The Guardian's reported that Ed Miliband has said:
What has social democracy been about in Britain and in Europe perhaps since Tony Crosland? It is about tax and transfer social democracy. Crosland said 'use the proceeds of growth to make society better and fairer'.
It was, I agree.
And it isn't any more. That's obviously true. That's not because of the financial crisis. That's because we have reached the limits to growth. It is not possible to exploit our planet at the rate we have been and survive as a race. Whatever the reason we come to accept that, it's a fact.
That, however, does not spell the end of social democracy. Indeed, if anything this is the moment of greatest opportunity and challenge for social democracy. After all, the market has no solution to this scarcity because it treats the environment as an unpriced externality. If we follow that thinking, as we have been, then we head for oblivion - as so many on the right with their sole emphasis on immediate gratification seem to desire. The left - believing as it does that it is the duty of the state to intervene to set the rules for markets without which those markets cannot deliver anything close to an optimal solution for everyone, let alone market participants - are bound to have the upper hand in this debate. This then is our political ground to claim.
And claim it we can, but only if we realise that the choices facing social democrats have to change now. The old paradigm looked remarkably like this:
In Tony Crosland's time the world started at A and grew to B. Out of the growth represented by the outer ring part (C) went to the state to pay for the additional schools, hospitals and services that were desired and part (D) went to the private sector. Candidly, this was easy. It was a case of dividing the spoils. And that pretty much remained the case right through to the Brown / Blair era when many still thought growth would go on forever.
Except we now know it isn't. The situation for social democrats now is this:
There is no growth now. What we're demanding as social democrats now is a bigger slice of the same cake. And that, of course, seems like a harder thing to do. Except it isn't. In fact, it's what logically should happen, but that takes some explaining. Let me start with this from Larry Summers in the FT this week, from their Capitalism in Crisis series:
The nature of the transformation [in productivity and prices] is highlighted by the 50 fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation. While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items such as appliances or clothing or telephone services, where productivity growth has been rapid, wages have actually risen rapidly over the last generation. The problem is that they have stagnated or fallen measured relative to the price of housing, healthcare, food, energy and education.
As fewer people are needed to meet the population's demand for goods like appliances and clothing it is natural that more people work in producing goods like healthcare and education where outcomes are manifestly unsatisfactory. Indeed as the economist Michael Spence has documented, a process of this kind is under way: essentially all US employment growth over the last generation has come in non-traded goods.
The difficulty is that in many of these areas the traditional case for market capitalism is weaker. It is surely not an accident that in almost every society the production of healthcare and education is much more involved with the public sector than is the case with the production of manufactured goods. There is an imperative to move workers from activities like steelmaking to activities like taking care of the aged.
All of this makes complete sense. What does not is that Summers went on to say immediately thereafter:
At the same time there is the imperative of shrinking or least slowing the growth of the public sector.
This comment is completely baffling. More than that, it explains the crisis we're in because the issue we face is a simple one. As labour efficiency in manufacturing improves (and Summers gives some evidence of by how much it has improved in real terms) real labour rates in manufacturing rise, although the number of people employed falls. That's inevitable, and an observed fact. What are less understood are the other consequences that are described in the economic phenomena known as Baumol's cost disease.
What Baumol in effect says is that the wages of those whose productivity has increased will drag behind them the wages of those whose productivity has not increased. Baumol explained this by comparing workers in the motor industry in the 1960s, where productivity had massively increased real wages , with the classical musicians playing a Beethoven string quartet, where like it or not the same four players were still needed in the 1960s as they had been in the 1780s and playing it in half the time certainly did not add to the quality of the product. However, as he noted, the string players wanted wage increases to at least partly keep up with the car workers with the inevitable result that playing string quartets had in real terms got a lot more expensive than it had been in Beethoven's time, so state subsidies were now needed in very many cases simply to make sure that the best could keep on playing.
This is where we are now. As a matter of fact real wages in many parts of the private sector have risen over the last 30 or 40 years because of increases in productivity because that sector is fundamentally focused upon producing products or commoditised services that can be easily packaged and sold using technology. On the other hand, a great many of the services supplied by the state, whether they be healthcare, education, support for those in need, one-to-one advice, and so on, cannot be enhanced in this way. You cannot teach a class a 50 minute lesson in 30 min and you cannot do a 10 min consultation with a patient in 7 min without some significant compromise on the quality of service supplied occurring. Productivity gains in a great many of the activities undertaken by the state will therefore always, and inevitably, be low. The claims of those who argue that these services are inefficient as a result and should be privatised as a consequence are just absurd: they're simply done in real time one to one, and that's a fact that will not change unless, of course, we want lower standard services (which privatisation does, invariably, deliver as a result).
