I’m here today with Gael Giraud, who was the senior researcher at the Center for Scientific Research in Paris. He is about to be the founder and leader of the Georgetown University Center for Environmental Justice. He is also, I’m glad to say, a member of the Commission on Global Economic Transformation that is founded and administered by the Institute for New Economic Thinking. Gael, thank you for joining me here today.
Thank you for giving me the floor.
Well, your work for the Global Commission was in midstream in many of the themes that I have come to understand through knowing you, seem now to be, how you say, more intense and more vivid as we talk on the 14th of May, and the pandemic has made very, very profound changes in the nature of our understanding of world systems, the role of governments, and what you might call shortcomings unmasked in a highly efficient, just in time global private sector. As you look at this world, how has it changed your perceptions and what do you see being done well, and particularly I know because you’re in Dublin now, but you’re in Europe, how do you see how the pandemic is affecting countries like Italy, France, Ireland, and the UK?
Well, I would say there are two levels, I grant two levels. The first one is the surface and the political issue. Many European countries have had a very bad reaction to the pandemic. They didn’t prepare themselves. They didn’t have any strategic plan, like Taiwan, South Korea, or Vietnam, so that they were rapidly overwhelmed by the pandemic. Hence, their consequences in terms of the death tolls and also the need to lock down the economies with the terrifying consequences that this has today. Of course, there are some exceptions. Iceland, for instance, began to test one month before the first case, the first positive case, came on the island. Malta also had a very good strategy against the pandemic, and to a certain extent, Germany and the Netherlands and Sweden also had a good strategy.
But Italy, France, the UK, Spain, definitely had the need to implement the medieval reaction, which is the lockdown, because they were entirely overwhelmed. So I guess this will create a huge debate in these countries about the need to reinforce the public health system, with of course a number of people saying, “No, no, it’s exactly the opposite. We should not destroy the public health system because we have made proof that it’s inefficient and we should privatize everything.” This debate is already occurring today in France, and I’m sure it will be very harsh in the coming weeks and months in many European countries.
So this is, let’s say, the surface. Beneath the surface, it seems to me there is a big challenge, which is raised by this crisis, which is the fact that mainstream economies being built on the idea that everything is at equilibrium to begin with cannot deal with this kind of problem, where we have a big crisis, where we both have a collapse of the supply side and the demand side at the same time, and it’s very hard to think about it in terms of an equilibrium model, so that’s why it seems to me, this pandemic opens a big window for non-orthodox alternatives, like dynamic consistence, using microeconomics theory, that you try to deal with this complexity of an economy, which is certainly not equilibrium and which now, in many European countries but also in the US unfortunately, if it’s going to an equilibrium, it might probably be a debt deflationary equilibrium in the sense of having Fisher and Hyman Minsky. So a very bad equilibrium.
So yeah, from this viewpoint, paradoxically enough, the pandemic might be a good opportunity for the academic sphere, economics, to get rid of the mainstream product and to start something new.
So let’s talk about the questions related to global supply chains. What has happened… Obviously when there is a system that’s highly integrated and operating on very thin margins, and that system comes apart, in this case for health protection, it creates short-term what I’ll call inelasticity, scarcities, and it’s not responsive. Are we now in a place where this is a one-time episode and we suffered the consequences? Or are we in a place now where people are going to want to do the equivalent of self-insurance by localizing, re-localizing I think is the phrase you’ve used, production, so that the depth and duration of the suffering that we could contingently incur is diminished in each region of the world?
Yeah, this debate is raging today in many countries in Europe, and I’m clearly in favor of re-localization of our industry, at least in countries like France, where as you know, industry is just among the 12th percent of the GDP, the same in the UK or in Italy. Well, my answer would be it’s obvious that this pandemic is not a one-shot, big, black, swan that will never come back in the sense that first, it might turn into a seasonal pandemic, in case the virus will re-mutate and come back. Second, there will be other pandemics due to the erosion of biodiversity. Let’s say for instance, the deforestation. The deforestation is bringing human beings close to wild animals, against which we have no immunology and no way to protect ourselves, in the same way the markets in Wuhan for wild animals are bringing us closer to these animals.
