Why we need to rebuild and strengthen local and regional economic cycles
An Article in the Compendium of Market-Based Social-Ecological Economics
Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?
Table of Contents
Under the neoliberal economic doctrine, the expansionist ambitions of industrial and financial economic players have taken on a life of their own. In the cut-throat competition on open global markets, the social and ecological obligations of the players have receded into the background. As a substitute, the illusion of never-ending quantitative economic growth is spread, which is supposed to bring prosperity and welfare to the world. The consequences of this doctrinal aberration are sobering: what began as deception and self-deception ends in destruction and self-destruction. Not only do individual global players fall by the wayside, but entire regions are also economically devastated, in other words, de-industrialized. Unemployment, poverty and environmental degradation are spreading. It is our duty to set the political course for change: What has been centralized must be decentralized again, what has been devastated must be rebuilt and strengthened!
2. Preliminary Remark
The following interview was conducted with me in September 2008 by Günther Hartmann, the responsible editor of the magazine ÖkologiePolitik. It was subsequently published in a slightly abridged version in edition no. 140 of November 2008.
3. Twenty Questions and Answers
ÖkologiePolitik: Do we need more economic growth?
Gerd Zeitler: In principle, there is no need for sustained economic growth. The national product can stagnate as soon as the basic needs in a society are satisfied. Throughout its history, humanity has lived in a static state for long periods of time. Growth is always problematic because, apart from positive external effects, it usually also generates undesirable negative ones, regardless of whether the economy is growing due to an increasing population or higher per capita consumption. Avoiding negative external effects is the greatest challenge facing humanity today, just think of climate change, species extinction and famine. Let’s get back to the basics: While population growth, if any, is politically motivated, per capita growth is the result of the human quest for a better and more comfortable life. For example, when a higher level of mobility is sought and the horse-drawn carriage is replaced by the automobile.
ÖP: Could you please explain this in more detail?
GZ: Yes, the ambivalent effects of technical innovations can be demonstrated very well using the example of the automobile: On the one hand, the car generates quantitative growth because its higher manufacturing costs are directly reflected in its price and thus in the national product, and on the other hand, it generates qualitative growth because its higher mobility benefit – which is quantified by the market – is also reflected in its price and thus in the national product. At the same time, however, it will reduce the quality of the natural capital disproportionately because its production and use consume more resources and generate more waste and emissions than the horse-drawn carriage. Its overall balance can therefore be negative – and with the current state of technology that is the case throughout – if the negative value of its consumption of resources including waste and emissions exceeds the positive value of its mobility benefit. Incidentally, the negative value must include all subsequent costs, and these can be astronomically high if irreversible damage is caused to natural capital. In today’s economic system, the negative items are not taken into account in pricing and are not included as quantified variables in the national product. This results in deceptively low prices and creates a deceptive overall picture of the state of society and the environment, and there is no basis for economic policy decision-making on how to steer the consumption of natural resources into sustainable paths.
ÖP: So what is sensible economic growth?
GZ: Obviously, the best economic growth is that which produces higher productivity and more useful products and which, at the same time, results in lower ecological and social costs, i.e.: less consumption of natural capital, but also less expenditure for undesirable social developments such as unemployment and poverty. Ideally, economic growth should even generate increasing ecological and social yields that improve the state of natural capital and the welfare of human society.
ÖP: But reality usually looks somewhat different.
GZ: Yes, in this respect the neoliberal economic system suffers from a birth defect: with the end of the post-war growth, the industry’s urge to expand has taken on a life of its own and growth has become a fetish, it’s actually economically perverted. Today the outcome of this development is omnipresent: »liberalized« markets and the dominance of unlimited export production at the expense of domestic economic cycles. The more export markets now reach their saturation point, the more global competition intensifies and puts the players under increasing cost pressure. In order to withstand the pressure and secure their expansion targets, but also to suggest that the social and ecological consequences of the expansion drive can be overcome, they regularly demand so-called growth stimuli. In the neoliberal context this means above all reductions in corporate taxes and labour costs, especially wages. Each round of such »growth stimuli« directly generates new poverty and environmental damage without stopping the trend towards declining employment. Thus, the system with its growth doctrine has already exceeded the limits of the regenerative capacity of our natural resources in the 1970s. Since then, the degradation of natural capital has accelerated. Moreover, since the 1990s we have been living with the phenomenon of permanent mass unemployment.
ÖP: What about our social resources?
