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Can We Have Prosperity Without Growth?

20/2/2015

Prior to the financial crisis, one of the larger concerns facing us all was the impact of our economic development upon the planet. The conversation was discussed in a way that held that there was a trade off between economic growth and prosperity on the one hand, and environmental degradation and resource depletion on the other. These links were well made.

For over 200 years, prosperity had risen. If we compare the average living standard prior to the industrial revolution to the average living standard today, then, at least in the UK, even after the great recession, we are better off today by an order of magnitude. We live longer and healthier lives, with a far greater level of material consumption than our forebears could even dream of. This improvement in our lot is the result of 200 years of economic growth, fuelled by the many technological and organisational developments during that period. Indeed, in our own times, the history of the last 40 years is one of literally hundreds of millions of people moving out of poverty in China and India as a result of economic growth in those countries. To date, economic growth is the vehicle by which prosperity has been delivered.

It is also the case that economic growth has been achieved at the cost of environmental degradation and resource depletion. One only has to think of modern levels of air pollution, acid rain, and the changing climate to take the point that 200 years of economic growth across the globe has had a detrimental impact upon the environment. Some may argue that environmental degradation is a price worth paying for material prosperity, but fewer people nowadays adhere to that cause. Economic growth has also led to the depletion of a number of key resources. Not only the obvious ones such as energy resources, but also implicit ones such as our ability to convert carbon dioxide into breathable oxygen on a planetary level. In that respect, we are poisoning the air we breathe, the water we drink, and the food we eat.

We have allowed this to happen because the cost of the material goods and services that we consume contains a significant external cost that isn’t taken into account in the market price. In the absence of a mechanism to bring the social cost - the private cost we pay, along with the external costs which we don’t pay – into line with the market cost, then the process will continue unabated. Increased prosperity generated by economic growth, at a cost of increased environmental degradation and resource depletion, is a process that can run until we hit the resource limit of a finite planet or until we make our planet unlivable. We do not hazard a guess at which will be the sooner.

For some years, a number of people and organisations, concerned at how this process could run unchecked, have attempted to draw our attention to the problem. Tim Jackson’s 2009 book “Prosperity without Growth: Economics for a Finite Planet” provides a good example of the work in this genre [1]. By and large this constituency has been listened to politely, but no effective action has been taken to address the issue. The great recession has provided us with some interesting data on why that might be and what the problems of addressing the issue might look like.

In 2008-09, in many advanced economies ceased to grow. Many shrank. Since the onset of the great recession, the policy response is to return to business as usual in terms of growth. There has been moderate success in achieving this over the past eight years in the US and the UK. There has been very little success to date in Europe and Japan. As parts of the global economy starts to climb out of stagnation, perhaps it might be time to take stock.

The recession has been kinder to the plant. Resource depletion has abated as falling levels of demand softens the markets for resources, the most dramatic example of which is the fall in the price of oil. With lower levels of economic activity the degradation of the planet will have slowed. To that extent the great recession has made the global economy more viable for the environment. We have seen, however, less growth and less prosperity. In the advanced nations poverty and inequality has increased, and it is the desire to alleviate that poverty and inequality that underwrites the desire for higher growth. We seem to be in a vicious circle that has no apparent resolution. Perhaps we are looking at the wrong issue?

The Brundtland Model

A different way of looking at the issue has been provided by the Brundtland Commission [2]. This constructed a model, as described in the accompanying diagram, consisting of three elements. It suggests that a long term sustainable solution to our predicament needs to balance the interests of the economy, the environment, and society. The great recession has eased the tension between the economy and the environment, but at the cost of making the tension between the economy and society that much greater. To respond to this by returning to ‘business as usual’ might ease the tension between the economy and society, but at the cost of increasing the tension between the economy and the environment.

The apparent problem requires not only policies to address the question of environmental degradation and resource depletion, but also to address the question of poverty and inequality at the global level, if we are to reach an outcome that is lasting. If a solution emerges which people feel is unfair, however ‘unfairness’ may be defined, then there will always be an incentive to move towards a fairer solution through greater economic growth, leaving us back where we started. Previous attempts to resolve the consequences of economic growth, such as climate change, have stalled precisely on the questions of equity. The benefits of climate resolution are shared equally, but the costs aren’t. Until they are, then those nations suffering as a result of climate mitigation, which are mainly the emerging economies, have very little incentive to reach a resolution to the problems of environmental degradation and resource depletion.

Can we have prosperity without growth? It could be possible if we were to develop a feeling of ‘enoughness’ amongst those of us in the rich world, and a willingness to share our surpluses with those who do not have enough in the emerging world [3]. However, the evidence suggests that this is too utopian for our current frame of mind, which means that growth will be the key to prosperity for the foreseeable future, and that environmental degradation and resource depletion are something that we will have to learn to live with as we move into the future.

Stephen Aguilar-Millan
© The European Futures Observatory 2015

References:
[1] “Prosperity without Growth: Economics for a Finite Planet.” by Tim Jackson (Earthscan 2009). For my review of the book on Goodreads, see: https://www.goodreads.com/book/show/10805219-prosperity-without-growth

[2] For more information on the Commission, see: http://en.wikipedia.org/wiki/Brundtland_Commission.

[3] See: “How much is enough?” by Robert & Edward Skidelsky (Allen Lane 2012). For my review of the book on Goodreads, see: https://www.goodreads.com/book/show/15707945-how-much-is-enough.

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Is Deflation Good For Us?

7/2/2015

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It is normally the case that periods of stagnation are accompanied by a period of general deflation. This is a process where companies reduce the prices of their goods and services in order to reduce inventory and to continue trading. Equally, the consumers of the goods and services may be tempted to delay the point of purchase in the expectation of further price reductions. The process then continues with both sides of the equation reinforcing each other over a period of time. The question arises of whether or not this is a good thing.

