Marx takes on Keynes, Friedman and Schumacher

The ultimate Davos debate: 

If you could construct the best panel at a World Economic Forum debate, this would be it. But what would they say about present problems? Read on …

What if Karl Marx and Keynes, Friedman and Schumacher were at the 43rd World Economic Forum in Davos, Switzerland? Photograph: Laurent Gillieron/AP

Imagine that you could construct the ultimate Davos panel. From the annals of history you can choose any quartet that could put the world to rights in an hour-long talk, the format beloved of the World Economic Forum.

Klaus Schwab, the man who has been organising the forum since 1971, ensured there were plenty of stellar names strutting their stuff in the high Alps last week. Davos attendees could watch Nouriel "Dr Doom" Roubini cross swords with Adam Posen, recently a member of the Bank of England's monetary policy committee about the merits of quantitative easing. They could listen to Mark Carney, soon to take over from Sir Mervyn King at Threadneedle Street, warn that the global economy is far from out of the woods. George Soros held forth on drugs; Facebook's Sheryl Sandberg spoke passionately about sexual stereotyping; David Cameron called for the G8 to act against tax avoidance and corruption.

But how about this for a panel? Karl Marx, John Maynard Keynes, Milton Friedman and Fritz Schumacher, all no longer with us, kept in line by the IMF's Christine Lagarde, thankfully still alive and kicking, and one of the standout performers last week.

Lagarde kicks off our fantasy discussion with a few words of introduction. She says business leaders have left Davos in a slightly better frame of mind not because of the millions of words spouted in Davos, but because of three little words spoken by the president of the European Central Bank, Mario Draghi, in London in July. Those words were "whatever it takes", a commitment by the ECB to buy up the bonds of troubled eurozone countries in unlimited quantities. That has removed one of the big tail risks to the global economy – a chaotic break-up of the eurozone. But, she adds, any recovery in 2013 will be fragile and timid, and there is a risk of a relapse. "Turning first to you Karl, how do you see things".

Marx: "The capitalist class gathered in Davos has spent the last few days wringing their hands about unemployment and the lack of demand for their goods. What they seem incapable of recognising is that these are inevitable in a globalised economy. There is a tendency towards over-investment, over-production and a falling rate of profit, which, as ever, employers have sought to counter by cutting wages and creating a reserve army of labour. That's why there are more than 200 million people unemployed around the world and there has been a trend towards greater inequality. It is possible that 2013 will be better than 2012 but it will be a brief respite."

Lagarde: "That's a gloomy analysis, Karl. Wages are growing quite fast in some parts of the world, such as China, but I'd agree that inequality is a threat. The IMF's own research shows that inequality is correlated to economic instability."

Marx: "It is true that the emerging market economies are growing rapidly now but in time they too will be affected by the same forces."

Lagarde: "Maynard, do you think things are as bleak as Karl says?

Keynes: "No I don't Christine. I think the problem is serious but soluble. When we last faced a crisis of this magnitude we responded by aggressive loosening of monetary policy – driving down both short-term and long-term interest rates – and by the use of public works to boost aggregate demand. In the US, my friend Franklin Roosevelt supported legislation that allowed workers to organise. After the second world war, the international community created the IMF in order to smooth out balance of payments imbalances, prevent beggar-my-neighbour currency wars and control movements of capital. All these lessons have been forgotten. The balance between fiscal and monetary policy is wrong; currency wars are brewing; the financial sector remains largely unreformed, and aggregate demand is weak because workers are not getting a fair share of their productivity gains. Economics is stuck in the past; it is as if physics had not moved on since Kepler."

Lagarde: "I gather from what you are saying, Maynard, that you do not approve of the way George Osborne is running the UK economy."

Keynes: "The man has taken leave of his senses. Britain has a growth problem, not a deficit problem."

Lagarde: "I daresay Milton that you disagree with everything Maynard has said? You would make the case, presumably, for nature's cure?"

Milton Friedman: "Some of my friends in the Austrian school of economics would certainly favour doing nothing in the hope of a cleansing of the system, but I wouldn't. Unlike Maynard, I wouldn't support measures that would increase the bargaining power of trade unions and I've never been keen on public works as a response to a slump.

"But I would certainly support what Ben Bernanke has been doing with monetary policy in the US and would support even more drastic action if it proved necessary."

Lagarde: "Such as?"

Friedman: "Well, I think monetary policy should be set in order to hit a target for nominal output – the increase in the size of the economy unadjusted for inflation. If that growth is too high, central banks should tighten policy. If it is too low, the trend since the crisis broke, they should loosen it. In extreme circumstances, I'd favour policies that blur the distinction between monetary and fiscal policy. That's what I mean when I talk about helicopter drops of money into the economy."

Lagarde: "Fritz, you have been sitting there patiently listening to Karl, Maynard and Milton. How do you assess the state of the world?