GZ: In terms of their regenerative capacity, if you want to put it that way, they are just as much affected as the natural resources. The difference is, however, that the long-term follow-up costs of poverty-related exclusion are even more readily swept under the carpet than the ecological costs. It is because of this blind spot that the players find it so easy to stylize their expansionist aspirations as a question of national destiny and to sell the repeatedly predicted economic growth as a surefire social cure.
ÖP: That is a widespread basic conviction today.
GZ: Yes, the misconception just described is responsible for the fact that the perception has spread that quantitative growth in particular is a prerequisite for avoiding or reversing social and environmental devastation and bringing about prosperity and welfare. This view seems to be fully confirmed in economic upswings, when, as a result of higher growth rates, new jobs are temporarily created. However, an accurate accounting including the negative items in the national product would show that social and environmental decline would continue even then.
ÖP: Employers repeatedly demand longer weekly and also lifetime working hours.
GZ: This demand is also due to the senseless cost pressure to which our industry is exposed in global competition. The extra working hours that are being demanded are nothing more than an indirect attempt to avoid new hires and to reduce labor costs – both with the aim of making export production more competitive and even more dominant than production destined for domestic markets. The economic absurdity of the system is particularly evident here: increasing corporate and macroeconomic productivity are constantly reported, but which are not really achieved because the social and ecological costs at both levels are excluded. At the same time, however, longer working hours are being demanded, although with rising productivity, working hours should actually be reduced and/or wages increased in order to maintain the balance between productivity and purchasing power on the markets and to keep economic cycles going. Whenever extra work is enforced in the neoliberal system, it reduces system-induced cost pressure, but has a devastating effect because it exacerbates the unequal distribution of work and income and further increases social costs. Thus, rising neoliberal productivity is in reality a shamproductivity achieved at the expense of society and the environment.
ÖP: So employees have to work longer, especially in export-oriented industries?
GZ: As a first step: yes. However, the purely domestically oriented sectors will have to catch up with the rest of the economy with a time lag, because sooner or later the global cost pressure via cheap imports will affect the entire economy. Statistics show that the trend towards shorter weekly working hours in globally exposed industries was already broken in 2005. For example, the weekly working hours of some of Deutsche Telekom’s service departments were increased again from 34 to 38 hours in 2007 simply by outsourcing the departments. Such measures temporarily safeguard jobs that would otherwise have been immediately lost in global competition. As the work intensification is also increasing due to cost factors, the people affected pay a high price for their indeterminate continuation of employment. On the other hand, underemployment is on the rise, not only because of partial work intensification, but also because of the unbroken trend towards territorial specialization and industrial concentration, which is dictated by global cost pressure and results in widespread deindustrialization, i.e. economic desertification and a shrinking spectrum of vocational qualifications in demand. The volume of work is thus distributed more and more unevenly and unfairly among the working population as a result of longer working hours and industrial concentration.
ÖP: Is there a meaningful measure for determining working hours?
GZ: The question of how much we should work must be based on our demand with regard to the progress in production technology, especially in terms of its social and ecological quality. Working hours then automatically result – under the condition of economic equilibrium – from the respective productivity level. With rising productivity, working hours must be reduced and/or wages increased in order to maintain the equilibrium. We can only gain the necessary freedom to decide independently on our economic order by refusing to engage in global cut-throat competition and by shaping our domestic structures and foreign trade relations autonomously and sovereignly. This is the absolutely unconditional prerequisite for bringing the demand for and the supply of labor into line – i.e. for achieving full employment – and for being able to reduce working hours and increase wages in a reasonable manner as productivity rises.
ÖP: Is our public pension system still affordable under the cost pressure? Demographic change is used as an argument for pension cuts and the need for higher growth rates.
GZ: Under neoliberal conditions a satisfactory pension system will never be achieved. Indoctrination is to blame that the statutory pay-as-you-go system (where the pension contributions collected are used immediately to finance the running costs for pensions) is presented as endangered due to insufficient economic growth and global cost pressure, and that a political climate is created to reduce employer-side contributions and channel employee contributions as cheap money into the private insurance industry and the financial markets – see the German Riester pension scheme. All the indications are that the political wrangling over pensions and the increase in old-age poverty will continue. For this reason, the following also and especially applies to secure basic provision in old age: we need a sustainable economic order that makes full employment possible. Then no one will be able to pose our increasing life expectancy as a threat – keyword: ageing society – because, with full employment, the financing of pensions can be easily controlled by means of a flexible retirement age: As productivity rises, the average retirement age can be lowered and/or pensions can be raised. At the same time, every employee can be given the freedom to determine his or her own pension level within a predetermined range, depending on his or her chosen retirement age.