Deflation has visited Japan for many years now, and is currently making itself felt in Europe. The rate of inflation in the Eurozone fell to –0.6% in January, which is an unwelcome development if we are looking to see the revival of the world economy [1]. Much of this can be attributed to the fall in the price of energy over the second half of 2014. Some can also be attributed to the falling cost of food as a result of bumper harvests. The rest of our current deflation is attributed to deficiencies in demand, especially within the Eurozone. In may respects, this is a consequence of a policy of austerity.

Some politicians have triumphed deflation and very low inflation rates as a vindication of their economic policies. For example, George Osborne in the UK is reported as having said, "Inflation is 0.5% - lowest level in modern times. Welcome news with family budgets going further & economic recovery starting to be widely felt." [2] The Chancellor is almost certainly correct. Falling prices will help to make household budgets go even further. As Osborne’s deputy Danny Alexander put it, lower inflation was "like a giant giant tax cut for the economy" [2]. In the normal course of events, a significant reduction in the price of energy, coupled with a relatively mild winter, should serve to boost household disposable income during the spring of 2015. As long as households spent this windfall rather than save it, we would normally expect one of the results of deflationary pressures to be an increase in economic activity as a result of increased household consumption. If this happens, George Osborne and Danny Alexander will be vindicated.

However, there are two clouds on the horizon. The first is that one person’s expenditure is another person’s income. If I buy a newspaper, the price of the newspaper is both my expenditure and the income of the newsagent. If prices are being squeezed at the retail end of the supply chain, then there is a danger that the deflationary pressure could be served all the way along the supply chain. We are starting to see this happen. As stated above, there is some downward pressure on food prices, and this is starting to have an effect on farm incomes. It is reported that milk is now cheaper to buy than water [3]. Throughout the energy sector in the UK, investment plans are starting to be scaled back and parts of the workforce laid off [4].

This marks a rather dangerous point. If falling prices lead to falling incomes, and if falling incomes lead to the scaling back of employment, then we will have reached a very dangerous deflationary spiral. This is exactly what happened in the 1930s. If left unchecked, a bottom will be found, but at the cost of mass unemployment. Unless there are major changes to economic policy in the Eurozone, this is exactly where Europe is heading. As we have said before - thanks to Wolfgang Munchau - Europe is following ‘the wacky economics of Germany’s parallel universe’ [5]. Recent events suggest that Europe will be locked into this deflationary spiral for some time to come.

The second cloud on the horizon relates to the cost of money. Nominal interest rates are at rock bottom levels – what economists call the lower bound (i.e. zero). Some monetary authorities have even set negative nominal interest rates (i.e. you pay the authorities to look after your money). However, it is not the nominal interest rate that describes the cost of money, the real interest rate does that. The real interest rate is the nominal interest rate less the rate of inflation. So, if the nominal interest rate is 5%, if inflation were to be 2%, then the real interest rate would be +3%. The cost of money to borrowers would be rising each year. Equally, if the rate of inflation were to be 9%, then the real rate of inflation would be –4%. The cost of money to borrowers, in real terms, would have fallen. The role of deflation is to accentuate the cost of money to borrowers. If inflation is –2% (i.e. we are in a situation of deflation), and if the nominal rate of interest is zero, then the cost to borrowers is +2%, in other words it is becoming dearer.

The rising cost of money as a result of an era of deflation is likely to dampen economic activity. The very households whose real disposable income has risen, if they are heavily indebted, might choose to pay down some of that debt rather than spend the money because the cost of that debt is rising in real terms. This form of disguised saving has the potential to nip in the bud the beneficial effects of falling prices. If it does so, then it has the potential to make the deflationary spiral much worse than it otherwise would have been.

Is deflation good for us? In some respects it is. It will lead to rising household disposable incomes, particularly for those who are disposed to spend their windfalls rather than save them. These are usually the poorest in society, who have suffered from fuel poverty in recent years. That is wholly beneficial. However, the silver lining also has a cloud attached to it. If falling prices lead to falling incomes and employment, then there is a danger that deflation will have a depressing effect on economic activity. If deflation really takes hold, then it may also lead to increased saving in the form of debt repayment, which will also have a depressing effect on economic activity and may serve to reinforce the deflationary spiral. This is wholly a detrimental effect, and can be seen within the Eurozone today.

It is too early to tell if we have more to gain than to lose from the current period of falling prices. We need to be vigilant of weak signals of an emerging future to see how things are likely to go. For example, we might like to take note of figures of credit card indebtedness to see if households are using the windfall of lower energy prices to pay down their debt. We might like to see if weaker incomes in the energy and food sectors have a knock on effect by reducing demand in those sectors which service these industries. If deflation is being passed on. We might like to see if either of these factors is having an effect on general retail sales. Is the windfall of rising household disposable incomes being spent or saved? Although the future is currently uncertain, signals about its progress will become evident in the months to come.

Only then will we know for sure if deflation is good for us.

Stephen Aguilar-Millan
© The European Futures Observatory 2015

References:

[1] See: http://www.ft.com/cms/s/0/3172b7bc-a868-11e4-bd17-00144feab7de.html#axzz3Qyt7ZP75.

[2] The statements from George Osborne and Danny Alexander are reported in: http://www.bbc.co.uk/news/business-30794673.

[3] For some background to this see: http://www.theguardian.com/business/2015/jan/12/dairy-farmers-go-unpaid-milk-becomes-cheaper-than-water.

[4] See: http://www.bbc.co.uk/news/uk-scotland-scotland-business-30817678.

