The blog provides a left-wing non-partisan perspective on socio-economic issues in Russia and throughout the world. The focus is on qualitative development of national economic systems and ensuring flexibility in economic policies to meet the challenges of the 21st century. Email: leftistobserver@gmail.com

ERA OF ECONOMIC FANTASIES


So much for the fast recovery then, huh? The statistics on US employment recently released shows that the recovery “has been losing momentum”, as the Wall Street Journal has eloquently put it. The entire global business community is vexed by whether the economy is going to slide down again. Since the collapse of markets in 2007-2008 mainstream economists have been looking into their magical crystal balls and seeing a full-fledged recovery just around the corner. Obviously, clever economic theories have been mentioned that allegedly prove that a “jobless” recovery is absolutely normal.

In this modern era of economic fantasies, there are two notions that I find difficult to accept: a notion that economic growth precedes the reduction of unemployment and a notion that that growth makes wealth trickle down to the masses. A superficial glance at the recent development may convince some that these two dogmas do reflect the current economic reality. Let us take unemployment as an example. While it is obviously true that an increase in investments creates new jobs, consumption as the final stage of any economic process seems to remain ignored. If investors do not see the American consumers’ restored willingness to spend like crazy and take out new loans, I am afraid the investment bonanza in job-creating businesses will have to wait for a while. The same logic is keeping credit out of reach for most businesses as banks are still jittery about the outcome of their investments. Obviously, the enormous inflow of government-injected liquidity finds its way to financial and commodity markets, which have been very prone to speculations these last couple of decades.

So the ability to increase consumption is a prerequisite to a rise in job-creating investments and, as a result, economic growth. Is it right then that economic growth is determined solely by how much is produced without any consideration for how much of what is produced is going to be consumed? In case of sharp drop in consumption, all the boastful talk of production capabilities sounds rather silly. One can brag all day about how much them, but they all are not worth a rotten egg if consumers are not willing to pull out their wallets. Thus, we can probably speak of consumption capabilities being just as important as the production ones. Recently, the matter of exorbitant debt accumulated in the spheres of production and consumption has become the talk of the town. As you can see, debt is believed to be driving economic growth because it can artificially boost short-term consumption. Businesses gladly assume this position as profit-seeking dictates them to take what comes their way now rather than later. So, obviously, the long-term consumption potential of the economy is left unnoticed. But this is exactly what the ever-increasing reliance on credit undermines – long-term consumption and long-term profits.

This allows a conclusion that the existing measurements of economic growth – GDP and GNP – hardly represent all the processes occurring in an economic system. It is the final consumer that pays for the cost of inputs and the added value contained in the product. Leaving the consumer out of the equation will be detrimental to the entire economic system. Isn’t it time to consider new approaches to measuring economic growth? In connection with this, I must mention that the sustainable development theory, which is another alternative approach, points out rather convincingly that often impressive economic growth is made possible by a ruthless abuse of nature. This logically indicates that future generations will have to assume greater costs in order to simply preserve the existing pace of economic development and resources extraction. Again, a short-term outcome of an economic activity is viewed more preferable for obvious reasons as long as it is possible to push certain costs into the future. The same is true for an economic system’s social “capabilities” in the process of economic development.

As for the trickle-down fantasy, statistics cannot possibly confirm it. First, it is obviously foolish to assume that an economy (a structured system rather than a chaotic cluster) that has grown by x per cent will equally increase everybody’s wealth by that exact number. This assumption will be akin to a belief that the more gas you pour down into the tank of a car, the faster the car will go. So we can speak of only a portion of that increase potentially trickling down to the bottom of the society. Politicians and mainstream economists worry these days about creating new incentives for producers (which is the essence of the supply-side economics dominating our neoliberal economic thinking for several decades after the collapse of the Keynesian demand-side economics with a focus on boosting artificial government-generated demand), the final consumption remains on the sidelines again. If it is the final consumer that ultimately pays for products and services, we will have to admit that there is hardly ever any trickle-down effect as eventually his or her wealth ends up being redistributed back to the top of the economic ladder of the society.

Second, constant economic growth is viewed as a solution to poverty and misfortune. But it is pretty clear that a system cannot expand forever without running the risk of collapsing or being restructured into a different system with entirely new wealth-distribution channels. Again, the expansion brings back the question of consumption capabilities, which entail a question of finding new markets.

A simple formula can explain this: a capital owner pays consumers for producing goods (and services) that they themselves will consume in the future. To boost profits, they must spend more, but their spending is limited by their salaries and wages coming from the capital owner. So this economic mechanism is not self-sustainable in a closed system. Should the system allow any outlets in the form of new markets for selling existing goods, hiring cheaper workers, taking cheaper loans, etc., only then the mechanism functions effectively and makes further economic development possible.

The sad thing is that when the new markets remain unavailable for too long, the elite at the helm of an economic system will be prepared to go any length to change the status quo since it threatens their political power and economic might.

Boris Anisimov

No comments:

Post a Comment