CC BY
17JamesK. Galbraith1
NEOCLASSICAL ECONOMICS IN A BIOPHYSICAL WORLD2
Biophysical principles underlie all living, mechanical and social systems. They provide a simple and compelling way to think about economics and political economy, underscoring the critical role of effective regulation in advanced systems, the trade-off between efficiency and resilience, and the economic consequences of the present pandemic.
Keywords: Biophysical Economics, Regulation, Resources, Resilience, Pandemic. DOI: 10.37930/1990-9780-2021-1-67-103-108
It is once again a pleasure to be invited to say a few words at the St. Petersburg Economic Congress. Especially at this moment in the relations between our countries it is vital to maintain and advance academic and scholarly debates, discussions and cooperation. I am especially happy to thank my friend Professor Sergey Bodrunov, for his many personal courtesies and generous references to the work of my father, and to express my appreciation also to my friend Aleksandr Buzgalin. I am proud to be an member of the Free Economic Society, and only regret that the circumstances of the pandemic make it impossible tojoin this meeting in person.
I was last in Russia in January, 2020,just a week before the lockdown in Hubei Province began the process of economic and social disruption that has challenged the entire world. We now have hope, if no certainty, that the global pandemic may be brought to heel over the next year by the dissemination of safe and effective vaccines. It may or may not happen, but our problem as economists is not there. Our problem is to assess the economic impact, and by extension the effect of these events on the structure of our ideas.
I have entitled my remarks "Neoclassical Economics in a Biophysical World" to place this immediate and practical concern in a broader and more theoretical context. It is hard to speak of neoclassical economics - the dominant strand in academic life - without caricature, since neoclassical economics is, basically, a caricature. But broadly we may identify two major strands of thought and their implications for economic analysis of the pandemic and its consequences.
The first, sometimes called "freshwater economics" in the United States, thanks to its base on the Great Lakes at the University of Chicago, is known generally as "market fundamentalism." Russia has experience with this line of argument. Applied to the pandemic, the general theme is adjustment. Let consumers send market signals to stimulate the production of face masks and vaccines, let consumers make the trade-offs between their daily pleasures and the risk of death, let wages fall until the unemployed can find work again, let the market
1 James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government, University of Texas at Austin (USA)
2 Based on the paper delivered at the Joint International Congress Genesis of Noonomy: Scientific and Technological Progress, Diffusion of Ownership, Socialization of Society, Solidarism (December 2-4, 2020).
punish the weak and reward the strong. If you haven't been hearing these arguments lately, it's because the economists to whom they are native have decided that their best course at the moment is a prudent silence.
Pitted against this view in what amounts to a mock debate, sufficient for the purposes of mainstream economics to preserve the illusion of discourse, we find the "flaws and frictions" analysis of the "saltwater economists." These are so named by virtue of their coastal origins and strongholds in Cambridge, Massachusetts and Berkeley, California.
The saltwater economists modify market fundamentalism with a dose of regrettable "rigidities," notably of wages and prices, so that the ideal state of flexibility leading to universal market-clearing does not arise. Since rigidities are difficult to abolish, the unhappy real world requires occasional "interventions" from government to help the economy "recover" and "get back to equilibrium." In the most recent variation of the saltwater theme, we read of "multiple equilibria," opening a path for interventions to move the economic system from a low-functioning to a high-functioning state - following which, presumably, the need for interventions will again recede.
A favorite policy concept of this crowd is "stimulus." This is the idea that by handing out money one can make the wheels of commerce turn, and that the major if not the only absolutely necessary agency of government is a green cheese factory, otherwise known as a central bank. This faction has practical relevance in a neoliberal state where writing checks is the one bureaucratic function that cannot be degraded by privatization and deregulation. Sometimes this factions identifies with John Maynard Keynes, although in real life Keynes was a much more subtle, realistic, pragmatic and radical thinker.
With either faction, the common theme in neoclassical or mainstream thought is the existence of equilibria, of a point (or points) of balance between market forces, with the government in the background, an add-on, necessary only to clean up some odds and ends that the market is not structured to provide, as well as to enforce contracts and property rights. This is the economics of 18th century agriculture, of comparative advantage and free trade, of King Cotton and of the Fugitive Slave Law. It is a triumph of doctrine over history and common sense. Russians who survived the 1990s will recognize the genre.
