Wednesday, November 26, 2014

Malthus, Marx, and Modern Growth

CAMBRIDGE – The promise that each generation will be better off than the last is a fundamental tenet of modern society. By and large, most advanced economies have fulfilled this promise, with living standards rising over recent generations, despite setbacks from wars and financial crises.

In the developing world, too, the vast majority of people have started to experience sustained improvement in living standards and are rapidly developing similar growth expectations. But will future generations, particularly in advanced economies, realize such expectations? Though the likely answer is yes, the downside risks seem higher than they did a few decades ago.

So far, every prediction in the modern era that mankind’s lot will worsen, from Thomas Malthus to Karl Marx, has turned out to be spectacularly wrong. Technological progress has trumped obstacles to economic growth. Periodic political rebalancing, sometimes peaceful, sometimes not, has ensured that the vast majority of people have benefited, albeit some far more than others.

As a result, Malthus’s concerns about mass starvation have failed to materialize in any peaceful capitalist economy. And, despite a disconcerting fall in labor’s share of income in recent decades, the long-run picture still defies Marx’s prediction that capitalism would prove immiserating for workers. Living standards around the world continue to rise.

But past growth performance is no guarantee that a broadly similar trajectory can be maintained throughout this century. Leaving aside potential geopolitical disruptions, there are some formidable challenges to overcome, mostly stemming from political underperformance and dysfunction.

The first set of issues includes slow-burn problems involving externalities, the leading example being environmental degradation. When property rights are ill-defined, as in the case of air and water, government must step in to provide appropriate regulation. I do not envy future generations for having to address the possible ramifications of global warming and fresh-water depletion.

A second set of problems concerns the need to ensure that the economic system is perceived as fundamentally fair, which is the key to its political sustainability. This perception can no longer be taken for granted, as the interaction of technology and globalization has exacerbated income and wealth inequality within countries, even as cross-country gaps have narrowed.

Until now, our societies have proved remarkably adept at adjusting to disruptive technologies; but the pace of change in recent decades has caused tremendous strains, reflected in huge income disparities within countries, with near-record gaps between the wealthiest and the rest. Inequality can corrupt and paralyze a country’s political system – and economic growth along with it.

The third problem is that of aging populations, an issue that would pose tough challenges even for the best-designed political system. How will resources be allocated to care for the elderly, especially in slow-growing economies where existing public pension schemes and old-age health plans are patently unsustainable? Soaring public debts surely exacerbate the problem, because future generations are being asked both to service our debt and to pay for our retirements.

The final challenge concerns a wide array of issues that require regulation of rapidly evolving technologies by governments that do not necessarily have the competence or resources to do so effectively. We have already seen where poor regulation of rapidly evolving financial markets can lead. There are parallel shortcomings in many other markets.

A leading example is food supply – an area where technology has continually produced ever-more highly processed and genetically refined food that scientists are only beginning to assess. What is known so far is that childhood obesity has become an epidemic in many countries, with an alarming rise in rates of type 2 diabetes and coronary disease implying a significant negative impact on life expectancy in future generations.

Many leading health researchers, including Kelly Brownell, David Ludwig, and Walter Willett, have documented these problems. Government interventions to date, mainly in the form of enhanced education, have proved largely ineffective. Self-destructive addiction to processed foods, which economists would describe as an “internality,” can lower quality of life for those afflicted, and can eventually lead to externalities for society, such as higher health-care costs. Again, despite a rising chorus of concern from researchers, political markets have seemed frozen.

All of these problems have solutions, at least in the short to medium run. A global carbon tax would mitigate climate risks while alleviating government debt burdens. Addressing inequality requires greater redistribution through national tax systems, together with enhanced programs for adult education, presumably making heavy use of new technologies. The negative effects of falling population growth can be mitigated by easing restrictions on international migration, and by encouraging more women and retirees to enter or stay in the workforce. But how long it will take for governments to act is a wide-open question.

Capitalist economies have been spectacularly efficient at enabling growing consumption of private goods, at least over the long run. When it comes to public goods – such as education, the environment, health care, and equal opportunity – the record is not quite as impressive, and the political obstacles to improvement have seemed to grow as capitalist economies have matured.

Will each future generation continue to enjoy a better quality of life than its immediate predecessor? In developing countries that have not yet reached the technological frontier, the answer is almost certainly yes. In advanced economies, though the answer should still be yes, the challenges are becoming formidable.