ÖP: Officially, unemployment is falling (referring to 2008!) and full employment is mentioned as a goal. But there is probably a lot of cosmetic calculation being done?!
GZ: Yes, that’s right. As a political guide, we therefore urgently need honest labor market statistics that capture the full extent of underemployment, and, as a supplement, statistics on poverty and wealth differentiated according to income level. The necessary data, which incidentally are available but are officially very restrictively evaluated, can create the necessary pressure to finally introduce an upwardly open progressive income tax tariff, based on Scandinavian experience. And to make statutory social, pension, health and long-term care insurances compulsory for all citizens and all types of income, and without an upper assessment ceiling, so that all citizens pay a uniform percentage of their total income into the insurance schemes, keyword: citizens’ insurance. Furthermore, the already mentioned autonomously and sovereignly shaped domestic and foreign trade economic order is again a basic requirement.
ÖP: What does a sustainable economic system look like? How and to which aim should our economic system develop?
GZ: This question includes the development of our political system, above all the question on how much democracy we need. However, democratic progress is hampered by the idea that conditions in the globalized environment have become so opaque to ordinary citizens that decisions should best be made by experts. But experience shows that economic policy bodies, usually composed of lobbyists, politicians and economists, and dealing with distributional issues, repeatedly succumb to the temptation to decide selfishly and against public interests. Therefore economic players can succeed in evading democratic regulation and establishing themselves in a detached transnational sphere, which offers them the basis to claim without fear of contradiction that their machinations are part of a historically inevitable process of globalization.
ÖP: Are democratic decisions better than expert decisions?
GZ: Democratic decisions, however complex their proceeding may be, are superior to any supposedly efficient expert decision. This is simply because they promote the necessary social learning process allowing decisions to be revised as soon as they are recognized as outdated or wrong. That is why we need democratically designed decentralized structures, or more precisely: subsidiary structures – incidentally, as they have already been agreed in the Maastricht Treaties, unfortunately so far without any influence on the practical policies of the EU. Instead of allowing territorial specialization and concentration to advance, we can then create a nationwide, diverse economic life with intact cycles. Negative social and ecological effects can be combated locally on-the-spot instead of passing them on to the general public and other national economies. And all this is ultimately also a prerequisite for regulated international exchange and trade.
ÖP: So the development must be turned back to small, manageable units?
GZ: Yes, every economic area must manage its economy under its own responsibility. Only on this basis are sovereign foreign trade relations free from blackmail conceivable. It is an illusion to believe that in times of globalization, domestic economic policies must be pursued by consensus at the global level. Although we have to agree on standards and rules of international exchange and trade, the first condition for sustainable globalization is a foundation of autonomous economic areas with functioning economic cycles.
ÖP: With which measures do you initiate the implementation of these goals?
GZ: Every political change starts with democratic persuasion and opinion-forming. To this end, the political interrelationships must be made clear and correctly named. The current undesirable developments can probably be described most simply with the terms »concentration« and »deindustrialization«. This is why the keyword »re-industrialization« is appropriate for the necessary political thrust. The term can be used to work towards a first round of subsidiarily structured rebuilding and making competitive all those industries that have already been ousted in global competition. However, not for the neoliberal kind of predatory competition, but in the sense of constructive competition that promotes progress in productivity, and at the same time allows for the natural and desirable productive differences in the world, and – what was always taken for granted before neoliberal globalization – neutralizes these differences through bilaterally agreed exchange rates and tariffs, and allows trading partners to set import quotas.
The task of a second round must be to decentralize and subsidiarily structure all those industries whose production facilities and ownership structures have been concentrated under global cost pressure. This round requires a much more difficult rethink than the first. Although it is not a question of changing the ownership structure directly, but economic subsidiarization naturally goes hand in hand with a – desirable – decentralization of economic power. And in the long term, ownership structures will also have to adapt to structural change. Incidentally, it is crucial for the success of both rounds that they are carried out under a protective shield of import quotas and customs duties.
ÖP: How do you decentralize the economy?
