Secular stagnation and technology

One of the problems I have with the term “secular stagnation” is that it implies condition relevant to the very long term, say, the coming century. Such long run conditions presumably have to arise from fundamental causes in demography and technology. That’s the kind of argument that Piketty makes with his r > g theory of rising inequality. There are some good arguments for the view that the depressed state of the global economy, and particularly that of the more developed countries, can be explained in this way. But it shouldn’t be implied in the name of the problem. I’ve argued in the past that technology, specifically the Internet, doesn’t explain growing inequality,

The key quote from that New Left Project article, responding to Tyler Cowen’s The Great Stagnation

The global crisis stopped economic growth, not only in the US, but in countries far inside the technological frontier like Greece; while it had hardly any impact in, for example, Australia, which avoided the initial financial crises and used Keynesian fiscal stimulus to offset shocks flowing from the global economy.

A further reason for scepticism about technological stagnation is that this explanation has been advanced in recessions and depressions ever since the beginning of the capitalist business cycle in the nineteenth century. Such claims represent the flipside of the equally common claim, made during every period of sustained expansion, that the economy has entered a New Era of untrammelled growth. The most recent episode of this kind was the ‘irrational exuberance’ of the 1990s, fuelled by optimistic claims about the potential economic implications of the Internet, which was opened to commercial use by the US Congress in 1992, and by capitalist triumphalism exemplified by Fukuyama’s The End of History.The collapse of the ‘dotcom’ bubble was softened by the housing bubble that developed shortly afterwards (again, not at all a new phenomenon), but the result was only to worsen the inevitable crash in 2008. The similarity of these events to previous bubbles and busts is good reason to doubt that they represent, or that they have inaugurated, a new phase in the evolution of capitalism.

26 thoughts on “Secular stagnation and technology

  1. There can be contributory causes to secular stagnation which vary from country to country. For Japan, demographics and lack of indigenous primary resources seem likely culprits. For Greece, we see corruption, inefficiency and a currency imposed widely over a non-optimal currency zone (not floating in response to Greece’s particular needs). For the USA, we see gross neglect of social, educational and infrastructural needs. These examples do not exhaust these secondary contributory causes.

    Behind the secondary contributory causes there exists the fundamental system cause. It is the system itself. Capitalism has a natural tendency to monopoly. Monopoly capitalism (in particular) has a stagnation tendency related to overaccumulation leading to a crisis of capital accumulation. Paul Sweezy argued that the “financialisation of the capital accumulation process” is a “response to the stagnation tendency of mature monopoly-capitalist economies.”

    “On March 27, 1947, a now legendary debate on the future of capitalism took place at Harvard University between Sweezy and Schumpeter, two of its most popular and influential economists. …

    The debate between Sweezy and Schumpeter was part of the larger debate on stagnation in the 1930s through the early ‘50s, brought on by the Great Depression. Sweezy argued on the basis of Marx and Keynes that “accumulation is the primary factor” in capitalist development, yet noted that its influence was waning. “There is no mechanism in the system,” he explained “for adjusting investment opportunities to the way capitalists want to accumulate and no reason to suppose that if investment opportunities are inadequate capitalists will turn to consumption—quite the contrary.” Hence, the motor was removed from the capitalist economy, which tended—without some external force, such as “the outside shot in the arm of a war”—toward long-run stagnation. Schumpeter, taking a more conservative and “Austrian” approach, apparently argued that a long cycle (Kondratieff) expansion might commence in the late 1950s, peaking in the late ‘80s; and yet the wind was likely to go out of the sails of the U.S. economy due to the waning of the entrepreneurial function and the rise of corporations and the state. Schumpeter did not deny the stagnationist tendency of the economy but thought growth was weighed down rather than stimulated by New Deal-type intrusions in the economy.” – The Endless Crisis by John Bellamy Foster and Robert W. McChesney

    The normal trend of the unfettered capitalist system is to monopoly, increasing inequality and thence to stagnation. Democracy and sociopolitical upheavals including war are exogenous to capitalism per se and can and do reverse the “logic” of capitalism even if only temporarily.

