On the aftermath of the Great Depression of the 1930’s in an attempt to convince people that they were “suffering from a bad attack of economic pessimism”. Keynes wrote one of the most amazing articles on the topic of economic crises (John Maynard Keynes, “Economic Possibilities for Our Grandchildren” Essays in Persuasion, NY: W.W. Norton & Co., 1963, pp.358-373). He predicted that in 100 years (that is 2030, 20 years from now!) the economic problem would have been solved and people would be free: “to return to some of the most sure and certain principles of religion and traditional virtue”; and would recognize “(…) that avarice is a vice, that the extraction of usury is a misdemeanour, and the love of money is detestable…. (and) once more value ends above means and prefer the good to the useful.”
Today on the aftermath of 2008’s Credit Crunch with unemployment reaching historic levels in developed and developing economies it is worth asking: Are we suffering again from a bad attack of economic pessimism? Is Keynes prediction still a feasible one? Are we capable to escape the ‘bubble-capitalism’ we have relied on for the last decades?
In order to answer these questions, first we need to understand the basis on which Keynes predicted our successfully escape from the “Economic Problem”. It is very likely that he got to the 100 years figure by calculating the increase in wealth given the “interest compounding” and the experience of Britain in the XIX Century. But he also based his conclusion in a key assumption. In contrast to classical economic theory that treat all human needs as insatiable Keynes differentiated human needs in two categories: “those needs which are absolute in the sense that we feel them whatever the situation of our fellow humans beings may be and those which are relative in the sense that we feel them only if their satisfactions lifts us above, makes us feel superior to, our fellows”. It is only relative needs that are insatiable.
Keynes believed that the key to solve the economic problem was to achieve a more equalitarian society that will lead us to the satisfaction of the absolute needs of all human beings and as a result of the relative needs. According to him the key determinants of the speed in which we were going to reach the solution of the economic problem were: a) our power to control population growth, b) our determination to avoid wars and civil dissensions, c) our ability to foster science and scientific developments and, d) our ability to reach an equilibrium between global production and global consumption. While we have more or less successfully managed to control population growth, the destructive effects of wars (not everywhere though) and we have continued to innovate at a fast speed. It is clear that we have failed to find the correct rate of accumulation and therefore equilibrium between global production and consumption.
In fact, the increase in inequality in developed and developing countries in the last decades has deepen such disequilibrium by producing a shift in resources from those whose absolute needs are not yet satisfied to those that have theirs satisfied, thus depressing aggregate demand and therefore economic growth producing high levels of unemployment around the world.
Without the willingness to achieve a better distribution of resources the global economy has relied on the creation of asset bubbles to foster economic growth for almost three decades (i.e. the dot.com bubble in the 90’s or the housing bubble that broke in 2008 creating the Credit Crunch). Moreover, the high concentration of income that has deepened the disequilibrium between aggregate demand and the global productive capacity has at the same time increased the dependence of governments and families on credit to satisfy their “relative needs”.
The prospects for the Global Economy in the New Year are alarmingly negative. Does this mean we are suffering from a bad attack of pessimism again? Or, are the current economic problems the effect of our inability to recognize the central role of equality in the last decades?
I believe if we want to “solve the economic problem” by 2030 as predicted by Keynes, governments need to regulate better the accumulation of resources and to channel at least the same amount of resources they have spend in bailing out the Financial System to improve the purchase power of the low income families around the world.
The real question is not: How long will it take us to solve the economic problem? But rather, how long will it take us to realize that the only way to solve the economic problem is to achieve a better distribution of resources? How long until we understand the only way is the common good?