Tuesday, August 17, 2010

Economics: the dismal and schizophrenic science

Reading economist Robert Reich's column today (The Truth About China As #2), followed by Joe McDonald's piece China's Slowdown Sends A Chill Through Trade Partners, one gets a sense of the schizophrenic nature of economics.

McDonald leads off with the statement
China's abrupt growth slowdown is sending a chill through Asian economies and as far away as Australia and Africa as its voracious demand for imports fades.

Beijing is cooling its economy with lending and investment curbs after explosive 11.9 percent first-quarter growth fed fears of overheating. Growth is slowing more sharply than expected, cutting demand for American and European factory machinery, industrial components from Asia and iron ore and other raw materials from Australia and Africa.

Then Reich tells us
Think of China as a giant production machine that's growing 10 percent a year (this year, somewhat less). The machine sucks in more and more raw materials and components from rest of world -- it's now the world's #1 buyer of iron ore and copper, and close to the #1 importer of crude oil -- and spews out a growing mountain of stuff, along with huge environmental problems.

But because the Chinese consume a smaller and smaller proportion of this stuff, it has to be exported to consumers elsewhere (Europe, North America, Japan) to keep the Chinese working. Much of the money China earns by selling it around the world is reinvested in factories, roads, trains, and power plants that enlarge China's capacity to produce far more. Another big portion is lent to or invested in the rest of the world (helping to finance America's budget deficit at very low cost).

But this can't go on. China's workers won't allow it. Workers in other nations who are losing their jobs won't allow it, either.

The answer is not simply more labor agitation in China or an upward revaluation of China's currency relative to the dollar. The problem is bigger. All over the world, we're witnessing a growing gap between production and consumption, while the environment continues to degrade. The Chinese machine is fast heading for a breakdown only because it's growing fastest.
Economics routinely uses the term "growth" without qualification. But we all know there are many kinds of growth, and all aren't necessarily good (take cancer, for example.) That growth is good is an unchallenged principle of American Capitalism.

Most of us fail to question that principle. Is all growth good? Obviously not. Then what kind of growth is good? In our capitalist system, the concept of "steady state" or balance seems to be inconceivable. what would that even look like?

Yet environmentalists such as Herman Daly have for decades argued that our present growth-for-growth's sake economic model is unsustainable and that we must re-engineer our economic models to reflect the "closed system" that Planet Earth represents.

I am convinced that there is no going back to the economic model that prevailed in the United States since World War II, that "irrationally exuberant" model of endless economic growth, the "rising tide that lifts all boats". These days, only luxury yachts are riding that tide, their skippers oblivious to the masses desperately flailing in the flood. Choose your metaphor, but America must come to grips with an economic perspective that actually encourages contraction of our out-of-control consumption and financial discipline, while re-inventing an economy based upon conservation, maximum utility of limited resources, full life-cycle accountability; and environmental, economic and social justice.

That may sound socialistic or communistic or whatever. Let's not get hung up on labels. This is what it means to live in a community where everyone takes responsibility.

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