Professorer er trivelige, de er stort sett noen snille gubber som vil det beste og er interessert i det meste. Men da jeg skulle fram og snakke, følte jeg meg litt som den stygge andungen. Det gikk på et vis, for temaet var seriøst. Foredraget het ”Mapping instability”, og handlet om hvorfor økonomien ikke er stabil, men trenger vekst for å unngå arbeidsløshet.
Ikke gjesp, det er dritviktig. Kanskje tar jeg munnen for full, men man får kvakke med det nebbet man har, og temaet er som sagt viktig. Det er i alle fall ikke noen tvil om at de ortodokse økonomene bommer så det suser.
Anledningen til det hele var en konferanse arrangert av Green Economics Institute. Den blir drevet av en dame som heter Miriam Kennet, og hun er en dynamo. Hun driver instituttet for beskjedne midler, stort sett prosjektstøtte. Arbeidet er viktig. Verden trenger noe nytt, for kommunismen falt for 20 år siden, og nå er markedsliberalismen i ferd med å falle, samtidig som klimaet begynner å røre på seg. Nye tanker er etterspurt – eller burde være det. Foreløpig hersker de ortodokse økonomene – dinosaurene, men de gamle dinosaurene døde da kometen kom, de nye dør vel ut på grunn av resesjon og klima. Jeg skal ikke sørge.
Så var det Oxford. Den er som en antikvitet, men en høyst levende sådan. Det bruser av studenter over alt, og pub livet er heftig. Universitetet her har eksistert siden middelalderen, og noen av bygningene er faktisk så gamle. Andre er yngre, men også i gotisk stil. Det er litt annerledes organisert. Studentene er medlemmer av et colledge. Det er 26 stykker av dem, og de er først og fremst et sted hvor man bor. Undervisningen foregår delvis på colledgene og delvis i andre bygninger.
Colledgene ligger stort sett i sentrum, det vil si, sentrum er hele byen. Det meste er gammelt og ærverdig. Vi hadde fest i et lokale som tilhørte kvekerne, enkelt men hyggelig, som man kunne vente. Jeg rakk ikke å se lokalet hvor Harry Potter ble spilt inn, for bussen gikk til Heathrow, og derfra bærer det videre – østover østover.
Forresten – Hvis noen skulle være interessert, legger jeg med den artikkelen jeg skrev til konferansen.
Mapping instability
We are all very concerned about the environment There is certainly no lack of solemn declarations, but words are words, and very little else, it seems. When it comes to practical actions the picture is a different one. We simply don’t mean what we say. Some problems, like the ozone layer depletion, have been largely solved, others have not been solved at all, they have become much worse. The far greatest of them is CO2 pollution and climate change. What was a theoretical risk thirty years ago is now a threatening reality.
One should believe it is only now that we have come to realize the graveness of the problem. But it is not so, the theoretical knowledge of climate change was well established in the seventies. Signs of environment destruction and the limits of non-renewable resources were also there. The red sign was flashing and the world should have reacted, but it did not. Instead the race towards climate disaster seemed to gain momentum. The question remains – why?
As a member of the Green Party, I started to form the question in the late nineties, and I realized that the answer must lie in economics, because in the modern world, this is the basis of politics. Seeking answers, I realized that Green Economics mostly deal with ideal systems, it discusses the systems we want to establish, but seldom mentions the prevailing system, and why it works the way it does. It makes sense, of course, to describe a better system, but one must always start with the present system, and the knowledge of this is crucial.
There are several economical schools, but the far most important, or we can say, the leading school today, is market liberalism. It is not a new school, it is one of the oldest, and it was abandoned after the crises in the thirties, but made a comeback in the late seventies when Keynesian economics proved unable to solve the problem of rising unemployment and inflation. Recently, market liberalism has also come to a dead end. We are now in the middle of a recession that resembles the crises of the thirties, and this is not unexpected, if we look at it from a historical perspective.
Experience shows that market liberalism has had a tremendous ability to promote new technologies and create economic growth, but it has grave shortcomings. Its three main flaws, or malfunctions are:
It tends to develop social and economic inequality.
It tends to run into economic crises.
It needs growth to be stable, and therefore cannot be combined with a sustainable economy.
The general reason for these flaws can be found in the central assumption, or rather dogma, that the economy, left to itself, will always move towards equilibrium. This assumption holds true for some of the movements in the economy, but for many others it is wrong.
One must be blind to believe that the economy is stable, and of course, there are many ways to explain the ups and downs which occur regularly. Most common is the assumption that the economy might suffer shocks or blows from external sources, for instance new taxes or the Arabs pressing oil prices up. But after a shock, the economy will move towards equilibrium again. Therefore the economy should be left to itself and everything will be fine.
