By Mariana Mazzucato, Professor, University of Sussex and author of The Entrepreneurial State. Originally published at the Institute for New Economic Thinking website
In 2008, Queen Elizabeth II went to the London School of Economics to open a new academic building. The British Monarch has made it a life’s work to avoid saying anything contentious in public, but this time she had a question for the economists: Why had they not seen the financial crash coming?
Her question went to the heart of two huge failures of modern economics: the near collapse of some of the world’s major economies; and the faith in an orthodox economic framework that offered no explanation for what was happening. The thesis of my new book Rethinking Capitalism: Economics and Policy for Inclusive and Sustainable Growth, co-edited with Michael Jacobs, is that these two failures are intimately related. The failure by policy-makers to fully understand the dynamics of the capitalist system not only leads to periodic crises; it also leads to the wrong remedies, such as the pro-cyclical austerity that has only deepened and prolonged the crisis in many countries.
Eight years on from the global financial crisis, the IMF is still describing the global recovery as “weak and precarious”. It points to modest recoveries experienced in most advanced economies characterised by “weak productivity, low investment, and low inflation”, which in turn reflect “subdued demand, diminished growth expectations, and declining output growth” (IMF, WEO, Oct 2016). Indeed, in most advanced economies investment remains below pre-financial crisis levels.
If future growth is to take a different path, it will require more than the usual mantra about taking advantage of low interest rates to fund infrastructure. Instead, we need to rethink the fundamental precepts that govern our understanding of how and why capitalist economies grow—both in terms of the ‘rate’ and the ‘direction’ of change. Key to this is a better understanding of what drives business investment, and the effect that public investment can have—not just ‘crowding-in’ investments that businesses may already have been considering, but actively stimulating the desire to make new investments they hadn’t yet considered. It is this ability of bold, strategic public investments to rouse what Keynes called the ‘animal spirits’ of business investors that is key.
Looking at the economy through an investment lens is indeed instructive. Weakness in investment in part explains the persistence of output gaps across advanced economies, but also the slowing in growth of the volume of international trade. But the key question is, what kind of investment is needed? Would simply digging ditches and constructing bridges and roads suffice?
There are two key issues here. The first is that it has historically been ‘mission-oriented’ public investments that have increased business-investor expectations about future areas of growth. Indeed, in biotech, nanotech and IT, bold strategic public investments created new landscapes that then crowded in business. The second is that the grand societal challenges of the future—from climate change to the demographic crisis affecting much of the West—requires visionary thinking about future growth possibilities and a broad array of public investments to make those opportunities emerge. ‘Market failure’ theory is not adequate to understand this approach.
Those who advocate the inevitability of secular stagnation miss both these points. Stagnation is not caused by the deterministic forces of an ageing population, high savings, and exhausted tech opportunities. Rather, it is a result of falling private and public investment that has prevented the emergence of new investment opportunities. In other words, it is the result of choices made by public and private actors: opportunities are endogenous to investment, and when there is a crisis on both the public and private sides, stagnation sets in.
Let’s look at each in turn.
On both sides of the Atlantic, public companies are sitting on record piles of cash—around $2 trillion in the U.S. and a similar amount in Europe—which they are choosing to hold rather than to invest. At the same time, over the last decade, more than $3 trillion has been returned to shareholders in the form of buy-backs, in some cases, like Pfizer and Exxon, exceeding their net earnings over the period. This reflects the extent to which the so-called ‘real’ economy has become financialized in the name of shareholder value, where it has been easier to boost share prices (and with it executive remuneration) through buy-backs, than through investment in the company’s future.
This failure of corporate leadership has been matched by an equal failure of public policy. After the crisis, public debate focused narrowly on the size of public deficits, rather than on how to raise long-term growth. But the size of the deficit, year to year, matters far less than the question of what it is spent on, and how that spending affects the debt-to-GDP ratio in the medium to long term. Many of the countries across Europe that have the highest debt-GDP ratios are also those that have had moderate deficits. Their problem was not the size of their deficits, but the slow rate of their GPD growth. Italy’s deficit, for example, has been lower than Germany’s for a decade. The problem for Italy, as elsewhere, was the lack of investments in areas like human capital and R&D that increase long run growth.
In mainstream theory, Keynes’ ‘animal spirits’ are assumed: firms are naturally inclined to invest, but will do so if only they receive the right incentive signals in the form of barriers being removed and competitive prices. In reality, however, business tends to invest only when it sees a growth opportunity. Cutting the cost of investment – through tax reliefs or other indirect mechanisms – will not be effective in stimulating investment if businesses do not see opportunities for growth. Historically, generating such opportunities has been closely tied to mission-oriented public investments that have created and shaped new markets through direct strategic investments: market making, not market fixing.
In Silicon Valley, for example, the public investments have not been limited to solving ‘public good’ problems such as the positive spill-overs from basic research. The breadth and depth of public investments were present across the whole innovation chain: basic research, applied research, and even early stage high risk funding for companies (through organisations like SBIR) providing the patient strategic finance not forthcoming from the private market. Despite all the talk about reforming finance after the crisis, too little attention has been given to the quality of finance. The long-term nature of innovation, and the extreme uncertainty which underlies it, means that it requires strategic, long-term, patient finance rather than venture capital seeking a quick return and exit. But today’s emphasis on cutting government budgets, and/or the need to show quick returns from such investments puts the public side at risk.
The investment lens is also missing from the debate about the effect on jobs of new technologies, especially Artificial Intelligence. Economists tend to discuss the ‘skill bias’ of technological change—how technological revolutions leave behind workers not able to adapt—but miss the key point that skills have always been an endogenous function of investment. The real problem is the lack of public and private investments in R&D, human capital formation (skills and training), and fixed capital. As early as 1821, David Ricardo worried about the effect of mechanization on labor displacement. What was important then, and should inform our thinking now, was that profits (from mechanization) be reinvested into production, meaning that, in Ricardo’s time, while some jobs fell away, others were created. Our focus today should also be on that kind of reinvestment, which can also help to tackle inequality.
This brings us to a key point: What economies need, today, is not only a new approach to investment, but also a New Deal in terms of reinvestment: a new compact between the public and private sectors that can lead to more inclusive growth. This should be part of a broader approach to market shaping to ensure social returns reflect the public investments that have been made including, for example, reforms to patenting (keeping them narrow and downstream) and conditions that profits generated from publicly supported innovation are reinvested back into innovation and not hoarded or used mainly for share buybacks. Indeed, it was precisely this type of healthy deal making that led to AT&T being asked to set up Bell Labs in exchange for its monopoly status.
The Queen’s 2008 question touched a nerve. Eight years on, it is pertinent to ask what we have really learned, given the continuing problems of public and private investment. We should be willing to question core assumptions about how economies grow and what inhibits growth. It means understanding why inequality must become a central concern of economic policy, for economic reasons. It means re-evaluating the role of public and private actors in generating growth; what drives investment; and how far the direction of growth can be shaped to benefit society. It means rethinking the role of government, understanding how an entrepreneurial state can actively stimulate new private sector investment. It means bringing back the notion of public value to economics—beyond the narrow way that the public good has been used to create a small slice of activity for the public to invest in. It means, in short, rethinking capitalism.
104 comments
Comments are closed.
To me it feels like Mazzucatto is promoting keynisanism. That’s not really new and, if Philip Mirowski is to be believed, the neoliberal thought collective already has a strategy to shoot it down. May I suggest a more genuine example of rethinking(from Mirowski himself) – https://www.youtube.com/watch?v=xfbVPDNl7V4&list=PLQWdiYL5PMXHtFu6RpVfKyHftAmYlkxW7&index=10 and his accompanying paper – ‘Markets Come to Bits: Evolution, Computation and Markomata in Economic Science’ https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwj5yNvb4bTQAhVBNY8KHWNLBnIQFggcMAA&url=http%3A%2F%2Fwww.uq.edu.au%2Feconomics%2FPDF%2Fint%2FMirowski.pdf&usg=AFQjCNGWnjLqCE3459qPKnbW161SC7c6VA
I haven’t watched the video you linked to yet and may not have read the linked pdf — not sure. I greatly appreciate your references to them and will be watching the video after posting this comment. I think we share a deep respect for Mirowski. I have to confess he is one of the most difficult reads I have ever tackled. I missed capturing an entire menagerie of new and I think useful words from his writings — must do better! Thanks!
The video you pointed to was very interesting. I have one qualm about Mirowski’s presentation — while I like automata as a basic model for microeconomics I can’t forget the disappointment of automata as a model for human language.
I watched another of the Mirowski videos https://www.youtube.com/watch?feature=player_detailpage&v=2J13SDqmaNw from a few years ago discussing how neoliberalism has impacted science and innovation. That lecture had greater impact on me than the lecture you referred to.
Good point on human languages. Of course, speech has nothing to do with micro-economics. Oh, wait…
I’m glad you found it worthy of your time. He is difficult to read but VERY insightful and so I think worth the effort.
