FLASH February 2015 - 1
Mihail E. Ionescu Ph. D.
1. Is Piketty right? A critique from China. I suppose many have heard about the success of Thomas Piketty's book, published over a year ago. Its central thesis is that when the rate of return on capital is greater than the rate of economic growth, there will likely be an unequal distribution of wealth and humanity will be divided between a small minority of super-rich and the rest ("We are the 99%"), a situation bound to create social unrest. So there will be widespread instability – wars, revolutions, extremist political movements etc. On a blog, I've come across a fascinating article that starts like this: “At an event in Beijing last November, I had the good fortune to meet the French economist Thomas Piketty, who has sold 1.5 million copies of his book, Capital in the Twenty-First Century, since it was first published in 2013. Pacing up and down in front of a packed auditorium, Piketty explained that because the rate of return on capital is now higher than the growth rate of the global economy, the proportion of the world's wealth that is owned by a small elite will likely keep increasing; in other words, we should expect to see a divergence of wealth as the rich get much richer. As his book says, ‘capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.’ ". The Chinese audience frantically applauded and then a debate started. It is what the author names a “lunch question”: “When a group of us withdrew for lunch, though, our Chinese hosts pushed back against Piketty's thesis: Hadn't Deng Xiaoping taught us that getting rich is no sin? Isn't rising inequality just the price China must pay to escape from poverty? Though Piketty would agree that there is nothing inherently wrong in accumulating a lot of wealth, he would also insist that it is very bad indeed if that accumulation results in too much inequality. The big issue in our discussion — what I have come to think of as ‘the lunch question’ — is whether the world is now crossing into an era of too much inequality.“. The author was intrigued by this question, especially since it was put in a debate in China, where one may presume that Pikkety's thesis is best proved, after three decades of rapid economic growth: “China could almost be the poster child for the process Piketty described. When Mao Zedong died in 1976, post-tax and -transfer income inequality stood at 0.31 on the Gini index. (The Gini coefficient runs from 0, meaning everyone in a country has the same income, to 1, meaning one person earns all the country's income and everyone else earns nothing.) By 2009, China's income inequality score had soared to 0.47, where it stubbornly remains after peaking at 0.51 in 2003. Though Chinese tax returns are too opaque to make reliable calculations regarding wealth inequality, or the uneven distribution of assets as opposed to income, he is almost certainly correct that this figure has risen even faster than the country's income inequality.” Using this “Gini index” and applying it to each of the periods humanity has went through, from the hunter-gatherer stage to the present one, going through the agrarian, industrial and digital revolutions, the author sees another interpretation of the process Piketty described. If in the 20th century the collosal difference between the two poles was resolved by two world wars, with huge material and human losses, today we can be more optimistic. Four major factors, especially going from the industrial to the digital era, can decisively change the paradigm of Piketty's process: “ New energy sources, technologies that erode the boundaries between mind and machine, and shifts toward living in virtual rather than physical spaces may all threaten — or promise — to make the 21st century the biggest rupture in human history, dwarfing the agricultural and industrial revolutions. A century from now, trying to find the right level of inequality for a fossil fuel society might seem as irrelevant as determining the right level of inequality for Neanderthals does today”, notes the author. In the end, he states: “All things considered, long-term history suggests that answering ‘the lunch question’ will not be as easy as I initially thought. Each economic system of energy capture has an ideal level of inequality, and perhaps we can even specify that in the fossil fuel world it is a Gini coefficient of 0.25-0.35 for income and 0.70-0.80 for wealth. However, running the numbers and looking for ways to stay in the right range is only the beginning. The real problem, as history shows, is that everything is connected to everything else. Tensions between those who are making it and those being left behind could easily exacerbate the ‘arbitrary and unsustainable inequalities’ that Piketty identifies. Then again, a shift from regional economies to a global market coupled with the ongoing expansion of effective demand could soothe them. Or perhaps in a post-fossil fuel and partly post-human world, inequalities far beyond those Piketty imagined might start to seem entirely reasonable.” ( See Ian Morris, The Lunch Question, “Global Affairs “, February 11, 2015, https://www.stratfor.com/weekly/lunch-question )
2.Democracy from Aristotle to the present day. The future of the European Union. There is an excellent American blog – it is multidisciplinary, of remarkable academic quality and focused on the current economic situation, without leaving aside history, philosophy or music. It is the blog of Bradford DeLong, a top economist and an intellectual that sets trends, not hypes, in contemporary thought. I have noticed the great relevance one of his posts (January 26th) has for what is known as „Grexit”, meaning the imminent Greek withdrawal from the eurozone following the formation of a new government. Opponent of austerity measures, currently involved in negotiations with its European partners regarding Greece's debt, the new left-wing government of Syriza may place Europe on a catastrophic path (nobody knows whether or not a Grexit would have a domino effect within the European Union). The surprise may be even greater if we take into consideration the fact that the post reiterates a speech DeLong gave at UC Berkeley in April 2013. The first comment regarding this post has been: ” A fine piece I mised at the time. It may be significant that the Chancellor of reunited Germany was born and educated in the DDR, not the Bundesrepublik. She may not have the reference points of educated western Europeans: Monnet’s two creations, the Beatles, May 1968, the oil shock of the 1970s , the Baader-Meinhof gang, and so on. It’s not just Realpoliti pushing her away from the historic (West) German willingness to sacrifice economic interests for the political project of European unity” It is what lead me to read through this exceptional article. In order to discuss and state his views regarding the future of the European project, inextricably linked to the eurozone, DeLong has five starting points. First there is a historical reference in order to explain the significance of a ”political union”, and the chosen example is the one of the seven Dutch provinces united at the beginning of the 17th century, that turned into a major player in the international arena. The author notes:
„As I understand it, the Dutch political union then consisted of:
1. A talk-shop in the Hague, with rather less power than currently held by the organs of the European Union in Brussels and Strasbourg.