This is a dogma, not reality, and everybody who cares to examine, will see that the economy turns more instable when it is left to itself without regulations.
The present crises will most probably last for years, and as a result the Western Economies will no longer be leading. That is OK, many would say, it also reduces consumption, and therefore lowers pollution, and reduces the risk that the climate will run wild. This might be so, but the burden will rest on the shoulders of those who already struggle to manage. There will be tragedies, and not only in Greece.
We can talk about two types of crises: Type one, the classical, which we have now, and type two, the climate/environmental/resource crises, which is slowly developing. It is still some years ahead, but when it comes, it will appear in the economy as a stagflation, and can not be fought with classical economical methods, because it is caused by physical realities.
Prices will rise, not because of the usual demand-drive mechanism, but because of a cost-push mechanism. Raw materials will be more scarce and difficult to extract, and therefore more expensive. Climate change will lead to draught and flooding, which will lower food production and send prices upwards. The cost of repairing climate damages will rise, and damage to ecological systems will lower the general biological production capability. Consequently, the cost of production will go up, and profits will go down. This means a reduction, both in investments and purchasing power. The result will be stagnation.
The classical way to counter a recession is Keynesian economics, but this cures the economy by raising consumption. This puts us in a quandary, fighting type one will bring us quicker into type two. On the other hand, we can hardly reduce consumption without triggering a recession, and as a result many people will suffer and react against this policy. They will, of course, be supported by those who don’t care for the environment. Necessary changes will postponed, and come too late to stop the climate collapsing. After that, of course, everybody will suffer.
We will have to break the connection between consumption reduction and recession, but to do so, we must first find the mechanisms that lead to instability. We can map some of them, and we will find that they can be described by imbalance, positive feedback, and game theory.
I will describe six types of mechanisms. There might be more, of course, and defining them does not necessarily tell us how to fight them. But we must start with a description, without this knowledge, we will be at a loss, unable to solve any of the problems.
The balance between wages and capital
The economy works by circulation. If products move in one direction, credits will move in the opposite direction. Problems arise when this circulation is inhibited, for instance by the wrong distribution of capital.
The total earnings of a nation, the GNP, is distributed, roughly speaking, by one part for wages, and one for profit. The first goes into savings, but the far greater part of it is circulated in the economy as consumption. The latter also goes into consumption, but most of it goes to investment.
If wages are too high, investment will be reduced, and production will go down. The lack of products relative to purchasing power will push up prices by a demand-drive mechanism. The result will be an inflation that overtakes wages, and after some time brings the economy down.
If profits are too high, wages will be too low, and purchasing power insufficient. Products will not be sold. At the same time, the capital surplus will tend to raise investment, thereby pushing more products into a market which cannot buy them. As a result the prices will go down so that products can be sold. But this requires reduced production costs. Wages will therefore be lowered, and the purchasing power will be reduced ever more. The economy will spiral downwards, followed by a deflation.
It might be obvious to investors that there are no profits in normal, productive investments, and the capital will therefore go into speculation, which sooner or later results in a bubble, followed by a breakdown.
Are there any mechanisms that automatically bring balance between production and purchasing power? Thirty years ago most people believed so, and strict market liberalists will always believe so, as a kind of dogma. But experience shows that this is not the case. The main cause of the present crises was the long time developing imbalance between wages and capital. This occurred all over the western world, but was strongest in the US. However, it was masked by cheap consumer credits. This, of course, could not be continued, and the bubble burst in 2008.
The general positive feedback mechanism
As an engineer I am familiar with positive feedback. Economists prefer to call it pro cyclic mechanisms. It goes like this: If you, for instance, want to keep an oven at a certain temperature, you install a mechanism that turns down the heat when temperature goes up, and increases it when the temperature goes down. This is a negative feedback, it works against the ongoing tendency. The opposite is a positive feedback, which strengthens the ongoing tendency, for example if the heat is turned up when the temperature rises. The latter mechanism leads to a very unstable system.
The economy has such a mechanism. If times are good, more money is earned, a greater amount goes to investment, which increases production, and with a good balance, a greater part also goes to wages, which increases consumption. As a result the economy speeds up. Good times tend to create better times. But it also functions in the opposite direction. In hard times less is earned, less goes to investment, and less to consumption. The economy shrinks. Bad times tend to create worse times.
This means that the economy seldom stands still, it either spirals upwards, often followed by inflation, or it spirals downwards, followed by deflation. Of course there are many factors modifying this, but the general tendency is there, and it means that zero growth is almost impossible to achieve. The economy simply does not stop at the zero growth level, but races past it, and descends into a recession.
