In this article I revisit the contention that the western world has entered a “new normal” of sluggish economic growth. It is the final part of my latest Fund Strategy cover story.
In many ways the notion of the low hanging fruit parallels the argument that the global economy has entered a “new normal” of poor growth. In both cases the idea is that the economic future is likely to be less rosy than the past.
The notion of the new normal has several high profile proponents. Mohamed El-Erian and Bill Gross of Pimco both used the term while George Soros talked of a “new paradigm”. Robert Peston, the BBC’s business editor, preferred to label the same idea “new capitalism” while Anatole Kaletsky, an economics commentator for the Times (London) referred to Capitalism 4.0.
Although there were differences in emphasis between each of them in broad terms they identified five key features of the new era:
* Slow economic growth or even stagnation in the developed world.
* Deleveraging. Companies will focus more on reducing their debt than promoting future growth.
* High instability. Financial volatility is likely to be greater than in the past.
* Reregulation. Financial regulation is likely to be tightened up.
* A more pragmatic form of politics.
Although the idea of the new normal covers a broader range of factors than that of the low hanging fruit it is also shower. There are two ways in which Tyler Cowen’s theory is more substantial. First, it traces the declining growth trend back to 1973 rather than seeing it as a response to the latest crisis. Second, it gives a plausible explanation, focused on technology, why growth has slowed.
However, despite some optimistic flourishes, both sets of ideas are fairly pessimistic about the prospects for future growth in the West.
* For more on the new normal argument see “Paradigm lost”, my Fund Strategy cover story of August 30, 2010.
This is the main text of my recent Fund Strategy cover story on the debate about the “great stagnation”. All the graphics can be found in the version in the magazine itself and I will post the remaining box here tomorrow.
An influential alternative to the well-worn explanation of the economic malaise of recent years has attracted much attention. It contends that the banks were perhaps not the main culprits after all. Maybe the era of rapid economic growth, particularly the improvements associated with technological progress, had already come to an end. From this perspective a prolonged period of economic stagnation could lie ahead.
This may seem an odd case to make in the age of the iPad and the smartphone. The internet and related mobile technology have become ubiquitous in western societies. At first sight such devices seem to refute the suggestion that the world has entered a period of slow innovation and atrophied growth.
But not so fast. In some respects the overwhelming focus on the internet supports the argument rather than contradicts it. There is much less excitement about technological advances outside the online world. Many important areas of technology have seen only incremental improvements in recent years.
Moreover, much of the recent spurt in internet-based technology is aimed at consumers. It makes it easier for individuals to communicate and to gather information. That is fine in principle but technological breakthroughs that could pave the way for growth by transforming the production process are rarer.
For instance, in the past the harnessing of electricity did not just benefit people in their homes. It meant that factories could be automated. As a result a range of other goods could be produced more efficiently.
What is more the iconic companies of the online world employ relatively few people. According to recent estimates Google only has about 20,000 employees, Facebook 1,700 and Twitter 300. In contrast some of the largest car companies employ more than 300,000 each.
The main figure behind the new theory of technologically-driven slowdown is Tyler Cowen, a professor of economics at George Mason University in Virginia. His argument is summarised in the title of his influential book first published in Kindle format last year: The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.
Essentially his thesis is that the easy gains from economic growth were made long ago. That accounts for the slowdown in American growth and innovation since 1973. The challenge now, from Cowen’s perspective, is to promote a new round of expansion. In some respects his theory resembles the idea that the developed world has entered a “new normal” of slow economic growth.
This article will first outline Cowen’s theory of the low hanging fruit in more detail. It will then examine some of the reactions to his argument. Finally, it will assess the strengths and weaknesses of his case.
Cowen marshals a range of evidence to support his contention that America entered a period of economic stagnation as far back as the 1970s. It can be broadly divided into anecdotal, indirect and direct arguments. He also has had support from other influential authorities.
To illustrate his case Cowen gives the example of his grandmother who was born in rural Wisconsin in 1900. Back then most Americans lived on farms and only about 6% graduated from high school. Cars were uncommon while many did not have flushing toilets or electricity in their homes.
By the 1950s a recognisably modern America was already in existence. Cars, flushing toilets and electricity were ubiquitous while most children went to high school. A kitchen from that era did not look fundamentally different from a contemporary one.
In contrast Cowen himself, who was born in 1962, has seen less change over a comparable period. Apart from the internet most change has been incremental rather than transformative.
Cowen also points to the thwarted dreams of his 1960s youth. Early in that decade the flying cars featured in such cartoons as the Jetsons were widely seen as feasible in the not too distant future. The first moon landing in 1969 also seemed at the time to be a harbinger of an exciting future of space exploration. With hindsight it can be seen as the high point of a space programme that was dramatically scaled back in subsequent years.
As indirect statistical evidence to support his case Cowen points to stagnating income growth in America (see graphic one, below). He points out that if median family income would have continued to grow at the same rate as it did during the post-war boom it would have been substantially higher. Cowen acknowledges alternative explanations for this growth slowdown, including political failures and mismeasurement, but argues that technological slowdown provides a better explanation (for more on the measurement debate see Daniel Ben-Ami “Average incomes ’did not stagnate’” Fund Strategy, April 30, 2012).
Cowen also points to direct measures of innovation and technological development. For example, a study by Jonathan Huebner, a former Pentagon physicist, shows the rate of innovation peaking as far back as 1873 (see graphic two, below). The calculation was made by taking the number of technological breakthroughs per year and dividing it by the global population.
Technology is the main form of low hanging fruit Cowen identifies but it is not the only one. He also points to free land that in America was there for the taking until the late 19th century. More recently the ability of America to tap into new reserves of bright, uneducated children has also reached its limits. For example, the proportion of Americans graduating from high school peaked at about 80% in the late 1960s and has fallen by about six percentage points since. There are arguably social benefits from ensuring everyone completes high school but there are diminishing returns in economic terms.
Overall Cowen’s thesis might suggest pessimistic conclusions but he gives several reasons for guarded optimism. First, the strong interest in science in places such as China and India could have global benefits. Although American may have picked its low hanging fruit not everyone has. Second, the internet might bring more opportunities for revenue generation in the future. Third, although most Americans enjoy a high school education there is still a lot of room to improve its quality.
