Getting over Financial & Economic Crises

The Financial Crises of 2007/08 is judged by many economists to be the worst financial crisis since the Great Depression of the 1930s. As a result of the 2008 crisis, significant financial institutions, notably banks and stock markets, lost trillions of $US. In turn housing markets lost value resulting in evictions, foreclosures and unemployment. People saw their savings, pensions and endowments loose overnight the kind of money that takes decades of hard work to save. We are still suffering from this crises as more key business suffer or fail, high street shops and house-hold names go out of business; and  the European sovereign-debt crisis has ruined countless lives  in Greece, Portugal, Spain, Ireland and now Cyprus.

The 2008 crisis took much of the Financial & Economic world by surprise in spite of global studies and close attention from all quarters. The causes of the crisis are difficult to identify and has given rise to extensive debate. It is a global crisis and all of us are involved. The search goes on for ways to stop it happening again.

A significant amount of blame for the crisis has to be the “financialization” of the economy:

“Over the past two to three decades various trends in financial development in the United States and also in other OECD countries seem to have emerged:

• Money and credit are increasingly used for financial transactions rather than for real transactions (i.e. exchange of goods, services and labour).

• Profit maximization is conceived more and more, at least by joint stock companies, as maximization of shareholder value rather than current profit. Accounting rules have been changing (based on such features as mark-to-market and fair value rather than on the lowest value principle); corporate governance is undertaken more by capital markets than by house banks; there are new forms of pay for management based on stock market performance, and lower barriers to mergers and acquisitions.

• The financial sector has experienced above-average growth in many countries, largely driven by financial innovations, deregulation and globalization of financial markets. Indeed, the financial sector has been considered the boom sector, seemingly without a clear distinction from the real (non-financial) economy, and financial service innovations have been seen as a special form of technical progress.

• Returns on equity − as well as management pay − have been rising relative to non-financial sectors, and have become more and more the benchmark for the real economy. The share of aggregate wages in national income has been falling in most OECD countries, and profits have tilted more towards financial industries than to non-financial sectors.15

• Security and other asset markets like real estate have become more susceptible to bubbles and speculation. The number of financial crises has increased, seemingly more in emerging-market economies, although these crises were linked to risk and high-yield-seeking external finance originating in OECD economies.

These trends have been the most pronounced in the United Kingdom and the United States, but are also prevalent in almost all other economies where financial markets tend to emulate the Wall Street model, be they in Frankfurt, Paris, Singapore, Beijing or Johannesburg.” (Dullien et al. 2010, p. 44).

Primal Reporter is not at the moment interested in the details of the detailed causes of the crisis. Too many others are such as the report quoted above and PR has little to add to the report’s 324 pages. In fact, PR makes a start at the very point where the report ends:

“Finally, the road to ever more financialization should be left behind; instead priority should be given to revitalization of the real economy, supported by a downsized financial sector that is more geared to serving the needs of non-financial enterprises. This includes a departure from excessive export-led or debt-led macroeconomic regimes, and a greater dependence than in the past on sustainable domestic demand dynamics, based on more equal distribution of income.” (ibid., p. 47).

Leaving “ever more financialization” behind is precisely what PR means by the title of this blog post, “Getting over Financial & Economic Crises”. In other words, PR does NOT focus upon finding economic and financial solutions to the crises so that it will not recur again: instead PR DOES focus upon a form a development that is not lead by financialized economics.

It will of course not be easy to take this other non-economic path to development. Indeed with our established attitudes and values, it is hard to imagine what such a development pathway would look like. What will the human race do with its time if it is not earning a living?

The rough answer to this question is “The human race will be living”. There is so much more to life than making money – this is so true of greed, of making excesses of money far far beyond individual need.

To bring about the transition from a financial/economic development to a living-focussed way of developing requires changes in personal attitudes and values as well as in politics and social infrastructures and institutions. The ways in which we assess performance, make decisions, and recognise success and failure will also change; accounting will change.