As for the video you linked to above he has covered the phenomenon, of the commercialisation of science via neoliberalism, at this sydney university lecture – ‘The Modern Commercialisation of Science is a Passel of Ponzi Schemes – Philip Mirowski’ https://www.youtube.com/watch?v=iN8gnbqOoMk&index=4&list=PLQWdiYL5PMXHtFu6RpVfKyHftAmYlkxW7
Someone had made a playlist out of his lectures and podcasts that are on the web.
As for extending the model of automata to human language, I didnt quite understand how you got to it. Was its applicability to language mentioned in the lecture?
As a working scientist in the 70′ and 80’s and in phama IP since, everything Mirowski says there rings true (“The Global Restructuring of Science as a Marketplace of Ideas”). Here is a real life example of surpressing one scientific truth in order to buy another one:
“The [safety] questions raised about Risug [single-use male contraceptive] and the resultant delays [in India] have come from the National Institutes of Health in the US. For several years, they wanted to promote a new drug that involved regular ingestion like the female pill, Guha said. “In fact, even in the WHO, there are people who don’t want the drug to come through,” A.R. Nanda, the union health secretary in 1999-2002, had told me some years ago. A hormone-based drug would offer prospects for continual demand and long-term profit.”
http://thewire.in/80751/risug-male-contraceptive-icmr/
Mirowski’s main point is that neoliberalism takes power in order to create the kind of markets that it favors. But he doesn’t explain the underlying principle governing what kind of markets those might be. My impression is that neoliberalism is trying to create a world in which everything is either over-priced or under-priced. Such markets will naturally, and it seems inevitably, create an over-class and an under-class. But why do they want to do that?
Following Orwell, I think this all has to do with avoiding nuclear war, by binding the interests of all the various rulers around the world together against everyone else.
“…it seems inevitably,
[ they]create an over-class and an under-class. But why do they want to do that?”
Good question.
The organic essence of any individual, any Party or Class is a tendency (a drive) to seek it’s own survival & growth (reproduction).
Power has its own internal dynamic. The harder question is often, why does a particular actor choose these OR those means to achieve survival/growth ? Means which many might interpret as being self defeating if not self destructive.
Allow that the FIRE sector is now the dominant economic & political Power in the world: how do we interpret their “governance” over the past 40 years, & especially over the last 16 years? Have we seen a ruthless will to power ? Yes. But what of self destruction ? Again, yes.
The 1%, & the FIRE sector, have striven savagely for short term power over long term survival.
The 1% has embraced real economy stagnation: THEIR interests are furthered by eternal QE (essentially a multi trillion dollar welfare scheme for the 1%), & ZIRP.
Both CB policies create asset inflation, enabling, not real economy investment, but share buy backs, massive dividends & grotesque executive bonuses. Actively retarding the real economy has the addition benefits of keeping price inflation (thus interest rates) low & unemployment high (no pressure on wages or inflation)
That a failure of private investment & public investment in infrastructure, a failure to invest in R&D, or even basic science (similar to a farmer eating next year’s seed stock)will have very dangerous long term consequences for the FIRE sector is beside the point to the 1%. (You can keep adding to any list of 1% insanities almost indefinitely: almost wholesale disregard for future environmental catastrophe; the willingness of elites, especially US elites to engage in apparently insane policies of Imperial destabilisation in places like the Middle East, Ukraine & the South China Sea are but two examples.)
How to explain such behavior ?
I can’t – beyond noting that our elites remind me of selfish- vicious- children.
Lord Actor’s views on corruption & Power do seem entirely applicable: however, does a tendency to corruption adequately explain the madness of our elites ?
Does a Marxist explanation assist ? Are elites entangled in mess of material contradictions inherent in capitalism ? Such as the tendency of the rate of profit to fall over time.
Perhaps the hardest question is: to what extent are we – average citizens – to blame for our Nero-like elites ?
She is not just advocating Keynesianism, at least as conventionally understood. (You can think of it as Keynsianism, though, if one recalls Keynes’s call for a “somewhat comprehensive socialization of investment.”) The point isn’t just for governments to manage the aggregate level of “demand” and “employment” in some indiscriminate sense, but for governments to take a more hands-on approach in charting a national economic strategy organized around specific investment missions. Governments need to play a bigger role both in carrying out and guiding the kinds of investment that are to take place.
FYI, that’s some of the confusion in discourse on the subject. Some people advocating MMT ideas do say the aggregate level is what matters (using Sector Financial Balances, for example, to argue that government should increase net transfers from the government sector to the private sector). NC is an important outlet for this perspective, both in terms of supporting stimulus and decrying austerity.
I think this is the heart of the discussion. A bigger role compared to what? The contemporary national government – particularly the USFG – claims an unprecedented amount of power in directing labor. The notion of bigger inherently implies understanding the role that government currently plays, yet there is a systemic unwillingness of our professional class to honestly address the myriad ways in which government’s role is causing problems rather than solving problems.
I think Wen makes a very important observation that nothing really new is being offered in this piece. The failure isn’t a lack of creative economic ideas. Rather, it’s in the wielding of political power by people who have fundamentally different goals.
Yes, but that role for governments is obvious. Post war USA is a great example of this. Maybe she should explore why it has come to it that this needs to be said out loud again.
removing the google wrapper around the link to the paper.
http://www.uq.edu.au/economics/PDF/int/Mirowski.pdf
Where is the sustainable part? It is not in goals of growth. The goal should be sustainable evolution.
Government enshrines process and practices. It doesn’t evolve well. Government also has a devastating track record on picking investments to incentivize — oil over ethyl alcohol back in the 1920’s. Promoting land development and farming practices in the western plains that created the dust bowl. Government does do an amazing job of steam rolling contrary information, ideas, etc.
Good point. But the icons of economic orthodoxy also effectively steamroller ideas not in sync with the nonsense mantra of “endless growth”. Therein lies the great enemy of really rethinking Capitalism, to really align growth with ecological possibility. Personally, I doubt that Capitalism as we now think of it can be “rethought” to eliminate it’s predatory and inequality-creating elements.
The rigorous and scientific economics profession just needs to decide ……
“Which way is up?”
40 years ago, most economists and almost everyone else believed the economy was demand driven and the system naturally trickled up.
Now most economists and almost everyone else believes the economy is supply driven and the system naturally trickles down.
Economics has been turned upside down in the last 40 years.
For a supply side, trickle down world you need Neo-Keynesian stimulus, where money is fed into the top of the economic pyramid, the banks, to be lent out, invested and trickle down.
For a demand driven, trickle up world you need traditional Keynesian stimulus, where money is fed into the bottom of the economic pyramid through infrastructure spending, to create jobs and wages which will be spent into the economy and trickle up.
The West has been doing Neo-Keynesian stimulus for the last eight years and asset prices have been maintained but little has trickled down to the real economy.
Oh dear, today’s economics is upside down, let’s try some good old Keynesian fiscal stimulus.
Brexit and Trump are the result of not working out “which way is up?” a little sooner.
China did fiscal stimulus after 2008, how did that go?
China was the engine of global growth after 2008, its insatiable demand for raw materials made lots of other emerging economies boom too.
Keynes is the man; he’s the right way up.
Let’s form a global economy guided by ideas of economic liberalism where we put the economy first over the interests of people.
1980s – boom
Early 1990s – bust
Late 1990s – boom
Early 2000s – bust
Mid 2000s – boom
Late 2000s – bust
2008 on – stagnation
Unfortunately, no one really understood how the economy worked.
2008 – “How did that happen?”
What more evidence do we need?
What is wrong with economics when science can successfully send space craft to the outer edges of the solar system?
Science has been allowed to develop successfully as it cannot be modified to suit certain vested interests to make them richer.
Economics is not like this.
There is something wrong with economics that was first spotted at the end of the 19th century and pretending it is a real science today is little more than wishful thinking.
Thorstein Veblen wrote an essay in 1898 “Why is economics not an evolutionary science?”.
Real sciences are evolutionary and old theory is replaced as new theory comes along and proves the old ideas wrong.
Economics jumps about like a cat on a hot tin roof and is not evolutionary, in the late 1970s Keynesian ideas were ditched for the ideas of Milton Freidman. We threw out the old Keynesian economics and bought in something new and untested just as we are about to embark on globalisation, it was asking for trouble.
Milton Freidman hadn’t realised real science is evolutionary.
Looking back we can see other problems.
Malthus came up with an economics that worked for the vested interests of the land owning class.
Ricardo came up with an economics that worked for the vested interests of the financial class.
Marx came up with an economics that worked for the ideology he was trying to put forward.
It’s complex, quite fuzzy and can be easily biased to suit vested interests.
Early on it became very apparent to the wealthy and powerful that economics needed to be biased in the right direction for their interests.
As Classical Economics reached its zenith in the 19th Century it had come to some unfortunate conclusions powerful, vested interests didn’t like so they backed a new, neoclassical economics that missed out the undesirable conclusions from Classical Economics like the differentiation of “earned” and “unearned” income.
Most of the UK now dreams of giving up work and living off the “unearned” income from a BTL portfolio, extracting the “earned” income of generation rent.
The UK dream is to be like the idle rich, rentier, living off “unearned” income and doing nothing productive.
This distinction between “earned” and “unearned” income has been buried ever since, but was hidden is later revealed by who this economics favours.
