On the cover of the paperback version of George Akerlof and Robert Schiller’s Animal Spirits, the blurb, from Time’s Michael Grunwald, is “Animal Sprits [is]… the new must read in Obamaworld.” In March of 2011, two years after President Obama took office and Animal Spirits was first published, it is clear that the President and his economic team were reading from this playbook. However, it is also clear that the President missed an opportunity to communicate to the public why he took the actions that he did. As the United States moves forward in a so-called jobless recovery, and divisiveness and friction rule across D.C. and the country, our economic policy is hobbled and scattershot. Support for the American Recovery and Reinvestment Act has wavered in the last two years, and the public’s drop in support killed any political will for more stimulus spending. The public apprehension and political failures are ironic, actually, because in Animal Spirits, Akerlof and Schiller write about an earlier misinterpretation of Keynesian economics, during the Great Depression.
In 1936 John Maynard Keynes’ The General Theory of Employment, Interest, and Money was published. Keynes charted a course between classical economists that argued that less regulation would allow private markets and rational actors, via the famous ‘invisible hand,’ to create jobs, and socialists that argued for the state to direct the economy. Instead, Keynes took issue with the idea that only rational actors governed the economy; he believed that noneconomic, non-rational, animal spirits actually caused involuntary unemployment and economic fluctuation. The government should not be too authoritarian, like the socialists argued, but it should also not be too permissive, like the classical economists argued. Unfortunately, in an effort to create consensus with classical economists, supporters of Keynes removed most of the animal spirits, hoping that they could convince the broad public as quickly as possible to adopt Keynes’ fiscal policy prescriptions (just like President Obama allowed political expediency to rule his economic platform). Unfortunately, this watered down theory was vulnerable to critique by neo-classical economists like Milton Friedman. The central thesis of Akerlof and Schiller’s book is that these animal spirits, cast off in the midst of the Great Depression, remain a prime cause of our contemporary economic difficulties. In fact, these ideas have emerged once again in the field of behavioral economics.
There are five animal spirits that the authors resurrect from The General Theory:
1) Confidence, the trust and belief that leads rational actors to make some irrational decisions, which amplifies business cycles
2) Fairness, often pushed to the backburner in economic textbooks, often trumps economic concerns and impacts both wages and prices
3) Corrupt Behavior and Bad Faith, economic activity with sinister motivation, was clearly evident in the recent economic crisis and recession, but can be clearly traced back through all of the major economic bumps in our past
4) Money illusion, disavowed by neo-classical economists like Milton Friedman, remains a contemporary concern as people continue to be confused about the impact of inflation and deflation
5) Stories, the narratives we create to describe human experience, often seem true and nurture speculative bubbles (like the housing bubble) until the bubble pops and the story changes
In the aftermath of the global economic shock, when many of the great economies of the world continue to stumble towards recovery, Akerlof and Schiller’s analysis is perfectly timed. They clearly trace the impact of these animal spirits on the economy, from the Great Depression through the stagflation of the 1970s, through the recessions and the Savings & Loans crises of the 1980s, the recession and the tech bubble of the 1990s, and finally to the Enron debacle, the housing bubble, and the jobless recoveries of our recent past. Akerlof and Schiller are true Keynesians; they appreciate the power of the free market to create economic opportunity, but they also appreciate the damage that these animal spirits can make in the economy. The vast neo-classical deregulation that started in the 1970s and continued through the last decade did not take into account these Animal Spirits, and the vast economic turmoil was the result.
Confidence is one of the most important animal spirits – it leads ‘rational actors’ to what Federal Reserve Chairman Alan Greenspan described as “Irrational exuberance.” If one looks back to the stock market of the 1890s or the 1920s, or the tech and housing bubble of our recent past, confidence is clearly evident. Remember in 2004 when some of your friends said that housing prices could never fall? That is confidence gone astray, irrational exuberance. That is also a story that we all told each other, which seemed irrefutable logic, until it wasn’t.