His main policy proposal is to improve the social status of scientists. By doing so, he argues, it should be possible to raise the level of technological innovation in the future.
The Great Stagnation was widely and largely positively reviewed in high profile publications such as the Financial Times (by Martin Wolf), the New York Times (by David Brooks) and the Wall Street Journal. The Economist even named it one of the best books of 2011.
In broad terms the criticisms can be divided into several types. One set of critics questioned the factual premises of Cowen’s case while others proposed alternative explanations for the economic slowdown. Others have, at least implicitly, argued that Cowen is focusing on the wrong problem.
On a factual level some commentators, particularly the more pro-market ones, have complained about his characterisation of a “great stagnation”. At its most basic they have pointed out America has grown and innovated since 1973 so it is inaccurate to talk of “stagnation”. While this is true in a literal sense it is a mundane criticism. Cowen makes clear that he is pointing to a secular slowdown of growth rather than its complete cessation.
More interesting is the criticism that Cowen uses the wrong metrics to make his case. If he had used better ones, so the argument goes, the stagnation thesis does not look so convincing.
For instance, Brink Lindsey, the vice president for research at the Cato Institute in Washington DC, has argued that Cowen does not use the best metric to gauge growth. If he would have used GDP per head rather than median household income the pattern looks different. Lindsey’s preferred measure suggests that the post-1973 slowdown looks like a return to normality while the post-war era, with its rapid growth, was the aberration.
Lindsey also points to figures from productivity growth from the Bureau for Labor Statistics showing more rapid growth from 1995-2007 than from 1973-95. Cowen does refer to this apparent improvement, arguing that the official statistics are misleading, but does not examine it in what is only a short book.
However, research by Robert Gordon, a professor of Northwestern university in Chicago, comes down on Cowen’s side. He has carefully re-examined the official data to show that the apparent surge in productivity growth from 1995-99 was illusory (“Does the ’new economy’ measure up to the great inventions of the past?”, Working Paper 7833, National Bureau of Economic Research).
Gordon argues that the entire productivity surge over that period can be attributed to the 12% of America’s private economy that consisted of computers, peripherals, telecommunications and other types of durables. In other words it was focused on that sector of the economy producing computers and related items. The rest of the economy, if anything, showed a declining trend in productivity growth. If anything, he argues, the contribution of computing power is likely to be even less pronounced in the future. “The rapid decline in the cost of computer power means that the marginal utility of computer characteristics like speed and memory has fallen rapidly as well, implying that the greatest contributions of computers lie in the past,” he writes.
Critics of Cowen have also questioned the data on innovation he gleaned from Jonathan Huebner. For instance, Huebner measures innovations per head of global population at a time when the world’s population was rising sharply. Therefore, so the argument goes, his data says more about a growing population than a falling level of innovation. It would certainly be worthwhile to do more detailed research in this area.
Others have accepted that growth rates have declined but have sought to find alternative explanations for the trend. Indeed Paul Krugman, subsequently to win the Nobel prize for economics in 2008, has a book on the same theme, the Age of Diminished Expectations, first published in 1990. Clearly the trend has advanced since then but it is worth noting that it was possible to identify a secular slowdown so far back.
David Brooks, a prominent conservative columnist on the New York Times, has argued that the economic slowdown is itself a reflection of a cultural shift. He contends that earlier generations emphasised economic growth, whereas the most recent generations have shifted to post-material values. For the new generation of adults, he argues, there is much less emphasis on material gains and much more on happiness. Brooks’ argument appears to draw on the work of Ronald Inglehart, a sociologist at the University of Michigan, who in the 1970s developed a theory of post-materialism.
But while it is true that values have shifted since the 1970s it is not clear that this is the cause of the slowdown. It could be that economic stagnation itself caused the cultural shift or, more likely in this case, several factors were involved. In Ferraris for All, my book on economic progress, I argue that the driving force behind the shift towards green, post-material, ideas include slower economic growth, deindustrialistion, social atomisation and the defeat of the idea of progress. It is the combination of these factors that explains the cultural shift.
On the economic front Joseph Stiglitz, another Nobel laureate, along with Bruce Greenwald, a professor at Columbia university in New York, have also developed an alternative theory. For the two of them the stagnation is the result of a shift from a manufacturing-based economy to a service-based one. In their view this parallels the way the transition from a rural to a manufacturing based economy caused the Great Depression in the 1930s.
Stiglitz summed up their argument in an article in Vanity Fair (“The Book of Jobs”, January 2012). His starting point is to identify what he argues are the real drivers of the crisis of the 1930s. A sharp increase in agricultural productivity from 1900 onwards meant that by the late 1920s many farms were no longer viable. The consequent shakeout of rural jobs led to a decline in farm incomes that then had a knock-on effect on the cities. Eventually it ended up in causing the financial implosion that today is often wrongly seen as the root of the crisis.
He then goes on to make a comparison with the current situation: “The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic – from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade”. He identifies two factors behind this decline in manufacturing: rising productivity and globalisation.
However, there are at least as many problems with Stiglitz’s arguments as there are with Cowen’s. For instance, why should higher productivity necessarily mean there are fewer jobs available? This may be true in agriculture, where there is a fixed area of land, but it does not necessarily apply to manufacturing. Why not raise productivity and maintain a large manufacturing base at the same time?
Nor is it clear why wages and consumer spending should be the main driver of economic growth. Arguably it works the other way round with a dynamic economy making it possible to employ more people and allowing them to spend more. In contrast an atrophied productive base tends to lead to more unemployment and declining incomes.
Before coming to a conclusion it is worth noting one final reaction, or perhaps non-reaction, coming from those who identify themselves as on the left. That is to argue that the key trend is not the slowing of growth from the 1970s but the widening of inequality. In other words the focus should be on a great divergence rather than a great stagnation.
Even if it is conceded that inequality is a key problem the counter-position does not hold up. From the perspective of individual living standards both the overall level of output and distribution play a part. In any case the main focus of Cowen’s argument is to explain why the slowdown has occurred. His thesis first of all needs to be considered on that level: whether it really does account for America’s current economic plight.