What is stable, or at least partly stable, is a steady, not to big, growth rate. Economists are aware of this, and get nervous when annual growth sinks below two percent. But growth has a nasty side, it tends to be exponential, growing faster and faster. Even with two percent growth the economy will double in 36 years, and in 108 years it will be eight times as large. With such a growth, consumption of oil will also increase, possibly at a lower rate, but nevertheless, it will at last break all limits.
The general positive feedback mechanism is simple, but very hard to harness. To do so, one must control both wages and the capital flowing back into investment. This is more or less what Keynesian economy does, but Keynes did not see growth as a problem, and never tried to stop it. In the future we must control it. If not, it will break all boundaries.
The perfect market
This is nothing new, but mainstream economic theory. In a perfect market, there are many small producers. None of them are big enough to control the prices, but they are all well informed about the conditions on the market. The competition will push the prices down to a level where some cannot compete, and must leave the business. The most efficient remain, and with a reduced number of participants, the competition gets a little bit easier, and prices stabilize. We will get a very efficient production, but at a cost. In such a market the prices will stabilize at a minimum level, and this means that there will be no capital accumulation. If this is the general situation, the economy will go into stagnation.
A perfect market, under certain conditions, can develop destructive competition. This means that the prices are forced below the level where a profit is possible, and as a result, everybody is loosing money. Normally this is prevented by some of the companies leaving the business. But if the investments are high and cannot be used for other purposes (for example large chemical processing plants), closing down will mean loss of all investments, and running the business, even at a loss, remains a better alternative.
This might also occur in agriculture, because a farm is a home, often with long family traditions. A farmer sticks to his soil, even with a very low income. This was the situation in European and American agriculture in the Twenties, and as a countermeasure, subsidies and regulations were established.
In the past, authorities tried to avoid the perfect market by limiting competition. It could be done by granting companies royal privileges, or it could be done by forming cartels, who, by agreeing on a fixed price, limited competition, and prevented the collapse of prices. This was the policy of Germany from around 1860 till 1814. German industry was a great success, and British industry started to fail. Then came the first world war and put an end to the German cartels.
A perfect market has hardly ever existed, but many have come close, and it might be the cause of some of the stagnation periods. But in general, the economy avoids these traps, and even with tough competition, profits remain high enough to maintain a vigorous economy. But this means there must be something strong enough to pull the economy out of the stalemate.
Technical monopoly
Talking about monopoly, people often mean a state monopoly. But there are also private ones, which appear when one company has the supreme market position. However, there is a third case.
Let us assume that a company comes up with some device that is new and attractive, for instance a revolutionizing type of cell phone. No one else has anything that can compete, and the company is alone on the market. It has a monopoly. We can call this a technical monopoly, because it is the result of technical innovation. As a consequence, the company can demand a price that is higher than a price determined by competition. This company makes money and builds up capital. A technical monopoly can break the stalemate and limit the negative workings of the perfect market, and if we did not care for environment or resources, we could live happily with it. But if we do care, this combination of mechanisms has a dark side. It promotes, or rather demands growth.
Some products cannot be made better because they are fully developed and further improvements do not add very much. This is the case with consumer goods like fridges and vacuum cleaners. It means that the mechanisms of the perfect market drive prices down, and these devices are now produced in large, ultra efficient plants, often outsourced to low cost countries. Fridges are very cheap, you can buy a new one and discard the old one long before it is worn out. At the same time a flow of new products turn up, and we are tempted to always go for the new and improved model. Many people replace their cell phone every year. The development of cell phones is still done in the old industrial world, but production lies in the low cost world, and this means that profits are very high. Apple and Google are swimming in money, but they must keep on swimming. They have to come up with new, attractive gadgets, or they will sink, like Nokia did. It is a modern treasure hunt, high profit, high risk.
Adding up, we can see that we are led into higher consumption. We replace the fridges and keep up with the newest cell phone. “Green consumers” may not do so, they are satisfied with the old fridge and phone, but if everybody should behave like this, the mechanism of the perfect market would be put into action, and without technical monopoly, it would drive the economy into stagnation.
The triple contradiction
Technical innovation does not only lead to new products, but also to better and more efficient methods of producing old ones. The drive for better production methods is very strong, and a company or a country that does not follow up, will fall out of business, or end up as a looser. Productivity, therefore, is rising all over the world, and this means more products per working hour. This is, in some ways, a blessing, it reduces hard work and poverty, but it also results in a growth that is hard to control.
If we want to avoid unemployment, this inevitably leads to a growing flow of products that must be consumed in some way. If we want to limit the number of products, or simply stabilize it, we will end up with rising unemployment.