    Piketty essentially agrees with Sweezy and Baran. The formula r > g broadly says the same thing. It encapsulates, in a real sense, the monopolist tendency and the implied subsequent stagnation. Piketty has pointed out that this “law” is the general and natural tendency of capitalism without exogenous inputs and shocks. The latter have so far come from politics mainly in the form of welfarism and war. We are very close to the point in history when these exogenous shocks could also come from resource and environmental constraints.

    The explanation that capitalism – outside of democracy, welfarism and warfare, the last being episodic or continuous – has this inherent tendency to monopoly and stagnation is what heterodox bourgeois economists are in complete denial about. They want to discuss secular stagnation piecemeal and without a system focus. Yet history and empirical evidence attest to its systemic nature. Piketty for one has assembled a mountain of new evidence from the historical data to show (unintentionally) that Marx’s overall analysis remains compelling and convincing.

    Piketty, on his own evidence, had remained adventitiously unaware of Marx’s analysis. This can have its own serendipitous value. To remain naive in respect to certain received (or unreceived) theories allows a person to work unaffected by the “giant’s shadow”. Provided they work validly from empirical data, their work will have independent value. Piketty has independently confirmed a fundamental aspect of Marx’s analysis.

  2. Correction: In my post above, the phrase “heterodox bourgeois economists” should read “orthodox economists”. The word “bourgeois”, meaning “pro-capitalist” then becomes superfluous.

  3. I must be missing something. The opening paragraphs ask whether technology explains rising inequality. The long quotation replies that technology dies not explain recent stagnation and crises. What is the connection between these? Inequality is not a cyclical problem. Technology is, pace the RBC cranks, likely to be cyclical either.

  4. Does RBC theory essentially posit that cycles and perturbations in the economy are, in the main, the result of real shocks? Does this mean that RBC theory discounts endogenous system behaviours as a possible source of cycles (regular or irregular) and also discounts the very notion of emergent behaviours? What would a complex systems thinker think of such propositions?

  5. John Kenneth Galbraith had a great aversion for the term “stagnation”, he thought it to be a noxious weed in the economist’s lexicon. I tend to agree with John Quiggin! Inequality is a structural flaw inherent in any money based system. The internet can neither, create more inequality, nor, reduce any inequality. Marx was right about many things, and I suspect Piketty knows where is is right, but he was wrong about communism. The Communist Manifesto cannot eliminate inequality just by eliminating capitalists. Having said all of that a distinction must be made between inequality of income and inequality of wealth. Yes I know they are linked but reducing the inequality of income, by progressive taxation and welfare, does not ipso facto reduce the inequality of wealth. Some economists argue that you could totally redistribute income until the Gini coefficient was zero, and within a single year inequality of wealth would restore the status quo.
    That does not mean that Marx’s communism is the answer. Marx wrote that “all property is theft!” and argued for the complete redistribution of wealth. But countries that enacted such a system, with the possible exception of Czechoslovakia in the 1960s, found that income inequality still existed even if hidden by party propaganda.
    The answer must be to redistribute wealth under a fully progressive income tax system that is supported by moral based welfare payments. Marx, of course, would call this utopian. He may be right. The internet will not do this, the patent rights and copyright laws of the USA, and every nation that signs free trade deals with the USA, will ensure that inequality of wealth and income prevail into the Twenty-First century. Of course cyber hacking will keep some countries, no names no pack drills, in the game of rich versus richer.
    But the innovation and technology dreams of some politicians, including our own Prime Minister, Malcolm Turnball, will not reduce inequality of income or wealth. Q.E.D.

  6. Isn’t the stagnation just because the money is concentrated in too few hands? And aren’t the good times booms like post war Europe, Japan and China stimulating the rest of the world?