Fundamental flaws
The Great Stagnation should be welcomed overall because it shifts the economic debate from a narrow obsession with banks. As a result it opens the way for a sensible discussion of the fundamental causes of the crisis. This is an important step as it helps create the basis for an informed debate about how to escape from the morass. Banking reform, however necessary it may be, will not rejuvenate the economy as a whole.
The weakness of Cowen’s book is precisely in what most commentators consider its strength: the idea of “low hanging fruit”. It is not clear why some sets of technologies should be inherently so much easier to develop than others.
From today’s perspective an iPhone might seem like a much more challenging piece of technology than, say, a car, or electricity. But that is with the benefit of hindsight. It took a huge amount of science and engineering to develop all of those technologies. Cars, for instance, may seem straightforward now but an immense effort was needed to invent them in the first place. They did not appear like low hanging fruit to many earlier generations.
In many respects all inventions can be seen as the result of thousands of years of cumulative human endeavour. Humans have existed as a species for tens of thousands of years while much technology we take for granted has only existed for a fraction of that time.
Cowen makes things even murkier when he says that some fruit can become low hanging. “It is just not low hanging yet,” he says (original emphasis). This concession undermines Cowen’s entire analogy. Either technology is intrinsically low hanging or it is not. If the ability to pick fruit, to use his metaphor, depends on other factors then those are the variables that need to be examined.
It would be far better if the focus was social – in the broadest sense of the term – rather than technological. The key driver needed to explain the great stagnation is low capital investment rather than intrinsic technical limits. Insufficient investment had meant there has not been a basis for new rounds of durable growth.
Politicians and government officials can take much, although not all, of the blame for this predicament. Rather than encourage economic restructuring they have simply prevaricated. They have extended credit to give a temporary boost to consumption rather than focusing on the productive side of the economy.
Paradoxically though the focus on investment provides a more upbeat assessment of possibilities than Cowen’s technological determinism. If the intrinsic character of technology is the key constraint on growth there is not much that can be done about it. If, in contrast, the key is to increase investment there are many positive measures that can be taken.
The challenge is to develop a culture that is less fearful of taking risks and more open to experimentation.
My Fund Strategy cover story on “the great stagnation” – the idea that a long-term technological slowdown has hit American economic growth – is available to read here. I will paste the full text over the next few days.
This is my latest column for Fund Strategy
The recent wave of shareholder action against high executive remuneration has been widely welcomed as a brave “shareholder spring” against corporate excess. It would be more accurate to see it as a moralistic outburst and a damaging evasion from grappling with real economic problems.
It should be immediately clear that the implied parallel with the Arab spring is absurd. At the time of writing no fund managers had been shot dead or run over by armoured vehicles at any annual general meetings (AGMs). On the contrary, shareholder activists were fawned over by politicians and journalists.
But the more damaging aspects of the campaign against executive remuneration are not so apparent. The argument that poorly performing chief executives should not get large pay rises seems unimpeachable. To see why the broader initiative is flawed it is necessary to look at it more closely.
It is true that many companies, including high profile names, have faced a wave of investor dissatisfaction at recent AGMs. The central complaint is that the high remuneration many executives have awarded themselves is not merited.
Many FTSE 100 companies are among those that have faced investor wrath including Aviva, AstraZeneca and Barclays. High profile casualties have included David Brennan, the chief executive of AstraZeneca, and Sly Bailey, the chief executive of the Trinity Mirror newspaper group, who have both announced plans to step down. Andrew Moss, the chief executive of Aviva, has already agreed to stand down. This all follows the decision earlier in the year by Stephen Hester, the chief executive of the Royal Bank of Scotland, to forego a bonus of nearly £1m after considerable public pressure.
On the face of it campaigns against excessive remuneration have a point. At an aggregate level the remuneration of chief executives at large firms has outpaced the FTSE 100 for many years. For example, a report from the department for business reported that median total remuneration of FTSE 100 chief executives rose over four-fold, from an average of £1m to £4.2m, for the period 2008-10. Yet the FTSE fell slightly over that period.
It is also possible to find many companies, where a similar trend is apparent. The firm has performed poorly by many metrics yet the chief executive has enjoyed a handsome pay rise.
There may be instances when such disparities can be justified. Perhaps a chief executive could argue that a company would have done even worse if he had not been in charge. Or maybe it was hit by circumstances beyond its control.
But the principle that executives should not be richly rewarded for poor performance has a strong common sense appeal. It is hard to imagine even the most pro-business conservative defending high rewards for lousy performance. On the contrary, conservatives are among the harshest critics of such behaviour.
It is precisely the easy character of the target that should be a warning sign. When politicians and others put so much effort making populist attacks on already unpopular figures it should be clear that something is up.
The campaign against excessive executive pay has strong political backing from all three of the main parties. David Cameron has appeared on television arguing that unmerited rewards for executives are unacceptable. The government’s point man on the topic, Vince Cable, the business secretary, has often attacked excessive remuneration. His Labour shadow, Chuka Umunna, is hardly less strident. Last week’s queen’s speech also announced legislation giving shareholders in public companies more say over executive pay.
Other high-profile critics of corporate governance practices come from a variety of backgrounds. They include fund managers such as Michelle Edkins, the global head of corporate governance at BlackRock, as well as campaigning outfits such as FairPensions (which itself is backed by organisations such as Amnesty International, Greenpeace, Oxfam, Unison and the WWF). There is also a think tank, the High Pay Centre, working on remuneration specifically.
In the case of politicians it is easy to detect a vested interest at work in their railing against excess remuneration. Focusing on errant chief executives, as with bankers too, helps to move the discussion away from the political culpability for Britain’s economic morass. It is much easier to moralise than to explain the country’s lack of economic durability or the absence of a credible recovery plan.
But even in relation to politicians this is not the whole story and others involved do not share such a vested interest. The focus on high executive pay draws on a sense that the economic crisis was caused by excess. Its proponents have often drawn the incorrect conclusion that excessive ambition got Britain into its economic plight in the first place and bold initiatives are only likely to make matters worse. What in earlier times would have been seen as aspiration and ambition is recast as greed.
This discussion diverts attention from a serious discussion of the causes of economic weakness. It fails to grapple with the lack of investment in the economy along with low levels of research and development. There is little recognition that signs of economic lethargy were apparent long before the emergence of the financial crisis in 2007-08. Whatever the alleged moral failings of certain business leaders they are only a small footnote in the overall story.
