Answering the Question: What is Economic Growth?

Economic growth is the buzzword of all political leaders and officials. The outcome of the recent G8 meeting is all too familiar:

The eight leaders meeting at the US presidential retreat in Maryland issued a communique declaring in its opening paragraph: “Our imperative is to promote growth and jobs.”

It added: “The global economic recovery shows signs of promise, but significant headwinds persist. Against this background, we commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognising that the right measures are not the same for each of us.”

This begs the question: What is economic growth? Where does it come from and how can it be promoted?

The economy is a dynamic and complex system (like the society itself) so system dynamics is the proper paradigm to approach it. Promoting something also requires comprehensive understanding and modelling in order to get the desired results. Here is the model:

The model has three core concepts: culture, institutions and economy, each of which form a framework for the other two:

• Culture creates the behavioral framework through creating and transforming identities, attitudes and values.
• Institutions create the social framework through creating and supporting rules, laws and organizations.
• Economy creates the material framework through resources, goods and services, and distribution.

Based on this model it is evident what the most effective way to promote social and economic development is: transformation in identities, attitudes and values. They affect economic activity both directly and through institutions, so we are better to start the discussion right away!

Who are you?

What do you do?

What can you do?

What is your passion?

What do you hope?

What are you afraid of?

Available Roles in the Western Society

The roles that are available to individuals in the society largely defines the nature of that society: many roles for factory workers constitute an industrial society, while roles for knowledge workers constructs a knowledge-based society. The concept of a social role is tightly connected to the institutions that make those roles available. The institution of state enables the role of the public servant, university makes the role of the scientist possible and the large quantity of production and leisure time creates the consumer.

In this timeline I have tried to describe the available roles in the Western society in the last 200 years. This timeline is, of course, highly subjective and dependent on the society in question. To whom are the roles available? Can an individual switch between roles? I have approached this with the idea that social roles used to be selected at a young age and that in the past they were more fixed for the whole lifetime than they are now.

It is a matter of another debate to consider which roles are currently available. There can also be a mismatch of available roles between the educational system and the economy. Studying how large percentage of graduates are employed to their own field is one indicator for the amount of mismatch. For example, the fact that Masters and Doctors of Philosophy end up as cleaners and cashiers indicates the inflation/disappearance of the role of the scientist.

Who understands the economy?

Mitt Romney understands the economy.

This quote keeps coming up in the discussion concerning the Republican party primaries. While the statement mostly symbolizes the attempt to unite the party against candidate Romney, we should anyway be interested in the truth value of this statement. So the question is: How can the economy be understood? Who can understand it?

The main problem with contemporary politics is that it doesn’t really seek to understand anything.

First off, you cannot understand the economy if you don’t understand the society. Economy isn’t something separate from “the government” (the social bureaucracy) but tightly intertwined with politics and everyday lives of people. Secondly, the economy is a feature of the organism of human society, so understanding organisms and emergence in them is the key issue in “understanding economy”.

The main problem with contemporary politics is that it doesn’t really seek to understand anything, but political action is haphazard, based on being hopeful while using abstract language. Rather than discussing “what is a good job, how are they created and should everyone have one”, the debate is on whether “jobs are created or destroyed”, as if “a job” is something self-evidently good and desirable and destruction of jobs is something unquestionably evil.

The basic nature of bureaucracy is that it expels creative thinking in order to enforce the hierarchial power structure. This is why the people who understand the economy as a phenomenon (such as economic sociologists and social scientists) don’t end up working in the bureaucracy. All bureaucracies are fundamentally against innovation and for stability – this means they face enormous problems in the era of chaotic economy, as creative and effective economic policies cannot possibly emerge inside the system.

So from the government point of view no-one understands or is able to understand the economy. It has to be this way, because if someone did understand it, it would instantly start tearing down bureaucratic power structures. This would create democratic discourses in which all that matters is the truth. In such discourses, there is no room for the small-minded power play that plagues contemporary politics.

Entrepreneur, the Contemporary Hero?

Mariana Mazzucato writes in the article The Entrepreneurial State (I uploaded it here in case the article gets removed some point in the future):

Entrepreneurship, like growth, is one of the least understood topics in economics. What is it? According to the Austrian economist Joseph Schumpeter, an entrepreneur is a person, or group of people, who is willing and able to convert a new idea or invention into a successful innovation. It is not just about setting up a new business (the more common definition), but doing so in a way that produces a new product, or a new process, or a new market for an existing product or process. Entrepreneurship, he wrote, employs ‘the gale of creative destruction’ to replace in whole or in part inferior innovations across markets and industries, simultaneously creating new products including new business models, and in so doing destroying the lead of the incumbents (Schumpeter, 1942; 1949). In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. Each major new technology leads to creative destruction: the steam engine, the railway, electricity, electronics, the car, the computer, the internet have all destroyed as much as they have created but led to increased wealth overall.

For Frank H. Knight and Peter Drucker, entrepreneurship is about taking risk (Knight, 1921; Drucker, 1970). The behaviour of the entrepreneur is that of a person willing to put his or her career and financial security on the line and take risks in the name of an idea, spending much time as well as capital on an uncertain venture. In fact, entrepreneurial risk-taking, like technological change, is not just risky, it is highly ‘uncertain’.

