This study proposes a theory of world income and world employment. The
presentation starts with the idea that the world-economy is a market economy.
The study further proposes a conceptual model of global income determination;
introduces the concept of a growth dialectic (disequilibrium); postulates
the possibility of a global full-employment equilibrium (global Keynes-Prebisch
equilibrium) as an alternative to a global unemployment equilibrium; discusses
the income-generating and employment-generating implications of such an
equilibrium; and, finally, examines various defects of global aggregate
demand and states the need for public intervention in the world market.
1. Why Study World Income?
Citizens have rights. The people of the world have inalienable
rights. Economic processes do not have inalienable rights. The present
world economy does not conform to Article 25 of the Universal Declaration
of Human Rights which states that: "Everyone has the right to a standard
of living adequate for the health and well-being of himself and his family..."
(We may amend this and say "of himself or herself and his or
her family".) In my opinion, the world economy must be reformed so
that it conforms to Article 25 of the human rights code. Theory of world
income and employment can make a contribution to such a reformation.
2. Tasks of a Theory of World Income
When we study income and employment in the world-system, we cannot but
have certain goals in mind. The goals which, in my opinion, should be supported
by a theory of world income -- in addition to the obtaining of valid knowledge,
are, as follows:
(a) global full employment
(b) improved global income distribution
(c) global social security
(d) global economic growth (of the sustainable kind)
(e) ecological sustainability
(f) democratic process
All of these goals are important. In practical situations, one may have
to rank-order them. In view of these goals, we can, perhaps, say that a
theory of world income must deal with the following topical areas:
1. growth of world income
2. sustainability of world income
3. distribution of world income
4. employment and world income
5. politics of world income
My study cannot deal with all of these issues. Instead, I will focus
on some of them and leave others for another time. I have explained my
general perspective on this elsewhere (Köhler
1999). The underlying paradigm does not have an agreed-upon name; it may
be called perspective X or leftist global Keynesianism or something of
that sort. As Shakespeare has Juliet say in Romeo and Juliet, a
rose by any other name is still a rose.
I am not aware of another similar theory of world income and employment. However, great literature exists which is thinking in the same direction. "World system" and "world-systems" literature, publications from the World Order Models Project, the work of UNDP (United Nations Development Program), the literature concerning NIEO (New International Economic Order), and other like-minded literature -- I am referring to authors like Addo, Alexander, Amin, Arrighi, Bornschier, Boswell, Chase-Dunn, Dalby, Eckhardt, Elsenhans, Emmanuel, Falk, Frank, Galtung, Greider, Grimes, Kothari, Makhijani, Mazrui, Mendlovitz, Prebisch, Raffer, Rozov, Tandon, Tausch, Sakamoto, SEF (collective author), Shiva, Singh and Gatade, UNDP (collective author), Wagar, Wallace, Wallerstein, to name some -- have articulated the need for studying the modern world as a single unit, a single society, a single economy, a single polity, a single cultural system, a single normative system, or a single ecosystem, in short, as a single world-system. A global view of the world has been articulated in a large body of ecological literature and in the literature known as "global political economy". Among economists, a Keynesian scholar proposed to study what he calls "megaeconomics" (world-level economics), as opposed to macroeconomics or microeconomics (Mead 1989). Some recent neoclassical literature is also theorizing about the world economy using a globocentric perspective (Siebert 1997). Popularly, this view is known as a "one-world" view which emphasizes the fact that the world is a single system, as opposed to a nation-state view of the world which treats the world as a multitude of countries. This kind of theorizing received a major boost from space exploration which made the image of the "blue planet" a household item. Theory of world income and employment is theory of the economy of "spaceship earth".
World-systems theory of the world economy is important because
there are numerous economic problems in the contemporary world which have
not been sufficiently elucidated by existing state-centered theories (statist
theories), including macroeconomics and the international economics of
textbooks. Theory formation seems to lag behind reality. While a great
deal of economic activity is being organized on a global scale by global
corporations like Coca Cola or Toyota, by global banks like Chase-Manhattan
and other global financial institutions, by global financial centers like
the New York, Tokyo and London stock exchanges, and by global public organizations
like IMF, World Bank, WTO and others, the theories we use most frequently
have been framed with the use of statist (nation-centered) concepts which
have their origins, for most part, in the 18th and 19th centuries.
4. Definition of World Income
World income is the aggregate income generated by the world economy;
world product is the aggregate product generated by the world economy;
both are commonly measured as world GDP (global GDP). This is the grand
dependent variable of my theory. (Some ecologists have proposed alternatives
to GDP measurement and Marxist economists have measured aggregate income
as NMP, net material product; but I will leave this measurement problem
aside for the time being.)
5. The World Economy As a Market
Qualified observers, including global investors, as well as Karl Marx and John Maynard Keynes, agree that the world economy is a market economy. What does that mean? There are four or more definitions of a "market", as follows: (1) the original concept of a market -- this kind of market can be found around the world and throughout history, in ancient China as well as in modern Canada -- namely, the market as a place in a village, town or city ("market place" or "market building") where shoppers go in order to buy something and vendors go in order to sell something. This is, of course, the market from which Adam Smith developed his abstract concept of a market. (2) The concept of a market in the sense of economic theory -- this is central to much of economic theory and refers to the notions of supply and demand and their interaction. This basic model has been applied in many different ways -- in microeconomics and macroeconomics; applied to product markets, labour markets, stock markets, and so on. (3) In political-economic analysis the emphasis is on the institutional dimension of "market" and we speak of a "market economy" (i.e., an economy organized around the concept of a market) or "market system", involving certain rules, laws, public organizations and policies. (4) Another important definiton of "market" is used in marketing, the art and science of designing and selling a company's products. In marketing, a company's "market" is defined as potential buyers with the ability, willingness, and purchasing power to buy the company's products. These could be individual buyers or organizational buyers (businesses or governments, etc.). In mass marketing, the "target market" is a mass of people (consumers). In global marketing, the target markets are potential buyers around the globe.
The world economy can be considered as a market in the sense of (2),
(3) and (4) above. That is to say, the world economy can be conceptualized
as (a) a market in the sense of economic theory (aggregate supply interacting
with aggregate demand); (b) as a market in the sense of political economy
(an institutional arrangement around the concept of a market); or (c) as
a market in the sense of marketing (as in "Cocal Cola Company is selling
to the world market"). The center of my theoretical discussion will be
on the world economy as a market in the sense of economic theory.
5.2 Physical and Monetary (Real and Nominal)
The world economy has, at the same time, a physical and a monetary dimension.
There are other sides like political, legal, military, cultural, and ecological;
but I will focus on the physical and monetary sides which are also known
as "real" and "nominal". In other words, the modern world economy is, for
most part, not a barter economy in which goods or services are bartered
for other goods or services, but rather a monetary economy in which economic
value takes on the alternate forms of products (i.e., physical or "real"
value) and money, broadly defined (i.e., monetary or "nominal" value).
The relationship between the two sides -- physical and monetary, is complex,
indeed, and has led theoreticians in different directions. Some treat money
as a means of payment and not much else; others treat money as an autonomous
element in the economic process which plays a role far beyond being a means
of payment. Keynesians and Marxists subscribe to the second outlook and
my discussion is placed in that broad camp as well. I do not see much sense
in making the highly artificial assumption that the modern world economy
is, in principle, a barter economy a la Robinson Crusoe. My general view
of the relationship between "nominal" and "real", or "physical" and "monetary",
is expressed by the Keynesian characterization of the (capitalist) (world)
economy as a "monetary entrepreneurial economy" (see, e.g., Davidson 1994).
While money is important for diagnostic purposes (namely, analysis and
explanation of economic processes), I agree with the statement by Keynes
that "consumption -- to repeat the obvious -- is the sole end of all economic
activity" (Keynes 1964: 104). When we add an ecological perspective, we
would have to say that the improvement of consumption must be within the
bounds of what is ecologically sustainable. With this amendment, I am still
agreeing with those who claim the normative supremacy of the real
(physical) economy over the nominal (monetary) economy while acknowledging
the diagnostic importance of money in the economic process.
6. Gobal Income Determination
6.1 Conceptual Model
I propose, as a conceptual model, that world income and world product
(global GDP) are determined as a market outcome; that is to say, as the
result of interactions ("feedback") between global aggregate supply and
global aggregate demand, whereby global money has an active influence on
the outcome as well -- an influence which goes beyond the role of money
as a means of payment. These interactions take place in a political-institutional,
an ecological, and an historical context.
6.2 Definition of Terms
Global aggregate supply is aggregate supply in the entire world economy. Global aggregate demand is aggregate (effective) demand in the entire world economy. The importance of these two concepts has been noted in the literature -- for example, by Wallerstein who stated:
"there are 'expansions' and 'contractions' in the world economy ... I think they are linked to a basic contradiction of the system, which has to do with supply and demand,that is, world-system supply and world-system demand, not firm supply and demand, nor state supply and demand, but world-system supply and demand." (Wallerstein 1978: 232; emphasis original)
Global money is aggregate money in the entire world economy. Monetary theory is full of complexities and disagreements and the theory of global money, as opposed to money in the macroeconomy, is still underdeveloped.
Market interaction and feedback refers to a process of mutual
causation. If A influences B, but B does not influence A (namely, if A
--> B), then there is no feedback, since the influence is only in one direction.
