All brands of politics and economics are deeply rooted in the idea of robust economic growth, combined with the belief that governments and central bankers can exert substantial control over the economy to bring this about. In his 1925 novel The Great Gatsby, F Scott Fitzgerald identified this fatal attraction: "Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that's no matter – tomorrow we will run faster, stretch out our arms farther."
But in nature, growth is only a temporary phase which ceases with maturity.
Economic growth has become the universal solution for all political and economic problems, from improving living standards, reducing poverty to now solving the problems of over-indebted individuals, businesses and nations. Growth allows higher living standards. It generates higher tax revenues, helping balance increased demand for public services and the funds needed to finance these.
Strong growth hides disparities in the distribution of wealth in many societies. Combined with the democratisation of credit, allowing lower income groups to borrow and spend, which ironically helps drive growth, it avoids having to deal with the problem of stagnant real incomes.
The prospect of improvements in living standards, however remote, limits pressure for wealth redistribution. As Henry Wallick, a former governor of the US Federal Reserve, diagnosed: "So long as there is growth there is hope, and that makes large income differential tolerable."
But much of recent growth was based on policies encouraging debt-fuelled consumption, as well as unsustainable degradation of the environment and profligate use of natural resources. The ability to maintain high rates of economic growth is now questionable.
Economists and policymakers (the alchemists attending the court of modern rulers) face a parallel crisis of credibility. Their power and influence derives from the well-crafted illusion that they can control the economy and markets with the application of applied mathematics and statistics.
Professor Robert Lucas of the University of Chicago set the bar on self-congratulation, claiming in 2003 that macroeconomics had "solved, for all practical purposes" the problem of economic depression. In 2007, on the 10th anniversary of its independence, Sir Mervyn King, the Governor of the Bank of England, spoke of a "sea change" in economic stability which he believed could not be dismissed "solely as a result of luck".
But policymakers may not have the necessary tools to address deep-rooted problems in current models. Revitalised Keynesian economics may not be able to arrest long-term declines in growth as governments find themselves unable to finance themselves to maintain demand. It is not clear how, if at all, printing money or financial games can create real ongoing growth and wealth. The former German finance minister Peer Steinbrück questioned this approach: "When I ask about the origins of the crisis, economists I respect tell me it is the credit financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again?"
Debates about the economy assume the inevitable return to robust growth. Politicians everywhere repeatedly mouth the sacred mantra of economic policies that lay the foundation for long-term growth. Even in Japan, which is about to enter its third successive decade of economic stagnation, the latest government recently outlined its growth strategy.
The reason is not difficult to discern. Writing about the US in The American Future, the historian Simon Schama observed that no one ever won an election by telling the electorate that it had come to the end of its "providential allotment of inexhaustible plenty". Like Fitzgerald's tragic hero Gatsby, the incredulous battle cry of politicians and policymakers everywhere is: "Can't repeat the past? Why of course you can!"
But the inability to acknowledge and manage the potential economic stagnation increases the chance of social conflict and political breakdown. Governments need to adjust policies to an environment of low growth with attendant problems of employment, labour relations, industrial policy, social welfare and stability. Relations between nations need to be reshaped to cope with increasing competition for growth, markets and scarce resources.
Satyajit Das is a former banker and the author of 'Traders, Guns & Money' and 'Extreme Money'
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