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    1. CommentedColombo Colombo

      There is an aporia in K. Rogoff's reasoning on a relation which I very often criticize, that of the effects of the population growth on the economic growth. Obviously, over-simplification often follows in considering that the demographic decline or stagnation is compensated by a rise in immigration. It is also evoked for sustaining retirement pensions. One remembers for example this delirious study of the UNO at the beginning of the years 2000, which recommended the surge of hundreds of million immigrants in Europe. This thesis has been however demolished with the awareness of the ageing of the immigrant populations and the rise in their incomes.
      But the relation between the two growths is itself antiquated. K. Rogoff precisely underlines the effects of technological progress on the rise of the living standard and on the overcoming of some limits of natural resources in particular, asserted in the 18th and 19th centuries. Besides, there are still perspectives of exhaustion of certain resources (oil…), for which the substitutes are not yet discovered or at bearable cost.

      But K. Rogoff eludes that the rise in the standard of living is generally related to an inflection of the population growth, as China also testifies to it today. One also often eludes that the fall of unemployment in Germany was obtained thanks to the stagnation of the working population between 2005 and 2010. Moreover, the growth has been weak for several years in developed countries in spite of the population growth. In the large Arab countries, the economic growth is too weak compared to that of the population. A “minimal” indicator is in any case the GDP per capita before focusing on the standard of living.

      Another aporia quite as enormous is that unemployment has increased much in most Euro-Anglo-Saxon countries for a few decades, which entails less consumption, lower birthrate, but also corresponds to unemployed productive resources. In such a context, an addition of population has only sclerosing effects, weighing in particular on the social systems, especially as it is composed of immigrants, increasingly substitutable with natives.

      Not counting the negative impact on the sustainability of the economic growth.

        CommentedL.J. Huang

        Dear Sir:

        The meaning of 'elude' is:
        1. to avoid or escape by speed, cleverness, trickery, etc.
        2. to escape the understanding, perception, or appreciation of.

        Whereas 'allude' is:
        1. to refer casually or indirectly; make an allusion.
        2. to contain a casual or indirect reference.

        I think you meant 'allude' when you used the word 'elude'.

    2. CommentedG. A. Pakela

      The period between the 1940s-1970s was dominated in the U.S. by business, labor and political oligopolies with little external competition. The economic success of Europe was based on its low starting point - economies and infrastructure destroyed by the war, combined with a "bourgeois" value system enabled it to recover by rebuilding its industry and infrastructure. In both cases the show was over by the late 1970s as then emerging markets like Japan, South Korea and Taiwan were able to produce steel and even final goods at more competitive prices. Europe retained its social democratic political structure, irrespective of which party happens to be in power and the results show: those coming into the labor force have scant opportunity while those that are established can look forward to lifetime employment and a healthy pension at a comparatively young age. However, this won't last either as demographics catch up to "old" Europe.

    3. CommentedEnrique Fleischmann

      With all due respect, I am afraid that Prof. Rogoff has interpreted Marx in a way the thinker itself would never approve. My critique has nothing to do with the accuracy of his "prophecies" but is related to the methodological and philosophical levels.

      It´s all about fetishism. If you would ask Marx, to measure the "benefits" of Capitalism in material terms alone is exactly the worst "sin" a social thinker can make. Why? Because it means to render the social activity of production and consumption to relation between human beings and OBJECTS, what he called fetishism.

      According to Marx (and even Smith, or Ricardo) Economy is a social activity and interchange is a social relation, not a material one. Therefore, Exploitation, or "improved living standards " is a RELATIVE term in social terms as all the economy is THE social activity. To put all the social structure only in material terms is like analysing the economy with the famous Robinson Crusoe case (so famous among Econ 101 students...) Therefore, the loss of purchasing power among the working people is the definitive reflection of the Capitalist system

      I would even say that the Prof. forgets the international perspective, so important in a globalized world. If the income gap is measured in international terms instead in national terms (as should be in a globalized economy) , the gap income is even more sever than in one country. Just compare the GDP per capita between lets say, Luxembourg and almost any Sub Sahara African country is just a reflection of the modern mechanism of exploitation

    4. CommentedAlejandro Arashi

      Attention grabbing title and author, nothing new in terms of "meat" of the article, kinda dry recitation of existing issues, no prescription of action, no mention even that a lot of these economically advanced countries' issues are being trended by Japan.

      Such a lite article, almost propaganda-like. Weird feeling to read on the heels of Rogoff's famous data "mistake".

