KEYNES IN THE LONG RUN ©STEPHEN A MARGLIN
A Keynesian “long run” will seem to some an oxymoron. Keynes himself is often cited (“in the long run we are all dead”) in support of the contention that his concerns were short run in nature. More important, a long-standing mainstream consensus hands over the short run to Keynes—sand in the wheels—but reserves the long run to neoclassical orthodoxy. The vertical long run aggregate supply schedule, in contrast with the upward sloping short run schedule, is the formal reflection of this partition of economic time.
The most important consequence is that, in the long run, full employment obtains—that is, after all, the precondition of a vertical AS schedule—so that little of the Keynesian critique remains, either from a theoretical or a policy perspective. In particular, Keynesian views on monetary and fiscal policy, based as they are on the possibility of too little (or, for that matter, too much) private aggregate demand, become irrelevant.
I shall not spend much time assessing Keynes’s own intent. For what it is worth, my opinion is that Keynes always intended something more than a novel explanation of sand in the wheels which temporarily impede the invisible hand’s ability to clear the labor market. And certainly his writings as an adviser to the British Treasury during World War II indicated a concern for the longer period and particularly for the role of aggregate demand in the longer period. But it is true that The General Theory is vague about the time dimension of the analysis, and his wartime writings, with the exception of his 1940 essay on how to address the “inflationary gap” created by military spending, do not make explicit use of the models laid out in The General Theory.
My intention here is to build a long run model on the basis of what I regard as the fundamental Keynesian insight, the absence of an efficacious mechanism by which the labor market adjusts to an equilibrium without unemployment and, in consequence, a role for demand in determining not only the composition of output but also its level. In the process I will bring in insights from other perspectives, particularly the Marxian notion of a “reserve army” of workers available for mobilization by capitalists. The resulting hybrid may or may not be sufficiently Keynesian to satisfy all tastes, but I will readily confess that I am more concerned with whether this way of looking at the long run provides some insight into the workings of a capitalist economy than with the specifics of its lineage.
Unlimited Supplies of Labor: The Road Not Taken
The assumption on labor supply connects my model to Roy Harrod’s pioneering attempt to apply Keynes’s conceptual framework to a growing economy, but in an odd way. Harrod considers “the proposition that the supply of labour is infinitely elastic at a certain real wage” (1948, p 19), but taking the “certain real wage” to be literally a subsistence wage, discards this hypothesis as irrelevant to the rich countries. In the rich countries, he argues, it is more appropriate to take the labor supply as exogenously given. Harrod’s choice has become the standard assumption about labor supply in growth models. In this respect, the present model is the road not taken.
The idea of an unlimited supply of labor is counterintuitive because we normally focus on the supply of labor to an entire economy coterminous with a society closed to immigration. In such a setting it is natural to think of labor supply in terms of population and population as given by the net reproduction rate. But this is hardly the only possible focus. In fact, with the exception of Japan, labor supplies in the rich countries have been augmented by immigration for the better part of a century, and in the US from the first permanent settlement in 1609. Innumerable battalions of the reserve army live outside the country until they are mobilized as wage labor.
Moreover, there is little reason to focus on the entire economy. Indeed it is tendentious to argue that any single model can explain all economic behavior in all settings; and in practice growth models implicitly assume that production is guided by profit maximization and that labor is a commodity, wage labor. In short, the focus of our inquiry, like the focus of virtually all growth economics, is the behavior of a capitalist economy embedded in a larger economic formation, which includes other sectors that follow a logic different from the logic of capitalism.
In particular we can distinguish a “family enterprise” sector in which production for the market dominates but most if not all of the labor is supplied by family members who are not paid wages. The family farm is the most important case in point. We can also distinguish a “household” sector in which not only is wage labor minimal but production is for the immediate satisfaction of wants and needs, unmediated by the market. Food is prepared, clothes washed, children driven to football or piano practice in the household sector—mostly by women.
Both these sectors have historically been important constituents of the internal reserve army. At the beginning of the last century the agricultural sector, mostly family farms, contained some 40 percent of the labor force in the US. By midcentury, the percentage had fallen to 10 percent, and by 1970 to less than 5 percent. It is currently less than 2 percent. As late as 1960 some 30 percent of the labor force in Japan and Italy and close to 25 percent of the French labor force were engaged in agriculture; in none of these countries is the figure above 5 percent today. (“Comparative Civilian Labor Force Statistics, 10 Countries, 1960-2004,” Bureau of Labor Statistics, US Department of Labor, 2005, p 30).
The household sector similarly provided a steady stream of recruits to the capitalist sector; women didn’t necessarily leave the kitchen altogether to join the ranks of the paid labor force; most added paid labor to their domestic duties. Female “participation rates,” so-called, have risen in the US from 35 percent in 1950 to 60 percent today.
These internal recruits have complemented the external reserve army, the immigrant population that has served as a reliable if politically contentious source of labor, especially for those jobs that native populations have been reluctant to fill at going rates of pay. The time pattern of immigration into the United States is especially revealing. After an abrupt fall in the wake of World War I, a decline which lasted for almost half a century, immigration picked up around 1970, just as domestic agriculture dried up as a source of labor—see Figure 1 below.
2 Sources of the Reserve Army in 20th Century America 70 60 Agricultural Employment as 50 Percentage of US Labor 40 Force 30 Foreign Born as Percentage
Percentage of US Population 20
10 Female Participation as 0 Percentage of Female US Population
Figure 1
Figure 2 shows the impact of the reserve army on the paid labor force in the US. Whereas the native born population grew at an annual rate of 1.3 percent over the 20th century, paid private employment outside agriculture was able to grow half again as fast, at a rate of more than 2 percent. Native Born Population and Private Non-Farm Employment ('000) 140000 300000 120000 250000 100000 200000 80000 Non-Farm Private Employment 150000 60000 (Left Axis) 100000 40000 Native Born Population (Right 20000 50000 Axis) 0 0
Figure 2
The important point is that the reserve army is not a fixed body of men and women, but a source of labor that is constituted and reconstituted in terms of the needs of the capitalist economy: as one source of labor, domestic agriculture, dried up, other spigots were opened. In practical terms, labor supply is unlimited, not only in the poor countries, but in the rich countries as well.