[5] See our piece on how Europe is on the wrong path: http://www.eufo.org/the-futurist-blog/the-fourth-reich.

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The Fourth Reich

30/1/2015

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What characterises the modern history of Europe? There are those who say that the history of Europe since the Nineteenth Century is characterised by the struggle for its mastery [1]. In this struggle, there have been four principal players – France, Germany, Russia, and Great Britain. The key struggle has been between France and Germany. The Nineteenth Century opened with the Napoleonic Wars, where France had the upper hand against the German remnants of the Holy Roman Empire – the First Reich. Eventually, a combination of German states, Russia, and Great Britain managed to subdue Napoleonic France to bring peace and stability to the continent of Europe.

The next phase of history can be seen as the growth of the German state as we know it today under the leadership of Prussia. Bismarck guided the German state into predominance in Europe, a process that led to the creation of modern Germany in 1871. The new German empire – the Empire of the Kaiser – became the Second Reich. Based upon the legitimacy of force, this attempt to mould Europe in the shape of Germany failed at the end of the First World War in 1918. However, the failure was not complete. The embers of German nationalism continued to glow and were fanned into flames by Adolph Hitler. A revived Germany – the Empire of the Fuhrer – continued the policy that could be traced back to the days of the First Reich – dominance in the West of Europe to provide security in the East. We do not need to be told how badly that ended. Hitler’s Third Reich left Germany devastated in 1945.

However, Germany occupies too important a place on the continent of Europe to be allowed to become an economic ruin. That was the mistake that the Allies had made in 1918. In 1945, the lessons had been learned and Germany was offered a generous Post-War settlement to allow for the reconstruction of the country. As part of that reconstruction, Germany joined the community of nations that started to form into what we now know as the European Union. The EU was designed to ensure that a continental war would not happen again. It did not replace national rivalry, it merely ensured that the arena for conflict moved from the battlefield to the board room. It is important to bear in mind the panorama of this narrative if we are to understand the current situation within the EU and if we are to be able to form an opinion of where events may next take us.

The Post-War settlement in Germany brought about a distinctive way of organising economic affairs. Deeply ingrained into the German way of organising and economy is the doctrine of Ordoliberalism, described by some as ‘the wacky economics of Germany’s parallel universe’ [2]. This doctrine essentially rejects the insights of Keynes, both in the monetary as well as the fiscal arenas. It is a free-market doctrine that aims for the fiscal neutrality of balanced budgets, low inflation as a result of tight monetary policy, prosperity to be delivered through growing external trade surpluses, and for internal adjustments to be made on the supply side in the labour market. This has worked well for Germany since 1945. It has been imposed on the Eurozone as a remedy for the current recession. It has been a disaster.

Each attempt to unify Europe in its own image has been a disaster for both Germany and for Europe. The First Reich did not re-establish a Catholic Europe, the Second Reich did not establish the military supremacy of Germany, and the Third Reich failed to establish the racial and political conformity of Europe. We are currently witnessing the failure of the Fourth Reich – the Empire of the Chancellor – to cast the European economy in its own image. Considering why this has failed offers us some useful clues to possible future courses of action.

There is a central flaw in Ordoliberalism as an economic doctrine. As long as the nation following that doctrine is relatively small in terms of total world trade, and as long as the economy is relatively open, then surpluses can be allowed to accumulate indefinitely. However, across the global trading system, all surpluses and deficits must balance out. The problem of trade imbalances arises when the same policy is followed in a relatively closed trading system, such as the Eurozone, that is dominated by the nation advocating the policy. A surplus on the trading account and an absence of movements in the exchange rate creates a deficit on the capital account if the fiscal position is neutral. In other words, firms and households absorb the trade surplus as prosperity rises and recycle this excess income through the financial system in the form of loans to foreigners. The money-go-round happily continues until such point as the ability of the foreigners to service their debts comes into question.

When the money-go-round stops, the foreign counterparties to German loans find themselves beggared. At this point, the creditor has the upper hand by threatening to halt the supply of finance upon which the debtor depends. This happened with the debtor nations across Europe, but the continued funding cane with strings – the debtor nations had to pursue the policies of Ordoliberalism. In a single word, austerity.

From the perspective of debtor nations such as Greece or Spain, austerity as been a disaster. The fiscal contraction required by the programme of austerity has taken out of their economies so much demand that we are currently witnessing a lost generation of young workers as the supply side adjusts in the labour market. With youth unemployment of over 50%, the social cost of austerity has been substantial. Whilst to a Keynesian the remedy – fiscal expansion - is simple, to the Ordoliberal the remedy is quite different. To them, continued malaise indicates that the supply side reforms to the labour market have not been pursued hard enough. More austerity is needed. It is at this point we now find the current battle lines drawn up. Syriza have won control of the Greek government on a platform of ending austerity. Podemos in Spain are polling well ahead of the general election in Spain later this year. Just to add spice to the sauce, France has missed the fiscal targets set out in the new Ordoliberal regime in Brussels, and is set on a confrontational course over the fine it may face for doing so. What happens next?

This is an area that has been gamed extensively in the past couple of years. The present arrangements are unsustainable and the governments of the debtor nations are receiving clear electoral mandates to end the policy of austerity. Nations such as Greece that are in a primary fiscal surplus (i.e. a surplus before debt repayments) have a much stronger position than those still in primary deficit, such as Spain. Spain still needs to borrow to provide essential services, Greece needs to borrow to make repayments on its borrowings. It could be that one or more debtor nations could be forced out of the Euro, but a more interesting possibility is if one of them is asked to leave but refuses to do so. As long as that nation has a primary surplus, it has no need of a funding facility at the ECB and can consider undertaking a selective haircut of some of its debt. An outright default is not beyond possibility.