    I’m sure that a mature economy, operating in isolation, would stagnate, until maybe there was a revolution.

  7. To me the stagnation is entirely due the the rent seekers; banks, real estate, monopolies we have sold and so on. Had dinner last night with a couple who owned butcher shops who chucked it in when they were thinking of going for the brass ring.

    They looked at the major Westfield type centres when they had half a dozen shops in local shopping strips and they told me the contracts always had clauses about looking at their books and adjusting rents accordingly. TPP anyone?

    I mean the big end of town is raping our assets and we have a Goldman Sachs waffler talking about agility and innovation as our future. If there is not a 15% GST and a company tax cut in place in 2016 I will vote LNP.

  8. I have published two articles on long term economic growth recently, one on the UK and another on Australia, using the ‘evolutionary macroeconomic’ methodology. In neither case does the evidence suggest that we are entering a phase of stagnation in either of these countries any time soon. This is good news for those who like growth but bad news for the environment unless there is a massive shift in our behaviour. See:

    Foster, J. (2014) “Energy, knowledge and economic growth.” Journal of Evolutionary Economics, Volume 24, Page 209-238.

    Foster, J. (2015) “The Australian growth miracle: an evolutionary macroeconomic explanation.” Cambridge Journal of Economics. First published online on June 3, 2015: doi:10.1093/cje/bev027

  9. @John Foster

    This seems an interesting paper. Honestly, I don’t understand much of it. I do agree very strongly that “economic processes involve a degree of time irreversibility and are subject to structural change… “. Naturally, I would agree with this coming from a Marxian and physical monist standpoint.

    Specifically, in response to:

    “With rapidly increasing computing power and innovations in information and communications
    technologies, both the quantity and technical quality of capital stock has increased markedly
    enabling new kinds of innovations… ”

    I would ask:

    What’s happened to our internet infrastructure? It doesn’t seem to fit this general model for Australia above. Is the general model wrong or are there special reasons our internet infrastructure is so abysmally backward in comparative terms?

    An ABC report from Jan 2015 is headlined “Internet speeds: Australia ranks 44th, study cites direction of NBN as part of problem.”

    More generally, I would ask is our backwardness in internet technology and in leaving coal and oil behind for solar and wind power likely to severely dent our future development? It seems to me we are at a watershed point in history. If we don’t solve these issues rapidly (in historical terms) we could fall into stagnation very quickly, IMO.

  10. @Ikonoclast
    Thanks for the comment. The modelling uses macro-data, so it is not entirely clear how the innovation processes going on underneath work – we are dealing with a complex, evolving system, after all. The ICT system we have had up until now seems to have been adequate to our needs but you point to the fact that we are falling behind and that this may have repercussions in the future if we shift relatively out of coal and oil. Possibly, but all this will have to go against a robust evolutionary tendency that has continued for over half a century, including 24 years without recession. Adverse change may well occur but it is hard to see it happening abruptly over the next decade. But there is no doubt that the combination of the emergence of renewable energy and further developments in ICTs could involve a structural transition as great as that experienced in the early 20th Century (including a phase of stagnation). But the macro-modelling (for what it is worth!) suggests that we are not quite there yet.

  11. @John Foster

    I don’t have the specialist qualifications or understanding to question your approach. All I can do is raise a layperson’s concerns. This discussion is about the Australian paper of course.

    1. I gained the impression that the WW2 discontinuity or the Great Depression and WW2 discontinuity had to be excised from two data sequences to get two fits to the theory or model. Please correct me if this is wrong. This procedure would not necessarily invalidate your positive findings but it could raise interesting questions about two factors namely “bounded conditions” and factors outside the Australian economy but still within the world economy.