That also explains why the obsession with executive pay is so damaging. It diverts attention from any serious discussion of how to tackle the country’s economic weaknesses. There is little recognition of the need to restructure the economy to create the basis for a new round of productive investment.
Instead it implicitly draws suspicion on anyone who is ambitious and aspirational. The qualities that could help promote a recovery are stigmatised. A deadening culture of caution is consolidated. The result is not so much a shareholder spring as a chilly autumn of economic stagnation.
My essay on the critics of inequality, previously previewed on spiked Plus, is now freely available on spiked. Its key innovation is to make a fundamental distinction between contemporary critics of inequality and support for equality.
It is easy to make the mistake of assuming there is a big drive towards equality in the world today. Politicians, pundits and even billionaire financiers rail against the dangers of inequality, excess and greed. A handful of Occupy protesters claiming to represent the ‘99 per cent’ against the super-rich ‘one per cent’ are widely lauded in influential circles. Parallel campaigns slate the wealthy for failing to pay their fair share of tax. Officially sanctioned campaigns promote fairness, social justice, social equality, equal access to education and the like.
From this false premise it appears to follow that radical politics is alive and well. If equality was historically a core principle of the left then, so it is assumed, the current discussion must be enlightened and humanistic. Those who oppose the plethora of apparently pro-equality initiatives are therefore cast as reactionary souls who are probably in the pay of giant corporations.
The aim of this essay is to show that there is no dynamic towards equality at present. Instead there is a drive towards what could be called the therapeutic management of inequality. This is not a trivial distinction. On the contrary, the two sets of ideas embody fundamentally opposing conceptions of humanity.
Historically, support for equality was ultimately about trying to achieve the full human potential or what was often called the perfectibility of mankind. It meant advancing from a more backward society to a civilised one. In its most advanced forms it married a desire for social equality with support for economic progress.
In contrast, the discussion in recent years has shifted decisively against the idea of economic progress and towards a deep suspicion, even hatred, of humanity. It promotes initiatives to counter the dangers of social fragmentation in an unequal society. Indeed, this fear of a disintegrating society can be seen as the organising principle behind a wide range of measures to regulate supposedly dysfunctional behaviour. These range across all areas of personal life, including childrearing, drinking alcohol, eating, sex and smoking. Such initiatives assume that public behaviour must be subject to strict regulation or it could fragment an already broken society.
A distinct feature of the current discussion is that the rich are also seen as posing a threat to social cohesion. Their greed is viewed as generating unrealistic expectations among ordinary people. In this conception, inequality leads to status competition in which everyone competes for ever-more lavish consumer products. A culture of excess is seen to be undermining trust and a sense of community.
The contemporary consensus thus marries the fear of social fragmentation with anxiety about economic growth. It insists that the wealthy must learn to behave responsibly by maintaining a modest public face. It also follows that prosperity must be curbed. This is on top of fears about the damage that economic expansion is alleged to do to the environment.
This drive to curb inequality is informed by what could be called the outlook of the anxious middle. It is middle class in the literal sense of feeling itself being torn between the rich on one side and ordinary people on the other. Its aim is to curb what it regards as excesses at both the top and bottom of society. It sees itself as living in a nightmare world being ripped apart by greedy bankers at one extreme and ‘trailer trash’ at the other.
This essay will examine the significance of the contemporary fear of inequality. First, it will examine current criticisms of inequality made by politicians, the media and academics in more detail. Typically, they are keen to promote economic sacrifice, thus paving the way for austerity, while supporting intrusive measures to curb social fragmentation. Second, it will look at the historical support for equality from the Enlightenment of the late seventeenth and eighteenth century onwards. Typically, egalitarians of this period linked their support for equality with notions of progress and the realisation of human potential. Economic advance was often seen as playing a central role in this process.
In conclusion, it will examine the damaging consequences of the current debate. It is harmful on both political and economic grounds. On the one hand, its therapeutic drive to regulate behaviour makes it a gross threat to individual freedom. On the other, through its populist rhetoric it paves the way for the popular acceptance of austerity. In this respect, what could be called ‘green egalitarianism’ is essentially about promoting equitable sacrifice. Its goal is to ensure that pain is ‘fairly’ distributed in society.
This essay focuses on the transformation of the discussion of economic and social equality. However, it should be noted in passing that there is also a parallel debate to be examined in relation to the redefinition of political and legal equality.
From Barack Obama downwards, there is a heated discussion of inequality across the Western world. At his State of the Union address to Congress earlier this year, the president said inequality is ‘the defining issue of our time’. He described how his American grandparents, both from humble backgrounds, benefited from US success. For him, the most important discussion was how to keep this promise alive:
‘We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.’
This is a theme he has focused on for a while and will no doubt feature highly in the coming presidential election campaign. In a weekly presidential address in July 2011, Obama called for ‘shared sacrifice’. He argued that all Americans, including the rich, needed to be willing to accept spending cuts and higher taxes for the sake of the America’s fiscal future.
A month later, the demand for shared sacrifice was endorsed by Warren Buffett, one of the world’s richest men, in a prominent opinion piece in the New York Times. It was not long before many of the richest individuals in Europe were making similar demands in their own countries.
Admittedly, Obama’s tax measures were blasted as ‘class warfare’ by Paul Ryan, the chairman of the House of Representatives’ budget committee, on FoxNews. Such ripostes can partly be understood as a result of the resentment many rich people feel at the prospect of paying higher taxes. More importantly, though, the conservative critics miss the significance of Obama’s populist rhetoric. They mistakenly assume it represents a form of radical socialism because it complains about inequality. In that respect the Republicans and the Occupy activists are making the same error in seeing the demand to lessen inequality as necessarily radical.
More recently it has become clear that discussion of the ‘Buffett rule’, in which individuals who earn over $1million (£630,000) a year will be taxed more heavily, will feature prominently in Obama’s re-election campaign. The president will use the tactic to present his Republican opponent, almost certainly Mitt Romney, as only caring for the rich. But at the same time, it will promote the notion that everyone must be prepared to make do with less. Championing the argument as a populist appeal against the super-rich clearly makes it easier to sell to the electorate.
