This essay is an overview of the themes of the two sessions in October and November 2008 on
THE GLOBAL ECONOMIC CRISIS Overshoot and collapse again WHAT IS HAPPENING AND HOW IT WAS FORESEEN 30 YEARS AGO
STOP GROWTH ! LOOKING AHEAD TO THE LEISURE SOCIETY An upbeat look at how to deal with global problems
Let me start with two stories of economists, which illustrate their frequent deliberate ignorance and how economics is so often a means of political control and obfuscation rather than a scientific enterprise. They will help to explain why the analysis which follows is ignored, denied and unknown to the general public.
Chairman Greenspan (seventeen years as governor of the US central bank) incorrectly praised Adam Smith for his ‘demonstration of the inherent stability and growth of what we now term free-market capitalism’. (Adam Smith was never that stupid.) This stability and growth arises, Greenspan said, in a principle discovered by Smith and called the ‘invisible hand’. One could hardly imagine, Greenspan has said, that today’s awesome array of international transactions would produce the relative economic stability that we experience daily if they were not led by some international version of Smith’s invisible hand. That was in 2005; who now in 2008 would believe in the inherent stability of the global economic system? When left to itself it is a disaster, as witness the great number of government actions required to bring some order to a collapsing system.
The 1972 model experiments of “The Limits to Growth” pointed out that the earth was finite and that many human activities would reach their final limits around 2050. (The forecast date is important here.) Big business did not like the message and simply denied the facts. In their minds freedom meant capitalism, capitalism meant growth, and so growth was necessary; never mind if was destroying the planet and was soon to become impossible. When it was reported in many New Zealand papers that Nobel Prize winner Wassily Leontief had shown that “The Limits to Growth” was wrong, business breathed a sigh of relief. As a scientist in the Applied Mathematics Division of the New Zealand DSIR I had written several papers supporting “The Limits to Growth” and I wanted to study Leontief’s analysis and make an informed comment. I soon found out that there was only a press release, and that the report would follow later. In fact, it was nearly a year later before I could get a copy. I found out that Leontief had stopped his computer in the year 2000, well before the limits might be reached. Up to that date he had repeated the trends of “The Limits to Growth”. He had proved nothing and the press release was a lie. But no one in the press or business sector was interested and my statement of clarification was never noted. The message of the disproving of “The Limits to Growth” however remains an incorrect belief among many economists, business people and politicians.
These are top economists talking hogwash. I wish to suggest that it is possible to have some understanding of global economics, to look ahead and to foresee important general trends, and then to work out how to do better.
THE GROWTH MACHINE
Capitalism operates as a repeating cycle from investment to production to profit – then back to the start with re-investment. The faster the wheels turn, the more the profit. The bigger the machine, the more the profit. It works well enough when there is a need for the production, and buyers for the produce. (It is important to recognise that this is not the only system to have produced economic growth, as shown by the growth of the USSR after the Second World War, with a faster recovery than the west.)
MARX PREDICTS COLLAPSE
Eventually demand is satisfied. Yet decisions made during the growth period mean that factories already planned continue to be built, and the potential is there to produce far more than can be purchased. Note the real, physical base of this economic event, which is not based on the feelings and behaviour of investors or the stock market. Competition means that many businesses fail, shut down, fire workers – who cannot spend and thus further reduce demand. Profits dip and capital has nowhere to go. That overshoot and decline mode and the subsequent collapse shows the failure of capitalism, which is replaced by a new system. That free market (which in reality is controlled by a super-rich international class) is replaced by central planning by the people’s representatives. As history tells us, the way those representatives are chosen can be key.
KONDRATIEFF IDENTIFIES A PATTERN
In 1920s USSR economist Kondratieff identified a number of past cycles that have followed that pattern. He developed Marx’s analysis based on that historical evidence, with the suggestion that capitalism may survive each crisis. The pattern, in brief, is then need and demand leading to investment and production; sales providing profit and further investment; satisfaction of demand leading to excess capacity, excess capital, crisis and collapse; collapse involves breaking down of the system, poverty, misery, failure of production – and then a need to produce again. Rather than being replaced, capitalism here picks itself up again and goes on. Kondratieff cycles are described in my 1989 book, “Excess capital”.
THE PATTERN IS BROKEN
After Kondratieff the pattern continued as forecast, with the Great depression of 1929-1933 and s subsequent recovery. The policy response in the west was to move away from pure free-market capitalism to a mixed economy of the New Deal, controlling the excesses of the market and providing infrastructure through communal government action. The destruction of World War Two helped, as the need to produce again dominated.