It then that the pressure would be placed upon the creditor nations. Is it worth losing all of that indebtedness in a default rather than losing only some of it in a more general haircut? German politicians talk about the moral hazard of irresponsible borrowers, but we may hear more about the moral hazard of irresponsible lenders. Those who were silly enough to lend money to those who could not repay the debt, on the same terms as those who could. If we pursue this line of though further, we can start to see the case where a creditor nation, such as Germany, feels that it is being forced out of the Euro. More ‘Gerexit’ than ‘Grexit’.

We can get a feel for the consequences of a Gerexit if we look at what is currently happening in Switzerland. Here we have a country that has had its exchange rate kept artificially low by association with weaker economies, where trade has become an important source of prosperity, and where it is small enough in global trade not to have distorted the overall patterns of trade. When the artificial exchange rate is restored to a market level, it rises dramatically in a small space of time. The net effect is to suck in recession and deflation from the weaker economy to which it was attached. This is not a good prospect for Germany.

It is reasonable to believe that we are now witnessing the last days of the Fourth Reich. The policy of Ordoliberalism, upon which it is based, is now coming under so much pressure that it is hard to see it continuing for much longer. The trade and financial counter-parties are now starting to reject the policy on the grounds that austerity is too expensive. Germany will either stay with the Euro, in which it may receive a really hard shock to its financial system in the form of debt write-downs. Or Germany will choose to leave the Euro, in which case recession and deflation will follow. The only way for Germany to avoid these two evils would be to abandon Ordoliberalism for a more modest dose of Keynesian fiscal expansion.

Whatever happens, we are heading towards a new normal, one in which the Fourth Reich becomes so different that it is not recognisable as such.

Stephen Aguilar-Millan
© The European Futures Observatory 2015

References:

[1] This theme is famously developed in ‘The Struggle For Mastery In Europe 1848-1915’ by AJP Taylor (Oxford 1988)

[2] See Wolfgang Munchau http://www.ft.com/cms/s/0/e257ed96-6b2c-11e4-be68-00144feabdc0.html?siteedition=uk#axzz3O9LMKqqE

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A Gnome’s Pockets

23/1/2015

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I have before wondered about the depth of a gnome’s pockets [1]. I am, of course, not speculating about ordinary garden gnomes, but those who occupy the lofty heights of the world of finance in Switzerland. The Swiss National Bank has recently abandoned the peg between the Swiss Franc and the Euro, established in 2011 at SFr 1.20 per Euro. The immediate consequence of this action was for the Euro to plummet in value to about SFr 0.80 per Euro, although it has since recovered to about SFr 1.0 per Euro.

In the short term, this has been unfortunate to a number of interests. Because the exchange rate had been relatively stable since 2011, a false sense of security had been allowed to develop in the currency trading community. Speculators were allowed to trade at very thin margins. When the currency moved substantially in a matter of minutes, a large number of traders were wiped out. And some! The contagion reached back into the brokers who facilitated the trading on thin margins, and they have gone ‘pop’ as well. The larger banks were not excluded from the impact of the turbulence. It is reported that Barclays, Deutsche Bank, and Citigroup have lost a combined amount of $USD 400 million [2]. It is yet unclear how far this contagion will go, but it will certainly test how robust the banking system is.

There is little need to speculate why the Swiss National Bank took its decision. Apparently, defending the Swiss Franc would have cost the SNB about $USD 100 billion in January alone [3]. The prospect of QE in the Eurozone is likely to have raised that figure considerably. As Europeans buy Swiss Francs for Euros, the SNP has had to buy Euros for Swiss Francs in order to maintain the currency peg. It is estimated that the SNB has amassed a total of $USD 480 billion worth of foreign currency since 2011, a figure representing about 70% of Swiss GDP [4]. These holdings will have lost some value since the abandonment of the peg, a loss that will take time to filter into the Swiss economy.

There is greater concern about the wider impact of the appreciation of the Swiss Franc. The Swiss economy relies heavily upon its trade with the rest of the world. A rising currency will make Swiss exports that much more expensive in foreign currency terms. The country also has an extensive tourism industry, and Switzerland has just become even more expensive than t was before the change. It will also have an adverse effect upon the private banking sector in Switzerland, which will become less competitive when compared to other financial centres. All in all, there are grounds to expect that Switzerland will import deflation and recession from the Eurozone in the months ahead.

It is possible to take the view that Switzerland is a small country and that events there have little impact on most of us. That is a very short-sighted view, one that is almost certainly wrong. The importance of recent events is that they show to us that finance isn’t mended, that risky and volatile financial transactions are still taking place, and that we have not left the era of casino capitalism. It is yet to be seen how far the financial contagion from the currency markets may have spread, but there are already rumours of central bank bailouts of financial institutions.

It is still not safe to breathe easy.

Stephen Aguilar-Millan
© The European Futures Observatory 2015

References:

[1] In many respects, this is a follow up piece to one I wrote in 2011, just as the Swiss National Bank established the currency peg to the Euro. It was obvious then, as it is now, that such an arrangement could not go on for ever. http://eufo.blogspot.co.uk/2011/09/how-deep-are-gnomes-pockets.html

[2] A more detailed analysis on the gyrations of currency trading, margin calls, and the impact on day trading can be found in this article from The Economist. http://www.economist.com/news/finance-and-economics/21640305-fallout-swiss-francs-gyrations-only-just-beginning-swiss-miss

[3] More details can be found here: http://uk.businessinsider.com/afp-swiss-central-bank-says-ending-franc-cap-was-best-option-2015-1

[4] More details can be found here:http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-13

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Who's Afraid Of Big Data?

