The rule is a guide to what interest rates should be, depending on the amount of slack in the economy and the inflation rate.It says that if there is no output gap (ie, if GDP is in line with the economy's capacity) and inflation is equal to the central bank's target, then interest rates should be at a neutral level, causing the economy neither to accelerate nor to slow down. If an output gap opens up, so that GDP outstrips long-run capacity, or inflation rises above target, rates should be above neutral. If there is slack in the economy or inflation dips, policy should be eased.
Global crises and economic implications
Global crises and implications for economics Invited lecture as part of the “Globalisation and Governance Module”, Sustainability Institute, Lynedoch 16 August 2012 By Martin de Wit
Leading questions• How can we understand the global crises?• What are the implications for economics?
Outline• Setting the scene• Measures on the impacts of the crises• Alternative views on the causes of the crises• Economic theories on making sense of the crises• Missing elements in main responses• Conclusions
Definitions• According to the New Oxford American Dictionary, a crisis can be defined as ‘a time of intense difficulty, trouble or anger’ as well as ‘a time when a difficult or important decision must be made’.• The origin of the word is from the Greek ‘krisis’ – ‘decision’ and from ‘krinein’ – ‘decide’
Impacts: Malnutrition• Malnutrition in children affects their physical and cognitive development and has long- lasting effects on livelihoods and economic prospects, even after the financial crises have been resolved (Von Grebmer et al., 2009).• Approximately 925 million people were still under- nourished in 2010, two years after the financial crisis.• This reflects deeper structural problems in accessing food and the production of food (WFP, 2010). Imagecredit: doctorswithoutborders.org
Impacts: Food riots• Timing of violent protests in North Africa and Middle East in 2011, and earlier in 2008 coincide with large peaks in global food prices• Adds up to political failings of governments Lagi et al 2011. The Food Crises and Political Instability in North Africa and the Middle East.
Impacts: Child Poverty• Child poverty already high in SA => poor human capital and lower productivity later in life• International economic crises => drop in world demand => fall in production => reduce employment (worse for informal workers) => drop household income and drop in firm investment• Major impact of crises is on the poorest Source: Chitiga, M. et al. 2010. The impact of the international economic crises on child poverty in South Africa Image credit: doctorswithoutborders.org
Impacts: Iceland’s financial failure• Financial excess, cronyism and poor governance made it first victim of 2008 global financial collapse• Privatised banks: aggressive lending, high interest rates of 15%, could not repay loans• By 2008: average Icelander $403 000 in debt and 25% of homeowners faced mortgage default, 50 000 people lost savings• Political reaction 2009: modesty, hard work, respect, moderation Boyes, 2009. Meldown Iceland.
Impacts: Ecological Indicator Result for SA Key aspects OutcomeEcological Footprint 2.8 ha/pp/yr vs. Carbon Ecologically target of 1.8 Crop land unsustainable ha/pp/yr Grazing land 91st out of 134 countries (2009) Environmental 0.508/1.0 Environmental EnvironmentallyPerformance Index burden of disease unsustainable 115th of 163 Climate change countries (2010) Air pollution on ecosystems Imagecredit: The OilDrum
Impacts: Healing or Collapse• “An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years, respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt” (Reinhardt &Rogoff, 2009)• Some even speak of a ‘Global Mega-Crisis’, defined as “a global environmental and economic collapse or near collapse, along with attendant problems of rising prices, mass protests, wide-spread psychic stress, and lawlessness.” (Halal and Marien, 2011).
Why a reflection on crises?• Denialism – A culture of ‘denialism’ makes one acutely aware of the irreversible damages that are possible to individuals and a country. – A chilling example is former Pres. Mbeki’sAIDS ‘denialism’: “…more than 330,000 people had died of HIV in South Africa between 2000 and 2005 as a consequence of the government’s failure to widen access to anti-retrovirals (ARVs) in a timely fashion.” (Mbali, 2010) – *The ecological crises does not exist; e.g. waste is not a problem…+• Moralism – commenting on issues right and wrong, typically with an unfounded air of superiority) – some religious, social justice and green advocacy groups react in response to crises – [Thou shall recycle…+• Pragmatism – an approach that assesses the truth of meaning and theories or beliefs in terms of the success of their practical application • Critique: key actors in Western society seek solutions to the shadows of progress (i.e. global poverty, environmental ruin and violence) by stubbornly deploying the means of progress, such as money, economic growth and technological development, as well as the institutions of progress, such as the market, planning and democratic mechanisms (Goudzwaard) – [We only recycle if pleasures are greater than the pains…+ Examine the evidence…!
