Has the global economy recovered?

Has the global economy really recovered?

Robin Matthews

The past returns. For centuries China and India had the highest GNP’s. Things changed in the nineteenth century as the industrial revolution brought European and later Japanese and American dominance. Briefly. Now the biggest contributors to world growth are the emerging nations (or emerging markets, EM’s) of Asia, latterly Russia and South America and South Africa. As in previous centuries, their GDP per head is below that of developed markets (DM’s). Inequality and lack of demand (both) are capitalism’s default states.


Capitalism is global and has many forms; not only the form imagined by the Washington Consensus.  Capitalism is a complex adaptive system. As a species it adapts from commercial to financial, industrial and global forms, in a variety of ways. The current phase includes informationalism and, as anticipated in the 1960’s, aspiring high mass consumption that needs to be financed.


Informationalism, if it’s not just a slogan, is embodied techno-science. The story is something like this. For millions of years, hominids and maybe other animals appear to have continuously developed technologies. Technologies are information locked up in tools (machines, processes and know how) that contain more and more sophisticated information, over time, about the forces of nature, enabling them to do more and more work.


Capitalism achieves exponential growth effectively. To say that capitalism speeded up growth is probably just an impression, a trick embedded in exponential curves that makes growth appear flat in early stages. Capitalism’s trick is to create variety and add opportunity for incremental growth in information, to genuine (phase) transitions.  


Capitalism is an expression of attachment, attachment to things and identification with things, including images of things and aspirations for things. So maybe capitalism[1] is ever present; dark and light perhaps; desire, greed, ambition; exploration, search, creativity.


And the rich. It is tempting to blame, or praise, or admire, or envy them. But income and wealth distribution is probably more of a random process than the rich or the talented like to admit[2]; peppered with path dependence, money goes where money is; plus preferential attachment, institutions are prone to favour those that have. And the most brilliant (accidental or opportunist) achievements of some, are built on the menial tasks of others; brilliant too.  


Capitalism is both unstable and dynamic, more or less for the same reason. It stimulates inventiveness and innovation of great variety; products, services, methods of production and distribution, explosions of brands and choice. Growth is exponential, but from time to time it is punctuated by crises because potential supply[3] outruns demand. Under consumption and crises emerge.


A characteristic of capitalism is that potential supply outruns potential demand irregularly[4] and hence growth has to be interrupted, until the right sort of demand, effective or actual demand, (demand backed up by the ability to pay), catches up.

Keynes understood this. Marketers understand the risks of lack of effective demand. Economists often don’t. In that sense the Keynesian revolution never happened. Keynes ideas were rapidly interpreted as an analysis of price inflexibility. If real wages[5], were flexible downward, so runs the interpretation, everyone who wanted to work could find work, provided they were willing to accept the real wage they were offered; and effective demand would equal potential supply.


On reason for relatively high levels of employment in the UK is that real wages have fallen. But potential demand reflects what people would like, not necessarily what they can pay for, leaving, as far as most people are concerned, an excess of potential over actual demand (and potential supply); a gap that cannot be filled just by the very rich, who can pay for far more than everything they can imagine paying for, leaving them with no alternative but to save.


Only about 30 percent of saving finds its way into productive (and effective demand creating) investment. The remaining 70 percent funds financial asset price inflation, increasing the wealth of the rich further, but doing little to create demand. So potential demand exceeds actual demand; actual demand falls short of potential supply and very often actual supply.


Surely these are conditions for price reductions. Yes, I think so. Certainly this happens. Evidence is everywhere from new economy products to fuels. But two or three things prevent the potential supply gap being closed.


First, capitalist dynamism again, lower profit margins stimulate technological progress which increases potential supply.


Second, lower margins are offset by restructuring, increasing average productivity, usually measured by unit labour costs (total output Q per labour unit L, Q/L). Such phrases are euphemisms for reducing workforces, zero hours contracts, outsourcing, producing more for less, or less by even less (increasing Q/L in one way or another).


Third, innovation includes financial innovation; increasing securitization, that is, increasing leverage, of assets that are already leveraged on the stock of capital built upon the 30 percent of saving that finds its way into productive assets.


We could extend the story of capitalist dynamism and instability. The underlying differential equations become more and more complex. Most saving (the 70 percent) is spent on financial assets, increasing wealth of the very rich, but not effective demand.


When the bubble bursts, as it inevitably does, a balance sheet recession emerges. Excess of market values of financial liabilities over market values of financial assets is spread throughout the community, through reduction in growth rates of GNP; reduction, especially developed economies, because financial markets, effective in securitization, are concentrated there. 


The bubble bursts for everyone including people who had nothing directly to do with excess securitization. Indirectly, they do, see below. The impact of the burst bubble is asymmetric. The global community bails in owners of securitized assets: effectively we might think, bailing in high savers, the rich.  To the extent, it is estimated, of between 60 and 200 trillion dollars.[6]


Once market values of balance sheets balance, the growth process can begin again. But the rich can’t do it alone. Governments could, but think they can’t and economists tell them they can’t. The Keynesian revolution never happened.

Asymmetry again. Effective demand is actual consumption spending. The less rich, who spend higher proportions of their income, partly finance their own consumption, but also borrow. Their potential demand is transformed into actual demand by securitization of their consumption. 


A huge problem for the global economy is that the largest consumer in the world, the USA, has to cut back on consumption and imports. Emerging suppliers and exporters, nations that have export led growth, including parts of Asia, especially China and parts of Europe with current account surpluses, need to consume more, import more, export less and save less.


Deficient world demand is made worse, because export led growth has been funded by undervalued currencies. Germany’s currency, for example, is chronically undervalued leaving much of the Euro area overvalued.


Has the global economy really recovered? Perhaps yes; perhaps no. Perhaps its default state is being in recovery from attachment, or something or other. 




[1] Some traditions use the word nafs.

[2] Talent is defined by the talented; a spinoff of cultural capital.

[3] What the economy is currently capable of producing.  irregularly

[4] Lies in wait in a fat tail.

[5] Keynes concentrated most on money wage inflexibility, money illusion.

[6] I borrow a lot, often from people that may not agree with my interpretations (personal grammar).  

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