However, if A influences B and B also influences A (namely, if A <-->
B), then interactivity (feedback) exists. The concept of a market, in the
sense of economic theory, implies that supply and demand are interactive
(i.e., in a relationship of feedback), so that supply influences demand
and demand influences supply. This is expressed in the standard supply-demand
diagram with a supply curve and a demand curve. In this diagram the market
outcome is represented as the point at which the supply curve and the demand
curve intersect. This intersection represents the result of the interaction
(feedback) between supply and demand.
6.3 Levels of Analysis
The conceptual model (above) implies that my theory is stated for the
world-system level of analysis (global level), rather than for the state
level of analysis (national level, macroeconomic level). As in the situation
between micro and macro levels, causation between state and world levels
may run in both directions. Certain large states (e.g., USA) or certain
groups of states (e.g., the Asian economies) influence the world system
and the world system influences individual states (countries, macroeconomies)
-- for example, via the global technology transfer, global demand, global
finance, and so on. No country is an island, so-to-speak. Robinson Crusoe
is dead. All national economies are so-called "open economies" within one
6.4 History, Politics, Ecology
I should point out that the determination of world income and world
product, as described above, does not occur in a political, historical
or ecological vacuum. Concepts similar to the ones I mentioned have been
used in globocentric history of the world economy. Furthermore,
the abstract model of an economy never exists without a political
context in which groups, classes, countries or empires push and fight for
their interests by non-violent or violent means. Furthermore, the world
economy (or, "world-economies" in the plural, as in historical sociology)
never exist(s) without an ecological context.
6.5 Praxeology, Scientism, Theory
The term "theory" means many things to many people. It is important, therefore, to state at the outset what it means here. Theoreticians may pursue theory of various types and there is not necessarily any clear-cut proof that one is wrong and the other is right; all theories are limited in one way or another. I subscribe to the view that economic theory, in order to be of interest, must have a practical purpose. Keynes studied the great depression of the 1930's in order to end it. Marx studied economics, politics and society in order to change them. Business schools study the world economy in order to improve business. As historical reality unfolds, new knowledge must be found in order to deal with changing reality and changing practical problems. This theoretical outlook differs from a kind of scientism which treats the economy as some kind of Newtonian universe in which eternal, ahistorical laws can be discovered. I find this orientation less appealing since the world economy is an intelligent reality, as opposed to an inanimate reality as in Newtonian physics.
Rejecting pure scientism does not mean a rejection of scientific method, however. By "scientific method" I mean method in the sense of Popper, where analytic theories and hypotheses or historical interpretations are formulated and then confronted with factual evidence of various kinds and are exposed to rival theories, hypothes or interpretations. Philosophical essentialism, as in Marx or in medieval European scholasticism, does not appeal to my mind. These approaches may generate valuable ideas, but only in the sense of preliminary theories, hypotheses or interpretations which must be exposed to a reality test (confrontation with observables) and even a praxis test. Thus, if theory leads to policies which lead to disastrous practical results, then this theory did not pass a praxis test, and the praxis test may also reveal flaws in the analytic apparatus of the theory.
Given this general orientation, I distinguish between (1) a "paradigm", in the sense of Kuhn; (2) analytic theories or models, on the one hand, and (3) praxeological theory or thought, on the other hand. I have attempted to describe the paradigm underlying my present effort in a separate publication where the paradigm or perspective is called "global Keynesianism and beyond" (Köhler 1999). By paradigm I mean, along Kuhn's lines, a general pre-analytic perspective which contains general understandings about salient concepts, admissibale evidence, modes of reasoning and preferred methods of inquiry, notions of causality and shared values. Within such a paradigm (which is like an umbrella, so-to-speak), more specific theories can be developed -- e.g., theories of economic growth, income distribution, entitlement, and so on. Moreover, one may also want to develop praxeological theory, policy thought, and practical advice. Neoclassical analytic theories are related to certain liberal, conservative or other policies; Keynesian analytic theory is related to certain Keynesian policies; Marxist analytic theory is related to certain Marxist praxeological ideas and prescriptions; and so on. These various endeavours can be looked at in terms of their analytic and factual strength and validity; in terms of their praxeological, practical and value dimensions; and in terms of ideology critique as mental systems which are used to advance the interests of various agents (individuals, groups, organizations, classes, nations, empires) in an open or disguised fashion.
The theory which I am proposing in this study is meant to support the
greatest utility (well-being, welfare) of the greatest number of people
around the globe and everybody's inalienable right to have an adequate
standard of living, as stated in Article 25 of the Universal Declaration
of Human Rights.
7. Accounting View Of Global Aggregates (Ex-post View)
The global aggregates mentioned in the conceptual statement of my theory -- namely, global income, global product, global supply, global demand, and global money, can be measured, given certain definitions and measurement procedures. This leads to a statistical picture of the world economy which is mostly descriptive. This descriptive statistical picture can be called the "accounting view" of the world economy. In Keynesian parlance, this is also known as an "ex post" view; that is to say, this is how the world economy looks at the end of an accounting period (usually, a year) when all the activity and turbulence of the economic process is "tuned out" and the accountants/statisticians total up all the variables.
Let's use symbolic notations, for example:
Z = world income or product
GAS = global aggregate supply
GAD = global aggregate demand
Mg = global money
In the ex-post view (accounting view) three of these magnitudes are
Z = global GDP
= (ex-post) GAS
= (ex-post) GAD
In words, the magnitude of global income for an accounting period is also the magnitude of the global product of the accounting period (both generally referred to as global GDP or world GDP). The actual (ex-post) global supply (namely, the amount actually supplied) and actual (ex-post) global demand (namely, the amount of demand actually satisfied) are identical to global GDP. It must be noted that these identities refer to the magnitudes of these variable expressed in money terms (e.g., in US dollars). For example, the magnitude of world income in the year 1995 was 28 trillion US dollars, based on standard currency conversion rates (World Bank 1997: 215). The magnitude of global aggregate money for the same year is more obscure and not readily available from published sources.
This accounting view of the global aggregates is a starting point for
theory and analysis but reveals, by itself, relatively little about the
dynamics, causes and determinants of world income and world product.
8. Dynamic View of Global Aggregates (Ex-ante View)
Keynesian theory distinguishes between "ex-post" and "ex-ante" views. In dynamic (ex-ante) analysis, global supply and global demand are more than dead, descriptive, statistical aggregates; they are rather treated as dynamic "economic forces", "potentialities", "functions" or "market forces" which are ever-changing in their strength. Thus, the "market force" or "function" of aggregate supply interacts with the "market force" or "function" of aggregate demand in the abstract space called the "market". The relative strength of these variable "market forces" determines the aggregate outcome at the end of the accounting period.
In dynamic (ex-ante) analysis it is presumed that the two forces of aggregate supply and aggregate demand may be of different strengths, so that a tension, dialectic or dynamic disequilibrium between the two may exist. In fact, Keynesian and Marxist theories presume that such a tension or disequilibrium-in-process (dialectic) is the usual situation. Generated by this perpetually changing relation of forces between supply and demand, the aggregate result may be an economic growth rate of, let's say, three percent (+3%)in one year, or, alternatively, a decline of, let's say, one percent (-1%) in another year, and so on.
The interaction between the aggregate supply force and the aggregate demand force is further complicated by the role of money which, according to Keynesian presumptions, makes an autonomous additional contribution to the economic process (money is "non-neutral"; Davidson 1994); and which, according to the Marxist view, is an integral part of the accumulation process (as in the formula M - C - M').
These general theoretical notions have been applied at the macroeconomic
level of analysis; they can also be applied at the world-system level.
9. The Global Growth Dialectic (Growth Disequilibrium)
9.1 General Statement
The preceding considerations lead to a concept of a global growth disequilibrium (dialectic), as follows.
Let's use the following symbolic notations (I am using the lower-case
letters in order to signify that these are growth rates):
z = growth rate of global income or product
gas = growth rate of global aggregate demand
gad = growth rate of global aggregate demand
mg = growth rate of global monetary aggregate
Using these notations, the inherent disequilibrium (dialectic) of the global growth dynamic can be stated, in a first approximation, as:
z = minimum of (gas, gad, mg)
[where "gas, gad, mg" are to be understood as "potentials", "functions" or "market forces" (ex-ante view) and not as the observed (actual) accounting magnitudes (ex-post view)]
In words, global income growth (z) is a market outcome resulting from the interaction of three disequilibrated market forces, where the weakest market force sets the pace. Thus, actual global income growth (z) is equal to the minimum of either (a) the growth rate of the global aggregate supply potential (gas) or (2) the growth rate of the global aggregate demand potential (gad) or (3) the growth rate of the global monetary aggregate (mg). This is a first, approximate statement which ignores finer points of the interactivities.