And that fall in the quality or quantity of such services is dangerous for the economy as a whole since, as I argue in The Courageous State, services such as these are the bed-rock of our economy, our communal well-being and to the well-being of our private sector, which is built upon the foundation of such state provided services being available to those who work in the private sector and who can therefore afford the risks of doing so. We could not have a prosperous private sector unless the state provided these essential underpinning services for what it does. This is the essence of my theory of the cappuccino economy, explained in chapter 5 of that book.
Now to go back to the diagrams, over the last 40 years we have financed government by making more 'stuff', mainly in the private sector. That 'growth' in the amount of 'stuff' we consumed, fuelled by a combination of the abuse of the environment and productivity gains then 'trickled down' into increased public services. The result is the commonly held, but completely wrong, assumption the value is created in the private sector and the public sector is dependent upon the private sector for the generation of real worth. This, of course, is not true (as anyone waiting in accident and emergency will tell you) but the perception remains in place precisely because productivity gains were undoubtedly made in the private sector that could not be replicated in the public sector, and so the myth persisted and continues to this day.
Now we have a fundamental choice to make. It's my suspicion that we are coming towards the end of growth. There are two good reasons for thinking so. The first is that we no longer wish to abuse our environment in the way we did. The second is that we are beginning to realise that we have enough ‘stuff'. There are only so many computers, mobile phones, sofas, and even cars that we need. Of course the distribution of that material well-being is inefficient, and even offensive on occasions at this point of time, with some being deprived of what they need whilst others have excess way beyond any reasonable requirements, but the point is that we do have sufficient to share to meet all reasonable material needs that anybody now has.
What is more, we seem to be increasingly aware of this fact and as a result are increasingly reluctant to be persuaded by advertising that we must go out and spend more on things that we know we don't need (see chapter 12 of the Courageous State for more on this). As a result it's my suspicion that the current increase in the savings ratios within the economy is not just arising from the fear of recession, it also reflects a real reluctance to spend on things people do not want. If true that has profound implications.
First of all, growth in manufacturing will be lower than in the past, and may even cease, barring the need to service an increasing number of people in some parts of the world. Secondly, that growth will not therefore provide the surplus to pay for the services we want out of productivity gains. And that means the model on which all political systems, and not just social democracy, has been based for the last few decades is, therefore, changing quite fundamentally. No wonder we have a political crisis!
If this critical point is properly understand then it follows that there is a need to change the criteria for decision-making in the economy as a whole and in the political sphere in particular in future. We will not pay for string quartets to be played out of the proceeds of growth undertaken at cost of the planet: we will instead have to positively decide that string quartets should be played because we think they have greater merit than the purchase of further digital music players for which there will be no content. In other words, we will have to positively decide to reallocate resources from making 'stuff' to the activities where productivity gains may be limited but where as a community the value of the service supplied is critical to our well-being.
That is what is shown in the second pair of diagrams. If we wish to prosper we must educate our children (and our workforces). Health has probably the greatest contribution to the quality-of-life after the meeting of very basic needs such as food, water, clean air and shelter, and so its continued provision is essential. But if we want the education, healthcare and other services we want, which are a fundamental basis for our succes as an economy and which we have more than enough trained people to supply then it is inevitable that we will have to allocate more resources to them in the future as a proportion of GDP since productivity gains in this sector are always going to be lower than in manufacturing and than in systematised private sector services. That's just a fact.
In that case Summers' argument that we recognise this fact and despite that cut the size of the state is utterly illogical - just as it is when the same argument is made by some people claiming to be on the centre left of politics. What he and they are actually saying is we must cut the supply of these essential services and the jobs associated with them to ensure that a continuing proportion of GDP can be dedicated to the production of goods and services in the private sector despite the fact that that sector will employ increasingly fewer people to make supply those products.
Or to put it another way, what they're actually saying is we must increase unemployment in what have been state run services so we can continue to keep the same proportion of GDP in the private sector even though that sector will also be shedding staff in its relentless desire to increase productivity. But that's ludicrous.
First, the inevitable outcome of these policies will be growing unemployment. Both the state and private sectors will employ fewer people as a result of them. Unless those arguing for such policies assume the people made redundant as a result simply ‘disappear' as a result (and they won't) then inevitably that means we will have rising unemployment and that's bounded to be associated with lower demand, and so a recessionary cycle.