Fairness has a big impact on unemployment. The neo-classical theories about how a labor market would clear itself revolve around wage efficiency, the idea that employers will pay the lowest wage and employ as many people as possible. Unfortunately, the labor contract is more complicated than that, and the transaction only starts when the wage is agreed upon. Schiller and Akerlof show that wages vary a great deal, and employers often pay more than they need to, to secure a motivated and skilled workforce. Fairness affects both the employer and the employee. The wage that workers deem fair is almost always above the market-clearing wage; this ensures that wages will remain sticky even during economic downturns, despite the fact that the ranks of the unemployed grow.
Money illusion also impacts wages; neo-classical economists argue that there is a Natural Rate of unemployment, but wage rigidity is partly due to the fact that people are largely unaware of the impact of inflation or deflation on their purchasing power. A survey they conducted with a group of economists and a second group representing the general public shows the money illusion clearly: reacting to the statement “I think if my pay went up I would feel more satisfaction… even if prices went up as much,” 90% of the economists disagreed, while 59% of the general public agreed. Fairness and money illusion clearly affect the setting of wages, behind the scenes of economic logic. Akerlof and Schiller argue that we should “fire the forecaster,” and forget, once and for all, the myth that capitalism is pure. They argue that safeguards must be built to protect the general public from the excesses of capitalism. They also make clear that the stories that we tell each other are often irrational and exaggerated, and we must be protected from these exaggerations.
Like I mentioned above, it is clear the Obama Administration used Animal Spirits as a playbook in their efforts to prevent the economy from falling into a Depression. Schiller and Akerlof advocated the use of the Discount window, as well as other provisions taken by both the Federal Reserve as well as the Treasury Department to prop up the banks. To their credit, they also predicted that “the injections may make the banks richer, and therefore less likely to become insolvent, but they will not necessarily lend more money.” As a result, the Government ended up taking extraordinary measures to ensure that money was available for mortgages and loans.
Ultimately, the actions taken by the Administration fell short of what Keynes, or Schiller and Akerlof would advocate. The stimulus was insufficient, and the government did not act aggressively enough to regulate the banks. But like the Gulf Oil spill last summer, I think the biggest loss was the failure to take advantage of the moment to educate the General Public of the external costs of our capitalist economy. If a better effort were made to explain to the general public the Animal Spirits, how they impact the economy, and the logic of the stimulus and TARP, our response could have been more sustained, more consistent, and less contentious. Keynesian economics could have stepped into the clear light of day, but instead the lessons of these animal spirits and their impact on the economy remain lost to much of the general public. Because the problem of Too Big To Fail was not confronted, we will undoubtedly once again be in a position to deal with the consequences of leverage and risk that these global institutions create.
The 2011 Academy Awards, hosted this year by acting ingénues James Franco and Anne Hathaway, was an attempt by the Academy of Arts and Sciences to reach out to a new, younger audience. By that measure, the Academy failed miserably, reaching 12% less viewers in the 18-49-age bracket. Ultimately, the Academy’s strategy, to reach all audiences at once, was baldly transparent and ineffective. The projected image of Bob Hope, who produced the funniest lines of the night, represented the Academy jumping the shark.
While The King’s Speech, a film about a British monarch overcoming a speech impediment, took the biggest honors of the night, the most competitive and interesting race was for Best Documentary. Presenter Oprah Winfrey said that, “It has never been more important for us to see these stories to help us try to make some sense of the world we live in.” Five strong films entered, including Sebastian Junger’s Restrepo and Josh Fox’s Gasland. Inside Job, Charles Ferguson’s searing inquiry into the roots of the financial crisis, took the Oscar. As Ferguson accepted his Oscar, he started by saying, “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong,”
One can’t help but think that JP Morgan Chase (JPMC) foresaw Inside Job’s victory and the speech by Ferguson, as no less than four times during the Oscar broadcast, their “New Way Forward” commercial appeared, promoting JPMC as a key driver of our ‘recovery:’
Conveniently, JPMC released their annual 10-K financial statement one day after the Oscars, so we can put their claims in perspective. In 2010, JPMC held just over $50 Billion in wholesale commercial loans to United States businesses, a significant drop from their commercial commitments in 2007 and 2008. While they are committed to making $10 Billion available to small businesses, that doesn’t mean that they will actually make the loans. Additionally, their offer of a second review seems reminiscent of the situation when you aren’t getting the assistance you need on the phone and ask to speak with a customer service representative’s manager. Why is this process necessary, and what does it actually offer to the small businessperson? More importantly, why are small businesses having trouble getting access to money in the first place?
