Towards a Syrian Political Economy of Productive Powers
The ideas of the German-American economist Friedrich List can create an equitable political economy in Syria.
What constitutes the wealth of a nation? Under the prevailing economic orthodoxy of our time, wealth creation is considered the product of productive economic activity through free-market systems. But this generalisation has two flaws:
Putting the cart before the horse by focusing on market-based mechanisms as the source of wealth, rather than one of the tools that policymakers can use to create wealth.
Including rent-seeking as a productive economic activity, even though rent-seeking does not create wealth, but merely shifts the use of resources from productive to unproductive.
Rent, undeniably, is a form of wealth, and those who collect ever larger rents are, undeniably, getting wealthier. Rent-extracting firms and individuals are members of a national economy, so any increase in their wealth must mean an increase in the national wealth. They may employ many people to generate rents and spend them within the national economy, contributing to the wealth of others.
Entire populations have grown incredibly wealthy based on economy-wide rent extraction. The Arab oil economies are a classic example. It is undeniable that, for example, Saudi Arabia, with a GDP per capita (GDPPC) of $32,000 is substantially richer than manufacturing-based China, where GDPPC is roughly $12,500. But is Saudi Arabia a wealthier nation than China?
The Theory of Productive Powers
If he were still alive today, the 19th-century German political economist, Friedrich List, would have answered that question with a vigorous “no”. List’s seminal work, The National System of Political Economy, has largely been forgotten by economic departments in western academia. But List’s theory of political economy contributed to the blueprint for the remarkable economic development of Prussia (later, the German Empire) in the 19th century, and Japan, Taiwan, South Korea and China in the 20th century. Little known is the influence that List also had on America’s early economic thought through the American School of Capitalism, pioneered by thinkers and politicians like Alexander Hamilton and Henry Clay.
List introduced a crucial distinction when it comes to ‘classical’ interpretations of the meaning of wealth, forcing us to think of it as more than mere exchange value. If List’s theory holds, we would be deluding ourselves if we thought that Saudi Arabia’s superior GDPPC to China is a true indicator of greater wealth – or for that matter, power. List would argue that China is far more prosperous than Saudi Arabia because a nation’s prosperity lies in its capacity to produce wealth in the future, rather than the total exchange value it possesses in the present.
List called this capacity to produce wealth the productive powers of a nation. His theory of productive powers is an expansive understanding of national wealth that, while not negating exchange value, nevertheless subsumes it within a more holistic and long-term vision of wealth in which productive powers are the principle and foundation of national wealth.
List contrasts his theory of productive powers with Adam Smith’s narrower, more short-term “theory of [exchange] values.” The thrust of his argument is captured in a hypothetical story of a farmer with five sons.
The farmer and his sons work the land and grow crops, which they sell at the market for a profit. Every year, the farmer takes ‘1000 marks’ (let’s call them dollars) of this profit and deposits it in the bank to earn interest. It is undeniable that year after year, the farmer grows wealthier as the amount of cash in his bank account grows exponentially. The farmer dies a rich man and at his death, his savings and land are divided up among his five sons who now farm their own plots, each one-fifth of the size of their father’s, exactly as they used to do on their father’s land. However, after the initial inheritance windfall that makes the sons briefly rich, each son eventually becomes much poorer than their father as they struggle to eke out any profit from such a small plot of land, using up all their inheritance in the process just to keep their head above water.
List contrasts this scenario with a farmer who uses his profits to invest in the productive capacity of his farm and family. This farmer, instead of annually stashing away 1000 dollars in the bank, spends it on sending three of his sons away to learn trades and professions and educating the remaining two sons in the most cutting-edge agricultural techniques and technology. When he dies, three of his sons are already earning more than they ever would have as farmers, engaged as they are in high-value trades and professions. The other two sons, possessing advanced agricultural knowledge, can earn far more profit per square metre from their 50% smaller farms than their father was ever able to do.