Second, rewards will be distributed increasingly unevenly as a result of such policies. The return to capital as a proportion of GDP will rise — and we're seeing that happening now — whilst the gap in income between those in employment and those increasingly out of it will also rise. The inevitable result will be that fewer and fewer people might in the future have the means to buy the private sector products that this policy is intended to promote because too many people will be either unemployed or too poor as a result of falling real wages to ever buy the consumer goods the private sector will produce. The result will be a spiral of decline, matched by rapidly increasing unemployment and income disparity.
As a result it's right to conclude that the second pair of diagrams aren't correct. There is no choice that they represent as shown like this where we can simply decide to allocate a fixed pie in different ways:
Instead there is only this option:
We can fix GDP as a proportion of GDP as Summers and those arguing for the constraint of budgets and government activity and who say we must cut healthcare, education, pensions and welfare want. But we can't do so without shrinking the economy as a whole for all the reasons noted above. Given the dynamic of the economy that's inevitable. So we move from position A to position B, and so long as we try to maintain a static state sector we continue to see the economy shrink. That's what is happening now.
Alternatively, we have the second diagram. State sector activity is allowed to grow from C to D and it puts to use the natural resources available to generate wealth within the economy that are currently going to waste. By for the most important of these, of course, are the people currently unemployed. And because they are now active the economy does at the very least continue to have the same overall value as before. The constituent elements of that value are different. We will have more state supplied services and less, proportionately, “stuff”. That “stuff” may need redistribution as a result if the benefits of material consumption are to be properly shared to ensure the vulnerable do not lose out, but this has always been a social democratic policy. But we do continue to have a strong economy, but one built on the supply of a growing proportion of communal services to meet the needs of the elderly, the young and the vulnerable, all of whom need personal services, all of which we can supply as we have the people available to deliver them if only we are willing to let them work. And if we do let them work then overall the private sector is bigger, I suggest, in the second diagram than the first even though it takes a smaller proportion of GDP.
This, I suggest is precisely why it is wrong to say there are now more limited resources for state spending: that's just not true if we want to avoid recession, let alone create sustainable growth. Those things can only happen by the state spending more. That's a simple economic fact, in my opinion.
The challenge for social democracy now is to say that this is the reality of the world we're now living in. We aren't living in a world where growth is inevitable, but we are living in a world where there is abundance for many, and there could be sufficient for all. However to achieve that situation where all have enough and the economy as a whole prospers we are completely dependent upon making decisions that correct the currently inappropriate allocation of rewards by the market because of its failure to take into account externalities, including its inability to properly value so many communal goods and services that only the state can supply efficiently. That decision to reallocate resources to those services will, of course, require courageous politicians who are able to defend their positions and who are willing to say that they believe they have the judgement to make these decisions on behalf of communities, and who will request electoral mandates to deliver them. That is what social democratic politicians are going to have to do in the future.
We're not, as Larry Summers seems to think, going to want politicians who argue that we must shrink the size of the state whilst recognising that it, and it alone, can effectively supplying so many of the services that are the subject of Baumol's cost disease.
Why would we? We'd only want such politicians if we thought leaving people to die due to lack of care was acceptable, because die they will, whether from thirst (in hospitals and care homes where staff do not have time to help the elderly drink), hunger, cold or more besides. And we'd only want such politicians if we did not care for our young and vulnerable people. And we'd only do that if we valued “stuff” more than the well-being of these people. Advertising seeks to persuade us that is, in fact, the case: that we do want “stuff” more than we want a decent life for all. Social democrats have the job of arguing that's not true and the evidence is, of course, on our side. Take for example the fact that so much of that advertising is for things that positively harm us as increasing obesity, amongst other things, demonstrates.
This task won't be easy. This demands a big change in the culture of our society. The idea of 'more' is deeply ingrained in us, but we will have to change in any event: the alternative is simply not sustainable. More than that though, politicians will have to change as those that are needed will have to make difficult decisions. Politicians have for a long time been able to free ride off the back of the economy and use its surplus to avoid the difficult challenges that politics is now going to face.
But face that challenge we must: we now are at the point where we have to decide whether things like education, health, a safety net for the old, protection for the disabled, the protection of the environment, the provision of housing for those who need it and all those other essential services that are critical to the well-being of our country as a whole are more important than generating higher wages for a reducing number of workers who are engaged in activities where productivity can be ratcheted by technology even though there are a fewer of those with significant income left to buy the products they make and with the excess returns to capital that are generated increasingly dividing society between those who own the resulting profit and everyone else. And we have to decide whether we really put value on people first. That means we emphasise in our choices employing as many people as possible productively, using their skills to facilitate the well-being of others, and to help them through this process achieve their potential in vibrant economies which are, however, more dependent upon services than ever, and with a lower overall rate of consumption of material goods in proportion to total income which we will accept because are, overall, as a result better off, as the above diagrams show.