3/12/2014

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One of the recurring themes in futurist discourse in recent years has been around the possibility of Big Data causing the technological obsolescence of the professional futurist. In a recent post for the Association of Professional Futurists (the APF), our former intern Jason Swanson added a new and different twist to this fear [1]. The purpose of this post is to pose the "so what?" question.

Big Data is defined as the capacity given to us to process large banks of data - using modern computing power - to analyse that data to yield causal relationships that can be formed into models to accurately predict future human behaviour. As the computing power increases, so our models can become ever more complex, and our predictions ever more accurate. Jason speculates whether this may lead to a narrowing in the cone of plausibility, the result of which may be lesser demand for those who deal with a more uncertain and nuanced future - the futurists.

I am not sure that Jason has correctly identified that which is being narrowed. I would argue that what is being narrowed is the cone of uncertainty. It would be correct to say that because a range of outcomes is now less certain, they are seen as less plausible, but it is their lesser certainty that makes them less plausible, not a greater implausibility. This is not hair splitting because the consequence of this is that organisations will not prepare for the possibility of a future that they otherwise would have prepared for.

Perhaps a practical example might help to clarify the point. Let us consider the financial crash of 2007-09. It was largely unforeseen by many in the financial sector, but foreseen by some. The difference between the two was the readiness of a minority to consider the possibility of an implausible event actually happening. This demonstrates a more general misunderstanding of how probabilities work. If an event has a probability of, say, 1%, it is generally concluded that it is unlikely to happen. This is not to say that it will never happen because it will, once in a hundred times.

When the unlikely event of a financial crash did actually occur, what happened next was quite instructive. The financial and commercial certainty of a fixed business environment melted. What were taken as absolute relationships were found to be nothing of the sort. I wrote at the time about the example of the take-over by Lloyds Banking Group of HBoS, and this still provides a good example of how the fixed certainties of a business relationship ended up becoming very fluid [2]. We had moved outside of the cone of plausibility to and uncertain world of implausibility.

The financial and commercial community had mistakenly believed that because an event has a very low probability, it could not happen because it was too implausible. There is an area of futures practice that operates in this environment. The low probability, apparently implausible, landscape is the territory of the Wild Card [3].

Stephen Aguilar-Millan
© The European Futures Observatory 2014

References:

[1] Jason's post can be found at: http://profuturists.org/blog/3160724

[2] The original piece can be found here: http://eufo.blogspot.co.uk/2009/02/pig-in-poke.html

[3] For more on Wild Cards, see: http://www.eufo.org/uploads/1/4/4/4/14444650/wfr_june_2013_aguilar-millan.pdf

http://eufo.blogspot.co.uk/2009/03/in-praise-of-futurists.html

http://eufo.blogspot.co.uk/2009/03/more-on-futurists.html

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The Productivity Hole

14/11/2014

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The Basic Perez Model restated to include a projected temporal dimension.

For a number of years a puzzle has been occupying commentators on the British economy. On the one hand, output fell very sharply in the initial phases of the recession in 2008, but on the other hand, employment was kept buoyant. The Economist published a couple of charts at the time (2013) which highlighted this phenomena [1]. The key explanation at the time was that firms were hoarding labour as a way of being prepared for the upturn. In this way, output per worker – a crude measure of labour productivity – would fall.

Since then, we have seen a recovery in the levels of output. However, as output has risen, so have the numbers in employment, suggesting that output per worker has not improved in the early phases of the recovery. It might be that we are simply seeing a time lag in the adjustment process within the economy. Some would point to the are growing numbers of self employed workers, who normally work longer hours for smaller remuneration than their employed counterparts [2]. It certainly goes some way to explaining why it is that, despite a recovery in the wider economy, real wages have fallen for five years. And yet it also fails to explain why it is that labour productivity - the key to increasing real wages – seems so resistant to improvement. Perhaps there is something else going on? How would this issue look from a long term perspective?

Our views on the long term perspective of the economy are very influenced by the work of Carlota Perez. We take the view that we currently occupy a position where the Maturity Phase of the Fifth Wave (the ICT wave) has just begun, and where the Pre-Eruption Stage of the Sixth Wave is starting to emerge [3], which can be seen in the accompanying chart that describes the architecture of the long waves. Elsewhere, we have argued that the Sixth Wave may well come to be known as ‘The Green Wave’ [4]. Much is made of the interior architecture of the waves, but it is worth giving a little thought to the transition from one wave to another. If we were to use the Three Horizons Model to describe this [5], then we could stylise The Fifth Wave (W5) as Horizon 1 (H1), the Sixth Wave (W6) as Horizon 3 (H3), and the transition between the two waves as Horizon 2 (H2). Perhaps a study of H2 might give us some clues about the productivity puzzle from a longer term perspective?

In considering this longer term perspective, we need to give some thought about what the model means. The relationship, as described in a graphical form, shows the ‘degree of diffusion’ over the time span of a technological paradigm - a bundle of related technologies that come to define that paradigm (e.g. the ‘Information Age’). This degree of diffusion warrants further thought. From a slightly different perspective, we could stylise this as the accumulation of change over time related to that particular surge in technology. The greater the degree of diffusion of a technological paradigm over time, the greater the degree of change that is accumulated. If we accept this view of the basic model, then a number of interesting conclusions emerge.

The Productivity Hole - How the Perez surges, the pace of change, and productivity fit together.

One thing that the model suggests is that change does not accumulate evenly over time. There are periods when the accumulation of change occurs rapidly, whilst at other times change accumulates less rapidly. We conceive of this as the pace of change. Within the context of the model, a graphical representation of the pace of change, and its relationship with the degree of accumulated change is shown on the accompanying graph. If this view is correct, then it suggests that the pace of change peaked just before the recession, that we are entering a phase where the pace of change associated with W5 is decelerating, and the pace of change associated with W6 has yet to accelerate to the point where it has a measurable impact. In terms of the three horizons model, we can say that the pace of change will diminish in H2 before picking up again.

