The ultimate Davos Debate

January 28, 2013

The ultimate Davos Debate: Marx takes on Keynes, Friedman and Schumacher

Larry ElliotPosted by , economics editor

Sunday 27 January 2013 13.28 GMT The Guardian

If you could construct the best panel at a World Economic Forum debate, this would be it. But what would they say about present problems? Read on …

Imagine that you could construct the ultimate Davos panel. From the annals of history you can choose any quartet that could put the world to rights in an hour-long talk, the format beloved of the World Economic Forum.

Klaus Schwab, the man who has been organising the forum since 1971, ensured there were plenty of stellar names strutting their stuff in the high Alps last week. Davos attendees could watch Nouriel “Dr Doom” Roubini cross swords with Adam Posen, recently a member of the Bank of England’s monetary policy committee about the merits of quantitative easing. They could listen to Mark Carney, soon to take over from Sir Mervyn King at Threadneedle Street, warn that the global economy is far from out of the woods. George Soros held forth on drugs; Facebook’s Sheryl Sandberg spoke passionately about sexual stereotyping; David Cameron called for the G8 to act against tax avoidance and corruption.

But how about this for a panel? Karl Marx, John Maynard Keynes, Milton Friedman and Fritz Schumacher, all no longer with us, kept in line by the IMF’s Christine Lagarde, thankfully still alive and kicking, and one of the standout performers last week.

Christine Lagarde at Davos

Lagarde (pic above) kicks off our fantasy discussion with a few words of introduction. She says business leaders have left Davos in a slightly better frame of mind not because of the millions of words spouted in Davos, but because of three little words spoken by the President of the European Central Bank, Mario Draghi, in London in July. Those words were “whatever it takes”, a commitment by the ECB to buy up the bonds of troubled eurozone countries in unlimited quantities. That has removed one of the big tail risks to the global economy – a chaotic break-up of the eurozone. But, she adds, any recovery in 2013 will be fragile and timid, and there is a risk of a relapse. “Turning first to you Karl, how do you see things”

Marx: “The capitalist class gathered in Davos has spent the last few days wringing their hands about unemployment and the lack of demand for their goods. What they seem incapable of recognising is that these are inevitable in a globalised economy. There is a tendency towards over-investment, over-production and a falling rate of profit, which, as ever, employers have sought to counter by cutting wages and creating a reserve army of labour. That’s why there are more than 200 million people unemployed around the world and there has been a trend towards greater inequality. It is possible that 2013 will be better than 2012 but it will be a brief respite.”

Lagarde: “That’s a gloomy analysis, Karl. Wages are growing quite fast in some parts of the world, such as China, but I’d agree that inequality is a threat. The IMF’s own research shows that inequality is correlated to economic instability.”

Marx: “It is true that the emerging market economies are growing rapidly now but in time they too will be affected by the same forces.”

Lagarde: “Maynard, do you think things are as bleak as Karl says?

Keynes: “No I don’t Christine. I think the problem is serious but soluble. When we lastjohn-maynard-keynes faced a crisis of this magnitude we responded by aggressive loosening of monetary policy – driving down both short-term and long-term interest rates – and by the use of public works to boost aggregate demand. In the US, my friend Franklin Roosevelt supported legislation that allowed workers to organise. After the Second World War, the international community created the IMF in order to smooth out balance of payments imbalances, prevent beggar-my-neighbour currency wars and control movements of capital.

All these lessons have been forgotten. The balance between fiscal and monetary policy is wrong; currency wars are brewing; the financial sector remains largely unreformed, and aggregate demand is weak because workers are not getting a fair share of their productivity gains. Economics is stuck in the past; it is as if physics had not moved on since Kepler.”

Lagarde: “I gather from what you are saying, Maynard, that you do not approve of the way George Osborne is running the UK economy.”

Keynes: “The man has taken leave of his senses. Britain has a growth problem, not a deficit problem.”

Lagarde: “I daresay Milton that you disagree with everything Maynard has said? You would make the case, presumably, for nature’s cure?”