What then determines the wage? I think the classical economists—Smith, Ricardo, and Marx— were on the right track in emphasizing subsistence as the determinant of wages though they have been misunderstood by later generations who took subsistence to mean a minimal
3 standard of living that would ensure the reproduction of the labor force. (This was Harrod’s understanding of the term and for him a reason to reject the whole idea of an unlimited labor supply.) Neither Smith nor Ricardo nor Marx conceived of subsistence solely in biological terms. For all three, there were historical, cultural, and institutional dimensions that entered the determination of real wages. Marx, not surprisingly, emphasized class power, but this emphasis need not preclude a recognition that class power is situated in a matrix of culture and history which makes workers more powerful to the extent that public opinion is favorable to their claims.
None of this is to say that productivity is irrelevant to wage determination. Productivity determines the size of the pie that the contending parties struggle over. Nineteenth century British output had to be of a certain size before workers could obtain a share large enough to permit them to buy refined white bread rather than the coarse grains to which the lower classes had accommodated themselves in earlier times; twentieth century American production had to be of a certain size before workers could successfully struggle for a share large enough to include an automobile as part of the wage packet. But a productive technology did not guarantee that either the nineteenth-century British pie or the twentieth-century American pie would be sliced in a way that would allow workers to achieve their aims. For this to happen, certain community standards were essential.
These community standards underlie, for example, the very idea of a legal minimum wage—and the erosion of community underlies the erosion of the minimum wage in the US over the last three decades. Nor is it just the minimum that is at issue. The last thirty years have also witnessed an ever-widening gap between workers in the middle of the wage distribution and the richest 1 percent of the income distribution, which includes both top managers and large stockholders. There is no longer even the pretense that we are all in it together, that the United States is a community when it comes to matters economic.
To summarize, the long run theory of labor supply that I am proposing reverses the mainstream relationship between the supply of labor and the real wage. Competitive profit maximization on the part of producers ensures that the marginal productivity of labor is equal to the real wage, even if—contrary to mainstream theory—the wage is not determined by the marginal productivity of labor. Instead of an exogenous labor supply and an endogenous real wage, as the mainstream would have it, I here posit an endogenous labor supply and an exogenous real wage. To avoid confusion, I have, as noted, labeled this wage not as a subsistence wage but as a conventional wage, conventional referring to both the customary and the contractual elements that enter into wage determination.
Observe that unemployment loses its salience as a measure of slack capacity in this conception of the long run. The assumption is that, in contrast with the short run, the labor force will expand (or contract) as necessary, though contraction may present political and social as well as economic difficulties. For this reason the question of the shape of the Phillips curve, specifically, whether or not it is vertical in the long run, becomes meaningless once we drop the idea of an exogenously given labor force. Capacity utilization becomes the variable of choice for
4 measuring economic activity in this context,1 but it should be noted that in what follows capacity utilization is defined as the ratio of actual to potential GDP, with potential GDP defined solely in terms of the limits imposed by the existing capital stock, that is, as the limit of output as employment increases without bound.2
The Model
Figure 3 relates the real price level (P/W) to the rate of capacity utilization (z). There are three relationships, an aggregate demand (AD) schedule, assumed, for the moment to be given independently of the real price level; a goods supply (GS) schedule, given by profit maximization on the part of perfectly competitive producers; and a labor supply (LS) schedule given by the assumption that labor is available in unlimited supply at a real price level (P/W)*, the inverse of the conventional wage.
The Basic Model
P W
Supply of goods 5 4
3 * Supply of labor P 2 W Aggregate demand 1 0
0 z0 1 z
Figure 3
1 Capacity utilization is not the possible only measure of economic activity. Given the propensity to consume, there is a monotonic relationship between investment and capacity utilization, and the rate of investment maps monotonically onto the rate of growth, so we could equally well measure the level of economic activity by the rate of growth: the generalized Phillips effect then would be reflected in a positive relationship between the rate of growth and the rate of inflation.
2 For capacity utilization defined this way to range from 0 to 1, it is necessary to assume that the limiting elasticity of substitution between capital and labor is less than unity.
5 The model is, like the models of previous chapters, overdetermined. Any two of the schedules are sufficient to determine capacity utilization (z) and the real price (P/W). All three together make the usual concept of equilibrium quite irrelevant. As with the models of the short run, we can make sense of the present diagram only by examining the dynamics of adjustment.
As before, we have a choice. A “Marshallian” dynamics makes the price level respond to AD. If, at any given moment, output exceeds expenditure, which is to say that the economy is to the right of the AD schedule, then the price level will fall. If expenditure exceeds output, the price level will rise. A similar logic applies to the (money) wage rate: if, at a given moment of time, the real wage rate falls short of the conventional wage, workers will put upward pressure on money wage rates. When the real wage is greater than the conventional wage, employers will be able to lower money wages. This is to say that if the real price level (P/W) exceeds (P/W)*, money wages rise, and when (P/W) falls short of (P/W)*, money wages will fall.
In consequence there is a locus, indicated in Figure 4 by the green “constant real price” schedule, on which money prices and money wages are changing at the same rate, with the result that the real price level (P/W) remains stationary. The exact position of this schedule depends on the relative speed of price and wage changes: the more rapidly wages change relative to the rate of price changes, the closer the CRP schedule lies to the labor-supply schedule.
Constant Real Price Level
P W P const Supply of goods W 5 4 E 3 * Supply of labor P 2 W Aggregate demand 1 0
0 z0 1 z
Figure 4
Producers are assumed to be content with the level of capacity utilization if they are on the GS schedule; this is to say that the GS schedule is a stationary locus of z. (To the right of this schedule producers contract production, to the left they expand.)
Equilibrium is defined by the intersection of the two stationary loci, for where these schedules intersect there is no endogenous mechanism for either the real price level or the level of
6 capacity utilization to change. At the equilibrium E in Figure 4 both prices and money wages rise in equilibrium: expenditure always runs ahead of output, driving up prices, and the equilibrium real wage is below the conventional wage, which drives up money wages.
Observe that the relationship between equilibrium expenditure and income is the opposite of the short-period depression scenario analyzed in previous chapters. In the depression scenario, prices and wages fall at equilibrium and, with Marshallian dynamics, output exceeds expenditure. The result is that inventories pile up on producers’ shelves, but since unwanted inventories form a fixed proportion of the total capital stock, it is plausible for this accumulation to continue in equilibrium. Here we need a different kind of story, one that makes plausible a permanent excess of expenditure over income.