Neoclassical economics led to the Wall Street Crash of 1929 and the Great Depression, where its ideas just made things worse.
Keynes came up with some new ideas that were incorporated into the “New Deal” and the recovery began in the US.
Keynes ideas had some unpleasant conclusions as well and so economists moulded some of Keynes ideas into neoclassical economics ready to use after the Second World War. Keynes had said that capitalism was inherently unstable and recognised the dangers from financial asset investing, not the sort of ideas that were desirable.
The Golden Age of the 1950s and 1960s followed.
The new hybrid Keynesian ideas went wrong in the 1970s and its ideas did not lead to recovery.
The powerful vested interests sought an opportunity to bring back their really biased pure neoclassical economics and use it as the basis for a global economy.
It was improved, but still had all the old problems:
1920s/2000s – high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase
1929/2008 – Wall Street crash
1930s/2010s – Global recession, currency wars, rising nationalism and extremism
Left to their own devices, powerful vested interests will develop an economics that is so biased the economic system will collapse due to the polarisation of wealth at the personal and national level (like now).
Lots of other inconvenient stuff is missing too, which has lead to many of the recent mistakes, including 2008 and its aftermath:
1) The true nature of money and how it is created and destroyed on bank balance sheets.
2) The work of Irving Fischer, Hyman Minsky and Steve Keen on debt inflated asset bubbles. Their inflation, bursting and the debt deflation that follows.
3) Richard Koo on balance sheet recessions.
You can bias economics to suit vested interests but you can’t make that biased economics work.
Economics needs to be rebuilt form the bottom up in an evolutionary, scientific, manner not missing out the bits that are inconvenient for wealthy and powerful vested interests.
You can’t put the economy first without good economics.
Let’s get busy.
re: “Let’s get busy.” What are you personally going to do wrt this?
“What is wrong with economics when science can successfully send space craft to the outer edges of the solar system?”
Humans are involved in the mechanism of basic economic function.
“Science has been allowed to develop successfully as it cannot be modified to suit certain vested interests to make them richer.”
See big tobacco and climate deniers.
And big oil… and sugar industry… and chemical industry…
Corruption has to include “science” to strengthen its arms.
If we are to rethink capitalism, let’s make sure to include as one key element the banishment of the phrase “human capital”.
Yes, please.
Also, Human Resources. I am not a vein of coal to be mined. Or at least, I shouldn’t be.
“On both sides of the Atlantic, public companies are sitting on record piles of cash—around $2 trillion in the U.S. and a similar amount in Europe”
Keynes called it the “liquidity trap”
1929 and 2008 were both debt inflated asset bubbles, where securitising loans increased leverage.
Keynes studied the Great Depression and noted monetary stimulus lead to a “liquidity trap”.
Businesses and investors will not invest without the demand there to ensure their investment will be worthwhile.
The money gets horded by investors and on company balance sheets as they won’t invest.
Cutting wages to increase profit just makes the demand side of the equation worse and leads you into debt deflation.
Central Banks today talk about the “savings glut” not realising this is Keynes’s “liquidity trap”.
US firms engage in share buybacks as they don’t want to invest in expansion.
Investors pour into negative yielding bonds and gold for safety.
Keynes realised wage income was just as important as profit as wage income looks after the demand side of the equation.
This is why you need fiscal stimulus to create jobs and wage income to spur demand.
Say may have said “supply creates its own demand” but he was wrong.
As we can see businesses and investors don’t believe Say either and this why they are hoarding.
Investors pour into negative yielding bonds Sound of the Suburbs
Investors should never have received even 0%* for sovereign debt since it is risk-free. Otherwise, with positive interest, we have welfare proportional to wealth, not need.
and gold
Central banks should be forbidden from buying private assets and that includes gold.
for safety. Sound of the Suburbs
Then we’ll see how safe gold is without special privilege, that is, without the expectation that central banks might buy it in the future.
Also Ezekiel 7:19.
Keynes realised wage income was just as important as profit as wage income looks after the demand side of the equation.
I would think any income could serve that purpose though profits, going largely to the rich, are less likely to be consumed than wages.
As we can see businesses and investors don’t believe Say either and this why they are hoarding. Sound of the Suburbs
Since ANY sovereign debt should yield less than 0%, then fiat account balances at the central bank, being the most liquid form of sovereign debt, should cost the most. So the solution to fiat hoarding is to charge for fiat appropriately, not store it for free, or worse, pay positive interest on it (IOR). That said, individual citizens should be allowed negative-interest-free fiat storage up to, say, $250,000 US with provisions to rent out unused portions of their account space to those who exceed their own limit for negative interest free storage.
*i.e., not 0% because of overhead costs, however slight.
>Stagnation is not caused by the deterministic forces of an ageing population, high savings, and exhausted tech opportunities. Rather, it is a result of falling private and public investment that has prevented the emergence of new investment opportunities.
So I expected an explanation of why “falling … investment” isn’t directly correlated to “exhausted tech opportunities” and the like. Didn’t get it.
The usual techno-libertarian babble with the libertarian part jammed into the closet so as to appeal to the political classes.
I think the problem with your problem is that it’s not clear where the next phase of growth will come from, and as tech has reached a pinnacle, maybe the new thing will turn out to be surprisingly luddite and the searching for it may be better done by collective action which then is picked up by the private sector with the public part moving on to lead the thing that replaces that because this old world keeps spinning around in spite of the fact that people are always haunted with the notion that it might stop….think y2k, jan 1 2000 was going to and did happen regardless of the perceived capacity for our systems to bear it. Like in the election where the private sector thought it could lead us where they wanted us to go but it turns out they were wrong and they’re actually following
I want to say one word to you. Just one word.
Robotics.
I don’t think it’s accurate to claim that “technology” has reached a pinnacle. Technology is both the wheel and the fountain pen. It is the iPhone and the Epi-Pen. If any version of human civilization survives, we will continue to invent things.
If the current crony capitalist, neoliberal, exploitative Silicon Valley model of technology development and monetization has nowhere else to go, that’s really less about technology per se and more about real economics (as opposed to economic theory), and current political practice globally.
Every advanced nation could, in principle, be pouring resources into a climate crisis version of the Manhattan Project, working feverishly to develop technological solutions to carbon capture and cost effective desalinization. All sorts of things could be invented and discovered in the course of such initiatives. Uber is that it isn’t really a tech company. Unless I deeply misunderstand it, the tech involved isn’t innovative. What is innovative is the massive financial backing of a company designed to evade regulation and exploit the public commons and the people living on it. If financial resources were more available to serious research scientists instead of affluent blonds with little science training but major league political connections, who knows what medical testing breakthroughs could result?
Humans haven’t stopped being inventive. That’s not our problem.
Mazzucato in her book The Entrepreneurial State explains the decline in major innovations. She attributes it to the fall in basic research, which was funded by the government (she downplays the role of regulated utilities like Bell Labs, which was also a very important center). The big issue is the private sector cannot afford to invest in basic research because 1. They payoffs are uncertain and often very long term and 2. They often accrue to players besides the firm doing the research. She also stresses that the way the federal government operated, contrary to anti-government PR, was freewheeling and very effective. She provides a good deal of evidence to support her argument.
I’m just checking, since it’s late for me and I’m migraining today — but you and Mazzucato are essentially agreeing with me, correct? (On this specific little point.) It’s not that there’s no new technology to be made, it’s a funding and ideology problem.
Correct.
One reason corporations can’t afford to do research anymore whether applied research, basic, or any other kind, is that current incentives make it almost impossible, since research costs money, and money now has better uses, e.g., stock buybacks combined with low income taxes. Going back to the 91% marginal tax rate on income over, say $3 million, would make it worthwhile to keep money working in the corporations, safeguarded by loyal and skilled employees, rather than stripping it. And all those loyal skilled employees would supply all the demand needed in the economy. Of course a society like would probably have widely distributed political power and small under class.
(not that I don’t believe in the general idea, that’s what made me sad..)
The secret is in how money works, which is why hardly any economists understand either the problem or the solution.
Money and debt are opposite sides of the same coin.
If there is no debt there is no money.
Money is created by loans and destroyed by repayments of those loans.
From the BoE:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
After the system has been flooded with lots of debt by encouraging bankers to maximise profit with their debt products, you get to a point where everyone is paying down debt and few people are taking on new loans.
This makes the money supply contract, making it harder to pay down the debt.
When the repayments are larger than the new debt being taken on, the money supply starts contracting.
The Government needs to step in as the borrower of last resort to keep the money supply stable, otherwise you head into a deflationary spiral.
Central Banks are the lender of last resort and Governments are the borrowers of last resort.
Central Banks print money for banks (QE) and, as no one is borrowing, it stays in the financial system blowing bubbles and doesn’t get to the real economy as seen from the low inflation round the world.
Central Banks printing money for the Government to engage in fiscal stimulus gets the money directly into the economy.
What they have been trying to do all along, the intermediary has just changed.
Banks never got the money into the real economy.
Keynes studied a similar situation in the Great Depression where debt deflation had taken hold.
He realised businesses and investors won’t invest in the real economy when there is no demand. Today we see all the global businesses hoarding cash and engaging in share buybacks, they won’t invest because there is no demand to make this worthwhile.
