Clusters

I saw a tweet that says “a bit tough being a marxist in kuwait because nothing here makes f*cking sense and marxism is a science” and wanted to share some thoughts about these matters.

Stratification of the World-Economy

Subsection headline indeed refers to the Arrighi & Drangel (1986) piece (AD¹ from now on). They came up with a theoretical and empirical investigation of the semi-periphery: Wallerstein brings up the concept, with some ambiguities while the modernization theory would see what could be thought as semi-periphery as a transitional state and the dependency theory would see it as residual. I’m no expert in this literature, so I will follow the AD explanation: Wallerstein’s world is structured in core-periphery relations, yet, unlike the dependency theory where national and regional economies are connected, these relations connect economic activities structured in commodity chains that cut across state boundaries. “All states enclose within their boundaries both core and peripheral activities” say AD. Their Wallerstein quotation from The Capitalist World Economy (1979) stands out for other reasons that I want to emphasize later, but for now: “ (…) within a capitalist  world-economy, all states cannot `develop’ simultaneously by definition, since the system functions by virtue of having unequal core and peripheral regions”, economists would’ve realized these are bold claims and thus fruitful/demanding research areas.

So, ambiguities. How do we know it’s a semi-periphery country when we see one? Wallerstein goes “the semi-peripheral country stands in between in terms of the products it exports and in terms of the wage levels and profit margins it knows” and “direct and immediate interest of the state as a political machinery in the control of the market (internal and international) is greater than in either core or the peripheral states” than follows a list of countries that are considered semi-peripheral.

To make the differences even more explicit, AD point out i) classical economics/its’ Marxian critique focuses on the distribution of the total product among labor incomes, property incomes and profit while world-system theory focuses on the distribution of the total product among the various nodes of the commodity chain, ii) in that, the classicals and Marxists considered the competitive scenario as their base scenario while world-system theory puts the “inequality of rewards” to the center of their conceptualizations (a similar emphasis on the monopoly can be found in Newton’s work²). AD’s claim is that in the above-described world core-periphery relations, the use of the term “surplus” is neither necessary nor helpful; what is required is actors that try to shift the burden of competition onto others, constantly. Sounds Schumpeterian? Well, it is Schumpeterian. AD say “Just as Schumpeter assumed that profit-oriented innovations and their effects (the dampening of competition at one pole and its intensification at another pole) cluster in time, so we can assume (irrespective of the validity of the other claim) that they cluster in space”.

I find two points a little unclear: i) “No particular activity (whether defined in terms of its output or of the technique used) is inherently core-like or periphery like (…) Nonetheless, there are always some products and techniques that are core-like and others that are periphery-like at any given time”, ii) “The clustering of core and peripheral activities into two different groups of enterprises does not in and by itself produce a similar polarization of the space of the world-economy into core and peripheral zones”. So, being in North America or in Central Europe may not be enough to be core, cannot classify economies based on their location; having a significant share of your economy constituted by what is thought to be a high profit-high wage sector may not be enough to be core, cannot classify economies based on dominant industry shares. It goes even further where AD say “It must be stated at the outset that there is no operational way of empirically distinguishing between peripheral and core-like activities and therefore of classifying states according to the mix of core-peripheral activities that fall under their jurisdiction”, yet, they wonder if there are some emergent patterns that indicate a periphery, semi-periphery and core structure. To do so, they plot the log[Gross National Product Per Capita] on x-axis and corresponding world population on y-axis, expecting to see a three mode distribution of world population.

Here’s what I did, I checked the Penn World Tables, and picked the GDP and population data for the year 2005. I wanted it to be pre 2007 crisis, post USSR, post China joining the WTO, I’m sure a better year could’ve been picked and AD is more interested in the time evolution anyway, but here’s what I got at the end:

If I haven’t made a mistake, pretty similar with the AD finding of three modal structures. With a little smoothing and everything the same argument could be made and the analysis could be extended to today.

What is missing is the names of the countries in the x-axis, since these three modes can be very counter-intuitive. AD extends their analysis to different years and checks if the countries are matching from year to year, I will take a different path and again, I will use a method that I’m absolutely not an expert on (the whole blog thing is about sharing some thoughts, reading-writing a little and applying these tools while doing so anyway) and try to adapt some clustering analysis.