    5. CommentedJoshua Lee

      What is a global carbon tax? Do you mean equal carbon taxes implemented at exactly the same time and enforced with exactly the same rigour in every country on earth? Tall order. Have you heard of the Kyoto accord? It didnt go very well.

      But I think growth will explode with technology. The technological horizon is expanding at a faster rate than many developing countries are able to approach it. Wealth is spreading around the world but through a trickle down effect. I think America and the west will only expand its lead as most of these technologies are industrial and military secrets. Americas innovation has no end. We have even slain the business cycle with financial innovation.

    6. CommentedRad Economics

      This guy is delusional. How exactly do mainstream economists think that growth can continue forever when it is painfully clear (to those of us with functioning brains) that the planet we live on has limits? This is pure insanity.

      "the long-run picture still defies Marx’s prediction that capitalism would prove immiserating for workers"

      Is that a joke? Tell that to all the people who have had their pay and benefits slashed, year after year. Tell that to all the people who can't find work or who are working multiple part-time jobs because companies keep reducing full-time positions. Tell that to all the people who work in deplorable conditions overseas to make all the stuff we use. Just because you can't see them doesn't mean they don't exist. It's no wonder that mainstream economists can't solve our problems - they are completely out of touch with reality!

    7. CommentedYoshimichi Moriyama

      Liberalism has a great deal to do with capitalism. First its principal task was to desroty old social shackles that hindered free economic activities. "In the sixteenth century this ideological is a new theology; and in the building of this researches are undertaken which undermine the hold of the faith upon men's minds. Finally a new cosmology is built, the result of which are a new scientific outlook, on the one hand, and a new metaphysics on the other (Harold Laski, The Rise of European Liberalism.)

      There was, in Great Britain in the first half of the nineteenth century, a school of thought that said that all and the only thing that we should concern ourselves was to take care so that our economic activities would go on and expand as smoothly as possible and that everything else would automatically follow.

      We now are increasingly made conscious that something very important is missing in this economic, and therefore social, outlook. We increasingly come to suspect that our economic activities depend on other social institutions, that our economic activites are destroying them, that our exclusive cult of economy may not take us nowhere ultimately, and that it will not help us build a good society. If so, this chill on our unbounded optimism, traceable back to the eighteenth century enlightenment philosophy, is very welcome.

    8. CommentedMatt Stillerman

      I knew it had to be in here somewhere. And Prof. Rogoff does not disappoint! He is really stuck on this idea that the national debt is a problem. For countries whose debt is denominated in a currency that they issue, this is manifestly not so. And, Prof. Rogoff's attempts to prove otherwise have backfired spectacularly. Yet, here he is again, trotting out this old zombie, and in language that suggests it is not even controversial!

      This article contains another gem. "Adult education" will somehow combat economic inequality. When we are all professors like Dr. Rogoff, who is going to collect the garbage? And, who will be our students, to pay our salaries? If only workers could train-up for higher-paying jobs, then all would be well.

      I am certainly in favor of providing educational opportunities for everyone that wants them. However, a much more pressing economic issue is ensuring that workers in *every* job can live with dignity.

    9. CommentedProcyon Mukherjee

      In the emerging world, the change will still be rapid from Generation X to Y to Z, growth will happen with marginal product of labor and capital yielding significant changes to living standards; in my life I have seen my grandmother not going to school and my daughter under-graduating in the top U.S. University.

      The trouble with the developed world, as perhaps somewhat touched upon by Rogoff, is that the growth is extremely skewed towards those who have the wherewithal to bid for it and get the benefits. It is becoming a strange world where opportunities are getting deeply concentrated to a very few; such is still not the case in the emerging world.

    10. CommentedPaul Mathew Mathew

      I have to laugh when I read this - the industrial age is OVER - because CHEAP oil is over - and we are debating if future generations will live better than us????

      Ha ha ha --- they will live in a world of starvation and disease.

      High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.

      Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.

      Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.

      Of course they will fail - because the disease is expensive oil. And there is no substitute

      The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.

      This moment will be known as the end of the industrial revolution by the few who survive.

      This is not a Hollywood movie where the hero saves the day. This is the reality we are facing.

    11. CommentedJoan Miro

      The use of the phrase "political markets" says a lot about Rogoff, and all the other orthodox capitalist economists. I presume he meas that elections are another sort of market with politicians as producers and voters as consumers. No politician or party has developed the right product--policy regarding food--for the market--the consumer/voter.