It would also be a mistake to assume that many conservative politicians have not embraced the therapeutic approach to inequality. Despite the common prejudice that they promote free market or ‘neo-liberal’ ideas this is seldom the case. David Cameron, Britain’s Conservative prime minister, provides a characteristic example. The Tories are widely seen as imposing a harsh regime of austerity by international standards but their intellectual framework embodies many similar themes to Obama.
Take a speech made by Cameron in 2009, when he was still leader of the opposition, to the World Economic Forum in Davos. He identified three main reasons why capitalism had become so unpopular:
* Its apparent lack of a moral framework. Under this heading he argued: ‘the roots of the current crisis lie in recklessness and greed’.
* The disconnection between people’s lives at a local level and global business.
* What he called ‘the incredible inequality of the modern world’.
He has repeated such sentiments many times since and they have also informed official policy. For instance, his government has not hesitated to excoriate bankers or executives when their income is viewed as excessive. As in America, the message is that everyone, including bankers, should be prepared to make sacrifices. The coalition government has also, as often discussed on spiked, followed its Labour predecessor in its fanatical drive to regulate even the most intimate aspects of individual behaviour.
Politicians have also happily endorsed academic work that appears to confirm their fear of inequality. In Britain, both David Cameron and Ed Miliband, the Labour leader, have praised The Spirit Level, a best-selling work by two epidemiologists that explicitly argues that wide inequalities make societies dysfunctional.
The debate among politicians parallels that in the media and among academics. Stories about greedy bankers, high executive remuneration and anti-social behaviour by a supposedly out-of-control public fill the media. Generally the response is for the behaviour of both the super-rich and ordinary people to be more tightly regulated. Although the rich are not generally subject to the same micro-regulation, both sides, in their own ways, are seen as guilty of excess. Only the respectable middle class – with their attachment to such notions as ethics, fairness and sustainability – are seen as largely behaving in a responsible manner.
In academia the discussion of inequality has changed fundamentally over the years. It has shifted from a focus on the material dimensions of inequality to one emphasising moral breakdown. Behaviours that seem to indicate a possible social breakdown receive the most attention: crime, drug taking, illegitimacy, mental illness, obesity, poor educational performance, public drunkenness, teenage parenthood, violence and the like.
From this perspective, the solution is not a political one in the sense of involving democratic debate and engagement. It is instead what could be called an elite-led therapeutic approach. The idea is that the authorities must promote a wide range of interventions to treat social ills.
Although sociologists on both sides of the Atlantic often discuss social breakdown, the vocabulary varies. In Europe it is generally discussed in the language of social inclusion and exclusion. The contemporary use of the terminology of exclusion first emerged in France towards the end of les trente glorieuses (the glorious thirty), France’s version of the postwar boom. Social Catholics used the term in the 1960s while René Lenoir, a centrist French politician and minister for social action from 1974-78, wrote a book called Les Exclus (The Excluded). ‘Social exclusion’ was originally used to mean those individuals who were not covered by the social-security systems of the time although the meaning of the term has broadened enormously since then. The European Commission formally adopted the term in the 1990s and it was a central theme of the policies of Britain’s Labour government from 1997-2010.
The premise behind the discussion was that society was becoming more fragmented. As far back as the early 1980s, Ulrich Beck, one of Germany’s most prominent sociologists, was already discussing the trend:
‘During the past three decades, almost unnoticed by social stratification research, the social meaning of inequality has changed. In all wealthy Western and industrialised countries, a process of individualisation has taken place’ (original emphasis) (1).
In America, broadly the same discussion took place but it focused on the idea of the underclass. Despite the widespread use of this neologism, there was no agreed definition of it. However, the media and academic focus on inequality in the US fell overwhelmingly on deviant social norms and moral breakdown. The debate on inequality was not simply a discussion about the poorest section of society.
More recently, Charles Murray, one of the main proponents of the idea of an underclass, has started to also talk of a new ‘overclass’. In Coming Apart, his new book, he argues that the American elite has developed a culture distinct from the rest of society. This is in contrast to the past where, although the elite tended to be richer than average, it shared, in his view, a common culture with the rest of society.
It should be noted that both of these sets of couplets – inclusion/exclusion, underclass/overclass – are ways of talking about inequality rather than poverty. Even though there is some discussion of low incomes, the overwhelming focus is on social and moral breakdown. Both of these perspectives view those at the top of society as posing as much of a problem as the general public.
Influential political, media and academic critics of inequality therefore share common concerns. Although the vocabulary may differ, they are all fearful that what they see as a culture of excess could exacerbate social fragmentation. As a result, they are keen to talk down economic expectations while promoting extensive interventions to regulate what they regard as dysfunctional behaviour.
The current preoccupation with inequality is a world away from the discussion of equality that emerged in the Enlightenment of the late seventeenth century onwards. Although it is difficult to generalise between a wide range of different thinkers, the Enlightenment embodied three related themes central to this discussion: a universalist conception of equality, the idea of human perfectibility, and a notion of progress.
The modern idea of equality emerged in the early stages of the Enlightenment in the mid-seventeenth century. Jonathan Israel, a professor of modern European history at Princeton, goes so far as to specify the Netherlands in the 1660s, towards the end of what became known as the Dutch Golden Age, as the time when it first emerged (2).
Israel explores in encyclopedic detail the differences between the radical and moderate wings of the Enlightenment. In essence, the radicals were much bolder in their demands for equality, freedom and progress, while the moderates were more guarded.
The most prominent early proponents of the radical Enlightenment were Baruch Spinoza and Pierre Bayle in the Netherlands. Denis Diderot later went on to become the best-known exponent of the radical Enlightenment in the eighteenth century. According to Israel:
‘The principle of equality… was central to the radical Enlightenment from the outset. This was because in Spinoza, Bayle and the clandestine philosophical literature of the early Enlightenment, moral and social philosophy is grounded on the principle that every person’s happiness, and hence worldly interests, must be deemed equal.’ (3)
Moderate supporters of the Enlightenment advocated a more qualified notion of equality. John Locke, for example, upheld a spiritual equality but did not support an equal civil status. He endorsed equality up to a point while supporting a society of ranks and even slavery (4).