So there will be other pandemics, and marginally, climate change and the erosion of biodiversity, we must probably provoke the same kind of big problems on the international level in the coming years and decades. So definitely it seems to me we have to rethink the way we have organized globalization in the last 40 years, which as you said was based on big supply chains with no stocks and very thin margin that you maximize profit in the short-term. So we are just making the experience that this is not resilient at all against any kind of exogenous shock like this pandemic, and that we definitely need to rethink it in another way. And from my viewpoint, to re-localize part of our industry.
Of course, this raises huge problems in the sense that in many sectors, the question is that in many European countries, we don’t have the qualified liberal forces that could work in the same way as some people in other, in the globalized southern countries would work today in these big supply chains. So this will probably increase the label cost for a number of industries and create a huge number of microeconomic problems in the future. But I don’t see any escape from it. The status quo would mean that we would be very fragile and non-resilient against shocks that will occur most probably in the near future.
I remember in preparing for this, I read a very vivid statement that came out in an article you wrote recently on starting anew after COVID-19. And you said that preventing events like a pandemic is not profitable in the short-term, hence no provisions were made for mass tests or tests to be carried out massively.
We’ve reduced hospital capacity in the name of the ideology of dismantling public services, which is now showing itself for what it is: an ideology that kills. That’s a strong statement, but that seems to be quite an accurate statement. Why does society get into a place where it convinced itself that cutting all of these public services to the bone was the right path?
Well, you know, it seems to me just to an extent, the neoliberal ideology has convinced a number of people that the state is definitely something inefficient, that deregulated markets should be much more efficient and that we should delegate to markets as much as possible the entire society, all the processes in the society. The point is that at the same time, we did not realize that most of these industries have fixed cost, and that cannot be taken into account by the private sector as we know, even from the most orthodox neoclassical economic series. As soon as a sector of, let’s say, a company has fixed cost, then you can’t just assume that it’s going to maximize its profit in the short-term, because it makes no sense if you have no convex production.
So to a certain extent, what we have done is that we have asked the state to pay for the fixed cost and then the private sector will just take benefit from the convex part of the production function. And this doesn’t work in the situation where we are now, simply because the pandemic shows that if you privatize the health system, then there would be a cost for that, and there will be poor people unable to pay this cost, this price, the price of the sanitary system. And these people will of course convey the virus to the others, even the richest, who could afford to have a good health system.
So the best way to remain healthy is for the rich to pay for a public system for the poor. I don’t see an alternative to that, but I must confess at the same time that the way the debate is organized today in many Western countries, partly goes in the opposite direction, saying, as I said earlier, the public system of health system is very bad and we should get rid of it, and privatize everything, which is pure nonsense.
Well, I think it’s a nonsense that comes from a lot of different directions. The deification of markets is almost like there’s some divine arbiter in markets that allocates or fulfills the wishes of people magically. One of the problems in markets is when you’re poor, you may have what economists call preferences, but you have no demand function. You’ve got to have money to be heard by the market. Secondly, this is what I’ll call the demonization of governance. Everything it does is a dimension of inefficiency. Well, I find this very problematic, particularly in the country where I live, the United States.
There is a former musician and artist who once appeared on a blog named Stuart Zechman, and he pointed out in this blog post, which I’ll be happy to put online associated with this episode, was that this division between markets and government, good and bad, in the United States is a false consciousness. And when you go to the Gallup polls in the United States, why do people think government is bad? Because they think wealthy people in large, concentrated, corporate interests control the government to subsidize themselves at the expense of the taxpayer. So it’s not one is an efficient mechanism and the other is a clumsy or error-prone mechanism. It’s that the power of the neoliberal vision in markets has commodified the appointments of politicians in the United States dependent on a tremendous amount of fundraising.
The making of laws, the making of regulations, the public relations, the appointments, the enforcement, and all of these things lead to what, after the financial crisis of 2008 and ‘09, which spawned Occupy Wall Street on the left, Tea Party on the right, and a change in control of the House, the Senate, and the White House was called the mother of all moral hazards. And I guess as I look at the structure of central bank-centered, fiscal assistance, I think many people are going to be concerned that all of those who were doing stock buybacks running on very thin margins or banks speculating aggressively were doing so because they thought they had the political muscle to use contingent fiscal capacity to bail themselves out because of their influence in the government and leave the people, the broad population, out to the side.
