HISTORY :ECONOMICS.        PART 4            

 THE POST INDUSTRIAL ECONOMY     The technology office

Rich countries have kicked away the ladder by forcing free market,free trade policies on poor countries-Ha joon chang

One of the puzzles of urbanisation is the willingness of people to pay very high rents to stay next door to people already paying very high rents- Jonathan haskel

The role of government in Infant industry support 

The role of externalities in industrialization and economic development is undisputed. But this is not the whole story ,especially in early stages of industrialization. In a developing country there is lack of physical  infrastructure and industrial ecosystem of complementary industries. There is lack of capital to build massive factories as well as lack of trained manpower and markets. All these make them extremely vulnerable to foreign competion and they are liable to be wiped out in a free trade situation. Institutional development is essential but it has gradually developed in advanced economies . It has fascilitated their growth through complementary effect. However  none  of the institutions were there in today’s form during initial industrialization of these nations.

    If we trace industrialization  in Europe we find that infant industry protection was done extensively in early stages.In  Britain in 1771 the Mercantile law was passed. It was aimed at restricting imports with high tariffs and giving export subsidy, reducing import duties on raw materials used in manufacturing,regulations to control quality of exportable goods. By 1860  Britain had established technological superiority of its manufactured goods behind tariff barriers and gradually they were removed and free trade established. However the free trade regime did not last long. By 1880 some manufactures were hard pressed and asked for higher tariffs. This was reinstated in 1932 when Britain faced increased competition from USA and Germany thus ending free trade.

The USA passed a tariff law with average tariff of 42% on all imports  in 1800. This continued more or less at same rate until 1932 when USA ultimately achieved undisputed supremacy in manufacturing and tariffs were reduced.Apart from this the government provided extensive subsidy in the form of land and guaranteed return to railroad companies and subsidy to agricultural research and public education in 19th century. Even today government military research in computing resulted in the information revolution in Silicon Valley in California.

 In early 19th century Graf von redden introduced advanced industrial technology from Britain to Germany by industrial espionage,and poaching of skilled workers. Other examples of state support were military investment in Silesia, state built roadways and education institutions.

 Essentially the same state support is seen newly industrialised nations of South Korea,Taiwan and China.

Tariffs and subsidies for industrial development

 Tariffs and subsidies have a deleterious effect on the economy in the short run. Thus if tariffs are applied on imported goods the manufacturers of this good in the country benefits from lack of low priced  foreign goods and has increased profit but the domestic buyer of these goods have to pay a higher price. Again if the domestic prices of a good is low manuacturers have increase profit when they export it to country with prevailing high prices.The domestic price however gradually rises to international high price.  Thus the domestic consumer has to pay a high price for the products in absence of export tariffs.In both the above cases tariffs lead to market contraction because of high prices of the good  due to tariffs.

   However the benefits in long run is different. If the domestic industry is destroyed by import of low priced manufactured imports the skill base gets lost. The gradual loss of skill loss in multiple sectors  leads to deindustrialization in the country.Moreover in absence of manufacturing the relevant research on these sectors and innovation does not occur.

It is very essential that infant industrial protection be given to manufacturing industries in developing countries. However they should have a time bound expiry clause. If continued indefinitely the nation becomes saddled with a protected firm unable to compete internationally. 


Postindustrial economy

From 1970 with the advent of the computer followed by the internet a new post industrial economy has taken shape. The new firms in technology sector have very scarce physical infrastructure compared to  traditional firms. Their profit comes from preparing computer programmes for solving business problems .The consequences for this type of intangible firms are immense. Firstly the firms compete to get the best talent for them and often those who are less skilled are excluded. The firms can scale up to monopoly proportions as their growth is costless  once the initial program is prepared and copi es can be produced for sale without further investment. Their growth now depends  on their consumer base which can increase limitlesslessly as these products are usually given free. The firms make profit from user charges and advertisements,

Intangible economy - effect on economic growth

  However there are certain features of intangible firms that are problematic. Firstly they have the property of sunkenness meaning the investment in talent is not recoverable . Thus traditional firms going bankrupt can be sold off and money recovered from their existing  assets . However  it is not possible to sell the intangible assets of technology firms A consequence of this is that banks are hesitant to give loan capital to these firms and they depend on stock markets for their capital requirement. The presence of highly profitable technology companies has led to massive expansion in the stock markets .Information technology  has also affected trading in stock markets where information technology is used to track stocks and make profits.There has been a shift in rent capital to stock markets from traditional brick and mortar companies.Morever with mutual fund companies and pension funds now investing  massively to generate profits for their shareholders in stock markets the managers of these funds are in a position to buy controlling share in many brick and mortar companies. The manager of these funds have control over numerous firms like Amazon,google and decide their policies

  Another consequence has been monopoly firms. Intangible firms compete on service and they are characterized by winner takes all competion,superstar effects. The consumer prefers the best product and firm as they compare them instantly on the internet. Second best firms get eliminated or are bought over.This monopoly situation profoundly affects smaller firms profitability. The wages in successful firms remain high ,but the majority of firms have low wages. The labour share of income compared to rent income comes down. This leads to sustained low economic growth- secular stagnation.

  However there are other forms of intangible firms apart from information technology. Thus the Franchise revolution of Macdonald was an early form Here the intangible production and marketing strategy is copied to form numerous successfull copies of the firm. Their success is due to the distinctive consumer experience they give.                                                                                                                                     The rise of intangible economy is due to the rise of knowledge component in production after 1970. The consequence for income inequality has been profound. The developed countries have low share of manufacturing today and many manufacturing jobs have been automated or outsourced to low wagecountries. The jobs in manufacturing led to a middle class  with an intermediate income group. This  is being replaced by a combination of highly paid managers,proffesionals and financial agents and a vast majority of low skilled service jobs in cabdrivers,delivery boys.healthcare workers. This leads to secular stagnation in the economy as labour share in income has come down.

    A possible solution of the problems of unemployment and inequality in incomes is a more equitable firm growth. As a first step tech monopolies should be stopped from taking over smaller firms. Smaller firms need labour with better training and education skills and subsidy by goverment should be available for interneeships .

Ack:: kicking away the ladder,capitalism without capital, The new goliaths,Technology and Inequality

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