Enlightened industrialization or nothing

MAYBE LIBERALISM never worked except in the classical age of flamboyant market formation in the 18th and 19th centuries. At that time small capitals and a wave of gadgets did the trick with lots of petty entrepreneurs with a penchant for innovation. Then the long 19th Century came and what had sparked the industrial revolution turned into a prairie fire. Capitalism flourished, and the age of imperialism came along with the second industrial revolution. However, the rest of the story is ambivalent. It is not clear for instance that scientific breakthroughs caused the industrial revolution. By 1700 high quality steel was already produced in England and elsewhere in Europe but the basic metallurgy behind it, the scientific knowledge of how and why steel could be produced in the first place was lacking. Institutions matter, yes, but perhaps there are meta-institutions that make institutional change possible. Institutions cannot change themselves often unless there are other forces at play. It is not sufficient to conjecture that inefficient institutions are replaced by efficient ones in the long-run. Rather, it is perhaps the ideas and the attitudes of key people towards innovation that make all the difference.

NEOLIBERALISM FAILED MISERABLY DESPITE GLOBALIZATION

That neoliberalism did not work at all is obvious now that it may have at most the merit of not being an obstacle in the new age of science and AI. Otherwise, the wave of new breakthroughs could be stifled in its infancy. Economically speaking, neoliberalism has just increased global government debt and worsened income and wealth distribution with the exception of China and a few Asian followers. In the last half a century, it is mainly China for instance that caused the average death rate by reducing infant deaths etc. If scientific progress and enlightened industrialization still endure it is not due to neoliberalism but either despite it or these are two independent phenomena. Neoliberalism caused 2008, but American manufacturing investments are rising again because Biden spend government money in a stupendous vein, not because unfettered markets are driven towards chip production in order to compete with China. China, in turn, has not become the manufacturing engine of the world because the nascent Chinese bourgeoisie was up to the task standing alone; it was the Chinese state –ironically the communist party- that led them to that end.

BIDEN IS PROOF THAT NEOLIBERALISM FAILED

Actually Donald Trump signed the CARES Act of 2020, which bailed out households and businesses alike. He also extended that in the last days of his presidency. He was possibly too late because his initial response to COVID was misguided, and this is probably what cost him the presidency. Biden went further by his ARP (American Rescue Plan) of 2021. America was not shutting down in 2021 as it did in 2020 because the pandemic was fading. So, ARP proved to be a bit inflationary. Yet Biden also supported electric vehicles and the manufacturing industry in general. Nobody can deny that he resorted to somewhat excessive public spending and this is a sign that market by itself could not do the trick during and after the pandemic. But he was right in his diagnosis and his policy response.

There were also the IRA (Inflation Reduction Act) and the bipartisan CHIPS and Science Act. After Biden managed to pass those bills manufacturing construction boomed. Trump supporters have in fact better concede that this should be seen as an instance of MAGA (Make America Great Again) campaign. However, Trump did not do it; Biden did. It is basically about chips and batteries, electronics, computers, and chemicals. And the market did not do it: Biden’s public spending bills sparked a way of investments with the government, of course, directing and financially supporting private companies.

BIDEN DID WELL ON OTHER ACCOUNTS TOO

He was also successful in international politics. For one thing, Trump –and Macron and perhaps even the Germans could dismantle the NATO or were about to render it effective. Biden cemented the Western Alliance and restored confidence. If Putin –and Dugin and Gumilev before him- thought or think Russia is an ethno-politic entity alien to the western world –a land empire as opposed to the Anglo-Saxon empire, then Biden could not do anything other than supporting Ukraine as he indeed did by amply supplying arms and introducing relief packages. Actually, NATO has expanded after Ukraine with two new members. He has also so far succeeded in supporting Israel –as any American president must for well-known reasons but at least publically he appeared to be a restraining force on Netanyahu. These are not value judgements and have nothing to do with me agreeing with Biden on international politics. Simply, it reflects the fact that

he is the U.S. president and given the grand chessboard he faced he seems to have acted in the most rational way. If it is a given that your country is portraying Russia –Russia is also doing the same thing- as enemy, then this is what you must do. Similarly, if the U.S. continues to see China as the main rival, any president must increase military expenditures because China is arming at breakneck speed. Whether the U.S. is in fact the main aggressor and tries to push China and Russia into the corner is not the issue here. I do not discuss ideology.

WHAT IS NEXT?

What is next is that nobody will change the said unevenness. The big Left Wave is gone now. Hence, I rather think whatever fairness that may result will be the result of the new tech wave, AI and all that. For this to happen, funding costs of all sorts have to fall, including Fed rates. This is not only because new technologies require a lot of funding; no, it is rather because replacement cost has to be lower. The First Industrial Revolution had been possible because interest rates and shipping costs had experienced a secular decline after 1700. By the end of the Early Modern period, longterm rates hovered around 11%, but fell to 3% in the 18th Century. Rates were never very high in fact, globally speaking, in the long view. Rates were exceptionally high though through the mid-1970s, that is after the first oil shock of 1973. This was also the beginning of financialization and a new era of changing attitudes towards the social conflict. Not only income and wealth distribution became tilted in favour of high income groups, but also wages and the nature of work have changed. Anyway, it is clear that low rates for a period extending over a decade is a good recipe for innovation. It did happen just before the First Industrial Revolution, and it is probably happening now in the form of Industry 5.0. In fact, real interest rates have been decreasing for the last 35 years. After 1990 real rates have fallen by 2 percentage points in every decade, and world real interest rates stood at (near) zero in the last few years. So, the rate-cutting cycle will last for years – because low rates are in fact the norm- and span a new wave of investments from here to 2030. Old fixed capital will retire by then, just as with electric cars and so on. This is a new phase. Enlightened economies and technology deliver, and we will see how pessimism will prove to be an extinct virtue as time goes by.

GIFTS OF ATHENA: TURKEY

The first and foremost thing to do is obvious: to provide modern education. The usual proxy for education, ‘years of schooling ’, is immaterial today; it is education adjusted for quality that matters. Quality implies a forward-looking approach. Most of the jobs, even professions, which we know are good jobs will disappear within a couple of decades. Science and technology grow by leaps and bounds. It is but the tip of an iceberg that we see today. What Turkey has to do is stop dragging its feet and stop looking backward. A meticulously designed industrial policy that gives specific targets to entrepreneurs and a science-based stateof-the art secular education can do the trick. Otherwise, we will talk about interest rates, inflation, and hot money etc. with no avail because the underlying economy is not industrialized in an enlightened way.