That possibility of people being better off as a result of this available choice to emphasise the provision of more services by the state that people need is the story that social democracy now has to sell.
As Polly Toynbee has said this week:
Hard times need create no "crisis of social democracy". In Attlee's postwar days of atrocious austerity, Labour produced its best policies — and so Miliband lays out reasons why fairness matters most when money is short. His "responsible capitalism" may look ever more essential by the end of this economically threatening year.
But that is true only if social democracy embraces the idea that this responsible capitalism is just one, albeit integral, part of the whole economy in which the state has at least as big a role to play and that it also understands that it is only when the state and responsible capitalism combine together to best effect to meet the needs of the people of this country that they in combination can help the people of this country achieve their own best potential for themselves.
And that's what social democracy is really about.
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LITTLE KNOWN FACTS
Angela Merkel’s doctorate, roughly translated, was titled “Investigation of the mechanism of decay reactions with single bond breaking and calculation of their velocity constants on the basis of quantum chemical and statistical methods”.
So we can all sleep a little easier now ….
Or not?
Sounds far more useful than a doctorate in neoclassical economics. (Immersed in Keen’s Debunking Economics).
Very interesting piece Richard. I like your vision. If only it could really be like that … (?)
I’m in no way, shape or form an economist, but – in my naivety – have long been puzzled by this almost universal (or so it seems) obsession for and worship of perpetual growth as the be all and end all. So it’s refreshing to see someone seriously questioning its never-ending pursuit as a desirable objective.
Whether any such transition to a functioning zero-growth society could ever be achieved without a full-blown revolution (which I certainly don’t wish for, but may yet happen) is another matter. “This task won’t be easy” sounds like a serious under-statement. It would indeed demand exceptionally courageous politicians. But it’s good to dream! Thanks for that.
A few comments
– I am not sure that I agree that we have reached the limits of growth – especially since we just suffered a pretty substantial contraction and there are not a few people around who would like some more stuff and who are currently not doing very much. We are also in something of downward spiral at present – and as we all know (yet again) these hurt the least well off the most.
– While I agree with your view that the real challenge will be allocating the spare resources freed up from increased productivity in making stuff (and also producing food where the increases in productivity are even greater) I am not sure that I totally buy your view that the productivity of others cannot be increased. To look at your analogies – the productivity of your string quartets can be increased by playing to bigger audiences or making recordings more widely available – or the productivity of teachers can be increased through webcasts/podcasts to a wider audience. There is also the point that those in the public sector could also do quite a lot to improve the quality of service experienced by their consumers. Such improvements in productivity may not be measurable in all cases using a profit and loss account and a balance sheet, or other measures used by those who are ideologically against the public sector, but that doesn’t mean that they are unachievable.
– I agree that it is right that there needs to be a reallocation of resources within the overall cake (if only to counter the one that has occurred as a result of the recent contraction), it is one thing to talk about such a reallocation, it is another to achieve it. Most social democrats I know (and I count my self as one) also see limits on the state as an effective reallocation mechanism just as we see limits on the effectiveness of market mechanisms (which nevertheless have many virtues) – to some extent you have to work with the grain of market mechanisms and only change things in a gradualist way if you are to avoid social unrest and damage to said markets. State socialism whether you follow the Russian or Yugoslav model hasn’t the best of track records as a possible alternative.
We’re getting close to the environmental limits of growth. Take fish stocks as one example and we’re already there. The question to ask ourselves is do we crash head on like an express train into the those physical constraints, or do we organise a program of managed change into (an inevitable) static state economy ?
But that doesn’t mean that you cannot produce/grow more with the same resources – isn’t fish farming the response to reaching the limit on naturally sustainable fish stocks. I’m not convinced that we have reached the technological limits – the doomsayers have been around for a pretty long time I’m afraid. And as I said I don’t believe growth needs to be just about stuff and food – and I can also accept that some types of growth are not sustainable.
A static state economy actaully sounds pretty awful to be honest – given the natural human instinct to want to improve things – we probbly just need to think about growing in a different and better way.
It’s not static
It’s dynamic
But overall it does not grow
Instead we accept we move on
Fish farming illustrates the problem when you try to break through environmental limits. Farmed fish have to be fed, and kept healthy which takes further resources (natural and man made) and can in turn have their own negative feedbacks into the ecosystem.