There’s a gentleman named Ian Welsh in America who has just written a blog post, which I’ll put up also with this, called How Neoliberalism has Destroyed Capitalism. And he basically talked about how all the small businesses are going out of business and all the big airlines and big private equity companies and big financial institutions are being fortified, and the stock market is not in disaster when the economy is.
I think we’re in a very confused state, and I did this long-winded preface in the spirit of asking you a question. There’s a very dangerous fork in the road now between authoritarian response and reinvigoration of democratic representation. And how do you see how we’re going to restore the integrity, faith, and trust in expertise? The integrity, faith, and trust in public service, when the episode screams at us that we are not providing adequate public goods in many places in the world, most noticeably the United States and the UK?
Well, I definitely agree with you that there is a big risk of shifting to authoritarian regimes. Actually, this monster that would be another authoritarian neoliberal state, and to a certain extent, even France is slowly going in this direction, the sense that the state of emergency looks like an alibi now to implement a police that is much more about what the private life of people, as it did earlier, same story in a number of European countries. I would say in equal to what you just said, just a few remarks, the first one is you spoke about the deification of markets. I totally agree, and that’s the products in the sense that even if you look at the most orthodox, it’s known since more than 40 years actually, since the ’80s, that incomplete financial markets are always or almost always inefficient, and deeply inefficient. They’re not even second best efficient.
So that’s the products that at the same in the ’80s, you have people proving, mathematically speaking, that incomplete markets are inefficient, and even if you have some financial innovation in the sense that you are a new financial derivative, then this is not necessarily reducing the inefficiency of markets. This is a beautiful result in the ’90s, and at the same time you must, Western business cause, you would find people teaching that markets are efficient, that they know everything, that they predict everything, and that we should just rely entirely on them.
So this is a big product. The second remark I would like to make is that yeah, I totally agree with you that the alternative to dilemma between the state on the one hand and the market on the other hand is quite simplistic, in the sense that it’s in heritage of the old dichotomy inherited from low between the public and the private, but as we’re shown by Elinor Ostrom, there are a number of other categories of goods and services, and for instance. And this provides me an answer to your last question, which is what would be the road to what’s an alternative from the authoritarian, neoliberal state?
The authoritarian neoliberal state is a way to combine the state, actually to capture the state, that is the public interest in a society, to make it serve some private interests. And that’s from my viewpoint the essence of neoliberalism, which has nothing to do with the political liberal project of enlightenment in the 18th century which was to protect people from tyranny thanks to the law. So neoliberalism does exactly the opposite. It captures the state, it captures the law, the public instance that you force it to serve some private interest, serving a minority of people.
Now the project, the political and social project of the commons, goes exactly in the other direction, saying, “Everything depends upon the resources that we want to manage and to deal with and of which we want to take care as a community, and that we want to turn into a commons.” That is, it means that most of the community, which advances its own rules, in order to take care of the commons beat, let’s say, a free software beat education beat the money, the money could be viewed as a commons, beating label. Why should label be considered as a private commodity, which is exchanged on the market? And why not does a commons, which take parts to an interesting project, socially useful, embedded in a company? And also of course ecosystem services could also be viewed as commons.
And by saying this, of course I’m referring to Karl Polanyi’s famous trilogy. The Earth ecology systemic services, and money, and labor. So this opens a huge research program which is both intellectually fascinating and politically very, I think very revolutionary. It’s consistent saying, “We need a third party in the old dilemma between the market and the state,” then lead a civil society which creates commons. To give you an example, when I was the chief economist of the French Bank, I served there for five years. We discovered that actually in a number of situations, if you help communities on the ground organize themselves in order to take care, let’s say, of water as a commons, this is much more efficient than privatizing the water or then asking the bureaucratic state to take care of water.
Let me just give you an example. In 2016, actually, La Paz in Bolivia, which is one of the two capitals of Bolivia, as you know, which is located very high at 4,000 meters high, La Paz had a big problem with water, the distribution of water. And then La Paz went through what is called the day zero during the summer, that is the day where you don’t have water on top, which as we know is a very complicated situation for many people, so that this means that rich people in the center of the city didn’t have any access to drinkable water, but at the same time, poor people in the suburbs of La Paz, which had organized themselves that you deal with water as a commons, they still had water during the whole summer. So they didn’t suffer from this terrifying situation where you don’t have any access to drinkable water.
