Last week I found an old document from my university years. A quote taken from an article wrote by Keynes in 1930 titled “Economic Possibilities for Our Grandchildren” (John Maynard Keynes, Essays in Persuasion, NY: W.W. Norton & Co., 1963, pp.358-373). It was the most amazing quote to find in the current economic climate.
Keynes wrote the essay on the aftermath of the Great Depression in an attempt to convince people that they were “suffering from a bad attack of economic pessimism”. He predicted that in 100 years (that is 2030, 20 years from now!) the economic problem would be solved and people would be free: “to return to some of the most sure and certain principles of religion and traditional virtue”; and would recognize “(…) that avarice is a vice, that the extraction of usury is a misdemeanour, and the love of money is detestable…. (and) once more value ends above means and prefer the good to the useful.”
Today on the aftermath of the ‘Great Recession’ with unemployment reaching historic levels in developed and developing economies alike it is worth asking: Are we suffering again from a bad attack of economic pessimism? Is Keynes prediction still a feasible one? Are we capable to escape the ‘bubble-capitalism’ we have relied on for the last three decades?
In order to answer these questions, first we need to understand the basis on which Keynes predicted our successfully escape from the “Economic Problem”. It is very likely that he got to the 100 years figure by calculating the increase in wealth given the “interest compounding” and the experience of Britain in the XIX Century. As we know Keynes was a prodigious mathematician and probability guru. But he also based his conclusion in a very un-orthodox assumption. In contrast to classical economic theory that treat all human needs as insatiable Keynes differentiated human needs in two categories: “those needs which are absolute in the sense that we feel them whatever the situation of our fellow humans beings may be, and those which are relative in the sense that we feel them only if their satisfactions lifts us above, makes us feel superior to, our fellows”. It is only relative needs that are insatiable.
He believed that: “The course of affairs will simply be that there will be ever larger and larger classes and groups of people from whom problems of economic necessity have been practically removed (absolute needs). The critical difference will be realised when this condition has become so general that the nature of one’s duty to one’s neighbour is changed”. He was also clear about the key determinants of the speed in which we were going to reach the solution of the economic problem: a) our power to control population growth, b) our determination to avoid wars and civil dissensions, c) our ability to foster science and scientific developments and, d) the rate of accumulation as fixed by the margin between our production and our consumption. While we have more or less successfully managed to control population growth, the destructive effects of wars (not everywhere though) and we have continued to innovate at a fast speed. In the aftermath of the ‘Great Recession’ (credit crunch) it is clear that we have failed to find the correct rate of accumulation and therefore an equilibrium between global production and consumption.
While orthodox theory will depict the current unemployment as “normal” and transitory given the huge increase in productivity in the last decades from the insertion of China and India into the global economy, it is evident that there is a structural disequilibrium in today’s capitalism. Unemployment is a perverse result of the huge disequilibrium between global productivity (supply) and aggregate demand (as highlighted by Stiglitz in: “Freefall: Free Markets and the Sinking of the Global Economy”, Penguin, 2010). While the recognition of the necessity of governments to tackle disequilibrium in last week G-20 meetings is positive there is a huge risk that the politics of bilateral negotiations among US, China, Germany, etc. will only delay the necessary actions and mislead the analysis of the actual causes behind the structural disequilibrium. For instance the G-20 members were only able to agree to track the imbalances but they haven’t even reached consensus on how to measure imbalances and what to include in the calculation (with China pushing to exclude fiscal balances).
There is a deep structural problem that needs to be dealt with at the national level in every country! The true reason behind the trade imbalances and the reason why US is now looking at its deficit (for the first time in a long time) lays not on China’s FX policy but on the increasing accumulation of economic resources and its effects on employment and consumption. The increase in inequality in developed economies in the last decades has produced a shift in resources from those who would have spent it to those who didn’t (Stiglitz, idem). From those whose absolute needs are not yet satisfied to those that have theirs satisfied. No other sector shows more evidence of the concentration of economic (and political) resources that the financial sector; a sector with a low job-creation capacity and a questionable multiplier effect into the real economy.
Governments need to finally question the ability of the current financial system to create wealth for the common family. We need to do a cost-benefit analysis of our huge economic and social investment in banks, insurers, investment companies, etc. not forgetting to include the increased crisis probability in the calculation. We have been treating the financial sector as an end instead of a mean to achieve further creation of wealth. And it is time we ask our politicians why?
Apart from the obvious political explanation based on power, I think the most important reason of why despite all logic and common sense the financial institutions have gotten away with their destruction of value and lack of value added to the real economy, is their key role in sustaining today’s bubble capitalism. Without financial markets we wouldn’t have had the dot-come bubble of the 90s, the housing and real state bubble of 2008 and we wouldn’t have a new equity bubble emerging in developing countries. And without those bubbles grow rates in developed countries would have been even lower and politicians will have lost a lot more elections!
The reality is that without the willingness to achieve a better distribution of resources the only solution for the shortage in aggregate demand is to create bubbles. But how many more until bankers, politicians, economists, and voters realize that we need to regulate the accumulation of resources and that governments need to channel at least the same amount of resources they have spend in bailing out the Financial System to improve the purchase power of the low income families. How long until we understand the only way is the common good!