Saturday, September 20, 2014

Will a Shrinking Economy Lead to Chaos?

A few years back there was a book published called The Moral Consequences of Economic Growth. You can read a review of that book here. The thesis broadly stated, was that growing economies produce more inclusive social institutions, tolerance for minorities, expansion of democratic rights, lower crime rates, social mobility and justice. In contrast, shrinking economies produce situations where people are angry and fearful and full of distrust. People turn to reactionary politics and look for scapegoats to blame for their reduced circumstances. Social dysfunction occurs as people fight each other over a shrinking economic pie. The undercurrent is that growth has led to better societies in history and is in fact a necessary prerequisite for stable societies and social inclusion.

This idea is commonly accepted in many quarters. The classic case is the Great Depression, where many European countries turned to authoritarian regimes and engaged in scapegoating, of which the Holocaust is the most tragic example. But periods of economic pain have been associated with state failure in many cases before and since.

This has been weighing on a lot of people’s minds of late. We’ve seen over five years of stagnant economies across much of the world with no end in sight (as some of us predicted), and recently the political situation has seemed to be deteriorating rapidly. The fact that this comes in  2014, the 100th anniversary of the First World War, is especially ironic.

There’s the rise of anti-immigrant parties in Europe, along with actual crypto-fascist parties in places like Hungary, where the leader has openly disparaged liberal democracy. In Germany, the chancellor is expressing concern about a rising tide of anti-Semitism amid vandalism of Jewish monuments. The Middle East has seen the march of the Islamic State in the wrecked countries of Syria and Iraq, a movement that seeks to bring about a caliphate united under fundamentalist Sharia law. Russia has annexed territory in the Ukraine under Putin, a move not seen since before the Second World War causing fears of a new East/West split. A majority of people in China expect to go to war with Japan. Violent insurgencies continue to roil East Africa. In the United States, the “home of democracy,” police in Missouri shake down poor communities for cash and show up in body armor and APC’s and deploy tear gas when protests break out over the killing of an unarmed teenager. Secession movements are popping up all over due to disgust over political governance and a sense of powerlessness over out-of-control elites. And that’s before we even get to natural phenomena like California’s historic drought, rising sea levels, antibiotic resistant bacteria and the frightening spread of Ebola.

If you, like me, believe that the long era of expansion is over and that we face a shrinking of the economy thanks to the limits to growth, this is especially concerning. This topic is dealt with in this recent article by 2013 Bank of Sweden (Nobel) prize winner Robert Shiller for Project Syndicate:
The current world situation is not nearly so dire, but there are parallels, particularly to 1937. Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. And such fears can have severe consequences. There is a name for the despair that has been driving discontent – and not only in Russia and Ukraine – since the financial crisis. That name is the “new normal,” referring to long-term diminished prospects for economic growth, a term popularized by Bill Gross, a founder of bond giant PIMCO.
The despair felt after 1937 led to the emergence of similar new terms then, too. “Secular stagnation,” referring to long-term economic malaise, is one example. The word secular comes from the Latin saeculum, meaning a generation or a century. The word stagnation suggests a swamp, implying a breeding ground for virulent dangers. In the late 1930s, people were also worrying about discontent in Europe, which had already powered the rise of Adolph Hitler and Benito Mussolini. 
The other term that suddenly became prominent around 1937 was “underconsumptionism” – the theory that fearful people may want to save too much for difficult times ahead. Moreover, the amount of saving that people desire exceeds the available investment opportunities. As a result, the desire to save will not add to aggregate saving to start new businesses, construct and sell new buildings, and so forth. 
Though investors may bid up prices of existing capital assets, their attempts to save only slow down the economy. “Secular stagnation” and “underconsumptionism” are terms that betray an underlying pessimism, which, by discouraging spending, not only reinforces a weak economy, but also generates anger, intolerance, and a potential for violence. 
In his magnum opus The Moral Consequences of Economic Growth, Benjamin M. Friedman showed many examples of declining economic growth giving rise – with variable and sometimes long lags – to intolerance, aggressive nationalism, and war. He concluded that, “The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political, and ultimately the moral character of a people.” 
Some will doubt the importance of economic growth. Maybe, many say, we are too ambitious and ought to enjoy a higher quality of life with more leisure. Maybe they are right. But the real issue is self-esteem and the social-comparison processes that psychologist Leon Festinger observed as a universal human trait. Though many will deny it, we are always comparing ourselves with others, and hoping to climb the social ladder. People will never be happy with newfound opportunities for leisure if it seems to signal their failure relative to others.  
The hope that economic growth promotes peace and tolerance is based on people’s tendency to compare themselves not just to others in the present, but also to what they remember of people – including themselves – in the past. According to Friedman, “Obviously nothing can enable the majority of the population to be better off than everyone else. But not only is it possible for most people to be better off than they used to be, that is precisely what economic growth means.”
Parallels to 1937 (Project Syndicate)

