New Year’s Wish

Now that 2013 is drawing to a close, I shall make a few remarks about what I consider to be the major global challenges that we have to face sooner or later, i.e. 2014 and beyond. Consider this my laundry wish list. They can be summarized under the headings of rumblings in the global economy, social inequality, and climate change. Let us look at each in part.

The economy has not been a stable creature since the introduction of capitalism, which according to scholars like Immanuel Wallerstein reaches as far back as the 1500s, when the Europeans strengthened their trading networks, and when an entrepreneurial class emerged from the major cities of the continent. Joseph Schumpeter appreciated the gale of creative destruction that was inherent in capitalism, and this analysis had often been used by later scholars, who celebrated the benefits of capitalism rather than the risks. Risk-taking has taken on a very positive image in the minds of the American people, and creating new products and new methods of production are constantly celebrated in the abstract.

But the reason why I want to be cautious here is that despite all the benefits to capitalism, such as a materially richer lifestyle, a longer life expectancy, more opportunities for privacy and free time, some significant cracks have appeared in the global economy, and it is our collective responsibility to try to fix it. The essential problem in our current capitalist system is that we are facing an overaccumulation of capital relative to what the society can produce. Now, scholars like Karl Marx, John Hobson, Vladimir Lenin, Rosa Luxemburg, and John Maynard Keynes have recognized this problem long ago. But it might be necessary to heed their call in the contemporary environment of economic instability.

There are several factors that have played into this overaccumulation problem, such as globalization, the increase of the global workforce, the increasing power of financiers and the wealthy, the weakened power of organized labor and the automation through technological advancement. I will highlight just the technological advances for now. The enormous technological advances over the last 30 years have been astronomical, and contrary to some views, I think that the computer had actually been a fairly revolutionary human invention, because since its invention and use in industries many jobs had been transformed. Work can be done faster, cheaper and more efficiently with computers than with humans, and we are facing automation in many industries, starting in the industrial sector, where most of the coveted, high-paid, union jobs were, but it is increasingly becoming clear that even in the service sector wide-scale automation is necessary. The essential problem with automation is that as more jobs get automated and as productivity per worker is increasing, more wealth trickles up to the owners of the technology and the companies of which they are part of, which will raise investor wealth, but not the wealth of the population, which is crucial for consumption and economic growth.

I will simply pick retail as an example, because I happen to be employed in this field. Recent data revealed that about 10% of all retail trade transactions were performed online, which is not all that much compared to the store-based retail trade that most people have become accustomed to, and which provides me and many others with a source of employment (it turns out that the sales associate is one of the fastest growing job in the US at the moment). But consider the long-term historical trend. Before online-shopping came along, there was logically no trade done online, and the increase in online trade has been phenomenal. From a consumer viewpoint this may be acceptable, because they don’t want to face the long lines or the annoying sales workers, who are doing their job so slowly or are not polite enough. And clicking a button on the screen is certainly much easier than the hassle of going into the mall, though that is still an important part of American culture. The implication is that many retail jobs can simply become lost, and will not be regained. No job is safe. The counter-reaction here might be that online-retailer jobs are rising, and labor is demanded there, but I don’t find this argument very convincing, because automation can happen in the online delivery system as well, and so the scope of employment growth will remain limited in the online retail sector as well. If we were rational we would solve this technological challenge by shortening work hours and distributing work fairly across the population, but that is not part of contemporary debate, especially as labor is weak and capital is strong (labor has an interest for less work, capital for more).

There are significant social consequences that are associated with chronically more unemployment or underemployment, and reducing it should certainly become an important part of the political agenda, especially in the countries of the European periphery, who have been facing enormous austerity policies in the name of saving the euro currency. The macro-economic situation in the US appears to be somewhat more optimistic, because the GDP figures are going up. But the enormous social pain is hidden behind these growth numbers. A significant proportion of the US workforce has simply dropped out of the labor force, and given the negative wage growth trends and the persistently rising cost of living, this does not indicate that workers are having too much money in order to sit idle, which would be part of the standard economic theory. There has been some improvement in the labor market and consumer confidence is up too, but this positive picture has to be counter-balanced by the falling US savings rate, which is good for short-term consumption, but bad for long-term growth development.