Here is an example. If global income and product grew between time 1
and time 2 by x percent (say, +3.0 %) [as per ex-post observation], then
it is implied that (actual) global aggregate supply and (actual) global
aggregate demand grew at the same rate and that the global monetary aggregate
may have grown at this rate as well (the last being less certain). In ex-post
terms we can thus speak of a global growth equilibrium between the
aggregates. In ex-ante analysis, however, we can presume that there
was a disequilibrium at work during the accounting period. Thus,
global aggregate supply (as a potential) may have grown at a rate of s
percent (say, +5.0 %); global aggregate demand (as a potential) may have
grown by d percent (say, +3.0 %); and the global monetary aggregate may
have grown by m percent (say, +4.0 %). These disequilibrated market forces
were interactive during the accounting period; that is to say, they influenced
each other. As a general rule, it may be postulated that the weakest of
the three forces tends to restrain the other two forces. In this example,
global demand growth (+3%) most likely restrained overall growth of income
and output to +3%. In other situations, the supply side may be the weakest
force and may restrain aggregate income and output. In yet other situations,
aggregate money growth may be so slow or negative that it constrains both
aggregate supply and demand growth, with the effect of controlling the
growth of global income and product.
9.2 Nation-state (Statist) View of Global Growth
A more conventional view of global growth of income and product is a
statist view (nation-state view). Let's denote the economic growth rates
of individual countries (in lower-case letters) as:
y1 = GDP growth rate of country 1
y2 = GDP growth rate of country 2
y200 = GDP growth rate of country 200
Using these notations, the statist (traditional macroeconomic) view of global growth can be stated as:
z = function of (y1, y2, ..., y200)
In words, the growth rate of global income (z) is a function of the
(national) GDP growth rates of the various countries around the world (y1,
y2, etc.). Both the nation-state view and the world-system view are valid
at the same time; they are two alternative ways of studying the same object.
9.3 Interactivity Between Global and National Income Growth
The relationships between the world-system level and the national (macro) level of analysis are complex. The question can be raised (a) which of the two levels (global, national) has the higher analytic status; and (b) which causes which? My answer to these questions is that the global and national levels relate to each other in a chicken-and-egg relationship. We cannot say whether the chicken was there before the egg or whether the egg was there before the chicken. Similarly, the world-system level and the national (macro) level have co-equal logical-analytic status. Both are categories of the mind which the mind superimposes on reality in order to make sense of reality (in Kant's philosophy, categories are superimposed on "the thing of itself" , "das Ding an sich"). As a corollary of that, it makes sense to claim that causality between the two levels may run in either direction; that is to say, that the world-system level may influence the national level and, at the same time, the national level may influence the world-system level. Aggregate global economic growth may influence each and every individual national economic growth; and each national economic growth may make a contribution (positive or negative) to aggregate global economic growth. In the ex-post (accounting) view, global aggregate income (Z) is equal to the sum of all national aggregate incomes (Y1, Y2, ... Y200). This is a statistical identity. On the other hand, in ex-ante (dynamic) analysis, the growing (or declining) national and global aggregates may influence each other in either direction. We can thus postulate that:
y1, y2 ... y200 --> z (i.e., national income growth influences global income growth); and:
z --> y1, y2 ... y200 (i.e., world income growth influences national
10. Taxonomy of the Determinants of World Income
The main determinants of world income (as per my model) -- namely, global
aggregate supply, global aggregate demand and the global monetary aggregate,
are abstractions at a very high level of abstraction. There are various
ways of classifying and describing these determinants.
10.1 The Components of Global Aggregate Supply
Global aggregate supply can be decomposed in several ways, as follows:
(a) By sector (1) -- agriculture, mining, industry, service
(b) By sector (2) -- private, public
(c) By end-use -- consumption, investment
(d) By national origin -- Mozambiquan, Canadian, etc.
(e) By class of productive agents -- land, labour, capital, information
(f) By ecological impact -- sustainable, non-sustainable
(g) By time -- year 1865, 1965, 2000 and so on
When all these categories are put together, the components of global
supply can be represented in a multidimensional matrix with a very large
number of cells. Such a global matrix is impractical to work with, but
it suggests, as a theoretical device, that global aggregate supply can
be analyzed in many different ways, depending on how we simplify the matrix.
10.2 The Components of Global Aggregate Demand
Global aggregate demand can similarly be decomposed in several ways. We can also think of global aggregate demand as a matrix with a large number of dimensions and cells. A standard approach to demand analysis is captured in the macroeconomic formula of textbooks which reads:
Y = C + I + G + (EX - IM)
or, in words, national income (Y) can be decomposed into four demand streams -- namely, (private) consumption demand (C), fixed-investment demand demand (I), government demand (G) and net foreign demand (export demand (EX) less import demand (IM)). At the world- system level, there is one special feature -- namely, world exports and world imports are the same quantity. Therefore, the expression (EX - IM) equals zero (null) at the world-level, by definition. Statistical measurements of this show only very small deviations from null. As a consequence, total world demand (GAD) is:
GAD = global C + global I + global G
where global G is the aggregate of all public expenditures in the world.
Note that (EX-IM) is null. This reflects the fact that the world economy
is the only economic system which is truly a "closed system", i.e., has
no external economic links.
10.3 Components of Global Money
Global money, as opposed to money in the macroeconomy, is a concept
which is not widely used and its theory is not as well developed as that
of money in a national (macroeconomic) context. When we speak of global
money, we must first distinguish between the notions of "global currency"
(e.g., is gold, is Stirling, is the U.S. dollar a "global currency"?) and
global money as an aggregate of some value. In a first, simplistic definition,
we can, perhaps, say that the volume of global money (Mg) is equal to the
sum of all national monetary aggregates (Mn), expressed in a common numeraire,
plus any other volumes of money which may be generated in the world-system
in a "space" which is not strictly national ("transnational space"), e.g.,
so-called "Eurodollars" created by non-U.S. banks or SDRs issued by the
IMF as transnational fiat money. Let's denote these kinds of "transnational
money" as Mt. Using these concepts, we can, perhaps, define the global
monetary aggregate (Mg) as the sum of all national monetary aggregates
(Mn) plus all transnational monetary aggregates (Mt) -- or, in a very simple
formula, Mg = Mn + Mt .
Global money can be decomposed in various ways, as follows:
(a) by national currency -- dollars, yuan, pesos, etc.
(b) by degree of liquidity -- cash, credit, asset
(c) by legitimization: state-sanctioned ("legal tender"), informal
(d) by valuation -- nominal versus deflated (so-called "real" in statistical accounts)
(e) by functionality -- global money as means of payment; or global money as effective demand; or global money as capital
The aggregate which may be called "global money" has various dimensions and components which are here only listed in a preliminary and incomplete manner. Most observers will probably agree with the general statement that "global money is important". This general statement may have various theoretical meanings. My general view on this is of a Keynesian or Marxist variety, namely, that global money is an integral part of the global accumulation process (Marxist view) or that money is a non-neutral force in the global "monetary entrepreneurial economy" (Keynesian view).
10.4 Growth Constraints and Growth Stimulants
The determinants of world income may function as constraints or stimulants of growth. The process of global economic growth may experience four broad types of aggregate constraints, namely: (1)inadequate global demand (global demand constraint); (2) inadequate global supply (global supply constraint); (3) inadequate global money supply (global monetary constraint); and (4) global ecological constraints. It is debatable, however, whether ecological constraints should be listed separately or treated as a type of supply constraint.
Similarly, the process of global economic growth may experience four
broad types of stimulation, namely: (1) stimulation from the global demand
side; (2) stimulation from the global supply side; (3) stimulation from
the global monetary side; or (4) stimulation from the global ecological
side. Certain kinds of ecologically motivated demand ("green" investment
demand, "green" consumption demand) may be contained in demand-side stimulation
and certain kinds of supply-side developments (e.g., alternative "green"
technologies) may serve as supply-side stimulants of growth.
10.5 Interactivity and Relativity of the Determinants
These are broad conceptual categories of possible constraints or stimulants of global economic growth. In a market situation where feedback between these aggregates occurs, these determinants are interactive and act relative to each other. By "interactive" I mean that they influence each other in a pattern of mutual causation (feedback). By "relative to each other" I mean that relative magnitudes, as opposed to absolute magnitudes, are important. Thus, aggregate demand of, say, 10 billion dollars is relatively little in USA but relatively much in Canada or many other countries; and aggregate demand amounting to 10 billion dollars, if confronted with aggregate supply of 12 billion dollars is relatively weak; however, if confronted with aggregated supply of only 8 billion dollars, is relatively strong.
If supply is the weakest market force, it functions as the major constraint;
as a consequence, positive changes on the supply side could be a major
stimulant of growth. If, on the other hand, demand is the weakest market
force, then this is the major constraint and, consequently, demand stimulation
can spur growth, and similarly for the monetary side. However, if the supply
is already the strongest market force, then further stimulation of supply
does not spur growth but, rather, leads to overproduction. If money supply
is already the strongest ex-ante force, then further stimulation of money
growth does not spur economic growth, but rather inflation and similarly
11. Theories of Economic Growth
There are several broad families of theories of economic growth, including:
(a) supply-side theories: Here the presumption is that economic growth is critically dependent on the supply side and that the supply side must be strengthened.
(b) ecological theories: Here the presumption is that economic growth (i.e. both supply and demand growth) is critically dependent on the global ecosystem and that growth must be ecologically sustainable.
(c) demand side theories: Here the presumption is that global economic growth is critically dependent on the demand side and that the supply side is relatively less critical.
(d) monetary theories: Here the presumption is that economic growth (and the growth of both aggregate supply and demand) is critically dependent on the growth of monetary aggregates.