Milton_friedmanMilton Friedman: “Some of my friends in the Austrian school of economics would certainly favour doing nothing in the hope of a cleansing of the system, but I wouldn’t. Unlike Maynard, I wouldn’t support measures that would increase the bargaining power of trade unions and I’ve never been keen on public works as a response to a slump.

“But I would certainly support what Ben Bernanke has been doing with monetary policy in the US and would support even more drastic action if it proved necessary.”

Lagarde: “Such as?”

Friedman: “Well, I think monetary policy should be set in order to hit a target for nominal output – the increase in the size of the economy unadjusted for inflation. If that growth is too high, central banks should tighten policy. If it is too low, the trend since the crisis broke, they should loosen it. In extreme circumstances, I’d favour policies that blur the distinction between monetary and fiscal policy. That’s what I mean when I talk about helicopter drops of money into the economy.”

Lagarde: “Fritz, you have been sitting there patiently listening to Karl, Maynard and Milton. How do you assess the state of the world?

Fritz Schumacher: “I am greatly disturbed by the way the debate is being framed. Fritz SchumacherThere is an obsession with growth at all costs regardless of the environmental costs. Climate change was rarely mentioned in Davos: this after a year of extreme weather events. It is frightening that so little attention has been paid to global warming, and almost criminally neglectful of governments not to use ultra-low interest rates to invest in green technologies.

As has been the case in the past, recessions have pushed green issues down the political agenda. In good times policymakers say they are in favour of sustainable development, but the pledges are forgotten as soon as unemployment starts to rise. Then it is back to business as usual: more roads, expanding airports, tax cuts to encourage consumption. When scientists are warning that global temperatures are on course to rise several degrees above pre-industrial levels on unchanged policies, this is the economics of the madhouse.”

Lagarde: “Maynard, what’s your response to that?”

Keynes: “I agree with him. If I were advising Roosevelt today I would be calling for a Green New Deal. I find it hard to envisage a world without growth, something that is politically unacceptable in the developing world in any case. But Fritz is right, we need smarter, cleaner growth. As you yourself said last week, Christine, if we carry on as we are the next generation will be ‘roasted, toasted, fried and grilled’.”

Schumacher: “I couldn’t have put it better myself.”


Heroes of Sustainability: E.F. Schumacher

Posted July 8, 2012 by Dolphin Blue Inc in Green Books, Sustainability Hero. Tagged: , , , , . Leave a Comment

One of the hundred most influential books published since World War II, according to The Times Literary Supplement, E.F. Schumacher’s internationally known Small Is Beautiful: A Study of Economics As If People Mattered has informed thinking on Western economies since 1973.

EF SchumacherThe German-born economist and statistician was more than just a numbers guy — he was an environmental champion. In Small Is Beautiful, he argued that technological production shouldn’t mean damaging our finite natural capital and thus ruining it for future generations. “Any intelligent fool can make things bigger, more complex, and more violent,” he said. “It takes a touch of genius — and a lot of courage — to move in the opposite direction.”

Excessive Growth

The title of the book itself fought back against the idea of “bigger is better” — small can be beautiful, and enough is enough. Rather than using gross national product as an indicator of human well-being, Schumacher thought another model may be more appropriate. “The aim ought to be to obtain the maximum amount of well-being with the minimum amount of consumption,” he wrote.

For 20 years, from 1950 to 1970, he served as chief economic adviser to the National Coal Board in Britain, during which time he championed coal over petroleum. His reasoning was that oil was a finite resource that would eventually be depleted and rise astronomically in price. Plus, he noted that the biggest reserves of oil were in some of the most unstable countries.

Up until his mid-40s, Schumacher was a proponent of unfettered economic growth, like most good economists. He came to realize, however, that modern technology was far exceeding human need. A trip to Burma inspired him to coin the term “Buddhist economics,” which referred to economic principles he created on the tenets of renewable resources and individuals doing good work to further human development.

Nature’s Potential

Instead of looking at natural resources as expendable income, they should be looked at as capital, Schumacher argued, since they can’t be renewed and will eventually disappear. He believed that sustainable development should be a priority, as the earth can’t protect itself against pollution forever. His controversial opinion that industrialism full speed ahead — with no concern for the impact it had on nature — wouldn’t stand up in the long run set him apart from his contemporaries.