GZ: It must be said in advance that in a market economy, economic players naturally tend to accumulate as much capital and power as possible. The pursuit of expansion is not reprehensible, but it must be regulated and limited to a beneficial level. The most important task of economic policy is therefore always to decentralize economic structures appropriately so that all citizens can participate in the economy in a self-determined way and enjoy a fair share of the economic outturn. Since taxation is the best method of control, a simple principle emerges: operating facilities can be progressively taxed classified by industry and sector, for example, as the consumption of resources increases, the amount of waste and emissions increases, the number of employees increases and the number of weekly working hours increases.
ÖP: The market will take care of the rest?
GZ: Yes, it is left to entrepreneurial freedom to decide up to what point expansion is worthwhile under the increasing tax burden, or when it is better to sell part of a company and invest the sales proceeds achieved, for example, in qualitative progress that is not subject to taxation.
ÖP: What are the advantages of subsidiary structures?
GZ: In addition to distributed diversity and responsibility, which are prerequisites for high employment levels and careful handling of natural resources, they promote »horizontal« domestic competition within individual subsidiary levels on the one hand, whereby the scope is locally and regionally limited at the lower levels, thus providing clear geographical dividing lines between different national productivity levels. On the other hand, they promote »vertical« competition between the different levels, especially between labour- and capital-intensive productions, which can coexist within a sector due to subsidiary structuring and corresponding taxation. All in all, production and productivity gains are then fully at the service of social welfare.
ÖP: How do you restructure foreign trade?
GZ: Thriving foreign trade can only be expected if countries can develop their specific competitive advantages. These advantages are rooted in their natural resources, but also in their cultural traditions. The development of specific advantages naturally results in considerable territorial differences in productivity and products. Both are not only unavoidable, but absolutely desirable and future-oriented for the diversity of world trade and for progress and trading gains induced by foreign trade. Economic globalization must promote and exploit this diversity. Incidentally, the appropriate economic mechanism for this has been known for two hundred years: Instead of competing on absolute price advantages in US dollars and euros as in neoliberal foreign trade and thereby decimating natural diversity with its evolved cycles through dumping and predatory competition, economic areas can beneficially compete on relative price advantages. This requires trade agreements.
ÖP: What kind of trade agreements would these be?
GZ: First and foremost, it must be agreed to regularly calculate exchange rates based on a basket of products to be traded bilaterally in order to neutralize the average price gap, and thus indirectly the productivity gap, so that an ongoing purchasing power parity between currencies is achieved. In other words, the price of an averagely expensive commercial product in domestic currency, when converted at the exchange rate, yields exactly the same price that the same or similar product has in the trading partner’s country. In even simpler terms, if travellers were to purchase foreign currency when crossing the border, they would pay the same prices for the averagely expensive products as at home. But this is not primarily about tourism, but about foreign trade. That is why trading partners must also grant each other autonomy in determining trade volumes and tariffs for fine-tuning import prices, so that they can constructively integrate imported products into their domestic markets and competition.
Since domestic competition by its very nature is always settled by absolute prices, economic players must initially stand the test in domestic competition. Moreover, if they want to export to a certain country, they can only succeed if they offer their products at prices that are lower than those of their trading partner in relation to the average price of all bilateral trade products in local currency – in each case on the basis of exchange rates that neutralize the average price gap. In other words, their products must have a »comparative price advantage«, as it is called in economic jargon. This price advantage arises from relative higher, not from absolutely higher productivity. Whether the products can actually be exported then depends ultimately on the autonomous decisions of the trading partner. Under these conditions, countries’ individual productivities and prices no longer play a role, meaning that even countries with completely different levels of productivity can engage in constructive trade with each other. Comparative advantages allow precisely calculable trading and prosperity gains and, if qualitative growth is made the basis, also contribute to sustainable welfare.
The practical building of subsidiary economic structures under the conditions of the neoliberal globalization as an entry into a post-neoliberal economic order is dealt with in the article Building Subsidiary Economic Structures.
Note on the COVID-19 Pandemic
The pandemic has noticeably revealed the significant weaknesses of the neoliberal economic system for everyone, above all the shortage of medical, but also other products, caused by disruptions in the absurdly networked value and supply chains across the globe.
The analyses of the neoliberal system as well as the principles and practical procedures based on them for building a sustainable system, which are presented in this compendium, thereby obtain an unexpected topicality. Now is the time to seize the opportunity and build up economic policy pressure to enforce the development of an economic order that is sustainably oriented towards social and ecological welfare.
The following article refers to the targeted arguments contained in the Compendium: COVID-19 and Globalization
Click here for the German language version: Dezentralisierung: Fragen und Antworten.