Schiller’s article is discussed in this important post from Yves Smith of Naked Capitalism, Are Advanced Economies Mature Enough to Handle No Growth? It asks some very important questions about the ramifications and potential outcomes of a no-growth economy:
Economists occasionally point out that societies generally move to the right during periods of sustained low growth and economic stress. Yet left-leaning advocates of low or even no growth policies rarely acknowledge the conflict between their antipathy towards growth and the sort of social values they like to see prevail. While some “the end of growth is nigh” types are simply expressing doubt that 20th century rates of increase can be attained in an era of resource scarcity, others see a low-growth future as attractive, even virtuous, with smaller, more autonomous, more cohesive communities. Perhaps they should be careful what they wish for....

From what I can tell, the proponents of a no-growth future have sorely neglected the doctrinal side of their program. If they are right about where we are headed, they need to heed Shiller’s warning. The inertial path is that reactionaries take charge.
The article makes some important points. We are much less self-sufficient than we used to be under the old agricultural economy, with ownership much more concentrated. Now we have an economy where people are dependent upon the labor market for jobs, but the labor market cannot provide enough jobs for everyone. And market fundamentalism holds that everything must be paid for individually in the market out of your own pocket rather than public goods made available collectively to all even as incomes for the vast majority of people are shrinking dramatically. Things like income and life expectancy have actually started to reverse for most people outside the technocratic elite. I'm sure the comments to the article are well worth reading in full.

This article from FireDogLake, Letting the Rich Keep All the Money, makes reference to both of the above posts, and adds:
Shiller talks about Ukraine and Russia, but it works here as well, and may make even more sense. The middle class has been deteriorating for decades, and lately the deterioration is increasing, as the 2013 Survey of Consumer Finances makes clear. Stagnation and insecurity, and the rising cost of things that matter most, food, education and medical care, make people unhappy. Mental doors long closed by social opprobrium reopen, allowing the expression of racism, virulent sexism, and loathing for the poor.

We get a similar approach in the norm-based economics described by George Akerloff in his 2007 Presidential Address to the American Economic Association:

    "Studs Terkel’s Working (1972) captures in a single volume much of the ethnographic findings summarized by Hodson. Terkel interviews people from many different occupations about their feelings about their jobs and concludes that people “search for daily meaning as well as daily bread.” (1972, p. xi). Some of the interviewees are successful in this search: like the stone mason, who cruises his Indiana county and basks in pride as he not infrequently passes his past work. At the opposite extreme is an Illinois steelworker, whose work denies him the dignity he seeks. He takes out his frustration at work by being disrespectful, and, in after hours, by getting into tavern brawls. Most workers are somewhere between these extremes, but in all cases, following Terkel, they have a feeling for how they should behave at work. It’s not just about the money; it is also about living up to an ideal about who they think they should be."
 For further reading, let me suggest this 1985 essay by Alan Brinkley, Richard Hofstadter’s The Age of Reform: A Reconsideration, which examines populism and progressivism, looking at the reactionary content of the former, and Hofstadter’s suggestion that the progressive elites were motivated by a loss of status in the aggressively money-centered capitalism that emerged from the 19th Century.

Taking the two extremes Akerloff describes, the stonemason and the steel worker, it’s easy to see how the miserable state of labor in the US today might tilt many people towards the steelworker’s responses. We can see a huge rise in racism in the responses to Ferguson, where the killer cop raised thousands of dollars to enable him to stay in hiding, and the comments about his activities ranged from acceptance to praise. Liberals rapidly ran away from the overt racism that dominates the lives of African-Americans in St. Louis to a discussion of police militarization which might affect them if their protests moved off Twitter and into action, and the use of courts to fill up municipal coffers with traffic fines, which might affect any of us in our own communities.

The most obvious thing about Akerloff and Shiller is that neither discusses the role of raw economic and political power in the creation of the current morass, not just here but around the world. The interests of the rich have always dominated, but from time to time, their rapacity was tempered to some extent by the forces of democracy or in earlier times, by noblesse oblige. That has rotted away. The justifications for obscene wealth and capture of all of the profits from production have been stripped away as well. Who thinks Lloyd Blankfein is doing God’s Work? Who thinks the jackasses who run any business are doing anything beyond lining their own pockets at the expense of everyone else? Who thinks the toads in Congress care about the day to day interests of the regular people of this country? Who thinks the Supreme Court is anything but a bunch of political hacks bent on protecting the rich at the expense of everyone else? And worse, the status of liberal academics and intellectuals is falling, especially as measured by their pay. If Hofstadter is right, the setting is ripe for trouble.