And this, it seemed to me this is the way we are at the French Bank. This is a very fascinating example of the fact that actually taking care of a number of resources as a commons is much more efficient than trying to privatize it or to ask the state to take care of it. Of course, water is just one example. But we could also think of, as I said earlier, a number of other issues, so not to be too long, so let me give you another example, which is money. We could read the experiment of the eurozone in Europe as a way actually to privatize money, in the sense that the European Central Bank doesn’t have any political counterpart to which it should talk now that you make a decision. That’s the famous dogma of the independence of the Central Bank, which I believe doesn’t have any analytical support.
Even from a purely orthodox viewpoint, because asking the Central Bank to be independent from the political power means that money should be neutral in the sense that the quantity of money circulating in an economy doesn’t have any impact on the microeconomic variables of the economy except the level of prices, the absolute level of prices, which is to start at the quantitative military theory. But as you know, this is entirely wrong, empirically speaking. We never observe money neutrality, be it in the short, or the medium run or even the long run, which means it makes no sense to disentangle fiscal policy from.
But nevertheless, we have done it in the eurozone, so that the ECB today is on its own to make decision, which means actually the ECB is talking to the private sector. And those who really have the power to create money without having to rely on the state and the economy, these are private banks. So to a certain extent, we have privatized money in the eurozone. Now the question is, is there alternatives? Or if you think of the classical dilemma between the state and the market, you would say, “Well, the alternative is to increase the reserve requirement from one person as it is in the eurozone to 100%,” which means that the ECB would decide directly what type of credit private banks could limit or not, which to a certain extent would mean that the ECB would have to control money creation through credit.
But I don’t believe this would be necessarily the good answer. The reasonable alternative to this dilemma, which is money as a commons, and all the complementary currencies that are created everywhere in Europe or in Latin American or in Africa today, I don’t know yet about the US, but probably also occurring in the US, are all examples of communities that try to recover some power on the money creation. So they create their own money on their own and they manage it in the way they want to do it, so they may have artificial inflation because they do believe that this is a good thing. This forces people to transact with money and not to try to keep it at home.
And there are some very successful stories, as you know. In, for instance, in the South of Italy, you have the so-called, which is one example of a complementary money, whose volume of transaction each year per annum is one trillion euros. So that’s a lot of money. And so this is an example, and it seems to me that’s the real alternative to the authoritarian, neoliberal state that might emerge from this big pandemic.
Yeah. By the way, a note, Raghuram Rajan wrote a book recently, the former, he’s a professor at Chicago Business School and a former Indian Central Banker, called the Third Pillar, and it sounded very, very similar when you said in between the state and the government, the third pillar in his mind was that local society.
But I think it’s fascinating to me, you’re talking about water, I come from Detroit, Michigan, and around the Great Lakes in the bankruptcy of Detroit, the Flint water crisis. Is it not absurd that at the time of the Detroit bankruptcy, they were cutting off the water for poor people and trying to sell the Detroit water and sewage, which is the largest freshwater public utility in the world, to a private French company actually called Suez-
Yeah, I know.
So that they could then not have to pay the pensions of all the workers, because you had to pay public pensions but if you privatize, then there would be a windfall. And at the same time, in Flint, Michigan, which is about two baseball throws away from Lake Huron, which is an enormous body of very high quality, fresh water, they managed to pollute the children with lead in the whole society. So it’s almost like we didn’t see the warnings in Michigan, and I’m sure in many, many other places, of how this system is… How would I say? Doing something monetary that is different than providing value through service.
But I also am very intrigued, because you were talking about money and you were talking about the privatization money central banks, the relationship with the state. Prior to the onset of the pandemic, you have been doing, but many people were building a great momentum towards what we might call the Green New Deal.
A monetary financed fiscal expansion that would invigorate aggregate demand and transform the structure of energy on planet Earth, in ways to make our environment sustainable, and obviously it was a global project and it required collaboration between many, many countries, but particularly the EU, the United States, China, and India, and Japan. How do you see now where people are disoriented by the pandemic, we’re using a tremendous amount of fiscal capacity to address that challenge, how do you see the prospects for resuming the call to action to address climate sooner rather than later?
