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13 October 2021

Why conventional economics is inadequate for our new age of scarcity and emergency

In an era of rising prices and low growth, redistribution is the only realistic means of maintaining living standards.

By James Meadway

The price crunch continues, with inflation spiking across Eurasia and North America in the past month. Although worsened in critical respects by the shock of Brexit in the UK, it is a parochial mistake to single out Britain’s leaving the EU as the primary cause of the crisis. What we are living through, in reality, is the first tremors of the generalised environmental collapse of this century. Gas prices are not going to come down any time soon, and the supply chain crisis will not be resolved this year – or even next. The costs of extreme weather events will become disruptively large; one credible forecast suggests $213bn globally by the end of this decade. Three generations in the developed Global North have enjoyed continual economic growth with only relatively minor disruptions. Those days are at an end.

The first, most obvious environmental shock is the pandemic. Lockdowns disturbed supply chains on an unprecedented scale, as production was wound back across the world and demand collapsed. As demand has returned, it has run into a series of constraints in supply that remain – from the backlog of orders, to the shortage of shipping containers, to continuing restrictions on the employment of labour, such as the “pingdemic” or ongoing factory shutdowns. Prices have risen for essentials including timber and steel.

In May global food prices were nearly 40 per cent higher than they were the previous year. They are being pushed up as a result of a pandemic-induced labour shortage. Brazil, an agricultural superpower responsible for one third of the world’s coffee exports, a third of the world’s corn-feed for livestock and half of global sugar exports, is suffering its worst drought for a century. Exports have been severely restricted as a result, pushing up prices. Meanwhile, storms in Texas and a drought in Taiwan have hindered semiconductor production. Extreme weather isn’t just a one-off cost. As weather systems become more unstable, supplies of basic goods will become more constrained.

There are energy supply constraints across Eurasia, from which North America is more insulated – for now. In Europe, the shift towards using daily “spot” markets for gas deliveries, rather than long-term delivery contracts with producers such as Russia’s Gazprom, has left importing countries hugely exposed should issues with supply arise. Britain’s highly liberalised gas market, and limited long-term storage facilities, is by some distance the worst-placed. Perversely, the shift to spot markets has increased Gazprom’s market power in Europe, since, as the largest producer, it can now cut or expand production with immediate market impact. At the same time, the shift of investment into renewable energy production has left essential infrastructure in carbon technologies – including long-term gas storage – undersupplied. Meanwhile, a surge in demand across East Asia as economies reopen has pushed up prices for liquified natural gas, which Europe now has to rely on too.

The conventional tools of economic management will do nothing to alter these new conditions. Raising the interest rate, as the Bank of England is apparently now contemplating, is likely to be worse than useless. The usual theory says that if a central bank raises its target interest rate for its short-term lending – the Bank of England’s “base rate” – this will cascade into higher interest rates across the economy, thus squeezing demand as borrowing becomes more expensive. Reducing demand eases pressure on prices, bringing inflation back down.

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The rationale for rates rises depends on rising inflation being the result of monetary demand – although rates rises themselves will hit borrowers, who are more likely to be poorer. But even this demand-squeezing argument for interest rate rises fails if inflation is the result of rising real costs that have emerged independently of demand. And by pushing up interest rates today, investment – the only means of forestalling future supply shortages, through expanding production – becomes more expensive, and therefore more unlikely.

Nor would attempting to cut real wages help to reduce costs – whether done directly, or, as is more likely, indirectly through inflation and, in the case of the UK, a sharp fall in the value of the pound. Options traders are increasingly betting on such a devaluation, on top of falls this year. With Britain so dependent on imports, the plunging value of the pound will feed back into rising domestic prices well ahead of any possible advantages for export sales. That said, in a world of rising cost constraints and limited growth, there is a version of the future where Britain slashes and slashes its real wage rates through devaluing its currency, aiming to steal markets by competing on cost. But there is nothing to prevent other countries doing the same thing – and, of course, the present government has noisily positioned itself as in favour of higher wages.

Governments can push up interest rates as much as they want or try to cut wages, but neither will magically produce more gas where it is needed, or grow more food, or prevent floods or forest fires. Instead, with tight labour markets appearing across the world – again, made tighter in crucial sectors, such as lorry driving, by Brexit, but clearly not caused by Brexit alone – there is a chance here for labour to claw back some of the power it has lost to capital in the past four decades. Doing so is probably the only realistic option for maintaining living standards. In a world tending, over time, towards zero growth, consistent improvements in the general standard of living can only be achieved through significant redistribution – through giving ordinary people a larger slice of a pie that is no longer meaningfully expanding. In other words, payments to capital have to be squeezed continually if most people are going to maintain their current standard of life – let alone improve on it. A so-called wage-price spiral at this point would be almost welcome, since it implies a redistribution away from capital holders and towards those who depend on selling their labour.

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There are hard limits on what can be achieved through wage redistribution, since we will need at least some financial resources set aside to pay for the accelerating costs of ecological collapse. Proposals have been floated for international funding mechanisms but, having witnessed the train wreck of global vaccine distribution, we shouldn’t hold out much hope for global cooperation at the required scale. Further subsidies for essential goods and services such as energy and housing, and imposing new taxes on the wealthy, would also be useful. But fundamentally we will need to find a way to rebalance the economy away from cheap goods and services, and towards greater use of cost-free, ecologically benign social goods such as free time and public space.