The quandary over small business loans goes to a larger question: what did the bailout of our financial institutions, through the Troubled Asset Relief Program (TARP) and FED actions, accomplish, if we don’t yet have a strong recovery? After the financial crisis the Federal Reserve and the Treasury Department bailed out many of our largest banks, including investment banks, through funds from TARP and through access to cheap money from the discount window at the FED. Many of the banks were overleveraged, and these programs allowed them to recapitalize. In essence, the government allowed these banks to repair their balance sheet by printing money, and forcing the public to take the loss through devalued currency. The actions in late 2008 and early 2009 by Hank Paulson, Ben Bernanke, and Tim Geithner certainly prevented a collapse of our banking sector. The TARP program remains universally unpopular, despite reports that even losses from loans to AIG won’t top $14 Billion, a significant drop from earlier estimates.
During the last few years, banks like JPMC and Goldman Sachs have made tidy profits and made tidy bonus payments, but that hasn’t necessarily translated into an economic recovery. We have stronger banks, but not a stronger recovery. The Excess Reserves of Depository Institutions (EXCRESNS) is a valuable lens with which to view this quandary. In 2009, after nearly 50 years of being near zero, meaning that banks lent out as much as they could based on their reserves, the data jumps to hockey stick proportions. You don’t have to believe me, you can see the data yourself on the FED’s website. Many banks are standing pat on reserves that they could be lending.
While JPMC isn’t actually saying much in their Oscar ad, they do sound earnest and committed to a recovery. I wonder how much that ad cost? JPMC paid to lobbyists $6.2 Million in 2009 to help make the Dodd-Frank Financial Reform Bill to their liking. What if JPMC lent that money out to small businesses in 2009, instead? In retrospect, I think the Oscar voters missed out on an award-winning acting performance by JPMC.
What can key an economic recovery? Lets look at the stimulus efforts to date, made up of both tax cuts and direct government expenditures. John Maynard Keynes argued that both tax cuts and government spending would help to increase the GDP, but that government investments were far more effective, driving a more powerful Keynesian multiplier. In essence, the expenditures recycle themselves more directly into the economy and have a larger impact, whereas tax cuts are often put into savings or used to pay off debt meaning that less money gets recycled back into the economy.
Republicans often argue that tax cuts ‘pay for themselves,’ relying on the unsubstantiated and discredited ‘Laffer curve;’ for example, the Republican House does not require tax cuts to be paid for in regards to the deficit. With Republican governors continuing to reject direct government stimulus, as Wisconsin and Florida governors recently did with high-speed rail money, this means that our efforts to stimulate the economy will still hurt the deficit, but they will not be very effective.
However, the recent ‘Obama’ tax cuts, the extension of the Bush tax cuts including those on the top 2% of wage earners, amounts to Supply Side economics redux. Capital gains cuts are similar in their effect to tax cuts, as the windfalls go to wealthy taxpayers who won’t spend the money immediately. Supply Side economists argue that by reducing tax rates and eliminating regulation, businesses will be able to hire more workers, and increase the GDP. To date, after many rounds of tax cuts for businesses, unemployment (and more importantly, underemployment) remains high. Looking at the big picture, the actions of our government in response to the financial crisis is a bit like the Academy – trying to please a lot of different audiences at once, without delivering a clear, concise, and effective message.
The guys who brought you ‘Fear the Boom and the Bust’, the Hayek vs. Keynes Hip Hop Smackdown are back. They preview their new sequel here in front of an audience of Wall Street Tycoons. The new video comes out in a month, with more lyrics and a new beat. For now, check out these sweet econ rhymes, starting at about 1:30 of the Youtube clip.