We of course must continue to pursue technological advance, but it must respect nature.
An interesting thought.
A no-growth economy.
Selling it will be very hard, if not impossible.
Not here, since we already have a no-growth economy, but in the developing world where no-growth will translate to eternal poverty.
You will note that Chinas rapid growth is slowing, along with the rapid ageing of the population. The one-child rule seems to be a non-starter.
I’ve said before, many times, that the limitation of the population by control of births only leads to stagnation, with an ageing population that has to be supported by a reducing amount of working young[er] people.
You may like to research the solution to the problem in other less “civilised” countries, where the elderly are promoted to being not-living.
So along with no-economic-growth we will also have to have no-population-growth.
Since this is an insoluble problem, by birth control, I leave it to others to realise the way around it.
We could have more wars (almost certainly anyway) except that they only do the same thing as birth control….the young tend to die first.
I’m afraid that having the young work to support the old is going to have rather drastic effects: Eventually.
At the moment I’m watching the stand-off in the middle east, where Iran is being provoked by the US led embargoes into some sort of precipitate action, along with their nuclear scientists having a rather bad run of accidents and assassinations. I have yet to see why they are stopping Iran selling oil, since that leads to higher prices. Except that the US doesn’t import much oil from Iran…..so I suppose everyone else cutting their noses off at the behest of the US makes perverse sense.
Not to mention Greece spending on arms upgrades. Hmmmmmmmmmmm.
This is a specifically UK focussed, or Western piece
I do not think ‘no growth’ appropriate in developing countries
In which case a level of growth has to be set beyond which growth is not allowed.
I can’t see that flying.
Although I am beginning to see light at the end of the low-carbon tunnel.
It’ll certainly be interesting to see a no-growth-by-design manufacturing economy.
I had to look for the article below…I read it last year:
“But Korowicz goes further. He isn’t just worried about no growth. He is worried about “de-growth”. Our global supply chain system is now such a delocalised and “networked complex adaptive system” that it is very dependent on a few “hub infrastructures” (such as the financial system and global energy flows). The collapse of any of these hubs could end in global systemic failure. This sounds like scaremongering, but you need only look back to the start of the financial crisis, when global trade all but stalled due to the absence of letters of credit, to see it has a ring of truth”
http://www.moneyweek.com/news-and-charts/economics/global/is-there-a-limit-to-growth-54103
I’ve often considered a no-and-mayby-un-growth economy, since nothing grows forever. I reached a conclusion of sorts, that no-growth would lead to stagnation and social “unrest”. But….dunno….the key is energy. Fossil fuels are a few centuries from depletion, and there are certain solutions available from re-engineering nuclear generation with gas as an intermediate until then.
The world population will stop growing when no one has to have children to provide an insurance policy for their old age or infirmity. The rich world has declining populations.
But the old will always need younger people to do the work.
Even those who provided for their old age via a pension obtain their money from investment, of sorts, which again uses the young to work in what their money is invested in.
The rich world has a declining birth rate because they import their population growth.
You need to think it through. A no-births policy is otherwise known as extinction. And it doesn’t take that long. Better to bite the bullet and admit that the policy of reducing birthrate is a bad policy. Nature has a policy that works well: Reducing lifespan.
A bitter pill to swallow. The alternative may well be a no-retirement-no-pension policy.
I really think a little less extrem thinking is needed here
The world is not black and white
it’s lits of shades of grey
Yes Richard the outlook for the world economies remains depressing with Europe facing a full-fledged recession/stagnation and the United States fighting to revive a moribund economy. Many world governments have responded to the crisis irrationally by launching restrictive fiscal policies rather than policies that provide economic stimulus – a decision likely to lead the world into deeper decline.
The wrong policies have already caused economic slowdown (if not an outright fall of industrial production) and the big developed nations are now unable to stimulate their economies, dragging them (and other countries with them) into a recession which will be followed by stagnation and end in deflation unable to return to a growth path.
Japan’s economy has been in this situation for two lost decades — and liable to remain so until government realise the most important overall component of growth are fiscal policies that encourage confidence. Similarly in the UK, Euro zone and USA , investment, production and consumption are all now held back by the mistaken idea that the only way to regain confidence is by cutting deficits.
The fact of life is that austerity does not cut public deficits – it is only an attempt to cut public deficits. Governments are just too big to cut their expenditure and expect that their revenues will remain as before… they will not and they will fall and eventually governments will realise that it is almost impossible to reduce a deficit – and, if they cannot reduce a deficit they cannot regain confidence so the whole idea is flawed from the very start.