Most important, mainstream economics descends from a tradition of pre-scientific thought, which emerged in the Enlightenment as advanced spirits such as Hume and Smith struggled with the dead hands of church doctrine and feudal practice. The discipline still carries with it an aura of crusading virtue from those days, aimed at the perfection ofhuman society along decentralized, competitive, commercial lines. The problem is that such a society, which has never actually existed, cannot actually exist. And the ideas that drive mainstream minds in this direction were superseded in the 19th century by the rise of evolutionary materialism, rooted in physics and biology, and in a never-ending process of irreversible changes conditioned by the arrow of time.
In the late 19th century the laws of thermodynamics captured the scientific world. My great-grandfather, Wilbur Olin Atwater, an early biochemist, relied on the First Law to develop the thermal calorimeter; his recognition was such that he was received by Tolstoy at Yasnaya Polyana. But these currents of thought and science passed economics by, and even so great an intellect as Nicolas Georgescu-Roegen [6], writing inl971, could not inject them into mainstream economics. More recently, with the energy crisis augmented by recognition of climate change, a new effort has become imperative. This effort will not reform neoclassical economics, which is unreformable, but rather replace it with a mode of thinking that can actually illuminate the world in which we live.
A biophysical perspective (Chen and Galbraith [2-5]) admits that economic life is subject to the same physical laws as any biological or mechanical system. Resources must be extracted. Investment is necessary to do so efficiently. Scale, efficiency and fixed cost have a price - what they gain in productivity they lose in resilience. To be large is to be dangerous. To be large is, also, to be relatively fragile and endangered, subject to the possibility of collapse. The history of industrialization is full of examples, including railways, ocean liners, aircraft, dams, reactors, and much else besides. Nowhere in the world is this more clear than in the territories of the former USSR. It is the same, in the social sphere, for empires, from that ofRome to that of the United States.
Above all, the biophysical perspective calls attention to the role of regulation in any advanced system. Regulation is not an add-on to a pre-existing, complex life form, machine, or economy. It is the precondition without which no such life form, machine or economy can exist. Regulation makes possible the sustained operation of any advanced system - not indefinitely, but for a longer time, and with greater success, than would otherwise be possible. Regulation mitigates the dangers. If you doubt the principle underlying this claim, stop taking your blood-pressure medicine, drain the oil from your crank-case, fire the air traffic controllers -and let your bankers regulate themselves. The result is always disaster, as the energy flowing through the system quickly exceeds the capacity of the materials from which the system is built to contain it.
The essential difference between an advanced and a developing country therefore does not lie in education or technology. Education can be poor in rich countries and it can be good in poor ones; production technologies can be transferred and plants located almost anywhere on the globe. The critical difference lies in the ability and will to regulate; that is, to develop and enforce standards, for quality, for safety, for the environment, and for wages. This was also the decisive difference between the West and the former socialist bloc; while the latter concentrated on efficiencies associated with the scale of production and the uniformity of the resulting products - from clothing and food to cars and housing - the latter regulated to improve quality, safety, and (through the design function of industrial corporations) also the diversity and aesthetic appeal of what was produced. Part of the great success of China in recent decades lies in the fact that it solved the quality and diversity problems of socialist production economies, initially by importing standards from its markets in the West. Quite simply, anything that could meet the regulatory standards of the most advanced Western markets could also be sold at home, raising the living standard of the Chinese people as a secondary effect.
A biophysical vision of the economy is evolutionary in a strict sense. It does not suppose an equilibrium disturbed from time to time by shocks. It does not suppose multiple equilibria that once achieved are locally stable. It does not suppose that corporations or other business entities necessarily adapt to changing conditions or pass along acquired characteristics - an echo in economics of a genetic doctrine Russians will no doubt remember with distaste. Biophysical principles deny immortality, and accept that in the competition to survive, the young have an advantage over the old. They subsume the Second Law of Thermodynamics, to wit that the global entropy of the system is always increasing, and that local entropy may be controlled only by the introduction of new energy resources and the creation of new complex structures, represented by ProfessorBodrunov's construction ofnoonomy." [1].