It seems to me there is already a big, how should I say this, argument between on the one hand a number of people in the civil society saying, “Well, we don’t want to resurrect the old world after the lockdown and after the pandemic.” So we need to take this opportunity to accelerate the transition towards society based on drainable energies and protecting and taking care of the services. And on the other hand, you have a number of people, including some political leaders in France who are saying exactly the opposite, namely we are going to have a lot of unemployment, probably something like 25% of jobless people. The unique way to provide them with jobs more rapidly is to resurrect the old world, because we don’t know how to do differently from that, and at the same time we have a huge public debt.
Just to take the example of France, the public debt of France was 98% of the GDP before the pandemic and probably it’s going to jump to 115. Italy is probably going to also jump to 160, maybe even more than that, and probably French markets will then just say, “Well, we have a public debt problem, as usual.” And then this will serve as a to say, “Well, we have to reduce public spending and we can’t afford to fund something like a Green New Deal.” Which would be just catastrophic, but this would mean that we are once again losing time. As you probably know, the last simulations that are ran by some climatologists from IPCC and some friends of mine tend to show that just before the pandemic, we were running not just on the most pessimistic scenario of the IPCC, which as you know, leads us somewhere between plus four and plus five degrees of increase of temperature on Earth at the end of the century.
But we were even above that, because there was an acceleration of global warming in the past few years. So not taking this opportunity to implement a Green New Deal would just be catastrophic and would probably bring us back to this business as usual scenario, which is very frightening. At the same time, of course we have to find solutions to provide some funding ways, to provide some ways to fund the Green New Deal in the near future. My viewpoint, and this is what I tried to emphasize in the last debates we had in Europe, is that we should think about canceling part of the public debt of a number of countries, including in the eurozone. I know that this is a taboo today, but actually if you think about it, the ECB in the last five years borrowed something like two trillion euros of public debt from sovereign countries in the eurozone.
For France, this is 400 billion euros. This debt now is in the balance sheet of the ECB. Suppose we cancel it. What’s happening? Actually nothing. This does not prevent the ECB from creating money, and there is a report that has been published by the Bank of International Settlements in Switzerland, which shows that a central bank can perfectly work and do its job with no equity at all, or with negative equity. So the equity of the ECB today is just something like 80 billion euros, that’s nothing, so it’s not the equity of the ECB that provides credibility to the euro. That’s just a fairytale. So that’s what provides credibility to the euro is the fact that the eurozone is a wealthy economic carrier, and then the best way to save the euro is on the contrary to implement the Green New Deal, and certainly not to say, “Whoa, we can’t do anything because we have to save the equity of the ECB.”
So if we were to cancel the public debt of the eurozone countries, which is in the balance sheet of the ECB, nobody would lose any money. No private actor would lose anything. The ECB would make a big loss, but that’s life. And in the European treaties, it’s not even written that countries would be forced to recapitalize the ECB. So we could just leave with it and this would save a lot of money and give a lot of freedom in terms of fiscal freedom for countries. So for France, it would be something, as I said, like 400 billion euros. That’s a lot of money, and with this you could easily finance a big Green New Deal in the next decade.
There is a small debate in this direction now in a number of countries, but of course, as you can imagine, as I said, this is entirely taboo, and a number of people in Germany and Netherlands will just be really shocked if this happens one day, but thinking about it, I truly believe that if the alternative is between this and it is not orthodox measure, and on the one hand, and on other other hand, a big depression, worse than the one we had in the ’30s during 10 days, I definitely choose the first option.
In the, how would I say, process of the Green New Deal, I feel like we’re suffering a little bit from what I had mentioned earlier, the lack of faith and credibility in government. We’re suffering a bit from the fact that the former system, the one you called neoliberal, that demonized public service and deified the markets, even before was not shared by the largest country in the world, which is China. Not the largest economy, I think it’s still the second largest economy. But we have a clash between systems, a clash between philosophical systems, between the Western Cartesian Enlightenment and the Chinese and Eastern philosophies, and we have enormous pain and dysfunction. We have a place which in India is about 20% of the world’s population, and it needs to have higher standards of living, but it can be at the margin, one of the greatest either contributors to climate change or dangers to sustainable climate change, depending on the path they choose and whether they get multilateral assistance.