Keynes realised wage income was just as important as profit, wage income creates demand.
Keynes understood money.
Today’s businesses think they should maximise profit by cutting wages, reducing wage income and demand and making the whole thing worse.
Today’s economics is basically the same as that of the 1920s, its neoclassical economics and its core remains unchanged.
Neoclassical economics believes supply creates its own demand “Say’s Law”. It didn’t then and it doesn’t now.
Neoclassical economics believes capitalism naturally reaches stable equilibriums. It led to a Wall Street Crash and Great Depression then and it led to a Wall Street Crash and global recession now.
The FED engaged in QE then, it has engaged in QE now, it didn’t really work either time.
It was the “New Deal” that bought the US out of the Great Depression, it’s what the world needs now.
Saturating an economy in debt will always lead to debt deflation and the only way out is fiscal stimulus.
Richard Koo studied this in the Japanese debt deflation from 1989 to today:
https://www.youtube.com/watch?v=8YTyJzmiHGk
He explains the mistake Christina Romer made analysing data from the Great Depression leading Central Banks to think they could get us over 2008 with monetary policy.
In the first 12 mins.
Austerity is the worst thing you can do as it accelerates the contraction of the money supply. When the US was panicking about the fiscal cliff it was because Ben Bernanke had read Richard Koo’s book and knew cutting Government spending would drive the US economy into recession.
Richard Koo understands money, he has worked in a Central Bank (New York Federal Reserve).
The secrets of money are not included in the neoclassical economics studied by economists outside the Central Banks. The consequences of the secrets of money are understood by very few who work in the Central Banks, they often favour austerity when it is the worst thing you can do.
You’ve nailed it . Koo gets it . It’s a balance sheet issue . The global economy is just one big balance sheet . Once you see that the next question follows and it was posed in 1925 by Lenin in his 1925 article ” Towards Capitalism or Towards Socialism ? ” This tension has never gone away and it is of course a matter of money and power. On the face of it Capital is winning ( has won ? ) , but what use are a lot of locked up digits on a computer screen posing as money other than as a means of creating yet more digits ? Power . Simple as that . And as long as the politicians are prepared to cede their power to big business short of the peasants revolting ( Trump, Brexit …….. ) and there is no guarantee that will work how are we to change the status quo. Look at the Democrats they’ve learnt nothing from Trump’s victory . Any more than the Conservatives have learnt anything from Brexit. My hope is for the next generation or two so I’ve written some papers called Money in the 21st Century for young people hoping to dispel so many of the myths . As Galbraith the Elder said ” The process by which money is created is so simple the mind is repelled ” . Indeed it is.
While I don’t disagree with the this essay in the whole, I think it misses an important piece. There must be something that drives government investment. In the 1950s the government’s investment in the highway system crowded in investment in the auto industry as well as investments in suburban housing. Those were things that could drive generations of wealth creation.
Green energy investments might do some of that today, but nowhere near on that scale. Besides that, what else is there?
What else?
Maybe a conversion to “single-payer” medicine expanded to include a geater range of services; child-services, elder care, and the like. These are people intensive services that can be performed by a wide range of skilled and semi-skilled people. It puts people to work at a job that is becoming essential as boomers age.
I think Mazzucato’s work is very timely.
I think that her idea of private public partnerships may be the opposite of that of Trump.
There is worry that Trump’s idea of this is privatization of assets to benefit a few in line with crony capitalism.
Mazzucato on the other hand wants the public to share profits and not just losses.
I think Trump does understand that fiscal stimulus is important and can outweigh the austerity oriented goal of balancing a budget.
Government has the deep pockets that can get huge projects like energy alternatives and public transportation off the ground. Mazzucato wants to do it in a way that benefits the public rather than what we have been seeing with the profits of these projects funneled to the 1%.
>I think that her idea of private public partnerships may be the opposite of that of Trump.
Oh the Judean People’s Front not those right b*stards in the People’s Front of Judea. Got it.
>Government has the deep pockets that can get huge projects like energy alternatives and public transportation off the ground.
Well then just do it. What does the private financial sector have to do with it? I’m pretty sure Solyandra didn’t cost anybody a single vote they would have gotten otherwise… so why did they even involve the private financial – again note the important word, here – sector?
I’m not opposed to a more socialistic type response and actually see this as a move in that direction.
She wants though to work within a capitalist system. Recognizing that the government has a lot of control even in so called ‘free markets’ this often leads to monopoly type activities. The government gives away important work such as in drug research or technology to the private sector and lets them run with it with little control.
She would like to see more control over this work. It can be given to pharmaceutical and tech companies to improve and market but not without controls in the public interest such as limiting excessive drug prices and not having all the tech gains of a product go to a few execs but be distributed to the overall public which helped fund the research in the first place.
In infrastructure it would emphasize the overall good to the economy of good infrastructure and not let a few companies benefit by control over tolls for example.
trying to better capitalism is the wrong path. the lack of investments is caused by the growing impossibility to get profit out of it – which is the effect of capitalism itself (tendency of falling profit rate).
Kalecki disagrees with you and later empirical work backs him up.
Capitalists choose to run the economy at less than full employment because they don’t like workers having the power they’d have (more say over work conditions, less of a pay gap with capitalists) if they could quit their jobs and find another one readily. They seek a higher profit level than is necessary and chronically underinvest as a result.
+1 …YES! See also Joan Robinson (re: unemployment):
The first function of unemployment (which has always existed in open or disguised forms) is that it maintains the authority of master over man. The master has normally been in a position to say: “If you don’t want the job, there are plenty of others who do.” When the man can say: “If you don’t want to employ me, there are plenty of others who will,” the situation is radically altered.
January 23rd 1943 – Alternative Solutions To A Dilemma
Uh, one small problem. Capitalism isn’t the problem. Unless we’re simply using the word capitalism to describe any fascist combination of imperialism abroad and corporate subsidies at home.
For example:
This is the state of economic discourse on the left? Policy-makers understand the dynamics quite well. That’s why they have done everything possible to undermine the rule of law and individual rights at the heart of market-based economics.
Concentration of wealth and power isn’t a failure of public policy. It’s the point.
Yas, No True Libertarian would allow erosion of the ruleoflaw and individualrights… if only those could be preserved, everythiing would fall into its preordained place… Market-based economics…
http://www.nakedcapitalism.com/2011/11/journey-into-a-libertarian-future-part-i-%e2%80%93the-vision.html , in six parts for those who want to imagine the Libertarian Paradise…
Accept Libertarians don’t belive in rights, but rather in a batch of comodities they call “rights” that exist for the soul purpous of being bartered away to the ownership class.
We are lucky to have this freely available—
Illiberal libertarians: Why libertarianism is not a liberal view
by Samuel Freeman in Philosophy and Public Affairs
http://sites.sas.upenn.edu/sfreeman/files/illiberal_libertarians_ppa_2001.pdf
Two highlights
p.147
p.149
Thanks for that excerpt.
The concept of the common good, and how to protect and improve it, is a challenge societies are still wrestling with, n’est-ce pas?! Even initially well-intentioned politicians get quickly hijacked by other interests. The people who should be the “commoners” (as in common good) are maybe too busy on the internetz & the latest scandal going on tv.
We the “commons” have to wake up and articulate what we say is the “common good” because delegating that task doesn’t seem to have worked so well.
“Concentration of wealth and power isn’t a failure of public policy. It’s the point.”
This gets to the root of the problem.
Thanks, I appreciate the comment.
I’ve noticed several times over the years that we collectively drift from discussion of the root problems as a defense mechanism against naming names of what specific policies are responsible for our current predicament (and who enacted them) since they tend to be policies that actual proponents of market-based economics don’t support. It’s much easier to rail against capitalism generally, for example, than to ask why it is that Democratic leaders and the intellectual class that supports them keep doing things like prosecuting poor and minority drug users while protecting war criminals and financial predators. If we use the word capitalism to describe the drug war and financial bailouts and wars of aggression and abuse of prisoners and so forth, then that word has no descriptive usefulness whatsoever.
I was fascinated by JT’s straw man on libertarianism. That has nothing to do with my usage of the concepts of rule of law and individual rights. It’s simply an attempt to smear civil liberties via guilt by association with crazy libertarians (who, by the way, have no power in DC anyway). JT, if you’re still reading, I would love to know to what end? Why are you worried about a defense of rule of law and individual rights being advanced?
Rethinking capitalism and rolling back the corporate coup d’etat will be difficult as most citizens have no idea what has taken place. Trumps election is good in one sense, it will be no longer possible to obfuscate corporate interests as somehow also in the best interests of the citizenry. The are in fact opposites.
Rethinking capitalism leads to rethinking the legitimacy of power centers. The cyclical political theatre between a sham duopoly hopefully is over, or will be over when Trump fails to deliver in any meaningful way for the working class. The time is now for rediscovering the true power in government lies with the people, not with some enthroned elite. It is somewhat ironic that it took the Queen of England to point that out in her indirect way.
If things go belly up then many of us will have the chance to take part in creating something new at the most local level out of necessity.
