Falling Down - Stiglitz

[messychopper]

Our economy is based on MEW dontcha know?

Well, it was. Now it's not based on anything at all.

Based on Miracles

[Flatdog]

Yes - the knowledge economy thing is a total delusion. It is the fantasy our politicians cling to, because they have nothing else to offer.

The reason is wrapped up in your last remark. What is a "leading position in the world"? I couldn't give a damn whether the UK is the world's no.1 widget maker, or bottom of every widget-making league table there is. The underlying mentality is the permanent war economy approach, that we are under threat from "them" (towelheads, terrorists, gun-toting Alaskan hockey moms, Asian hordes, etc) so we must fight back by ramping production in some permanent struggle against, well, the other guy. Somebody posted earlier that making lots more bricks is fine as long as we export them. Export them where? Every country wants an export-led economy, so let's all devalue so we can export more cheaply to whoever hasn't yet devalued so we can undercut their home production. Until they devalue in turn. Ah. Bit of a problem there. And of course if they are part of a currency bloc they can achieve the same thing by forcing down wages - perhaps by importing lower-paid workers from somewhere else. It may not have been in the past but it certainly now is a zero-sum game.

What gets lost sight of is that the economy is a means to an end, not an end in itself. The point is for individual human beings to lead satisfying lives. Part of this is external (the necessaries and a few luxuries every now and then), part of it is internal - we need to grow up and stop demanding more more more in thoroughly childish fashion. Sadly it is easier to satisfy the infantile craving for more stuff, more novelty, more shiny disposable immediate gratification tat than to work on the things that are satisfying at a deeper level. Politicians know this so they pander to the infantile, posturing on the world stage claiming that we're the 6th biggest economy so don't you mess with me but yes of course Uncle Sam we'll do whatever you want and would you like to borrow our army to go on some pointless military venture as you need more oil to run your latest toys.

We badly need a more grown-up debate about the good life and stop regarding the means - the system of making and exchanging - as an end in itself.

Another great post.

Call me an optimist but perhaps this hapless government and their Ponzi schemes might at least cause reality to filter further into society...and by doing so prompt the wider and more grown-up debate needed.

[Mr Nice]

We're the world's 6th largest manufacturing nation and we have a host of small, dedicated, companies providing the manufacturers with services.

the trouble is that the definition of manufacturing is changing as well.

putting burgers together at mcdonalds is technically "assembling," but it isnt the same class of jobs we used to have like assembling cars.

also you run a huge risk of those countries that actually DO the manufacturing realizing that they don't particularly need your "services," that they can usually do both themselves.

[Bloo Loo]

That's pretty much it.

Price signals are telling people to take it easy and work less. People won't listen and this is in effect self harming, because it just makes the problem they have worse.

our systems and fundamentally ourselves are designed for an environment with scarce food and limited opportunities, they go on the fritz when we have abundance, we fundamentally aren't wired for it.

now that would explain why, when mortgage rates were lower, people didnt improve their lives by using their newfound excess cash to enrich their lives, they competed with each other to bid up the price of housing by borrowing more.

[munro]

Fair point - exporting bricks is a stupid example to what I saw as a silly premise - that building more houses somehow furthers our economy and standard of living.

I don't see export as some kind of blue/red game where we win and screw the rest of the world. I just think mutually beneficial trade is the basis of a sound economy - we do what we're good at and sell it, we buy what we're not so good at and in theory global standards of living rise.

Absolutely I see the problem being that UK has specialised in non-value-adding activities like complex financial services - only thing we're creating is paper money. That's a different premise from the knowledge-based economy where what you're good at is based on what you know that can genuinely add value to the production process (e.g. London Transport sending consultants to Venezuela to advise on transport policy).

The vast majority of consumer 'wealth' in the UK sits in house prices and it's not real. People are all trying to put in a conservatory, 'add £20k of value' and sell it on the next idiot. That's my frustration, bringing things back to the point of the forum.

Feel free to take me apart, just my views

The bricks aren't a stupid example - the problem is to do with exporting in a globalised economy. The theory of comparative advantage, as it's called, dates back to ca 1815, particularly Ricardo in 1817 (article here http://en.wikipedia.org/wiki/Comparative_advantage#Criticism ). The problem is just that - it's a theory. It doesn't work any more for reasons given in the article (in brief, that the free movement of capital undercuts any advantage that might have occurred otherwise). It was written up by Alfred Marshall in his 1890 Principles of Economics, which was the text book in the subject for years. I haven't read it, but I did read some years ago that Marshall admits in an appendix that free trade, which underpins comparative advantage, can't be justified theoretically. The truth is that free trade works for countries that are richer, more powerful, and more industrialised, which happened to be us in the 1890s. It isn't us any more and free movement of capital and tax competition is contributing to trashing our economy.

