17 October 2020

Capital and Foreign Investment

'Financial History, Historical Analysis, and the New History of Finance Capital' by Barry Eichengreen in (2019) 1(1) Capitalism  20-58 comments

The traditional way of starting an essay on the history of capitalism is by not defining the term. The practice is regrettable, since it elides multiple definitions of which two most obviously stand out. For Karl Marx, the essence of capitalism was the separation of labor from the means of production, the concentration of the latter in the hands of the capitalist class, and the development of a political superstructure to secure property rights. For Milton Friedman, who positioned himself as the Marxist's mid-twentieth-century bete noire, capitalism was synonymous with markets and their association with private property and voluntary exchange. The Marxian portrait lends itself to a characterization of the economic system as unequal, exploitative, and unstable, whether due to a falling rate of profit or, in its twenty-first-century variant, an everincreasing concentration of wealth and power in the hands of the 1 percent. Friedman and his followers, on the other hand, see unregulated market exchange as expressing freedom of choice, as a vehicle of opportunity and self-improvement, and as a mechanism for competing away inefficiencies. 

Both conceptualizations are of ideal types. Both are ahistorical since they treat capitalism as a disembodied system detached from time and place. For Marx, the dynamics of the system arise out of a struggle between classes that occurs independently of the particulars of the setting. For Friedman, the magic of capitalism is its extraordinary facility at aggregating the decisions of self-interested individuals - homos economicus - into a social optimum in any context in which an unregulated market exists. 

This analysis of ideal types, whether undertaken by neoclassical economists or class theorists, appeals to neither the "new economic historians" who reside in economics departments nor to "new historians of capitalism" whose disciplinary home is history. Both are dissatisfied with the disembodied nature of such analyses. Both are concerned to understand how the response of individuals to the economic problems that they confront is shaped by a particular historical setting. Economic historians respond to this dissatisfaction by assembling large data sets that can expose the particularities and historically contingent nature of economic behavior. They use these data points of historical information on, inter alia, individual consumers, investors, and entrepreneurs, together with statistical techniques, to document actual economic behavior, dispensing with the economist's assumption of convenience, utility maximization. They use historical data to contextualize economic behavior and demonstrate how it is shaped by the specific context. 

Historians of capitalism substitute narrative for statistical methods in an effort to make their portrayal of historical action more vivid and context-specific. They invoke global history to demonstrate how national cases are embedded in a larger social and economic setting and a broader set of power relations. They embed their analyses of economic processes in the twenty-first-century historian's framework, emphasizing race, gender, and ethnicity in order to show how the dynamics of the economic order are contingent on its social underpinnings. 

Thus, economic historians and historians of capitalism see economic structure and organization as contingent. Both see it as contextually and historically specific. Both challenge the economist's conception of an ideal, rarified market. Both seek to denaturalize the economic order. In their common emphasis on how economic relations are shaped by historical context, the two schools are natural allies. 

That's the positive take, anyway. The negative take is that economic historians, concentrated in economics departments, have been corrupted by that discipline's obsession with statistical technique, causing them to focus on ever-narrower questions to which such technique can be neatly applied to the exclusion of aspects of economic behavior that are not easily measured and quantified. They narrow their audience to that small subset of historical scholars with advanced training in mathematics. Historians of capitalism, lacking that training, disregard their colleagues' statistical analyses and, all too often, the findings of a half-century of scholarship in economic history. Lacking a statistical mindset, they use evidence selectively, in a manner consistent with their grand narrative. In this view, the two sides are engaged in a dialogue of the deaf, where no communication, much less synthesis, takes place. 

Evidently, then, questions about the state of the field serve as something of a Rorschach test. Being optimistic by temperament, I will make the positive case in this essay-that dialogue and maybe even synthesis are possible. Even if dialogue and synthesis are not yet evident, the preconditions for their existence are present. Among economic historians resident in economics departments, an appreciation of the importance of large processes, of the global reach of markets and capitalism, and of the ever-present question of race never went away. Despite their reliance on statistics, economists concerned with historical issues never in fact abandoned the use of narrative.  Contrary to the belief that "the half has never been told," new economic historians never lost sight of the importance of slavery for American economic development nor of the importance of giving voice to the enslaved. Economic historians no longer feel obliged to dismiss traditional historical findings, the revolutionary fervor of the 1960s and 70s generation having given way to an awareness that iconoclasm is not everything. Nor must they defend themselves against unsympathetic colleagues, economists having been reminded of the limitations of their abstract theories and of the existence of historical precedents by the global financial crisis and therefore having grown increasingly sympathetic to the historical enterprise. 