This has a number of significant consequences. If we accept that there is a strong positive linkage between the pace of change and innovation, and that innovation drives investment, which fuels productivity gains, then the model suggests that a feature of H2 - the transition from one technological paradigm to another - will be a falling away in productivity gains. In other words, a productivity hole emerges. This has implications for both aggregate demand through a period of sluggish investment performance, and for aggregate supply through a period of restrained productivity growth. We have argued elsewhere that this could well dominate the experience of the rest of this decade, and that we would expect to come out of this phase in the 2020s, as the pace of change associated with W6 starts to gather momentum [6].

What we cannot be sure about is how long this process will take. Much will depend upon the policy environment created by governments. If the policy of austerity continues to be the dominant view of policy-makers, then we can expect the process to take longer than we could otherwise expect if a policy of fiscal expansion were to be followed. It is likely that the deficiencies in aggregate demand will constrain the investment climate as businesses hold back on creating new productive capacity in the face of uncertain prospects of being able to sell the produce of that increased capacity. Continued austerity is almost certain to make further QE likely in the years to come, but this monetary expansion is likely to continue to swell the asset prices of unproductive capital (the stock markets and property values) rather than accommodate the expansion of productive capital. An important part of the Perez model that is missing is an asset switching model between productive and unproductive capital.

Perhaps we might take a turn in this direction in the future?

Stephen Aguilar-Millan
© The European Futures Observatory 2014

References:

[1] http://www.economist.com/news/britain/21570692-dive-britains-productivity-puzzle-uncovers-serious-risk-economy-job-rich

[2] http://www.independent.co.uk/news/uk/collapse-in-pay-lies-behind--britains-return-to-work-9324388.html

[3] Our article can be found here: http://www.eufo.org/uploads/1/4/4/4/14444650/surfing_the_sixth_wave.pdf It also contains a more detailed description of the mechanics of the Perez long waves, along with supporting references.

[4] http://www.eufo.org/uploads/1/4/4/4/14444650/science_omega_the_green_wave.pdf

[5] See our review on the Three Horizons Model http://www.eufo.org/the-futurist-blog/three-horizons-the-patterning-of-hope

[6] http://www.eufo.org/uploads/1/4/4/4/14444650/world_future_review-2014-aguilar-millan.pdf

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What Do Zombie Novels Have To Do With Future Studies?

4/8/2014

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A friend recently recommended “Breaking News: An Autozombiography” [1] for me to read. They thought that I might find it interesting, informative, and that I would enjoy the storyline. The recommendation was based upon the knowledge that we are currently deep into a project on wild card scenarios, and that we are now writing into fiction some of the storylines that have been generated by that project. I have already written about a structural framework through which wild card scenarios – or storylines – can be generated [2], and this aspect of our work takes it to the next step.

I am not quite ready to accept that a zombie novel could be considered a wild card scenario because it only has two of the three key attributes that we would like to see from a wild card scenario. The zombie novel certainly has a very low probability 0f occurring, and it will definitely have a high impact if it were to occur, but the central premise of the zombie story – the living dead – lacks a key element of scientific plausibility. It is this lack of plausibility that places the fiction of the zombie story outside of the canon of wild card scenarios. There is a contrary view that, in a world with the possibility of global pandemics, such as with Ebola disease [3], we ought not to be too dogmatic in our view because, in the new diseases of the future, there is no way of knowing how they will play out.

If we were to experience a zombie emergency, how would we react to it? The Kubler-Ross model ( the five stages of grief) from psychology provides a good framework for analysing this [4]. The model suggests a transition from denial to anger, to bargaining, to depression, through to acceptance. In many respects, the progress of the book is along this journey. The novel splits into four sections. The first is concerned with the recognition that there is a viral outbreak of the zombie virus. I found that to be quite an interesting part of the book. It is all about a denial by the general population of the evidence all around them. It takes a while for people to work out what is going on, and by then, for many of them, it is too late.

Once the survivors had recognised what is going on, then anger soon sets in. The second part of the book is all about retribution (killing as many zombies as possible) and finding somewhere to stay. There is an element of bargaining in this, where the group goes out to forage for food, water, and other essential supplies. This contrast between the destruction of the zombie hordes and the creation of a new society provides a dramatic tension within the novel that works very well. It provides the focus for the depression within the story – that the task of building afresh whilst fighting off the zombie menace might overwhelm the small community. This creative aspect occupies the third part of the book, which I found immensely interesting.

Of course, like all quest stories, the heroes of the story manage to attain their quest. The fourth part of the book is the one devoted to the future of the small community. I have to say that is an issue which I consider well worth studying. However, I found this to be the weakest part of the book. It would seem that the British monarchy have survived the crisis and are seeking to command the loyalty of the remaining small communities of survivors. Why these communities should have any particular loyalties towards an institution that abandoned them to their fate escapes me. There were so many inconsistencies in the ending that I found it to be pretty unconvincing. However, the story is to be continued in a sequel to the book, which I await with great anticipation.

The book is well written and the pace of the narrative keeps the reader moving along quite nicely. There are some good touches to the narrative, such as the golfer zombie who continues his swing on the golf course, just out of the sheer habit of doing so. I guess we all know someone like that. There are also some good jokes and quirks in the narrative that manage to keep the plot interesting, such as Bub the captured zombie. In terms of being just a good read, the book has much to recommend it. However, it also has something extra. The book serves as a good template for writing wild card scenarios, whether it be the aftermath of a flu pandemic or the consequences of a solar burp that wipes out all of the electronics on Earth. It is for this reason that I am grateful to my friend for recommending this book.

