Whither the World: The Political Economy of the Future

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1 Whither the World: The Political Economy of the Future

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3 Whither the World: The Political Economy of the Future Volume 1 Grzegorz W. Kolodko Professor of Economics and Economic Policy, Kozminski University, Poland Translated by Joanna Łuczak

4 Grzegorz W. Kolodko 2014 Softcover reprint of the hardcover 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6 10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number , of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. Typeset by MPS Limited, Chennai, India.

5 Contents An Upbeat Foreword vi Part I Why Economists Err So Often 1 A Truthful Economics, or What Modern Economics is and What it Should Be 3 2 Blueprint for the Future 43 3 On Employing Economics to Shape Reality 60 4 Globalization an Accident of History? 82 5 Market Versus Government in an Age of Globalization 119 Part II Threats and Opportunities Which Prevail? 6 Economy Without Values is Like Life Without Sense International Agreements and Disagreements 189 Notes 211 Index 216 v

6 An Upbeat Foreword People ask questions because they want to know. They ask not only why things are the way they are and how it has come to that, but most of all they look to the future because they would like to know how things will be. To a better future, because some expect it, others believe in it and yet some others, without believing, subconsciously wish somebody would shake them out of this disbelief. Who is supposed to do that? Not a week goes by without me having to answer a question regarding what s in store for us. What will be, what may be, what should be? These are different issues and in each of them, the focus varies slightly. What will be for sure and how do we know it? What may be and what does it depend on? What should be because it would be useful to us? What should be done to make things better? How can we know that something is going to happen inevitably? How do we know what depends on what in objective terms? Who and based on what is in their right to claim what is beneficial to whom and what we should aim for? Who knows how to change this reality into a better one? Who is responsible for the future? History may be blamed for the past but the future doesn t have one yet and once it does, we may, as always, take advantage of History, making it responsible for human sins. If we assume rationally that the future is only partly determined by what is written not so much in the stars but rather in the nature of objective biological and social processes, and that it will depend, to a great degree, on the decisions we take, then social sciences, and mostly economics, will have a major role to play. The more it is to blame for the deficiencies of the past and the shortcomings of the present, the more it should bear the burden of giving the future the best possible shape as desired by people. Economics will not save the world, but it can help it a lot. So whither the world? Do we know a lot about it or do we have no clue? Is it worth living? And where? And how? Should we rely on fate and on the notorious market about which some economists talk almost as if they re talking about God or should we take this fate in our hands and try and give direction to the course of our life, that of our family, neighborhood, society, country and the world toward a better future? How much can we achieve in that respect and what can be done? What are the limits to economic growth? vi

7 An Upbeat Foreword vii In the years leading up to the current crisis, the traditionally measured growth rate fluctuated around 4 percent per year and it was the highest in the whole period for which statistics are available, that is roughly the last two hundred years. Will the world get back to such a high growth rate? Is that possible? Is that necessary? Or perhaps in the future we will increasingly aim for something other than simple quantitative growth in output? If national income, measured by the Gross Domestic Product per capita, is growing at 7 percent per year, this is enough to double output every ten years. In how many countries is there a chance to achieve such growth and to double incomes within the next decade to catch up with more advanced economies? If not, then what should we count on, what to expect and what to demand? Or perhaps we re in for a yet greater disaster than the recent crisis and for dissensions building up further, followed by even more exacerbated conflicts, not only economic ones? Are things about to get better or will the answer to the question When will it be better? have to be like that in the old joke: It already has been? The supposed Chinese wish/curse: May you live in interesting times! is coming all too true these days. The times are very interesting in many respects, with overlapping megaprocesses that are changing the face of civilization. Whatever enlightened ideas came from Aristotle s pen ( BC), they were recorded at a time when roughly 200 million people walked on the Earth. Whatever wise things were taught by Thomas Aquinas ( ), the world of his era had a population of around 300 million. In less than two generations from now our world will have thirty times as many people. Consequently, the economics of the present times, and especially that of the future, is the economics of a crowd; most of all we have to squeeze in. Will we make it? What should we do to make it work? If it won t happen of its own accord, so who and how should we coordinate the economic movements of such a throng to make it squeeze into a physically limited planetary space? These are just some of the litany of things on heaven and earth that have not been dreamt of in our philosophy. Well, let s say they had occurred to or, to be more exact, plagued the minds of those who wanted and knew how to look ahead. Who said and when: We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterized the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which