The simplest story is one in which we assume that the expenditure which drives demand is desired expenditure, and that actual expenditure is the minimum of desired expenditure and actual output. If desired expenditure exceeds output, the difference is never actualized. (This is Edmond Malinvaud’s “short side” rule, as formulated in 1977 and 1980). In the present model, without a government or a foreign trade sector, this amounts to assuming that actual investment is the minimum of desired saving and desired investment. In the present case, desired investment exceeds desired saving, and some investment plans are frustrated. Assume these investors rely on lines of credit which in the event are not drawn upon, with the result that whereas desired expenditure constantly exceeds output—this is what drives up prices— actual expenditure just equals actual output.3
The comparative statics of displacing one or another of the underlying schedules is revealing. If the AD schedule is replaced by the dashed schedule because one or another component of spending increases, the consequence is to displace the CRP schedule upwards, as indicated in Figure 5.
3 This simple story has the analytic advantage of making it unnecessary to account for expenditure in excess of output. In a discrete period model, it would be relatively easy to assume that the rate of inflation is determined by the change in prices necessary to absorb the excess purchasing power if the value of output is to equal desired expenditure. This was the assumption I deployed in what I thought was the original prototype model of an inflationary equilibrium (Marglin 1984, ch 20). I recently discovered that Tjalling Koopmans had anticipated my argument four decades earlier in his a ttempt to formalize Keynes’s argument in How to Pay for the War (Koopmans, 1942, “The Dynamics of Inflation,” Review of Economics and Statistics 24:53-65). The assumption that prices increase to absorb excess purchasing power has no simple analogy in a continuous time model.
7 An Aggregate Demand Shock
P W P const Supply of goods W 5 4 E’ E 3 * Supply of labor P 2 W Aggregate demand 1 0
0 z0 1 z
Figure 5
At the new equilibrium, capacity utilization is higher, the real wage is lower, and the rate of inflation higher. We may call this a generalized Phillips effect—Phillips effect because of the positive relationship between the level of economic activity and the rate of inflation, generalized because the index of economic activity is not the level of unemployment (which it has been noted does not mean much of anything in a model in which the labor supply is endogenous) but the level of capacity utilization.
In contrast with a demand shock, a supply shock, either a displacement of the GS schedule or a displacement of the LS schedule, leads to an anti-Phillips effect: a negative relationship between the level of economic activity and the rate of inflation. In Figure 6 the GS schedule is displaced upwards because, say, energy becomes more expensive. This displacement produces a new equilibrium with higher inflation but lower economic activity.
8 A Shock to the GS Schedule
P W P const Supply of goods W 5 4 3 * Supply of labor P 2 W Aggregate demand 1 0
0 z0 1 z
Figure 6
The same thing happens in Figure 7, in which it is assumed that the conventional wage increases, which shifts the LS schedule downwards. The result is once again to depress economic activity while increasing inflation.
An Increase in the Conventional Wage
P W P const Supply of goods W 5 4 3 * Supply of labor P 2 W Aggregate demand 1 0
0 z0 1 z
Figure 7
These results are of course sharply at odds with the mainstream consensus. In the mainstream view, the classical dichotomy insures that full employment of available resources obtains in the long run, so that aggregate demand is irrelevant; the goods-supply schedule is fixed once and for all; and a conventional wage, much less an autonomous shift in this wage, is impossible. In
9 the mainstream view the level of economic activity is determined by real elements of the economy and is independent of the rate of inflation.
The data for the last 70 years show episodes in which there have been both strong (generalized) Phillips Curve results and strong anti-Phillips results. As Figure 8 shows, the demand driven increase in output as the US mobilized for war in the 1940s was accompanied by strong inflationary pressure (with a lag) both before the US actually entered the war and then again once price controls imposed between 1942 and 1945 were lifted.
The twin oil shocks of the 1970s produced the anti-Phillips result of a spike in the price level accompanied by a reduction in the rate of growth from over 40% per decade to half that rate by the early ‘80s—though prices had already started to rise and growth rates had already begun to decline in the late ‘60s throughout Western Europe, Japan and the US for reasons that had more to do with the behavior of real wages and productivity growth than with energy prices (Marglin and Schor [eds], 1990, The Golden Age of Capitalism, Oxford: Clarendon Press).
Changes in Output and Prices
150
100
GDP 50 Prices
0 OVer Previous Ten Years Previous OVer
1935 1955 1975 1995 Change in Output and in Level Output Change Price -50
Figure 8
The data also suggest an explanation for why the relatively strong growth performance of the US economy over the last two decades of the 20th century did not trigger inflation: in addition to the positive supply shock in the form of falling energy costs, the growth rate of real wages fell relative to productivity growth. The data in Figure 9 are dramatic: whereas the first half of the postwar period saw real wages and productivity move almost in lockstep in the US, the second half of the period, from roughly 1977 to the present saw productivity growth outstrip real wages by a considerable margin, so much so that by the end of the period, the growth in productivity was double the growth in real wages.
10 Real Wages and Productivity 200 180 160 140 120 Output per Man-Hour 100 (1977 = 100) 80 Real Wage (1977 = 100) 60 40 20 0 1947 1957 1967 1977 1987 1997 2007
Figure 9
Many theories have been put forward to explain this phenomenon, but the present approach suggests a new suspect: a falling conventional wage. A falling conventional wage would have mitigated the upward pressure on real wages caused by the expansion of output associated with the positive supply shock of falling energy prices.
To be sure, this explanation can only be tentative. For one thing any reduction in the conventional wage would have been expressed as a fall in the share of wages rather than the absolute wage level, a difference that is elided in the present model because it abstracts from technological progress and hence all productivity gains except those associated with a higher capital:labor ratio.4
4 I need help reconciling the BLS data on which Figure 9 is based with the Department of Commerce NIPA data on the division of corporate product, Table 1.13 in NIPA, which show an upward trend in labor’s share from 1948 until the late ‘70s, and then virtual constancy, or perhaps a very modest downward trend, as reflected in the figure below.
Wages as Share of Corporate Product (NIPA data) 80 75 70 65 60 1948 1958 1968 1978 1988 1998 2008
11
Second, the conventional wage is not directly observable in this model. At best we can identify the GS schedule and the CRP schedule, but not the underlying components of the CRP schedule, namely the AD and LS schedules. The identification problem stems not only from the underlying static characterization of the model in terms of AD, GS, and LS schedules, but also from the assumption about dynamics. If we change the dynamics, we obtain a different equilibrium and different answers to questions about the impact of demand and supply shocks.