(e) historical theories: Here the presumption is that economic growth unfolds in long-term historical patterns, including "stages" (as in Rostow's "stages of economic growth" (Rostow 1978)), "long cycles" or "long waves" (e.g., Kondratieff cycles);
(f) category by itself: Marxist theories
(g) other theories.
It is unworkable to review all of these theories at this juncture. Disagreement between scholars of economic growth is high. No matter how much one might try to bring economists to agree with each other, there is an irreducible amount of disagreement resulting from differences in politics and values. Economic theories cannot but serve certain interests, be they public or private, business or labour, rich country or poor country interests, and so on. Agreement between the different economic schools of thought is not in sight because agreement on political and moral values is not in sight either. The ideal, cherished by some, of a value-free "economic physics" is unattainable.
12. Analysis of Global Aggregate Interactions and Feedback
12.1 Multiple Interactions
The interactions between the various dynamically changing global aggregates
(global market forces) are complex and, indeed, more complex than interactions
at the national level. In addition to the interactivity between global
supply and global demand, the conceptual statement of my theory also mentions
the influence of global money and other interactions (economic-political,
economic-ecological, historical processes). Here is a small selection of
existing theories which are relevant for the further development of my
12.2 Say's Law
In line with Keynesian and post-Keynesian literature, I do not believe
in what is known as Say's Law -- namely, the view that supply creates its
own demand and that, therefore, one need not worry about demand. The tendency
for a market economy to generate a supply-demand gap has been recognized
by Marx, Keynes, Samuelson, Pasinetti and others, albeit in different formulations.
These formulations have been stated for the national level of analysis
but can be applied at the world-system level as well.
Marx subdivides the aggregate income generated by the system into wages
and surplus-value (i.e., "mass of surplus value", namely, that portion
of aggregate income which is not paid to workers). Workers who, at his
time, were living at subsistance levels, spent all their earnings, thus
returning all wages to the system as aggregate demand. Surplus-value, on
the other hand, was, partly, spent and, partly, accumulated by the bourgeois
class (i.e., not spent). The system thus generates an aggregate gap --
namely, a situation where the capitalist class tries to produce more and
more in order to increase profit (surplus value), but does not spend all
of the surplus value. This creates a situation of (relative) overproduction.
This disequilibrium is responsible for economic crises and the creation
of a reserve army of the unemployed in Marxist theory.
Keynes subdivides aggregate demand into consumption demand (D1 or C)
and (fixed-)investment demand (D2 or I). He argues, in his General Theory,
that both components of demand may be deficient relative to aggregate supply.
In other words, recipients of wages and salaries may not spend all their
earnings. Here he presents the consumption function which states that income
distribution affects the re-spending of wages and salaries. Earners of
low incomes tend to spend most of their earnings, while recipients of higher
incomes may save a greater proportion of their incomes, thus effectively
withdrawing certain amounts of income from potential consumption demand.
At the side of (fixed-)investment another deficiency may develop. Entrepreneurs
may anticipate falling consumption demand and may reduce their (fixed-)investment
spending or, in a situation of depression or panic, lose their entrepreneurial
"animal spirits" altogether for a while. In either case, the effect is
that entrepreneurs have earned incomes from their business activity which
they may not spend in full (or not at all) on (fixed-) investment or consumption.
As a result of the possible D1 and D2 demand deficiencies, the system may
generate a shortfall of aggregate demand relative to aggregate supply potential.
This ex-ante disequilibrium may lead to an ex-post unemployment equilibrium
of the system.
In Pasinetti's theory technology is the driving force of economic growth
("primum movens", Pasinetti 1993:45). Pasinetti states that: "It is the
acquisition of knowledge that eventually makes the wealth of nations."
(Pasinetti 1993: 176). Technology drives both the supply and demand sides.
"Technical change emerges as the crucial determinant in the dynamic process
outlined by Pasinetti, since it contains both a demand and a supply aspect."
(Halevi 1994:58). In this process technological change propels both labour
productivity and per capita incomes simultaneously. However, there is no
guarantee that there will be a proper match between changing magnitudes
of productivity and changing magnitudes of income and demand. There is
"no reliance on any automatic fulfillment of the macroeconomic condition
that ensures the correct level of overall effective demand and hence full
employment" (Pasinetti 1993: 116). Because of that, "(t)echnologcial progress
can ... also cause net losses of wealth or social well-being in general"
(Pasinetti 1993:57). Although aggregate supply-demand gaps are a quasi-normal
occurrance in this process, there is, on the other hand, "no inherent impossibility
of finding ways to counteract such tendencies" (Pasinetti 1993:116). The
remedy for this unreliability of the system can be provided by the "institutions"
of society or, as Halevi and Kriesler put it: "Without a visible hand,
the invisible hand is likely to guide us on to the wrong path..." (Halevi/Kriesler
12.5 Transferability to the World-System Level
The theories mentioned above are applicable at the world-system level
as well. When Marx, Keynes or Pasinetti wrote about the economy (market
system, capitalist economy), they had the national economy in mind
(except for Marx who had a more global view). Their theories are stated
in abstract terms which can easily be applied to a market economy (capitalist
economy) at the world-system level, since the concepts of aggregate
supply, aggregate demand and of an aggregate gap or mismatch between the
two are similar at both the national and world-system levels of analysis.
13. The Inadequacy of Global Demand
Parallel to Marx, Keynes, Samuelson, Pasinetti and others (who were
theorizing for the national level), I believe that aggregate demand
tends to be inadequate at the global level of analysis as well.
"Inadequate global demand" has three discernible meanings, namely:
(1) social meaning (social-existential) -- certain classes of people do not have enough purchasing power in order to have an adequate standard of living (which is their inalienable human right, as per Article 25 of the Universal Declaration of Human Rights);
(2) economic meaning (circulatory-systemic) -- the market force of global demand is weaker than the market force of global supply, creating an aggregate gap in the circulatory system of the world economy ("inadequate global demand", Keynesian; (relative) "global overproduction", Marxist);
(3) ecological meaning -- the composition of global demand is inadequate with respect to ecological sustainability.
14. Global Unemployment Equilibrium
I agree with the well-known Keynesian and Marxist view that inadequacy
of effective demand (Keynesian) or (relative) overproduction (Marxist)
will lead to unemployment. This mechanism can also be found at the world-system
level, except that at this level we are speaking of a global unemployment
equilibrium (world-system unemployment equilibrium) (see also, Köhler
15. Global Full-Employment Equilibrium
A global full-employment equilibrium can be defined as a state of the
world economy in which global aggregate supply and global aggregate demand
have a configuration in which all available labour is fully employed. This
is a normative concept at first, namely, a concept describing a state of
the world economy which is desirable, rather than one which is empirically
extant. We can elaborate this concept by combining elements from Prebisch's
and Keynes's theories.
15.2 Intellectual Origins
(a) From Keynes, Kalecki, and some post-Keynesians we may want to use the ideas that (1) aggregate demand may be deficient so that the system may be stuck in an unemployment equilibrium; (2) the unemployment equilibrium may be caused by inadequate aggregate demand (consumption demand or (fixed-)investment demand or both); (3) inadequacy of consumption demand may be caused by (i) a polarized income distribution and weakness of labour as a class, (ii) inadequate business activity, leading to inadequate (fixed-)investment demand, and (iii) other factors (e.g., of a monetary nature); (4) inadequacy of (fixed-)investment demand may be induced or autonomous -- namely, it may be caused by low entrepreneurial expections of demand growth or by other factors leading to a low entrepreneurial appetite for innovation and capital investment; (5) the price and availability of money (credit) may influence all of the above in various ways; (6) full employment will result if the above adverse factors and mechanisms are reversed.
(b) From Prebisch we may want to use the idea that improved terms of trade for Third World countries could, conceivably, lead to a global equilibrium at a higher level, generating a positive-sum outcome for both center and periphery countries. Prebisch writes:
"For the first time in the history of capitalist development the periphery,
passive hitherto, might exert a dynamic influence on the centers, provided
new forms of cooperation were devised. An increase in exports of goods
requiring less advanced technology than that of the centers and their exchange
for more highly developed goods would mean that both parties could obtain
well-recognized advantages with the consequent increases in productivity
... We have reached a stage in our relations with the centers ... in which
great possibilities of convergent interests arise." (Prebisch 1988: 40-41).
However, in order for these non-zero-sum gains to materialize, "(n)ew formulas
must be found that allow for the progressive participation of manufactures
from the periphery in the growth of consumption in the centers. This would
minimize the disruptive effects of competition through lower prices, which
are harmful both to the centers and to the periphery, since the latter
transfers part of its productivity through a lowering of prices." (Prebisch
1986: 4). The new formulas must include improved terms of trade for the
periphery -- namely: "It cannot be doubted that the periphery has an enormous
potential demand for those manufactures produced by the centers ... Nevertheless,
to make this potential effective, the peripheral countries need to have
the means to pay for such purchases through their own exports of manufactures."
(Prebisch 1986: 4).
Let's put the two streams of theory together (Keynes, Prebisch) in the context of world-systems theory of world income. The result of such an exercise may read somewhat like the following.