But in your and my conversations prior to this podcast, we’ve talked a little bit about how the multilateral system needs itself maybe dying, needs to be resurrected, is caught in all of these cross currents. How are we going to bring global collaboration, which I believe, you tell me if you think otherwise, I think is a necessary condition to achieve the goals the IPCC and others have told us are necessary to our survival?
Yeah, I totally agree with you, and I would even say this is the main political we have to face in the next decades, which is on the one hand, you have to re-localize part of our production system, which goes in the opposite direction of the globalization, the way we have implemented it in the last 40 years, and at the same time we have to improve considerably the type of corporation among states that we can experience today. In a situation where multilateralism in the way that we have constructed it in 1945 with the United Nations and the Bretton Woods agreement, this is collapsing today. The United Nations’ security council could not even make any declaration about the pandemic, and that’s the first time since the civil world war that we observed such a paralysis of this body.
The leadership of the US is gone, as I said, and then we have to reinvent a new multilateralism in a situation where, as you just mentioned, we seem to have a big clash of civilizations, well, China, India, and Western countries, to be very simplistic. It seems to me the way I would try to deal with it and to think about it is to follow it. It seems to me if you think of the different categories of commodities and goods, namely private, public, commons, and there is a fourth one, which is tribal, or network goods. So economists used to think what it does that’s safer than an iPhone or Internet, Wikipedia, this is a network good in the sense that the more numerous people who are connected to this more valuable, but we could also think about it as a tribal good, which means that if you have an access to it, you need to pay fees, you pay some fees, and once you are in the tribe, then it’s a public good, but just for the tribe.
So if you have in mind these four degrees, private, public, commons, and tribal, then we could say to a certain extent this clash of civilization, if you want, means to follow it. China actually never really invented the public instance. China never had what we had in the Western countries, namely the Gregorian Reformation in the 11th century, where actually the church invented for the first time the modern state, creating a body of civil servants that made a clergy, which was an international class of civil servants, so that all the Western countries, including the US, have, to a certain extent, just replicated what the church invented in the 11th century.
What we have done in this context is that we have formalized the public instance. Of course, at the same time we had also the private, let’s say, category, which never disappeared and which was already there in the Roman Empire, namely private ownership, and of course, the commons. And of course, the tribal also, which was present in Europe and in the US, but China it seems to me never had the public momentum, never had the state in the sense that we understand it since the 11th century. The most important category in China, at least according to Confucianism, is the family. That is the tribe, it’s a tribal category, and the reason I think for which it’s so difficult for Chinese to think of a democratic state is that they don’t have, in their own culture, as far as I understand it, maybe I’m not efficient of China, of course, but the way I understand it, they don’t have this philosophical instance of a public body, which would be the state in the way we understand it in Western countries.
I would say the same story for India, to a certain extent. So these are two big countries whose civilization is based on tribal concepts, namely for instance the family in Confucianism, and which are just meeting our old countries where we do have a public body, a private sector, commons, and also tribes, and then this is the place where it seems to me we could enter into a fruitful dialogue, trying to show to the Chinese, and I’m sure they can understand it and they have already understood it, that having a legitimate, strong public sector is efficient for everybody, even for the private sector. So it seems to me that’s the big challenge that we have to win in the coming decades in the dialogue we are having with China.
Of course, in this big game, there is an actor which is to say the least very ambivalent, namely Russia. Russia knows something about what a state means, but at the same time, Russia is, I mean, embarked today, thanks to Vladimir Putin in a Pan-Slavic political program, which I’m afraid to say is not really compatible with any democratic effort that we could try to implement in some countries.
So we’ve covered a lot of the issues that you have illuminated for our commission in light of the pandemic and I find this very, very nourishing. But this global commission was looking at essentially the four, we’ve called it the four sources of disruption, and then induced disruption, meaning technology, financialization, climate, and what we might call the challenge to the nation state of globalization. And then finally, the induced disruption is migration, when things don’t add up, people try to leave out of despair. And that itself is quite disruptive. How do you think this commission that we’re all co-architects of together should reorient its priorities in light of what we’ve learned and what we’ve discussed today?