8 viii An Upbeat Foreword lies ahead of us? This is not an opinion from yesterday s newspaper, but the words of one of the most prominent economists ever, John Maynard Keynes ( ). It was his theory and practical advice that helped the world not only recover from the greatest economic crisis of the previous periods, that of , but also secure a significant economic growth in the West which lasted from then almost until the end of last century. Somebody could quote these words today, in reference to present-day events, as many people are again losing the hope of a better future. In the world s greatest economic power, the USA, over half of all adults believe that their children s living conditions will be worse than their own. Let us hope that this isn t the case either in the USA or anywhere else, but let us be aware that this could well come to pass. It hasn t been determined yet, it still depends. It s worth knowing what exactly it depends on. The words quoted above were written by Keynes during the depths of the Great Depression, in 1930, in his essay with the revealing title Economic Possibilities for our Grandchildren. 1 Distancing himself from short-sighted bellyaching, of which there s no shortage in any period, including in ours, Keynes tried to answer the question of What could be reasonably expected in a hundred years time as concerns living standards. It s interesting as he himself cautioned others against drawing conclusions about the economic future, claiming that it is impossible to make general comments on something that doesn t exist and that, after all, the future is yet to come. The most common Keynesian quote, repeated often enough to become cliché, is the one stating that in the long run we are all dead, in other words we d better not refer too often to a distant future as we will not be concerned about it any longer. However, despite cautioning others, he ventured a forecast of what was in store for us in a hundred years time. And he was greatly mistaken, expecting a much higher output and up to eight times higher living standards in countries that were already developed back then, for example in his home country, the United Kingdom. He was mistaken as while looking into the future he made a couple of key assumptions which did not come to pass: that there would be no more wars and that the population problem would be solved. He was extremely optimistic about the future so his vision was quite overdone. He was right to claim that the main economic problem, that of how to satisfy reasonable human needs, is solvable. However, he was wrong to think that it could be solved over the course of one century. It could not have been solved in the last hundred years, and it will not be solved in the hundred years to come. This is because the two factors

9 An Upbeat Foreword ix that luckily have been a given for roughly three hundred years, namely the ability to accumulate capital and the technical progress driven by innovations, are not sufficient to guarantee the longed-for social and economic development. The former is a reason to invest, which helps the expansion of production capabilities, the latter is the basis for increased work performance. However, what is also needed is skills in microeconomic management and macroeconomic policy, so that the growing potential may be fully exploited. Presently and in the time to come, there will be both increasing opportunities and threats in these areas, with a unique overlapping of development megatrends that have been unknown in the history of mankind: globalization, another scientific and technical revolution, and the revision of cultural, social and political values. And what would George Orwell ( ) write, if he lived among us in our day and age, in this civilization dominated by liberal democracy but also by technical capabilities for the surveillance of citizens that Big Brother would instantly fall in love with and apply, obviously, for our own good? How would he feel leaving his apartment in which he wrote 1984, a cautionary tale of a totalitarian regime, knowing that within fewer than two hundred meters he is being watched by 32 CCTV cameras? What would a novel written in 2014 and entitled 2041 caution us against and how? What vision of the political and economic system he would unfold to us now that in the European Union alone there are 25 million unemployed, and many of the nine times larger number of the lucky ones who have a job, are treated like cogwheels in a massive capitalist machine? Who is spying on who and treating others as objects, and for the sake of what? Who is manipulating who and who is exploiting who? Would Orwell, looking to the future from the perspective of 2014 rather than 1948, fear the totalitarian future more or not at all? And, which is of particular interest to economists, how would he describe human relations in corporations of this wonderful free world of ours? Would it be an idyll such as those served to us by the apologists for neoliberalism or perhaps a scene more resembling of those depicted a hundred years before Orwell by Engels in The Condition of the Working Class in England? Let us not forget that the market does not eliminate dishonesty, nor does democracy rule out stupidity, and neither of them saves people from social alienation and economic exclusion. I remember from the socialist regime a drawing by an excellent Polish cartoonist where a guy sitting over a plate comments: They told me «Put your mouth in the bucket». Luckily the bucket was full. Incidentally, if it had been really full, then perhaps the former regime would have lasted a bit longer and