Good idea to think of it in advance. I’ve already taken the step of reaching out to all my nearest neighbors. It’s been a good experience so far. Better to take initial steps now, rather than react to an emergency when the fear factor will be high.
The author seems to have a hard time shaking certain conventional assumptions.
If that path is negative then maybe they have a point but we can’t have perpetual growth in a closed system which is what this planet is.
And then this part:
This also seems a little shortsighted and somewhat vague. How much exactly do we need to produce? Based on the amount of garbage floating around in the ocean and the rising global temperatures it would seem we’ve probably already overdone it.
This is another author who seems to think that money really does grow on trees, ie it’s a naturally occurring phenomenon like the weather that we are subject to and can’t change much rather than a tool made by human beings that can be used any way we see fit.
Rather than factories running 24/7 producing mounds of cheap crap that breaks down and needs to be replaced on a regular basis just to keep enough people marginally employed and constantly buying stuff, would it really be so bad to have automation that produces enough of what we need and then stops for a while until there’s a new need, coupled with a job guarantee and BIG?
It boils down to, do you want a rip roaring economy for all or a habitable planet?
Perhaps we can escape this with a combination of jawb guarantee and BIG. You’re hired and your jawb is to do nothing. The problem is when you are off the jawb, spending the money earned by doing nothing
What caused the economic collapse was hitting the obvious limits of economical resource extraction and environmental limits to absorbing our industrial waste stream.
The global economy is 100% dependent on resource extraction, production, and disposal.
We have tried to deny this reality by jiggering around with economic, monetary, and financial theories as if they, along with technolology can over come it. All that has done is increase inequality and empower what I call the cannibalistic phase of capitalism.
What is needed is just about the opposite of capitalism. We need to figure out how to pay people to do less…way less, have less, consume less, procreate less….
We are facing a longer-term economic collapse if we don’t restructure the economy to be vastly less wasteful. But the crisis in 2008 was not the result of resource extraction. This was a financial crisis and I (and many others) described at great length how it came about. My argument was that it was the result of bad economic ideology, applied over a period of 50 years.
I just don’t see how capitalism can be “saved.” While in theory you could use democratic governance to keep it tamed, that doesn’t seem to work very well. Non-elites in the United States, for example, have only experienced brief periods economic security and well-being, and they came as the result of conquest every single time, did they not? Driving existing nations off land that could be then handed to non-landed Americans in areas the elites didn’t want to bother with, like the difficult to farm Great Plains, or the boom of the ’50s which was fueled by how badly the rest of the First World had been damaged by World War II, as well as the continued suppression and exploitation of black people and renewed oppression of middle-class women. Because capitalism tends toward concentrated wealth, it just seems too easy for the rapacious to acquire the capital to then bend the government to their will, and against the well-being of the many.
Looked at objectively, capitalism doesn’t deliver enough long-term benefits to most people. I’m not claiming it delivers no benefits. But its exploitative, destabilizing power has overcome democratic restraints again and again, in parliamentary systems, in Presidential systems. In a big enough economy, capitalism devours its cage, and pretty quickly, too.
I realize nobody sees a feasible path in the Western world from capitalism to something better, so pragmatic people tend to focus on trying to fix capitalism. But honestly, I think that’s like alchemy. I don’t think capitalism is fixable. I realize this is non-responsive to the point you are debating here. I am fully aware the 2008 crisis was a financial one. But more broadly, it is looking like the planet is about to render a ruling on capitalism that cannot be appealed; we need to quit focusing on turning lead into gold so we can get on with figuring how to get to the something better ASAP.
I don’t know if you saw those charts Bill McKibben was tweeting out, but we really have very little time as a species to figure this out.
Capitalism comes in many flavors. The version we have now looks pretty hard to redeem. But the Roaring 20s were followed by the Roosevelt experimentation that led to a social democratic version that was pretty durable. And what screwed that up was Johnson running deficits in the 1960s when the economy was at full employment because he was not willing to raise taxed to fund the unpopular Vietnam War (mind you that was not the only thing he would have been funding but that was his concern). And then the Keynesians Solow and Samuelson (who used a bastard form of Keynes which Keynes tried repudiating with no success) said the resulting inflation wouldn’t be so bad in terms of its overall effects using a poorly substantiated theory called the Phillips curve (this is a considerable simplification). When this turned out to be wrong, it considerably discredited the Dems and left-leaning economists generally, paving the way for Milton Friedman (who along with Walter Heller had objected to the Johnson deficits) and the Chicago School, and their corporate right wing allies (see the Powell Memo) to become dominant.
So the point is I regard how we got where we are as path dependent and not at all inevitable. Similarly, the Club of Rome was onto environmental risks early but published overly-dire forecasts which proved to be wrong, allowing them to be marginalized.
Capitalism has remained more of the social democratic version in Sweden (although the right wingers, emboldened by their success in the US and UK, have done a lot to weaken it) and Japan (despite all the economic stresses).
Other experts have argued, and I think they have a point, that you can’t have a strong social welfare state and liberalized immigration. Voters are not willing to bear the cost of providing social safety nets to large numbers of immigrants who are disproportionately at the lower end of the economic food chain (ie costly).
I will think more about that perspective. But I still think, big picture, that every time a wealthy country puts restraints in place, capitalism manages to eat its cage in short order. I only see icy little countries making it work. It’s not surprising that billionaires are leaving Iceland alone.
It’s not that I want to be correct about this. I, too, recognize that we have no clear or safe path to actual socialism or any other egalitarian, non-capitalist system. But at the very least, I think we have to be a lot more cognizant of how big a factor this is, and design policy and institutions going forward to make the cage much, much stronger and much, much smaller. Bill Clinton was a tool of existing forces. He wasn’t a unique monster who dragged us off a better path. He and his wife basically took advantage of an existing market niche that was available.
Perhaps that’s a better way to frame it. Capitalism is by its very nature predatory. Predators have a role to play in any ecosystem. But when I read discussions like Mazzucato’s, I get frustrated, because I feel like there’s a lot of dancing around about how oh well, the government needs to fund basic research, and infrastructure, and do this and do that, and then private investment will…take advantage of everything the government set up and steal all that value for the elite, demolishing all the good the government built in the process. Wash, rinse, repeat. There’s nothing in most economic analysis that seems to acknowledge as a foundational element that capitalism is innately, profoundly destructive. There is such a thing as creative destruction. Forest fires in California are an absolutely healthy and necessary part of the ecosystem. And maybe we will just stumble our way/evolve into a system where capitalism nourishes the economic ecosystem instead of routinely ravaging it, before the planet boils. But I think it would happen faster and better if general discourse around this issue grappled more consistently and directly with the fact that it is inherently destructive. That perspective is still treated as an ideological one, it seems to me. But it shouldn’t be. It’s not a matter of ideology that water is wet, fire burns, and bears eat tourists. Those are easily observed facts. The same really should be true of capitalism. It’s predatory and destructive. We may be stuck with it (for now), but let’s not kid ourselves about its nature.
By the way, thanks for that thoughtful reply. I wanted to spend the last year or so self-teaching myself Keynes, but life got in the way. I am well-aware that my granular understanding of economic theory and economic history is very limited. It’s one of the reasons I never thought I’d end up commenting here. If I’d known I would, I’d have come up with a really cool screen name, I swear.
It doesn’t have to be saved; it has to be dealt with. The fact is that the world is, for now, a capitalist show, and waiting for capitalism to somehow collapse only guarantees that it will continue to be so. If global sea levels rise three feet, that makes the lives of billions of people even more horrible and miserable, and undoubtedly unleashes all kinds of ugliness TSTL, but it doesn’t overthrow capitalism.
The most frustrating thing to me about the green perspective is the notion that if things get bad enough, capitalism will either collapse from internal contradictions (and something more sensible will “naturally” arise from the ashes) or that capitalists will somehow come to recognize the folly of the system and agree to help us make something better.
Power is never given away voluntarily. The point is not to reform capitalism; it is to do away with it. But, unfortunately, the road ahead has yet to be built. We will need to build it. But it has to be a road from here to there. We need to start where we are, not from some imaginary future place.
I have no argument wrt your economic analysis. My point is that the catalyst that finally triggered collapse was resource and environmental.
I was there in the trenches as it were. Diesel went up 5 fold and stayed up long enough to trigger serious feedback effects. People were selling or parking their diesel trucks and cars and buying small cars if they could find them. Commercial trucking lost their profit margin and started jacking up prices and not contracting shipping prices long term. Mining became almost unprofitable and this went on and on. Farm inputs went up 10 fold then feed skyrocketed until whole herds were destroyed rather than fed. Farm diesel became scarce. Farmers were filing bankruptcy all across the country. Lead shortages caused a huge speculative market for bullets. Copper and Iron jumped.
All of which put huge constraints on production surplus for all industries which as you know translated to financial lock-up. That and a growing awareness that the environment was reaching its ability to support industrial civilization as it was structured made the future look very poor for investment and lending.
Even now it is clear to those who’s job it is to know such things that any attempt at restarting the Global economy will eventually slam up against the constraints except that now we have even less resources and the environment is even worse shape making the collapse even worse.