There seems to be a lack of more philosophical analysis of entrepreneurship, at least in the writings of economists – literature from the beginning of 20th century surely doesn’t reflect the most recent understanding or scientific knowledge on entrepreneurship. Patricia Thornton’s article Sociology of Entrepreneurship (backup here) seeks to widen the understanding on entrepreneurship from a sociological viewpoint.

In a way the entrepreneur is part of the historical continuum in the line of prophets, philosophers and scientists.

I am, however, more interested in the cultural discourses here. What does the entrepreneur symbolize? What characteristics does he embody? Could we consider the entrepreneur a hero of the prevailing economical worldview?

The entrepreneur has a lot in common with the cultural figure of the prophet. A prophet is a person who “is claimed to have been contacted by the supernatural or the divine, and to speak for them, serving as an intermediary with humanity, delivering this newfound knowledge from the supernatural entity to other people”. Prophets can be considered heroes in religious discourses, much like figures such as Martin Luther is the hero of protestantism and Galileo Galilei is a hero in science.

In business, the entrepreneur is the prophet with the divine understanding: he receives a vision of the world and starts to see things “as they truly are”, comes up with novel and necessary ideas and establishes an organization that promotes those ideas through new services and products.

In a way the entrepreneur is part of the historical continuum in the line of prophets, philosophers and scientists. When the prophet gets the idea: “We should build a temple for God”, the philosopher asks: “What is God?”, the scientist asks: “What is the best way to build a temple?”, and the entrepreneur immediately comes up with the idea: “A temple would be a great marketplace for selling pigeons.”¹

• ¹Quoting the bible: And Jesus entered the temple and drove out all who sold and bought in the temple, and he overturned the tables of the money-changers and the seats of those who sold pigeons. He said to them, “It is written, ‘My house shall be called a house of prayer,’ but you make it a den of robbers.” (Matthew 21:12-13)

Mohammed receiving his first revelation from the angel Gabriel. Miniature illustration on vellum from the book Jami’ al-Tawarikh (literally “Compendium of Chronicles” but often referred to as The Universal History or History of the World), by Rashid al-Din, published in Tabriz, Persia, 1307 A.D.

How crises are solved – a model

I came up with this system model that could be thought to develop the previous one to focus more on organizational agency.

What is important to recognize is that each actor proposes actions based on their education and background. We could take the Iran nuclear program as an example:

• Authoritatively thinking people such as military officials most probably propose military action to solve the crisis.
• Economically thinking people such as economists propose market-based solutions such as sanctions.
• Politically (many-sided) thinking people such as politicians are most likely to promote diplomacy and peaceful resolution of the crisis.
• Hierarchial (authoritarian) individuals typically actively reject diplomatic efforts, and political (liberal) individuals reject military action.

In case of the Greek economic crisis the proposals go like this:

• Hierarchial thinking produces proposals based on rules, monitoring, austerity and abandonment.
• Market thinking promotes approaches such as letting banks go bankrupt and supporting creative destruction.
• Political thinking produces ideas that seek to increase political cooperation and public discourse.

All the proposed actions are processed in the dialogue in which the system transforms into a synchronous one: the individuals agree on “what must be done” and start acting as a larger unit. Here dialogue is more of a “process of reality” that results in collectively approved action.

Understanding the dynamic of the economy

I drew the following picture as an attempt to understand how the economy functions. The white arrows indicate flow of money, the violet ones the flow of goods and services.

The government provides people with those goods and services that are not economical from a short term (=market) perspective but seen as otherwise valuable. E.g. libraries, hospitals and healthy environment.

What is the good or service the government gets from the economy? The growth of the economy; it legitimizes the government, since politicians can say that during their rule the economy grew so-and-so much, elect me again.

The much-adoed austerity means government is cut in a simplistic manner. In this situation, taxes stay on the same level (or rise), whereas the level of service provided by government is weakened. When public spending is also cut, the economy stalls. Because the government is part of the system, it cannot be reduced without damage to the whole.

While simplistic explanations like “the debt crisis happened because of governments spending too much” are surely tempting, their implications (“hence spending must be cut”) should be carefully explored. The government was spending too much because it had to do so in order to stay in power. If it had radically cut the spending, it would have become unpopular and delegitimized, replaced by government that would have restored the situation.

Approaching this basic dilemma with a cheeky attitude is the problem of Germany, Finland and other good-growth countries. It is now evident that the debt crisis was, not something caused by reckless politicians, but built into the European economy.

How to rescue the economy?