The moral of List’s story is clear: a nation may well regard itself as becoming more prosperous as its companies register larger profits, its workers take home larger wages, the value of its assets increase, and its consumers acquire a greater number and higher value of goods and services – but it is a house of cards if little attention is paid to cultivating the roots and principles of all that wealth, an economy’s productive powers, which are necessary to sustain and grow the nation’s capacity to create wealth far into the future. The truly prosperous nation is not the nation that piles up riches but the nation whose productive powers are constantly expanding.
By productive powers, List was not referring to the means of production themselves. What List meant by productive powers is the entire ecosystem of concrete public infrastructure, intangible institutions, and human skill and expertise upon which the means of production depend for their optimal use in the present and their capacity to be used more effectively in the future. Productive powers are what facilitate an economic developmental path of increasingly expansive and sophisticated production. Developing productive powers means everything from investments in transport infrastructure and technological research and development programmes, the improvement of education and healthcare provision, the development of efficient and competent bureaucratic institutions, the maintenance of law and order, the promulgation of laws and regulations that favour productive activities, the protection of a reliable and trustworthy judicial system, to even the promotion of art and religion, which List saw as vital for maintaining a healthy human spirit capable of creativity and self-discipline.
While List’s discussion of ‘powers of production’ focused on all those more subtle forces that underwrite production (the ‘powers’), those forces had one objective: production. Production is the process by which truly novel value is generated in an economy through the creation of outputs – products – that are more valuable than the sum of their material and immaterial inputs. In other words, production is fundamentally about ‘making things’.
For List, writing at the height of the Industrial Revolution, production was synonymous with industrial manufacturing, but production encompasses both the creation of concrete items and intangible products, such as software. Production explicitly excludes any form of wealth generation through arbitrage, speculation, exploitation of scarcity (rent-seeking), lending at interest, or outright gambling, all of which are non-productive activities. All of these forms of economic activity merely extract and shift wealth around an economy, or from one economy to another, rather than generate truly new wealth through a process of production.
On List’s account of wealth, it is hard to argue that China is less wealthy or prosperous than Saudi Arabia. China is an industrial powerhouse with a diverse and sophisticated manufacturing base, manufacturing everything from steel and microchips to electric car batteries and 5th-generation fighter jets. This manufacturing base is underwritten by a well-run and self-sustaining public administration, including a highly competent economic management bureaucracy, a vast and well-funded research and development base that allows China to produce high-quality indigenous technologies, an increasingly world-class higher education system, and an excellent public transport system.
By contrast, (classically) richer Saudi Arabia is a rentier economy built principally on the exploitation of its natural hydrocarbon gifts. The Kingdom produces very little and cannot produce much in future, owing, in part, to its public administration being hollowed out by foreign management consultants, combined with decades of underinvestment in developing home-grown institutions capable of researching and developing advanced technologies.
While Saudi Arabia’s Vision 2030 may be attempting to remedy historic dependence on oil, it appears to be doing so by pouring resources into a new type of non-productive economy built around tourism, luxury real estate development, and the expansion of domestic retail consumption – of almost exclusively imported entertainment services and consumer goods.
The comparison of China and Saudi Arabia also highlights the deep symbiosis - possibly even a dialectical relationship - between how an economy generates its income (rent-seeking/other non-productive activity or production) and the productive powers of an economy. China has become the world’s foremost manufacturing power and, as a result, has developed a comprehensive national ecosystem of productive powers geared toward sustaining and expanding its capacity to make and create.
The inverse is equally true: China has developed a comprehensive national ecosystem geared toward sustaining and expanding its capacity to make and create, and as a result, has been successful in realising its ambitions to become the world’s greatest manufacturing hub. It is a chicken and egg scenario and almost impossible to untangle the two.
Saudi Arabia’s rentier hydrocarbon economy and its lack of productive powers are similarly intrinsically intertwined. While it may not be possible to untangle the threads to determine the direction of causation, what we can see is that where there are productive powers there are productive economies; where productive powers are weak, rentierism tends to thrive.
