Dejenie A. Lakew,

thank you for your comment and recommendation. I am happy to recieve a comment from a mathematician who has worked on Fibonattic seqeunce, hyper symmetries, and others.

In the domain of economics, there is sometimes an asstonishing discovery. I found that what I call subtropical algebra descrives just the logic of Ricardian trade theory. Subtrpoical here means an algebra that has two operators: max as plus and times as ordianry multiplication.

Please see my two of my papers:

(1) Subtropical Convex Geometry as the Ricardian Theory of International Trade

https://www.researchgate.net/publication/236020268_Subtropical_Convex_Geometry_as_the_Ricardian_Theory_of_International_Trade

(2) International trade theory and exotic algebra

https://www.researchgate.net/publication/280646264_International_trade_theory_and_exotic_algebra

(2) is a digest of (1). You may be interested in this topic as you are keenly interested in applied mathematics.

Article Subtropical Convex Geometry as the Ricardian Theory of Inter...

Article International trade theory and exotic algebra

Dear Jelly Decker,

yes, history and the structure left as legacy play an important role in developing economics. As you have worked as senior engineer and is strong in mathematics, you can contribute much to the development of economics.

Please read my discussion with Ken Zimmerman in the Real World Economics Blog:

https://rwer.wordpress.com/2017/06/28/economics-10whatever/#comment-121778

and after. You have more than twenty posts. How do you judge him?

Dear Yoshinori,

you may be interested in the work of Harry Bloch on Schumpeterian pricing in a Sraffa framework. Very illuminating work!

Kurt

Dear Kurt Dopfer,

thank you for the information. I have asked Harry Bloch to share his paper with me.

Yoshinori Shiozawa