The Policy Ramifications of Capital as Ideas

In 1987, Baldwin Ranson wrote about capital and technology in economic growth. Ranson argued that capital should be defined as intangible ideas and technology that are not subject to supply and demand constraints. Thorstein Veblen (1908, 518) described his conception of capital as being “found in possession of something in the way of a body of technological knowledge, – knowledge serviceable and requisite to the quest of a livelihood.” John R. Commons (1934, 662) wrote in a similar vein that “capital is not an accumulation of past products of stored-up labor – these are transitory and aimless – capital is a going plant of industrial knowledge and experience.” More recently, Cesar Hidalgo (2015) and Paul Romer (1990, 1994) have also written about the idea of capital as ideas and the key to economic growth. Hidalgo (2015, 179) states that “the growth of information in the economy, which is ultimately the essence of economic growth, results from the coevolution of our species’ collective computation capacity.” The first section of this article explores the linkages between the older generation and more recent thinkers on the intersection of capital as technology and ideas. The second section explores the policy ramifications of this conceptualization of capital. Romer argues that temporary monopolies are needed to encourage investment in innovation. According to both Veblen and Ranson, these rules do not allow for the full social value of ideas to be utilized. The second part of this article also explores these differences using A. Allan Schmid’s situation-structure-performance (SSP) model.     

On the effects of human capital and R&D policies in an endogenous growth model

We introduce an external effect of existing technologies in human capital accumulation in an endogenous growth model and describe its steady-state and transition. We numerically solve the model to compare the quantitative effects of R&D policy with the quantitative effects of human capital policy in wealth and welfare. Although R&D subsidies have now an overall positive effect on growth, wealth and welfare, the calibration exercise shows that for plausible values for the parameters, human capital policy is simultaneously the most income and welfare-improving and the less expensive to the government.     

Fiscal Policy,Economic Integration and Unemployment

In this paper fiscal policy is examined for an open economy characterized by unemployment due to efficiency wages. We allow for capital and firm mobility in a model where the government chooses the level of wage, source-based capital and profit taxation. The taxing choices of governments are analyzed in scenarios which differ with respect to the constraints imposed on the set of available taxes and on the mobility of firms. As a general result, the welfare loss from labor market imperfections increases when tax bases become internationally mobile, which suggests an increasing relevance of domestic labor-market reforms when tax bases become global.     

The Optimal Speed of Transition: A General Equilibrium Analysis

We present a benchmark model for the optimal speed of transition from a state-owned to a private market economy, based on the consumption-savings decision in a closed economy. We abstract from frictions to focus on the macroeconomic conditions for accumulation of private capital and closure or restructuring of state-owned enterprises. It is shown that hard budget constraints compensate for too slow speed of enterprise closure but that an excess speed of closure may slow down transition because of output contraction effects. This will especially be the case if such a deviation occurs at early stages of transition.     

Capital accumulation during the transition from plan to market1

This paper focuses on the process of capital accumulation and the forces that drive it in the countries undergoing the transition from plan to market. The methodological framework for analyzing the determinants of aggregate business investment draws on the neoclassical accelerator model, extending it to reflect some of the specificities of the transition environment. The model is estimated on data for the economies in Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS). The results highlight the role of some key drivers of capital accumulation in an economy in transition, in particular, the relatively significant accelerator response to output, the importance of adjustment effects and financing constraints and the relatively minor role of the cost of capital.     

Policy commitment and the welfare gains from capital market liberalization

This paper evaluates the quantitative impact of capital liberalization on the taxation structure and welfare of the liberalizing countries when governments conduct fiscal policy optimally but without commitment (time-consistent policies). The transition from a regime of capital autarky to a regime of free mobility leads to a decrease in the long-term tax rate on capital of 13 percent and an increase in the tax rate on labor of 2 percent. As a consequence of this taxation shift, welfare increases by about 1 percent. The reduction in capital taxation induced by capital market liberalization is welfare improving because, in the absence of capital mobility, the time-consistent policies over-tax capital.     