It is quite alarming that countries are unable to agree a synchronized course of action for stimulating world economic growth — clearly none of them have learned the lessons of the last great depression in the 1930s.
Some thoughts:
– Agree about the need for social democracy, and for an enabling state – for all the reasns you state.
– As you point out the developing world wants more ‘stuff’ so if we commit to a greater proportion of GDP going to net exports, we could still have private sector led growth.
– I think you are unecessarily pessimistic about our growth prospects. The current malaise is cyclical and aggravated by the Govt’s contractionary policies. Dissemination of new tranformational technologies could mean there is more demand for ‘stuff’. The State may have a leading role in promoting these new technologies e.g. smart grids and car power points for a green transformation of our economy akin to that brought about by finding out how to use oil and coal for power.
– Dealing with environmental abuse will come by internalising externalities – green taxes. This will provide new sources of revenue.
Respectfully – that’s cloud cuckoo land
It’s like saying ‘we’ll export the externalities of growth’
Where too?
There’s only one planet
Do you envisage a total move away from manufacturing then? Instead of a furious export drive (which is entirely seff-defeating) can we just merely supply our own manufacuring needs and export any surplus (should their be one) to whichever country wants our products?
Also, instead of just absorbing the money made from any exports, we use the money earned to buy imports? This would surely provide for a more balanced economy?
I don’t see an end to manufacturing – there is “stuff” we clearly still need
That’s not the same as “want”
And clearly we will still import – bananas are good I’m told, although I’m allergic to them. So sure we can still but them
What I’m saying is that the myths that only the private sector generates wealth and only manufacturing is real are both wrong and we need to realise it
“There’s only one planet”. Except that we live in a galaxy with a hundred million stars. Assuming our solar system is “average” that implies a hundred hundred million planets, and that is just in our galaxy.
Oh yes of course
Let’s nip off to them now, shall we?
You may have noticed we haven’t even got to the moon since about 1974
But why let that worry you?
“And clearly we will still import — bananas are good I’m told, although I’m allergic to them. So sure we can still but them”
Mmmm…yes, I rather gathered we would still have to import stuff. 🙂 What I suggested though, is that instead of absorbing the debt-free money derived from exports into the economy, we instead spend that money back into another country to buy any imports we need.
Instead of a pointless and relentless drive for exports, we instead use the money derived from exporting any surplus to buy imported goods, leading to a more balanced economy.
I think I follow….
so it took us about 200,000 years to get to the moon, and 40 more years or so to actually find planets in other star systems capable of supporting life. How long to get to one is a moot question. But I would bet you are not in favour of such activities?
I don’t mind pure research – but let’s not pretend this is an escape route from our irresponsibility
It isn’t – and only a fool would even think it was
If there is a point then it is that we live on a very small part of a very large universe. Actually you could easily alter that to we live on a very small part of a very large planet. And our knowledge of it is somewhat limited. How irresponsible is it to ignore that?
Knowledge is fine
But since we are light years from the nearest escape rout shall we restrict ourselves to what is plausible?
Or is this another case of an economist saying “let us assume we could all leave for another planet” at which point they think the problem is solved?
Douglas Adams has the last word on this with his golgafrincham arks. BUT, why would you want to leave? There is still loads to explore and exploit on this planet; and this solar system.
” think I follow….”
Mmmm….OK – I detect a slight facetious tone here. 🙂 Sorry if it sounded as if I was trying to teach you to suck eggs.
No it wasn’t facetious
I meant exactly what I said
“No it wasn’t facetious
I meant exactly what I said”
OK…….I misunderstood. Many apologies! I’m being a bit over-senstive today, I think! 🙂
I suffer from that, too often
Easy on places like this
Changing the subject slightly:
The government is currently using QE to buy back bonds from banks. These bonds have been bought and paid for, therefore is it not in any way feasible for the government to simply cancel those bonds and therefore the debt that goes with them, albiet gradually so as not to cause any undue economic shocks?
Would this be feasible or not?
Yes, of course it is
And they already deny the fact that a great dela of the interest paid by the gov’t is going straight back to the gov’t
But why would Baumol’s observation apply, in an economy without growth? It’s driven by differential rates of productivity growth – higher productivity growth in manufacturing.
But if productivity in manufacturing is growing, the economy will grow (as Krugman says, productivity growth isn’t everything but in the long run it’s nearly everything).
So if there’s no growth, Baumol’s observation won’t happen apply, surely?