There are those who believe that the right economic, monetary, financial policies will over come these constraints which is part of what got us in this mess in the first place, hasen’t worked at all over the last 8+ years and has no chance in the future. Which is why I feel it is critical that we proceed from this perspective.
Cheers!
Sorry, that is not true. Correlation is not causation.
Subprime started collapsing in December 2006, long before the brief (only 6 months) runup in commodities in 2008 (all of 6 months). It recovered in March through May 2007 and stopped totally in 2007. Subprime was destined to collapse because it was a Ponzi (a class Minsky Ponzi process) where the borrowers got cheap rates for only 2 years and the mortgages reset at much higher rates. They had to be refied every 2 years. The incentive for the lenders was they took large fees on every refi. But they’d also push the borrowers to take more debt every time (a “cash out refi”) based on the appreciation of their home price. More than half the subprime mortgages pre-crisis were cash out refis, so subsidizing consumption. And as I document long-form in ECONNED, the subprime market was never viable on a long-term basis (an earlier, smaller subprime market had flamed out in the 1990s) because the deals always had one trance no one wanted, the BBB- tranche, which really said everyone was taking out too much in fees and costs to make all the bond tranches attractive to investors. The BBB- tranche was rolled into CDOs, and I show how they were a Ponzi.
The first acute phase of the crisis was in August-Sept 2007, before the six month runup in commodity prices in early 2008. Hank Paulson tried bailing out SIVs (structured investment vehicles) starting in Sept and was unable to do so. At the Jackson Hole Fed meeting, Jim Hamilton showed how Fannie and Freddie would get in a crisis because they were too thinly capitalized.
The reason what would have been a savings and loan crisis level turned into a global financial crisis was shorts on the subprime market. The use of credit default swaps, packaged into largely “synthetic” (as in based on CDS) CDOs, had the perverse effect of keeping the cost of subprime debt low by making largely BBB credit as AAA, and in creating toxic BBB exposures that were 4-6x the level of real economy subprime risk, and concentrating that in the hands of highly leveraged (as in fragile) systemically important financial institutions like Bear (major CDS player), monoline insurers, AIG, UBS and other Eurobanks,
The second acute phase of the crisis was in Dec 2007, again before the commodities runup of January-July 2008. And during the commodities runup, we were one of the few to call it as a bubble, not driven by fundamentals. I shorted it at $141 a barrel, when it peaked at $147 and was at that level only very briefly.
The failure of Bear, Fannie and Freddie, and Lehman, had nothing to do with commodities. Nothing. Bill Ackman was recommending a short of monolines in late 2007, based on historical performance and data (as in 3Q 2007 and earlier), which led to a January 2008 discussion of a bailout that went nowhere. The debate over whether Lehman was a goner took place starting in early 2008, again based on 2007 and earlier financial data.
Again I have no argument with your economic assessment but the “…run up in commodities…” as you so easily dismiss off hand started much sooner than you acknowledge and lasted as long as it took for massive demand destruction to kick in and demand destruction is the name of the game from here on out.
Truth is that if the world could have kept exponential, “hockey stick” growth going then we would not have had economic collapse. What kept “exponential, “hockey stick” growth” from happening was real physical constraints and that is what will keep any attempt at re-igniting growth from ever happening so why discuss it? Lets talk about the real issues.
The runup in commodities was for all of six months and took place across all commodities that were financialized but not, for instance, in agricultural products that weren’t (like cooking oil and eggplant, which has a huge market in India). That is not the pattern of one driven by real economy demand but by financial speculation.
please be open to looking a little deeper. You keep repeating something that is not true as if that makes it so. the Fossil Fuel industry is trillions and it alone under pins economies not the other way around.
I truly think that your analysis coupled with an understanding of the constraints is a worthwhile endeavor. I understand you expertise and blog has a theme but focusing on economics alone will always leave you coming up short of understanding what is happening and makes your analysis weak and useless.
I chronicled the crisis at great length in real time. I started this blog in late 2006 because I could see Things Were Going to End Badly. I later wrote a book about the crisis in which I did a great deal more research. I have to tell you again that you are wrong and I have done vastly more work on this topic than you have, as the voluminous footnote in my book indicate. I hate to pull rank but this is not you terrain.
Sigh— another blind Economist wandering through the zoo, stumbling upon an elephant’s trunk, and conjuring up ideas to make it GROW longer.
Sustained exponential growth is mathematically impossible. At any rate of growth, the end result is that humans and their things end up occupying every square inch of territory, using every joule of energy, and consuming every natural resource until collapse intervenes.
Natural capital — the physical characteristics of the biosphere— is the foundation of all life including that of homo sapiens. Any economic theory that fails to build from this fundamental fact is mere econobabble.
Humans are a tribal species who have devoted much of their “human capital” to warfare since the current genetic strain succeeded in exterminating the Neanderthals. Any discussion of contemporary capitalism in the USA that fails to examine the pivotal role of the military-industrial state is fatally flawed.
The goal of economic policy should be the maximization of quality of life for a population level that can live in harmony with the billions of other inhalants of the biosphere— a goal diametrically opposed to homo sapiens goal of growth in ability to dominate it.
“Sustained exponential growth is mathematically impossible.”
Two things. Growth is more like an annuity of 1 at compound interest. if we are growing at r% per year the growth curve would be (1+r)^n.
Growth can be based on human resources, rather than real resources, i.e. services as opposed to consumption.
You are wrong on both counts. If “growth” is just “compound intrest,” than you have a pointless economey, one that is not based in the real world,
Second, “human resourcs” is a “real resource” and thus havefundemental limits.
This is the origial point. You can not have an economey that violates the 2nd law of thermal dynamics. Economist need to stop pretending physics dosn’t apply.
the entropy that exists in our economies is a failure to organize at a much more complex and complete level – they say that nuclear energy is an incomplete technology and we all know how disastrous it can be – so is economics and it is because capitalism is a simplistic theory. Steve Keen is so good on this subject. He almost makes me see in graphic form how we should reverse our thinking from outward fractals of “productivity and profits” to something that goes deep instead. We need to change the concept of vertical integration to deep integration – make productivity be coherent all the way down the economic food chain from the profits to the bacteria in the ground. Repair the environment at all levels of production and account for the costs of using even the smallest thing – this would indeed put a cramp in capitalism.
“Economists need to stop pretending.”
There, fixed it for you, the idea that an infinitely-complex system that is massively swayed by human emotion is somehow “model-able” is silly. The queen called everybody’s bluff, recall what the august “economists” finally said after she asked what happened and why: “We don’t know”.
Second-order silly is the idea that a centrally-planned, command-and-control approach can work on such a system. Keynes and the others that came up with this hoo-haw were admirers of Stalinist Russia, at the time the Bloomsbury and other pink crowd were gushing “I have seen the future…and it works!”. The idea is “let’s raise X number cows because we project we will need leather for Y number of shoes”. After you’re done falling off your chair laughing take a moment to realize that’s exactly what they try to do today with the price of money and the level of demand in the economy.
There are too many unintended consequences, look at ZIRP for example, they thought free money would make people borrow more but (being rational) people saw they would get no current income so boosted their savings instead.
So:
Let bad debts clear, otherwise you’re just suppressing brush fires on the forest floor and eventually the whole thing burns to the ground. Mario Draghi buying CCC-rated junk is precisely what you should not do.
And to Watt4 Bob below, the only “creative destruction” we have today is for people and households. Zombie banks, oil companies, insurers, big pharma, military companies, the surveillance-industrial complex are completely isolated from creative destruction by the big fat thumb of the gumment on the scales.
“You are wrong on both counts. If “growth” is just “compound intrest,” than you have a pointless economey, one that is not based in the real world,”
Straw men. The arithmetic for growth is (1+r)^n, the same as for compound interest. Whether or not arithmetic makes an economy pointless deserves some explanation.
“human resourcs” is a “real resource” and thus havefundemental limits.”
If you re-read what I wrote you might see that I neither said nor implied otherwise. Reducing consumption can mitigate the problem somewhat, which was the point I was trying to make.
“2nd law of thermal dynamics”
2nd Law of Thermodynamics. It rules out perpetual motion. How is that applicable here?
For what it’s worth I’m an engineer not an economist. Cheers.
The arithmetic for growth is (1+r)^n, the same as for compound interest. Whether or not arithmetic makes an economy pointless deserves some explanation.
Otherwise known as exponential. This is the discrete formulation of the continuous version e^x. And yes, it does grow without bound and surprisingly quickly even for low values of r (which is why compound interest is so widely praised in an investment context).
I would not say that sustained exponential growth is mathematically impossible, but it is most certainly physically impossible in the context of a finite system (which I think is what Thor’s Hammer was actually trying to say). Extend our current growth trajectory for as little as 400-500 years and just the waste heat from entropy would be enough to make Earth hotter than the sun. It will end sometime – the only questions are when and how.
I think you should read http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/ which outlines a lot of the arguments here in conversational form (I was wrong about 400 years to be hotter than the sun – that only gets us to above the boiling point of water, which would still be pretty damn uncomfortable).
Check out act three where your growth in services multiplier argument is raised and debunked as a possible counterexample.
Paul, Please step back and analyze the logical fallacy in your statement. Exponential growth based upon human resources (“rather than real resources” means that at some point in the growth cycle humans have to eat human resources rather than food.