An Alternative Dynamics
To see this, suppose that, instead of to Marshall we look to Walras, or rather to the particular characterization of Walras that John Hicks opposes to Marshallian “flexprice” dynamics in his 1974 exposition of Keynes. The Walrasian “fixprice” model posits dynamics more like the dynamics originally posited by Joan Robinson in her exposition of The General Theory three years avant la lettre (Robinson, 1933, “The Theory of Money and the Analysis of Output,” Review of Economic Studies, 1:22-26), and indeed more like the dynamics that was used to explain Keynes when I was a student and which I deploy in my own teaching. The key difference between fixprice dynamics and flexprice dynamics is whether an imbalance between (desired) expenditure and output directly changes output through its effect on inventories and order books, or indirectly through its effect on prices.
I placed quotation marks around flexprice and fixprice because prices change in both models, albeit by different mechanisms. In the fixprice model, rather than because of the pressure of expenditure on output, prices change because of the actions producers take when they find themselves off their supply curves. If producers find themselves to the left and above the GS schedule, they lower their prices in order to sell more goods and align price with marginal cost; if to the right/below the GS schedule, producers increase prices to bring price into line with marginal cost.
If we continue to assume in the fixprice model that money wage dynamics are driven by how actual real wages relate to the conventional wage, then the CRP schedule lies somewhere between the GS and LS schedules, its exact position determined by the relative speeds of adjustment of money prices and wages. It is closer to the GS schedule to the degree that prices adjust faster than wages, closer to the LS schedule to the degree that wages adjust faster. Figure 10 shows a fixprice CRP schedule.
12 The Model With Fixprice Dynamics
P W
Supply of goods 5 P const 4 W
3 * Supply of labor P 2 W Aggregate demand 1 0
0 z0 1 z
Figure 10
Notwithstanding the differences between the two models with respect to the determination of equilibrium, demand shocks qualitatively affect equilibrium in the fixprice model in the same way as in the earlier flexprice model, depicted in Figure 5, at least as long as the AD schedule is totally inelastic. Figure 11 shows the displacement of equilibrium by an outward shift in the AD schedule.
A Demand Shock
P W
Supply of goods 5 P const 4 W
3 * Supply of labor P 2 W Aggregate demand 1 0
0 z0 1 z
Figure 11
13
The consequence is an increase in economic activity accompanied by higher inflation and an increase in the real price level (a fall in real wages). By contrast, since the level of economic activity is determined solely by aggregate demand, supply shocks have no impact on the level of activity. Both kinds of supply shock, a shift in the GS schedule and a shift in the LS schedule, only change the rate of inflation and the real price level.
There is less in these results than appears, for the similarity in the consequences of two very different kinds of supply shock is in part due to the assumption of a perfectly inelastic AD schedule. If we assume instead a downward sloping AD schedule, as in Figure 12, the two kinds of supply shocks lead to different results.
Two Kinds of Supply Shocks With Fixprice Dynamics
P W
Supply of goods 5 5 Supply of goods P 4 const W 4
3 * 3 P Supply of labor Supply of labor W 2 2 Aggregate demand 1 Aggregate demand 1
0 0 0 z 1 0 z 0 z0 1 z
(a) (b)
Figure 12
In panel (a) the GS schedule shifts because, say, energy becomes more expensive. The result is a decline in activity as the economy moves up the AD schedule in response to higher energy costs. In panel (b) the LS schedule shifts downward as the conventional wage increases. With higher real wages, aggregate demand is assumed to increase, either because investment is more attractive (perhaps because it becomes more profitable to substitute capital for labor) or because workers spend a larger fraction of their incomes on domestically produced goods. (Workers may have lower propensities to import or lower propensities to save than others.)5
5 Observe that the textbook arguments for a downward sloping AD schedule—Keynes (interest rate) effects, terms-of-trade effects, and Pigou (wealth) effects—assume that the vertical axis measures the absolute price level rather than the price level relative to the wage rate. Accordingly, these arguments cannot be deployed to argue for a downward sloping AD schedule in the present context.
14 Evidently there is no compelling logic as to why the AD schedule should slope downward. Indeed, if we look at the balance of investment and saving, a higher real price level could be expected to stimulate greater investment demand since a higher real price implies higher profit margins and hence makes investment which aims at increasing productive capacity more attractive. In case the AD schedule slopes upward, a negative shock to the GS schedule can lead to an expansion of equilibrium output.6 An increase in the conventional wage can lead to a reduction of equilibrium output. The diagrams are given in Figure 13.
Two Kinds of Supply Shocks With Fixprice Dynamics: The Case of an Upward Sloping AD Schedule P W
Supply of goods 5 5 Supply of goods P 4 const W 4
3 * 3 P Supply of labor Supply of labor W 2 2 Aggregate demand 1 Aggregate demand 1
0 0 0 z 1 0 z 0 z0 1 z
(a) (b)
Figure 13
Wage and Profit Led Growth
The possibility that higher wages will reduce the level of economic activity is perhaps surprising. Indeed, before Amit Bhaduri and I (Marglin and Bhaduri, in Marglin and Schor [eds], 1990) explored the idea of “profit led growth” (as opposed to “wage led growth), the view associated with economists who, like Bob Rowthorn, regarded the real wage rate as an independent variable (Rowthorn 1982) was that, in a closed economy, a redistribution of income in favor of workers would necessarily stimulate demand and hence the level of economic activity. But this is not a logical implication of assuming the real wage is an independent variable; this assumption is logically consistent with the level of the real wage influencing economic activity negatively as well as positively: the difference between profit led growth and wage led growth lies in the slope of the AD schedule.
The slope of the AD schedule depends on the responsiveness of saving and investment to the underlying state variables, capacity utilization and the real price of goods. In earlier work Amit
6 But see the qualification below.
15 Bhaduri and I (1990) characterized responsiveness in terms of the effects of changing capacity utilization and the profit share, which are perhaps more natural dimensions in which to frame investment and saving. This earlier work expanded Robinson’s formulation of investment demand as a positive function of the anticipated rate of profit, which in turn depends positively on today’s profit rate: the higher today’s profit rate, the higher is the rate of investment (Robinson 1956, 1962). In the long run, in a variant on the theme of rational expectations, anticipations are realized and though Robinson might turn over in her grave at the characterization of this as “equilibrium,” the shoe fits.