This is more or less what happens today on a world scale, and it causes debt and imbalance. The big producers are China, India and Germany. They have surplus in foreign trade, while others, like USA, have a growing deficit and rising unemployment. In Europe, Germany is the winner. It has an efficient production, but the wages have been kept at the same level for more than ten years. Southern Europe has also raised its productivity, but the wages, originally lower than in Germany, have been rising faster. The result is that Germany is the producer, with Trade Balance surplus, and southern Europe is the consumer, with a deficit. Debt has been building up, and is now one of the factors creating recession.
There is however a third part in the game. Higher production leads to rising pollution and depletion of resources. This can be reduced with an environmentally efficient production, but the rising flow of products will sooner or later overtake the reductions. The environment, the climate and the remaining resources will suffer.
There is therefore a triple contradiction between productivity, unemployment and environment, As long as productivity rise is a given factor, we must choose between the other two, solving one element, makes the other worse. However, there is a solution of a sort. By lowering the work hours, we can deal with rising productivity, and keep control over the production, so it does not ruin the environment.
This could be simple, but the international competition makes it difficult. Will people accept such a policy? It stops the growth, or even reduces consumption, but has also something to offer, more leisure time, which certainly has a positive effect on health, both mental and physical. It is an important ingredient of green politics, but it still remains to see if it can be put into practice. Most people don’t accept to have less than their neighbors, and this also applies to nations.
The Chicken Race of Wages
According to conservative theory, wages should be determined by the market, because this will automatically lead to an efficient income distribution. Work is a commodity and has a price. If the price is low, it simply means that the value of the work is low, and altering this “natural distribution of wages” will lead to restrictions in economic circulation, and therefore a loss of efficiency.
But how do we find the correct value of work? Many jobs are exhausting and dirty, but nevertheless, important, like for instance, cleaning and garbage disposal. In times of high unemployment, the wages in such sectors tend to fall, but the importance, and therefore the value of the work, is the same. Certain types of jobs in financial business are well paid. But do they create real values? Looking back at speculation bubbles it seems reasonable to say that these jobs can be either beneficial or harmful. After crises, the wages in the financial sector should go down, but that is often not the case, they might go up, even if the financial activities have been harmful and produced great losses. This kind of wage distribution can not be called natural or just, or even efficient.
If we concentrate on the lower sector, we will find that the wages are often determined by a mechanism that is described in game theory, a Chicken Game. It was played by American teenagers in the fifties. Two cars (stolen) were racing towards each other, and to avoid a deadly crash, the participants had to throw themself out of the car. The man who jumped first was the looser, and was called chicken, or coward. But the “chicken”, who jumped first, and saved his life, also saved the winners life. If both were equally brave, and waited for the other to loose his nerve, they would both be killed.
Let us turn to economics. Imagine a town with many restaurants, and let us look at the middle and low cost ones. If one of these cuts the wages of the employees, the prices can also be reduced, and the restaurant will be a winner on the market. This forces the others to follow, cutting wages and prices, thereby reconquering their market share. The first restaurant, or any of them, could then go further, and the others would have to follow. Wages and prices will spiral downwards. There is no equilibrium in this game, not until the bare existence of the employees is threatened.
This resembles the mechanism of the perfect market, both of them is a kind of Chicken Game. If all the actors are determined to go on, there is no equilibrium, it ends up with disaster for the participants. But in the case of the wild teenagers, the players put themselves at a risk. In the case of the restaurants, the owners are playing and the employees take the risk. There is nothing fair in this, but on the other hand, the owners are not necessarily the bad guys, they are simply forced by the game.
However, the game can be stopped. The teenagers will stop if the police arrives. The restaurants can be stopped if there are other, better paid jobs available, but with high unemployment, it is not so. Other barriers can be official minimum wages and social security that establishes an alternative, a reservation salary, below which employees will not go.
The fourth barrier is trade unions, who negotiate as a group. They have the strength that lies in numbers, and can use sanctions like strikes.
Classical theory says that wages are determined by the marginal productivity of the worker. This might be the case for some groups or professions, but not for the top and bottom. The top wages are determined by power and connections, and the bottom wages are often determined by a Chicken Race, which, under certain circumstances, can end up at the very bottom.
But does this affect the stability of the economy, or is the effect simply that some segments of the society end up with low income?
If these groups are small, and the situation does not change, the stability is not shaken. But if the groups affected are large, and growing, it will alter the balance between wages and capital in such a way that it can trigger a downward spiral. The low wages reduce the total consumption power of the society, and this leads to lower business activity, rising unemployment and deflation. This movement can also be described as a kind of Chicken Game.