Anyone who makes the (common) claim that you do simply does not understand the meaning of exponential growth. Model growth at any rate and you eventually reach the point where the next increment of growth fills the entirety of any finite universe. If production grows exponentially at the 3% target often bandied about as desirable the entire world would be covered by the human capital you hope will provide an escape from mathematical certainty. It only takes about 400 years of 3% exponential growth starting with only one Einstein or one bite of information to reach the finite limit of our planet. And it matters not a whit whether the human capital walks around in a physical body or is condensed into bits & bites and stored on a flash drive, the mathematics are the same.
Because we live in a real world with real physical limits, sustained long term growth will always be impossible and collapse of growth inevitable. Any theory of economics worth more than toilet paper should recognize that fundamental fact.
For those confused about real world limits to exponential growth, watch this short lecture:
https://www.youtube.com/watch?v=bRc-YfcXVYo
Perhaps a more straightforward introduction to exponential growth:
https://www.youtube.com/watch?v=W2rTQpdyCFQ
Thor, with all due respect you’ve misunderstood what I wrote. Your response killed a bunch of straw men.
The point about human resources was that the growth in consumption is some 20 times greater than population growth. Take that for what it’s worth, I think that is a big part of the problem.
The first point was purely arithmetic. An annuity of 1 at rate r for n periods fits the curve of GDP growth (a proxy for growth) like a glove. Compound interest is calculated using the same formula. Beyond that I don’t know what you’re arguing against.
You can do the same for growth in federal spending, growth in Investment, etc. They all fit the annuity curve. Your “3% exponential growth” is an annuity of 1 at 3% compounded for n periods.
Which IS an exponential relationship, but it puts growth in perspective when you look at it as analogous to compounding interest. For me at least.
I like your idea that growth can be based on human rather than real resources. We could grow in knowledge, wisdom, and in caring for others as you suggest. Were the world’s great wealth better shared humankind could enjoy adequate consumption and then spend time and energy on human pursuits — on the Arts — on being with Good Friends — on living simply and well.
True our populations are too many but in only a century our population could be under control without great costs. A small change in the balance of life and death could over a century trim away our hungry billions to the billions we could together feed and care for.
Following the path we are on — there can be no happy ending. And I don’t see any signs of real change. We dodged an immediate threat — war with Russia — (we hope). Another threat of like destructiveness looms all too soon in our futures.
As for “Rethinking Capitalism” — I believe we’ve done that here … many times over. I don’t believe “Capitalism” is the problem, as I have great difficulty calling our present economic system “Capitalism”. The capitalism taught in our economics schools bears less relation to our current economic systems than the civics taught in high school relates to our current governments. Ours is a world through the looking glass. I grew up so hopeful but Hope was the last curse in Pandora’s box.
Your comments about indefinite growth should seem obvious, but one searches in vein to see the topic addressed in the MSM, or heaven forbid, by our political “leaders.”
It’s worse than that.
Hysteresis, one of my favorite new vocabulary words, is the reason there’s no easy fix for the system that is currently circling the drain.
That being the damage done by neo-liberal, creative destruction was actually destructive destruction.
It is impossible to simply turn-back the hands of time, the damage is done, the manufacturing base that supported a healthy working-class has been destroyed, and there is no actual path for revival of that reality.
This is the reason we are faced with the necessity of creating a new economy, TPTB have destroyed any path to what we might call a ‘normal’ economy from our current condition.
Hysteresis, means “Nope, you can’t get there from here.”
That used to be a Yankee farmer joke, now it’s a perfectly good explanation for our situation.
Assuming infinite growth on a finite planet is the fatal hubris of capitalism, which assumes that economics exist apart from the laws of nature. We are experiencing inevitable contraction because we have exceeded the limits of earth’s ability to sustain our species’ rapacious demands and destructive lifestyles. We are already experiencing catastrophic effects from our destruction of the planet’s climate moderating system, which ultimately will destroy our habitat. We have seen this coming for a long time, yet leaders, heads of state, and academicians (including this author) continue to think in outmoded ways, particularly about our disregard of the ecosystem which will result in near-term mass extinction. Human exceptionalism is the fatal flaw that will wipe out most if not all life on this planet.
In the past, disaster was local, because hubris met its match locally. With a global civilization, we dream of going to Mars to trash another planet from scratch. But when disaster is truly global, the result will be truly apocalyptic. Humanity has had a good run; eat, drink and love while you still can.
There is an ancient battle between Heraclitus and Parmenides. Either dynamics is reality, or statics is reality. The reality is, both are real. Change is liberal, stasis is conservative. Unfortunately neither is a panacea, because there is no panacea, it all depends on context. When change is required, conservative-ism brings us the French Revolution as an unintended consequence. When stasis is required, liberal-ism brings us the French Revolution as an intended consequence. Sometimes change happens, sometimes things stay the same … and either can be good or bad for you individually. Generalizing beyond this is over-generalization.
While I acknowledge that this was written for an audience of economists, I do not think economists should expect to have much influence on the development of new systems until they learn to express themselves in language intelligible to an educated general audience. I can parse the clause, “Skills have always been an endogenous function of investment.” I know the meaning of every word in it. I have no idea what it is supposed to communicate. It is not my problem, but the author’s, that she fails to state what she considers a key point in language that conveys meaning. In fact, the sentence which follows the jargon appears to say what needed to be said; it is not at all clear what purpose the jargon was intended to serve, other than to signal membership in a professional club. Its primary effect is to break the flow of thought and annoy the non-specialist reader.
i got that feeling as well – too many economists fail to make a satisfying point when it is pretty obvious by now what’s wrong
Interesting. My reading of her’s “endogenous function” is she means that capitalists (and governments) invest their money in the production of (labour) skills. This is another example of economists not understanding business. Private investment is for making money and profit, not for the generation of labour skills.
I read “endogenous function” a little differently. To me it reads “assume a can opener”. It is like the nice passive voice statements that invoke or refer to actions without actors. One big problem with our current economics is precisely that skills are NOT an “endogenous function” of investment. More plainly said — we used to have on-the-job-training. When I left the world of work on-the-job-training meant you had to be smart enough and work hard enough to come up to speed in a week or two on the job. But now — based on my reading endless job listings inside and outside the firm — even those two weeks were gone … replaced by endless credentials of specialization and claims of already having worked at the job listed … and ideally still employed on that very job and willing to move for lower pay.
The point about companies hording profits is, I believe a key point. The money belongs to the shareholders, and the individual shareholder have to place investments and not indulge in share buybacks.
A second point not mentioned, after the great recession the chose solution was to preserve as much debt and debt service as possible, ignoring the asserting “debt which cannot be repaid, will not be repaid.”
Why does money BELONG to the shareholder? The author did note that there was $3 trillion in buybacks but investment still remains mis-directed.
“… shareholders have to place investments…” in order for capitalism to progress. But oops, we have come to the end of an era and altho there are trillions of dollars on the sidelines, there is no place to invest. Like the guy in MASH said re Christianity: You guys haven’t come up with a new idea for 2000 years.
While the article is designed as the executive summary of a forthcoming book, and the assumption is that certain ideas will be developed further, I can not ignore the fact that it seems to be just another brilliant analysis of the problem, while the solutions presented are not convincing.
1. “Inequality must become a central concern of economic policy, for economic reasons”. Sounds perfect. But how exactly am I to expect an opponent who since 1980 substantially increased his wealth in collusion with the political class to simply “agree” to any policy diminishing his ROI? This solution underestimates the means and determination of my opponent and is doomed to failure.
2. “It means re-evaluating the role of public and private actors in generating growth; what drives investment; and how far the direction of growth can be shaped to benefit society.” After the botched “remedies” on both sides of the Atlantic to the widely publicized disaster we got used to call the “financial crises”, there is no reason why any strategic solution to problems definitely receiving less air-time should include public actors – at least not in the foreseable future. Placing your bets on public actors is a fine idea leading straight to public subsidies for yet another research project and nothing more. And it stays a fine idea as long as we do not get too specific and start naming names (DC? Brussels? Berlin?). This top-down approach worked only occasionally in times when the republic was more than a constitutional term and the public good was not seen as being unsexy. Why should it work during our current feudal times?
The title should be “Rethinking goverment”. Government has had too much bias for the asset-owners and unless that bias change then asset-owners will continue to get a disproportunate part of economic gains.
Maybe goverment is for people, not for people AND businesses? Business come from people so the current bias for business might not be right?
[If future growth is to take a different path, it will require MORE THAN THE USUAL MANTRA ABOUT taking advantage of low interest rates to fund INFRASTRUCTURE. Instead, we need to rethink the fundamental precepts that govern our understanding of how and why capitalist economies GROWTH—both in terms of the ‘rate’ and the ‘direction’ of change.]
Rethinking capitalism? Is the author hand waving off infrastructure (Flint lead pipes, water systems, waste systems, roads, bridges) ? and insisting that focus on the growth rate is an innovative strategy? through public/private partnerships?