The point of breaking down the rate of profit into its constituent elements, profit share and capacity utilization, is to avoid the restriction implicit in Robinson’s formuation that these two elements influence investment demand symmetrically. When business confidence is high, and finding buyers for output is not considered problematic, investment demand may be more sensitive to the share of profits. When confidence is low and buyers harder to find, investment demand may be more sensitive to the level of capacity utilization. The first corresponds to the upward sloping AD schedule in Figure 13, the second, to the more conventional downward sloping AD schedule in Figure 12. Which of these regimes obtains determines the effect of changes in the conventional wage on growth. With a downward sloping AD schedule, the rate of capacity utilization can be increased, and along with it, the rate of growth, by increasing the conventional wage. The extra spending by workers more than makes up for the negative effects on investment. With an upward sloping AD schedule, the loss of investment demand is not made good by the extra spending out of higher wages; capacity utilization and growth suffer.
The simplest way of distinguishing the two regimes formally is by how we characterize the responsiveness of investment and saving to the profit share, holding the rate of capacity utilization constant. The original diagram comes from Joan Robinson (1962, p 48), reproduced below as Figure 14. The vertical axis measures the rate of profit (r), defined as the ratio of total profits (Π) to the value of the capital stock (pK). The horizontal axis measures the rate of growth of the capital stock (g), in terms of the ratio of real saving to the real capital stock (S/K) and the ratio of investment to the real capital stock (I/K).
16 A Two-Way Relationship Between the Rate of Profit and the Growth of the Capital Stock
r Saving per Unit of Capital
Investment per Unit of Capital
g
Figure 14
Robinson does not, as has been observed, separate out the profit share and capacity utilization, but it is not much of a leap to interpret the diagram as taking capacity utilization as given, and measuring the responsiveness of investment and saving to the profit share. In the diagram investment is pictured as being less responsive than saving to marginal changes in the profit share. The usual justification is that this is a condition of stability, of adjustment actually leading to the equilibrium where the two schedules intersect. It is straightforward to show that in the present approach this assumption guarantees the AD schedule will be downward sloping, as in Figure 12, provided that a condition that Bhaduri and I characterized as Keynesian stability also holds. Keynesian stability requires that, holding the real price constant, investment is more responsive to changes in the profit share than to changes in capacity utilization. (In the present model, Keynesian stability plays the role of the assumption that guarantees stability of the multiplier process in the simplest textbook representation of The General Theory, namely, that investment is less sensitive at the margin to changes in income than is saving.)
The alternative to Robinson’s assumption of relatively unresponsive investment demand is shown in Figure 15. With a strong response of investment to changes in the profit share, the AD schedule becomes upward sloping (once again assuming Keynesian stability), as in Figure 13.
17 A Two-Way Relationship Between the Rate of Profit and the Growth of the Capital Stock
r
Investment per Unit of Capital
Saving per Unit of Capital
g
Figure 15
This possibility got short shrift not only from Robinson, but from her followers, like Don Harris (1978), John Roemer (1980), and myself (1984), for an obvious reason: within the context of a theory that makes no distinction between the constituents of the profit rate, the equilibrium in Figure 15 is unstable. But this is not the case in the present theory. Coupled with Keynesian stability, the equilibrium associated with fixprice dynamics in Figure 13 is stable provided the AD schedule is steeper than the CRP schedule.
It is in one way a strength of the theory that it is compatible with both wage-led and profit-led regimes. But this theoretical ambivalence must be frustrating for those whose focus is on the policy implications. Even if the theory itself tells us nothing about which regime is the more likely, it provides a framework in which to give formal content to a narrative which recent experience reinforces. The narrative is this: suppose we start with a recession, like the one we are presently living through. The general mood is one of doubt, or worse, about the future prospects of the economy. “Animal spirits” are on vacation and many fear that the optimism of a relatively recent past will never return. In terms of the present theoretical framework, the economy is in a situation in which investment is relatively unresponsive to changes in the profit share, with a downward sloping AD schedule. As the economy recovers and the excesses of the past are forgotten, as optimism returns, the downward-sloping AD schedule may morph into a positively sloped schedule; investment responds more positively to profits, and output and growth will be served by policies that favor profits over wages. But if history is any guide, at some point a profit-led regime will tip over into irrational exuberance, one bubble or another leading to an all-around collapse of the AD schedule, to recession (or worse) and a repeat of the cycle.
The vicissitudes of the AD schedule open up a line of policy intervention that, not surprisingly, has come back into fashion since the financial crash triggered by the fall of Lehman Brothers in
18 September, 2008: intervening in the distribution of income as a means of restarting a stalled economy. (Or for that matter, as a means of cooling down an overheated economy.) In recession conditions, where the AD schedule slopes downward, moving the economy down the AD schedule by increasing the conventional wage may provide macro stimulus as well as repairing the growing inequality that inevitably accompanies the pursuit of profit-led growth in the later stages of an economic boom. Robert Reich, Secretary of Labor in the Clinton Administration, has been a strong voice for redistributing income downwards as a means of stimulating aggregate demand. See Aftershock: The Next Economy and America's Future, New York: Random House, 2010.
Three comments are in order here. First, the intervention called for by Reich and others is not an alternative to interventions to move the AD schedule itself, but another element of the tool box of policy intervention—one which may become more attractive as the limits of stimulus, more political than economic, are reached. Second, as the very concepts of wage-led and profit- led growth are more relevant the more closed is an economy, so are the policy prescriptions that emerge from the present framework. Wage-led growth, in particular, is of little relevance to a very open economy in which international wage competiveness is a crucial determinant of demand. Finally, on the theoretical level, it is worth noting the distance travelled from Keynes’s own formulation of the macro economy in The General Theory. In Keynes’s framework, the real price and real wage, and thus the distribution of income between wages and profits, are not exogenous, but an outcome of the equilibrium determined. In this respect the present theory is closer to Michał Kalecki (1971) than to Keynes, for whom, if you will, the real wage is a thermometer rather than a thermostat.