Of course it's a different matter if you have natural resources to sell, as the Middle East countries are well aware. But we don't have much to sell and we're rapidly running out of oil and gas.

Previous posters are right about this "adding value" notion - it only works if there's something we can do that the other guy can't. Doesn't apply any more. Sure some people will get work as per your LT guys but that leaves the lumpen proletariat at a loose end.

"Wealth" all tied up in housing - just so. It isn't "wealth" in a collective sense, just redistribution. The thing in all this that niggles me is whether it is now worth buying a house at all, at least if you look at it in strict financial terms. Diminishing energy and rising prices for it may reduce the money available to service mortgages year in, year out for the foreseeable future, in which case tying oneself to a big mortgage is nuts. On the other hand inflation might go wild, in which case one should leverage to the eyeballs and beyond. This is what really bugs me - it's all become a matter of game theory and trying to second-guess what's going on. A crystal ball would be handy.

[LowestoftBoy]

What's wrong with making and selling bricks?

Nothing wrong with this in itself, but we need to export them. Impractical, due to them weighing as much as... bricks.

[Injin]

The bricks aren't a stupid example - the problem is to do with exporting in a globalised economy. The theory of comparative advantage, as it's called, dates back to ca 1815, particularly Ricardo in 1817 (article here http://en.wikipedia.org/wiki/Comparative_advantage#Criticism ). The problem is just that - it's a theory. It doesn't work any more for reasons given in the article (in brief, that the free movement of capital undercuts any advantage that might have occurred otherwise). It was written up by Alfred Marshall in his 1890 Principles of Economics, which was the text book in the subject for years. I haven't read it, but I did read some years ago that Marshall admits in an appendix that free trade, which underpins comparative advantage, can't be justified theoretically. The truth is that free trade works for countries that are richer, more powerful, and more industrialised, which happened to be us in the 1890s. It isn't us any more and free movement of capital and tax competition is contributing to trashing our economy.

Of course it's a different matter if you have natural resources to sell, as the Middle East countries are well aware. But we don't have much to sell and we're rapidly running out of oil and gas.

Previous posters are right about this "adding value" notion - it only works if there's something we can do that the other guy can't. Doesn't apply any more. Sure some people will get work as per your LT guys but that leaves the lumpen proletariat at a loose end.

"Wealth" all tied up in housing - just so. It isn't "wealth" in a collective sense, just redistribution. The thing in all this that niggles me is whether it is now worth buying a house at all, at least if you look at it in strict financial terms. Diminishing energy and rising prices for it may reduce the money available to service mortgages year in, year out for the foreseeable future, in which case tying oneself to a big mortgage is nuts. On the other hand inflation might go wild, in which case one should leverage to the eyeballs and beyond. This is what really bugs me - it's all become a matter of game theory and trying to second-guess what's going on. A crystal ball would be handy.

This might be the ultimate HPC thread. Top posts.

Just saying......

[Optimuswolf]

http://www.tnr.com/politics/story.html?id=...ac-579658c99ddf

Great article. Enjoy!

You like this article? Seriously?

It is good - would like to see more detail on the last paragraph. The problem I have with Stiglitz, Krugman et al is that when you leave academia for a career in media you lose a lot of the rigorous testing of your views that made you a nobel prize winner etc. You start getting sloppy relative to your former self.

[LowestoftBoy]

Yes, hence retraction above.

We could export our brickmaking expertise and knowledge to places like USA who still build their homes from timber.

[andrewwk]

I find that very hard to believe. Do you have an up-to-date source?

Oh man. this constant back and forth about manufacturing is doing my head in.

What to do :

1. go to google and look up office for national stats

2. download their spreadsheet and docs that give a breakdown of manufacturing. you can then

a. find out which sectors are affected by missing trader fraud and how they deal with it

b. graph each subsector's output and see how they have been doing over the years and see if there

are anomalies etc (i.e. how far you feel comfortable with the figures).

c. compare the headline figures to the cia.gov ones often cited here.

that way we can get to some sort of conclusion. I would do it myself, but I am lazy and don't care enough

if I am honest (despite this long-winded post..).

NB-this is not a personal attack on anyone, I just think the argument is a bit sterile.

[benj]

Yes - the knowledge economy thing is a total delusion. It is the fantasy our politicians cling to, because they have nothing else to offer.