Finance will not dominate our lives in the future

A recent issues of the journal “Environmental Innovation and Societal Transitions” (Issue 6, 2013) considers the transition away from the existing financial/economic form of development. There are several authors published in this issue who deserve to be called “Primal” for the vision and understanding they provide. For example Vergragt (2013, p. 124) has the following to say about greed and the unequal distributions of wealth that the existing financial and economic system favours:

“It has been amply documented that more equal societies perform better on a wide range of social indicators of well-being, including social trust and support for democratic institutions, political participation, educational outcomes, health status, crime and opportunities for social mobility (Wilkinson et al., 2009). A society with large income disparities provides the free market system with a perfect setting for exploiting the natural human tendency toward insatiability and positional consumption, and thus perpetuates and inflames the consumerist society. Less inequality will also mean lower material consumption and a smaller environmental burden, while providing greater life satisfaction and a higher standard of living for most people. In short, I argue for returning to the values of the welfare state that have been eroding in Europe and the US since the 1980s. But this would be a welfare state in which the combination of high labor productivity we have achieved, less consumerism, and education that could provide for full employment and entrepreneurship, would allow people to work fewer hours and engage in leisure actives–as already envisioned by John Maynard Keynes in his visionary (1936) essay.”

Inequality is a key concern for the older boy in PR’s source book, “Intrinsic Sustainable Development: epistemes, sciences, business and sustainability” (Birkin and Polesie, 2011). Things that are “real” is one of the older boy’s foremost concerns. He argues for a new reality based on the scientific knowledge of ourselves and the world that we now possess – significantly this knowledge was not available when the foundations were laid down for our existing financial and economic institutions. This change in our knowledge makes a new “possibility for knowledge” and this is the reason why PR argues that a new “episteme” is emerging (Birkin and Polesie 2011).

Loorbach and Huffenreuter (2013, p. 41) belong to the emerging Primal episteme for they argue in favour of a transition from the financial and economic economy to a “real” and “Glocal”economy as follows:

“We here therefore suggest shifting the focus to transition alternatives, i.e. actions and solutions that divert from existing business-as-usual scenarios or incremental, green-growth type of improvement strategies. In other words, looking for permanent, systemic solutions. We find that such alternatives cannot be categorized as merely global or local, and therefore propose the terminology ‘glocal’ (Svensson, 2001). This term has been used in multiple ways often referring to the simultaneous process of globalisation and regionalization. Here we use it to refer to the phenomenon that in very different places, domains and communities similar patterns and alternatives are emerging. ‘Glocal’ alternatives share common and generic characteristics, but otherwise have very specific forms in local contexts. Examples are food and energy cooperatives, mobility sharing, cooperative social services as well as new public-private cooperatives and financial instruments. Interestingly, it seems that glocal alternatives share characteristics such as a focus on broader value definitions, self-organisational structures, explicit links to local communities, sustainable technologies and low-impact but high-quality lifestyles.”

This shift to “Glocal” reflects the transition from the worst human-self-referencing abstractions of the Modern episteme to the new foundations in empirically-grounded science that is the mark of the Primal.  Finally, Foxon (2013, p. 127) recognises the roles of complexity and autopoiesis in the Primal episteme:

“Combining the above elements has been suggested to lead to a complexity economics. This proposes that economies should be understood as complex adaptive systems, differing from the standard neoclassical-economic view in at least five ways (Arthur, 1999; Beinhocker, 2006; Foxon et al., 2013):

·         economies are open, dynamic systems, rather than generally being in equilibrium;

·         they are made up of heterogeneous agents, lacking perfect foresight, but able to learn and adapt over time;

·         agents interact through various networks;

·         macro patterns emerge from micro behaviours and interactions and feedbacks on these;

·         evolutionary processes create novelty and growing order and complexity over time.”

The Primal episteme is getting more apparent with each passing month. PR will continue to keep you updated on the changes as they take place.

References

Birkin, F.K. and Polesie, T. (2011). “Intrinsic Sustainable Development: epistemes, sciences, business and sustainability.” Singapore, World Scientific Press.

Dullien, S., Kotte, D.J., Márquez, A. and Priewe, J. (2010). “The Financial and Economic Crisis of 2008-2009 and Developing Countries.” New York and Geneva, United Nations. Available on line at <http://unctad.org/en/Docs/gdsmdp20101_en.pdf> [Accessed April 2013].

Foxon, T.J. (2013). “Responding to the financial crisis: Need for a new Economics.” Environmental Innovation and Societal Transitions, 6, pp. 126– 128.

Loorbach, D.A. and Huffenreuter, L. (2013). Exploring the economic crisis from a transition management perspective.” Environmental Innovation and Societal Transitions, 6, pp. 35-46.

Vergragt, P.J. (2013). A possible way out of the combined economic-sustainability crisis. Environmental Innovation and Societal Transitions, 6, pp. 123-125.