15.3 Global Aggregates and Center/Periphery Aggregates (Ex-post View)
I will use the term "center" as a short expression for "industrialized",
"advanced", "high-income" or "OECD countries" and the term "periphery"
as a short expression for "less developed", "less industrialized", "low-
and middle-income" or "non-OECD countries". Furthermore, I will use the
Z = world income (aggregate)
Zc = aggregate income of the center
Zp = aggregate income of the periphery
GAS = global aggregate supply
ASc = aggregate supply generated by the center
ASp = aggregate supply generated by the periphery
GAD = global aggregate demand
ADc = aggregate demand generated by the center
ADp = aggregate demand generated by the periphery
(These symbols are in upper case letters in order to indicate that these
are ex-post accounting magnitudes.)
15.3.2 Ex-post Relationships
With the use of these symbols we can state the following:
(a) The global aggregates are the sum of the regional aggregates; and the regional aggregates are components of the global aggregates. For example:
Z = Zc + Zp
in words, world income equals center income plus periphery income; and center income and periphery income are components of world income; and :
GAS = ASc + ASp
in words, global aggregate supply equals center aggregate supply plus periphery aggregate supply; and center supply and periphery supply are components of global aggregate supply; and:
GAD = ADc + ADp
in words, global aggregate demand equals center aggregate demand plus periphery aggregate demand; and so on.
(b) In ex-post (accounting) analysis, (actual) global aggregate supply and (actual) global aggregate demand are identical magnitudes, which are also identical to world income, namely:
(ex-post) GAS = (ex-post) GAD = Z [which is the same as global GDP]
(c) Since global aggregate supply and global aggregate demand are composed of center and periphery aggregates, world income is (in ex-post accounting) also identical to the sums of (ex-post) center and periphery supply and (ex-post) center and periphery demand, namely:
Z = ASc + ASp
= ADc + ADp
(d) Compositional theorem:
When global aggregate supply and global aggregate demand are balanced (identical) in ex-post accounting, it does not matter (for the accountant) whether aggregate supply and aggregate demand are also balanced within each region (within-center or within-periphery).
Z = 10 (i.e., let world income have the arbitrary magnitude of 10 units)
Since Z = (ex-post) GAS = (ex-post) GAD, we have an accounting identity
between world income, (actual) global aggregate supply and (actual) global
aggregate demand, as follows:
Z = 10
GAS = 10
GAD = 10
Since the global aggregate supply (ex-post) is composed of the center and periphery aggregates (namely, GAS = ASc+ASp) and since global aggregate demand (ex-post) is composed of the center and periphery aggregates (namely, GAD = ADc+ADp), the above global totals of 10 (arbitrary) units could have been the result of various alternative center-periphery constellations, for example:
Alternative 1 (balanced within the regions):
GAS = 10 = 5 + 5 [i.e., center and periphery contribute 5 each to (actual) global aggregate supply]
GAD = 10 = 5 + 5 [i.e., center and periphery contribute 5 each to (actual) global aggregate demand] ;or,
Alternative 2 (unbalanced within the regions):
GAS = 10 = 6 + 4
GAD = 10 = 4 + 6
In this alternative, the center contributed 6 units of aggregate supply and 4 units of aggregate demand (in ex-post accounting) and the periphery contributed 4 units of aggregate supply and 6 units of aggregate demand (in ex-post accounting). The global aggregates are the same as in Alternative (1) (namely, equal to 10), whereas the regional aggregates of supply and demand are now unbalanced within the regions. A global balance of global aggregate supply and global aggregate demand may thus coexist with regional imbalances of supply and demand.
15.3.3 Global Situation With Inadequate Global Demand (Relative Global Overproduction)
In a world situation of inadequate global demand, we can write:
(potential) GAD < (potential) GAS
or, in words, the market force of global aggregate demand is weaker than the market force of global aggregate supply.
[This is the Keynesian way of stating the supply-demand gap].
In a world situation of relative overproduction, we can write:
(potential) GAS > (potential) GAD
or, in words, the production power of society is stronger than the consumption power of society. [This is the Marxist way of stating the supply-demand gap.] (Both the Keynesian and Marxist formulations amount to the same.) The question arises what happens to world income (Z) if global aggregate supply and global aggregate demand are in a disequilibrium of this kind. This leads to a dynamic analysis.
15.4 Dynamic View with Center/Periphery
In addition to the symbols used in the previous section, I will use
growth rates of the various aggregates, denoted in lower case letters,
as in an earlier section, namely:
z = growth rate of world income
gas = growth rate of global aggregate supply
gad = growth rate of global aggregate demand
mg = growth rate of the global monetary aggregate
15.4.2 Dynamic Effects of the Aggregate Gap
According to the notion of a growth disequilibrium (growth dialectic) introduced earlier in this study, three market forces are mainly responsible for global income growth, namely, the market forces of global supply, global demand and global money. In dynamic (ex-ante) analysis, we postulate that these market forces may not be of equal strength and that the weakest of them determines overall global income growth, namely: z = minimum of (gas, gad, mg)
As per Keynesian and Marxist presupposition, global aggregate demand tends to be weaker than global aggregate supply and global aggregate demand is the major constraining factor. Let us ignore the growth rate of the global monetary aggregate for the time being and focus the analysis on global demand. With this cavalier trick, we can reduce our statement, namely to:
z = function of (gad) [simplified global-Keynesian view]
or, in words, the growth of world income is a function of the growth of global aggregate demand. This represents a popular leftist viewpoint (and is, of course, extremely simplified). However, it is not unreasonable to entertain this as a working hypothesis in view of the fact that ruling opinion makes another extremely simplified assumption, namely that:
z = function of (gas) [simplified global neoliberal view]
or, in words, the growth of world income is a function of the growth
of global aggregate supply. I will ignore this global neoliberal view at
15.4.3 Dynamic Center-Periphery Interaction With Inadequate Global Demand
My further discussion will (1) continue with an example, followed (2) by a generalized statement.
(a) Let's say that:
Z1 = 10 [world income at time 1 = 10 units] , and
z = 20% [the ex-post growth rate of world income is 20%] , so that
Z2 = 12 [world income at time 2 = 12 units]
(b) The market forces of global aggregate supply and global aggregate demand are dynamically disequilibrated and global aggregate demand is the weaker market force. The growth rate of world income of 20% may have been the result of various configurations between the market forces of global aggregate supply and global aggregate demand. However, per assumption, global aggregate demand was the determining force. Therefore, in our example:
GAD1 = 10 [actual global aggregate demand at time 1 = 10 units] , and
gad = 20% [actual growth rate of global aggregate demand = 20%] , and
GAD2 = 12 [actual global aggregate demand at time 2 = 12 units]
On the other hand, the market force of global aggregate supply was,
per assumption, greater than the demand force. We don't know how
much greater, but let us assume that the global aggregate supply potential
may have grown by 40% and actual global aggregate supply would have grown
by that much if global aggregate demand had been sufficient. We can state
GAS1 = 10 [actual global aggregate supply at time 1 = 10 units] , and
gas (potential) = 40% [potential global aggregate supply growth rate = 40%]
GAS2 = 12 [actual global aggregate supply at time 2 = 12 units, because of the global demand constraint] therefore,
gas (actual) = 20% [actual global aggregate supply growth rate = 20%]
The global demand constraint had the effect that global income at time 2 is only Z2 = 12 and that actual global supply growth was only 20%, whereas potential global supply growth could have been 40%. Without the global demand constraint, world income at time 2 could, conceivably, have been Z2 = 14, since there was enough global supply potential to accomplish that. The imbalance at time 2 can be stated as:
GAS2(potential) = 14
This is greater than:
GAD2(potential) = 12 [demand side]
Z2 = 12 [market result, Z2 = GAD2, since z = minimum of (gas, gad, mg) ]
(in words, the resulting world income Z2 is equal to the lower figure because of the demand constraint)
(c) Let's introduce a center-periphery view. I will use two alternatives.
Alternative 1 (even split):
The supply and demand potentials may have been split evenly between center and periphery. In this case, the imbalance at time 2 could have been thus:
GAS2(potential) = 14 = 7 + 7 [center and periphery contribute 7 units each to the global supply potential]
GAD2(potential) = 12 = 6 + 6 [center and periphery contribute 6 units each to the global demand potential]
Alternative 2 (uneven split):
The supply and demand potential may have been split unevenly between center and periphery. In this case, the imbalance at time 2 could have been thus:
GAS2(potential) = 14 = 8 + 6 [center contributes 8 units and periphery contributes 6 units to global supply potential]
GAD2(potential) = 12 = 5 + 7 [center contributes 5 units and periphery contributes 7 units to global demand potential]
In both Alternatives (1) and (2) there is a global supply-demand gap
(inadequate demand, Keynesian; relative overproduction, Marxist). Based
on the theorem of composition (see above), it does not matter (for the
ex-post accountant) whether the global aggregate gap originates evenly
or unevenly within the center and the periphery.
(d) Keynesian and Prebischian Aspects of the Dynamic Disequilibrium
The Keynesian aspect of this disequilibrium is that global aggregate demand in this example is inadequate (GAD < GAS) and that world income growth is constrained by this inadequacy of global demand. The amount of potential world income lost due to this dynamic is 12 - 14 = -2 units.