While the buzz-phrase "knowledge economy" is certainly a hollow phrase that only a politician could ever truly believe in, the importance of knowledge in an economy can be understated as well as overstated.

They key to harnessing the world's resources to improve living standards for everyone is innovation. This is what is supposed to drive capitalism. Someone has an idea to change something in the world - maybe something big, maybe something small. Whatever it is, if there is a desire for it then people will pay for it. The innovator will be able to make a profit from his idea - provided he has the wherewithall to develop it and the skill to bring it to the market successfully and a good dollop of luck to boot. Then others will see what he is doing and set up their own businesses doing the same thing, maybe slightly differently. Competition hones innovation, and drives down the price of the new product or service. Eventually, there is no profit to be made in that sphere, and it is time for a new innovation to disrupt the status quo again.

If only capitalism actually worked like that in the real world!

Still, it is undeniable that innovation has the power to make our lives better. It also has the power to make them worse. The market is supposed to solve that problem too, but it doesn't. So we have improved sanitation thanks to the flushing toilet - but we need to pipe all this water to every house and most of it drains away again wasted. So we have private transport, so everyone can go wherever they like - but it polutes the very air we breath. So we have cheap, tasty things to eat - that all too easily ruin our health. Is innovation always desirable? On balance, probably yes. Specific counter-examples are not hard to find. If you don't believe me, ask anyone who works (or worked until recently) at a fixed-interest trading desk.

The wonderful thing about innovation is that it is cannot be surpressed . It is hardwired into our very nature. It happens as readily in bad times as in good times - maybe more so. It is impossible to throw this particular baby out with the bathwater. But the way our economies are heading at the moment, the biggest risk to the baby is that it will drown in a bath full of debt. We need to pull the plug, and fast.

[wonderpup]

What feeds innovation is synergy- many minds interacting. Maybe one reason that a small island like the UK was able to innovate it's way to having the British empire was because it was small- shorter lines of communication, faster transfer of ideas, more concentrated groups of expertise- more synergy.

Today the internet allows thought to travel more or less instantly- the 'developed' nations lose the advantages that their superior communications networks gave them in the past, and thus lose their advantage in innovation.

really though, the 'knowlege economy' is just a comforting bed time story to conceal the fact that we are asset stripping our nation and exporting our jobs to make a few rich men even richer.

[Flatdog]

What feeds innovation is synergy- many minds interacting. Maybe one reason that a small island like the UK was able to innovate it's way to having the British empire was because it was small- shorter lines of communication, faster transfer of ideas, more concentrated groups of expertise- more synergy.

Today the internet allows thought to travel more or less instantly- the 'developed' nations lose the advantages that their superior communications networks gave them in the past, and thus lose their advantage in innovation.

really though, the 'knowlege economy' is just a comforting bed time story to conceal the fact that we are asset stripping our nation and exporting our jobs to make a few rich men even richer.

IMO, post 'Empire', global communications have evolved at a much faster rate than mankind.

Perhaps we are just an Airmail species struggling to cope with a self-imposed Cyberspeed world.

[winkie]

[Flatdog]

In other words we spend our lives on HPC instead of doing something useful about it all.

QED

Daft not to avail oneself of the facilities but...

[Pindar]

The process whereby the knowledge and expertise of the early industrialisers is transferred to the rest of the world seems to be driven initially by high costs in the original country. This process can either be purely a transfer of expertise and knowledge or it can be harnessing of cheap labour in order to produce the same goods more competitively. In either case, they eventually lead to the target country becoming wealthy and building manufacturing capacity in terms of skills, infrastructure and knowledge. In the case of Japan, the process started after the war - technology was copied and mass produced cheaply - it was technology that was in high demand so the Japanese economy grew exponentially and spawned home grown giants like Sony etc. who now have enourmous R & D outfits of their own.

This is an example of what will eventually happen with China, India and other emerging economies. This is why reliance of "knowledge economy" is really just treading water in the interim between being kings of industry and manufacturing to becoming just another country with some manufacturing capacity. Manufacturing capacity means availability of skills, capital and infrastructure.

Since skills and capital are now global, it effectively means that small countries like the UK do not necessarily need to invest heavily in universities and training unless they have a political interest in it. The unfortunate side effect of this is that children born in the UK no longer have the opportunities they once had to attain the skills their predecessors did unless they are willing to study overseas. I see UK students wishing to pursue engineering/scientific degrees travelling abroad more and more in future - perhaps to universities in the far east or the US. What concerns me is that the standards of the schooling system may not be rigorous enough to prepare young people for studying science or engineering elsewhere.

