Opinionista Ivo Vegter 18 September 2018

Scientists seek to subject us to socialism

A tiny and hitherto unknown Finnish research outfit is advising the UN on transforming the global economy. It wants to collectivise the economy, revoke economic freedom, give us guaranteed, state-funded, low-skilled jobs so we don’t go around destroying the environment, and pay for this socialist utopia with magic monopoly money.

The United Nations is working on its Global Sustainable Development Report for 2019. It will include a chapter entitled Transformation: The Economy. It commissioned five Finnish scientists associated with a small, recently-founded organisation known as the BIOS Research Unit, led by Paavo Järvensivu, to write a background paper for this chapter.

The era of cheap energy is coming to an end,” they write, based on old peak oil theories that stubbornly refuse to come true, and theories about declining energy return on investment that are contradicted by the global oil price.

Neither electricity not oil prices have shown any indication of an irreversible upward swing. The electricity price (in the US) is lower than it was in the early 1960s and throughout the 1980s. In the last three years, crude oil has traded at its lowest level in 15 years, well below half of its peaks in 1980 and 2008.

Their belief about the end of cheap energy, combined with the fact that “economies have used up the capacity of planetary ecosystems to handle the waste generated by energy and material use”, leads them to declare that existing economic theories are incapable of meeting the needs of the future, and that we need an “economic transition”, away from neoclassical economics and market capitalism.

They wish to replace globalisation with localisation, limit international trade to urgent needs such as food security instead of general free trade, substitute private enterprise with strong government control over the factors of production, and enforce limits on all economic production in line with what they believe the limits on resources, energy and ecosystems to be.

Economic activity will gain meaning not by achieving economic growth but by rebuilding infrastructure and practices toward a post-fossil fuel world with a radically smaller burden on natural ecosystems,” they fantasise.

In rich countries, citizens would have less purchasing power than now, but it would be distributed more equally. Citizens in all countries would have access to meaningful jobs and they could trust that a desirable future is being constructed on the collective level.”

So they propose a collectivist, centrally-planned, government-run economy. If their report is included in the UN’s Global Sustainable Development Report, it would betray the UN’s objective to not merely protect a threatened environment, but to achieve a global economic transition to socialism.

The authors appeal to Post-Keynesianism:

Post-Keynesian analysis is historical in nature; markets would not and do not exist without political regulation.”

This is, of course, not true. Markets can and do exist perfectly well without political regulation. In fact, political regulation only serves to hamper them.

Consequently, the Post-Keynesian approach is not a priori wary of the state’s role in the market,” they continue.

It does not assume that markets always seek equilibrium, but maintains instead that capitalist economies tend to generate market bubbles and other crises. Markets do not lead to socially and ecologically desirable outcomes on their own, but require active political guidance.”

Markets, of course, certainly lead to socially desirable outcomes. If they didn’t, they would not exist. The rest is argument by assertion. There is no evidence for the claim that capitalist economies cause market bubbles, for example. In fact, market booms and busts are strongly correlated with government intervention in the economy through monetary and fiscal policy. Because policy reaction always lags shocks in the market, and often over-reacts, such interventions tend to exacerbate or prolong both downturns and upturns in the economy.

I explained this in a column many years ago. Notice, in particular, US Congressman and one-time presidential candidate Ron Paul’s startlingly accurate prediction in 2001 of how easy money in the wake of the dot-com boom would inflate a housing market bubble, which, led by government-sponsored home loan enterprises, would inevitably collapse. He was proved right, in every detail, six years later. Blaming this on the capitalist economy, instead of government intervention in the capitalist economy, is quite simply wrong.

Unsurprisingly, perhaps, Järvensivu et al. appeal to modern monetary theory (MMT). This theory describes the magic by which governments that print their own money can never run out of it. They can therefore run up deficits indefinitely, without ever going bankrupt. They have an unlimited ability to pay for things they need or want, modern monetary theorists believe, and an unlimited ability to provide funds to favoured segments of the economy. Isn’t that just fabulous?

The problem with socialism, quipped Maggie Thatcher, is that you inevitably run out of other people’s money. This is why the magic money theory is very popular with socialists.

It is, of course, logically absurd. If modern monetary theory were correct, why would government not buy us all houses and cars and high-end gaming computers? Why would government not make all of us millionaires? Or billionaires? Or trillionaires? They could do so. In fact, some governments have done so. I’m looking at you, Zimbabwe.