The notion of the perfectibility of man is closely linked to the idea of equality. It assumes that although humans may currently live in a degraded state they have the potential to achieve great things. As Condorcet, a leading French radical, wrote in his introduction to his Outlines of an Historical View of the Progress of the Human Mind (1795):
‘Such is the object of the work I have undertaken; the result of which will be to show, from reasoning and from facts, that no bounds have been fixed to the improvement of the human faculties; that the perfectibility of man is absolutely indefinite; that the progress of this perfectibility, henceforth above the control of every power that would impede it, has no other limit than the duration of the globe upon which nature has placed us.’ (5)
This does not imply that the full human potential is easy to realise. On the contrary, it involves a determined struggle against backward ideas. But it is possible at least in principle for the whole of humanity to achieve great things.
The idea of progress, the third part of our triumvirate, is logically connected to the two others. If perfectibility is possible and equality desirable it follows that they can be achieved by progress. By the mid-eighteenth century such advancement was not just being conceived in moral and social terms but in relation to material prosperity, too. Enlightenment thinkers such as Adam Smith in Britain and Anne-Robert-Jacques Turgot in France emphasised the economic dimension as central to human progress.
Once again the radicals took the arguments much further than more moderate figures. By the late eighteenth century they were not just supporting prosperity but arguing that it was possible to abolish poverty entirely. This vision was painted by such thinkers as Condorcet and Britain’s Thomas Paine (6). They saw it as a practical possibility rather than an unrealisable vision of an idealised community.
Supporters of equality in the nineteenth and much of the twentieth century can also be divided into two broad strands. The most consistent exponent of material equality was what could be called classical or revolutionary Marxism. Moderate socialists and other advocates of welfare provision were more guarded. But even those with more modest goals generally maintained some notion of economic progress.
Karl Marx took some of the key features of the radical Enlightenment and integrated them into his own thinking. He certainly embodied ideas of equality, human potential and economic progress. What distinguished Marx from Enlightenment thinkers was that he did not believe that material equality could be achieved within the framework of capitalism. Since inequality in capitalism took the form of a class society, equality could only be achieved through capitalism’s overthrow. Only in a classless society would it be possible to realise his famous goal of ‘from each according to his ability, to each according to his needs’ (7).
Anyone who doubts Marx’s attachment to economic progress would do well to read the Communist Manifesto of 1848. He made clear that he welcomed capitalism to the extent that it had swept away feudalism and created the basis for vastly more prosperity. His concern was essentially that humanity could do even better. Although capitalism generated growth, it simultaneously created barriers to economic expansion. To abolish scarcity, it would be necessary to move to a more productive form of society.
These core premises were upheld by the Bolsheviks in the late 1910s and early 1920s. For example, Leon Trotsky outlined his optimistic notion of human potential in a socialist future: ‘The average human type will rise to the heights of an Aristotle, a Goethe, or a Marx. And above this ridge new peaks will rise.’ (8) This positive vision was swept away with the rise of Joseph Stalin as leader of the Soviet Union from the mid-1920s onwards. Nevertheless, it is a salutary reminder of the huge distance between the historical discussion of equality and contemporary fears of inequality.
In contrast to the Marxists, the more moderate proponents of equality often advocated redistribution as a way of heading off a revolutionary threat. In the late nineteenth and twentieth centuries this often took the form of promoting welfare provision as a way of redistributing resources to the poor and needy. In the 1880s, Count Otto von Bismarck, Germany’s first chancellor, devised the model of a Sozialstaat (social state) that others later built on. In Britain, especially after the Second World War, the talk was often of the welfare state. In America, supporters of more extensive welfare provision were generally referred to as ‘liberals’.
But even the more moderate egalitarians generally had a more positive vision than today’s pessimistic critics of inequality. Antony Crosland’s The Future of Socialism, first published in 1956, provides a graphic illustration of mainstream thinking at the time. The moderate Labour MP and later minister focused largely on the subject of equality. For Crosland, ‘This belief in social equality, which has been the strongest ethical inspiration of virtually every socialist doctrine, still remains the most characteristic feature of socialist thought today’ (9). At the same time he was unequivocal in his support for growth:
‘A rapid rate of growth, therefore at least for the next decade, so far from being inconsistent with socialist ideals, is a pre-condition for their attainment. And it is also a precondition of attaining office; for if the Labour Party were to neglect the goal of higher production, it would be accorded, and deserve, the clear disfavour of the British public.’ (10)
It is hard to imagine an equivalent contemporary figure making such an unqualified statement in favour of growth. Nowadays, support for material progress is almost invariably hedged with caveats about living within our means, climate change, the importance of happiness over GDP, sustainability and so on. Today, growth is typically seen as more of a problem than as a precondition for overcoming the challenges facing society.
Nor were old-fashioned egalitarians obsessed with individual behaviour in the manner of the current generation. This has been such a preoccupation in recent years that it is easy to assume it has always been so. But political debate in the earlier period instead focused on such questions as how best to organise society to generate more prosperity. In this context, conservatives would typically defend the necessity of social inequalities while their opponents would talk of the need to move to a better society.
It is now possible to see the vast distance between the historical discussion of equality and the recent preoccupation with curbing inequality.
The proponents of equality, particularly the radical ones, typically married hostility to social hierarchy to a positive view of human potential. It followed that it was necessary to find ways to promote progress towards the ultimate goal of human perfection. Often the importance of economic advance towards the abolition of scarcity was central to this vision.
In contrast, contemporary critics of inequality have a completely degraded view of humanity. They view human beings in relation to their vulnerability to the temptations of excess rather than their potential. From this perspective it is necessary to impose a wide variety of restraints on behaviour to reduce the danger of social breakdown. People are expected to rein in their material aspirations and curb their other desires.
Often the current culture of limits is couched in language that may sound progressive to many. It favours ethics, fairness, morality, responsibility and sustainability. Occasionally it even uses the language of equality.
But although the language may sound appealing, it represents a trap. In the current debate it is all linked to the acceptance of restraint. Fairness, for instance, is used to promote the idea that everyone should accept their fair share of sacrifice. Morality and ethics are harnessed to support the notion that aspirations should be curbed. Sustainability is a way of arguing that economic growth should be limited for the sake of the environment.
If such restraints are not accepted voluntarily then it is assumed they will be imposed on us. Nation states across the developed world have drawn up a wide range of therapeutic interventions to curb behaviours they regard as undesirable. These represent a formidable attack on our liberty.