The Prebischian aspect of the disequilibrium is that a global center-periphery trade-off is thinkable. Prebisch has expressed this idea with reference to the center-periphery terms of trade -- namely, that, in his opinion, improvement of the terms of trade for the periphery could, under certain circumstances, lead to gains for both the center and the periphery (win-win situation; positive-sum situation, in terms of game theory). Prebisch's formulation is stating a specific case (related to terms of trade); however, the same idea can be generalized and expressed in terms of aggregate demand -- namely, if aggregate demand of the periphery could be increased (via terms of trade or in other ways), then the entire world-system, including the center, could be better off, in the sense of a positive-sum outcome. In my example above, this concept can be demonstrated, as follows (I am using the hypothetical figures from Alternative 2):
Step 1: The global imbalance is:
Z2(actual) - Z2(potential) = 12 - 14 = -2
in words, the difference between actual and potential world income at time 2 is two units.
This is the result of the following constellation of global market forces:
GAS2(potential) = 14 = 8 + 6 [center contributes 8 units and periphery contributes 6 units to global aggregate supply potential] , and
GAD2(potential) = 12 = 5 + 7 [center contributes 5 units and periphery contributes 7 units to global aggregate demand potential]
Step 2: Augment periphery demand in a Keynes-Prebisch
Let us add 2 units of periphery demand (how to do that in practice is a different matter), leading to:
GAD2(potential) = 12 + 2 = 5 + (7 + 2)
= 14 = 5 + 9
Periphery demand is now 9 (up by 2 from the previous 7). As a result, global aggregate demand is now 14 (up by 2 from the previous 12). Since global supply potential in this example isGAS2(potential) = 14 , we now have a global supply-demand equilibrium at a higher level, which leads to higher world income, namely:
GAS2(potential) = 14
GAD2(potential) = 14 (this is up from 12)
This is a new equilibrium, therefore:
GAS2(actual) = 14
GAD2(actual) = 14
therefore: Z2(actual)(new and improved) = 14
The world-system is now in a Keynes-Prebisch full-employment equilibrium. The fact that center aggregate supply may not match center aggregate demand and that periphery aggregate supply may not match periphery aggregate demand is inconsequential (as per theorem of composition) for the fact that global aggregate supply and global aggregate demand balance at a higher level (Z2 = 14) than before (Z2 = 12).
(e) General Statement of the Global Keynes-Prebisch Equilibrium
The above examples can be restated in general terms. The dynamic global growth equilibrium (disequilibrium) is, as stated earlier: z = minimum of (gas, gad, mg) -- in words, the actual growth rate of global income is equal to the minimum of either potential global supply growth or potential global demand growth or potential global monetary growth. Let's ignore the global monetary aggregate for the time being. The global disequilibrium (growth dialectic) can be restated in center-periphery terms, namely:
Step 1: global growth disequilibrium (growth dialectic) with center, periphery:
z = minimum of [potential growth rate of (ASc+ASp), or potential growth rate of (ADc+ADp)]
potential growth rate of (ADc+ADp) < potential growth rate of (ASc+ASp) [this is the demand constraint]
Step 2: global Keynes-Prebisch growth equilibrium:
If, in this situation, peripheral demand is augmented, leading to increased peripheral demand (ADp'= ADp + x), this will lead to a higher equilibrium growth rate of world income (z'), since now:
z' = minimum of [potential growth rate of (ASc+ASp), or potential growth rate of (ADc+ADp + x)]
where: (ADc+ADp+x) > (ADc+ADp) or, in words, x is a positive number
Since periphery demand has been increased, unused global supply
potential is activated and real global income increases. As per the "compositional
theorem" above, it does not matter whether supply and demand balance within
each region (within-center, within-periphery). Increased periphery demand
can be satisfied by either (1) increased (actual) periphery supply
or (2) by increased (actual) center supply or (3) both.
In other words, increased periphery demand can be beneficial for both the
center and the periphery, as postulated by Prebisch.
(f) Summary of the Global Keynes-Prebisch Growth Equilibrium (in words)
The global Keynes-Prebisch equilibrium is a theoretically attainable
global equilibrium between global aggregate supply and global aggregate
demand in situations where global aggregate demand is inadequate relative
to global aggregate supply. An increase in periphery demand will have the
effect of increasing total global aggregate demand and, thereby, actualizing
unused global supply potential. This leads to a global supply-demand equilibrium
above the global equilibrium level before the increase in peripheral demand.
The global Keynes-Prebisch equilibrium can be brought about through an
improvement of the terms of trade for the periphery (as originally proposed
by Prebisch) or by other global-Keynesian methods of demand-building.
Other strategies from a global-Keynesian tool kit are, for example, (a)
reducing the debt burden of the periphery, (b) issuing global (transnational)
credit for the periphery, (c) global exchange rate reform, and others.
15.4.4 Ecological Aspects of the global Keynes-Prebisch Equilibrium
The increase of global demand and output, as envisaged in connection
with a global Keynes-Prebisch equilibrium, may alarm the ecologically aware.
Is this not a recipe for unfettered industrial expansion of the world economy
with disastrous consequences for the ecosystem and its sustainability?
This criticism is legitimate and must be addressed. I do not have a satisfactory
answer for this problem, but acknowledge its urgency. I would like to point
out, however, that support for a global Keynes-Prebisch equilibrium leads
one to support public intervention in the economy (of the world and/or
the nation). This opens up possibilities for public stewardship which is
ecologically aware. For example, added global demand can be additional
sustainable demand (e.g., food, housing, social, health and education
services). Public intervention can also be used to replace existing unsustainable
demand streams by sustainable demand streams. Furthermore, to the extent
that this approach leads to public support for fixed investment (capital
expenditures) of some kind, this could be capital expenditure for technologies
which are themselves sustainable and/or produce sustainable goods and services
(e.g., energy production other than fossil and nuclear-based). Furthermore,
the analytic device of the global Keynes-Prebisch equilibrium can, perhaps,
also be used to find acceptable compromises between Northern ecological
concerns, to the extent that they exist, and Southern material interest
in more economic growth. These issues are too complex to permit a comprehensive
treatment in this study.
16. Employment and Global Keynes-Prebisch Equilibrium
A global Keynes-Prebisch equilibrium will increase world income, as
I have tried to show above; but will it also increase global employment
and will it create global full-employment?
16.1 Trade-off Between Employment and Productivity
One way of examining the problem is in terms of a trade-off between
employment and productivity. Let us use the following symbols:
Z = world income
Ng = global employment (volume)
Z/Ng = average global labour productivity
z = growth rate of world income
ng = growth rate of global employment
q = growth rate of average global labour productivity
Using these, we can write two statistical identities, as follows:
Z = Ng * (Z/Ng)
in words, world income equals global employment times average global labour productivity; and:
z = ng + q
in words, the growth rate of world income equals the growth rate of global employment plus the growth rate of average global labour productivity.
These identities reveal a trade-off situation. For example, a growth of world income of +3% could be the result of global employment growth of +3% with constant productivity (i.e., no productivity growth; namely: z = ng + q = +3 + 0 ). Alternatively, the same world income growth could come about through "jobless growth", where employment growth equals zero and productivity growth equals +3% (namely: z = ng + q = 0 + 3 ). Intermediate constellations are also possible -- for example, +2% employment growth with +1% productivity growth.
If we went along with Keynes's General Theory, we would hold technology and productivity constant. That means, when applied to our context, we would assume that Z/Ng = constant and that productivity growth (q) equals zero. Applied to the above identities, Keynes's approach would lead to a simplification, namely: Z = Ng * (a constant) , and: z = ng + 0 = ng . Using this approach we would reach the conclusion that each increment in world income is accompanied by a proportional increment in world employment. We know for a fact, however, that productivity does not stand still.
An examination of some statistical data shows the following (Table 1):
Source: Table 2 . Note: the income and productivity figures are based on constant 1987 U.S. dollar values
Table 1 shows that, between 1980 and 1990, world income grew by about 3% per year; the world labour force by about 2% ; and average global labour force productivity by slightly less than one percent. This, admittedly limited, evidence suggests that the world economy seems to have generated employment growth at a rate higher than that of productivity growth. This suggests further that a global Keynes-Prebisch equilibrium might also lead to increased employment, not only to increased income.
On the critical side, we must be cautious about the above trends because
they show data pertaining to the "labour force", which is not the same
as "employment". "Labour force" includes the "unemployed" and "underemployed".
The figures upon which Table 1 is based are shown in Table 2:
(a) world income (Z)
US dollars, billions (1987 = 100)
(b) world labour force (Ng) 2,037 2,536 million persons
(c) average global labour 6,479 7,043 US dollars per person (1987 = 100)
force productivity (Z/Ng) (c = a : b)
Sources: (1) for labour force: World Bank. World Development Report 1992 (p. 218-219) and 1997 (p. 220-221); (2) for world income: my calculation based on world population (same sources as for labour force) and gross national income per capita in constant U.S. dollars (1987=100) from World Bank. World Tables 1995, p. 8-9.
16.2 The Problem of "Full Employment"
A global Keynes-Prebisch equilibrium will not only lead to higher world
income, but can also be expected to generate more world employment. Can
we, consequently, claim that a global Keynes-Prebisch equilibrium is a
"global full-employment equilibrium"?
16.2.1 Concept of Global Full Employment
Global full employment is a difficult concept. As a preliminary statement, we can define global full employment as a state of the world in which all persons who are capable of work and want to have employment are fully employed. Various questions can be raised about this concept of full employment, including the following:
(a) Are there any age limits? How about child labour? How about
(b) How do we define "capable of work"? This seems to exclude the sick and disabled, but it is also possible that the sick and disabled are partially or fully employable.