Productive Powers for Development
List’s theory of productive powers sits within his broader (and more famous) theory of state-directed, manufacturing-based economic development in which the state uses subsidies and protections to, first, develop highly productive agriculture and, subsequently, cultivate select manufacturing-for-export sectors and climb the value chain. List connected the ultimate success and sustainability of such an approach to economic development to the state’s ability to cultivate the nation’s ecosystem of productive powers, within which the actual process of production is nested and from which it draws its vitality and sustainability.
History has proven List largely right. Few countries have climbed to the top of the development ladder, and remained there, without substantial investment in their productive powers. While its fortunes are currently reversing due to rising energy prices, the longevity of German industrial success would not have been possible without the first-rate rail network it began building in the early 19th century, a feted technical/vocational education system, and a general atmosphere of orderliness, institutional predictability and rule of law.
The US may not be the industrial powerhouse it once was, but its great universities, lavishly supported by institutions such as the federal government’s National Science Foundation and filled with researchers on “genius visas”, have ensured that the US has consistently been a world leader in technological innovation in everything from medicine to AI.
Post-war Japan’s remarkable economic development was undergirded by land reform laws geared toward maximal food productivity, extensive investment in transport infrastructure and technical educational institutions, and the work of the government’s Ministry of International Trade and Industry (MITI), whose economic management bureaucrats ensured Japanese industry stayed relentlessly focused on the path of technological learning and export dominance. South Korean, Taiwanese, and post-1978 Chinese economic development has been built on the cultivation of similar productive powers to post-war Japan.
Cultivating Syria’s Productive Powers
Building an equitable, robust and dynamic Syrian political economy means incentivising productive economic activity. Productive economic activities are those relating to the process of production: marshalling of resources to create more valuable products, at least in exchange terms, than the total value of their inputs. It is the work of everyone from the designer, to the engineer, to the immediate makers of products, and the entire collection of ancillary services around production.
By contrast, non-productive activities either shift wealth around to make money out of price differentials, exploit some sort of resource scarcity, or earn money through interest. Non-productive activity includes the generation of revenue through collecting fees for the provision of services, which is to say the services sector. To say these are non-productive means of generating wealth is not to pass a moral judgement on bankers, lawyers, consultants, personal trainers, call centre workers, or tourism operators, but it is simply to say that the sectors in which they work are not related in any direct way to production.
While Syria needs great service providers, Syria must build an economy principally based on productive activities and geared toward a perpetual quantitative and qualitative expansion of that production capacity, i.e. making more and making more valuable. This is the long, grinding but ultimately most rewarding path to economic development.
Taking into account Friedrich List’s theory of productive powers, the Syrian government needs to ask itself how it would promote productive activities by directly supporting certain sectors in the economy rather than others with specific policy interventions, but also how it would indirectly promote production by cultivating a broader governmental, bureaucratic, educational, institutional, legal, regulatory, and concrete infrastructural environment geared toward fostering productive powers and away from rent extraction. In other words, capital needs to find itself in a wider ecosystem that both pushes and pulls it in the direction of growth through productive activities.
Take education, for example. The government should be thinking about how to reform the education system to gear it toward equipping young Syrians with the relevant knowledge and skills to foster a highly productive economy. Before 2011, Syria’s secondary education system was not a disaster. Arabic language and literature were generally taught to a very high standard, as were the natural sciences and mathematics, but the entire secondary education system was highly academic and failed students who may have thrived in vocational training. The university entrance system, and the social attitudes toward higher education, have also long directed an inordinate volume of the county’s brightest minds to Medicine, Dentistry and Pharmacy. Other streams of technical and vocational higher education have been neglected and undervalued by both government and society.
Syria would do well to emulate Germany’s multi-layered approach to secondary and higher education, where technical and vocational high schools and universities receive just as much government funding – and are just as highly regarded by society and the job market – as more traditional academic intuitions. Moreover Germany, as well as Japan and South Korea, have been incredibly successful in forging an almost symbiotic relationship between higher education and industry. The research and development departments of some of South Korea’s chaebols, for example, operate in many respects as de facto universities.