Another basis for dialogue is that-notwithstanding the emphasis in history curricula on race, gender, ethnicity, and psychology-the old staples of business history, labor history, and financial history never actually went away. That said, the rebirth of the history of capitalism in history departments allows the history of material processes to share the stage with "literary-inflected analyses of identity formation and collective memory." Initiatives like the Cornell University boot camp for historians of capitalism seeking to acquire facility in quantitative methods and economic theory enable more scholars in history departments to access and utilize research by economic historians. 

Having emphasized the importance of time, place, and context, I will elaborate these arguments by drawing on a specific historical literature, that on the development of financial markets in the United States. This is an appropriate case for several reasons, aside from the fact that it utilizes my expertise. There is the association of capitalism with finance capitalism in the Marxist-Leninist canon and, equally, the tendency for neoclassical economists to take finance as epitomizing the efficiency of market outcomes.  There is the disproportionate attention that early practitioners of the new economic history paid to tests of financial market efficiency, but also the prominence that historians of capitalism accord to financial markets and relations. And there is the impetus that the financial crisis of 2007-2008 and its echoes of crises past gave to both the history of capitalism and economic history.

The Productivity Commission's research paper on Foreign Investment states

Over the past two centuries, foreign funding has supported Australia’s economic development by permitting more capital investment than domestic savings would have otherwise allowed 

Foreign investment brings ‘spillover’ impacts too, both positive (access to new technologies, better management practices, increased competition) and negative (potentially less competition, social and environmental costs). 

Foreign investment also stirs strong community reservations, although Australians are generally supportive of globalisation and free trade. To balance the economic benefits of foreign investment against the risks, and to maintain community confidence that foreign investment is in the national interest, Australia regulates foreign investment through a range of mechanisms. 

Since 1974, foreign acquisitions with a value above certain thresholds are screened and require a decision of the Treasurer that they are not contrary to the ‘national interest’. Recent changes have lowered these thresholds to zero for sensitive national security businesses. Australia has a broadly open policy towards foreign investment, but is more restrictive than many other advanced economies, by some measures To the extent that foreign investment proposals are blocked or discouraged, this results in lower Australian household incomes — Commission modelling estimates that these economic costs would be material, though not large. 

Foreign investment policy has become more prominent over recent years. Greater attention is being given to the difficulty of taxing multinationals and the national security risks associated with sensitive sectors or critical infrastructure assets — as, for the first time, one of our largest sources of investment is not a democracy or a military ally. 

Policy change in response has been piecemeal. Monetary thresholds for screening vary by source country, sector and type of investor, while the use of approval conditions is increasing. 

The role of the Foreign Investment Review Board has become more akin to a regulator than a gatekeeper, yet its powers and institutional arrangements have changed little. 

Overall, the design and vesting of responsibility with the Treasurer for administering the ‘national interest’ test works well. It gives flexibility to quickly adapt to new concerns, weighing up not just the costs, but also the benefits from foreign investment. The ‘negative’ nature of the test (deciding whether proposals are contrary to the national interest) also limits the risk of rejecting projects that are in the national interest. These features should be retained. 

Other aspects of the foreign investment policy framework could be improved. 

The national interest test lacks clarity around how it is interpreted from case to case. Tighter policy guidance and excluding risks from the test that can be mitigated through national regulations (such as competition) would lower compliance costs and lift investor certainty. Attaching conditions to foreign investment approvals provides only a limited means to mitigate risks. National laws and regulations, together with purpose-built and adequately-resourced regulators (such as the Australian Competition and Consumer Commission, or the Critical Infrastructure Centre), where available, should be preferred. 

Publication of reasons for decisions to block proposals, greater certainty around timelines, and aligning applications fees with the actual cost of administering the screening regime would increase transparency, enhance predictability and lower the costs of the screening regime.