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Monthly articles (in French and English) on the theme "Querying orthodox economics"

No. 45 - September 2009

War against unemployment

ANGUS SIBLEY


I do not consider the Keynesian revolution to have been a great intellectual triumph. On the contrary, it was a tragedy because it arrived so late. Hitler had already found how to cure unemployment before Keynes was finished explaining why it occurred....We know that, for twenty-five years, severe recessions have been avoided. For a government, the simplest method is to spend on armaments. The military-industrial complex does the job. I do not think it plausible that the cold war and several real wars were invented just to solve the employment problem. But they have certainly had that effect.   

Joan Robinson, address to the American Economic Association, 1971

To restore employment, we need the war against global warming.

We do best under compulsion

It's an old story. We human beings boast that we are fit for self-determination; that is why we demand negative freedom, that is to say, absence of external constraints which have the effect of restricting our independence, our free-will, our right to choose. At the same time, far too often it is apparent that we behave well only under a restrictive régime.

Thus, bankers call for deregulation even as they demonstrate that, in the absence of rigorous controls, they misbehave in grotesque and disastrous fashion.

Speculators want to be left free to trade as they fancy, even when it is clear that their operations are deranging our markets.

Joan Robinson (1903 - 1983), professor at Cambridge (England), was an eccentric and iconoclastic economist, but she was more sagacious than most of her peers. She reminds us that it took the severe discipline of military necessity to force us to solve the employment problem, as she called it.

Why is there an employment problem?

To manage our economies in such a way that, except during occasional transient recessions, we all have the opportunity to earn our living, should not really be a huge problem. We find it so because we are caught in the meshes of perverse economic theories, such as the doctrine that it is absolutely obligatory to continually increase labour productivity. That means that we must constantly force ourselves to do what we want to do with less human labour. The theorists who persuade us to swallow this panacea do not concern themselves with the problems of those who thus find themselves out of work. 

In the 1930s, the rise of Nazism obliged the British, French, American and other governments to embark on the spending necessary to sharpen their weapons in the face of the German threat. This spending put the unemployed back to work. It also led, of course, to oversized public debts. But wartime shortages reduced consumption and increased savings; so governments were able to borrow heavily from the public to finance their inflated spending.

Later, during the Cold War years, military expenditure continued to support employment; we may note that the armed forces are not in general subject to the norms of productivity and profitability that restrain private-sector employment. Governments avoided excessive borrowing by raking in relatively heavy taxes; the libertarians, obsessed with tax-cutting, were not yet in control. 

The breakdown of the full-employment system

How did this system, which provided us with virtually full employment, break down towards and after the end of the cold war? Among the various explanations, let us note a few of the more important.

* The disappearance of major military threats reduced the scope of those public expenditures that are considered obligatory, even though they are not profitable in the financial sense.

* The triumph of libertarian ideology brought with it the insistence on profitability in many other economic activities, including those that have been privatised and those that, though they remain in the public sector, are now run with the object of earning a substantial return on capital employed.

* The same ideology insists that all economic activities be subject to free and undistorted competition, to use the phrase which Nicholas Sarkozy (much to the annoyance of Gordon Brown) deliberately had excluded from the Treaty of Lisbon.

This enforcement of obligatory profitability and competitiveness throughout practically the entire economy has led to the present obsession with cost-reduction and with enhancement of labour productivity. Consequently, employment has to be trimmed everywhere, except where production is increasing.

Limits on production

However, it is becoming clear that, for ecological and climatic reasons, we can no longer allow ourselves to go on endlessly increasing our production of physical goods. It follows that the maintenance of employment in physical production is no longer possible under the current economic régime.

How then can we get out of this impasse?

If worldwide production of physical goods needs to grow more slowly, and eventually to stop growing, and if labour productivity continues to rise, then this production will inevitably employ fewer and fewer people. Thus, the rest of us will have to find work in services which consume few physical resources. We shall not be able to buy more and more cars or clothes, but we should still be able to increase our spending on telephone and computer services, on insurance, medical and paramedical services, courses in languages, music, gym...

However, most services are also faced with the competitive need to increase their productivity. Try to make personal contact with your insurer or internet service provider, and you will very quickly see the problem. The employees available to answer your queries are precious few; the pursuit of productivity is getting rid of them. So it appears that it will be very difficult for services to compensate, let alone exceed, the decline in employment in the physical production sectors.

The Robinson solution

However, there remains Mrs Robinson's solution. Some external menace could compel us to undertake major unavoidable expenditures, which would mop up unemployment and ensure a long period of full employment. 