    When I use the phrase “bounded conditions”, I mean the boundaries to the validity of a formula. For example, the formulas for Newtonian mechanics are only valid (reasonably accurate) within certain bounded conditions (relative speeds are small fractions of the speed of light and maybe some other conditions). By analogy, it would seem your formula gets some fit within bounded conditions but fails at certain crises or discontinuities, major wars being one. This is no surprise in itself and also no proof against your research program.

    It also occurs to me that the Australian economy is a sub-system of the world economy (a much larger system). Could a generally growing system “tow” an economy like Australia’s? Though the question then would be why didn’t it “tow” the Argentinian economy as effectively? I guess I am asking if our “robust evolutionary tendency” is really just two lucky resource breaks (to look at it very simplistically)? Did we “ride on the sheep’s back” in the first growth phase and “ride on the coal trucks” in the second growth phase?

    2. “Possibly, but all this will have to go against a robust evolutionary tendency that has continued for over half a century, including 24 years without recession.” – This statement is interesting but it has to be balanced against other data. Can we really call it a “robust evolutionary tendency” (of the economy) since about the mid 1970s when unemployment, underemployment and more recently a diminishing wage share in the economy are evolving as more prominent features?

    I am perhaps asking the question “Can equations capture the salient features of the full economy and its effects on individuals and classes better than an extended language analysis?”

    Of course, a Marxian Autonomist like me, who is maybe just OK at language but very bad at maths, is bound to ask a question like this, so feel free to demolish me if it’s warranted.

    3. I am strongly in favour of analysing the economy as a complex system (again without specialist knowledge in that arena) simply because that is what I think an economy is based on my understanding of Marx’s analysis. I believe Marx does take a systems approach (relative to and based on the development of knowledge in his time).

    My own thoughts are that this entire arena (political economy) has to be analysed in terms of real systems / formal systems. It is the fitness of our formal systems to the real systems, in terms of “analogical correspondence” which will determine our success or failure in managing real economies, real environments and meeting the needs of real people. However, my theories on this are idiosyncratic and poorly developed so I had better leave it at that except for one tiny example.

    If a formal economic ideology posits that the real economy can grow indefinitely and builds this assumption into its formal ownership and finance systems whilst at the same time the real biosphere system clearly cannot support endless growth, then there is a clear lack of “analogical correspondence” between the formal system and the real system. Such an ideology is a plan for a three-pronged blivet: something which cannot be made in the real world.

  12. @Ikonoclast
    Thank you again for your interesting and perceptive comments. I think that you a skeptical about the usefulness of aggregate data. I can understand that. But, bear in mind that there is some really bad macroeconomic analysis out there (John Quiggin’s Zombie Economics discusses some of this) and I am trying to counter that. The methodology I use tries to embed our understanding of the growth of aggregates, such as GDP, in historical context, using quite stringent econometric estimation to understand historical tendencies that exist. However, it cannot deal with shifts in the distribution of income, unemployment, underemployment, etc, although, perhaps, it provides a starting point to begin to explore the causes and consequences of these. But I should add that the methodology I use is strongly rejected by mainstream economists, including, I suspect, John Quiggin! But I don’t mind, I’m quite happy with it, as are some journal editors outside the mainstream of economics.

  13. @John Foster

    I hope I didn’t appear too sceptical. I am a supporter of the aggregate data approach and of macro over micro. I really do not think (for example) that one could explain a whole economic system (or even a market) purely from the behaviour of agents worked upwards. Human agents exist in a pre-existing physical matrix, social matrix, institutional matrix, ideological matrix, even language and symbol matrix, etc. etc. (all historical accretions) which play both limiting and facilitating roles in human agent behaviour.

    In theory, a complex systems approach to economics must be right. But how to develop it in practice, that’s the question. It’s probably going to be more difficult than string theory! Finally, any new theory of the extant social-political-economic system enters into the system it theorises about and consequently modifies the system. This can have non-trivial effects if we are talking about, say, the theories of Marx or Keynes.