What do zombie novels have to do with future studies? Until recently, I would have answered that they don’t really have an awful lot to do with each other. I think that it now might be time to change my mind.

Stephen Aguilar-Millan
© The European Futures Observatory 2014

References:

[1] ‘Breaking News: An Autozombiography’ by N J Hallard (Cissbury Publishing 2010, ISBN 978-1-4457-8538-7)

[2] My piece can be accessed at: http://www.eufo.org/uploads/1/4/4/4/14444650/wfr_june_2013_aguilar-millan.pdf

[3] See the Wall Street Journal for one case of Ebola disease being moved from the point of incubus in Africa to North America for treatment: http://online.wsj.com/articles/cdc-chief-seeks-to-allay-ebola-fears-1407081530

[4] See the Wikipedia entry for the Kubler-Ross model: http://en.wikipedia.org/wiki/K%C3%BCbler-Ross_model

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Three Horizons: The Patterning Of Hope

3/8/2014

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by Bill Sharpe

ISBN 978-1-909470-27-9

This book is more like a collection of essays. The essays are connected, but also distinct and could quite easily stand alone. I have to say that I came to 3 Horizons from a practical perspective. I learned about it in action, I saw it in action, and that led me to want to read about some of the genesis of the technique.
I am a bit of a fan of 3H. It can work well if you keep in mind what it can do, and what it can't. It is not a model - there is no causality path. It is a tool - something that can help in the process of reaching the objects of a futures exercise. It is good in the examination of the flow of change, in the identification of why it is that some people embrace change whilst others resist it, and helping people map a transition from an old paradigm to a new one.

What I particularly like is the idea that there is an emergent future (H3 in the jargon) in the present, that elements of the present (H1 in the jargon) will still be seen in the future once it has emerged, and that the transition to the new future (H2 in the jargon) will be seen in both the old and the new. That came as a bit of a revelation to me because it underpins why it is that people embrace the future and why others are also resistant to change. This is a concept to which I will return quite frequently in the future.

I think that the book could do with a good edit. It is a bit bitty in places and the pace can be a bit uneven at times. The first two essays - why we do it and how we do it - are the real payload of the book. The third essay - on how others have used the technique - is interesting, but could easily be missed. And the fourth essay - on some of the philosophical underpinnings - could be seen by some as being a bit abstract.

On the whole I enjoyed the book. I would recommend it to others. It is a technique with increasing popularity, and one that futurists could do well to study.

Stephen Aguilar-Millan
© The European Futures Observatory 2014

Further information about the book can be found on the International Futures Forum web site at:
http://www.internationalfuturesforum.com/p/three-horizons-the-patterning-of-hope

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Showing The Future

1/7/2014

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The mythological princess Cassandra. [1]

Futurists are always mindful of the story about Cassandra. To remind us, Cassandra is the princess in Greek mythology who was both blest with perfect foresight, and cursed by the fact that nobody would believe her visions of the future. We have seen a few Cassandra moments in the past few years. Those alerting us of the inherent instability of a financial system that lent to those who could not afford the repayments were scoffed at. Those who questioned the insane valuations of unproven companies that lacked both earnings and a balance sheet were ridiculed. And those who questioned the wisdom of placing a nuclear reactor by the sea in an area that suffers from tidal waves were seen as uninformed. However, we still experienced the financial crash of 2008, the bursting of the Dot-Com bubble, and a tidal wave inundating the nuclear plant at Fukushima.

Within the world of foresight, there is always a question of how we can get people to pay more attention to our work. In part, we are asking people to give our message more importance than it possibly deserves. There are large numbers of people nowadays who call themselves ‘futurists’, but don’t really bring a vast amount to a conversation. The genius forecasters who pronounce that, “In the future X, Y, and Z will happen!” generally don’t have a great deal of substantive thinking behind their pronouncements, and they are generally vague about exactly when in the future X, Y, and Z will happen. They are easily dealt with by asking them to map out a path by which we get from the present into that future, what forces will shape that future, and exactly when that future will happen. I see this as a lesser obstacle to our cause. Like the pilot fish that congregate around sharks, there will always be fellow travellers who feed off the work of others.

A far greater obstacle to our cause is ourselves. In many cases, the message of foresight isn’t getting across simply because of our inability to convey the message. A cursory review of the majority of foresight output will show two things. First, it is conveyed in a very formal, very serious, very official style. Second, it generally tends to be very poorly written. These two factors combine to make most foresight output very boring to read. It is not surprising that the foresight message is not getting across if it is being used as a cure for insomnia!

This need not be the case. If we make two assumptions, we can achieve much better results. First, let us assume that all futures are works of fiction. I have argued elsewhere that, as the future has yet to happen, an account of the future cannot be factual [2]. It can only convey conjecture, an opinion. Second, the means by which fiction is most effectively conveyed to the reader is at an emotional rather than a rational level. Those who study creative writing – which is what I would argue foresight to consist of – have a technique that they use to describe this. It is called ‘Show, don’t tell’.

The purpose of ‘Show, don’t tell’ is to allow the reader to experience the piece emotionally rather than rationally. The description of events becomes sensory to convey a quality of what is being shown. The writer does this because telling the reader the story leaves little room for the reader to engage with a piece emotionally. It leaves no room for the reader’s imagination to provide a context to the backstory. In a futures context, if we are telling the future, then we are reporting on how we think a future state will evolve. If we are showing the future, we are providing a context which allows the reader to engage with the future at an emotional level. There is a greater degree of involvement to a particular vision of the future by a reader if they have been involved, even at a sub-conscious level, in creating that future vision. It will help to make them want to go out to build that future rather than filing the foresight report, often in the waste-bin.