The years after World War Two (1945-1970) were a time of growth, with real need satisfied by growing production. The theory of Kondratieff cycles suggests a crisis around 1970. There were indeed major problems and the USA moved off the gold standard. In the 1970s there was overproduction in many sectors, such as chemicals, shipbuilding, car manufacture. Yet no crash.
Reasons for the continuation of capitalism include the provision of benefits to the unemployed, who could continue to purchase goods, and the intervention of the World Bank and International Monetary Fund. Governments and international organisations were more active in the economies. There has also been an unprecedented use of modern communications to create artificial demand and to brainwash people into a selfish consumer society.
I came to understand the pattern, including the Kondratieff cycles, in the 1970s from meetings of the Club of Rome and various research institutions in Europe. My reading of a considerable mass of information while with OECD Interfutures told of the considerable overproductive capacity. A senior OECD economist told me, in confidence, that the move by the USA off the gold standard was a key development, but he could not say that within the organisation.
While the stresses identified were real, the system had not collapsed. My 1980 forecast was for ongoing high unemployment and economic glitches through to 2000 – no full recovery to 1950s growth and no 1930s collapse. I could not see past 2000, expecting the imbalance to eventually lead to a global crisis.
It is a pity that there has been no Commission for the Future, no think tank to debate these ideas, to pool expertise, and to build a further understanding of global long-term economic trends. It is evident now that the excess capital, which I identified as a danger, has caused immense damage.
CAUSE BEFORE EFFECT
One reaction by governments to a global crisis has been to gain some control of the economy, and of trade – to limit ‘free trade’. Many economists have interpreted such limits to free trade as a response to the crash of 1929-1933 as the cause. This is nonsense; the cause is what led into the crash – the period of unregulated growth and the resultant overproduction.
One reaction to the shortage of capital, for home loans and the like, has been to inject more money into the system. This seems fine as a short-term palliative. Yet there is no clear recognition that the previous over-abundance of capital is the cause of the current (2008) crisis. The basic problem is not the lack of easy finance. It is that too much capital has been searching for profit in an overproducing world. This includes the enormous flow of petrodollars which helped to set off the current crisis.
Eventually an economy may succeed. All basic needs can be satisfied for the entire population. Work is then required to look after one another and to replace goods which wear out, plus some new products. But then, however, spare cash cannot be readily invested to grow. The belief that investment must always produce unearned income has had its day. A limit has been reached.
Many of us saw this back in the 1970s. Many populist movements called for a better way – a society that reached for quality of life rather than quantity of goods. Almost every New Zealand home had a refrigerator, washing machine, and car. The considerable improvements in computer technology that were forecast could lead to improvements in efficiency so that the work week could be cut from 40 (or 37.5) hours to 35. Such an emphasis on the good life was fitting to the economy of the day, and would produce a more stable and satisfying society.
A demand for work, and a desire by government to put everyone into the paid workforce, is a basic feature of today’s New Zealand – an end in itself. We are asked to compete, to become more innovative, to grow!
People work to provide goods and services for themselves and for others, and to gain an income. Once the job is done, we can move to fill in the gaps and then relax.
PROVIDING SERVICES WITH TAXES
Much modern equipment has improved the efficiency of manufacturing in the private sector, as machines have replaced labour. Meanwhile the challenges of good health care, education and policing require more people. They need to be paid, and should be paid well. They are best provided for everyone by everyone, that is by government which gets its money from taxes. The inescapable conclusion is that high taxes must be a feature of a modern, sustainable, stable, caring, leisure society.
When I said this years ago I found myself squeezed out of the Green Party, which is not given to deep thought. Challenging thinking such as this must get into the public arena if society is to face the challenges created by past growth and current crisis.
We in the Island Bay World Service are challenging political parties to set up independent think tanks so that people can ‘think outside the square’ and discuss the current in an informed manner, in a situation free from the restrictions of a growth-oriented conventional wisdom, which is largely directed by the economists employed by the wealthy to support narrow and selfish sectional interests.
What we have seen in our lifetimes is not a series of aberrations but the working of the global system.
Wars from Vietnam to Iraq and Afghanistan are not a series of aberrations but the working of the military-industrial complex that so worried Eisenhower.
Depression, war, stock market crashes (1987 and 2008 etc.) and high unemployment are not a series of aberrations but the working of free market capitalism.
The questioning must go deep. Modern capitalism is increasingly dependent on speculative bubbles, and profit is no longer made from useful production but from speculation, artifice and excess. We do not need growth; we have had growth and now produce too much. Those with lots of cash cannot make more out of the production of useful or needed things. So they create artificial needs and bubbles of promised goodies that each collapse in turn, but produce wealth for the wealthy in the process.
We challenge community groups who focus on local action to think global, to measure their actions against the need to act in a crisis, and to add positive global action to their goals.