A lack of intellectual flexibility!

I used to have a quite favourable opinion of Mr. Krugman and I enjoy reading his blog in the New York Times. He is a quite outspoken personality and utters his views without much hesitation. I also tend to agree with many of his economic positions and think he deserves the Nobel price that he received for his work on trade theory. He once denied a government post as he considered himself to outspoken for the policy business – I begin to understand why.

I was reading recently that he finds the German response to the financial crisis a “great disappointment” and doubts the “intellectual flexibility” of the German chancellor Angela Merkel. The German finance minister is even worse; a Republican-like (that is obviously already quite a bad stigma) politician who issues know-nothing diatribes. Note, we are talking about economic views here. I am not writing about this because I am a particular fan of Mrs. Merkel, but those statements are quite unrefined in my opinion. As a Nobel laureate Mr. Krugman knows that there are different streams of thoughts in economics and he naturally thinks his position is the right one. There is nothing wrong with that. To disqualify a different view as a lack of intellectual flexibility and even a great disappointment shows a lack of respect for others and could be deemed arrogant.

Having said that we can discuss on an objective level what makes Mr. Krugman so upset. He repeatedly argued that the American stimulus is much too small to have a positive effect, hence he rallies for an increase on both sides of the Atlantic. I fully agree on his point that the effect of the stimulus will be far too small to have any significant impact on the economy. Whether Keynesian policies can get us out of the crisis is an open question as is the amount that would be necessary to do so. Mr. Krugman already denies political realities in his home country where at the moment political will seems to be lacking to take even bolder action and he does not understand that the political fortunes for putting unprecedented amounts of taxpayers money at risk are even worse in some European countries. He might be right that only a much larger stimulus could save the economy. However, if you know that there is no political environment to raise the required funds and smaller stimuli are just a drop in the ocean, why would you destroy your fiscal budget for years, if not decades in such an effort? If you see it that way the lack of intellectual flexibility lies elsewhere. And: it is not a lack of intellectual flexibility to dare to have a different opinion than somebody else – even if this somebody else won the Nobel price.

Should we end economic growth?

Should we end economic growth? There are few things that can be investigated with experimental methods in economics what is one of the inevitable weaknesses of this science. Sometimes, however, natural experiments occur. The arguably biggest natural experiment in economic history is the comparison of a planned economy and a capitalist, individual based system. Few would doubt that the latter showed to be superior. Libraries could be filled with writing on this topic, but I want to point out only two things. First, the idea of equal distribution of wealth is still considered as positive and that is why communist ideas have never entirely disappeared. Second, planned economies just do not work and that can be proven by many examples in history and the reason is simply human nature. Individuals seem to constantly strive for more and it does have a negative impact on economic performance to deprive them of any incentive to achieve more than others.

To get back to more up-to-date issues, there is a question that is not so far away from those initial thoughts. Is there a need to further expand our economies and keep on growing endlessly? In the current system there certainly is. All industrial economies are constructed in a way that they only function when there is constant growth. The current financial meltdown shows this in its extreme: everything was built on ever faster growing asset prices. Once asset prices turned the other way the system nearly collapsed. Not only the financial sector relies on constant growth, governments and the connected social systems depend on it as well. There is no alternative way to pay back the huge public deficits and pay out pensions for an overaged population. There is no way to escape from the “growth trap” as I may call it – at least not in the near future.

It is not a secret that many resources are limited and cannot be exploited endlessly. Therefore, the very nature of planet earth will end this system of permanent growth one day. Admittedly, this might be a remote point in time, but there are already some signs of depletion in different areas, namely climate and energy related issues. A different question is whether it makes sense to have growth as the prior goal. Are western industrial nations not at a point where the created wealth is enough and they should merely try to preserve it? Will two cars make us happier than one? Or do four instead of three trips to a distant paradise every year enhance our quality of life? Should we not just create a system that sustains itself in the long run and make this the goal of economic policy?

This idea – that is of course not new – is in some sense as radical and hinges on the same human traits as communism does. It would deprive people of their ambition and as probably some systems would keep their growth focus the latter ones would be superior and squeeze out the new system again. Just as communism was bound to fail due to the competition with capitalist systems. Does this mean we should drop this idea and put it into the utopia corner? To answer this question I want to explain briefly some ideas of Karl Marx, who is often perceived as the founder of communist ideas. Marx described for the most part the economic conditions of severe inequality caused by the extreme capitalism of his time. He also predicted the overthrowing of the system by a possibly violent revolution. He actually was quite vague when it comes the exact form of a new system. What he caused was an enormous fear among the establishment which reacted in order to prevent Marx’s predictions. Marx´s warnings and predictions contributed to the fact that they actually did not come true in some parts of the world (in some they did of course). The capitalist system is quite flexible and managed to incorporate many of the socialist ideas that were proposed by Marx´s fellows.

An economy that is not allowed to expand will be doomed to failure for the same reasons as an economy without any income differences. However, the postulation of such radical changes will hopefully cause what the communist ideas caused: A change in the way capitalism works and the incorporation of more sustainability. We are already in the middle of this process with a shift in the perception of renewable energies and climate issues. Hopefully, the global economies will be flexible enough to undergo the necessary changes. In general, sustainability and environmental issues suffer naturally from a political problem that is often called “free rider problem”. Without a unified global leadership this is extremely difficult to circumvent as some countries profit from others’ efforts in those areas. The current crisis is extremely harmful to that process as protectionism grows and everybody is concerned with their own troubles.

To answer my question finally: It goes against human nature to abandon the concept of growth altogether and will therefore not work. Although the idea seems promising to people rightly concerned about the future of our planet, simply ending economic growth will not fix it. This shall in no way mean that we should neglect global environmental and sustainability issues and go on with business as usual. The world is steering towards a severe environmental crisis and bold action is necessary. However, the proposal to end growth is just not thought through properly and just too radical and will in the end just bring us to the point where we started. And we might not have time to try another big economic experiment to gain that insight.