Causes of the crises: Instrumental• How to jump start consumer demand? – choices of policies, programmes and policy instruments needed to reach the goal of increased liquidity in the markets or to counter the credit crunch and associated weak demand. – relative merits of using spending, incentives or tax credits, a balance between fiscal and monetary policy and policy instruments. – how regulations need to be enforced and how criminal activities can be minimised.• The debate is usually amongst economists and policy-makers, operating in the powerful neo-liberal economic traditions of thought – Keynesian (govt spending and tax cuts on low income) – Neoclassical/laissez faire (monetary policy and tax cuts on business and wealthy)• Green New Deal’ – Green economy strategies are launched around the globe and promise jobs, a revitalised economy and, at the same time, intend to start addressing the ecological crisis mostly through the deployment of cleaner technology
Causes of crises: Structural• need for interventions in what is perceived as the underlying bio- physical state of the real economy and/or in the structures, cultures and institutions that lead to social and economic injustice.• From an ecological limits point of view, such responses include explicit attention to sustainability of the integrated world system, as achieved, for example, through the de-coupling of economic growth from materials, pollution and waste.• The focus is on accepting social and biophysical limits to economic expansion and finding ways to circumvent these.• In other words, increased consumption may not even be possible, let alone desirable.• Heterodox economics, incl. ecological economic response
Causes of crises: Moral• asks deeper-level questions on how individuals and culture operate• importance of individual behaviour, ethics, religion and cultural drivers manifesting itself, for example, in aggressive exploitation, hubris, greed and unfettered capitalism• Religious roots of dualism between humanity and nature and humanity exploit nature to serve human interests (Lynn White Jr.)• Death of ‘joy’ in nature (Schaeffer)• Moral philosophical, moral principled (ethics) and eco- theological responses
Causes of crises: Ontological• How humanity’s poor interpretation of what the nature of reality is caused the crises• Argued that humanity has not interpreted and acted on the fullness of reality, but on selected and reduced parts of it(see Von Bertalanffy, 1972; Boulding, 1956), leading to the crises.• Call for alternative anthropology and cosmology (Naess)• Is there a fundamental, ultimate economic reality? – e.g. Conceptual “market model” vs studying actual markets and institutions• Elegant, deductive mathematical models at expense reality (Lawson) – Colander et al. (2008) calls for an ethical code for economists to communicate the limitations and potential misuse of their models. – Not a simple claim to be morally good within a particular understanding of reality, but at its heart is the realisation that the ontological limitations of economic science have important ethical implications.
Economic theories on crises: mainstream• Many causes, three main factors (du Plessis, 2011) – Incentives leading to credit-fuelled bubble (esp property), loose monetary policy (below Taylor principle) for too long – Gearing in financial sector (financial leverage through creditor funds) – Failure of highly geared banks impacts on economy (sale of other assets, tight credit) Imagecredit: The Economist
Ecological economics• Kallis et al (2009): The root of the crisis is the growing disjuncture between the real economy of production and the paper economy of ﬁnance.• Gains from specialisation and exchange come at cost of detachment actors from (natural) realities and the moral implications of their decisions• Brings a broader view: complexity of reality, nature, justice, dynamics• Ambitious and transformative objectives: sustainable and just• Intellectual and methodological pluralism• Propensity for structural reform – Biophysical limits on wealth accumulation – Structural change proposed: Heavy handed interventions• Mix of morality – Generalised entropy as if earth is closed system – Aristotelean virtue ethics, invest in ‘power of judgment’ of ecological economists• Fragile discipline, not well-grounded response to ecological crises (Faber) – Risk to break apart old Kantian philosophical fault lines of natural determinism and human freedom
Biophysical economics• 25 Neoclassical economics is inconsistent with the laws of 20 thermodynamics Cleveland (20 U.S. EROI [-] 15 – Human actions should conform to physical realities, objective natural 05) 10 laws (Cleveland, Costanza, Hall) Exp Lin on e ntia ea l r• 5 Survival of living creatures is limited by the concept of energy return on 0 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110 2120 2130 2140 investment (EROI)• Question strategies of debt-based fiscal stimulus in context of declining fossil fuels• Tverberg (2012): – “The financial crisis may eventually worsen, to resemble a collapse situation as described by Joseph Tainter in The Collapse of Complex Societies (1990) or an adverse decline situation similar to adverse scenarios foreseen by Donella Meadows in Limits to Growth (1972)”. http://netenergy.theoild rum.com/node/5304
Missing elements in the main responses• Economics as complex system (Kirman, Faggini, Schweitser) – Change (speed and slowness) – Learning and feedback of human actors – Interaction between (bounded rational) agents – Robust socio-economic networks – Local self-organisation• Innovation (Atkinson, Etzkowitz): – Government role in spurring innovation? • investments in steam engine, Internet, iPhone. – Schumpetrian “creative destruction” – Invest in R&D – Manage globalization, not “knee-jerk mercantilism”• Transitioning – call for a broader analytical framework to reassess innovation and techno- logical change, crucial factors for a successful transition (Smith et al).
Conclusions (I)• Economic and ecological crises have severe real world impacts (malnutrition, food riots, child poverty, household hardship, banking system failures)• Crises stimulates to explore beyond denialism, moralism and pragmatism• Causes stylised as – instrumental (lack of consumer demand), – structural (sustainability and justice needs institutional overhaul), – moral (greed and hubris calls for ethics) and – ontological (dualism, reductionism, abstraction calls for holism and realism)
Conclusions (II)• Economic theoretical responses: – Mainstream: incentives, policies, safeguards, regulations – Ecological economics: agents in economy operate within and be aware of physical limits of real economy – Biophysical economics: as EE, but a focus on energy, EROI, peaky fossil fuels and minerals and recessionary feedback with probability of collapse• Towards a more inclusive economic-ecological theory in response to crises – Nature and humans in complex, dynamic relationship – Alternative behavioural theories – Interplay context-specific physical limits and innovation – Transitions
Earlier work• De Wit, M.P. 2011. Reflecting On How To Respond To The Economic And Ecological Crises. International Conference on Ecological Theology and Environmental Ethics- ECOTHEEOrthodox Academy of Crete, 1-5 June, 2011.• De Wit, M.P. 2011. How do we approach practical, messyproblems? A reflectiononhow to respond to the economic and ecological crises. Presentation at Building the ScientificMind 2011 Colloqium, SustainabilityInstitute, Lynedoch, 7-11 March.• De Wit, M.P. 2010. FactoringSustainabilityintoSouthAfrica’sFuture. Invitedpresentation to World Future Society, Cape Town, 6 May 2010.• De Wit, M.P. 2001. EconomicPolicyMakingfor Complex and DynamicEnvironmentalProblems: A ConceptualFramework. Thesis submitted in fulfillment of the requirements of Doctor Commercii (Economics) in the FacultyEconomics and Management Sciences at the University of Pretoria.