Equality in its historical sense of realising human potential through progress remains a desirable goal. It is a world away from the contemporary drive to curb inequality by inhibiting our aspirations and passions.
(1) Ulrich Beck. Risk Society. 1992, p92 (first published in German in 1986).
(2) Jonathan Israel Enlightenment Contested. 2006, p564.
(3) Jonathan Israel A Revolution of the Mind 2010, p92.
(4) Jonathan Israel A Revolution of the Mind 2010, p93.
(5) Condorcet. Outlines of an Historical View of the Progress of the Human Mind 1795.
(6) Gareth Stedman Jones An End to Poverty. 2004.
(7) Karl Marx. Critique of the Gotha Programme 1875.
(8) Leon Trotsky Literature and Revolution 1924
(9) Anthony Crosland The Future of Socialism 2006, p87.
(10) Anthony Crosland The Future of Socialism 2006, p328.
My recent spiked review of Pity the Billionaire is the lead item on Real Clear Books today. The site looks like a useful portal for coverage of non-fiction books.
This is my latest column for Fund Strategy
Is your relatively affluent lifestyle depriving a poor person of food? That in effect is the accusation from Britain’s leading science body.
The Royal Society has published a report called People and the Planet warning that global population should be stabilised and western living standards curtailed. Given the organisation’s pedigree it is likely to be taken seriously. It has about 1,500 fellows and foreign members including more than 80 Nobel laureates. Since it was founded in 1660 it has included such distinguished scientific luminaries in its ranks as Charles Darwin, Albert Einstein and Isaac Newton.
It might come as a surprise then to learn that the report is deeply flawed. As one wag put it on Twitter, it has the intellectual weight of a promotion video for creationism. The report is not so much well-worn as threadbare; with all its key contentions rehearsed many times in the past. It is also marred by a circular argument: the conclusion is contained in the premise.
Let us start with some of the uncontested facts. The world’s population is likely to grow from its present level of about seven billion to somewhere between eight billion and 11 billion in 2050. According to the United Nations the most likely figure is about 9.3 billion by mid-century.
Although the average rate of population growth has slowed sharply since the 1960s, when it was about 2% a year compared with 1.1% at present, the level is rising. So on average people are having fewer children than they used to but still enough for the global population to rise for several decades.
It is also indisputable, and hardly a new insight, that global inequality is high. Most glaringly there are 1.3 billion living in extreme poverty, according to the World Bank definition (those living on less than $1.25 a day when calculated at purchasing power parity in 2005 prices).??So far so good. The report then goes on to argue that, assuming the earth’s resources are finite, the combination of increasing consumption and rising population poses three challenges:
• The 1.3 billion poorest people need to be raised out of extreme poverty.
• In the developed and emerging economies unsustainable consumption must be reduced.
• Global population growth should be slowed and stabilised.
The accusation that prosperous westerners inevitably deprive poor people is already apparent. From the assumption of a finite world it appears to follow that those in the affluent world are depriving the poor of resources. Indeed the Royal Society seems to be going even further: the implication is that everyone, even many of these who live in emerging economies, should make sacrifices rather than deprive those in extreme poverty.
Attentive readers will have noticed the logical flaw in the argument. To win the argument the authors of the report have to prove that resources are finite rather than assume it is the case. By starting from the premise of scarce resources they simply engage in a circular argument where the conclusion is given in the premise. In effect they are arguing that the earth is finite because it is finite.
Strictly speaking they should prove two things. Not only that the world is finite but that humanity is approaching the limits of consumption. For it could be that we are still a long way from any putative natural constraints. But the most fundamental question is whether a limit exists in the first place.
The alternative is that there are no fixed limits to human consumption. From this perspective there may only be one planet earth but it is possible to generate ever more resources by harnessing human ingenuity.
Such an approach can take many forms including using resources more efficiently, finding more of the same kind of resources or substituting for a different kind of resource. For example, in relation to petrol it is possible to create more efficient engines, find new sources of crude oil and ultimately perhaps switch wholesale to electric cars. The latter could in principle harness inexhaustible forms of energy including nuclear and solar.
The Royal Society follows the method employed by Thomas Malthus (1766-1834) who argued that human population tended to grow faster than the food supply. He maintained that as a result starvation and war over scarce resources would bring population levels into check.
In the event Malthus’s prediction has failed abysmally. The global population has risen from about one billion to seven billion since he wrote it, yet at the same time we are immensely richer and better fed.
Yet the Royal Society, although it mentions Malthus three times in its report, fails to even acknowledge the dramatic failure of his predictions. It simply says coyly that his concerns: “resurfaced in the middle of the 20th century when it became clear that an era of unprecedented, rapid increase in the populations of the developing countries had started”. At the very least it should have shown why essentially the same approach could be true this time around.
The report also refers to more recent criticisms of Malthusianism but fails to tackle them head on. Essentially its argument is that the critics fail to recognise the importance of sustainability and of natural capital.
But such a rebuttal is disingenuous as both concepts assume the notion of limits in the first place. The central idea behind sustainability is that humans need to accept environmental constraints for the sake of future generations. Similarly the idea behind the concept of natural capital is that the availability of raw materials is scarce. Once again the report is assuming what it seeks to prove.
Perhaps the supreme irony of this discussion is that the first person to argue against the notion of natural limits to human activity was Francis Bacon (1561-1626). He was many things including Lord Chancellor, Attorney General, great philosopher and eminent scientist. Bacon was also the inspiration behind the foundation of the Royal Society.
This blog post was first published on Fundweb today.
This of course is the opposite of the mainstream view. The conventional argument is that there has been too much politics, particularly of the democratic sort, and too little expertise. It would be far better, according to this line of thinking, if more decisions were left to the grey-suited experts such as that nice Mr King at the Bank of England.
But it is not hard to find examples to call mainstream thinking into question. Britain had a well-regarded framework of monetary and fiscal rules before the crisis but it did not stop trouble emerging. Nowadays hardly anyone mentions Labour’s “golden rule” and “sustainable investment rule” but they were designed to protect the country against fiscal over-reach. The monetary framework, with inflation pegged around a clear target, was also crafted to ensure stability.