      This parodying of politics fits the notion that capitalism is a natural phenomenon and that only a state that is fundamentally oriented towards protecting property is, likewise, natural. This flies in the face of the reaity of the only sustained period of solid, BROAD BASED economic well being, the period of the 1940's-1970's in Europe and the US. Picketty shows how this period is an aberration from capitalism, and the normal bourgeois domination of the state was briefly suspended. That has come to an end without question s we zoom rapidly backwards toward the Gilded Age.

      Some decisive crisis, greater than the Great Recession will be necessary to orient the economy towards something other than transferring capitla from those who produce it--workers--to those who don't, "owners."

    12. CommentedZsolt Hermann

      We are in an unprecedented state none of those great thinkers, philosophers, economists could foresee, or even if they suspected it they never experienced "in the flesh".
      All our past and present ideology, methods, toolbox is based on a linear world, where individuals, nations are at least partially independent from each other, as if living side by side in a space of their own, and also in which linear world model there are no limits to growth, where we can simply continue expanding, exploring, exploiting both human and natural resources in order to gain more profit infinitely.
      The whole constant quantitative growth global economy and the supporting political structure is based on that.
      And despite the global crisis showing us day by day that our previous calculations, even Nobel prize winning methods have become dysfunctional, moreover harmful, we want to ignore this as a "bug" in the software and we try pushing on with the same stubbornly like a child hoping that at the next attempt by some miracle it will work again.
      The totally interconnected and interdependent global, and integral world is nothing we have ever experienced.
      All the ruthless competition driving our previous and present structure has become exactly as destructive as a cancer in a normal body.
      In a global, integral system only globally mutual complementing cooperation can succeed.
      In such a system there are no friends and foes, regardless of historical or presumed antagonism, rejection and hatred each and every nation and individual is tied together as cogwheels without any truly free movement.
      A move of a finger or even a single thought already influences the whole system.
      It is a scary situation since it means that without knowing the whole system, all of its parts and their reactions we must not initiate, inject any new ideas or action as the consequences could be catastrophic.
      This is not a theory or philosophy any more we can watch it live, or read about it in the news every day.
      This is not something that might happen to us in the future but we are already existing in this system which is not man-made, but evolutionary.
      Which means we cannot change it but we have to adapt by learning about it, educating ourselves and changing our environment accordingly.
      And this is where our precious human uniqueness, our capability of critical self-assessment and self-change comes into play.
      Never before did we use this as we simply floated instinctively forward, our inherently self-centered and egoistic nature driving us.
      But from now on we have to ride on top of this nature as a skilled rodeo rider in order to use its force but in the right direction, in adapting to the global integral, natural system we live in.

        CommentedEdward Ponderer

        If economics is to be like physics, then it would pursue the microcosm of human relationships first -- i.e., the atomic theory of economics is behavioral economics. However, as Albert Einstein once pointed out, physics great power of explanation lies in the fact that it seeks to understand the fundamental principles of physical reality and in exchange has gladly sacrificed any hope of describing truly complex phenomenon.

        Applying superstring models to even a simple molecule would be a task well beyond what a physicist today would even consider. Economist can't avoid complexity--but try to. They imagine that simple man made models of a limited number of terms like some quantum wave equation, will describe the rapidly evolving global economy. But with all due respect to Douglas Adams, the secret of life, the universe, and everything, is not 42 -- it is outside the ken of individual economists, or even armies of them. The Internet is today kind of a large component in economics is it not? Well at 50 million nodes it was determined that no reasonable, meaningful model of its dynamics could be formulated anymore. There are now about 2 billion such nodes. And of course, this is the tip of the iceberg in terms of climatic effects, sociological patterns, etc., etc., etc. Simple symmetries are rapidly disappearing and being replaced by deterministic chaos.

        This doesn't mean the matter is hopeless, because like Douglas Adams's Hitch Hiker's Guide to the Galaxy Deep Thought computer, we have a vast computational tool that can grab the chaotic bull by the horns and tame it. And this too is called Global Integral Humanity. That is, we must become like evolved communities throughout nature into a single holistic ("swarm") intelligence. This is not science fiction, but rather a reality that must unfold between us all. A true integral education and taking the societal steps necessary to reach a state of mutual responsibility as mimicked in lower life forms, is precisely the behavioral links -- the behavioral economics -- that we need to make.

        Economists, psychologists, and teachers do have their work cut out for them, but first they must begin thinking out of the box on a scale never before seen. They must stop rehashing the same toy models of vastly simplistic model, but rather work simple principles of understanding and care between human beings to create the vast economist that can handle the true complexity that we face.