Or take the tax system. The Syrian government could look at making the tax system contribute to fostering an environment of productivity by reducing taxes on income from productive activities and, instead, taxing rents. One of the biggest drains on the productivity of any economy is ground rent. High ground rents reduce the profitability of any business using physical premises and they suck demand out of the economy by reducing consumers’ disposable income as they are compelled to spend a large chunk of their monthly salary on simply keeping a roof over their head. Rising ground rents are often a result of rising real estate prices, a phenomenon which often encourages speculation and real estate bubbles as the holders of capital seek to make easy money by buying up property in anticipation of its appreciation in value.
A Land Value Tax (LVT), paid on the value of land considered in its unimproved state, could remedy some of these problems by disincentivising holding real estate, thereby driving down its price and, therefore, driving down rents. A well-thought-out LVT could encourage expansion of the housing stock by incentivising land-holders to build as many homes as possible on the plots they own to maximise returns, most likely by ‘building upwards’ rather than outwards, given the unavoidable sunk cost of the LVT. An expansion of the housing stock would likely contribute to reducing rents. Moreover, the state could ringfence a portion of the LVT income for the extensive construction of social housing, possibly along the Singapore model, which would be a further means to keep housing affordable and reduce the economically damaging effects of high rents and property prices.
Alongside high ground rents, food dependency is a potentially crippling drain on the economy’s vitality. Relying on imports to feed a country is a terrible waste of foreign exchange that could be used to import more economically valuable items such as machinery and other technology. Much of the struggle of South American countries to successfully industrialise since the Second World War has been a result of dependence on cheap food imports from the US constantly eating up foreign exchange earned from exporting raw materials. A reliance on imported food also dangerously exposes a country to the unpredictable vicissitudes of the global market. Egypt, for example, has suffered from steep price inflation since the war in Ukraine disrupted global grain supply chains.
Syria needs to think about how to develop greater independence in the production of food staples in order not to fall into the food dependency trap that many developing countries have fallen into. Alongside investment in advanced irrigation technologies, Syria could take inspiration from Japan, South Korea, Taiwan, and post-’78 China, where land reforms created a system of small-scale family farms that were consistently far more productive per square metre farmed than large farms growing the same crops. These labour-intensive small farms had the added benefit of keeping a large portion of the labour force employed in productive work while manufacturing was being incubated, and they generated rural family wealth that formed a key source of demand for early domestic manufactures.
One could cite many more examples of policies that Syria could adopt to enhance the economy’s productive powers, but those three should suffice for now. The point is that Syria must become a nation of producers. It must place production, not rent-seeking or any other form of non-productive economic activity, front and centre of the national agenda. To develop an economy that thrives due to producing things of value, the government must develop a policy orientation of prioritising and promoting Syria’s powers of production rather than simply generating exchange value regardless of how. This will require creativity, fortitude and grit because it is the long, difficult and unglamorous road to development – but it is the only tried and tested road.
The alternative – an economy built on, for example, tourism, real estate development, services outsourcing, media production, and consumer spending – would be a terrible waste of the ingenuity, skill, knowledge, and spirit that the Syrian people possess in abundance. While Syria is subject to its unique conditions and will not (and cannot) become a new South Korea, China, Japan, Taiwan or Vietnam, the country would do well to draw inspiration from the path these countries followed.
Syria must aspire to become a nation “skilled-in-making” rather than “skilled-in-turning a profit”. It is the path of the craftsman rather than the merchant, the engineer rather than the banker, and the designer rather than the lawyer.
Thanks for writing. Very informative and easy to understand. May Allah ﷻ grant Syria a thriving productive economy.
This has been a delightful read, I was pleasantly surprised by the LVT proposal, I hope that the Syrian govt implements these ideas or possibly even higher some of you guys, you would do for a great think tank.