I often lament how few futures courses give very little consideration to the communication of futures. There are other vehicles, such as video or infographics, but the vast majority of foresight is conveyed by the written word. It is such a shame that budding futurists aren’t taught how to write as a core skill. We seem to be condemned to travel round a loop whereby futurists continue to tell us about the future, which bores the reader, who in turn pays little attention to the work of the futurist.

Perhaps we should give some thought about how to break this loop?

Stephen Aguilar-Millan
© The European Futures Observatory 2014

References:

[1] Picture credit: http://lfianamind.blogspot.co.uk/2012_05_01_archive.html

[2] http://www.futuretakes.org/SpringSummer2009/vol8no1/lsb1.html#lsb2

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Who Are The 1%?

24/5/2014

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A widely held view is that whilst GDP has increased significantly over the past thirty years, incomes - particularly middle-class incomes - have stagnated. It is further argued that in order to maintain their living standards, middle class families - the ‘hard working families’ that have now entered our political life – have been forced to increase their indebtedness rather than see a fall in the standard of living that they enjoy. Part of the persuasiveness of this story is that it happens to be supported by the facts. In the 25 years between 1985 and 2010, real nominal GDP (in 2009 prices) rose by 410% whilst the real value of average earnings (again in 2009 prices) only rose by 142%. During this period, the share of wages as a percentage of GDP has fallen by 3%, emphasizing the stagnation of incomes. At the same time, profits in real terms rose by 191%.

It is this disparity (wages growing by 142% whilst profits rose by 191%) that has given rise to a new modern bogeyman – the 1%. It is generally held that the economy is worked by the 99% (i.e. the vast majority of the workforce) on behalf of the 1% (a new shorthand for ‘the rich’). This has a very appealing sound to it. The rich make the poor work so that they can become richer. It is a view that has gained currency in the light of soaring executive pay and what is seen as the scandal of banker’s bonuses. It provides the theoretical underpinnings for the ‘Occupy Movement’, which has gained currency in recent years. And yet, exactly how much of this has a basis in fact? How much of it represents a modern conspiracy theory?

Delving into data provided by the Office for National Statistics (ONS) [1], we can examine the structure of ownership of UK quoted companies in 2012. In 2012, the latest year for which data is available, about half of the shares on the London Stock Exchange were owned domestically, and about half were in the hands of overseas owners. Of the domestic holdings, about one fifth of the holdings were by individuals, whereas four fifths were held by UK institutions of various forms. Of the overseas holdings, only 1% were held by overseas individuals, with 99% of the ownership being through overseas financial institutions of varying forms. Taken all together, about 11% of the London Stock Exchange was owned by individuals from both home and abroad, with about 89% of the holdings being in the hands of both UK and foreign institutions.

The institutional holdings consist of three key constituents – pension funds, insurance companies, and unit trusts (a form of mutual ownership). The question then arises of who owns the institutional funds. These represent a long term obligation on the part of the financial institution towards it’s pensioners, policy holders, and unit trust holders. In many cases, these beneficial owners are not those normally associated with the 1% elite. We would normally associate these people with the 99% workforce. On this level, the answer to the question: who are the 1%? Is: we all are! If you have a pension plan, if you hold an insurance policy, if you have saved a bit in the form of unit trusts, then you are part of the largest group that owns the London Stock Exchange.

It could be objected that this view is just a little too simplistic. Many one-percenters would put their money into collective funds rather than in straightforward share holdings. Many would prefer the tax wrappings that insurance and pension products could offer. All of this is true. It could also be objected that the London Stock Exchange is not the only depository of wealth. Much wealth in the UK is tied up in property. This is also true, but, excluding the owner-occupation of residential property, the spread of property ownership also tends to reflect the spread of share holdings. Both objections are valid, but do they essentially change the story?

In his review in Prospect Magazine of Thomas Piketty’s book ‘Capital’ [2], Robert Skidelsky makes an interesting point. On one level, we are part of the 1% by virtue of the complex ownership structure of wealth in a modern economy. To this extent, the 1% as a concept reflects a world that no longer exists. There is a slight twist to the tale. In a modern economy, it is not a case of who owns the wealth in the economy, but one of who controls it. Skidelsky points to the move away from a ‘hyperpatrimonial society’ (you are rich by virtue of your family and inherited wealth) to a ‘hypermeritocratic society’ (you are rich because of the job you hold in a ‘winner takes all’ economy). The modern wealthy elite have accessed their wealth by managing the wealth of others. In that sense, these are the 1%.

As long as the system continues where the wealthy elite pay themselves their own inflated value of their worth, inequality will continue to increase. This provides an interesting canvass for the future. Is there a limit to the growth of executive pay? If so, what is it, and where will it come from? The wilder end of the conspiracy theory spectrum talks about insurrection and rebellion, but there are little signs of that so far. Perhaps it is possible for the system to devour itself? If so, how would that work? How much of a financial crash would be needed to make an impact on current levels of wealth? And what would be the collateral damage in the real economy?

I can’t pretend to have an answer to all of these questions, but I do have a better idea of who the 1% are. I also have an idea of where to look next for clues of an emergent future.

Stephen Aguilar-Millan
© The European Futures Observatory 2014

References:

[1] http://www.ons.gov.uk/ons/rel/pnfc1/share-ownership---share-register-survey-report/2012/stb-share-ownership-2012.html#tab-Key-Points

[2] http://www.prospectmagazine.co.uk/magazine/book-review-capital-in-21-century-thomas-piketty/#.U2O1oFdLpqC

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