Above, I have used the log of the GDP (a better measure and a more detailed analysis is suggested in Junfu’s paper³) and log of the population itself, for the year 2005 again (I have not checked any of the countries names, this is how they are named in the dataset, my apologies if there are any mistakes). I have adapted an agglomeration method for finding the clusters (ward.D2) and measures are scaled (subtract mean divide by the standard deviation). I was thinking of comparing different methods but don’t want to overcrowd here with that, it will be a long post anyway. And here we are, the US and Bangladesh; Nigeria and Japan, clustered together. Technically this does make sense: there is no industrial composition or geographical requirements.

Now, this may be more informative as all names are explicitly stated and hierarchies are also more explicit. The bottom-up approach suggests there are more than one hierarchy in the world economy and a similar observation could’ve been made from the AD findings as well (I don’t think they deny this possibility). With a three modal structure, I don’t think we come to completely unsatisfactory conclusions at all, indeed this is what you would get if you base your analysis on the GDP and population. Besides, the framework itself is a little agnostic regarding requirements for the clusters.

But I feel like asking, what was this all about? If the Schumpeterian view was that the actors will try to push the competition to each other constantly and that will form some global structures, irrespective of the economic nodes’ industrial composition and location what exactly we make out of this? AD’s point seems to be, i) the world economy moved as if their hypothesis that three modal structure exists, ii) the world economy cannot be described with a catching up scenario, since there always exists three modes, iii) the world economy show patterns more consistent with the dependency theories, while together with the modernization theories, it still cannot account for the three modal character. In a more straightforward explanation AD state the semi-periphery is the world of political turmoil and the great debtor states (other than the US) and “they have to run fast in order to remain where they are”. According to AD “After `euro-centrism’ and `third-worldism’ the time is ripe for a closer look at the semiperipheral zone”.

I don’t think AD made these last statements out of convenience.

Unequal Exchange

I believe a more explicit (less self-censored I would even dare to say) version of such arguments were made in Arghiri (1972)⁴. Arghiri’s argument is explicitly based on Marx’s equilibrium analysis, only that, he brought up the international exchange and asked what happens to the prices of production when we allow the international prices of production to emerge. For this relatively unexplored area, Arghiri too goes to a substitution and instead of a variation in a particular industry’s wages he modifies Marx’s statement and considers a variation in wages of a particular region: “`In case of a partial, or local rise in wages’ (…) `that is, a rise only in some branches of production, or certain regions or countries, a local rise in prices of production of these branches, or of these regions or countries, may follow.’” [Italics belong to Arghiri]. Arghiri’s argument is that when unequal surplus values are assumed in between two countries, in order to keep the equalized rate of profit, wage differentials need to be introduced. Arghiri points out to the existence of nonequivalence in two potential ways: i) when the wage rates are the same but the organic compositions of capital are different, ii) when there are differences in both wages and organic compositions. He refused to call the first version a basis for the unequal exchange, since “ (…) this kind of nonequivalence exists in every exchange that occurs under the capitalist system, whether inside or outside a nation”.

The significance of this argument is as follows: if we start from the differences in the organic compositions affecting international prices, we assume equalization of the profit rate implicitly, which then implies wage rates can affect the prices, says Arghiri and continues “Could it be that on reaching this point, Marxist thought has been inhibited by the dreadful implications of such a proposition in relation to the international solidarity of working people?”. Arghiri states this possibility is not overlooked yet he claims by tying it only to a certain phase of the current system and limiting it only to an upper-stratum of the workers, it was characterized as a temporary phenomenon.

Yet, at least the claim is that, inequality in exchange between countries is consistent. This view has another important implication, I’ll just quote it here and you be the judge: “ (…) it is the slow but steady growth in awareness by the masses that they belong to privileged exploiting nations that has obliged the leaders of their parties to revise their ideologies so as not lose their clientele”.

What strikes me regarding the, let’s call them “so far mentioned persistent regional inequality studies”, is that all of them (there are numerous ways in which one could legitimize unequal exchange in any modelling framework) are steady state analyses. Let me be more explicit, I came across to a talk couple of months ago where a transfer -I don’t know call it wealth call it value- from one part of the world to the other part of the world was described as a natural, inescapable phenomenon. It is indeed a steady state outcome, as well as an equilibrium, according to these views after all, and I got a little annoyed by this description. This is the thing about models, you may like one as it may enable you to produce certain phenomenon unlike other models, yet, they all come with some other implications embedded. Now, the MENA social scientist is able to center MENA into their analysis, but let’s be honest, at the cost of developing almost a vulgar view about the “core”.