2. The holding of the seven offices of stadthouder of each of the provinces by the then-current Prince of Orange, whoever that happened to be.
3. The fact that the single province of Holland had 60% of the GDP of the whole; and thus could credibly threaten to go it alone, do what was necessary, make a little list of those who had not enthusiastically contributed their share of the resources needed for the common good, and remember” Therefore, the first consideration of the author: "’political union’ is a vague thing, and often you only know that you had it after the fact when you look back, and see that things worked, and that in fact it did not all fall apart.”
The second part of the demonstration refers to a theorizing of the issue from ancient times to the present day, an intertwining of Aristotle and George Madison: „Aristotle of Stagira believed that there were and could be no stable democracies, and certainly no good democracies. They were, he thought to the innermost core of his bones, inevitably ruled by faction--so much so that the end-state of democratic politics was a downward spiral of street-fights and purges ending in tyranny. And while this process worked itself out, he thought, at those times when you could get enough people assembled in the Assembly to make a decision, the policies that resulted would be irrational and random. /.../Moreover, a democracy would be a bad neighbor. It would be always prepared for aggressive war, for war would bring the demos paid employment in the fleet and their share of plunder as well. Since those who were prosperous and had something to lose did not have a big voice in the government, the government would not pay proper attention to the destructive side of war.Faction-ridden, irrational, aggressive, militaristic--the classical Athenian democracy, Aristotle said, and for good reason, was very bad news for its neighbors and for itself.” As better alternatives to democracy, Aristotle indicates the monarchy, despotism or the republic, which is considered to be the best by DeLong, but only in the case of a community that occupies a small territory (i.e. a city). The conclusion: „Thus the classical tradition says that something like today's "Europe"--a highly-democratic republic on a continent-wide scale--cannot be a possible good regime.” This is where the author brings into the discussion James Madison's correction, that shows that in the case of a vast territory and a constitutional order, a political system based on the separation of powers between a president, a Senate and a House of Representatives can be valid. So DeLong concludes that the European Union can indeed function: „So Madison, trying to correct Aristotle and found the United States, raises at least the possibility that ‚Europe’ could work--with the right constitutional order.”
