Houston, we have a problem: World Identity Crisis

“SPACECRAFT: Hey, we’ve got a problem here”
CAPSULE COMMUNICATOR: This is Houston. Say again, please”

Houston, we have a terrible problem here! It is not the debt problem, the lack of growth problem, neither the lack of jobs problem. It is the lack of ideas: new, fresh, powerful ideas that put the world back on its feet again, and looking forward to a brilliant future.

They say the current crisis is a giant financial crisis rooted in a debt crisis. However the world has no net external debt. It cannot have, unless there are some Martians out there granting us loans. Therefore the debt problem is essentially a wealth distribution problem, a giant wealth distribution problem indeed. Governments owe tons of money to their citizens, their banks, and foreign economies. Enterprises and citizens owe tons of money to banks. Banks owe tons of money to their lenders: citizens, other banks and now also Governments. And so on and so forth. A pretty huge mess. It may sound a bit Marxist, but it seems it all boils down to something quite simple: some people have been eagerly eating a major portion of the global cake and now they just cannot honour their excesses.

Economists and politicians say we need growth to get out of the crisis. They insist on more growth for two main reasons:

  • First one is debt. The amount of debt is so huge compared with global wealth and is growing so fast that lenders think, with reason, that many borrowers will not ever be able to re-pay their debts. If you look how the global debt clock ticks, even after nearly 5 years of fighting against debt, you get scared. If we think of the debt as the pressure inside the global economy balloon, the pressure is now so high that it is threatening to burst. Growth would enlarge the balloon and diminish its internal debt pressure. Hence the headlong rush into growth.
  • Second one is jobs. Current growth rate is not enough to create enough jobs. In consequence, unemployment and poorly paid jobs are growing in many regions and contributing to spread pools of poverty across the world. The classic relationship between rising output and rising employment—known as Okun’s Law or Okun’s Rule of Thumb—appears to be broken, or the relatively sluggish growth is unable to ignite it.

These two reasons for growth seem spurious to me, and I think that the more we focus on them, the more we avoid looking into the real causes of our economic problems, and the more incapable we will be of finding real solutions to our real woes.

In my humble opinion, there are only two legitimate reasons for growth. The first one is population growth: more people means more goods and services are necessary to cover everybody’s needs. The second one is individual wealth growth: a natural aspiration to an ever increasing number and quality of the goods and services we consume and enjoy at an individual level. World wealth is growing, but is this growth enough and sustainable?

  • Real global GDP growth rate (adjusted for inflation) has been erratic but sustained above 2% over the period 1960-2010. The average growth rate in that period was 3.55% (1). Only in 2009, World GDP growth fell below 0% to then bounce back to 4%. In the period 2000-2010, the average growth rate decreased to 2,68%.
  • World population growth rate has been below 2% over the period 1960-2010 (2). It has been decreasing and will continue to do so over the coming years. The average growth rate in that period was 1,64%, and from 2000 to 2010 the growth rate fell to 1,2.
  • Therefore, the GDP/person is growing, slightly but consistently over the years. Using the World Bank data above, a rough calculation shows that average GPD per capita growth in the period 1960-2010 was 1,88% and between 2000 to 2010 fell to 1,46%
  • Are there any reasons to think that this growth trend should reverse, or else that the current slowdown could continue and eventually turn over to negative GDP/per capita growth rate? There are plenty of reasons in my opinion: lack of affordable energy sources and material resources (notably water), increasing conflicts caused by this self-same lack of resources, even existential risks. But you don’t hear too much talk about this in the news, at least not in relation to our gargantuan debt crisis. You only hear talk about the financial crisis and the debt problem.

Someone may argüe that using GDP as an estimate of wealth it is a delusion and, of course, I fully agree. Even his own creator, Simon Kuznets warned in 1934: “the welfare of a nation can scarcely be inferred from measurement of national income.” I am using GDP as a measure of wealth, only for the sake of the argument. It is the generally accepted figure, but above all because when economists and politicians insist on growth, they mean GDP growth.