Let me signal a difficulty with the focus on profit share and capacity utilization as determinants of investment demand. I have simply assumed, as if it were obviously true, that a higher profit share necessarily has a positive impact on investment demand. If the only investment that took place were investment to expand productive capacity, this supposition would likely be true. But there is a whole other category of investment for which the relationship between investment and profit share might well be negative. I have in mind, cost cutting, especially labor-cost cutting investment. It is reasonable to suppose that the attractiveness of investment to reduce labor inputs will vary directly with the real wage, and thus inversely with the real price of goods. And thus inversely with the profit share! How important this category of investment is, and how sensitive to the real price remains to be seen, but it must be considered as one factor which makes it more likely that the AD schedule will slope downwards, so that a higher conventional wage would be positive for output and growth.
Observe finally that in the present context the profit share is not independent of capacity utilization once the aggregate production function is specified. Given the production function, the profit share is determined jointly by the real price and capacity utilization, so that the profit share (and the profit rate) are not themselves exogenous variables. So, if the AD schedule depends on the profit share (or rate), as I have been assuming in the present section of this chapter, a shift in the production function will shift the AD schedule. Since shifts in the production function necessarily shift the GS schedule, these schedules are no longer independent of one another. So strictly speaking, the representation in Figures 12(a) and 13(a) of a shift in the GS schedule due to a change in production conditions is inaccurate. A shock to the GS schedule will necessarily be accompanied by a shock to the AD schedule. If, say, higher energy costs move the GS schedule upward and to the left, as in Figures 12(a) and 13(a), then
19 the same shock might be expected also to move the AD schedule to the left, by virtue of the impact on present profits and thus on the anticipated profitability of investment. This would simply accentuate the negative impact on economic activity of the shock to the GS schedule depicted in Figure 12(a), but it may also offset the favorable impact of a negative GS shock in Figure 13(a), where the AD schedule slopes upward rather than downward.
Taking stock, the main comparative statics results of the flexprice model survive into the fixprice model, with the exception of the argument that a decline in the conventional wage should be expected to stimulate economic activity and lower inflation. It is possible, in the fixprice as well as the flexprice versions of the theory, that a falling conventional wage (share) over the last 30 years bolstered growth while holding inflation in check—but the assumptions required to reach this result in the fixprice model are more stringent. In the fixprice model this result depends on the assumption that the AD schedule is upward sloping, an assumption for which a good case can be made, especially after the election of Ronald Reagan as President in 1980 ushered in an era of accommodating the agenda of big business, and even more so after Bill Clinton made it clear that this was a bipartisan agenda—but for all that an assumption, not to be confused with empirical fact.
Beyond the specific comparative statics of the two models, the general policy message is very different from the self-denying ordinance that emerges from the mainstream approach. The vertical aggregate supply schedule that dominates mainstream thinking implies that aggregate demand management is impossible in the long run. By contrast, the message of the present approach is one of trade-offs. Pressing on demand, whether by means of low interest rates and easily available credit or by means of fiscal deficits, will expand economic activity. So may intervening in the distribution of income to favor higher wages at the expense of profits.
What’s So Bad About Inflation?
What is the downside of government intervention to stimulate economic activity? In the present theory, higher levels of activity resulting from stimulating demand are always accompanied by higher prices. In recession this is hardly a downside, indeed the consequences of deflation can be even more catastrophic than the failure to make use of existing capacity. But what about the long run? What exactly are the costs of inflation. There is here a disconnect between the man and woman in the street and the economist. In the mid 1990s Robert Shilller documented the public fear and loathing of inflation in three countries: the US, which has dealt with moderate inflation over most of the post World War II period; Germany, where prices have been much more stable over this period, but memories of the disastrous hyperinflation of the early 1920s are supposed to haunt public and policymakers alike; and Brazil, which for much of the last half century has faced chronic inflation. Interviews with ordinary people revealed more similarities than differences among the three countries, as well as between two age cohorts, despite the great differences in their actual experience of inflation. Among many surprising results, perhaps the most surprising was the strong preference voiced by the Americans and Germans for relatively stable prices even at the cost of high unemployment. In these two countries both those born before 1940 and presumably more sensitive to the evils of high unemployment as well as high inflation, and those born after 1940, preferred a hypothetical combination of annual inflation at a 2 percent rate coupled with 9 percent unemployment over a combination of an inflation rate of 10 percent per month coupled with 3 percent
20 unemployment by margins ranging from 2:1 to 3:1. Only the Brazilians, with recent experience of high inflation, were more or less evenly split between the two options (Robert Shiller, “Why Do People Dislike Inflation?” in Christina Romer and David Romer (eds), Reducing Inflation: Motivation and Strategy, Chicago: University of Chicago Press, 1997, p 27).
In Shiller’s survey, the public was consistently at odds with economists over both the causes and consequences of inflation. Much of the difference between how non-economists and economists view inflation evidently lies in how the effects on real incomes are perceived. Economists tend, as Shiller shows, to conceptualize inflation as neutral between prices and wages, the second rising as rapidly as the first, so that it has no impact on the distribution of income. Non-economists believe that their real incomes are likely to suffer when inflation is high.
Who’s right? Greg Mankiw, in a perceptive comment on Shiller’s essay (Mankiw in Romer and Romer, pp 65-69) points out that supply shocks necessarily reduce the real income of some segment of the population; inflation is simply one way of absorbing the hit the economy takes. The real culprit is the supply shock, but to the extent the association between supply shocks and inflation holds, it is no wonder that the public associates price inflation with reductions in the real standard of living. In other words, it is reasonable to blame the messenger (inflation) for the message (the hit to real income) when the message is so frequently delivered by the same messenger.
Mankiw might have added that positive demand shocks can also reduce real incomes somewhere along the line, and demand shocks too can play out in terms of inflation. This is true whether the demand shock is the result of an expansion of the government’s claim on resources (German hyperinflation was the result of the inability of the Weimar Government to levy the taxes that would have been required to meet reparations obligations while maintaining price stability) or whether the demand shock is the result of expansion of private investment demand or, for that matter, consumption demand. The older term of art for the process by which the economy balances its books in accommodating a demand shock is “forced saving,” forced highlighting the contrast between ordinary, voluntary saving and the involuntary nature of the reduction in real consumption that accompanies the failure of (some) money incomes to keep pace with rising prices.