The third part of DeLong's demonstration is called „the necessity of political union in Europe”. Using recent history and references to ancient times, DeLong states that it is absolutely necessary that Europe be united: „is the absolute necessity of political union in Europe today. It is just too costly and too terrible not to have one: the history of the first half of the twentieth century and then the edge-of-nuclear-terror decades of the Cold War teach that very strongly.” The fourth part of the demonstration is „the Kindlebergian Hegemony”: „Absence of a hegemon is, in brief, Kindleberger's theory of why the history of the North Atlantic economy between 1919 and 1939 was such a tragedy: Britain no longer but the United States not yet willing and perhaps not yet able to be the hegemon. That leads one to fear that perhaps, at the deepest level, the central problem with Europe today is that the United States is no longer the Cold-War North Atlantic benevolent hegemon it once was, but that Germany has not or has not yet stepped into that benevolent-hegemon role--or because of German history and German attitudes would not be tolerated by the rest of Europe in that role.” The fifth part of the demonstration - „External Pressure„ – shows that for a political union to be viable, a massive external threat is necessary (the author refers to alliances in Ancient Greece or to European unity in the face of the Soviet threat during the Cold War). The conclusion shows that the creators of the eurozone did not learn the lessons of the interwar period and rushed into creating the common currency: „ If it turned out that someone had to pay somehow some when for the sin of not clearly foreseeing the consequences of the single currency and the Eurozone, this political support by the rest of continental Europe in the face of some skepticism as to the wisdon of immediate German unification from the United States and Russia meant that the rest of Europe had a very deep well of credit with Germany on which could draw. Germany would remember. And Germany would be eagerv to pay. It may wel work out. Fifty years from now historians may well be writing that Maastricht was a gamble- and was, like Waterloo, a near-run thing- but a gamble that in the end paid off after all. ‚After all’, historians may say in 20163 ‚it has now been years since an army crossed the Rhine with fire and sword, and the unforeseen costs of Maastricht are a very small payment for an insurance policy against that eventuality’. There may be still be large differences in prosperity between Europe’s core and its periphery. But come 2063 Europe as a whole may well be so rich that these are and are seen as second –order concerns at most. In 2063 Northern Europeans may still grumble that Southern Europeans lack a proper work-ethic, but when they do so they may do so as they pay through the nose for the amenities of all their Mediterranean vacations. After all, being taxed a bit to support the common the common European project has large benefits. The Kimbri and the Teutones never got to enjoy the feta band the olives and the sunshine. We have very brerason to think that the Northern Europeans of 2063 will. Perhaps. Perhaps not. But right now, it loks to me as though history did indeed teach the lesson, but that while history was teaching the lesson the Princes and Princesses of Eurovia today were very busy texting on their cell phones to pay any attention”.
(See The Future of the European Project, and the Future of the Eurozone: A Talk from 2013: The Honest Broker for the Week of January 25, 2015- http://www.bradford-delong.com/2015/01/the-future-of-the-european-project-and-the-future-of-the-eurozone-a-talk-from-2013-the-honest-broker-for-the-week-of-janua.html#more)
3. When we think about speeches, we tend to think of them as tedious, dull, unoriginal. When the speaker is a banker, our expectations grow even dimmer. This isn't the case with Andrew G Haldane's speech - Growing, fast and slow – held at the University of East Anglia, Norwich, on February 17th. The depth of analysis and its astute conclusion places this speech in the category of high quality academic texts. The author wants to identify the sources of economic growth and to explain the differences in global wealth today. He has some quite impressive predecessors - D. Acemoglu and J. Robinson, authors of ‘Why Nations Fail: The Origins of Power, Prosperity and Poverty’ or Thomas Piketty. The author employs an imperfect variable, but the only one available and capable of being of use to this analysis: „In the media, economists spend much of their time discussing growth and its statistical counterpart, Gross Domestic Product or GDP. At least for some, this focus is misplaced. For example, it is increasingly well-recognised that GDP is a partial, and often imperfect, measure of societal well-being.1 As Einstein said, not all that can be countedcounts.But even if it is not all that counts, sustained economic growth remains the single most important determinantof rising societal living standards. To bring that point to life, consider two economies – China and Italy. As recently as 1990, the aggregate annual income of these two economies was roughly equal.2 Now let’s run these economies forward, with China growing at more than 10% per year, Italy by less than 1% per year. By 2014, what do we find? Due to the magic of compound interest, China is now almost eight times the size of Italy. Indeed, China creates a new economy the size of Italy every 18 months; an economy the size of Portugal every quarter; an economy the size of Greece every month; and an economy the size of Cyprus every week. Those things that can be counted sometimes really do count.” Using a short history of global economic growth, the author comes to the conclusion that „While steady, growth has not been constant. Wars, depressions and financial crises have pock-marked history, causing growth to stall or fall. And phases of innovation have lifted economic fortunes, caused living standards to leap. But whereas the growth lapses have been temporary, the leaps have been permanent.” To exemplify, the author invokes what happened in the last two and a half centuries: „Over the past two and a half centuries, secular innovation has dwarfed secular stagnation.In explaining rising living standards since 1750, economists have typically identified three distinct innovation phases. Each was associated with a great leap forward in society’s production possibility frontier. The first is the Industrial Revolution commencing in the middle of the 18th century; the second, the era of mass industrialisation, starting in the second half of the 19th century; and the third is the IT revolution, which began life in the second half of the 20th century.What distinguished these three innovation phases is that they gave birth to a sequence of so-called General Purchase Technologies (GPTs).10 These technologies had applicability well beyond the sector for which they were originally designed, thereby transforming the efficiency of business practices generally. During the first industrial revolution, these GPTs included the steam engine, cotton spinning and railways; during the second, electricity, the internal combustion engine and internal water supply and sanitation; and in the third, the personal computer and the internet.” Based upon this historical background and using recent research regarding the digital revolution, the author lists a series of factors that can slow down the economic growth and concludes::„ Growth is a gift. Yet contrary to popular perceptions, it has not always kept on giving. Despite centuries of experience, the raw ingredients of growth remain something of a mystery. As best we can tell historically, they have been a complex mix of the sociological and the technological, typically acting in harmony. All three of the industrial revolutions since 1750 bear these hallmarks. Today, the growth picture is foggier. We have fear about secular stagnation at the same time as cheer about secular innovation. The technological tailwinds to growth are strong, but so too are the sociological headwinds. Buffeted by these cross-winds, future growth risks becoming suspended between the mundane
and the miraculous.” (See http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech797.pdf )
4. Stephen M. Walt, a remarkable International Relations theoretician, raises a question that is currently decisive for Europe's security architecture and the future of world order: „the United States seems to be moving toward raising the stakes in Ukraine. This decision is somewhat surprising, however, because few experts think this bankrupt and divided country is a vital strategic interest and no one is talking about sending U.S. troops to fight on Kiev’s behalf. So the question is: does sending Ukraine a bunch of advanced weaponry make sense? The answer is no.”