Defenders of the framework often argue that the crisis emerged in Britain as a result of an external shock rather than domestic weakness. But the eurozone too had an elaborate monetary and fiscal framework but this did not prevent turmoil there either. The crisis is rooted in the atrophy of the real economy rather than a lack of rules or the inability of politicians to follow them.
I was reminded of this discussion when listening to John Taylor, a professor of economics at Stanford university in California, interviewed on the latest Econtalk programme (regular readers will know I am a fan of the show even though I often disagree with the views expressed). He described how in his new book he outlines five keys to prosperity:
· Predictable policies.
· An emphasis on the rule of law.
· An emphasis on markets.
· The importance of incentives.
· A limited role for government.
Let us assume for a moment that these principles are all desirable (although the first one is arguably more of a policy guideline than a principle). Does it necessarily follow that they can be guaranteed by rules?
However well drafted or intentioned any set of rules it is likely they will be breached in times of trouble. Indeed it is desirable that politicians should have the discretion to react to unforeseen circumstances.
What Taylor is really concerned about is politics and particularly popular pressure. He does not like the idea that the public could react to particular problems in such a way that they go against free market principles. In other words he wants to insulate technocrats, such as central bank governors, from the popular will.
If Taylor is confident of his ideas he should be willing to argue the case for them among the public. That is the only way he can be sure of them being pursued consistently. If the public makes the wrong choices it should also have to face the consequences. Detailed rules of the sort Taylor advocates are not only undesirable, for they are undemocratic, they also tend not to work when they are most needed.
In contrast, principles are vital as they help provide a vision of people’s aspirations. As long as politicians stay loyal to the broad principles on which they are elected they should have the discretion to adapt to changing circumstances.
This is my Perspective column for this week’s issue of Fund Strategy.
A strong challenge has emerged to the widely held view that living standards for the average American stagnated for many years even before 2007. This is an important debate to examine because it suggests that most people did not become more prosperous even when America was growing.
The standard argument concedes incomes rose roughly in line with economic growth during the boom years from the late 1940s to the early 1970s. Naturally, a gap between rich and poor remained but it did not significantly widen during this period. Most Americans enjoyed rising prosperity as the economy grew even though some were much richer than others.
It is then argued that things went horribly wrong from the mid-1970s onwards. Not only did economic growth rates slow – a point often downplayed – but a small elite captured the gains from rising prosperity. Inequality widened while average incomes were squeezed. From this premise, it is often argued that America entered a new “gilded age”; a winner-takes-all society in which the wealthy enjoy the spoils of success while others get next to nothing.
Barack Obama has broadly endorsed this view several times. For instance, in a keynote speech in Osawatomie, Kansas, last December he said: “Over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.”
Similar views about the patterns of American prosperity are common in Britain. In November 2011 The Guardian argued: “The US economy is now almost thrice as big as in the early 1970s – and yet the typical working man finds not a dime of this transformative growth in his pay packet.”
There are many sources of data on this question but the work by Thomas Piketty and Emmanuel Saez, two French economists, has become an important benchmark. Piketty and Saez would no doubt dispute some of the more extreme political conclusions drawn from their data. But it is necessary to examine the figures as dispassionately as possible to try to identify its strengths and weaknesses.
I was therefore fascinated to hear a recent interview with Professor Richard Burkhauser of Cornell University in Ithaca, New York, on the invaluable weekly Econtalk podcast series (available at www.econtalk.com ). Burkhauser has re-examined the official data on the subject and has concluded that on different – he would argue more realistic – assumptions, median incomes in America from 1979 to the onset of crisis in 2008 did not fare nearly as badly as Piketty and Saez suggest.
The accompanying table (see link here ) neatly sums up Burkhauser’s point about assumptions. Median income for each sharing unit between 1979 and 2007 is estimated to have risen between 3.2% and 36.7%, depending on the assumptions made. One set of assumptions relates to what is included as median income. The lowest estimate for each tax unit looks at the figures before tax and without including any other transfers, such as social security payments. Look at the figures after tax and transfers, throw in health insurance, and the rise is considerably more.
The other set of assumptions relates to the “sharing unit” measured. For instance, a couple who live together and both work would be counted as two tax units but one household. Adjusting for the size of the sharing unit also makes a difference.
There are also more specific technical factors to be taken into account. Evidently the Current Population Survey, the American Census, was redesigned between 1992 and 1993 to capture more data. Health insurance information was also unavailable before 1988. Burkhauser therefore assumes that the value of health insurance from 1979 to 1989 rose in line with post-tax, post-transfer income.
A debate on the relative merits of the Piketty-Saez and Burkhauser data alone would be a valuable enterprise. Hopefully, the two French economists will in time respond to the criticisms and the outcome will help to get everyone closer to the truth of the matter.
It would certainly be wrong for people to let their political views colour their view of the data. Many liberals (in the common American sense) will no doubt feel more of an emotional affinity with Piketty-Saez while conservatives will favour Burkhauser. But it would be far better if the debate focused on getting the best possible picture of what is happening to American living standards.
Important as this discussion is, there are also other dimensions to measuring living standards. For instance, does the consumer price index accurately reflect inflation? Clearly, the inflation rate is necessary to convert nominal incomes (their face value) into real (that is inflation-adjusted) incomes. Another question is whether the various surveys of income accurately capture all the necessary data.
Other debates go beyond the correct statistical measure of income. Some experts argue that what people consume, rather than the money they receive, is a better indicator of living standards.
In my view, it might also make sense to recalculate the economic growth rate over the years of apparent boom. In a sense the debt-fuelled growth in the years running up to 2007 can be understood as based on borrowing from the future. It might therefore be better to look at the average growth rate from the 1970s until now – that is including the recent downturn – to measure the real trend rate of growth.
Such a procedure would no doubt show slower growth of both the economy and income. But perhaps that would be a better description of the trend than the assumption that the two variables were dramatically out of line.
The more constructive the debate, the closer it will be possible to get to the truth on these vital questions.
“The economic crisis that first hit the US in 2008 put one of America’s leading left-wing writers in an awkward spot. Only for Thomas Frank, it was not the risk of unemployment or lower wages. Instead, the financial crisis and subsequent recession threatened to undermine his pet theory: that conservatives had somehow duped ordinary Americans into ‘false consciousness’.”
Spiked has published my review of Thomas Frank’s Pity the Billionaire.
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