Growth is a differential – so of course it happens in a static economy – just because there is no overall growth does not mean there is no differential growth
Thanks for replying. Most bloggers don’t. Still not quite sure I’m there – let me try again.
Suppose productivity increases in the manufacturing sector, If manufacturing output is flat, employment in manufacturing falls. If those people end up in the public sector, producing public services, then in the GDP calculation (a) manufacturing output is the same as before, (b) services output in the public sector is higher. ie – there’s growth.
That’s not just another of those funny artefacts of the way GDP is calculated. If
there are more people supplying public services and just as much manufactured stuff, so we are materially better off.
Perhaps I’m misunderstanding what you mean by zero growth? I can see that some people would value public services at zero, but ordinary GDP measures don’t (and nor do I – and I suspect nor do you!).
If you don’t get the productivity growth in manufacturing, then you don’t get this, but of course then you don’t get Baumol’s ever-increasing service sector either.
I think that an economy with productivity growth won’t, can’t be ‘zero overall growth’. Unless someone has productivity growth that is actually negative, which seems unlikely.
Well actually, if we assume one to one services are low productivity and we do the more marginal ones of the now on your logic we at least downgrade growth
But that’s all within the fairly absurd constraints of GDP anyway
I don’t buy GDP in the Courageous State
Yes, I think that’s right, on my logic we downgrade growth. If, say, productivity growth in manufacturing is (say) 5% and manufacturing is (say) 20% of the economy, and productivity growth in services is (say) zero, then the economy grows by just 1%. But it’s not zero. Productivity growth in manufacturing results in growth in the economy, to the extent that manufacturing is part of the economy.
But this isn’t a silly consequence of the way we calculate GDP. It’s increased employment in the public sector resulting in higher living standards, because productivity growth in manufacturing is allowing the public sector to increase the services if provides. That’s an increase in material wellbeing, however we measure growth or welfare. That seems to me something to be supported, and I don’t see what the problem is in calling it ‘growth’.
If we have productivity growth in manufacturing, and so we have the Baumol effect, then we won’t have a zero growth economy. Good, say I!
Interesting piece, anyway. Thank you.
Assuming productivity growth is nearing an end, does that mean that Malthus is going to be proved right after 200 years?
Or is space colonization as suggested by Stephen Hawkins going to save us?
Probably neither
We can redistribute to cover population growth, with ease
All it requires is the will
That’s not what Malthus said
And Hawkings is living in cloud cuckoo
to be fair, Hawking is physically not able to do much more than that, but he is not the only one who thinks it likely.
It’s striking that, when you make a pretty radical proposal, so many of the responses want to agree with you but then start to question themselves with “but we can still have …….. (enter your choice) can’t we?”. And God forbid that anyone should be bold enough to to say we have, well, enough.
For me, this is one of your most appealing proposals for our future. Why? Because it starts and ends with the well being of people in general in place of the preservation and enhancement of wealth for a minority.
It’s far too brave for the current crop of politicians.
Thanks
Appreciated
And I live in hope of Courageous Politicians in a Courageous State
The first requirement of social emocarcy is honesty and real information to people
Not Polly Townbee’s Labour Party propagandist forte
– nor yours when it comes to employment issues, Richard.
[…] that capitalism has ingrained in us to feed its profits. This wont be easy, as Richard Murphy says; The idea of ‘more’ is deeply ingrained in us, but we will have to change in any event: the […]
You know what, Richard, you can take a running jump. All the while when the pie (or the world, as you have it) was growing under the Blair/Brown Government, all of the extra growth and then some more (through borrowing) were being plowed into creating new and exciting ways of getting everyone on one sort of benefit or another, or in one public sector job or other. There was no logic to this except for the fact that if everyone is on one benefit/public sector job or other, it’s much easier at election time to wail “Those wicked Tories will cut your benefits/job! Vote Labour!” We had the biggest boom in history and still contrived to have 1.5 million (and that’s only officially, which we know is an underestimate) unemployed.
Now the pie is static, or even shrinking, you come out with a load of polysyllabic mouth about how the state needs even more. More cash for the left to slosh about bribing people to put it back in power and keep in power. Perhaps if there’s no more pie to add to the state sector it should just be borrowed, eh?
So, screw you and the horse you rode in on. We are tightening our belts now, not splashing the cash to make the benefits system the easy life for us all, while the rest of the world knuckles down. This is an intellectually dishonest, greedy article. The British people are not going to be fooled by this blatant bribery again.
I post this simply to show the moral bankruptcy and debased greed of those who oppose social democracy
Interesting post, thanks.
