A good LTE in the same FT:

Rich nations need to rediscover wisdom of the great economists

By Paul Rayment,
Former Director of Economic Research, UN Economic Commission for Europe,

Sir, Michael Prowse ("Britain overlooks the human factor in productivity", January 12) rightly draws attention to the relation between fairness and productivity and reminds us that corporate Britain, despite all the boasting and macho-management rhetoric since the 1980s, is not mucho when it comes to raising productive investment and productivity.

Mr Prowse is surely right to ask why people should be expected to give their best when the boardroom walks away with huge salaries and other benefits that bear little or no relation to their marginal productivity or any other measure of performance while the rest of the workforce is expected to accept increased insecurity (also known as "flexibility") and to show public-spirited restraint when seeking a salary increase.

This is not a petty question that can be brushed aside with disdainful remarks about the "politics of envy". What the boardroom seems to be in danger of forgetting is that the corporate sector is part of a larger social and political reality from which the market economy draws its legitimacy, not the reverse.

The issue, however, is a general one for all free-market economies, not just the UK. A prime reason for the difficulties with the Doha round of trade negotiations is that many developing countries see the promotion of global markets by the European Union and the US as narrowly self-serving: the rich want free access to developing-country markets for their goods, services and capital but are slow to reciprocate when liberalisation concerns areas where the poorer countries have a competitive advantage and where the rich have always managed to exempt themselves from the principles and rules they urge on others.

Western politicians and their advisers need to rediscover the wisdom of earlier generations of economists, from Adam Smith to Lord Keynes, and statesmen, from Bismarck to Roosevelt, who understood that if capitalism could not be reconciled with a socially acceptable distribution of its costs and benefits the entire system would be compromised.

Adam Smith, who today would probably find himself well to the left of Tony Blair, put the matter very clearly in his Theory of Moral Sentiments (which those who claim Smith as the godfather of globalisation should realise is really part one of his Wealth of Nations): "Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it . . . Justice is the main pillar that upholds the whole edifice".

Today, we have growth without fairness. In our world of plenty (in the West, at least), where relative wealth is just as important, if not more, than absolute wealth, no wonder that unhappiness is on the rise, along with "macho management"...

In the long run, we're all dead. John Maynard Keynes

We've been talking about this here at ET since our inception, mostly vis-a-vis GDP and growth, about finding some other way to measure progress. I would be kidding myself to think someone out there is listening to US here on this...but it is good to see this converstaion starting in the wider press too!

Half the population is under the age of 18. Tanzania's future is NOW...join the 50% campaign!

A very good post Colman. This is indeed an issue that we need to look at. Other economists have been looking at the question and other social scientists as well.

Jerome's article that has the Adam Smith quotes is also on target. It still amazes me how much of what Smith really said gets swept under the rug. The Smith that gets hauled out as the absolute voice of the absolute free market has become a characature.

The difficulty with so much of the current free market advocates is that they have come to see the market has morally neutral and actors within it as amoral. (This isn't exactly what I mean, but I can't find other words.) Smith, on the other hand, understood a market working according to market laws but moral actors had to work within this market.  

Another academic who has been working in this area for most of his career:
Robert H Frank

He also writes a column for the NY Times. The most relevant book would seem to be "Luxury Fever".


Policies not Politics
---- Daily Landscape

I've posted this before, but its worth another look:

[T]he whole World Values Survey, which grew out of the European Values Survey in 1981, is concerned with tracking value evolution across the globe, which is commonly seen as a two-step process. Though it is often simply referred to as "modernization," a more precise description differentiates between two stages.

The first is modernization, which involves the transition from agriculture to industrial societies, dominated by increases in income that translate into increased well-being. The second is post-modernization, which involves a shift in emphasis toward quality of life, self-expression and self-determination. . . .

The two-phase structure is very evident in the following graph of GNP and perceived well-being:

which is schematized thus:

To me, the point is not that productivity growth or economic growth are not important, but that in developed economies like the US or EU, we should focus on taking more of that growth in non-material goods. What sociologist Fred Block calls qualitative growth:

Quality Production and Non-material Goods: "The second key principle is the expansion of the qualitative dimensions of output, including satisfactions that are not directly embedded in commodities."

• Intrinsically satisfying work
  
• Voluntary leisure time
  
• Economic security
  
• A safe and clean environment
  
• A plenitude of community and voluntary services

"Qualitative growth would seek to reverse the underproduction of these satisfactions, while also systematically increasing the quality of all kinds of commodity outputs."

"Most of the growth dividend from the positive feedback dynamic would be used to increase not the quantity of economic output but the quality."

"These improvements in quality would, in turn, contribute to the expanded development of human capacities that makes the economy more productive."

Reconciling Growth with Sustainability

1. "Shifts in the nature of consumption (services) and technological advances make possible a reduction of pressures on the environment."

2. Under qualitative growth, "environmental improvement is one way in which continued growth could occur. . . . no longer treat[ing] the environment as something completely external to the economy."

As someone who is no longer working I've been spending a fair amount of time thinking about the concept of wealth.

In my case my future "happiness" is not so much determined by the increase in my personal wealth by acquisitive acts (like working harder or becoming an entrepreneur), as by assuring that I have adequate resources to last.

Since the future is unknown the amount of resources required is unknowable. If one has an outlook that thinks that society will remain relatively stable then the simplest course of action is to convert investments into an annuity and live off the proceeds. This was the norm in the UK at the start of industrial revolution for the well to do middle class. The land owner class could depend on ground rents. The poor starved and died.

The annuity model fails if inflation rises and the value of the annuity stays constant. (There are variable annuities, but this just changes the assumptions). In this case one is forced to accumulate more wealth than would actually be needed as a hedge. If this the is mindset of many people when they are still working then it means they will divert more of their current income into retirement funds than they would need to do otherwise. So, this issue applies to everyone, not just those who are retired. The implied insecurity leads to a decrease in "happiness".

I wonder how much of this determines the attitudes of people when making economic decisions. Certainly the rapid collapse of defined benefit retirement plans in the US must be having investment implications.

A life where health and old age needs are guaranteed would seem to compensate for much in the way of the pursuit of wealth as a marker for happiness.
 

Policies not Politics
---- Daily Landscape

Hubbert was thinking beyond peak oil, it seems.

I'd like to hear from ppl who know more about finance than I do about the idea and implementation of steady-state economics.

(and, btw, Colman, I'm waving hello to you...hope you're doing well.)

I don't usually cuss but... it's about friggin' time.

the growth mantra is insanity, in the sense that it pits ideology against physics.  ideology loses every time;  which means that people lose, are losing every day.

see also Barefoot Economics Manifesto

more later...

The difference between theory and practise in practise ...