Incidentally, if you missed the original video, here it is:
I was born in 1976, and came of age in Ronald Reagan’s ‘Morning in America.’ After reading Naomi Klein’s 2007 book The Shock Doctrine: The Rise of Disaster Capitalism, I feel as if a veil has been lifted from my perception of history, and the important events of my youth stand out in new significance. The story told in this important book centers around Milton Freidman, and the fundamentalist capitalist beliefs espoused at the University of Chicago School of Economics, where Freidman taught.
Klein’s main thesis in the book, which travels across continents and decades, is that in order to implement the fundamentalist economic policies espoused by the Chicago School, a clean slate is required. The technique to facilitate that clean slate is what amounts to the shock doctrine. Klein uses a quote from Freidman’s introduction to his seminal work, Capitalism and Freedom to quantify the shock doctrine. Freidman observes that:
“Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”
The crisis that Freidman describes is crucial. To analyze how that crisis and the clean sheet are created, Klein uses torture as a metaphor, tracing the ghastly experiments at McGill University by psychiatrist Ewen Cameron, under the direction of the CIA (through its MK FrUltra program).
Cameron believed that in order to teach his patients new behaviors, old pathological patterns needed to broken up to create a tabula rasa. The way to create that blank slate was to attack the mind with electricity, uppers, downers, and hallucinogens to, in Cameron’s words, “disinhibit [the patient] so that his defenses might be reduced.”
The CIA provided grants to Cameron starting in 1957; at this point Cameron started upping the number of shocks to unprecedented levels, increasing the dosage of drugs, and experimenting with sensory deprivation and extended sleep. The CIA took the fruit of Cameron’s research and produced a handbook, Kubark Counterintelligence Interrogation, a secret manual on the interrogation of resistant sources. The CIA taught these methods to authoritarian governments including Chile, Guatemala, Honduras, and Iran.
Klein traces the introduction of this fundamentalist form of capitalism over the last 40 years and finds that:
“Seen through the lens of this doctrine… some of the most infamous human rights violations of this era, which have tended to be viewed as sadistic acts carried out by antidemocratic regimes, were in fact either committed with the deliberate intent of terrorizing the public or actively harnessed to prepare the ground for the introduction of radical free market ‘reforms.’”
Argentina, Chile, and Bolivia were part of the first wave of the imposition of Freidman’s reforms, and those junta regimes used disappearances, as well as torture techniques from the Kubark handbook, to eliminate opposition to the implementation of reforms. Klein also views the 1990s crises in China, Russia, and Asia through the lens of the shock doctrine, and closely looks at the role of the International Monetary Fund in creating the necessary shock condition. Ultimately, Klein turns to 9/11, Iraq and Sri Lanka to show the rise of disaster capitalism as a global movement.
In the 1960s, at the University of Chicago, Freidman saw a United States where its capitalism was tainted by “interferences” (fixed prices, minimum wage, public education); while they may have provided benefits to the public, these interferences polluted the equilibrium of the market and inhibited market signals. Freidman and his fellow Chicago economists (including his mentor Friedrich Hayek) wanted to purify the market, to get rid of these interferences. Friedman saw the mixed economy supported by John Maynard Keynes as the enemy to be defeated.
Freidman’s prescription was as follows: remove as many rules and regulations as possible, privatize most state assets, and cut back most social programs. Taxes should be low, and flat, if they should exist at all. Protectionism was sacrilege to Freidman. The invisible hand should determine prices, and there should be no minimum wage. These were bold steps to take, even in the capitalist United States. In order to prove his theories, Freidman would have to demonstrate them in the real world. He found a laboratory in Chile, one of the Developmentalist, mixed economies in South America that sought to find a middle road between the Cold War economic extremes.
These economies were linked around the United Nations Economic Commission for Latin America, based in Santiago Chile, and headed by economist Raul Prebisch. In the 1950s and early 1960s, the Developmentalist economies prospered, and nurtured a burgeoning middle class. However, American multi-national companies like Ford convinced the United States government create a program that, starting in 1956, educated 100 Chilean economists at the University of Chicago. These Chileans, indoctrinated in Freidman’s fundamentalist beliefs, were unable to change Chile, however, without America’s help.