Besides, the Federal Reserve policy of raising monetary stimulus, which principally benefits the wealthiest people, has also done its part in raising investor confidence, and this may raise real investments in the economy, which is what Ben Bernanke had intended all along. But that is where the overaccumulation argument comes back again. Fattening the share prices through monetary stimulus may be good for the investors, but it does not have to translate into significant improvements in the macro-economy, nor does it have to contribute into real investments and real jobs. It seems to be that monetary stimulus policy may be currently inevitable in order to keep the logic of the current system going, but it certainly promises no positive recovery for the larger economy, and exacerbates overaccumulation problems. Where are the investors going to put all their money toward?

Robert Reich, Joseph Stiglitz, Engelbert Stockhammer, and other economists are rightly pointing out that the increasing extent of income and wealth inequality on a global scale, but specifically in the US, is a major contributor to the continuing economic malaise in the form of overaccumulation, and the growing social discontent. As I pointed out, consumption growth is not possible without a more equitable wealth distribution, and strengthening labor at the expense of capital is the decisive mechanism through which this more equitable distribution of wealth becomes possible. Unfortunately, in my understanding of the global political economy, the trend toward unrestricted capital movement, deregulation, privatization, tax cuts for the wealthy etc point to the well-connected capitalists as the winners, and not workers, who are not as mobile and well-organized as capital. Reversing this power balance, which would reduce some of these overaccumulation problems, is essential.

Why does overaccumulation matter as a problem? Because if there is too much capital that accumulates in the hands of the few, then there is fewer opportunities or reasons for re-investment, and that implies fewer jobs and more social discontent. Every product that is produced eventually needs to be consumed by somebody. But poor people don’t consume all that much (except if you lend them money, which creates its own contradictions, such as during the housing crisis in 2008), and the rich have the money, but won’t consume more. The Chinese, who are accumulating their unsold inventories in the shipyards of Shenzhen and Shanghai may see this problem more clearly than the rest of us. Some very wealthy people like Bill Gates or Warren Buffett understand this problem very well, and I think part of their philanthropic work is subconsciously related with the recognition that the rich can not consume all of their wealth, but have to share it with others. Some other billionaires like the Walton family, who are lobbying actively in Congress to repeal the estate tax to protect their $130 billion net worth from Uncle Sam, or Sheldon Adelson, who had transferred $7.9 billion of his $30 billion in total net worth to his children tax free thanks to foundation schemes, are not as wise, and their selfishness certainly portrays the perfidity of the capitalist system, and not the virtues as Adam Smith sees them.

The investors try to solve their overaccumulation problem by shifting more of their investments to ever riskier bonds and stocks in the search of higher yields. But exploiting transactions in the financial sector is simply a waste of real resources in society. As much of the equipment and the unemployed workers remain idle, society is certainly operating well beneath its potential. Nobody is getting better off, when investors refuse to massively raise investments in the real economy. There have to be significant government regulations in place that would direct more capital toward the real economy, even if the investors will not immediately see benefits from their investment. (Remember that overaccumulation means that the investors have a lot of money, which they don’t think can profitably be re-invested in the real economy, which is why it stays within the financial sector for speculation.)

Some economists will scream and complain about my solution as being ineffective and inefficient for the economy, because the investors should freely decide, where they should make their investments, because that would guarantee the most efficient and optimal allocation of capital. But I don’t recognize this as a valid argument. It is simply not true that if the investors are allowed to pull their investments out of the companies in which they are holding stock and re-allocating it elsewhere that the economy is running better and more efficiently. I would surmise that the economy is then running more erratically and terribly, because investments in manufacturing and service facilities take long-term planning and long-term investments (a point well recognized by John Kenneth Galbraith and Ha-Joon Chang). Allowing investors to immediately pull out crucial funding for long-term investment projects undermines any rational calculation in the production process, and makes the economy unnecessarily more unstable. The government has to take steps here to force the investors to hold their investments longer in the companies, so that managers can do some useful things for the company such as hiring more people.