中国国有工业企业劳动力冗员问题研究

科尔奈发展的预算软约束理论提出了一个引人注目的关于国营企业冗员现象的解释。然而这类文献有时忽略这样一种现象,即政府、特别是转型经济中的政府往往会让国有企业(SOES)追求一些非经济目标,并通过补贴和政策性贷款来为此提供资助。通过对大约700家国有企业的研究,我们发现在不减轻企业社会负担的情况下,预算约束的硬化是直接导致九十年代初中国国企冗员上升的主要原因之一。     

中国地方政府扩张偏向的财政行为:观察与解释

本文考察了中国地方政府的扩张偏向的财政行为。本文认为扩张偏向的财政行为是中国式的分权治理模式与缺乏良好制度约束相互作用的结果。本文利用中国28个地区的1994—2004年的非平衡面板数据和Probit模型方法验证了这个假说。本文的政策含义是,要使地方政府执行有利于宏观经济稳定的财政政策,除需要良好的制度基础设施之外,最根本的还是要将中国式分权治理模式中以GDP为主的政绩考核机制调整为以经济稳定优先并兼顾民意的政府考核机制。     

School Education,Learning‐by‐Doing,and Fertility in Economic Development

We examine the policy implications of relaxing constraints on the educational choice of individuals for economic development. Distinguishing human capital accumulation through schooling and through learning‐by‐doing and knowledge spillovers, we show that in the earlier stages of development, mitigating and eventually eliminating constraints on school education would be necessary for even further economic development. Expanded school education increases the income of individuals and encourages physical capital accumulation, which enlarges productive knowledge through implementation and operations. The increased labor productivity thus boosts economic growth. In the process, the fertility rate will decline because of the increased education cost per child.     

Money power of Capital and Production of ‘New State Spaces’: A View from the Global South

An array of innovative financial and monetary institutional and policy initiatives recently emerged across the Global South at various spatial scales: (1) the deployment of national ‘self-insurance’ strategies such as large foreign reserve accumulation, different forms of capital controls, and currency market interventions; (2) the multiplication of bilateral, sub-regional, and regional financial and monetary mechanisms, including currency swaps and reserve-pooling arrangements, credit lines, bilateral aid, and development finance; and (3) a growing participation and assertiveness in multilateral financial arrangements. After critically reviewing the existing literatures – the international political economy (IPE) of ‘policy space’ and the IPE of ‘financial statecraft’ – the paper deploys a ‘scalar-relational’ critical IPE approach and interprets these policy initiatives in terms of a crisis-driven production of ‘new state spaces’ across the Global South, in the context of the current period of credit-led capital accumulation. The paper argues that this process has been characterised by the contradictory extension, intensification and growing complexity of the tasks taken on by the capitalist state at various scale levels, resulting in the increasing entanglement of state power in the nested hierarchy of monetary relations, from the global scale to bodies and subjectivities.     

Policy effects on transitional welfare in an overlapping generations model: A pay-as-you-go pension reconsidered

We study the welfare effects of a pay-as-you-go (PAYG) pension system in transition, as well as in the steady state, by showing how the total welfare effects are determined by a cumulative effect on capital. Theoretical studies have shown that the introduction of a PAYG pension system reduces steady-state welfare under dynamic efficiency. Nevertheless, such pension systems have been widely adopted in the real world. To explain this, we algebraically and graphically prove that the PAYG pension system could be Pareto-improving in transition under dynamic efficiency. Similarly, it is acknowledged that this pension system should be introduced under dynamic inefficiency because it improves steady-state welfare. However, we show that the PAYG pension system may be Pareto-deteriorating in transition. Our findings imply that governments adopt PAYG pension systems to achieve policy targets other than long-run welfare maximization.     

Human capital investment and debt constraints

When young individuals face binding debt constraints, their human capital investments will be insufficiently financed by private creditors. If generations overlap, then a well-designed fiscal policy may be able to improve human capital investments by replacing missing capital markets with an intergenerational transfer scheme. The optimal (balanced budget) fiscal policy in this context entails the joint provision of an education subsidy for the young and a pension program for the old, financed with a tax on those in their peak earning years. We demonstrate, however, that the desirability of such a cradle-to-grave policy depends crucially on the assumption of an exogenous debt constraint. If debt constraints arise endogenously for reasons of limited commitment, then the optimal (balanced budget) fiscal policy looks radically different. Furthermore, we find that cradle-to-grave type policy interventions may actually lead to lower levels of human capital investment as altered default incentives induce private creditors to contract the supply of student loans by an amount greater than the subsidy. In some cases, the constrained-optimal policy entails zero intervention. These results highlight the importance of taking seriously the reasons for why debt constraints exist.     