(c) How do we handle the difference between "work" and "employment"? There are various categories of persons who desire work, but not necessarily employment in the sense of factory employment or office employment -- for example, farmers and business people who are their own bosses, so-to-speak, and do not wish to be other people's employees.
(d) What is "fully employed"? Does this mean being employed for 16 hours a day, or 8 hours, or 4 hours per day? How does one treat, in the employment statistics, categories of working people like destitute slum dwellers, starving farm families, other "underemployed", "part-time employed", "seasonally employed", small businesses of one person who may have no work for periods of time, unpaid members of the family who work, and so on?
(e) The concept of full employment implies some notion of income. Prisoners may be fully employed but do not receive a "full income" in the normal sense of the word. People may be working very hard but may hardly be able to survive. What amount of income received from employment is consistent with the notion of full employment?
(f) How is quality of work related to "full employment"? Quality of work has many aspects, including working hours, working conditions, health and safety aspects, social security aspects, and other.
These problems are also important at the world-system level and are
even more difficult at that level than at the national level because of
societal and cultural differences between countries. In particular, wage
levels differ so drastically around the globe that the definition of a
"bad", "adequate", or "good" job in terms of income and job quality differs
16.2.2 Definition of Global Full Employment in Terms of the Human Rights Code
One way of defining global full employment is in terms of the human rights code. Article 25 of the Universal Declaration of Human Rights states that "everybody has a right to an adequate standard of living for himself and his family...". With the help of this declaration, global full employment can, perhaps, be defined as a state of the world in which all persons who are capable of work and want to have income-generating work (in the form of employment by an employer or work without an employer; receiving money income or income "in kind", as on a farm) do, in fact, have income-generating work of acceptable quality (e.g., limited to eight hours per day) which provides an adequate standard of living for the working person and his or her family. (See also, other human rights provisions concerning work, leisure time, and social security.)
This definition is flexible in three ways -- namely, (1) it includes
both work in an employer-employee relationship and self-directed work like
farmers, small business owners, or independent professionals; (2) it includes
remuneration "in cash or in kind" -- namely, in the form of either money
or goods and services (the latter being important for farm populations);
and (3) it provides flexibility with respect to the definition of "adequacy"
of income from work between one country and another. For example, in 1999
an hourly wage of U.S. $ 4.00 is a low wage in USA but a high wage in many
other countries. I will use the above definition of global full employment
in terms of the human rights code as my guide in the subsequent discussion.
16.2.3 A Look at the Global Employment Situation
From an employment perspective, the world population can be subdivided,
(1) not in the labour force (i.e., not capable of work or not required to work like the sick, children, old people)
(2) in the labour force
(2a) in the labour force, working and with adequate income received from work ("adequately employed");
(2b) in the labour force, working but with inadequate income received from work ("underemployed");
(2c) in the labour force, but without income-generating work ("unemployed").
A statistical picture of the world labour situation, using some reported figures and some of my own estimates, may look
somewhat like the following (Table 3):
1. population 902 4771
2. labour force 432 100% 2263 100%
2a. adequately employed 84%? 60%?
2b. underemployed 8%? 35%?
2c. unemployed 35 8% 5%?
Sources: (a) World Bank. World Development Report 1997, p. 221
(for numbers without question marks).
(b) Numbers with question marks are author's estimates.
16.2.4 The Global Employment Gap (Estimate)
When we think of an "adequate job" as a "unit of employment", then an
adequately employed person has one "unit of employment"; an "unemployed"
person has zero units of employment. For the "underemployed", it
is clear that they do not have an adequate job and, thus, do not have a
full "unit of employment", but only a partial one, which may be anywhere
between 0.0 and 1.0 "unit of employment". I will use this reasoning in
order to estimate the size of the global employment gap -- namely, the
number of units of employment missing in the world. "Unit of employment",
as used in this exercise, can be interpreted as "adequate full-time job
or equivalent". Thus, when two persons have half a job each, they
together have the equivalent of one full unit of employment.
Using the figures and estimates of Table 3, we can estimate a global employment
gap for 1995, as follows (Table 4):
2. Low- and middle-
(a) fully employed
60% * 0.0 * 2263 mln
= 0 mln
(b) underemployed 35% * 0.7 * 2263 = 554 mln
(c) unemployed 5% * 1.0 * 2263 = 113 mln
3. World Employment Gap 719 millions (missing units of employment)
4. World Labour Force (432+2263=) 2695 millions (persons available for work)
5. World Employment Gap
as percent of global labour force 27 %
(line 5 = line 3 : line 4)
Notes: (a) "share" and "base" and labour force data from Table 3; (b) "weight": my estimates, assuming that in high-wage countries the average "underemployed" person has one half of a full job; and that in low- and middle income countries the average "underemployed" person has three tenths of an adequate job, so that 0.7 of a "unit of work" is missing. The reader may want to recalculate the estimates with different assumptions.
The estimates of the global employment gap shown in Table 4 are very
rough but give an indication of the order of magnitude of the global unemployment
problem -- namely, equivalent to 27% of the global labour force. During
the great depression of the 1930s, the industrialized countries had unemployment
rates of similar magnitude.
16.2.5 Political Barriers to Global Full Employment
The most powerful obstacles to global full employment are of a political nature. Here one can blame the ordinary people of the world just as much as the corporations and the elites. Workers who have a good job are most unwilling to share such a source of income and social security with others. Workers in rich countries are unwilling to share their standard of living with workers in less fortunate countries. Worker solidarity is an ideal talked about by some, rather than a reality. Politicians thus have little room for manouevre if they try to advance the cause of global full employment. In addition, the presently ruling elites of the world are not committed to global full employment to begin with.
A theoretically possible approach to global full employment would be via radical redistribution of available work around the world. With a world income of 28 trillion U.S. dollars (1995) and a world population of 6 billion persons, such a radical redistribution of work and income would leave every person with (28,000 billion U.S. dollars, divided by 6 billion people = ) US $4,666 per capita per year, for every man, woman and child on earth. This shows how relatively rich the world really is. Of course, Swiss, Japanese, Canadian, and other rich-country workers would not want to go down from their present levels of income to US $4,666. There is also no worker solidarity to speak of within countries. Thus, employed workers in OECD countries would not want to work 10% less (and have 10% less income) so that the unemployed 10% of their fellow-countrymen could have a job.
Ironically, neoliberal labour market policies, as practiced in the United
States, and global neoliberal policies have the effect of spreading
availabale work more thinly among workers -- more part-time work, instead
of straight unemployment, in the United States and, globally, redeployment
of the jobs available from global corporations from high-wage countries
to low-wage countries. Labour and labour unions in rich countries do not
like these trends. Global full employment through radical redistribution
of available work is thus not overly popular. The approach preferred
by labour is rather another one, namely, national full employment and global
full employment through economic growth which benefits the unemployed and
underemployed, or, using an old formula, "economic growth with redistribution"
(nationally and globally), so that the economically destitute, unemployed
and underemployed members of the labour force are moved up without bringing
the economically well-off members of the labour force down on the income
scale. This is a major political constraint for the theory and praxis of
global full employment.
16.2.6 Summary Regarding Global Full Employment
The question was posed above whether the global Keynes-Prebisch equilibrium
can be called a genuine global full-employment equilibrium, taking into
consideration that the pursuit of this equilibrium will lead to an increase
in world income and world employment. My answer is "maybe" and "that depends"
-- namely, whether or not genuine global full employment will be achieved,
that depends on such variables as (a) the magnitude of global demand mobilized,
(b) the duration of such efforts, and other factors.
17. Defects of Global Demand (Leakages and Losses)
Inadequacy of global aggregate demand may be due to a variety of defects
which may be of two general types -- namely, (a) structural defects,
and (b) circulatory defects. Circulatory defects are also known
as "leakages" in Keynesian parlance; i.e., effective demand "leaks" from
the circulatory flow of the economy. Both aspects may also be found together.
Another typology is in terms of (a) short-term defects and (b) long-term
defects. Here are a number of defects of global demand, out of a larger
list, which I would like to comment on.
17.2 Recent Examples
Some recent examples of global demand defects are mentioned in the following
passage: "...now as in the 1930s, it may be impolitic to ascribe the present
crisis to a lack of effective demand relative to aggregate world supply
capacity. Yet the fact remains that "over investment", "excess capacity"
and "overproduction" are all relative to the level of effective demand.
It is not rocket science to see that predatory capitalists were the chief
beneficiaries of the Third World Debt bonanza of the 1970's, the U.S. S&L
craze of the 1980s, and the Asia-Russia-Latin America credit bubble of
the 1990s, while the clean-up costs in terms of bank "recapitalization"
etc. have been shouldered by the average would-be consumer. Nor is it rocket
science to see how this must deflate effective demand." (Tomasson and Daastol,
17.3 Global Wage Differential
A major structural defect of global demand results from the global wage differential. Having a low wage means having low purchasing power. Countries with comparatively low wages contribute comparatively small amounts of purchasing power (effective demand) to the world market.
An important theoretical question is whether the global wage differential
is "natural" in some sense or "politically constructed" ("man-made"). Many
people believe that the poor earn what they deserve (namely, little). At
a more theoretical level, many economists, including many leftists, believe
that wage differences between high-wage and low-wage countries reflect
productivity differences and are natural in that sense. This point of view
is questionable -- see, below on exchange rates and productivity.