After the 1970 election of leftist Salvador Allende, the new government promised to nationalize sectors of the economy that were being run by foreign corporations. President Nixon declared a virtual war on Chile through the Ad Hoc Committee on Chile, which included ITT, owner of 70% of the Chilean phone system. Ultimately, in September 1973 General Augusto Pinochet took power in a military coup, but before the coup, the Chicago boys prepared a set of laws and regulations known as “The Brick” which went into effect immediately, a 500 page economic bible full of deregulation, privatization, and social spending cuts.
Unfortunately, by 1974, counter to the expectations of Freidman and the Chicago Boys, inflation doubled to 375%. The Chicago boys argued that the medicine wasn’t strong enough, and Freidman himself came to the country in 1975 to personally make the same case. Freidman urged another 25% spending cut, and even more deregulation. Unfortunately, in the next year the economy contracted by 15%, and unemployment reached 20%. In fact, the economy did not start to improve until 1982, when Pinochet was forced to follow Allende’s advice and nationalize many companies. Ultimately, the real legacy of Freidman’s prescription in Chile was that by 1988, 45% of the population had fallen below the poverty line, while the richest 10% had seen their incomes increase 83%. But it wasn’t just poverty that eviscerated the middle class; Pinochet used the techniques in the Kubark manual to torture prisoners, who instead of being arrested, were “disappeared.” In fact, the CIA trained Pinochet’s security forces, along with those in Uruguay and Argentina. Ultimately, in South America, that was the effort required to create a tabula rasa: military coup, economic shock, and torture.
Klein’s conception of the Shock Doctrine is most clear when she looks at the brutal dictatorships in South America, as well as South Africa’s transition and Russia’s paradigm shift in the 1990s. Klein’s analysis of Russia under Yeltzin is powerful. I was in high school and college during those years, and my impression was formed from the jingoistic American press. Klein makes clear that the IMF and Jeffrey Sachs, economic wunderkind, produced the kind of pressure that resulted in tragedy and mass killings.
However, Klein’s argument loses coherence when she looks at China, the United States, and Sri Lanka. In the United States, Klein makes the leap from Freidman laissez-faire economics to the privatized homeland security apparatus. I applaud the critique of Donald Rumsfeld, a Freidman acolyte, but it doesn’t fit the overall thesis. In China, Klein describes the protestors as resisting the free market reforms of Deng Xiaoping. Klein argues that most of the protestors opposed free market reforms, and that Xiaoping attacked those protestors to quell the rebellion and implement reforms while the Chinese population was still in shock. This narrative is historically tenuous, at best.
However, the larger point of Klein, particularly as demonstrated in South America, is valid. Freidman’s fundamentalist free market reforms require a tabula rasa, and the middle and lower classes will naturally oppose the lowering of their standard of living. In order to create the tabula rasa, some level of force will be required. The research that Ewen Cameron completed at McGill University is particularly troubling, especially in light of the torture that the United States implemented in Iraq. In fact, Iraq is a Pandora’s box that should continue to produce troubling revelations. Hopefully, those revelations will remain in the public consciousness the next time that we want to create the kind of fundamental change that President Bush wanted to in Iraq, that General Pinochet wanted to do in Chile, and that dictators have long sought to do in the name of the free market.
Get the kids, get the dog, and grab whatever weapons you happen to have within arms reach, zombies are coming! Now, I’m not talking about the raised dead, like we all saw on Thriller, but rather bond vigilantes, about to pull the plug on good old Uncle Sam because they perceive us as unable or unwilling to pay our debt. At the G20 summit this week, President Obama argued that more Keynesian stimulus was necessary until employment recovered. The rest of the G20 balked, opting instead of fiscal austerity, because they fear the bond vigilantes. Economist Paul Krugman, Nobel laureate, believes you can put that weapon down:
“Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. As Douglas Elmendorf, the director of the Congressional Budget Office, recently put it, “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.” Nonetheless, every few months we’re told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them. Three months ago, a slight uptick in long-term interest rates was greeted with near hysteria: “Debt Fears Send Rates Up,” was the headline at The Wall Street Journal, although there was no actual evidence of such fears, and Alan Greenspan pronounced the rise a “canary in the mine.” Since then, long-term rates have plunged again. Far from fleeing U.S. government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we don’t slash spending immediately.”