While his ideas were fairly radical in economics circles, they made him popular with proponents of environmentalism, a movement that was gaining steam at the height of Schumacher’s career. A thoroughly readable collection of essays that stand the test of time, Small Is Beautiful still informs thought today on eco issues.

As Schumacher said: “There is incredible generosity in the potentialities of Nature. We only have to discover how to utilize them.”

8 thoughts on “The ultimate Davos Debate

  1. Where and when are the Asians talking in WEF? Why to me at least, these so-called Westerns commentators pinning to return to pre-crisis world economy which had largely relied on their theories? Are they postposing some disaster in the distant future for short-term gains?

  2. Tang,
    Remember what Keynes said…”The long run is a misleading guide to current affairs. In the long run we are all dead.” Politicians cannot think beyond their mandate.The American President has a maximum of two 4-year terms. Even then he has to stand for re-election after his first term. Very few people are given for more than two decades. Only in Malaysia, it is possible where Mahathir could govern for 22+ years with absolute powers.–Din Merican

  3. ABCT was rejected due to lack of empirical which supposedly gives mathematical reasons into the future. However the fundamental of ABCT is the greater natural cycle of climate which drives habitation and on that where is empirical to be found?

    Examples that most can relate to are after effects of El-Nino/Nina upon commodities resources of free market economics that may not distribute uniformly to warrant a uniform spread of monetary economics to achieve governing effects across a large country like the US. Smaller land mass like Spore has less, much lesser variability. A command economy may achieve better fiscal result if they find the right leverage in allocating the right expenditures base on their understanding of the greater cycles that may affect their land resources.

    Where new-Keynesians stimulus succeed or fail, wouldn’t that fundamental decision came from knowing where the greater cycle from El-Nino/Nina may inflict absolute provisioning national spending?

    Simple local example: Palm Oil price cycle is subject to demand/supply in the midst of competitive oil. Their yield cycles dictate their business cycles which back to fundamental are controlled by weather cycles.

    ABCT in flowing with the greater cycle therefore cannot offer the pinpoint accuracy that is based on empirical because the greater cycle being natural is free flow without empirical patterns strong enough to project macro expectation.

  4. The lack of financial responsibility coupled with the advent of Sovereign Funds has distorted the Global Financial System. Today the fundamentals are well below the valuation of goods and services. Low interest and interest free Sovereign funds have occupied that gap.How long this will go on no one knows because now the First World has now officially joined the party. Investors do not want to take risks and governments are betting on stimulus packages and meaningless cuts in the budget to fix the problem. In the case of the US they cannot even decide on how far down the road they should kick the can.

    Countries want to export their way out of the problem but unfortunately the only way to do that effectively is to work for a market adjusted devaluation of your currency.In this regard, we have to prepare ourselves for the competitive devaluation of the currencies.

    Our expectation that private equity will come in to fill that gap between fundamentals and current valuation will depend on how the Sovereign Funds will react to the Global Financial Situation in the coming year and beyond. Observers are inclined to believe that we are unlikely to see a retreat of Sovereign Funds and the problem will be kicked further down the road with the currrencies of the affected nations giving up some financial ground to maintain their financial ground.

  5. January 29 2013: Reuters

    Jin Liqun, told the World Economic Forum in Davos: “I am a little bit worried.”
    “There will be no winners in currency wars. But it is important for a central bank that the money goes to the right place,” The US should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar.

    French Finance Minister Pierre Moscovici voiced concern that the euro was becoming overvalued as a result of quantitative easing and other stimulus actions taken by other nations’ central banks.”Certainly, the level of the euro is high and creates some problem,” he said, attributing the single currency’s recent gains partly to the return of confidence created by the European Central Bank and euro zone governments in starting to overcome Europe’s debt crisis.

    1. Germany begins pulling its Gold reserves from the US,
    2. PRC and France saying publicly that the Fed’s policies are damaging confidence in the US Dollar.
    3. The Fed has recently announced it will be printing $85 billion every month until employment reaches 6.5%

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