The planned economy
Looking at economic history, it seems clear that the economy is not stable. Confronted with this, classical economists have no theories that explain the facts. Their explanations sound more like excuses. Why are they so persistent? I am afraid the reason is that they have a political agenda, but there might be other causes. The answer is often formed as a question: “Do you want a Soviet type of economy?”
It is a good question, so we have to take a brief look at the Soviet economy. It ended as a failure, but this is not the whole story. In fact it was a success till the sixties, a period of almost forty years. Soviet, in the thirties, was a disaster when it came to human rights and democracy, but the economy experienced a tremendous growth. The great fall came in the nineties, after communism. It was the reforms that really broke Russian economy. The quick and crude introduction of “capitalism” tore down a tottering, but still functioning system, and replaced it with an oligarchy rule that even today is paralyzing the economy.
If we want to explain the stagnation of the late period, we must also take into consideration the earlier success. Why was the early Soviet economy such a success? The best explanation is probably that efforts could be concentrated and channeled. The early Soviet society grew out of a desperate situation, with a devastating war and massive starvation. Russians knew that only hard work could bring them out of it, and the system, however undemocratic, provided a frame and an organization that made it possible. The farmers, especially in Ukraine, did not agree, because they had to bear the cost of it. As a communist state, Soviet could not get loans from the West, so they had to export what they could export, and this was agricultural products. The farmers, however, got nothing in return, it all went into investments in the industrial sector. The protests were quenched by massive repression, and this, in turn, was probably one of the reasons for the latter stagnation. The system became stiff and repressive, protests and alternative views were silenced. Decisions were made at the top by few people, and if they were wrong, no alternative decision makers were there to correct them. The system lacked plurality, and did not have creativity and flexibility.
Then came the change, and with it, the classical naive dogma of capitalism: Let everything loose, and the market will automatically ensure that everything runs fine. Today Russian economy is concentrated on the extraction of oil and natural resources. Other industries, with the exception of the military industry, are not promoted, as the oligarchs do not need them, and they keep newcomers down with methods that look more like the gangster rule of Chicago in the Thirties.
The Tiger Economies
There is one more story to tell, the success of China and the new rising economies of India and the Far East. Conservatives say it confirms the superiority of the market based economy, but it rather confirms the success of a mixed economy, because these countries have not followed market liberalism, but the neo mercantilist, or historical school.
These countries have more or less followed the same policy, regardless of their Capitalist or Communist past. They have a private owned, profit based industry, but the financial system is under government control, and there is a large degree of central planning, establishing new industries and channeling capital. Foreign investments have been promoted, but also controlled. The economies have not been open, they have used tariffs and quotas to protect their own industries. After a buildup period, when their industries have gained strength, tariffs have been reduced, as the protection is no longer needed. Experience has proved that a poor country needs to protect its industry in a buildup period. Those who have started with an open economy, many of them in Africa, have failed. This is, however, the policy of the World Bank and IMF. After so many fiascos one can ask why they don’t alter their policy. The reason might very well be that they want to keep these countries down.
Drawing some conclusions
Forming the future economy, we should take lessons both from the fiascos and successes, and they simply tell us that extremes don’t work. A mixed economy with a reasonable level of planning seems to be best in the long run, even if extremes can lead to short time successes.
But there is one thing that experience cannot tell us: How do we establish a non-growth economy?
In fact, no society has ever tried to voluntarily reduce consumption. It has occurred, of course, but always as a result of some political, economic or environmental crises.
Continuing the present policy will sooner or later be impossible. It will be stopped by some kind of crises, but we should do what we can to avoid it, because it will not occur as a smooth leveling out and stabilization at an acceptable level, but rather as an abrupt fall.
We are already on borrowed time, because the production and recycling ability of nature is suffering damage that cannot be repaired. The scarcity of resources can also have surprising effects. The industrial economy has always been operating with cheap and accessible resources, and we don’t know if it can cope with expensive and rare ones.
We are in new territory, but not completely blindfolded. We know that we must avoid extremes, and we know a lot about how to harness consumption. However, until now, Green Economists have not cared very much for the workings of the present economy, but they should, because it can kick like a wild horse.
We are short of time, and the man in the street does not believe that reforms are necessary. We must only hope that reforms will come quick enough, but if we don’t take into consideration the workings of the economy, reforms may backfire, and lead to recession, which might stop the reforms, and we are back to square one.
Mapping the mechanisms of instability is absolutely necessary if we want to fight both the present crises, and the climate and environmental crises that will come in the not so distant future.
Arne Thodok Eriksen
Arne Thodok Eriksen - reiseblogg 