However, advocates for austerity want to cut off unemployment benefits, when the housing market, and the larger economy, is still on life support. They want to fire teachers, firefighters, and policemen around the country by slashing state aid. In the halls of power, you can hear faint echoes of Herbert Hoover. These austerity advocates often talk about Japan’s lost decade, and the inability of government spending to lift that country out of its recession. However, no less than the Economist, Bible to the global business elite, brings up the much more pertinent examples of Canada and Sweden:
“The advocates of austerity… base their argument on cases in the 1990s, when countries such as Canada to Sweden cut their deficits and boomed. But in most of these instances interest rates fell sharply or the country’s currency weakened. Those remedies are not available now: interest rates are already low and rich-country currencies cannot all depreciate at once. Without those cushions, fiscal austerity is not likely to boost growth.”
What would be a sensible action to take right now? Well, how about finally tackling entitlement reform? Sure sure, Republicans would never undertake bipartisan work on entitlements in their Party of No posture, but stepping outside of political reality, now is the perfect time for politicians to compromise and craft a sensible reform of Social Security. If not now, when? It would send the right signals to those (imaginary) bond vigilantes that everyone worries about so much, but more to the point, it would deal with the long-term deficit, which we will have to deal with sooner or later. Politicians will always try to punt that football down the road, but who is to say that there will be a better opportunity in the future?
John Maynard Keyes wrote in 1945 that “the day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behavior and religion.” In the United States, we have pursued a policy of unquestioned growth and expansion, following the recommendations of prominent economists with an ardor that borders on religiosity. However, the economic problem, as Keynes described it, has not taken a back seat, but rather has the developed world in the grip of a severe recession.
In the United States we have always looked to economists for the magic to make our economy go. Milton Friedman, winner of the Nobel Prize in Economics, believed that a free market economy could expand and prosper with minimal government interference. Alan Greenspan, an admirer of Friedman, was revered as an enabler of unending growth during his service as Chairman of the Federal Reserve; he received the Presidential Medal of Freedom, the inaugural Harry S. Truman Medal for Economic Policy, the inaugural Thomas Jefferson Foundation Medal in Civilian Leadership, and was named both a Knight Commander of the British Empire and a Commander of the French L’Egion D’honneur. Presidents from Ronald Reagan to George W. Bush all trusted Greenspan with the keys to the economy. During the same time period, Bill Clinton, a Democrat, trusted economist Larry Summers’ advice that deregulation of banking and finance would also lead to continued growth; that was the height of Milton Friedman’s influence. Barack Obama appointed Summers to be Chairman of his Economic Council despite the fact that his policies were partly at fault for the current economic crisis. Why do all of these Presidents, from Reagan on the right to Obama on the left, put so much faith in these economists? Keynes, in The General Theory of Employment History and Money (1935), addressed this question. He wrote that:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”
The economic policies of the United States have become more and more complex since Keynes’ time. Over the decades, as the United States left the Gold standard, and created a dynamic economy reliant on the growth of consumption and continuous expansion, we have relied and trusted economists to make it all work. Most Americans who do not work on Wall Street have trouble understanding even some of the basic terminology and concepts used in finance today. Many of us learned what a Collateralized Debt Obligation was last year, and discovered how debt was securitized in such complex ways that even some of the old hands in charge of major firms didn’t really understand. Americans trusted economists to drive our growth, and while many don’t understand the problems we face, they expect economists to create a deus ex machina to miraculously get us out of the recession and onward to unending growth.
