The Reformation of Capitalism Continues

Two extraordinary economics articles this week. Extraordinary not only for their content, but the fact that such things are being said openly by mainstream economists. The first is from Kenneth Rogoff. His CV reads as follows: Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF. Yet this article reads like something I might expect from the Center for the Advancement of a Steady State Economy or the Degrowth movement:

Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. That message is echoed in political debates, central-bank boardrooms, and front-page headlines. But does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume?

Certainly, many critiques of standard economic statistics have argued for broader measures of national welfare, such as life expectancy at birth, literacy, etc. Such appraisals include the United Nations Human Development Report, and, more recently, the French-sponsored Commission on the Measurement of Economic Performance and Social Progress, led by the economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi.

But there might be a problem even deeper than statistical narrowness: the failure of modern growth theory to emphasize adequately that people are fundamentally social creatures. They evaluate their welfare based on what they see around them, not just on some absolute standard.

The economist Richard Easterlin famously observed that surveys of “happiness” show surprisingly little evolution in the decades after World War II, despite significant trend income growth. Needless to say, Easterlin’s result seems less plausible for very poor countries, where rapidly rising incomes often allow societies to enjoy large life improvements, which presumably strongly correlate with any reasonable measure of overall well-being.

There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations. Consider a simple thought experiment. Imagine that per capita national income (or some broader measure of welfare) is set to rise by 1% per year over the next couple of centuries. This is roughly the trend per capita growth rate in the advanced world in recent years. With annual income growth of 1%, a generation born 70 years from now will enjoy roughly double today’s average income. Over two centuries, income will grow eight-fold.

Now suppose that we lived in a much faster-growing economy, with per capita income rising at 2% annually. In that case, per capita income would double after only 35 years, and an eight-fold increase would take only a century.

Finally, ask yourself how much you really care if it takes 100, 200, or even 1,000 years for welfare to increase eight-fold. Wouldn’t it make more sense to worry about the long-term sustainability and durability of global growth? Wouldn’t it make more sense to worry whether conflict or global warming might produce a catastrophe that derails society for centuries or more?

Rethinking the Growth Imperative (Kenneth Rogoff)

Another is from Umair Haique. He is a blogger for the Harvard Business Review (!!!). His CV reads as follows: Umair Haque is Director of the Havas Media Lab and author of The New Capitalist Manifesto: Building a Disruptively Better Business. He also founded Bubblegeneration, an agenda-setting advisory boutique that shaped strategies across media and consumer industries. Here is an article he wrote for the Atlantic Magazine:

The Bureau of Economic Analysis calls GDP "the crowning achievement of 20th century economics"--and it is not overstating the case. It single-handedly allowed America to begin optimizing its economy for a then-compelling definition of prosperity: industrial output. GDP is an income statement for an economy--to use my auto allegory, a rev counter. But a balance sheet is like a speedometer. It tells us whether our effort--our busyness--is actually getting us anywhere.

Just as the crowning achievement of twentieth-century economics was constructing a national income statement, so the crowning achievement of twenty-first-century economics is likely to be conceptualizing and constructing a national balance sheet, a speedometer for the economy. While I can't build a full-blown balance sheet for you--that's a grand, generational project--we can take a brief glimpse across the different kinds of capital and try to ascertain whether their buckets are filling or emptying, whether the speedometer's needle is rising or falling.

You might see social capital--the wealth of relationships--crashing. According to Ohio State University's Pamela Paxton, declines in trust among individuals of half a percent per year from 1975 to 1994. A life rich in relationships and connections seems to be a more and more elusive goal.

You might notice human capital--the wealth in people--splintering. Perhaps the most essential component of human capital is education. Yet, the Brookings Institution found that, for the first time, older generations have attained more higher education than younger ones. That points to an inflection point in human capital, marking a peak in American educational attainment.

Human capital is also composed of mental and physical health. Both mental illness and obesity rates have risen steadily for the last century in America. And rates of happiness in the United States, United Kingdom, and Japan have flatlined--and by some measures, fallen--over recent decades.

You might see intellectual capital--the wealth of ideas--struggling to develop. Intellectual capital is often assessed simply by looking at the sheer number of patents, but I'd choose a higher bar: the creation not merely of patents, but of new industries, sectors, and markets. Fewer industries were created in the noughties than in any decade since 1930: just two, by my count--search and nanotech. Though patent applications have skyrocketed, patent quality has dropped. They are now less expressions of true intellectual wealth than tools for strategic control.

You might see organizational capital--the wealth that harmonizes and synchronizes the other kinds of wealth--cratering. Organizational capital is the toughest kind of capital to measure and observe. I'd roughly gauge it by looking at the creation rate of new jobs, because new jobs often represent new roles, gains in the division of labor, the raw stuff of organizational capital. America is often said to be the most dynamic economy in the world, but the net creation rate of new jobs has dropped steadily since 1970. I'd also look at an alternative measure of organizational capital: political decision-making. Here, we find more "gridlock": filibusters in the Senate have risen exponentially over the last three decades to an unprecedented high.

Here's what the glimpse I've given suggests: the state of the Common Wealth is in crisis. In terms of an authentically good life, we're going nowhere fast. The rev counter is buzzing, but the speedometer's needle is barely moving. We're very busy, but we're not better for it.

GDP Needs Help: Let's Build a Second Measure of Economic Strength (Umair Haique)

Both of these articles are phenomenal, and I advise you to read them if you read nothing else economic this year (or this month at least). If a former IMF economist and a Harvard Business Review blogger with an MBA are saying stuff like this, it's a sign that the criticisms of the status quo are becoming mainstream. And that's at least a glimmer of hope.

BONUS:
Here's Richard Heinberg last year in the UK Guardian: Life after the end of economic growth: A continually rising GDP is not necessarily possible – or even desirable. So why do policymakers obsess over it?