But this aspect touches on another thorny subject within the area of corporate governance. Right now the chief executives are in an unholy alliance with their investors, where the executive only has the incentive to maximize short-term profits and deliver on dividends to shareholders, while receiving a generous compensation package in return. The alliance is unholy, because the major stakeholders in the company, smaller suppliers and workers, are shortchanged in this arrangement. Switching suppliers and laying off 30% of the staff are ways to maximize shareholder value, but not how to satisfy stakeholders nor to run a company successfully over the long term. A combination of government intervention and public protests should lead to some form of corporate governance reform, where long-term institutional investments, and long-term oriented management become the norm rather than the exception. Such corporate governance reform might even contribute toward mitigating the impacts of overaccumulation by letting the workers have a greater stake in their companies, and correspondingly more pay and benefits. Experimenting with alternative forms of companies, where workers run their own company, such as in cooperatives, are another way to solve the principal-agent problem inherent in traditional capitalist enterprises.

The other major political concern is the extent of social inequality that exists and persists in current society. All the benefits of globalization, automation, increased trade, and capital mobility have been wonderfully exploited by a handful of people, who were the first ones to grab the given opportunities for wealth creation, and also those who have used the social-political system to advance to top positions with top compensation. The problem is that not everyone benefits from it, as Jeffrey Frieden had pointed out in his book “Global Capitalism”. Why is it important to care about losers, like the inhabitants in Camden, New Jersey or Detroit, Michigan, or in Lagos or Karachi for that matter? The purely economic and rational argument has already been formulated in the form of overaccumulation. But then there are purely sentimental and human rights views on it, which argues that we can not allow so much suffering amid plenty. The picture can be painted easily. One imagines on the one hand wealthy people, who are fighting with each other about the appropriate distribution of the family wealth after the death of the patron, and another family that is very poor, where the children fight about the extra meat ball on the plate, while everyone is still rather hungry. It is quite easily possible that in the former case, the conflict might have bloody consequences, but it is hardly existential, but has to do with social signaling, status and reputation, as Thorstein Veblen formulated correctly. The battle in the poor family is much more existential, and it is questionable why we should allow so much suffering to continue, when we could easily erase poverty with the given levels of production.

The social consequences of enormous inequality are also worth a consideration. As the spasm in society increases, so the life chances between rich and poor become vastly different. There is simply much less social mobility among the poor compared to the rich, and this is especially the case in the US, where inequality is greater than in any other European country, where inequality, though growing, is still less than here. A large middle class is the prerequisite to more social mobility, but with the current trends, the middle class is really thinning out, as we add to the ranks of the poor. Increases among the very wealthy exist too, but it is minimal. This trend toward increasing social polarization should become alarming to us not only because we ourselves might befall the ranks of the poor (or already are, and are very angry that nothing is done to alleviate our already existing plight).

It should also concern us, because the provision of public infrastructure, which maintains our high civilizational status, is also fraying. Want to go to college? Too bad the government is cutting funding for state colleges, so take out enormous debts to go to college, or miss out on the minimal credential requirement for most entry-level jobs that allow you to eke out a living. Want to get health care? Too bad that funding for public health care is curtailed, so that you either have to pay lots of money to be served first in line with the best treatment that the world has to offer, or go without needed care. Want to drive on good roads? Too bad that the state does not tax the wealthy enough, so that important repairs in the infrastructure are simply neglected, so that public goods like roads are left to decay. Many more examples can be added here, but I hope the picture is becoming clear now. Aristotle had made the argument a long time ago that in order for a polity to be well-run wealth has to be distributed roughly equally, and the middle class has to be large. We can satisfy neither of these two conditions, and our market fundamentalist, capitalist logic is certainly driving and exacerbating the trend toward more social inequality and polarization.

