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Economic growth, stagnation, and poverty

February 11, 2011

While GDP is almost always proclaimed to be rising, the general population experiences stagnation or declining living standards and global poverty remains endemic.  How can this be?  What explains this contradiction?  Many attribute it to the weakness of workers which enables corporations and senior managements to capture disproportionate gains.  While this is certainly one of the central aspects of the problem, I think it misses another dynamic within the logic of the capitalist market – that being the fact that productivity growth almost inevitably requires an offsetting insecurity and stagnation.

Economic growth is essentially defined as productivity growth and economic theory treats it as perhaps the ultimate good.  Productivity growth is realized when we produce the same level of output with fewer workers or a higher output with the same number.  Since all markets eventually become saturated though, and there’s a limit to both human consumption needs and the planet’s absorption capacity, it’s a reasonable simplification to say that productivity growth under normal circumstances enables about the same production with less worker input.

Consumer goods are not created equal – there’s a hierarchy in importance.  There are goods that  are critical to human well being and there are goods that, while nice, are not so critical.  Food, adequate housing, and clothes are some of the most obvious and there are certainly many more.  There’s always demand for the critical goods but, as we will see, the logic of the capitalist market economy will not produce enough of them.  And this is so even if we assume an egalitarian structure in which there are no corporate profits or exorbitant CEO salaries.  It would be a problem even in a hypothetical worker managed market economy.

Assume an economy which is initially fully employed in producing critical goods and then achieves a sudden advance in productivity.  The same amount of critical goods can now be produced with fewer workers.  The now redundant workers are no longer employed in the critical goods industry (CGI) and must desperately attempt to produce something else in order to meet their needs.  This isn’t easy though since what they’re now trying to sell isn’t critical.  In order to maintain previous standards of living, they must create something that can be exchanged on a ratio at least equal to the original productivity level in the CGI.  If they don’t, they suffer a decline in living standards.  Critical goods in the new more productive economy will be produced only to a level that covers workers in the CGI plus whatever purchasing power can be produced by those now in the “Tier 2” industry.  The Tier 2 workers will produce something and it will be exchanged with workers in the CGI but unless the perceived “value” of these goods meets the original productivity level in the CGI, insufficient critical goods will be produced.  Living standards of those in the CGI will rise as they now have access to the goods produced by those in Tier 2 in addition to their own critical goods.  We can see  that Tier 2 workers could be struggling greatly while at the same time economists report rising economic growth.  The greater the productivity growth, the greater the disparity.

The effects are like a snowball.  As productivity in the CGI continues to rise, more are thrown into the Tier 2 industry, where, by definition, there is less demand.  The Tier 2 industry then inevitably becomes more productive and additional lower tiers are formed – the economy becomes like an onion with many tiers below the CGI.  It’s highly unstable and perhaps a reasonable analogy can be made to the onion like stratification of elements in an aging star.  Those familiar with the mechanics of stellar evolution will, of course, know the inevitable outcome.

Astronomical references aside though, I think this extremely simplified and top level view of a dynamic provides a useful insight into our economy.  Even if income were distributed equally in every company, we still would have a world in which insufficient resources were put into the CGI.

Focusing still on our simple model, what could society do to alleviate the problem?  Those enamored with laissez faire markets would say nothing.  If workers in lower tiers aren’t sufficiently productive, then it’s their own fault.  It’s an individual problem and not one of the system.  Socialists would respond it’s systemic and the economy needs to be collectivized.  A possible midway solution could have the government distribute purchasing power to those who can’t acquire sufficient critical goods.  The effect, contrary to conservative ideology, would not necessarily increase the price of critical goods except perhaps in the short term.  The increased purchasing power from the lower tier workers would serve as a signal to move a sufficient number of workers into the CGI to meet the higher demand and all would then have sufficient levels of critical goods.  The living standards of CGI workers, though, would go down.  The decline would not be due to taxes as the government could simply print the money, it would rather be attributable to a reduction in the number of workers in lower tier industries who, having been transferred to the CGI, would begin to produce for their own needs rather than for the more advantaged.  In this way it can be seen that poverty and marginal living standards are evidence of an over allocation of resources in non-critical goods and this turns out to be highly beneficial to privileged groups within the structure of production.  This is a very important insight – a significant portion of the real income of the privileged is based on the fact that marginalized workers are forced by the logic of the market economy to produce for them.  That such conditions exist is a damning testimony to a market enforced misallocation of resources away from critical goods and towards a “service” industry for the better off.  Is there not a deep inherent immorality in requiring workers with insufficient access to critical necessities to devote their lives to producing things that are not critical?

The real economy is of course far more complex than this.  And one may wonder if the history of capitalism negates the above argument, i.e hasn’t the worker done pretty well in the past couple hundred years of industrialization?  Consider that the past 200 years were quite remarkable.  Completely new continents were discovered leading to a massive expansion.  We had and still have a huge  government supported Tier 2 industry called the war machine and recoveries after the two major wars in the past century provided a great deal of stimulation.  I think history and current reality support the essentials of the argument.  Despite great productivity, majorities of populations throughout the world live in poverty or in marginal and insecure conditions.  No one has any idea, within the market paradigm, how to eliminate these conditions or stop our slide downward toward lower standards.  But there’s no great mystery here.  The simple fact is that capitalism is not conducive to widely shared prosperity.

From → Wealth & Poverty

  1. Andrew Bell permalink

    I believe that you are correct. We have become productive enough to support all the people of the world without all of the people of the world being employed producing necessities. We have a couple of choices:

    1) Consume resources faster and give people more stuff.
    2) Use some other mechanism to distribute resources.

    We seem to be hell-bent on number 1, which will mean competition for real resources sooner than if we choose number 2. I suppose we could do both, but that seems unlikely. Humans are creatures of inertia. People have to understand that it is OK to give people access to real resources (money) even if their labor does not lead directly (or even indirectly) to the production of those resources.

    The fact that we are laying off teachers because we “don’t have enough money” just makes me so frustrated. Give me access to the right computer and I can make plenty of money to pay all of those teachers a decent salary.

    P.S. – I was glad to see your comment on Brad DeLong’s blog about “crowding out.”

  2. Andrew,

    Completely agree.

    We can’t get to a higher understanding on distribution until the left in some country begins to forcefully argue for it. I get frustrated with the “center-left” economists out there who often quote Keynes yet at the same time promote policies which are little more than the “treasury” view. And they always seem to forget to quote Keynes’ fundamental conclusions: euthanize the rentier, establish zero interest rates, socialize investment, etc. Is it mostly fear of losing their high status in the temple, sincere disagreement with Keynes, or failure to truly engage with his works? Although I’m definitely not arguing along the standard Keynesian lines that we need to increase consumption – we only need to increase necessary consumption.

    An accurate view of the monetary nature of the whole thing is needed for us to move forward and I think it’s the weakest link in the ideology of capitalism. Once we puncture the myth that purchasing power is of limited supply, then the whole structure becomes very unstable. Your example of laying off teachers is a perfect example and the same point applies throughout the whole economy.

    Appreciate the thoughts.


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