[Would simply digging ditches and constructing bridges and roads suffice?] If this was a headline, the answer would default to ‘NO’, let’s see if that’s where this goes. The author’s two selected issues…. History of biotech and tanotech … that’s not much history. Growth as the solution to climate change. Problems listed are hoarding cash, financialization,
[Indeed, it was precisely this type of HEALTHY deal making that led to AT&T being asked to set up Bell Labs in exchange for its MONOPOLY status.] — No comment.
[Economists tend to discuss the ‘skill bias’ of technological change—how technological revolutions leave behind workers not able to adapt—but miss the key point that skills have always been an endogenous (IT’S ALIVE!) function of investment. The real problem is the lack of public and private investments in R&D, human capital formation (skills and training), and fixed capital.]
Blah, same ol’ same ol’….
Private investment in private ownership and industry in addition to public investment in private ownership and private industry.
Baby step…
Private investment in private ownership and private industry separate from public investment in public ownership and public industry.
Bold….
Public investment in public ownership and public industry in addition to private investment in public ownership and industry.
The failure of corporate leadership? – it’s never proposed by a certain type, that the solutions target the corporate charter/legal system that leadership hides behind. The proposals always involve how the public will be parasitized. Let’s not discuss whether to strip corporate charters but how to, let’s not discuss repatriation/hoarding but how extreme the penalties will be, let’s not discuss insufficient retraining put on the backs of the classes experiencing job losses but where to locate/how to fund co-ops, let’s not discuss how to ameliorate the errors of the elite at the expense of the public nor how the elite are going to ameliorate the errors they’ve done but the numerous ways to take away the power of the elite to repeat the same errors.
The fatal flaw of the current system is that it is not designed to benefit the majority of people. It is a system of rent extraction, made to benefit a few people on top at the expense of the general public.
It needs more than just a rethinking. It needs a ground up design. The problem is that the rent seekers have control of business and government. Both institutions will not be used for public benefit, but rather for the benefit of the extractive elite at the expense of the rest of society.
As for what has been learned – the elite do not “want” to learn the lessons that need to be learned. That is the problem that we face.
These solutions will not bring us the growth rates we used to enjoy. What actually drives economic growth is not the capitalist system itself but the processes of urbanization and industrialization. Before the industrial revolution, growth rates were extremely low despite the economic system being capitalist. Once a nation finishes these processes, growth can only come from bubbles or external demand. Now that the rest of the world is catching up, the latter is near impossible (someone else will produce using cheaper labor). The writing is on the wall, as profit rates in the manufacturing sector have steadily declined for a while. Japan’s last quarter century is our future, though ours might end up much bleaker. Many nations will end up like Argentina, for example, with very poorly functioning economies despite abundant natural and social capital.
Moreover, if the global economy maintained a 3% growth rate, it would have to double by 2060, and double again by the end of the century. How is that supposed to happen? And even with China and India growing like crazy in the 90’s and 00’s, there wasn’t enough room for all of the surplus capital washing about the system. Africa will be an important destination, but it won’t be enough to make the entire global economy grow at that pace. Speculation will continue to be the main outlet and we will continue to face stagnation (low growth) combined with financial crises. Keynesianism can’t save us the way it did during the Great Depression because that time around, huge swaths of the country remained unsettled. The New Deal great improved the conditions for the accumulation of capital. Public investment nowadays does not have the same potential, and on the consumption side, will end up just giving a boost to Chinese firms (our trade deficit with China).
At some point, the people will get fed up (they are addicted to high growth rates) and overthrow the system. I hope we move to the left and not to the right.
Sorry if this is already posted, but it doesn’t seem to have worked.
These solutions will not bring us the growth rates we used to enjoy. What actually drives economic growth is not the capitalist system itself but the processes of urbanization and industrialization. Before the industrial revolution, growth rates were extremely low despite the economic system being capitalist. Once a nation finishes these processes, growth can only come from bubbles or external demand. Now that the rest of the world is catching up, the latter is near impossible (someone else will produce using cheaper labor). The writing is on the wall, as profit rates in the manufacturing sector have steadily declined for a while. Japan’s last quarter century is our future, though ours might end up much bleaker. Many nations will end up like Argentina, for example, with very poorly functioning economies despite abundant natural and social capital.
Moreover, if the global economy maintained a 3% growth rate, it would have to double by 2060, and double again by the end of the century. How is that supposed to happen? And even with China and India growing like crazy in the 90’s and 00’s, there wasn’t enough room for all of the surplus capital washing about the system. Africa will be an important destination, but it won’t be enough to make the entire global economy grow at that pace. Speculation will continue to be the main outlet and we will continue to face stagnation (low growth) combined with financial crises. Keynesianism can’t save us the way it did during the Great Depression because that time around, huge swaths of the country remained unsettled. The New Deal great improved the conditions for the accumulation of capital. Public investment nowadays does not have the same potential, and on the consumption side, will end up just giving a boost to Chinese firms (our trade deficit with China).
At some point, the people will get fed up (they are addicted to high growth rates) and overthrow the system. I hope we move to the left and not to the right.
From Mariana’s blurb about her book “The Entrepreneurial State”
Mazzucato also controversially argues that in the history of modern capitalism the State has not only fixed market failures, but has also actively shaped and created markets. In doing so, it sometimes wins and sometimes fails. Yet by not admitting the State’s role in such active risk taking, and pretending that the state only cheers on the side-lines while the private sector roars, we have ended up creating an ‘innovation system’ whereby the public sector socializes risks, while rewards are privatized. The book considers how to change this dysfunctional dynamic so that economic growth can be not only ‘smart’ but also ‘inclusive’.
Bullshit tell?
. . . Economists tend to discuss the ‘skill bias’ of technological change—how technological revolutions leave behind workers not able to adapt—but miss the key point that skills have always been an endogenous function of investment. The real problem is the lack of public and private investments in R&D, human capital formation (skills and training), and fixed capital. As early as 1821, David Ricardo worried about the effect of mechanization on labor displacement. What was important then, and should inform our thinking now, was that profits (from mechanization) be reinvested into production, meaning that, in Ricardo’s time, while some jobs fell away, others were created. Our focus today should also be on that kind of reinvestment, which can also help to tackle inequality.
Before one gets to produce anything, some type of tooling and ancillary equipment is needed. This is the expensive part leading to production, at which point there are no profits. It isn’t until after production and sales that profit becomes possible, so in my opinion Mariana has it exactly backwards, and it has nothing to do with job creation and destruction in Ricardo’s time.
Exponential economic groaf is going to kill the future, and it can’t fight back. Rethink capitalism with that front and center.
> it is pertinent to ask what we have really learned
“What the fuck do we learn, Palmer?”
As coincidence would have it, the movie Network is on TV tonight. Paddy Chayefsky already had this figured out: TINA (there is no alternative) except to walk away. It’s in three successive scenes.
The boardroom scene between the corporate chairman (Jensen) played Ned Beatty and the Peter Finch character (Howard Beale):
Just take that same concept and apply it within the US. In the case of trade with OPEC, they need to recycle the currency back to the US. In the case of “trade” within the US, the winners (banks) need to recycle the currency back to main street. There’s only so many options. And Fed Gov spending is the best one. Just swap your currency for bonds (no different than what our trading partners do that peg their currencies to the US dollar). Really, the only difference between the winners in the US who hoover up the US currency and our trading partners in other countries who hoover up the US currency, is that we can tax the former but not the latter.
Later in that same scene …
The scene afterwards (after Beale’s conversion above by Arthur Jensen), where Beale is now spreading the new word with his audience:
As I said, TINA. TV might be going by the way side. But are corporations fundamentally changing? Is private debt fundamentally changing? It’s still the same all devouring maw, creating winners (few) and losers (many).
The only way to keep your humanity is to walk away. Per the following scene.
Breakup scene between the William Holden character (Max) and Faye Dunaway character (Diana):
Or … we unwind everything and go to completely balanced trade. In a way, we already do this as individuals: we don’t use our interpersonal relationships to hoard a surplus in the trade. That’s what makes us human. But that’s where our humanity stops; we turn that part of ourselves off when we let capitalism hoard the surplus in their trade with us.
If you really want to change the equation, seek a balance of trade in all things. Not only between countries, which hopefully Trump will pursue. But also between the winners and losers in the US (capital and labor, banks and debtors), which Trump will not pursue. That would destroy capitalism as it would destroy the profit concept. So is that an alternative?
A cheapjack ‘ reality show ‘ host becomes the President of the USA . Why isn’t everybody laughing until they fall over ? It’s the Truman Show and we are all participants in it .
It’s not just about “Rethinking Capitalism”, it’s also about “Rethinking Growth”. Continued economic growth is simply not sustainable (unless a transient “miracle” happens – like a new source of abundant and cheap energy, along with other key resources and associated technologies). We need to think about how to grow areas of our economy that will be more sustainable, while shrinking others, in a context of global economic stagnation and future decline.
infinite growth on a finite world…
Thanks for this article NC.
My dream is to see capitalism focused on its proper role as the financial choice for all sorts of exploratory and uncertain ventures. Elon Musk has given us some examples. Either he should get a greater reward where his ideas work or everyone else should get less for taking no chances.
Students pay to do R &D now. Hollow nation as all is for DOD.