It seems that internet has become one big shouting competition. Looking at Will Hutton’s article “George Osborne has no idea how to rescue the economy – but then who has?”, there’s 500 comments arguing what the real problem is and what is the solution to that. SteB1 has perhaps the best comment, excerpt:

Looking through the comments I see a lot of pointless discussion about about economic theory. By this I mean that people are looking for the answers in conventional economic theory, and why one particular approach has failed. They are completely looking in the wrong place. It is a pointless activity because if conventional economic thinking really had the answers then self-evidently we wouldn’t be in the situation we are in. It is self-evident that most conventional politicians, economists, financial experts, and commentators don’t really have much of a clue as to what is going on and what the answers are. Sure there are plenty of opportunistic carpetbaggers about spying the chance and trying to convince everyone that their old worn out solutions are really the answer.

This got me thinking what are the actual solutions to the crisis. Here’s my list:

Stop the petty thinking about how to rescue the British, Finnish, European etc. economy. It’s useless to start drawing imaginary limits to the economic problems.

Instead, we should begin learning from each other. For example I am interested in the Third Italy and how the best practices in creating economic activity could be spread. What are the actual reasons halting establishing new business? Why is entrepreneurship so unattractive? What blocks creativity? (Hint: Distressing societal climate and the imperative to succeed aren’t that inspiring.)

I think the answer to the crisis is “back to small-scale, now with networks”. After the era of large multinational corporations and mindless competition, locality makes a comeback. We will stop thinking the market through the warfare mindset (competition, worldwide domination, ruthlessness) and start approaching it as a human ecosystem where rational needs meet the products and services that satisfy those needs. This presupposes heightened rationality, which comes via realization of happiness outside consumption (human relationships, vita activa). What follows from the ecosystem approach is ecological sustainability.

The small-scale movement can be seen in politics as well, when large polities (nation states, EU) will break down in favor of networked world that is organization-based. The old government departments become flexible organizations that exchange information with similar organizations around the world. The metaphor of governing itself is transformed into guiding, helping and supporting. The idea of legitimation is understood, and when parliaments become nodes in the network society, the power to “collectively legitimize” is returned to them. This, of course, implies that morality and the ability to participate is restored.

In the future, the difference between NGOs and companies will be blurred, when companies adopt a charitable approach to the society and NGOs become worldwide actors.

The changes have already been going on for decades in the form of privatisation, networking and the rise of global civil society. So nothing big is going to happen quickly. Well, maybe except for realizing that we’re all just part of this great movement.

Economy and the language of violence

budget policing
tougher enforcement
push to rework EU rules
more discipline
automatic penalties
nations that break fiscal rules
combat the crisis
closer monitoring of budgets

How come the European Union, the great project of the 20th century, ever resorted to the language of totalitarian states? Frightening.

The Germans really ought to work out their East Germany traumas so we could get over this dreadful language – whose only promise is an endless amount of rules, penalties and austerity.

Measuring economic and societal activity

I started to think of possible ways to measure economic activity beyond GDP. What should be understood is that economy is actually very deep in relationships between human beings, so actually economic growth per se should be considered nothing and focus should be put on the activity of the economy. This could be thought as the amount of “swarming” in the society. Comparing economic activity to some “societal activity” index (the non-money side of society) would be interesting!

There already is Human Development Index, but I think its scope is too narrow. The indicator business should be exploded by releasing worldwide data in one easily accessible database and let the users figure out different kinds of indexes. Perhaps there is no one perfect indicator, but we will settle for some basic principles.

Couple of things that could be included in the economic activity indicator:

• amount of new businesses
• amount of patent applications (by small and medium enterprises so patent warfare is excluded)
• size distribution of businesses
• attitudes towards entrepreneurship

The societal activity index could include things like:

• amount of users in public libraries
• amount of new NGOs
• attitudes towards civil society (e.g. how many consider good level of public libraries to be essential in the society?)

There is always value choices done in selecting the factors to the indicators, so it’s best just to state this openly.

The new indexes would also give room for improvement for the wealthy western countries that easily start to consider themselves as the ideal societies with perfect policies and practices (and nothing to learn). There must be a fundamental paradigm shift: instead of measuring some aspects carved in stone, the new indexes should measure the amount of buzz in the economy and society in general.

P.S. Rick Falkvinge has a post on swarm economy. There are good points such as “writing to Wikipedia isn’t currently considered as creating value”. Perhaps Wikipedia editing activity should be included in the societal activity index?

Beyond Tobin tax

I wonder: when will this Tobin tax mumbo jumbo ever end? The tax was proposed forty freakin’ years ago! It comes up in every single anti-globalization book I have read, just as a vague proposal without any practical basis. If it were such a good idea, wouldn’t it have already been implemented?

The problem is, there is currently no official body to implement worldwide taxes: EU or Euro level isn’t enough.

So what is my suggestion, you ask. Well, there is a need for a holistic view. Here’s something for starters:

• Reform United Nations: call it United Citizens of the World or something that makes the organizational paradigm shift visible; merge EU and US federal government with it (both are too heavy to be sustainable)
• Reform UN General Assembly as the global parliament
• Place IMF, World Bank and WTO (and what have you) under its political control
• Encourage all worldwide concerns to be handled there; use internet-based tools effectively
• Reform national parliaments into UCW’s branches that deal with the local areas of interest
• the global parliament is not seen as having control over the national branches but it does have “negotiation power” with its wide representation

Can we now move on from this Tobin tax? Please?