  14. @Ikonoclast
    I completely agree. I have been seeking a relatively simple way of dealing with economic complexity for a number of years now but not with a lot of success. And you are right about the feedback effect. The feedback effect from both Keynes and Marx changed the systems that they were analysing in fundamental ways.

  15. John Foster,

    The link below is to a very interesting little paper. I am not saying I agree with everything in it but the discussion of the proposed “Five Laws of Social Science”, especially re indeterminancy, the loss of information and the implied “arrow of time” (irreversibility), is thought provoking.

    Click to access MPRA_paper_47811.pdf

    I have noted elsewhere, in other discussions on this blog, that I disagree philosophically with the employment of the word “choice”. I would prefer the word “determination” to be used to the indicate the moment when what is indeterminate becomes determined. Agents conscious or not conscious can make determinations in this sense as can quantum phenomena for that matter.

    Broadly, I disagree with what I see as unproven metaphysical assertions made when trying to conduct empirical investigations. “Free will” and “choice” are two contentions I see as unproven metaphysical assertions. Even “consciousness” is dubious if it is used broadly and loosely: especially if it used in a fashion which implies dualism or idealism as opposed to material monism. I assert that material monism is the most that can be reasonably be assumed (via empiricism) without entering into metaphysical speculation. This is not to assert that material monism can easily or successfully explain consciousness. But Ockham’s razor suggests we take our investigations as far as possible materially and empirically rather than resorting to untestable metaphysical speculations. The former will yield some verifiable, communicable and materially practical knowledge, the latter will yield none of this kind of knowledge at all.

  16. Ikon, as ever you are my tutor.

    I think there is that secular stagnation in the west, I think we’ve moved way too far from real since, say the sixties of the last century. I think we are like the Habsburg empire of the seventeenth century with its endorsement of flat earth in the face of science, that must flee to the emerging socieities of Northern Europe..Spinoza comes to mind.

    Our era is also defined in the term “reactionary modernism”that denotes a baffled response to the reality.

    Fifty years ago, the heroes were the Kennedys and MLK and the iconic movie for that era was Inherit The Wind. These days the paradigm is to do with the Tea Party and Donald Trump and the Kardashians, Big Brother and Monckton represent the current pinnacle of cultural endeavour, which is to say the Death of Cultural Memory.

  17. @paul walter

    “Secular stagnation” is an evocative phrase. In economics it basically means “long run economic stagnation”. Yet it calls to mind another meaning and an unease about the progress of enlightenment, reason and humanism.

    Following a link from “reactionary modernism” on Wikipedia led me to “The Californian Ideology”.

    “Barbrook argues that members of the digerati who adhere to the Californian Ideology, embrace a form of reactionary modernism. According to Barbrook, “American neo-liberalism seems to have successfully achieved the contradictory aims of reactionary modernism: economic progress and social immobility. Because the long-term goal of liberating everyone will never be reached, the short-term rule of the digerati can last forever.”

    “The original promise of the Californian Ideology, was that the computers would liberate us from all the old forms of political control, and we would become Randian heroes, in control of our own destiny. Instead, today, we feel the opposite—that we are helpless components in a global system—a system that is controlled by a rigid logic that we are powerless to challenge or to change.” – 2011 documentary, All Watched Over by Machines of Loving Grace.

  18. @John Foster

    The feedback effect from both Keynes and Marx changed the systems that they were analysing in fundamental ways.

    For Marx, the feedback did not merely change the system – it drove it into crisis. The feedback is a structural contradiction.

    As for Keynes, I am not aware of any pure feedback other than increasing inequality and debt to respond (or counter) to Marx’s core contradiction.

    Anyway we need to be mindful of the other feedback from capitalism – skyrocketing global temperatures.

  19. @Ivor

    I get what you are saying. Putting it together with what John Foster and I were talking about, it means we are collectively (the three of us) referring to two levels of feedback.

