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Does Inequality Matter?

24/2/2013

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One of the main objections to modern capitalism that is levied by the Occupiers is that it generates a situation that is manifestly unfair. The unfairness of the situation are the large disparities in wealth that have come about during the years of the 'Washington Consensus' (free market economics combined with a minimalist approach to state intervention and regulation). The Washington Consensus has given rise to an unparalleled increase in prosperity across the planet, but one has to ask whether this is  sustainable in the longer term. If the increasing disparities in income and wealth were to lead to increasing levels of social unrest, then the gains to prosperity that have been achieved in recent decades could well be called into question.

An important point raised in Will Hutton's book 'Them and Us' [1] is that for a society to prosper, there needs to be a broad consensus within that society that the distribution of income has been reached through a fair process. Indeed, we have previously argued that the perceived unfairness of our current social arrangements is the result of many of our institutions that are no longer 'fit for purpose' [2]. It has always been argued that, for a harmonious society to occur, an appropriate balance has to be reached between economic efficiency - which normally involves the operation of unfettered markets - and social justice - which normally involves some form of re-distribution  of wealth and income. This point has recently been made by Jerry Muller [3], and is at the heart of the demands of the Occupy movement.

There is, however, more to the issue of inequality than fairness alone. Economists have a concept called the marginal propensity to consume. This is a simple device, which answers the question: if you were given an extra £1, how much of that would you spend? One of the answers that has been consistent over decades is that poorer people in the income distribution will spend more of that £1 than richer people in the income distribution. They have a higher marginal propensity to consume. If we find ourselves in a recession that is typified by a lack of demand in the economy - as we do now - then one of the more effective ways in which to get the economy moving again would be to re-distribute to the lower end of the income scale rather than providing benefits at the higher end. Which seems close to what is asked by the Occupy movement.

The Occupy movement does not speak with a single voice, so it is difficult to characterise exactly what their proposals are. Indeed, I had an interesting afternoon at the Tent City University at Occupy London discussing economic futures, listening to why I was wrong. However, there are those who argue that the present distribution of income is wrong and inefficient. In an interesting Special Report, The Economist reviews various aspects of what reform might look like and argues that institutional reform is more likely to generate more sustainable results than yet more tax, spend, and regulate [4]. This is an interesting idea and has some merit.

Does inequality matter? Yes it does. Inequality produces an feeling of unfairness within society which undermines the social cohesion that we all rely upon. It also prolongs a period of idleness in the economy, when productive resources - especially labour resources - remain under-utilised, which further erodes the social capital that has been built up. We live at a point in time where the root cause of this situation is structural, which means that the most effective remedies are likely to be structural in nature. We are likely to achieve more by attacking crony capitalism than by relying upon the traditional policies of income re-distribution, which is very close to what the Occupiers have been saying.


Stephen Aguilar-Millan
© The European Futures Observatory 2013

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References:

[1] http://www.guardian.co.uk/books/2010/sep/26/them-and-us-will-hutton

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

[3] http://www.foreignaffairs.com/articles/138844/jerry-z-muller/capitalism-and-inequality

[4] http://www.economist.com/node/21564414

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Towards A New Economics

9/2/2013

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There is a wonderful moment in the folklore of economics when the Queen, on a visit to the LSE, asked why it was that so many eminent and distinguished scholars of economics had not foreseen the length and severity of the economic downturn that we continue to suffer. Of course, some had seen the crisis in advance, forewarned of it, and were ignored. Such is the fate of Cassandra! However, it is a point well made, and one that hit home.

What the Queen touched upon was a more fundamental question: is economics fit for purpose? Up to 2007, we would have said 'yes'. The free-market neo-classical economics had delivered decades of rising prosperity and improved living standards. It was only when that particular strain of economics was tested that it was found wanting. It was found that the fundamental principles of the free-market neo-classical economics had a significant flaw - the theory was too divorced from reality. It represented a fiction of human behaviour that was overly influenced by one narrow political stripe. Under pressure, the fiction evaporated.

One response to this was to argue that the theory was right, but that it had not been followed properly. This view doesn't have many supporters now. Another view was that the theory was wrong, and that a new economics was needed, one that gave as much prominence to social contribution as was formerly given to personal enrichment. This is a theme that the Occupy movement has taken up, where social justice is seen as just as important as rising prosperity. Added to that is the growing agenda of sustainability - a world in which there is little economic growth - which helps to form the shape of the new economics.

This indicates two things. First, a growing belief that the days of relentless economic growth are numbered. If we are to see slow, or no, growth, then the issue of the distribution of income - the social justice agenda - is likely to rise in importance. Second, whereas the free-market neo-classical economics had a very restricted role for government, collective social action takes a more prominent role in defining and delivering an outcome that is more socially just. To that extend, the Occupiers are right. And they need a new economics to help them deliver that outcome.


Stephen Aguilar-Millan
© The European Futures Observatory 2013

Debate this issue further on the Deliberator site.

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Are The Occupiers Right?

2/2/2013

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Occupy Wall Street may best be described as a meta-protest. The Occupy Movement, which spread from Wall Street to Occupy movements throughout the world all shared a common theme. People from different walks of life have come together to voice their displeasure at a wide range of things: bank bailouts, student loan debt, lack of healthcare, to name a few. The list is as diverse as the people involved in the Occupy movements. However, at the heart of it all, the Occupiers’ main critique is a protest against the rise of economic inequality, with much of their ire focused on the big banks, or “banksters” according to many in the Occupy movement. This is personified in their signature “we are the 99%”.

The banks have come to represent a system that has potentially failed. Bankers were given huge incentives to create complex financial products and extend cheap lines of credit, in many cases to people who normally would not qualify for loans. The bankers were making vast sums as of money when things were going well, but  when things began to unravel, these very same banks - who were engaged in a high risk / high reward game - suddenly became “too big too fail” and had to be bailed out with public funds. This incited the Occupiers’ sense of unfairness. Looking into the future, does the failure and bailout of the banks represent a turning point? Has Western style capitalism failed? If so, do the Occupiers give us any signals of what may replace it?

While the Occupy movement’s critique is accurate, they fall short in terms of any substantive solutions. The Occupiers have made a good start, but have seemingly reached the natural limits to where they could go. A solution for this could be that the Occupy movement widens its scope to help with constructing an alternative form of banking, one that can address the issues of economic equality. By joining with other groups, the Occupiers can move from being a loud voice that is too vague, to become a group working with the banks against which they protest. The purpose of this would be to create a banking system in the future that is socially useful for everyone. A banking system that contains regulatory and operational reforms, as well as dealing with the issues of equity that form the basis of the Occupy Movement. To devise a system of solidarity and reciprocity that meets the needs of our communities, not a system that divides the world into the ultra wealthy 1% and the other 99%.

Were the Occupiers right? They were. In highlighting the rise of inequality they helped to bring into light and popularize the problems of the global financial system. In coming up short in terms of solutions, the Occupiers may have reached their limits, and it may be necessary for them to reach out to other groups in order to craft a new financial system in the future, one that serves everyone, and not just the 1%.

Jason Swanson
© The European Futures Observatory 2013

Follow The Conversation On Deliberator

Resources:

A Leaf Being Turned: A speech given by Andrew Haldane (Bank of England) to Occupy Economics, 29 Oct 2012.

A Blueprint For Better Business?: A speech given by Archbishop Vincent Nichols at conference 18 Sept 2012.

www.blueprintforbusiness.org : Making the case for the need for change.

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