While GDP is growing, the employment-population ratio is plummeting, particularly in some regions, meaning than the percentage of working age people who have jobs is decreasing abruptly (see figure 1)

Figure 1: Andrew McAfee, The Rebound that Stayed Flat; Jan 5, 2012

And the villain has already been identified: information technologies. In “Race Against the Machine“, Brynjolfsson and Andrew McAfee argue that the economy is in the early stages of a “Great Restructuring” that is hollowing out the labour market and exacerbating inequality. Blaming technology for the lack of jobs is not new. There is even a name for it: Luddism.

One thing that it is particularly intriguing is that technology is blamed both, because there is too much of it: the luddite approach, and also because there is not enough of it. You can see this other side of the debate backed by Tyler Cowen (“The Great Stagnation“) or Peter Thyel (“The End of The Future“). My point of view is that this side, not enough technology, would be the only potential problem to worry about.

Regarding the luddite paranoia, I wonder why a lack of jobs should be a problem at all. On the contrary, we should be more than happy that we need to work less to have the same produce or even more. This is what economists call productivity. Instead, we are crying and fighting over the ever decreasing relative number of hours/jobs required to produce a growing wealth and make a living.

If we were talking about jobs as one’s life’s end and social inclusion; something that shapes our personality; only in that case would I understand the concern and the debate. However, very rarely you hear talk about that, and no one talks about it as the reason why a lack of jobs is a critical problem today. The critical problem with a lack of jobs today is that today, jobs are the mainstream access to wealth. It is wealth distribution again.

If we connect the dots, a clear picture is revealed: our current supposedly free market economy, call it capitalism, is still a fantastic wealth creation machine, but it is a horrible wealth distribution machine. In consequence, as Brian W. Arthur suggests in “The Second Economy“, the main challenge of the economy is shifting from producing prosperity to distributing prosperity. We need to rethink how we distribute wealth:

For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinking—fewer of us in the future may have white-collar business process jobs—and we face a problem (…) Perhaps the very idea of a job and of being productive will change over the next two or three decades. The problem is by no means insoluble. The good news is that if we do solve it we may at last have the freedom to invest our energies in creative acts. (Brian W. Arthur, “The Second Economy”)

Why wealth distribution is a concern requires a few words:

  • Economics teaches us that inequality is the result of our different willingness to pursue wealth putting more effort or assuming higher risks, and therefore it is necessary to create the right incentives. And most economists, particularly fresh water economists, maintain that inequality should not be a concern provided that everybody’s wealth is increasing (Pareto improvement)
  • However, most people understand that it is unfair to allow other people to starve or live without a minimum standard of living, while there are people and regions able to produce and consume much more than that same minimum. The dislike for inequality or unfairness seems to be deeply rooted in our psychology. Experimental economics shows that people usually reject unfair splits, even when they represent a net increase of their wealth, and such results are usually shown as evidence against the so-called  “Homo economicus” assumptions of rational decisions (ultimatum game)
  • Why is there such apparent contradiction between economic theory and moral? Why have humans evolved such stupid irrational biases? Those biases might be the result of dynamic evolutionary strategies for survival. That seems to me particularly the case with our apparently stubborn dislike of inequality. If I allow you to grow a lot bigger than me, even if I am increasing myself and therefore improving, I am granting you a future advantage to dominate me. Only if I make a point/static analysis of my present situation, would I consider that my situation is improving when I receive more and you are receiving ten times more. Abstracting my situation from what is going to come later, does not quite seem rational at the end.