    The “feedback is a structural contradiction” which you mention is an internal feedback in the capitalist economic system. Overaccumulation and the crisis of capital accumulation is a good example. It is a systemic problem inherent in the capitalist system.

    Almost invariably, when we humans build complex systems we don’t fully understand them. Many complex systems that we build could be said to evolve and grow by accretion over time. Whilst certain components and sub-systems have master-plans and are often quite well understood, the overall complex system often has no technical master plan (though it may have an ideological master plan) and it is thus not well understand, even not understood at all in some senses, especially in early phases of development. One could argue (I do) that this was exactly the case with early capitalism. We humans understood relatively few of the implications and ramifications of what we were building.

    Marx sat outside the capitalist system, so to speak, and observed and intellectualised. He discovered “laws of motion” of the system. We would now call them dynamics of the system. This is the claim and I for one accept it in broad brush though not in all fine detail. In developing a theory and feeding it back into the “intellectual commons” he provided what we might call a metafeedback: a feedback about the feedbacks, or an intellectual feedback about a material system from outside the system (in the intellectual sense). This feedback, this new theory then feeds back into the system.

    Workers, revolutionaries, agitators and then capitalists and reactionaries, all behave somewhat differently after some of the hidden dynamics of the system become “revealed”. This will be true no matter if the “revelatory theories” are correct or incorrect but true in different ways in each case as the results of false theories and correct theories are likely to widely different. The above is the sense in which theory will alter praxis. In turn, theory will have to be modified again to deal with the new praxis and so on. I don’t know if I subscribe to Marxist dialectics (dialectical materialism) precisely, but if what I have described is also dialectics then I do subscribe to a form of dialectics.

  20. @Ikonoclast
    Interesting paper but the author ignored the dramatic failure of Black-Scoles in the GFC. Economists such as Hayek argued similarly that the microeconomic level is just an “atomic flux” and cannot be captured by any deterministic representation.This led Hayek to stress the importance of understanding how rules evolve and are sustained in complex systems. When we accept that tractability in complex economic systems comes from understanding the pattern of rules that have emerged, then my own view is that, rather than building upon quantum physics, the Second Law of thermodynamics offers a much better starting point. The author does acknowledge the role of the Second Law but does not explain fully its importance. Once the role of the Second Law, and the dissipative structures that it gives rise to, is understood it becomes clear why, for example, the availability of cheap fossil fuel energy has been such an important driver of exponential growth over the past two centuries. This is what my two afore-mentioned articles on economic growth are, in essence, about. And the implications are rather scary……

  21. @John Foster

    Yes, I agree the latter part of that paper talking about equilibrium was the weakest part.

    With evolution and growth in the direction of greater complexity, the issue is the input of energy to build and maintain complexity against entropic processes. Even with a steady-state economy we should be talking about homeostasis (at least analogously) and not equilibrium.

    We might now have an escape from coal and oil dependence. The issue which is most often talked about is EROEI (energy return on energy input). In the “good old days” we may have been getting an EROEI of 100:1 for sweet crude oil from gushers. Today we might get 32:1 from all coal and conventional oil sources combined. On the other hand we might now be getting, let us say, about 8:1 from solar and wind combined.

    It’s interesting to note that the efficiency of ICE (internal combustion engines) is about 20% on a good day. The efficiency of electric motors is about 80% on a bad day. I suggest taking these efficiencies as proxies for the fossil fuel economy versus the pure electrical economy. Thus, while we get 1/4 of the EROEI with renewable fuels compared to fossil fuels, we then get the same useful work out of an all-electrical economy as its efficiency is about four times greater.

    Energy might not be our problem. Waste sinks, bioservices and natural cycles may be our problem and where our limits will be. I suspect we have already overshot those limits. But that’s a whole other blog post.

  22. @Ikonoclast
    I think I should wind up this discussion by saying that you seem to be one of the rare people who seem to fully understand the key issues with regard to the roles of energy and entropy in the processes that give rise to economic growth!

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