Environmental quality,the macroeconomy,and intergenerational distribution

The paper studies the dynamic allocation effects and intergenerational welfare consequences of environmental taxes. To this end, environmental externalities are introduced in a Blanchard–Yaari overlapping generations model of a small open economy. A rise in environmental taxes – taking into account pre-existing distortionary taxes and endogenous labor supply – is shown to yield an efficiency gain if agents care enough for the environment. The benefits are unevenly distributed across generations because agents are heterogeneous in their capital ownership. An accompanying debt policy can be designed – prescribing debt accumulation at impact and debt redemption in the new steady state – to ensure everybody gains to the same extent. With lump-sum recycling of environmental tax revenue, aggregate employment is unaffected in the short run, but falls in the long run. Furthermore, it raises environmental quality more in the long run than in the short run. Recycling revenue through a cut in labor taxes, however, is shown to yield a rise in employment in the short run, which disappears during transition. In the new steady state, environmental quality is higher at the expense of a lower level of employment.     

Earthquake hazard and civic capital

We examine the empirical relationship between the exposure to earthquake hazard and civic capital in Italian municipalities. Drawing on the Italian National Institute of Geophysics and Volcanology, we find that earthquake hazard increases civic capital. We exploit variation across neighboring municipalities and use a neighbor-pair fixed effect estimator to establish a causal link between earthquake hazard and the accumulation of civic capital. We decompose the effect of earthquake hazard variation along four dimensions – frequency, space, magnitude, and timing – and observe that the effect is mostly explained by high-magnitude seismic events in the past. Our results are in line with the intuition that cooperative social norms build over a very long time span.     

Distorted Time Preferences and Time-to-Build in the Transition to a Low-Carbon Energy Industry

We study the welfare-theoretic consequences of diverging social and private time-preference rates and time-to-build for the transition to a low-carbon energy industry. We show that time-to-build, a prevalent characteristic of capital accumulation in the energy sector, amplifies the distortion induced by the split discount rates. Thus, these two characteristics create in a mutually reinforcing way less favorable circumstances for the introduction of new clean energy technologies as compared to the social optimum, even if welfare losses from emissions are internalized. We discuss resulting policy implications with particular emphasis on the energy sector.     

Monetary policy with heterogeneous agents and borrowing constraints

We show that the long-run neutrality of inflation on capital accumulation obtained in complete market models no longer holds when households face binding credit constraints. Borrowing-constrained households are not able to rebalance their financial portfolio when inflation varies, and thus adjust their money holdings differently compared to unconstrained households. This heterogeneity leads to a new precautionary savings motive, which implies that inflation increases capital accumulation. We quantify the importance of this new channel in an incomplete market model where the traditional redistributive effects of inflation are also introduced. We show that this model provides a quantitative rationale for the observed hump-shaped relationship between inflation and capital accumulation.     

Competitive equilibria with limited enforcement

We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.     

Institutions,human capital,and growth: The institutional mechanism

This paper contributes to the debate on the relationship between human capital, institutions, and economic growth. The paper first develops a micro-foundation model linking institutions to human capital. The advantage of our modeling strategy is that the human capital accumulation function is derived from an endogenous process. The theoretical model shows that improvements in the quality of institutions foster human capital accumulation, decrease income inequality and change the historical development path. The paper uses cross-country panel data from 1965 to 2005 to test some of the model's propositions and finds that deep structures or structural institutions – which are very persistent and rooted on the historical development path of an economy – affect long-term economic performance, while political institutions are uncorrelated with productivity and long-term economic growth. The empirical estimates also show that growth of physical and human capital – instead of levels – determines long-run economic growth.     

Sudden stops in a currency union – some lessons from the euro area

During the Great Financial Crisis several euro area Member States with current account deficits were subject to sharp reversals of private capital flows. We examine how the specific policy rules of the euro area's payments system TARGET2 affects the macroeconomic adjustments to sudden stops. We find that – in the short run – public capital flows in form of TARGET2 help euro area‐deficit countries to stabilize output, consumption, and investment after a sudden stop of private capital inflows. In the long run, however, euro area countries suffer under a prolonged economic recovery and accumulated large public debt as well as higher welfare losses relative to euro peggers.