10 x An Upbeat Foreword those who expected it to would have been less mistaken. Now we can hear: don t complain, we have a democracy, you can vote for something better. And if something better does not show up, you can vote for a yet better one. To allow the market and democracy, the two most powerful institutions of the present-day liberalism, to bear fruit, something else is also needed, namely a culture with an adequate system of values. So what values should be cherished in order that economic freedom has a chance of meeting our reasonable expectations? Thus the people who believe that we d better be quiet about a very remote future and deal only with expedient measures, those meant to counter a crisis when it is raging and those to stimulate the economic boom when there is one, are wrong. Economy is like life. It has its yesterday and its today, but it also has its tomorrow, its day after tomorrow and its time beyond that. It has its history and its future which is by no means unforeseeable. And this is something worth reflecting on, discussing, writing and reading about. All things considered, the entire economic debate could boil down to the issue of avoiding errors in all forms of economic activity in which we are all enmeshed at all times. All of us: the poor, the average and the rich. Not only the entrepreneurs, managers and politicians who make decisions both in their own interest and for others or on their behalf, but also employees from the bottom to the top of the social ladder; not only those who are currently employed but also their children, pensioners and the unemployed who are looking for a job. So how should we try to avoid economic errors in future? Is it possible at all? It surely is, to a certain extent, as it is only those who do nothing that commit no errors. So when doing a lot, let us make as few errors as possible. I don t know if I m an optimist or a pessimist; if that matters, let others be the judge. What I know is that the power of human thought and action may solve a number of complex economic problems of which there will be no shortage also in the future. When I am labeled an optimist, especially an excessive one, I retort that it s the other person that s a pessimist. If I am accused of pessimism, then he or she is an optimist. I myself try to be a rational pragmatist. And that is how I see economics: it must be, above all, rational and practical, which means that it is meant to best serve development and progress. The trajectory we follow is moving from output growth to social and economic development to civilization progress. Let us then have our own contribution to this Greatest Issue of All. Of course, when doing so, we must make some assumptions. I do it myself, too, and I assume, although it s by no means certain, that the

11 An Upbeat Foreword xi world of the future will be peaceful, that we will manage to avoid a total thermonuclear war, that we will manage to avoid a catastrophic global warming, that no pandemics will decimate mankind, and that we can steer clear of many other total disasters. And, most of all, I assume that a rational pragmatism will help us ward off huge blunders and that we will not become deceived by new utopias. So here it is, an upbeat foreword for you. An upbeat one as even though our time is as interesting as it is difficult, we can emerge unscathed from all of this mess we re in. We can try and journey toward a better future. This treatise is a follow-up to my meditations on the world. First, a book was published in ten different languages, with the US edition entitled Truth, Errors, and Lies: Politics and Economics in a Volatile World. 2 It was nominated for the Michael Harrington Award for an outstanding book that demonstrates how scholarship can be used in the struggle for a better world. And this struggle is both worthwhile and needed. However, economics, perhaps more so than other sciences, is characterized by the fact that every answer immediately gives rise to more questions. Anyway, life itself creates them. The matter that economics deals with, the broadly defined mutual relationships people enter as part of economic process, is in constant change. Therefore, economics must keep up with those changes. Unfortunately, it lags behind. All too often, the present-day economic policy is based on yesterday s economic thought, while in an increasing number of cases it should be oriented to respond to tomorrow s challenges. Hence this book: Whither the World: The Political Economy of the Future. As was the case with the previous one, also this book comes with a dedicated web portal, the NAVIGATOR (www. volatileworld.net). Its major part is a dynamic statistical appendix, containing a large amount of data on the contemporary world, on politics, on societies, on the economy and the natural environment. There are over 120 illustrative maps, diagrams and tables which are updated regularly. This way statistical data to illustrate many issues, phenomena and processes discussed in both books stay fresh rather than wither. I also make reference to a number of titles on the subject, often providing relevant web links, which are worth consulting should you desire to broaden your perspective and get a more in-depth understanding of the issues dealt with here. Therefore, it s worth consulting the NAVIGATOR, as then it s easier to bump into useful information. Let me repeat: With NAVIGATOR in hand, or under your finger, to be more exact, it s hard to get lost!