In The Treatise on Money Keynes made important use of the concept of forced saving by workers whose wages fail to keep pace with prices; it is the mechanism by which resources are diverted from consumption to investment when investment demand runs ahead of profits. (By the time of The General Theory, Keynes had dropped the assumption that the normal state of the economy was one of full employment, in which the mechanism of forced saving makes sense, in favor of the assumption that slack is the normal state, in which no forced saving is necessary to accommodate an expansion of investment.)
Keynes already hints at forced saving in his polemic against the Versailles Treaty, The Economic Consequences of the Peace: “Profiteers,” *quotation marks are Keynes’s+ are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who
21 has purchased for stock or owns property and plant inevitably makes profits (Keynes 1920, pp 236-237).
Keynes expands on the process of forced saving in the context of wartime government finance in a lecture delivered at about the time he was putting the finishing touches on The Treatise. Keynes explains how this mechanism worked to fuel inflation during World War I, when, as a middle level adviser to the British Treasury, he had had a ringside seat: When a government orders munitions of war at a rate faster than that of current savings as supplemented by taxation—the inevitable effect of such measures must be to cause prices to rise faster than wages. The government secures purchasing power for itself at the expense of the consumer, who is constantly finding that the real value of his income is less than he had supposed…
The transference… puts some resources directly into the hands of the government. But to a very great extent the gains accrue in the first instance not to the government, but to business men, who, owing to this rise of price, are able to sell what they have produced at an unexpectedly high price which yields them a profit in excess of what they had anticipated. The selling price of their goods is rising all the time faster than their cost of production. That is to say, if this method of forced transference is adopted, the business men are made, in the first instance, the collectors—the agents, so to speak—for the government, to collect the purchasing poser which has been thus forcibly diverted from the consumers… If, having allowed them to receive this additional sum, you then proceed to withdraw it from them through taxes and in fact treat them as having been agents for the government, then this device is far and away the most efficient that exists for collecting purchasing power from the consumers and transferring it into the hands of the government (Lecture to the Royal United Service Institution, February 13, 1929, Donald Moggridge [ed.] The Collected Writings of John Maynard Keynes, v 19, Activities 1922-1929, The Return to Gold and Industrial Policy, Part II, Macmillan and Cambridge University Press 1981, pp 785-786).
Economists today may argue that inflation does not discriminate against wage workers, but most are not ready to let inflation off the hook. Obsessed as they are with efficiency, economists tend to emphasize the inefficiencies brought about by inflation. Two favorites are “shoeleather” and “menu” costs. The first harks back to an era when depositors had to visit the bank to withdraw money or shift funds from interest-bearing accounts to demand deposits; they would use up more shoeleather in having to make more trips to the bank, trips they must make to avoid holding currency or non-interest bearing checking accounts which are continually depreciating in value. Menu costs hark back to an era when menus had to be reset in hard type as prices rose. The faster prices are rising, the more frequently menus have to be printed. Whatever the inefficiencies caused to previous generations by higher costs in terms of shoeleather and menus, neither of these can be considered formidable costs in the age of the internet and the web.
Another inefficiency to which economists point—this time with more reason—is tax distortions, particularly in the treatment of capital gains. There is no question that people with significant capital gains suffer from inflation at the hands of the taxman. Efficiency (and fairness as well) would arguably be served if the real gain could be separated from the nominal gain, but in fact it is extremely difficult to do so: I know of no country in which the tax code effectively separates
22 out the real component of taxable gains and forgives the purely nominal component. In any case this is a rather parochial interest in terms of the percentage of taxpayers seriously affected, and it is hard to make a popular case against inflation on these grounds, especially if, as in the US Internal Revenue Code, there is a very generous exemption for the sale of one’s principal residence.
Although economists for the most part hold that inflation does not have much of an impact on the distribution of income, they charge that inflation redistributes wealth in an arbitrary fashion. Since inflation can never be entirely anticipated, debtors gain at the expense of creditors. But to argue, as two of the leading elementary texts do, that this redistribution is arbitrary is to stretch the facts or the definition of “arbitrary.”7 No doubt some creditors are people of modest means. But the plain fact is that the holdings of fixed-income securities—bonds and the like— are highly concentrated among the upper tiers of wealth holders, so that the redistribution is far from arbitrary. It may or may not be fair—Will Baumol and Alan Blinder may be, so to speak, on the money when they write, “The gainers do not earn their spoils, and the losers do not deserve their fate” (Economics, 11e, p 504). But the redistribution is as systematic as can be.
Keynes himself in his “pre-Keynesian” manifestation was partial to the view espoused by today’s leading textbooks. Inflation redistributes not only arbitrarily, but apocalyptically. In a famous passage from The Economic Consequences of the Peace he wrote Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not confiscated, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden
7 According to Greg Mankiw, whose conservative-leaning Principles of Economics is the leading textbook in terms of market share, “Unexpected inflation redistributes wealth among the population in a way that has nothing to do with either merit or need” (Principles of Economics, 4e, p 680). According to Will Baumol and Alan Blinder, whose Economics is the leading liberal (in the American sense) text, “Inflation redistributes income in an arbitrary way.” (Economics, 11e, p 504)
23 forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose (Keynes 1920, pp 235-236).
In the end I think Keynes was in touch with emotions that play a huge role in the public’s fear and loathing of inflation. Shiller reports a strong public identification with the idea that inflation undermines social cohesion and international prestige, and in the end can, if unchecked, lead to “economic and political chaos” (Shiller 1997, pp 37-46). But I can’t help but believe that the very real economic interest of the creditor class in keeping prices in check plays an important role in shaping political attitudes. Main Street may have its reasons, right or wrong, for disliking inflation, but central banks and finance ministers, I believe, are more attuned to Wall Street in emphasizing price stability as the holy grail of economic policy.
Past Performance is Not Necessarily Indicative…
The past, as prospectus writers know full well, is at best prologue. There is good reason to suppose that the future will be very different from the past in respect of labor supply. Last May, a collaboration between the Fetzer Institute and the UN Sustainable Development Division brought together some of the leading critical thinkers on sustainability, mostly economists. The purpose of the workshop was to sort out the various claims that have been made about the feasibility of economic growth in an age of diminishing sources of raw materials and increasingly clogged sinks for the detritus of growth.