Järvensivu et al. actually believe that the infinite capacity of government to create money can translate into a guarantee that everyone can get a permanent, state-funded job, doing things they think are needed, such as “installing decentralised energy solutions and preparing for floods”.

Awesome. Let’s haul sandbags for the rest of our sorry lives. At least we’ll get paid with magic money.

In real life, the value of money is derived not from government fiat, but from economic production. For a given quantity of production, printing money inherently decreases the value of each monetary unit. It is a tax on everyone who holds cash. More important, it is a wealth transfer from the poor to the rich.

No serious economists buy into this modern monetary theory malarkey. Even Paul Krugman, a staunch supporter of easy money in hard times, thinks MMT is nonsense. Ask any country that has experienced hyper-inflation what happens when a government prints as much money as it wants.

Their support for MTT alone should disqualify Järvensivu and company from having any economic opinions at all, let alone formally advising the United Nations.

Järvensivu and his colleagues cite a book by Charles Hall and Kent Klitgaard, entitled Energy and the Wealth of Nations. These authors argue that while early schools of economics recognised the biophysical origins of the factors of production, “by the early 20th century, land, representing all of nature, was simply omitted, along with energy, from neoclassical production functions”.

But that’s just bullshit. The first thing I learnt in economics at secondary school level was that the primary factors of production were land, labour and capital, and the secondary factors of production, which could be derived from the primary factors, included things like raw materials, energy, technology and intellectual property. Neither land nor energy were omitted.

The scarcity (and therefore cost) of materials and energy has been fundamental to every credible school of economics, including neoclassical economics, which along with Keynesian economics dominates the mainstream of economic thinking today. There are many things wrong with Keynesian economics, including its somewhat more restrained belief in magic money, but ignoring some of the factors of production is not one of them.

Hall and Klitgaard call neoclassical economics “faith-based economics”, and believe that economies, like natural systems, are constrained by physical forces and the laws of thermodynamics.

In their attempt to reduce economics to a biophysical science, subject to all the constraints that apply to physical matter and energy, they make the mistake of concluding that economics must be a zero-sum game.

This is easily disproven. When a baker trades two loaves of bread for a pair of shoes, the baker and the cobbler both gain in prosperity, because the baker values the shoes higher than the bread, while the cobbler values the bread higher than the shoes. In a world where everyone voluntarily transacts with others, these gains result not in the mere circulation of a fixed amount of wealth, but in the creation of new wealth.

In the literal-minded world of Hall, Klitgaard and Järvensivu, however, this would violate the law of thermodynamics. In their conception of economics, one party can only gain if another party loses. That both parties to a transaction might benefit simultaneously would blow their little scientific minds.

Their view of economics as a zero-sum game is closely related to the notion that we’re bound to run out of resources, because all resources are finite in extent, and that if or when we do, this will pose an existential crisis to the continued prosperity of humanity.

In truth, many resources are so abundant that we cannot even contemplate consuming them all. But in cases where resources are indeed scarce, that is exactly what the price mechanism is for: discovering how best to use scarce resources to produce the goods and services that serve human needs and desires.

It isn’t scarcity that breaks our economic theories; a lack of scarcity would do so.

Whether or not it is true that the era of cheap energy is over – and there is plenty reason to believe it is not – it does not in any way suggest that a transition away from free market capitalism is required.

The authors say that we’re witnessing rising inequality, rising unemployment, slow economic growth and rising debt levels. They list factors that are either non-issues (inequality), or short-term effects of economic cycles (the rest).

They ignore, as socialists often do in their attempts to vilify capitalism, relentlessly rising prosperity, higher life expectancy, sharply declining poverty rates, fewer life-years lost to disease and disability, improved nutrition, fewer famines, lower real food prices, more leisure time, declining global income inequality, lower levels of violence, rising literacy and education levels, greater racial and gender equality, greater political and civil rights, and rising life satisfaction and happiness.

And they ignore, as all socialists do, that all these good things are strongly correlated not with government intervention in economies, but in measures of economic freedom.

Many of these statistics can be found at Max Rosen’s website, Our World In Data. Most ironically, Rosen’s data demonstrate that trust in governments is declining, which bodes ill for Järvensivu’s desire to entrust governments with far greater control over our economic future.