Well, I would say the four main topics you were just mentioning are the right ones, are the most relevant ones. What I would say from my viewpoint is that I would personally try to emphasize something, I mean, a big research program to which I try to contribute, but of course I’m not alone in this game, namely something like reconstructing microeconomics towards what we could call an ecological, post-Keynesian microeconomic theory. For the following reason, if you look at the mainstream microeconomic theory, but that’s also microeconomics, it deals with capital and labor and claims that we can produce wealth just with capital and labor, which is of course nonsense.
If you just think in terms of the first two laws of thermodynamics, we know that nothing can occur without energy, and we know that in a process of dissipating energy, the quality of energy is declining. That’s the certain law, the necessary growth of entropy. And once I had a discussion with Valerie Masson-Delmotte, who is the president of the IPCC, that is the group which is dedicated to the physics of climate. And she asked me in a very provocative way, “Well, you’re violating the first two laws of thermodynamics every day with your models, and you don’t care. You can sleep peacefully.” And well, I have to admit she was right. And this is one of the main reasons I believe why microeconomics is unable to deal with the big problems that are raised by climate change and the erosion of, simply because in most of our models, climate does not exist. Nature does not exist. Energy plays a minor role, and matter does not exist.
So it seems to me what we have to do definitely is to think of microeconomic theory as formalized through dynamic systems, because as I said earlier, equilibrium theory does not make sense. There is no reason to believe that an economy’s at equilibrium. We have very, very good reasons to believe that it’s not at equilibrium, but that it’s wandering maybe towards an equilibrium, but then we have to study the conditions, on which this equilibrium is localized or not, first. And second, to understand the impact of a number of physical constraints on microeconomic theory.
To just give you an example, if you try to understand why, since the certain oil shock at the end of the ’70s and since actually the 1985 where the price of oil came back to the level it had before the first oil shock, Western countries never succeeded in getting back to the growth rate that we had during the 13 glorious years, even though there was apparently no market constraint on the oil. And one explanation, one possible explanation is that we have reached the conventional in 2006 at the world level, as you know, with something like 98 billion barrels per day, which means that the scarcity of oil extraction might have been felt earlier and why not in the ’80s? So to a certain extent, it might be a case that the reason why we never had the growth rate in Western countries that we had earlier, we have in every country at the same time and a huge increase of both private and public debt, and a huge increase of inequality, all this might be linked to the fact that there is a growing scarcity of oil extraction beginning in the ’80s.
So that to a certain extent, we were, without knowing it, we were compensating the lack of, not the lack of oil, but the lack of, the impossibility to accelerate the rate of oil extraction. We were compensating it by increasing debt as a way to feed growth in our economies. Debt increase, of course, which feeds in turn financial bubbles, housing bubbles, and inequality. So this means that not taking into account the physical constraints that we are facing might be the big elephant in the room that we have totally ignored in microeconomic theory since decades.
So my viewpoint is that what we should emphasize is this, especially because as you know, in the near future, there will be a number of resources, natural resources, whose might reach a peak, and so in my own research with physicists, we have found, for instance, that copper might reach a worldwide peak in 2060, and this would be very problematic because we need a lot of copper, especially for grain infrastructures, and you know probably that grain infrastructures need on average much more copper than infrastructures dedicated to fossil fuels. So if we don’t pay attention to the way we use copper today, if we don’t organize recycling procedures in a very efficient way, it might be the case that we will be not running out of copper because there will still be a lot of copper, but we won’t be able to increase the quantity of copper extract from Earth every year in a sufficiently rapid way, so as to be able to implement the energy safe towards renewable energies, which would be very, very silly.
So yeah, I would say this. Ecological microeconomic series would definitely be a huge research program that I will try to emphasize. I would add one word regarding climate. Within this research program, there is a big issue, which is how to understand the impact of climate change on microeconomic systems. As you know, there are some economies, some mainstream economies who keep repeating things 30 years that well, we might have something like plus six degrees an increase of our average temperature at the end of this century, and this would cost something like minus 10% of world GDP.
Well, that’s ridiculous. If you talk with climatologists, they just laugh when you tell them this story, and they just say, “Plus six degrees? That’s the end of the world to a certain extent.” So of course, there are some alternative damage functions that are less ridiculous than the one that has been used by, for instance. Weitzman has an alternative function and needs to also have alternative functions, which seem to me much more realistic. But we don’t have a really convincing scholarly founded debate on damage functions, so that actually we don’t know how much it will cost us if we don’t do anything along the business as usual scenario, even on purely monetary returns. And this is cumbersome because it prevents us from taking good and strong decisions today, just because we don’t know.