In 1930, with the Western World mired in the Great Depression, John Maynard Keynes wrote an essay, titled Economic Possibilities for our Grandchildren, in which he forecast that one day, the economic problem which had concerned the human race since its beginning would be solved. He wrote that “assuming no important wars, and no important increase in population” we could be in sight of a solution by 2030. Of course no one except possibly Adolf Hitler could have foreseen World War II. In addition, the population of the world has increased since 1930. However, Keynes’ point about scarcity, that the human economic problem could be solved, bears consideration.
Keynes believed that revolutionary technical improvements would create the condition for continued advances in the material condition of peoples’ lives. He also believed that when those continuing technical developments improved the human condition to a certain point, the human moral condition would change. The large majority of us would have a “purposeness” in which we would be “more concerned with the remote future results of our actions than with their own quality or their immediate effects on our own environment.” Basically, Keynes believed that the great majority of people would no longer strive to accumulate wealth; in fact we would return to traditional conditions of virtue where “avarice is a vice, the extraction of usury is a misdemeanor, and the love of money is detestable… we shall once more value ends above means and prefer the good to the useful.”
Keynes did not think scarcity would be a problem, because he believed that innovations would solve any problems of scarcity that appeared. Looking back at the last 80 years, The Green Revolution is an example of a predicted scarcity that was overcome with technical innovations. Mark Sagoff, in his 1997 essay “Do We Consume Too Much,” considered again the question of scarcity; he too believed that the human capacity for innovation was infinite. As an example, he shows how the farm fishing of salmon and tilapia makes up for disappearing fisheries in our oceans.
Sagoff structures his argument about what he considers three main misconceptions: that we are running out of raw materials, food and timber, and energy. He describes how economists disproved Keynes’ main proposition, that accumulation would no longer improve well-being, – because they discovered that human wants are insatiable. Sagoff doesn’t buy that, but he does believe that “as long as the debate over sustainability is framed in terms of physical limits to growth rather than the moral purpose, mainstream economic theory will have the better of the argument.”
Now mainstream economic theory does treat scarcity as something to be solved with innovation. We do commonly substitute one resource for another; however, during the economic downturn, it has become common to see people break into vacant homes to steal copper, a resource that is becoming scarce. The other problem with unending mineral wealth and energy supply is that over time, the Energy Returned on Energy Invested (EROEI) of oil, copper, and other resources has gradually diminished; the disaster in the Gulf of Mexico shows that obtaining oil from the ocean bottom is a technical feat, but also inherently expensive, difficult, and dangerous. With China and India building their respective Middle Classes, the scarcity of resources will only become more apparent. Technology will certainly help; alternative energy will expand, and new forms of efficiency will be discovered.
The problem, of course, with that reliance on technology is that humans also rely on the Earth’s biosphere to support our growth and development. Global Warming will make it more and more difficult for human civilization to prosper, unless we change our habits. Sagoff wrote that “we consume too much when consumption becomes an end itself and makes us lose affection and reverence for the natural world.” Unfortunately, affection and reverence will not do the job. Consumption is an end to itself, at least in Western Society. The moral dreams of Keynes seem quaint today. Certainly, when we consider the sustainability of our communities, we do echo the “purposeness” that Keynes imagined. However, we also invent new technologies that require more and more energy consumption, like the iPhone. The excessive consumption that Sagoff saw in 1997 will go on unabated, largely, until scarcity becomes apparent to human society at large. When gas prices went up above $4/gallon, people adjusted their consumption habits; some even bought ultra-efficient vehicles.
Of course, when you look at science fiction, with stories set in the distant future, humans typically have discovered some sort of energy source that allows them to travel light years through space. You could call it unobtanium. In our time, cold fusion was that unobtanium. Of course, the “discovery” of cold fusion” in the late 1970s turned out to be incorrect. I don’t discount the potential for innovations that would solve the problems of scarcity that I see on the horizon. In fact, after reading Keynes and Sagoff’s essays, I don’t doubt that the world will turn out completely different than I am imagining it 50 or even 100 years from now. However, I am skeptical that our voracious consumption will ever abate; as such, I see scarcity as a continual dilemma for human society.
As I begin Econ II this video reminds me, as Nixon said, “We’re all Keynesians now.”
“Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.”
- J.M. Keynes