In practice, all indications, both empirical and theoretical, point to the fact that an alternative economic system, in which governments exert more control over economic activity, will be unable to improve on the outcomes that economic freedom can deliver, whether the economy is growing or shrinking.

It is perfectly possible to address issues such as overuse of ecosystem services, or climate change, or pollution, or resource depletion, within our current economic framework.

Economics automatically deals with things like energy or resource scarcity simply because scarcity causes prices to rise, which will motivate more frugal use of those resources, the discovery of new sources, or the development of alternatives that are less scarce.

To the extent that pollution is a significant problem, the externality cost can easily be internalised by taxing polluters, incentivising pollution cleanup, or creating other market-based incentives to curb pollution.

Supposing that climate change caused by carbon dioxide emissions poses a threat to human welfare, it is perfectly easy to impose a carbon tax, a cap-and-trade system, or other means of regulating greenhouse gas emissions, without in any way breaking neoclassical economics or the capitalist mode of production.

One could even go as far as banning fossil fuels entirely, without any need to fundamentally transform our economic theories, as Järvensivu appears to think would be necessary.

If the use of ecosystem services affects others, such as when upstream water users diminish water quality or availability for downstream users, it is easy to impose prices, taxes or restrictions to reduce the impact on or account for the costs incurred to ecosystems and to the public.

Of course, all of this supposes that these problems need to be addressed by government regulators in the first place. In many cases, the principles of private ownership of resources can mitigate the negative effects that the paper’s authors foresee.

When production is dependent on ecosystem services of some form or another, and those ecosystem services are privately owned, it wouldn’t pay the owner to see those services destroyed. Only when ecosystem services are not owned would you run into a tragedy of the commons scenario, where rapid exploitation is incentivised, lest competitors get there before you do.

Pointing to externalities to make an argument for government intervention in the economy is fraught with difficulty, both practical, moral and legal. Pricing in externalities does not require a new economic system. And it isn’t always clear that externalities ought to be priced in. In many cases, they are hard to measure, small, or diffuse, or can be justified as a fair trade-off against the net good an industry does for society.

The Järvensivu report makes a lot of suggestions of things the authors think need to change, such as increasing reliance on walking or cycling, local food self-sufficiency, and reducing international freight transport. All these changes were reality less than two centuries ago. At the time, the vast majority of the planet’s population lived nasty, brutish and short lives. What Järvensivu and his colleagues want is a return to this less-than-idyllic past.

Life was pretty dismal when travel was slow and cumbersome. The ability to travel significant distances was largely limited to a very small wealthy elite, while the common people were stuck in poor villages, without the option to relocate to where there were more work opportunities or better living conditions.

Local food self-sufficiency meant that people would routinely starve when local crops failed because of weather, disease or war. Improved trade, including global trade, has protected billions of people against the vagaries of farm production in any one region. Järvensivu et al. want to return the world to the limited, localised and highly vulnerable one we have only recently escaped. Or they want to put government in charge of famine relief. As if most major famines aren’t caused by governments in the first place.

When international freight was rare, the vast majority of the world could neither access nor afford the modern conveniences that make life better, such as steam engines, mechanical washing machines, fire extinguishers, the printing press and moveable type, microscopes and telescopes, bicycles, flush toilets, eyeglasses, clocks and watches, seismographs, paper, soap and antiseptics, compasses, stethoscopes, typewriters, refrigerators, or knitting, sewing, weaving and spinning machines.

Such devices improved health, freed ordinary people from laborious effort, or gave them more time to devote to production or leisure. However, they used to be largely limited to the geographies where they were invented, thus denying the vast majority of humanity the tremendous benefits to general welfare that they enabled.

Today, free international trade is strongly associated with improved indicators of human health, prosperity and happiness. Seeking to constrain international trade will reduce the general welfare. But Järvensivu thinks international trade is, in most cases, a luxury we neither need nor can afford.

In order to forcibly constrain humanity’s energy and resource use, Järvensivu et al. propose to toss us into a socialist morass. They hope to subject people to the rule of government bureaucrats advised by well-paid scientists and technocrats who are ignorant about economics. Ask the Union of Soviet Socialist Republics, or Venezuela, how that worked out for them.

Let’s hope, for the sake of all of our welfare and freedom, that this unelected coterie of scientists fails to convince the grandees at the UN to shackle us with socialism and shower us with magic money that will impoverish everyone. DM

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