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fransgeraedts (99.92)

Mismanaging a golden age; the global structural output gap; the long view (5)

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August 15, 2010 – Comments (5)

I want to introduce a different use of the word output gap. (Its reappearance in the economic debate is a sign of a renaissance of keynesianism. I applaud that renaissance. I would however wish for a renaissance that is also a reworking. We need a neo-keynesian approach just as we needed a neo-classical one. And we need a general theory of economics that can put both in context.) I want to call it : the global structural output gap. What i am aiming for is a thought experiment. What would world GDP be if all societies would be using the best economic practices? And what is the real world GDP now? The difference between the two is the global structural output gap.

One of the way's to make clear what globalization of the individual pursuit of wealth is about is that it brings with it an acceleration in the shrinking of the GSOG.(grin)

Of course the fall of communism is the decisive event here. Not only because it made it possible for capitalism to enter the former communist countries. Almost as important is that it was a certain kind of proof that there is indeed no alternative to the capitalist route. The pursuit of wealth by free individuals showed itself in a direct competition to be not just a bit better  -but to be the better economic system by a mile. That gave all emergent societies (not just the ex-communist) for the first time a very clear development path.

What does all this mean? It means that the productivity of the labour of lets say of 3 to 4 billion people will grow with leaps and bounds for the next century. It will do so simply by the implementation of the economic practices we are already familiar with. Nothing needs to be invented. That will mean that the unbelievable growthpath of the world economy of the last 100 years will be dwarfed by the growth of the next hundred years.

And that is no pie in the sky! it is already happening. Look at the enormous growth in the bric-economies in the last 10 years!

Now combine the following: The technological breakthroughs that have created a third economy: the information-economy. An economy that will  over time be bigger then all of the industrial economy. And the breakthrough in the global political economy that for the first time has created a truly global capitalism. Together they make a true accelaration of global economic growth possible on a scale we have never encountered before.

We have created a global golden age  .....

and immediately have mismanaged it to such an extent that there is a real prospect of a global depression!

What went wrong?

 

fransgeraedts

 

5 Comments – Post Your Own

#1) On August 15, 2010 at 11:11 AM, blesto (31.75) wrote:

What went wrong?

Greed on one part and ignorance/naivete on the other.

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#2) On August 15, 2010 at 4:50 PM, binve (< 20) wrote:

fransgeraedts,

Nice post man! And I agree with several ideas:

>>What does all this mean? It means that the productivity of the labour of lets say of 3 to 4 billion people will grow with leaps and bounds for the next century. It will do so simply by the implementation of the economic practices we are already familiar with. Nothing needs to be invented. That will mean that the unbelievable growthpath of the world economy of the last 100 years will be dwarfed by the growth of the next hundred years.

100% agreed. This is what makes me a long term optimist. Combined with the fact that the last 100 years saw most importantly the advancement of materials science. This is why I do not consider myself a permabear. Because there is nothing to be truly bearish about long term. We have problems, and when we have problems and we don't preemptively deal with them, then we have corrections in human endeavours, like the stock market. This is natural cyclic behavior and is not something that can be 'fixed'. The best thing is to understand cycles and to plan for not only years of fat, but also years of lean, because neither last forever. The biggest fraud that modern economics has perpetrated on us is to convice us that we can have perpetual fat, and that lean is something that can be eradicated. And we are no paying for that hubris.

But again, even this correction will not last forever, and the next bull run, when it is ready to happen, will be even stronger than the last.

>>

Now combine the following: The technological breakthroughs that have created a third economy: the information-economy. An economy that will  over time be bigger then all of the industrial economy. And the breakthrough in the global political economy that for the first time has created a truly global capitalism. Together they make a true accelaration of global economic growth possible on a scale we have never encountered before. We have created a global golden age  ..... nd immediately have mismanaged it to such an extent that there is a real prospect of a global depression! What went wrong?

Because I don't think we had a golden age all the way through. There was a golden age from the 1950s to the late 1980s (at least in the US and much of Europe). The problem is that credit expansion fueled the rest of the golden age, which meant it was not golden at all.

So specifically when we should have been actively slowing down and enrouaging saving to weather the next downturn (which had we done, would not have been nearly as bad and nearly as long because the savings would beget capital investment which would beget the next bull run). But instead, we pushed the accelerator on credit expansion and we are now forced into paying a heavier price, instead of proactively choosing to pay a lower price.

I am a big believer in business cycles and cycle theory in general and I think the biggest fraud perpetrated by economists and financials instuitions is so saying that we can "manage them" (i.e. give only upside and no downside) or to say they no longer exists (i.e. the 'great moderation' or the 'new normal')

My $0.02 at any rate. Thanks!..

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#3) On August 15, 2010 at 6:03 PM, leohaas (31.73) wrote:

"What went wrong?"

We (humanity in general, I mean) keep on squandering our opportunities on wars and internal conflicts! That is the big problem. It is true all over the world. Country A wants to wipe Country B off the face of the earth. Country C want Province X that is currently part of Country D. Province Y that is currently part of Country E wants to be independent. People in Country F think that everyone in their country must adhere to their interpretation of a holy book. People in Country G think that the whole world must adhere to their interpretation of a different holy book. People of religion Q hate religion R, not to mention anyone who does not have any religion. People with blue eyes think that all people with brown eyes are inferior (and the other way round). 

I can go on for hours doing this, and use real country names, provinces, religions, groups and so on. The hate, combined with lack of tolerance in this world is almost without borders. That is why things are so f'ed up in this world!

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#4) On August 15, 2010 at 6:17 PM, leohaas (31.73) wrote:

Oh, and there is one country that starts wars all over the world because its people are uninformed, gullible, and paranoid!

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#5) On August 16, 2010 at 9:35 AM, russiangambit (29.42) wrote:

#4 - ha-ha, very true.

Though, in general, I dont really see what is going on as wrong. It is a massive process of chane via globalization and resulting from it equalization. developed countries are being equalized to lower standard of living while emergining countries develop. Due to globalization the barriers to entry that many devloped countries had disappeared and that left them exposed to global competition. They are having hard time accepting it and dealing with it.

Population growth could soften the blow somewhat for developed countries, but most of them have declinging populations, rising obligations to older generations and resist immigration at all costs. If US had a smart immigration policy such as Canada and Australia where they  make it easy for skilled labor to come in, US could make it much easier on iteself because skilled workers usually have high spending capacity and they educate their childeren. US also needs a guest-worker program for low killed labor, but without giving them so much freebies as illegal mexicans now have. The mess is really in the developed countries because they are playing ostrich and are unwilling to deal with the changes.

It kind of reminds me "Gone with the Wind", where the South didn't want any changes and so they were forced into them, swpt with the wind and forced to deal with inevtiable. And what now? Americans acknowledge it as a tragic period in their history but the coutry only became stronger after that. What US is going through now is really nothing compared to those cataclismic chanages of the past.

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