Everyone agreed that decarbonization was a necessary condition for a sustainable future, but there was a wide divergence from that point on. At one extreme was the view that decarbonization is sufficient as well as necessary, which is to say that the problem of global warming can be addressed more or less à la Nicholas Stern (2006, 2010) with a modest investment in prevention, mitigation, and adaptation, and from there on it’s more or less business as usual. At the other extreme was the view that sinks other than the carbon sink were fast being clogged, so that solving the climate problem would only provide a brief reprieve. Moreover resource scarcity would make the growth regime of the past impossible to continue even if there were enough Drano to unclog all the sinks.
Despite the divergences in our views, we could find common ground in an argument for “degrowth” in the rich countries (the “global North”). Our common ground was based on three principles we took as axiomatic: 1. the overwhelming uncertainty about the feasibility of continued growth worldwide at rates that have obtained in the last 30 years; 2. the economic, political, and moral imperative of growth in poor countries (the “global South”); 3. the limited scope for further growth to contribute to well-being in the North.
Our conclusion was that the North should cede to the South what might turn out to be a very limited ecological space for further growth.8
8 I prepared a preliminary statement of our collective vision with input from many of the workshop participants, which was posted on the Sustainable Development Division website,
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The novelty of this position lies not so much in the idea of limits to growth and the limits of growth in contributing to well being. These are hardly new ideas. The novelty is rather that we based our conclusions not on sure knowledge that we are going to hell in a basket but instead on prudence in the light of the overwhelming uncertainties about the feasibility of growth coupled with a recognition of both the limited desirability of growth (enough should be enough) and the dictates of equity in a world in which growth might have to be rationed.
Planning for de-growth or “post-growth” in the North will require significant innovation in technologies, economic practice, and social institutions. In principle the growth of output could be maintained at historical rates while reducing the share of consumption in GDP, and transferring a rising level of income to the South through foreign investment and aid. An “optimal growth trajectory” which takes account of the distribution of consumption across regions as well as across time would point us in this direction.
This trajectory would leave the structure of production and employment in the North relatively intact. Specifically, growth based on a model of unlimited supplies of labor might continue for the foreseeable future if not indefinitely. However, Northern populations would receive no benefit from productivity growth, making this a politically difficult option.
The alternative for the North is to use a rising share of the gains from productivity growth to reduce hours of work or the fraction of lifetimes spent in the labor force. This will require a fundamentally different theory, one which would no longer be characterized by unlimited supplies of labor. Even though such a new theoretical conception remains to be fleshed out, important first steps have already been taken towards charting the contours of models of de- growth. (Peter Victor and Gideon Rosenbluth, “Managing Without Growth,” Ecological Economics: 61:492-504 (2007), and Victor, Managing Without Growth: Slower by Design and Not Disaster, Cheltenham: Elgar, 2008; see also Tim Jackson, Prosperity Without Growth: Economics for a Finite Planet, London: Earthscan, 2009).
Both shortening annual hours and shortening work lives present challenges. To be feasible, the shorter-hours path would require substantial innovation in the organization of the economy. Capitalism has built-in incentives to concentrate work into fewer hands rather than spread it throughout the available work force (Schor, 1992). Because a large fraction of labor costs are fixed rather than varying with the number of hours worked, firms typically find it more profitable to employ fewer workers for longer hours than to allow hours to fall with productivity growth. Unless countered by financial incentives and regulations, the incentive to lay off
http://www.un.org/esa/dsd/dsd_aofw_sdkp/sdkp_uncsd_workshop_0510. The other signers of the statement were (in alphabetical order) : Frank Ackerman, Lois Barber, Peter Brown, Robert Costanza, Paul Ekins, Marina Fischer-Kowalski, Maja Göpel, Tim Jackson, Ashok Khosla, Nebosja Nakicenovic, Paul Raskin, William Rees, Wolfgang Sachs, Juliet Schor, Gus Speth, Peter Victor, Ernst von Weiszäcker.
The remainder of this section cribs liberally from a subsequent version of the collective statement.
25 workers in response to productivity increases could lead to rising unemployment coexisting with a cadre of workers who continue consumption-oriented lives as if there were no limits to growth. Therefore, it will be necessary to re-structure the incentives facing firms in areas such as health coverage, payroll and other employment taxes, as well as to institute regulations that encourage reductions in working hours.
An alternative to reduced annual hours is to take productivity gains in the form of shortened work lives. This is less consequential for firms’ decisions about hours of work, but requires fundamental institutional changes in other dimensions. Around the world, public pension plans face actuarial shortfalls, and one frequently suggested remedy is to raise the retirement age. The solvency of planetary ecosystems points in the opposite direction. Greater reliance on ecological taxes could both contribute to funding pension liabilities and to reducing environmental impacts.
Not only the organization of work but also the organization of investment must be transformed. Investment must be redirected from capacity expansion to protecting and enhancing the ecosystem services on which genuine prosperity depends. To some extent this can be accomplished by modifying private incentives through taxes and subsidies. To some extent it will be necessary to override the profit motive altogether.
Changes in how work and investment are organized speak to the supply side of growth. Equally far-reaching changes will be required on the demand side: a slow or no-growth economy requires individuals to accept a new tradeoff of time for money. This can be done partly by supplanting private consumption with new public amenities and spaces that create non- commodified opportunities for leisure and self-development. A second substitution is to build community and other forms of human connection, thereby enriching people’s lives without enlarging ecological footprints. This shift will require new policies toward marketing and advertising, which are a major force for promoting consumerist values. Particularly for children, these are pernicious means of persuasion, which limit their mental and spiritual universes.
Ultimately it will also be necessary to develop non-consumerist ways of understanding and being in the world. These ways, which draw on a variety of traditions that have long opposed consumerism, will be strengthened by a retreat from market-driven growth, which inevitably inculcates values, beliefs, and ways of being that favor success in the market environment. An evolving balance between paid employment and other activities will also require strengthening educational systems to ensure that people have skills and tools to meet their needs inside and outside the market.
We need to rediscover relationships of respect and reciprocity with each other and the Earth. The logic of our situation suggests that some form of global polity may emerge in the coming decades—good or bad, beautiful or ugly. In one scenario we will descend into a latter day version of Hobbes’s war of all against all, powerful nations fighting for access both to the limited sources of materials and energy for growth and to the limited sinks into which to throw out the garbage that accompanies growth. In another we will go forward in appreciation of what unites us, building solidarity and equality, justice and compassion, quality of human life and ecological flourishing.
26 We have a choice between a blessing and a curse: either we live in harmony with each other and the planet, or we destroy each other and—perhaps—life on the planet. Let us choose life.
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