In all these respects, biophysical principles refute the central principles of the neoclassical mainstream. They refute the theological fantasy of a self-regulating market, like God Himself, millions of times faster and wiser than the quantum computer. They reject the ergodic hypothesis, according to which the future is a stochastic projection of the past. They reject the possibility of "rational expectations," of making forecasts subject only to random
and unbiased error. But they also refute the "flaws and frictions" approach, which consists of adding a few restrictions to (or relaxing a few assumptions of) the freshwater theology, in hopes of more closely approximating "the real world." For biophysical economics, nothing short of a full transition from Linnaeus and Smith to Mendel and Darwin and their successors including Thorstein Veblen, John Maynard Keynes and John Kenneth Galbraith will do.
Let me bring this back to the pandemic and what it means for our economic future. It means, first, that the economy will not self-adjust. It means that the world ex post will not correspond in all respects to the world ex ante. Full recovery is not inevitable. Since there was no equilibrium before the pandemic, the situation in the past is not a realistic guide to the situation in the future. Returning to a path described by the economic statistics of recent is not a process that will occur on its own; nor will it necessarily be effected by the mere act of accelerating thepace of activity - the declared goal of a "stimulus" program. While passing out cash is useful - even necessary - in the short term, cash is not sufficient. More fuel it will not by itself repair the damage to a broken engine or a worn-out transmission, any more than food is by itself a cure for infection or cancer.
It is a feature of the biophysical view, not incidentally, that each situation requires its own experts; there are no universal policy formulas in economic life, notwithstanding the repetitive prescriptions of the International Monetary Fund and itinerant professors with high-status academic appointments. I will therefore not try to comment on how the pandemic may affect the course of economic development and the evolution of social structures in Russia. That is a task for economists with far greater familiarity with the specific conditions in Russia. With respect to the economy of the United States, which I have been trying to observe closely, there are three principal specific concerns:
In the advanced sectors, such as aircraft and energy and information, and in investment sectors such as commercial and retail construction, the demand for product will not return to previous patterns or levels. This is an obvious consequence of vastly excessive supply and pandemic-induced obsolescence. For example, with a large share of airworthy civilian aircraft parked on the ground, new ones need scarcely be manufactured. Office buildings and retail malls are vacant and filling with dust and microbes, so new ones will not be built. The price of petroleum is about half of the lifting cost in the Permian Basin, so new fracking wells will not be drilled. And it appears that the future of American telecommunications hegemony rests on the ability of the state to crush a low-cost competitor from China, a proposition that is possible but far from assured. The capabilities that underlie these sectors, along with the biomedical sciences, are at the heart of the American position in the global economy. If the industries collapse, then the underlying capabilities will wither; they will fade out of existence and the people who presently animate those sectors will retire or turn to other activities, not using their training, talents and teamwork. To keep the capabilities, therefore it will be necessary to mobilize for some other uses, to use them for public and social purposes, and so to obtain a distinct social benefit from their reinvention. Whether such a mobilization is possible in the present social conditions of the United States is an important, open question.
The services sectors employ many millions of less-skilled, less-interdependent workers; they are the main source ofjobs and incomes in the United States, and have been for many years. In the United States, with a minor exception for industries attracted in recent years by the low cost of North American natural gas, all of the net gain in employment for twenty years or more has been in a vast complex of restaurants, bars, gyms, hotels, spas, resorts, leisure and business travel, nail and hair salons, massage parlors and tattoo shops, schools, office work and retail and the like. Profit margins in the services sector are low, but all services enterprises face fixed costs, in the forms of rent, maintenance, utilities and interest. To be
profitable, they require a certain level of clientele, in many cases that the facilities be packed with people on certain days of the week or parts of the year. But public health has forced many businesses to shutter while others were obliged to operate far below their design capacity. Shuttering of some businesses creates blight, making entire districts unattractive and so less profitable for those who survive. In many cases, what was profitable before the pandemic is not profitable now and may well not become so again, even if the virus recedes over the next year or so.
What will happen is, of course, not entirely known. But full recovery of the services sector will face three obstacles. The first is a kind of doom loop: the fact that the clients of many services are the employees of other services, who will not resume their previous consumption habits until they are themselves re-employed. The second is the problem of blight: neighborhoods with shuttered and decaying storefronts and offices are less inviting for services and less profitable going forward. And their third is the possibility that habits changed in the pandemic may stay changed. For safety's sake, as Covid spread, middle class Americans retreated, by and large, to their homes, often in suburbs, where the instincts of an earlier generation had provided adequate equipment for cooking, entertainment and the raising of children. Some will emerge when the pandemic ends to resume the previous patterns oflife, but others will not.