Three points:
1) As I am sure you are aware, the basic state pension is funded on a pay as go basis. All of the actuarial assessments of the solvency of this benefit assume positive income growth and increases in productivity.
Therefore if growth is lower than expected, the current levels of the basic state pension will not be sustainable, without changes to other state spending or increases in taxes.
This is why economists focus on growth in GDP. Whilst GDP does not equate to happiness, I’m fairly sure that if state pensions payments are reduced people will get pretty cranky, see Greece or Italy or Spain.
If growth does not resume, retirement in the UK, if it happens at all, will be grim.
2) I struggle to comprehend your proposal to increase state spending. In the long term, the government budget deficit as a % of GDP must be lower than GDP growth rate. Government debt as a % of GDP cannot rise indefinitely. The state can only spend as much as it raises in taxation. How do you propose to pay for the increases in government spending you propose?
Given the dead weight losses associated with increases in taxation, how can we be certain that increases in taxation would not reduce output?
3) Finally, the current budget problems faced by the UK are due to demographics. We have made unfunded promises to future retirees. This implicit debt is not accounted for in most of the public finance statistics, for example the 62.8% of GDP published by the ONS.
Surely the first step to guaranteeing the future of social democracies is to ensure that these debts are fully accounted for as the rights are accrued? We require accrual accounting for our companies, surely we should expect the same of our state? Otherwise we should not be surprised when it turns out our politicians promised voters higher spending in future than our economy is capable of producing?
Might it be a good idea to do this before we start worrying about the proportion of GDP spent by the state?
You ignore the balancing factor in the equation
It’s called tax
You also ignore the fact that people aren’t going to let pensioners die
They’re our parents
But not, apparently as far as you’re concerned -let them starve you seem to be saying. Actually, like it or not we’ll be keeping them – so you’d better get your head round it. Your option of a cull without growth is on no-one’s agenda
A little macro perception would help your analysis. You’re missing it on many levels right now – all you’re doing is extraploating your narrow thinking and saying it then doesn’t work. All that proves is the narrowness of your thinking – not that you’re right
Dear Richard,
Thanks for your response.
I think we can all agree that no one wants to see pensioners starve.
Which is why I am concerned that most of the actuarial assessments of the UKs old age welfare system assume positive rates of economic growth.
Many commentators who argue that GDP growth should not be the focus of economic policy, do not seem aware of the link between the sustainability of the UK’s state pensions systems and GDP growth.
As you suggest, it is possible for the UK to permanently increase government spending by increasing tax rates. But there is a limit to how much tax can be raised. At present government revenues are around 40% of GDP, even in Nordic countries the state only raises 55% of GDP in revenues.
It is far from clear that the pension promises already made are affordable within this budget constraint. This is compounded if there is little or no growth in GDP.
Furthermore, where would these additional tax revenues would come from? For example, the IFS recently estimated that 50% rate of income tax raises little revenue. Raising taxes can decrease incentives for work, which may reduce output: the dead weight loss of taxation.
It’s also hard to see raising taxes on capital helping much either. A large proportion of the capital in the UK is owned by pension funds and people saving for their retirements. Raising taxes on people foresighted enough to prepare for their own retirement does not seem to be a sensible way to address funding problems associated with an aging population. Surely we should be encouraging people to save, i.e. lowering taxes on capital held by pension funds and people saving for retirement.
In terms of macroeconomics, of course effective monetary policy can help to maximise and stabilise output. But I do not see how expansionary fiscal policy (deficit spending) can overcome these demographic changes.
David Blake (2006) has written persuasively on these issues, see:
http://www.res.org.uk/economic/freearticles/june06.pdf
He lays out five options for making the UKs pensions systems sustainable:
1. accept a cut in real pensions
2. contribute more whilst in work or
3. work harder or
4. work longer and retire later or
5. accept more immigration.
Each option has its own distributional consequences and different groups will be made worse of with each.
But, in order to minimise the consequences on any one group, it seems sensible to share the costs of increases in life expectancy across as wide a section of the population as possible, younger and older workers, and retirees.
Personally I would rather prepare and save for my own retirement, rather than paying for it by increasing taxation on my own children, but this may be a case of de gustibus non est disputandum?
On the Limits to Growth (and consumption):
“There will be no more sequels based on World3, though. The model can no longer serve its purpose, which was to show us how to avoid collapse. Starting from [today’s] current conditions, no plausible assumptions produce any result but overshoot. “There is no sense in only describing a series of collapse scenarios,” says Dennis Meadows, another of the original authors of Limits.”
Mmmm – sobering, and all the more so because it’s believable.