Classical Views

Hauner, Milanovic and Naidu has a very nice paper⁵ exploring the relevance of classical views on what you may call globalization. They argue the increase in the income and wealth inequality in major countries has produced an increase in the demand for financial assets where the rich tended to invest overwhelmingly in foreign assets since when adjusted for risk they were more profitable and to protect such foreign assets, invested heavily into military. They state they don’t claim to be explaining the reason of the outbreak of the war, however, they do show the empirical relevance of the main theories of global expansion, meaning, “the key ingredients needed for the war were present”. They identify two main views: i) Hobson’s view that is unequal distribution of income in advanced capitalist countries leading to secular underconsumption due to lack of purchasing power of the poorer and a glut of savings by the rich due to lack of profitable investment opportunities, ending up with either lending to foreign governments in the form of purchase of their bonds or foreign direct investments, while at the same time investing into the military to ensure the safety of these foreign investments, ii) Lenin/Hilferding/Luxemburg (LHL) view that is a tendential fall in the rate of profit/national cartels obtaining profits due to tariffs/permanent crisis of realization of surplus value.

A “briefest possible definition” could be found in LHL as (1) the existence of monopolies which play a decisive role in economic life, (2) the merging of bank capital with industrial capital, (3) the export of capital, (4) the formation of international monopolists, (5) the territorial division of the whole world among the biggest firms; I would add, from the same source (1.1) due to monopolies, a tendency of stagnation and decay, (5.1) the world being divided into a handful of rentier states (so-called coupon clippers) and vast majority of debtor states.

I was planning to share the data for discussing the relevance of these arguments but 1-2-3 are topics that are studied in any economics department in any part of the world lately, which is another reason I thought one may want to revisit these old debates. About 5 and 5.1, the above-mentioned schools of thought have come up with empirical evidence as well as theoretical models. I believe, however, there is a gap in between these two views: “Finance capital and the trusts do not diminish but increase the differences in the rate of growth of the various parts of the world economy. Once the relation of forces is changed, what other solution of the contradictions can be found under capitalism than that of force?”. Overall, I’m not under the impression that the early 20^th century thinkers were seeing the stratification of the world economy as a steady state, or an equilibrium outcome that is resistant to shocks of different magnitudes; instead, they describe a highly unstable system that is subject to change: “Consider grains of sand being slowly piled on a table. As we drop each grain, it might land on a stable spot and increase the pile, but in doing so it makes that spot less stable than it was before. Alternatively, it might land on unstable part of the pile, triggering an avalanche” (from John H. Miller’s A Crude Look at the Whole)

Equilibrium

How’s it the case that rather early thinkers were able to produce the stratified world economy outcome in their competitive model? In LHL the existence of monopolies and finance capital is re-stated numerous times yet particularly Luxemburg’s argument relies only on the reproduction schemes and lack of adequate demand and a need of expansion of markets, and that’s that.

The modeling framework one puts themselves in, indeed determines more than the responses to the immediate questions on the table. Realize how central the “inequality of return” piece of the argument is, in pretty much all of the first schools I have tried to describe. One could see this as a result of some sort of an “imperfection”, pointing out to the monopolies, or as an outcome of an evolutionary process of innovation and disequilibrium. Or, as in the Laws of Chaos by Farjoun & Machover “Due to competition, at any given time the amount of capital yielding extreme rates of profit (whether extremely high or extremely low) is relatively small, and most chunks of capital that find themselves in such a position do not endure in it for very long; but at the same time competition continually gives rise to new disparities”, which sees the non-uniform profit rate, wage rate or prices in general not as a mistake in the system, but as the normal state of the world where the equilibrium state comes out as a distribution.

Which, then, should cast some further doubts on the claims about the way in which stratification of the world economy (countries and regions) occurs, shouldn’t it?

1- Arrighi, G., & Drangel, J. (1986). The stratification of the world-economy: an exploration of the semiperipheral zone. Review (Fernand Braudel Center), 10(1), 9-74.

2-https://viewpointmag.com/2018/06/11/intercommunalism-1974/

3-http://jwsr.pitt.edu/ojs/jwsr/article/view/1006

4-Emmanuel, Arghiri. Unequal exchange. Vol. 197. No. 2. New York: Monthly Review Press, 1972.

5-Hauner, Thomas, Branko Milanovic, and Suresh Naidu. "Inequality, foreign investment, and imperialism." (2017).