Hard working decent people can’t make a living, can’t get ahead, don’t benefit from the labor and loss of time that go into work, have no sense of security in their jobs or in their health, and don’t see how their children will have better lives. They want to blame someone, and the social barriers that kept the collective id behind bars have dropped, leaving them free to blame those they’ve always blamed: the poor and sick, the immigrant, and the liberal intellectuals who reject their values and their beliefs. The airwaves are full of Fox News and worse encouraging these prejudices. If Hofstadter is wrong, and economic woes are the moving factor, the setting is ripe for trouble.
Finally, here are some related comments from an interview with KMO of the C-Realm podcast on the Agroinnovations podcast:
Frank Aragona (host): "One thing that I picked up on and you haven't really mentioned this in a while...a while back you were making the comment, and it was almost in passing in some cases that the people who are wealthy in this society, in the United States and elsewhere around the world, are perfectly happy for people like you and I to choose poverty because then we basically become marginalized figures. We don't really have any impact on policy or economics or land management, or anything of significance."

"And so this idea that you're going to drop out and have a Permaculture farm in the middle of nowhere, while it's a lifestyle that many people choose, and I don't think it's a bad choice, it also seems like there are some advantages to that lifestyle for people who are controlling the means of production."

KMO: "Absolutely. I mean if you give up your demand that you maintain the quality of life that your parents enjoyed during the height of the petroleum-fueled expansion, that makes it a lot easier on the people at the top of the pyramid. If you are very vocal in insisting that you do notice the fact that your circumstances are greatly diminished and that you're not happy about it and that you demand that the people in charge or the people with resources do something to correct the situation, and you make a pain of it, you become a pain for them. Well, they would much rather have you go and be a happy voluntary peasant someplace."

They discuss the prevalence of the "walk away from society" attitude in some areas of the Permaculture community and why Frank Aragona thinks it may be not the most constructive attitude to take. Frank asks KMO about the fragmented future we seem to be facing.

KMO: "...In the United States in particular, we have a very strong well-funded, well organized movement to make people stupid. To make them completely ignorant, to put them into a reality tunnel that is really really at odds with the available evidence but because it is tied to people's self-worth and their cultural identities and to some extent their racial identities, they're encouraged to believe it and they're strongly motivated to believe it. And it seems like the longer this goes on the harder it is to remedy, because you get just deeper and... particularly as people become more impoverished and more immiserated they're going to cling to comforting stories which seem to validate their lifestyles and their choices and their cultural traditions and in general it just seems..."

"Like, there's this notion, and this is something that I think you'll encounter in the sort of secessionist people [with a] secessionist mindset, the people who think, 'I'm just going to go start my Permaculture farm, I'm going to drop out of the system, I'm going to radically reduce my expectations in terms of my material standard of living.' There's also an accompanying notion that says, 'the worse things get materially for the bulk of the people, the better that is for those of us trying to prompt some sort of positive transformation.' Marxists sometimes think this. But also somebody who has no affinity whatsoever with Marxism, they just think, you know, we need to transition to renewable energy, we need to transition to sustainable agriculture, we need to transition to a more enlightened mode of just being in the world; they think that as long as the middle class is comfortable that they're never going to make any change. But once they become uncomfortable, once they become deprived, then there's an opportunity for people who are pushing a positive agenda to really get their message across and have more people take it up."

"So there's this idea that as the economy gets worse, as jobs become more scarce, that this is all really good, that this is driving some positive development. And it doesn't really work that way historically. Revolutions tend to come in time of rising expectations. And the labor movement was strongest when the economy was at its best and jobs were well-paying and there were plenty of them."

"So I think it's almost a truism, it's almost not worth saying, but the worse things get, the worse things get, I think. I see a lot of people mobilizing to make change, but as I say in a huge population, a population of 300 million people, a tiny fraction of them, a statistically insignificant faction of them, still is a lot of people and you can immerse yourself in that culture...there are a lot of examples that you can draw from a statistically insignificant fragment of the population."

1 comment:

  1. Certainly the dominant American mythos is poorly adapted to decline. We will have to change the stories we tell ourselves if we are going to survive a decline- but the rich have no reason to change these stories. Even when the economy has become a game of musical chairs- and they keep taking away chairs- it is still true that the strong, the fast, the lucky (the rich) survive. For them, the story works. They can still find enough chairs. Why can't everyone else? There must be something wrong with those people who don't get a chair- they didn't try hard enough.

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