At some point in the future when most of the globe has been industrialised, we may see manufacturing investment come back here - the stage having been reached where there'll be little to differentiate one global location from another - little that is, other than plentiful and cheap energy. People will be recruited from a global pool for skills and infrastructure will be built on demand.

The nations that invest in energy security now, will prosper in the future. The notion of the nation state will become increasingly diminished and a region will be either energy rich or energy poor. The only thing that has been keeping the likes of the UK "rich" is that we have relatively good infrastructure, skilled enough to fill jobs in foreign owned car plants and an artificially over-valued currency which makes imports relatively cheap whilst making exports expensive, our exports are high-value, quality goods which people are willing to pay more for.

We were once an energy rich country. Now this is in decline, our only hope is to invest what we still have into alternatives like nuclear, tidal and wind. Northern europe has an abundance of wind and waves even if sunshine may be lacking - the opportunity should be seized now while we are still relatively wealthy, to build the power plants of the future - even when measured in today's £/KWh they look expensive. Tomorrow, when fossil fuels are scarce, that £/KWh will be insignificant.

[JustYield]

We badly need a more grown-up debate about the good life and stop regarding the means - the system of making and exchanging - as an end in itself.

We are sometimes guilty of looking down on the French - but they are far more open to considering life and the economy holistically. (Although this stereotype is changing apparently.)

now that would explain why, when mortgage rates were lower, people didnt improve their lives by using their newfound excess cash to enrich their lives, they competed with each other to bid up the price of housing by borrowing more.

Exactly. Doesn't it also show such a dismal collective lack of imagination?

Still, it is undeniable that innovation has the power to make our lives better. It also has the power to make them worse.

It is interesting that as a civilization takes certain forks in the road it is almost impossible to backtrack and take the better path. That is left to the emerging economies if they learn from the mistakes in time, and so leapfrog ahead.

Two factors in the last 100 years make it even more important that we organize and head down the right path: exploitation of finite oil supplies, population explosion. It is a very unstable situation we find ourselves in.

The nations that invest in energy security now, will prosper in the future.

...

We were once an energy rich country. Now this is in decline, our only hope is to invest what we still have into alternatives like nuclear, tidal and wind.

An inescapable conclusion. And not a credit default swap in sight.

[huw]

PLENTY of land in this country for both.

Sadly not. We already import food and energy (needed to make food on what land we do have).

[huw]

Yes - the knowledge economy thing is a total delusion. It is the fantasy our politicians cling to, because they have nothing else to offer.

Knowledge workers are the ultimate specialists; specialism thrives on abundance. Now we're on the down-side of the resource/energy availability curve and the basic assumption of the knowledge economy (that the problems of manufacturing, food production and so on have been decisively solved) no longer hold. So it's more that the politicians haven't caught up than that they're entirely delusional, IMO.

[munro]

Knowledge workers are the ultimate specialists; specialism thrives on abundance. Now we're on the down-side of the resource/energy availability curve and the basic assumption of the knowledge economy (that the problems of manufacturing, food production and so on have been decisively solved) no longer hold. So it's more that the politicians haven't caught up than that they're entirely delusional, IMO.

Yes, I'd agree - saying the knowledge economy is totally delusional is a bit sweeping. Like the earlier post about LT consultants advising abroad. The problem is that the "knowledge economy" can only ever work for a very small number of very smart people, yet our government bang on about it as if it is open to all. The problem is that it seems to be the only game in town; we must upskill, leverage our intellectual assets, exploit our IP, etc etc, and everyone is supposed to be doing this. The original Stiglitz article is along these lines, that somehow we'd be richer if we did more of this and less speculating on housing. It isn't and can never be a "solution" for a whole country and because it is inherently winner takes all (the knowledge workers grab the cake) it is contributing to rising inequality with all its consequent problems.

And of course the more income inequality rises the more likely it is that the housing market will stratify viciously, with slum dwellings (ie HMOs) for the poor and the young, multi-million pound mansions for the few who benefit, and a middle market of ageing boomers shocked to find that no-one can buy up their houses so they can downsize. So prices will compress viciously in a downward direction.

[Injin]

Yes, I'd agree - saying the knowledge economy is totally delusional is a bit sweeping. Like the earlier post about LT consultants advising abroad. The problem is that the "knowledge economy" can only ever work for a very small number of very smart people, yet our government bang on about it as if it is open to all. The problem is that it seems to be the only game in town; we must upskill, leverage our intellectual assets, exploit our IP, etc etc, and everyone is supposed to be doing this. The original Stiglitz article is along these lines, that somehow we'd be richer if we did more of this and less speculating on housing. It isn't and can never be a "solution" for a whole country and because it is inherently winner takes all (the knowledge workers grab the cake) it is contributing to rising inequality with all its consequent problems.