We are blind about the cost of not doing anything in the near future. So there is a big research area here, which is to understand, to have more realistic damage functions, and to understand how much it will cost to us not to do anything. Just as an illustration, with two colleagues of mine, we have written a paper that we are going to publish now, which makes the following thought experiment. So we take two of the probably most convincing damage functions that I use today in the literature, both by climatologists, and we test them not on a global warming, but a global cooling. So we make the thought experiment, lets you pose that we face minus four degrees cooling on Earth, which would be exactly the reverse situation of the one we are going to experience in the coming decades.
Why minus four degrees? Because this is exactly the temperature of the last global glaciation that we had something like 20,000 years ago, and we have a lot of information about the Earth in this period, so that we know exactly how the Earth would look like if we were to experience some minus four degree cooling. So there is no way to escape from that and to say, “Well, you know, there is some uncertainty about the impact of climate change.” If we had this cooling, we would know exactly how this would look like, and actually half of Western countries would just be under ice, under a big layer of one kilometer ice. So we know this would be certainly a huge collapse of the world economy.
And nevertheless, the damage functions that we have tested claim that growth at one level will stake take place. GDP will still increase, which is ridiculous. So there definitely is an area of research it seems to me which is consistent trying to have much more realistic damage functions.
As I listen to you, I recall a movie whose title was Six Degrees of Separation, and that title takes on a new likeness. Six degrees might separate us as human beings from planet Earth, and I think the urgency… There was a former, you probably knew an Italian economy and finance minister, Tommaso Padoa-Schioppa-
He gave the last speech at the very first INET conference at King’s College Cambridge in April of 2010. And when he got done, and he by the way later codified this in writing in the Per Jacobsson lecture for the IMF a month or two later, and what Tommaso said was, “The challenge for INET was that there were three types of sustainability.” Financial, resource, and social, and that they would all interact, and when he sat down, which he later elaborated in the Per Jacobsson lecture, he sat next to me at the dinner, he sat down and he said, “Robert, this conference will deal with financial sustainability that has been revealed not to be on track. It will create a great deal of suspicion about the relationship,” he said, “between Croesus and the emperor, between government and the power of money.
“And this will sow the seeds of social discord and social distrust.” And he said, “And then with inequality, and how inequality will be exacerbated by climate change, mankind will have its greatest test, and it will ultimately focus on social sustainability because without social coherence, we cannot govern.” And I remember just sitting with him at dinner, feeling that scenario, that perception wash over me, and I recalled it today as you were talking about ecological macroeconomics in the post-Cagean realm, because it seems as if, like you talked about with the physical constraints and so forth, that our macroeconomics presumes all those other sustainabilities are not in play.
And particularly environmental resource sustainability. But I guess you’re in Dublin, and as I listen to you today, I was reminded of a song that I’ve been very fond of by U2, which was called 40, comes from Psalm 40 from the Bible, and the second verse, the lyric is, “You set my feet upon a rock and made my footsteps firm. Many will see, many will see and hear. I will sing, sing a new song. I will sing, sing a new song. How long to sing this song?” Well, Gael, I think you, from Dublin, are singing a new song in economics, and it’s one that we must hear, and you’re helping our global commission firm up our footsteps and to build a vision that we hope and believe that many will see and hear.
Thank you for being my guest today.
I look forward to working with you, and I look forward to having perhaps another chapter together. Any final thoughts?
Thank you for quoting the Psalm 40. You know, this psalm was written by Jews when they were in captivity in Babylon, in exile actually, and so they were saying, “We are in a very complicated situation. Our country has been destroyed. The kingdom of David is destroyed. The temple is destroyed. Everything has been destroyed, but nevertheless, we have faith that a future is possible.” So it seems to me, yeah, we are getting close to the situation and we need to keep faith.
Yes. Well, the song by U2 started with, “I waited patiently for the Lord. He inclined and heard my cry.”
“He brought me up out of the pit, out of the mire and clay. I will sing a new song. I will sing, sing a new song.” Gael, we’ll have to get together again for another chapter of Economics & Beyond.
But this has been delightful today, and I thank you again.
We’ll see you again soon. Bye-bye.