We do indeed face such a menace. Today the main threat is not military but meteorological; the danger that a runaway acceleration of global warming could bring catastrophic consequences. We are in a vicious circle where more warming leads to still faster warming, to the point where climatic conditions risk becoming intolerable, perhaps even before the end of this century.

Recent scientific research

Thus, let us hear the Indian engineer Rajendra Pachauri, winner of a Nobel peace prize in 2007, president of the Intergovernmental Panel on Climate Change:

To contain the rise in temperatures below 2.0 to 2.4 degrees Centigrade, which according to our studies is the limit to avoid putting ourselves in grave danger, we have just seven years to reverse the global curve of greenhouse gas emissions. (1)

According to a study (2) published in 2008 in the journal Climatic Change, to stabilise the atmospheric level of CO2  at 450 parts per million (ppm), that is 0.045%, we need to start at once to reduce global emissions at the rate of 1.25% to 2% per annum. Were we to delay the reduction by ten years, then to achieve the same result we would have to reduce by more than 3% per annum, which would be extremely difficult.

Again, we may note the warnings given by Nicholas Stern, professor at the London School of Economics and former vice-president of the World Bank. In 2006 he published a major study, commissioned by the British government, the Stern Review of the Economics of Climate Change. There, he recommends stabilisation of the atmospheric level of CO2 below 500 ppm.

More recently, in his book Global Deal (PublicAffairs, New York, 2009), Stern recognises that atmospheric deterioration is proceeding faster than he thought in 2006; he believes therefore that we must aim to stabilise at no more than 450 ppm, compared with the present (still rising) level of 390 ppm. (4) Yet other experts argue that we need to aim for 350 ppm, which is still well above the pre-industrial level of around 275 ppm. Stern has estimated the cost of stabilising at 450ppm: annual global outlays between 1% and 2% of "world GDP", ie total worldwide revenues. One cannot reasonably expect the poorest countries to spend at such a rate, therefore the rich countries need to spend more heavily. 

Stern himself, like Pachauri, favours a long-term target of 350 ppm (5); he has limited his latest recommendation to 450 ppm, because he feels that a more demanding target seems for the moment politically impossible.   

A great and urgent need for investment

So it appears absolutely necessary that, during the coming years and decades, we make the investments needed to reduce dramatically our consumption of hydrocarbon fuels. We need to contemplate annual outlays reaching several percentage points of GDP in the developed countries. 

Given that the cost of not doing this would be catastrophe, the normal constraint of market profitability is not relevant here. In effect, we are at war. The return on the costs of this war will be the survival, which is beyond price, of our civilisation. We have to invest, not for a luxuriant financial return, but for indispensable concrete results.

These investments, not being generally profitable in the normal sense of the word, cannot be left to the free market alone, that is, exclusively to the voluntary decisions of private-sector investors. They will have to be made either by governments, or by businesses and individuals acting under incentives or obligations imposed by governments. Thus, for example, it is profitable for French individuals to set up private generators powered by the sun or the wind; but this scheme only works because Electricité de France, the state-controlled supplier, buys 'home-made' electricity at specially favourable prices.

Keynes's return

Thus, we are looking at a move back towards the Keynesianism of the years 1935 - 1975, or something like it, with the abandonment, at least in part, of the theories and practices of the age of economic libertarianism (roughly 1975 - 2008). At a reinstatement of the dirigisme damned by the free-market economists who have been dominant till recently. In other words, at an admission that many of our economic policies have, for several decades, been fundamentally wrong.

However, we have the real hope that this urgent, but also long-term, programme will restore to us better levels of employment and more stable economies. What a splendid result, even without counting our escape from climatic disaster!

It is a pity, is it not, that we need the threat of catastrophe to force us to pursue humane and practical economic policies. But there we are, human nature is like that! In vain do libertarians insist that negative freedom is the best way, with its absence of disciplines and constraints. It is rare that, without some compulsive constraints, we are willing to behave reasonably.


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Références

1        See Le Monde, 8 July 2008        

2      Bryan K Mignone et al., Atmospheric Stabilization and the timing of carbon mitigation, in Climatic Change (Springer Science & Business Media, 2008), page 262; see link

3       Stern Review of the Economics of Climate Change (HM Treasury, Londres, 2006), page vii; see link

4        Frank Ackerman,  Nature Report, 9 April 2009; see link    

5      The energy collective, September 2009, see link