Over the last few weeks I’ve been considering what happens when productivity increases. With the exception of new technologies that have the possibility of rapidly expanding their market, the productivity savings are always achieved by reducing employment or wages.
And it seems an inexorable process. We don’t want to use coal anymore, even if it was economically viable, so coal miners have to lose their jobs. If driverless trucks and cars will lead to cheaper transport costs and therefore cheaper products, as well as liberating those who physically cannot drive or afford current taxi prices, we don’t want to stand in the way.
But why do the workers who are no longer required have to pay the cost of the wider benefit to society? Can’t some part of the savings be targeted back to helping those workers? We wouldn’t want to keep inefficient production processes going just to keep people in employment, but how do we ensure that improved productivity doesn’t lead to lasting economic decline for the individuals and regions affected?
If an industry has grown up in a region, employing thousands of people and sustaining countless other businesses as this income flows between them, it has also invested in that industry – by providing the infrastructure, the roads, the education system that supplies the workers. Those workers themselves have often not merely participated in a financial contract, but have felt a sense of belonging and loyalty to that industry, contributing to its success through their ingenuity and dedication.
But once a developing nation reaches the point it can offer a cheaper workforce that can do much the same job, that industry ups and leaves. So far as the original stakeholders in that industry are concerned, all the financial benefits go to its owners (shareholders) and senior management, and the abandoned region takes all the pain. This is the repeated story among areas of the Western world facing economic decline. There is now decades of evidence that the free market doesn’t enable these regions to bounce back in the end. We don’t want to limit the growth of developing nations, but is there a way to channel savings into investment in the regions affected, rather than to the wealthiest in society?
The seeds of a coherent response to this situation can be found in work already presented on the blog. Mariana Mazzucato has demonstrated that the development of any new industry has always been founded on significant investment by the state into the basic science and applied research that is necessary before companies can even start thinking about the private investment required to bring products to market. Beyond the modern industries that Mazzucato focuses on, no country has ever industrialised without significant government planning and investment (a topic to be covered, with references, in the final section of the blog).
Hence, the key to the development of new industries is state-funded investment. If we want to see renewable technologies become viable to end our dependence on fossil fuels, we need massive government investment. At present, the Chinese Government is meeting this challenge, and therefore China is the world leader in this industry. If we want to address our monumental waste disposal problem, and not keep contributing to the garbage continents floating in our oceans, we need massive government investment in the solutions.
And if we need governments to fund research and infrastructure investment in the needed industries of the future, they can also choose where to target that investment. Once we accept the critical role of government in funding investment in new industries, then we can see that the solution to the economic decline of a region caused by a core industry becoming obsolete or uncompetitive lies in the government targeting its investment funding into that region.
And how do we pay for this? Again, the answer is in the blog, this time repeated in copious detail. The need for the money supply to increase each year as productivity increases, and for this increase to be through the government spending newly created money into the economy, ideally spending on investment, has been unequivocally demonstrated in earlier sections of the blog. What sounds like a crazy proposition is actually simple logic when we study the actual empirical reality of how money is created and what the effects of different types of money creation are (private banks vs public money). This post summarises the issues, but if this concept is causing you to have an aneurysm, read the entire “Models” and “Money” sections, and then come back and try to refute the logic.
In addition, Mazzucato demonstrates that private sector companies – companies like Google and Apple – benefit from the publicly funded research, but there are no mechanisms in place to make them repay these benefits. And they even manage to avoid paying most of their taxes. All the benefits of the public funding are privatised, while the costs are socialised.
Even if we stamped out tax evasion and tax avoidance, the resultant payment of corporation tax would still be less than a reasonable return on the government’s investment in new industries, and Mazzucato advocates a series of additional measures to ensure that companies that profit from government investment pay their far share. But we do also need an internationally coordinated approach to ending tax evasion and tax avoidance. I’m not going to go into the details of how such a tax system could be developed, but there is extensive research available on this. Richard Murphy’s book “The Joy Of Tax” provides a brilliant and detailed explanation of not just why such reform is needed, but exactly how it could be implemented successfully. The answers are out there, in quite some detail.
The various measures proposed by Mazzucato, along with tax reform, would ensure that the state receives a return on its investment in productivity, which can then be reinvested. This is essentially how such measures can be funded.
But this is not all down to the public sector. The criticisms of Mazzucato that I have found are typically straw man arguments that she is advocating a bureaucratic state, or even a planned economy. But rather, she is describing the role that the state has always played in the development of every new industry, anywhere in the world (but specifically in the USA in the last century), and arguing that we need to acknowledge that role and support the state to continue playing it. This complements the role of the private sector, which thrives when ‘national systems of innovation’ are in place.
Then in terms of the role of the private sector, the “Financial Markets” section of the blog presents the evidence that these markets are currently “grossly inefficient“. Left unregulated, they fail to channel saving to productive investment, and rather soak up these savings into asset price bubbles, slowing down the real economy through the paradox of thrift. Regulation of these markets could complement the process described above by ensuring that national saving is directed towards the industries and regions where it can yield the greatest productivity gains. After all, many of the companies that receive the investment, and the pension and insurance funds providing much of the the capital are, in a sense, “publicly owned” (explained here). It is therefore reasonable to have public oversight of this process.
So the proposals here are not merely for a process to tax and redistribute wealth that has been allowed to concentrate in the hands of a few, but rather for an economic system in which the distribution of wealth is more even in the first place, as a result of the functioning of that system itself. Such a system needs to operate not just in the context of a single country managing its economy, preventing the decline of one region while another flourishes, but on an international level, enabling the economic development of all countries in the world.
This entire section of the blog on “Distribution” is exploring the premise (first stated here):
The distribution of wealth is critical to the future path of the economy.
I have repeatedly emphasised that I am not focusing on wealth distribution for reasons of social justice, but because the distribution of wealth impacts on the functioning of the economy. Achieving a more even distribution of wealth, by enabling an even distribution of the capacity to produce in all regions and countries, will lead to a stable and functioning economy – as opposed to the unstable, chaotic, dysfunctional economy we currently have, that abjectly fails to provide enough for everyone, despite the incredible capacity to produce which global society now possesses. Allowing the lion’s share of these fruits to flow to the wealthiest in society destabilises and weakens the economy as a whole, a theme emphasised throughout the “Productivity” and “Financial Markets” sections of the blog (see for example here and here).
Of course, all of this is very simple to say, and extremely difficult to do successfully. Indeed, we have no experience as the human race in running our economy this way. But just because the first time you try to ride a bike you will fall off, doesn’t mean learning to ride is a bad idea.
Our utter lack of experience in how to implement such a logical and coherent approach is the second biggest barrier to implementing it. But the biggest barrier is overcoming the ideological beliefs, held with a religious-like fundamentalist fervour, that prevent many people even considering such ideas. Overcoming these two barriers will be the theme of the final section of the blog.
But for now, let’s consider the question of why the rich should welcome this new regime, that requires them to pay their taxes rather than amassing wealth for themselves, and beyond that welcome an economic system that prevents such wealth inequality in the first place. The simple answer is that it is in their own best interests. I will explain why over the next two posts.