In short, to provide employment and to maintain the viability of the services sector after the virus recedes, new cooperative, public-private models will be necessary for private concerns. And to absorb those who may not be so easily re-employed, expanded public services and ajob guarantee program will be necessary to providejobs where the private forprofit sector fails to measure up. Conscious institutional design - and not market-clearing through ever-lower wage rates - will be required.
Finally, debts contracted under the old assumptions cannot and will not be paid in full under the new conditions, and the attempt to maintain them will act as a barrier to new economic activities. This is one of the oldest problems in economic dynamics. In good times, people take on debts - mortgages, rental contracts, utility obligations, car loans and in the US student loans and health care loans - all of which are non-contingent obligations. But the incomes that support those contracts are contingent - on personal good health, on economic conditions both local and national. The pandemic has disrupted the contingent incomes while leaving the non-contingent obligations intact.
For the moment, temporary deferrals, forbearance and a moratorium on evictions and foreclosures are keeping the debt problem under control. But when these provisional measures expire, a wave of obligations will come due, and many will be defaulted, with consequences for the credit ratings and future economic viability of the debtors, as well as for their immediate social welfare. There is no easy resolution here, since the viability of the system going forward also depends on the credibility of debt contracts. One cannot maintain a capitalist system if debts are routinely or frivolously excused. But one also cannot maintain the system under a crushing burden of unpayable debts. So it will be necessary to restructure, to writedown and to settle up a wide range of pandemic-induced debts, as fairly as possible to all parties involved, and to restructure the financial system as necessary to reflect the resulting improvement in the overall distribution of financial wealth.
In short, even though the Great Financial Crisis failed to dislodge neoclassical thinking from its death-grip on the academic mainstream, the situation is even more serious today. The imperative is therefore all the greater. Each of these problems mentioned above attests to the relevance of a biophysical, evolutionary mindset, and to the irrelevance of the ergodic hypothesis and the neoclassical framework. Historical events have consequences. The future
is not a predestined extension of the past. In the words of Omar Khayyam: "The moving finger writes, and having writ, moves on."
Biophysical economics is, in short, a practical, common-sense analytical approach, rooted in reality, based on science, consistent with institutionalism, with my father's work on the corporation, with the work of this Congress and of Professor Bodrunov on noonomy. May you prosper and succeed in your efforts to advance economics along these lines.
References
1. Bodrunov, Sergey (2018) Noonomy, Moscow, St. Petersburg, London, UK.
2. Chen, Jing and James К Galbraith, (2012b), "A Common Framework for Evolutionary and Institutional EconomicsJournal of Economic Issues, VolXLVINo. 2, June, 419-428. DOI 10.2753/ JEI0021-3624460217
3. Chen, Jing and James К Galbraith, (2012a), "Austerity and Fraud under Different Structures of Technology and Resource Abundance," Cambridge Journal of Economics,^olume 36 Issue 1 January, 335-343. doi:10.1093/cje/ber027
4. Chen, Jing and James К Galbraith, (2011), "Institutional Structures and Policies in an Environment of Increasingly Scarce and Expensive Resources: A Fixed Cost Perspective," Journal of Economic Issues, Vol. XLVNo. 2 June, 301-309. DOI 10.2753/JEI0021-3624450206
5. Chen, Jing and James К Galbraith, (2009), "A Biophysical Approach to Production Theory," UTIP WorkingPaperNo. 55, http://utip.lbj.utexas.edu, Feb. 1, 2009.
6. Georgescu-Roegen, Nicholas, (1971) Phe Entropy Law and the Economic Process, Cambridge: Harvard Universith Press.
Д. К. Гэлбрейт3. Неоклассическая экономическая теория в биофизическом мире.
Биофизические принципы лежат в основе функционирования всех биологических, механических и социальных систем. Они подчеркивают определяющую роль эффективного регулирования в системах, построенных на базе последних технических достижений, важность компромисса между эффективностью и устойчивостью к внешним воздействиям и значение экономических последствий текущей пандемии и таким образом дают возможность простого и наглядного подхода к осмыслению экономики и политэкономии.
Ключевые слова: биофизическая экономика, регулирование, ресурсы, устойчивость, пандемия.
3 Джеймс К. Гэлбрейт, заведующий кафедрой правительственных и деловых связей им. Ллойда М. Бентсена-мл. Школы по связям с общественностью им. Линдона Б. Джонсона и профессор государственного управления Техасского университета в Остине (США).
