by Piet Coetzer

The failure of macro-economic theory

Are our financial practises reaching the end of the road?

Keynes, father of macroeconomic theory, predicted several shortfalls we experience today.
John Keynes.jpg

The world after the current global economic crisis “will neither look nor feel as it did in the lifetimes of those of us who grew up in the 1950s, 60s and 70s.” This is according to an internationally renowned economist. Ironically some 80 years ago, the man credited with much of modern macro-economic theory and practice, John Maynard Keynes, foresaw one of the major threats to the system.

Arguably the greatest threat to the free market capitalist model and the social stability that developed with it in the decades after the “Great Depression” of the early 1930s, has been the growing trend over the past 40 years of what has become known as “jobless growth”. 

In every up cycle of the economy, improved efficiency of capital utilisation causes the shedding of job opportunities. It mostly happens at the hand of technological advances, which are more cost effective than human labour. 

Ironically Keynes in his 1930 essay, Economic Possibilities for Our Grandchildren, wrote that “[w]e are being afflicted with a new disease of which some readers may not yet have heard the name but of which they will hear a great deal in the years to come – namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labor.” 

What Keynes could not foresee, was the extent to which this 'disease' would eat away at the fabric of society and to what extent the development of computer science and robotics after the 1970s would accelerate this trend. 

One of the side effects of this trend, especially over the last 40 years, was the disappearance of mid-level skilled human labour. And it is not only in the world of manufacturing that it has been happening. Just think of what sophisticated computer systems have done to the need for mid-level managers, clerks or even tellers at branch level in the banking sector. 

Another side effect has been the disappearance of mid-skilled, mid-wage positions and the polarisation of the workforce between high- and low-paid jobs. In an article in which she refers to the 'hollowing out' of the workforce, Catherine Rampell writes in the New York Times, “While a majority of jobs lost during the downturn were in the middle range of wages, a majority of those added during the recovery have been low paying, according to a new report from the National Employment Law Project.”

This phenomenon also greatly contributes to the growing levels of inequality in most modern societies, with the social stresses that come with it. 

And, as one report puts it, “Economic recovery is now treated as consistent with declining standards of living. Lowered expectations and acquiescence in long-term working-class hardship are now built into what we are told to regard as recovery.” 

As early as 2010, Peter S. Goodman, in an article in the New York Times, warned that the recovery following the 2009 recession would not bring sufficient jobs to absorb the record-setting ranks of the long-term unemployed.

In the same article he mentions the fact that, in the US alone, automation has helped manufacturers cut 5.6 million jobs since 2000 — the sort of jobs that once provided lower-skilled workers with middle-class pay cheques. 

One of the main reasons why the Keynes' economic model is no longer working for the majority of the members of society is that increasingly the majority of shareholders in big companies are institutional investors for whom the biggest and fastest profit is the only goal.

In the words of Allen Sinai, chief global economist at the research firm, Decision Economics, “American business is about maximising shareholder value. You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.”

There are, however, other paradoxes built into the present economic construct. While 'jobless growth' is pushing more and more people into lower living standards or even poverty, the system also needs their purchasing power as an important element for growth.

As the global economy is battling to come to grips with the 'Great Recession', which some commentators are already calling a depression, social unrest and protests about the price being paid by ordinary people to cope with the crisis, are becoming increasingly common.

Only last week, for example, Portugal experienced people marching through 40 cities in the largest protests since the 1974 Carnation Revolution that overthrew the Salazar regime.

In addition, indications are that the globe is heading for a repeat of the food price crisis, which in 2011 triggered the so-called Arab Spring. Both the US department of agriculture and sources in the United Kingdom predict increases of between 3% and 5% this year.

And, according to the British relief organisation, Oxfam, this is 'the new normal'. The organisation quotes former UN secretary-general Kofi Annan as saying: “Without action at the global level to address climate change, we will see farmers across Africa – and in many other parts of the world, including America – forced to leave their land. The result will be mass migration, growing food shortages, loss of social cohesion and even political instability.” 

If, when and how the present standard socio-economic model will be replaced by something different is by far not clear. What is clear is that the status quo has become unsustainable. 

A system cannot last in which financial sectors account for higher shares in what is regarded as the total gross domestic product (GDP) than manufacturing sectors, without adding any jobs as a means for ordinary people to put food on the table nor where share prices reflect interventions of central banks rather than real economy fundamentals.


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Issue 412


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