Nov 30th 2016

Missing the Economic Big Picture

by J. Bradford DeLong

J. Bradford DeLong, a former Assistant US Treasury Secretary in the Clinton administration, is Professor of Economics at the University of California at Berkeley.

BERKELEY – I recently heard former World Trade Organization Director-General Pascal Lamy paraphrasing a classic Buddhist proverb, wherein China’s Sixth Buddhist Patriarch Huineng tells the nun Wu Jincang: “When the philosopher points at the moon, the fool looks at the finger.” Lamy added that, “Market capitalism is the moon. Globalization is the finger.”

With anti-globalization sentiment now on the rise throughout the West, this has been quite a year for finger-watching. In the United Kingdom’s Brexit referendum, “Little Englanders” voted to leave the European Union; and in the United States, Donald Trump won the presidency because he convinced enough voters in crucial states that he will “make America great again,” not least by negotiating very different trade “deals” for the country.

Let us orient ourselves by considering what the economic-policy moon looks like today, particularly with respect to growth and inequality. For starters, technological innovation in areas such as information processing, robotics, and biotechnology continues to accelerate at a remarkable pace. But annual productivity growth in North Atlantic countries has fallen from the 2% rate to which we have been accustomed since 1870 to about 1% now. Productivity growth is an important economic indicator, because it measures the year-on-year decline in resources or manpower needed to achieve the same level of economic output.

Northwestern University economist Robert J. Gordon maintains that all of the true “game-changing” innovations that have fueled past economic growth – electric power, flight, modern sanitation, and so forth – have already been exhausted, and that we should not expect growth to continue indefinitely. But Gordon is almost surely wrong: game-changing inventions fundamentally transform or redefine lived experience, which means that they often fall outside the scope of conventional measurements of economic growth. If anything, we should expect to see only more game changers, given the current pace of innovation.

Measures of productivity growth or technology’s added value include only market-based production and consumption. But one’s material wealth is not synonymous with one’s true wealth, which is to say, one’s freedom and ability to lead a fulfilling life. Much of our true wealth is constituted within the household, where we can combine non-market temporal, informational, and social inputs with market goods and services to accomplish various ends of our own choosing.

While standard measures show productivity growth falling, all other indicators suggest that true productivity growth is leaping ahead, owing to synergies between market goods and services and emerging information and communication technologies. But when countries with low-growth economies do not sufficiently educate their populations, nearly everyone below the top income quintile misses out on the gains from measured economic growth, while still benefiting from new technologies that can improve their lives and wellbeing.

As economist Karl Polanyi pointed out in the 1930s and 1940s, if an economic system promises to create shared prosperity but only seems to serve the top 20% of earners, it has disappointed the vast majority of economic participants’ expectations. And market capitalism, for its part, has not delivered the ever-more affordable 1980s lifestyle that so many back then expected it would.

Instead, during the past 30 years, an “overclass” has emerged, one that exercises even more relative economic power than Gilded Age robber barons did. The factors contributing to its rise and undue power, however, remain unclear.

Elsewhere, China, India, and some Pacific Rim countries have matched, or will soon match, North Atlantic countries’ productivity and prosperity. The rest of the world is no longer falling further behind the North Atlantic, but nor is it closing the productivity and prosperity gap, implying that these countries will continue to lag behind indefinitely.

The aforementioned features are all constituent parts of our proverbial market capitalist moon. As it develops and interacts with social, political, and technological forces, it creates elation alongside distress. Globalization is one piece in a larger puzzle: while it is important that we determine the best way to manage the global trade system, doing so cannot substitute for the much larger challenge of managing market capitalism itself.

By focusing on individual free-trade agreements, whether proposed or already existing, or on closing national borders to immigrants, we are looking at the finger and missing the moon. If we are to get a grip on the global economy’s trajectory, is time to look up.


J. Bradford DeLong, a former deputy assistant US Treasury secretary, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research.

Copyright: Project Syndicate, 2016.
www.project-syndicate.org

 


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