Nowadays, this question is obviously widespread. Washington's decision to send lethal weapons to the Ukrainian military may have significant consequences on Europe and the global order. The decision not to supply lethal weaponry would smooth the way towards a peaceful resolution of the 12-month crisis with 5,000 official and 50,000 unofficial casualties. Walt analyzes the situation according to two models: „the deterrent model” and „the spiral model”. Here is his take on the first model:” Those who now favor arming Ukraine clearly believe the ‚deterrence model’ is the right way to think about this problem. In this view, Vladimir Putin is a relentless aggressor who is trying to recreate something akin to the old Soviet empire, and thus not confronting him over Ukraine will lead him to take aggressive actions elsewhere. The only thing to do, therefore, is increase the costs until Russia backs down and leaves Ukraine free to pursue its own foreign policy. This is precisely the course of action the report from the three think tanks recommends: in addition to ‚ ‚bolstering deterrence’, its authors believe arming Ukraine will help ‚produce conditions in which Moscow decides to negotiate a genuine settlement that allows Ukraine to reestablish full sovereignty.’ In addition to bolstering deterrence, in short, giving arms to Kiev is intended to coerce Moscow into doing what we want.” The other model is presented both theoretically and practically, in short and memorable phrases. (See Stephen M. Walt, Why Arming Kiev Is a Really, Really Bad Idea http://foreignpolicy.com/2015/02/09/how-not-to-save-ukraine-arming-kiev-is-a-bad-idea/)
5. The Prime Minister of Japan, Shinzo Abe, is well-known for his economic innovations, hence the term "Abenomics" used for Japan's current structural reforms and for the Prime Minister's vision regarding his country's role in Northeast Asia. Especially since in 2015 China has overtaken the United States as the world's largest economy, and the regional security situation is quite worrisome. In such a context, Abe wants to reform Japan's security policy, virtually unchanged since the end of World War II. According to a recent analysis, „Caught flat footed by Chinese assertiveness in the East China Sea and Russian military flights near its borders, the government of Prime Minister Shinzo Abe has implemented a raft of security improvements, from secrecy laws to the creation of a national security council modeled off the one that serves the U.S. President.” The same analysis that decries the decrease by 38 percent in defense acquisitions in the 1990-2013 period, lists five weapons that Japan needs immediately in order to counter imminent threats: Aegis Ashore, meant to counter the North Korean nuclear threat and that will offer the possibility „ to watch over the nearby Senkaku Islands (Diaoyu Islands to the Chinese.) This would give Japan the ability to close the airspace over the islands whenever it wished, and make it very dangerous for China to use military aircraft to push its territorial claims.” Besides this system, the article invokes the creation of a marine brigade (long time considered an offensive weapon) instructed to protect and recover enemy-occupied territory.
„ Japan has announced the creation of a marine brigade, built around the battalion-sized Western Army Infantry Regiment. The brigade is to be stationed in Sasebo, Nagasaki, where it will be co-located with sealift provided by the Maritime Self Defense Force.” The article also points to the necessity of sealift capabilities necessary for the transportation of Japanese amphibious troops and transport aircraft with the ability to land troops by air. (See Kyle Mizokami, 5 Weapons of War Japan Needs Immediately , in „ The National Interest”, February 17, 2015- http://nationalinterest.org/feature/5-weapons-war-japan-needs-immediately-12259?page=show )
February 23, 2015