Saving glut or… investment famine?

by Ugo Pagano

The financial crisis is often blamed on a saving glut, while protectionism is almost unanimously viewed as its most dangerous potential consequence. But it is more likely that the crisis is due to a famine of investments due partly to protectionism camouflaged behind the blessed principles of ‘intellectual property’.

The immediate causes of the crisis are often seen as being the lack of regulation and the expansionary policies of the Fed, which by keeping interest rates artificially low, has provoked an excessive supply of saving. As amply explained by the well-known models of adverse selection, the latter has in turn produced a growing pool of toxic debt, with the consequences by now evident worldwide. According to an article in the Economist of last January, a beneficial “flow” of saving has turned into a disastrous “flood”, but this flood is more due to “global imbalances” generated abroad than being an endogenous product of the American economy and policies. Governor Bernanke has long argued that the role of the Fed in credit expansion has been marginal, and that the prime cause of the crisis has been a saving glut forced on the United States by massive inflows of savings from other countries.


There is something appealingly infantile in Bernanke’s argument. For many of us (and for me at my mother’s), ‘bellyfuls’ and the indigestion which they cause are due to the excellent and over-abundant food that is served. The real weakness in Bernanke’s thesis, however, is not so much its infantilism as the inaccuracy of its content. As shown by the data set out in the Bank of France paper by Moec and Frey, there has been no overabundance of savings in other countries, but rather a famine of investments. In recent years, savings have not grown around the world; instead, and especially outside the United States, investments have diminished. In other words, the abundance of food in America has been the result of a blockage in the digestive systems of its neighbours. It can be argued that, in this situation, the Americans have generously done the digesting on behalf of other countries, and give them transfusions of pre-digested food. Part of the saving absorbed by America, in fact, has been injected in the form of direct investments in countries suffering from blockages in their digestive systems. Is it therefore not the fault of the neighbours if they have been unable to create suitable investment opportunities and if, moreover, they have poisoned the Americans with their flood of savings?

The problem is that the lobbies for the American multinationals, by applying pressure for the new architecture of international trade founded at Marrakech in 1994, have played a major role in causing the blockages of their competitors’ digestive systems. We may start from 1992, when George Bush Senior concluded a presidency replete with success in foreign policy which saw, among other things, the collapse of the socialist economies and the disintegration of the Soviet Union. Yet the slogan “It’s the economy, stupid!” was enough to make him lose the elections against Clinton. The cause was not so much the economic crisis which began in 1990 as the consolidated perception that the “American model” was falling behind the alternative Japanese and German models. In the previous decade, a huge body of studies had described the miracles of Japanese management and suggested various ways in which the Americans could imitate it. By the end of the 1990s the situation had gone into reverse. The United States (and the United Kingdom) had become the model to imitate, and yesterday’s heroes (not only Germany and Japan but, after the 1997 crisis, also all the Asian tigers) strove to restructure their economies on the so-called Anglo-American model. In the meantime the Chinese economy had undergone rapid development. What had led to this unexpected reversal?

The explanation may lie in the standard liberalist refrain: only the Americans (and the British) had suddenly have rediscovered the virtues of the market, thus offering numerous investment opportunities precluded to their rigid competitors. However, on closer inspection, it was not the virtues of competition, but rather the advantages of intellectual monopoly, which enabled the United States rapidly to catch up with the other Western economies. Indeed, in the first half of the 1990s, the United States no longer had global military and political rivals. It was thus able to reorganize the world economy so as to enhance its scientific and technological leadership, and above all its monopoly positions, to the maximum.

The salient features of the new world were contained in the TRIPS agreement signed at Marrakech on 15 April 1994. Significantly, TRIPS was the 1C annex to the agreement founding the WTO. The preamble to TRIPS states as self-evidently obvious that “intellectual property rights are private rights” like all other private property rights. Yet this obviousness would have been unknown to an innovation economist of Schumpeter’s calibre, and it has been recently disputed in Boldrin and Levine’s fine book Against Intellectual Monopoly. Whilst the granting of property rights (including intellectual ones) constituted the natural basis for free trade, ratification of TRIPS necessarily created an annex to the WTO agreements, and an obligatory requisite for access to international trade. Unlike all previous international agreements on intellectual property, the inclusion of TRIPS in the WTO constitution created an efficient mechanism with which to enforce intellectual property rights. States could now be disciplined through the institutions of the WTO itself; and, in extreme cases, access to international trade by intellectual property “thieves” could be restricted.

Notwithstanding the seductive rhetoric extolling free trade and private property, the Marrakech agreement surreptitiously introduced super-tariffs such that the most extreme protectionism pales into insignificance. Since TRIPS, intellectual property rights have become global monopolies; that is, in a certain sense, customs tariffs of almost infinite magnitude. Not only are competitors of other countries not allowed to export a good to the country of the intellectual monopolist, they are also prohibited from producing it in their own country. When multinationals of some countries organize themselves into “patent pools”, the economic desertification of that sector in other countries becomes inevitable, resembling Britain’s erstwhile levies on its colonies, especially India (Marcello De Cecco, Money and Empire, Rowman and Littlefield, 1975).

With notable exceptions like Krugman, a chorus of alarm at the dangers of impending protectionism has been raised in recent months. It is claimed that one of the worse effects of financial crises is the disruption of free trade. Yet the relationship between the two phenomena has a chicken-and-egg complexity which does not admit to easy solutions. It is certainly true that the crisis is generating protectionist attitudes and the resumption of economic nationalism. But it also true that protectionism, by appropriating the blessed principle of private property rights, has helped produce the financial crisis. It initially only reduced opportunities for investment outside the United States, while the latter, thanks to direct investments by its multinationals, for a certain time also ‘digested’ for others. In fact, as Moec and Frey show, the crisis was preceded primarily by a fall of investments outside America. This fall was initially attenuated by the direct investments of multinationals endowed with an unbeatable recipe based on American intellectual monopoly and low-cost Chinese labour.

Added to the fall of investments by other countries was a gradual digestive blockage of the American multinationals themselves. Already in July 2005 an article in the Economist talked of a “corporate savings glut”, and its subtitle noted that the great corporations, more than the emerging economies, had become the world leaders of the global switch to thrift. The same article then referred to Keynes’ famous paradox of thrift whereby if everyone wants to save, they must (in the absence of investments) reduce their saving … though they naturally first go through speculative bubbles and various “financial innovations”.

In conclusion, although the financial crises have provoked protectionism, the super-protectionism of intellectual property has driven down investments. This has happened in two stages (largely overlapping in time) and through two mechanisms. The first stage after TRIPS saw the launching of the Chinese-American model and a shift to investments designed to consolidate American intellectual monopolies. As new spaces opened up for the American companies super-endowed with these “resources”, numerous opportunities for investment were closed to Japan and the former Asian tigers, which had neither America’s monopolistic endowment nor China’s lower costs. This phase culminated in the Asian crisis of 1997. In the second stage, because of the mechanisms described in the well-known tragedies of the anti-commons, world intellectual monopolies became too pervasive and began to block each other. At this point the accumulation mechanism used by the great “knowledge owners” became jammed as well. The fall in investments therefore created some of the factors that led to the financial crisis, and the latter in its turn drove investments down to further depths from which it will be difficult to re-emerge without a significant number of economic policy measures. One such measure should engender an investment super-multiplier by combining Keynesian policies, on the one hand, with the capacity for knowledge to be used infinite times without deterioration on the other. Support for aggregate demand and the re-appropriation of knowledge may constitute the two components of a single policy intended to free innovation from the cage of intellectual monopoly and to furnish greater investment opportunities for everyone.