Therefore everything is about strategic wealth distribution and accumulation. Maybe Karl Marx was right after all, even though recent history and the stubborn crew of left-wing political parties that he bred have blurred his insights:

But the deeper reason a broad-based populist left has failed to materialize is an intellectual one. It has been several decades since anyone on the left has been able to articulate, first, a coherent analysis of what happens to the structure of advanced societies as they undergo economic change and, second, a realistic agenda that has any hope of protecting a middle-class society (Francis Fukuyama, “The Future of History“)

Occupy Wall Street brought the increased inequality in the U.S. to the headlines. Almost a quarter of total U.S. national income now accrues to the richest 1 percent of the population, a figure that was barely above 10 percent 40 years ago (see figure 2) Some have even pointed to inequality as a culprit of the financial crisis, but there is no consistent link between income concentration and credit booms (The Economist, “Body of Evidence”)

Figure 2: The problem with US inequality

Inequality has always existed. According to Francis Fukuyama, this is the logical result of natural differences in talent and character, although today’s technological world vastly magnifies those differences:

In earlier phases of industrialization — the ages of textiles, coal, steel, and the internal combustion engine — the benefits of technological changes almost always flowed down in significant ways to the rest of society in terms of employment. But this is not a law of nature. We are today living in what the scholar Shoshana Zuboff has labelled “the age of the smart machine,” in which technology is increasingly able to substitute for more and higher human functions. Every great advance for Silicon Valley likely means a loss of low-skill jobs elsewhere in the economy, a trend that is unlikely to end anytime soon. (Francis Fukuyama, “The Future of History“)

However, it is not the first time that we have been here. Things were much worse during the Gilded Age, with a wealthy elite more unscrupulous. If the problem is not completely new, most likely there must be someone who knows how to deal with it, at least in an approximate way. All we need to do is to look at the present crisis with enough historical perspective. This is what Carlota Pérez does in her book “Technological Revolutions and Financial Capital“. And according to her research, we would now be in the turning point between the “installation period” and the “deployment period” of the current information revolution wave which started back in 1970’s.  Such transition periods usually need government action to overcome the recessionary consequences of the major bubble. Unfortunately here is where the problem gets really tough.

There is a worrisome lack of new ideas, particularly among political leaders. They stick to the old rules, the old growth recipes, the old labour market medicines, written in the old macroeconomics books:

The world of 2012 is so fundamentally different from 30 to 40 years ago that traditional, commonly held economic views and perspectives seem downright quaint today (…) Yet we are still using methods of a simpler past to measure, diagnose, and direct our economy today (Peter Marber, “Brave New Math”)

It is particularly frustrating to see how politicians continue with the old debate of right wing vs. left wing, when it should be clear to everybody that such a one-dimensional debate is sterile, because economy and for that matter, human wellbeing, is such a multifaceted entity

One wants to shout at them: stop screwing around! Lives and livelihoods are on the line! (…). Sometimes history gives us individuals equal to troubling circumstances. Sometimes it doesn’t, and the world suffers. Maybe everything will turn out all right. Shame on the leaders of Europe and America for working so diligently to ensure that it doesn’t. (The Economist, “Policy Failure in a Major Scale”)

Maybe the only thing they can do is like Saint-Exupery’s king of asteroid 325, in The Little Prince, who suggested waiting towards the evening—when conditions were more favourable—before ordering the sunset. Meanwhile, let’s call Houston again and see if someone there has managed to come up with some new remedies.

4 comments

  1. […] What we call unemployment is not really a curse. The curse is only the smallness of the dole. There are remedies for this. (…) For everybody must agree that there is no shortage of things; there is only a shortage of money. The powers of production have increased a thousandfold but the powers of distribution have not increased correspondingly. The weakness is not in production but in distribution. […]

  2. […] If I allow you to grow a lot bigger than me, even if I am increasing myself and therefore improving, I am granting you a future advantage to dominate me. Only if I make a point/static analysis of my present situation, would I consider that my situation is improving when I receive more and you are receiving ten times more. Abstracting my situation from what is going to come later, does not quite seem rational at the end. (Mind the Post, “Houston, we have a problem: World Identity Crisis“) […]

  3. […] The first two industrial revolutions inflicted plenty of pain but ultimately benefited everyone. Technological advances increase productivity only after a long lag. The past four decades have been a period of gestation for ICT during which processing power […]

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