Fritz Schumacher: "I am greatly disturbed by the way the debate is being framed. There is an obsession with growth at all costs regardless of the environmental costs. Climate change was rarely mentioned in Davos: this after a year of extreme weather events. It is frightening that so little attention has been paid to global warming, and almost criminally neglectful of governments not to use ultra-low interest rates to invest in green technologies.

"As has been the case in the past, recessions have pushed green issues down the political agenda. In good times policymakers say they are in favour of sustainable development, but the pledges are forgotten as soon as unemployment starts to rise. Then it is back to business as usual: more roads, expanding airports, tax cuts to encourage consumption. When scientists are warning that global temperatures are on course to rise several degrees above pre-industrial levels on unchanged policies, this is the economics of the madhouse."

Lagarde: "Maynard, what's your response to that?"

Keynes: "I agree with him. If I were advising Roosevelt today I would be calling for a Green New Deal. I find it hard to envisage a world without growth, something that is politically unacceptable in the developing world in any case. But Fritz is right, we need smarter, cleaner growth. As you yourself said last week, Christine, if we carry on as we are the next generation will be 'roasted, toasted, fried and grilled'."

Schumacher: "I couldn't have put it better myself."

Criticism of Schumacher - if you curtail growth, living standards drop

Schumacher was no radical – if you curtail growth, living standards drop

By suggesting it's better to be economically poorer and spiritually richer, Schumacher ignores links between growth and wellbeing

• 
• • Daniel Ben-Ami
  • guardian.co.uk, Wednesday 16 November 2011 11.30 GMT
  • larger | smaller

Consumer revolution … a customer inspects washing machines at a supermarket in Wuhan, China. Photograph: Darley Shen/Reuters

EF Schumacher's Small is Beautiful is widely viewed as a humanistic and radical tract. Nothing could be further from the truth. Viewed in its proper context it is both profoundly anti-human and deeply conservative.
The central idea in Schumacher's text is that there is a natural limit to economic growth. As he put it: "Economic growth, which viewed from the point of view of economics, physics, chemistry and technology, has no discernible limit, must necessarily run into decisive bottlenecks when viewed from the point of view of the environmental sciences."

Schumacher objected to organising the economy on a large scale precisely because he believed that more prosperity would damage the environment. He correctly understood that small-scale communities cannot produce nearly as much as those operating on a regional or global scale. A modern car, for example, typically relies on components, raw materials and know-how from around the globe. From the perspective of Schumacher's "Buddhist economics", it is better for people to be poorer in economic terms if they can be spiritually richer.

This argument flies against a huge weight of evidence showing that material advance is closely bound up with progress more generally. The past two centuries of modern economic growth have seen huge advances in human welfare along with technological innovation and social advance. Perhaps the most striking single indicator of this improvement is the increase in human life expectancy from about 30 in 1800 to nearly 70 today. Note that this is a global average, so it includes the billions of people who live in poor countries as well as the minority who live in rich ones.

Almost every other measure of wellbeing has increased hugely over the long term, including infant mortality, food consumption and level of education. Most of humanity, even in the developing world, has access to services our ancestors could only have dreamt of, including electricity, clean water, sanitation and mobile phones.

None of the arguments used by Schumacher's followers to counter this narrative of progress are convincing. Greens often side-step the broader case for growth by deriding the accumulation of consumer goods and services. Environmentalist arguments have more than a tinge of elitism, with comfortably middle-class greens scoffing at the masses for wanting flat-screen televisions and foreign holidays. It should also be remembered that some consumer goods, such as washing machines, have directly led to huge improvements in human welfare.

Anti-consumerism reveals more about the narrowness of the green vision than it does about economic growth. Viewing rising prosperity simply in terms of consumer goods is incredibly blinkered. Growth provides the resources for much else including airports, art galleries, hospitals, museums, power stations, railways, roads, schools and universities. Popular prosperity provides the bedrock for much that we value in contemporary society.

Another common green rebuttal to the benefits of growth is to point to the existence of inequality. Of course it is true that there are huge disparities both within countries as well as between the developed and developing world. The key question, however, is how best to tackle the problem. From Schumacher's perspective it is desirable to reduce the living standards of everyone except the poorest of the poor. His is a narrative of shared sacrifice and lower living standards for almost all. The alternative vision, the traditional position of the left, was to argue for plenty for everyone.

Finally, there is the argument about the environment itself. The most popular variant of the idea of a natural limit nowadays is that growth inevitably means runaway climate change. However, there is plenty of evidence to the contrary. There are many forms of energy, including nuclear, that do not emit greenhouse gases. There are also ways to adapt to global warming such as building higher sea walls. Since such measures are expensive it will take more resources to pay for them; which means more economic growth rather than less. If anything the green drive to curb prosperity is likely to undermine our capacity to tackle climate change.
Schumacher's fundamentally conservative argument chimes well with those who want to reconcile us to austerity. It suits those in power for the mass of the population to accept the need to make do with less. Under such circumstances it is no surprise that David Cameron, like his international peers, is keen for us to focus on individual contentment rather than material prosperity.

It is hard to imagine a more anti-human outlook than one advocating a sharp fall in living standards for the bulk of the world's population.