And of course the more income inequality rises the more likely it is that the housing market will stratify viciously, with slum dwellings (ie HMOs) for the poor and the young, multi-million pound mansions for the few who benefit, and a middle market of ageing boomers shocked to find that no-one can buy up their houses so they can downsize. So prices will compress viciously in a downward direction.

For the politicians, those with knowledge = those with control of resources. A scarce skillset means higher income and higher income means the ability to bribe.

While our monetary system and our political systems don't help, both designed as they are to force people to get busy to pay taxes and outrun inflation I don't think the situtation will improve much if they are removed from the equation. People want to impress others, they want more wealth for themselves in a subjective way i.e. relative to the neighbours and not relative to anything objective. Our hindbrain wants us to become chief monkey when there isn't even a defined group to be chief of any longer!

I'm kindof coming arouind to the idea that the pace of change in the economy is now becoming or has already become self hindering. The long investment and start up times don't go well with the uncertainty of the markets in a globalised world, so people don't even begin. Add on protections from the state in various markets.....What we have therefore, is tinkering around the edges of previous advancements with the odd black swan or two thrown in such as the internet.

[betterToDo]

While our monetary system and our political systems don't help, both designed as they are to force people to get busy to pay taxes and outrun inflation I don't think the situtation will improve much if they are removed from the equation. People want to impress others, they want more wealth for themselves in a subjective way i.e. relative to the neighbours and not relative to anything objective. Our hindbrain wants us to become chief monkey when there isn't even a defined group to be chief of any longer!

Completely agree. I was thinking the other day, if we weren't forced onwards to ever-increasing growth, say we sorted out our own monetary system, surely we'd then be even more screwed since relative to the rest of the world that still did, we'd immediately start falling behind, and whilst our quality of life in some respects might improve, in general we'd rapidly become impoverished and enslaved? Neither seems particularly attractive, but maybe I'm drawing the wrong conclusion?

Has it almost become a competition over who has the blaggiest money system?

Edited September 5, 2008 by Fraccy

[notthereyet]

A big part of our economy is based on rising investment values of things - particularly property. Now the whole idea looks a bit silly.

To right what you say,it was always said we need a good mix of both service and manufacturing, gone to far away from manufacturing in my mind.

[Injin]

Completely agree. I was thinking the other day, if we weren't forced onwards to ever-increasing growth, say we sorted out our own monetary system, surely we'd then be even more screwed since relative to the rest of the world that still did, we'd immediately start falling behind, and whilst our quality of life in some respects might improve, in general we'd rapidly become impoverished and enslaved? Neither seems particularly attractive, but maybe I'm drawing the wrong conclusion?

I don't think wed be impoverished because we'd have a better standard of living, it just wouldn't be measured in material wealth - it would be the strength of our relationships, our general health and well being, all that free time would mean incredible output in the arts and so forth.

I do think that we'd wind up enslaved though, eventually, yes. "Decadent and lazy" people are an easy target for warmongers to rally their followers against.

[Mr Nice]

I don't think wed be impoverished because we'd have a better standard of living, it just wouldn't be measured in material wealth - it would be the strength of our relationships, our general health and well being, all that free time would mean incredible output in the arts and so forth.

I do think that we'd wind up enslaved though, eventually, yes. "Decadent and lazy" people are an easy target for warmongers to rally their followers against.

someone (can't remember who) on some show (can't remember which) was saying something that kind of goes along with that.

when we hear of some third world country where they only live on a dollar a day, we are immediately horrified, and can't imagine how such a thing could be possible.

but it many cases in the past (it is changing a bit now), while the population of that country didn't have much money per se, they had a subsistence lifestyle that took care of many of their needs.

they usually were very agricultural for example, so their food and housing was taken care of with their farming.

so the fact that they were only making a dollar a day for work didn't hurt them so much as we might imagine (conditions were many times still grim, make no mistake, just not as bad as a dollar a day sounds to western minds)

as those companies started to urbanize and join into a more modern industrial framework, and move into the cities, their pay might go up ( to 3 dollars a day for instance) but now since they are paying rent, buying food etc etc, their standards of living actually went WAAYY down even though they were making 3 times the money.

whereas before they might have had hard but steady work, a room on a farm, basic food, home-made clothing etc, not they are cramped into tiny flats, living in staggering pollution, working under some pretty miserable circumstances etc etc.

HOWEVER, you almost always have the people almost running into the towns to take the jobs vs their idyllic rural existence, so it couldn't have been ALL that good.