The most sensitive topic remains at the end, which is climate change. There is no doubt that humans have impacted the environment since the beginning of our existence. But the important observation here is that, historically, the more we have impacted the environment the more unpredictable earth feed-back responses have we caused. Human ingenuity certainly leads to significant progress, but what is that progress ultimately worth if our grandchildren can not enjoy it? This is really a fin-de-siecle scenario, and the escape routes are limited. The environmental trends can roughly be summarized as such: continued burning of fossil fuel leads to the trapping of greenhouse gases in the atmosphere, which raises overall temperature levels across the globe, and makes for warmer than usual weather patterns. There are always annual fluctuations in temperature, and cold winters are still possible anywhere, but the trend toward warming does exist. The intensity of natural disasters, which may be linked to climate change, in the form of floods, droughts, hurricanes etc. are expected to increase. We can also anticipate rising sea levels due to the melting of the polar ice caps, so major cities like London or New York are threatened with flooding in the long term future. Climate change is also associated with the loss of biodiversity, meaning that many forms of animals are facing extinction if they can not save themselves by migration or adaptation. Less biodiversity implies less stability in the eco-system, and this might eventually have impact on humans as well, though this problem is more abstract to grasp.

For me the controversial portion about climate change is not so much the science behind, which I find very hard to dispute, though some people with vested economic interests spend much time and effort disputing climate science. The really controversial portion of climate change is socio-economic in nature. I have argued the first half of the article that policymakers need to take steps to restore economic growth, and produce the economic stability which is the prerequisite for social stability and social peace. This is the social-democrat or liberal instinct in me, which dates back to Knut Wicksell, John Maynard Keynes and Eduard Bernstein. But given the environmental constraints, I essentially have to make a 180-degree turn and make the opposite argument.

More economic growth is precisely what we don’t need. Here is why. The starting point of the analysis is that climate change is exacerbated by the burning of more fossil fuel, which is the prerequisite for our modern, industrial lifestyle. But economic growth under the current model means an increase in fossil fuel consumption. And that increase is going to come, because if we assume that capitalists will find ingenious ways to continue their accumulation through the real growth in the economy (thus weakening the argument I made in the first part of the article), there will be more fossil fuel that is required to maintain production at an expanded scope.

The important structural factors for this prediction are two-fold. First, I expect an increase in the total global population, whose implications I had remarked in a previous blog post. Second, I expect more capitalist investments in currently peripheral or at least the emerging markets, which means that many more people across the globe will be able to approach western living and consumption standards, even though the road to it is not smooth, as the first part of the article points out. Michael Mann has correctly pointed out that the unholy trinity between capitalism, nation-states and consumers (all entities desire for growth) makes an end to economic and consumption growth impossible to contemplate. Consuming the climate science literature is depressing enough, but contemplating the collective foolishness of humanity, that appears irreversible, is even more depressing.

Now some people might object that we don’t have to tie ourselves to fossil fuels. By using alternative energies, like solar or wind technology, or nuclear energy, we can dramatically cut back on CO2 emissions, and yet maintain a high standard of living. No conflict with nature is required. Skepticism against such optimism is warranted here. First, it is unlikely that even if we stopped CO2 emissions now that current trends will be shifted significantly, they will merely be slowed down. Second, alternative renewable energy is only a small portion of total energy production, even though I hope that in the future we may be able to exclusively rely on it. Third, much of the material production still relies on fossil fuels. Some innovation has appeared in the production of synthetic material, and re-cycling is becoming a more acceptable way of handling previously existing material, but these efforts are not enough to completely halt the use of fossil fuels. Fourth, if the population growth and living standard growth trend holds, then resource scarcity and more fossil fuel burning remain on the agenda, and are not cleared that easily.

I do hope, however, that energy reform toward renewable energy is the solution to our climate change challenge, but as I see it the stars are lined up against it. More investments in renewable energy has to be undertaken by all governments, and it has to be pursued regardless of the dire implications I have just pointed out. Doing something is better than nothing, in this case. Finally, we need a steady-state economy, where overall well-being of the population not just GDP growth is put forward to mitigate human impacts on the environment.

If this article has not given you enough problems to ponder on, then I wish you a Happy New Year and a successful pursuit of your personal goals, if at least they can be pursued.

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