17.4 Exchange Rate Differential (Undervaluation)
The majority of the world's people live in non-OECD countries like Brazil,
China, India, Nigeria, Russia and so on. An important fact is emerging
from the World Bank's data on purchasing power parities of currencies (PPP
values). From these data it is apparent that the majority of the world's
people live in countries whose currencies are under-valued. Tourists and
traders know this exchange rate differential as "hard currencies" versus
"soft currencies" -- e.g., U.S. dollar / Mexican peso; Swiss franc / Russian
ruble; Japanese yen / Chinese yuan; and so on. The true purchasing power
value (PPP value) of a currency can be measured and this reveals two facts
-- namely: (a) within the "center" (OECD countries), exchange rates are,
for the most part, relatively close to PPP rates; but (2) the exchange
rates of the periphery countries tend to be significantly lower than their
PPP rates. For example, in 1995 the undervaluation of periphery currencies
(deviation from purchasing power parity) was, as follows: for low-income
countries, undervaluation by a factor of 4.0 (on average); for middle-income
countries, undervaluation by a factor of 2.4 (on average). The maximum
distortion was recorded for Mozambique, which had an undervaluation of
its currency by a factor of 10.1 (see, Penn World Tables; also, Köhler
1998: 151, Table 2). This exchange rate differential has profound implications
for the low- and middle-income countries. See, on productivity and trade
17.5 Undervaluation of Productivity of the Low- and Middle-income Countries
The exchange rate differential between periphery and center of the world
economy has the effect that productivity levels between periphery and center
are measured incorrectly. Here is an example (USA, China) (Table 5):
1. GNP (national currency)(a) 3,413 billion yuan
2. Labour force (b) 133 709 million persons
3. GNP at nominal exchange rate (c) 7,098 744 billion US $
4. Labour productivity 53,372 1,050 US $ per worker
(at actual exchange rate)
(line 4 = line 3 : line 2)
5. Productivity ratio (nominal) 51 : 1
Sources: World Bank. World Development Report 1997: 214-215,
Table 1; 220-221, Table 4, except note (a).
Notes (a): This is for 1993, from World Bank. World Tables 1994: 211); (b) this is "total labor force" in the source; (c) calculated from GNP per capita and population in the source
1. GNP (national currency)(a) 3,413 billion yuan
2. Labour force (b) 133 709 million persons
3. GNP at PPP rate (c) 7,098 3,505 billion PPP $
4. Labour productivity 53,372 4,943 PPP $ per worker
(at PPP rate)
(line 4 = line 3 : line 2)
5. Productivity ratio (real) 11 : 1
Sources: World Bank. World Development Report 1997: 214-215,
Table 1; 220-221, Table 4, except note (a).
Notes (a): This is for 1993, from World Bank. World Tables 1994: 211); (b) this is "total labor force" in the source; (c) calculated from GNP per capita (in PPP values) and population in the source
17.6 Undervaluation of Trading Demand of the Periphery
The undervaluation of non-OECD exchange rates has an additional valuation
effect which is important for global aggregate demand -- namely, the effective
trading demand of the periphery is distorted and undervalued. If the periphery
was de-linked from the world market, this valuation effect could be ignored.
However, the periphery is integrated into the global economy. For example,
in 1995 the OECD countries (center) imported, from the non-OECD countries
(periphery), goods and services in the amount of 940 billion U.S. dollars
(at prevailing exchange rates). We saw that the exchange rates of the periphery
are undervalued. The undervaluation factor implied in this trade flow is
2.86. If valued at PPP rates (purchasing power parity rates) the same imports
to OECD (i.e., exports from non-OECD) would have been 940 * 2.86 = 2692
billion = 2.7 trillion dollars at PPP rates. Due to exchange rate undervaluation,
the world economy lost 2692 - 940 = 1752 billion = 1.75 trillion dollars
of global aggregate demand by virtue of the fact that the periphery could
not spend dollars which it had not received, but should have received if
the terms of trade had been fair; in other words, if there had been no
"unequal exchange". This structural demand defect amounts to a loss of
6.6 % of global aggregate demand for a single year (1995). (See, Köhler
1998, Appendix, Table A-1 for detailed calculations.)
17.7 Globalization of Production
Global corporations are redeploying production from high-wage countries
to low-wage countries. This has several effects -- namely: (a) low-wage
countries gain jobs from global corporations, but may also lose traditional
local jobs to the global competition. High-wage countries may lose jobs
(or do not gain the newly created jobs) of global corporations. (b) Global
aggregate demand is weakened (or grows relatively less vigorously) because
jobs created for low-wage workers generate less global demand than
jobs created for high-income workers. (However, these jobs generate more
local demand and income in the low-wage country.) Globalization
of production thus weakens the global demand side.
17.8 Defective Circulation of Global Money
There are various "leakages" (old Keynesian vocabulary) in the circulatory
system of the world economy. "Leakages" are flows of money from the real
side (physical side of goods and services) to the nominal side (financial
side) of the economy. In other words, globally available money may be spent
on goods and services -- i.e., become effective demand, or else, it may
not be spent on goods and services -- i.e., become a leakage
from effective demand. Leakages from effective global demand include:
(a) money hidden under the bed or in the chicken pen
(b) bank balances accumulating in domestic or foreign bank accounts (e.g., Swiss bank accounts for the world's dictators and lesser global investors)
(c) taxes collected by governments and not recycled into the economy through public spending but used to pay off public debts or to enrich certain politicians
(d) financial investments, instead of productive investment (capital expenditure)
According to a recent estimate, the amount of money deposited in the world's private banks (category (b) above) amounted to US $10 trillion in 1997 (Gwynne 1998: 24). When other categories of leakages are added, the proportion of global leakages to global effective demand is enormous.
17.9 Ecological Defects of Global Demand
Ecological defects of global demand are both qualitative and quantitative in nature. Both the content of demand and the quantities of various components of demand matter with respect to ecological sustainability. Global demand may be demand for ecologically sound (sustainable) goods and services like bread, housing, health care and education, or ecologically unsound (not sustainable) goods and services like nuclear energy and nuclear war. Many categories of demand are ambivalent insofar as their sustainability rating depends on how the demand is satisfied. Thus, demand for fish may lead to overfishing of the seas. However, fish may also be grown in aquacultures. Quantities matter as well for a sustainability rating of demand. Thus, when one thousand people in the world want to own and operate automobiles, that is relatively sustainable. If, on the other hand, one billion people use automobiles, that is relatively unsustainable.
A related political-moral issue is: Who is more responsible for safeguarding
the ecosystem -- the center or the periphery, the North or the South of
the world? Another problem is the desirability of economic growth. Should
the growth of world income be halted for ecological reasons? The answer
depends on how we define "economic growth". Daly, for example, defines
"growth" as ecologically damaging or wasteful "throughput" resulting from
industrialization, Keynesianism, etc., and wants this to be halted. On
the other hand, he concedes that "development" is desirable (Daly 1996).
I prefer a terminology which distinguishes between (ecologically) "good
growth" and (ecologically) "bad growth" (as, e.g., used by Douthwaite 1998).
If growth is defined this way, then it makes sense to argue that bad growth
must be halted, reversed and phased out and that good growth must be strenghtened.
This implies a change in the content of global demand.
17.10 Political Defects of Global Demand
For regular, apolitical economists this is a non-issue. However, for
political economists this is an issue of the highest importance. Global
demand is defective (socially, economically, ecologically), partly or largely,
(a) the political and social institutions of the world-system support and create such defects;
(b) the ruling ideology supports and creates such defects; and
(c) the elites managing the world system support and create such defects of global demand through various deliberate policies of deregulation, neoliberal globalization, and so on.
One critic of global neoliberalism described the "essence of neoliberalism" as a "utopia of endless exploitation" (Bourdieu 1998).
18. Global Demand-Building Measures (Injections and Interventions)
Inadequacy of global demand is reversible. Available global demand-building measures are of two broad types -- (a) global anti-structural measures -- for example, improving the terms of trade for the low- and middle-income countries, as advocated by Prebisch; or commodity price stabilization schemes, or other; and (b) global "injections" (old Keynesian vocabulary) of purchasing power -- for example, increasing SDRs and global credit; cancelling debts of certain categories of countries; or other. There is a rich literature of such proposals.
Global demand-building requires public intervention. We have already
global public intervention -- namely, on behalf of the interests of global
business and global investors (global capital). But we need another kind
of intervention in the global economy -- namely, pro-economic human rights;
pro-periphery; pro-labour; pro-ecology. This political demand arises from
Article 25 of the Universal Declaration of Human Rights.
19. Practical Conclusion
My theory suggests that billions, if not trillions, of dollars can be
added to world income and millions, if not hundreds of millions, of jobs
can be added to world employment through public intervention in the world
market. The global wage differential can be significantly reduced through
a reformation of the world-economy. Everyone has an inalienable right to
an adequate standard of living. Economic reason and political legitimacy
are thus on the side of the citizens of the world and their hopes
for "life, liberty and the pursuit of happiness" (in the words of the American
constitution); and their striving "to the sun, to freedom" (from
the song of the Socialist International); and their right to an
adequate standard of living (pursuant to Article 25 of the Universal Declaration
of Human Rights).
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