Amsterdam, 25 October 2016 Content Overview 1. The Current Reality - PowerPoint PPT Presentation

www.perspectivity.org www.publicpolicy.agency Amsterdam, 25 October 2016

Content Overview 1. The Current Reality 2. Background and Shortcomings of Current Economic Views 3. IIER’s Economic Model 4. What it takes to grow 5. Consequences for our societies

Growth Predictions vs. Reality During the past years, growth prediction for almost all economies – and on global level – were constantly overoptimistic, and most countries grew at a slower pace than anticipated during the recovery since the 2008/9 crisis

Euro zone household incomes For most households in advanced economies, real incomes have shrunk or stagnated, in the U.S. since the year 2000, in Europe since 2009 102% 100% 98% 96% 94% 92% 1st quitile 2nd quintile 3rd quintile 4th quintile 90% 2007 2008 2009 2010 2011 2012 2013 2014 Source: Eurostat (real household incomes)

The Netherlands follow the pattern Dutch real incomes are very much in line with the rest of the Euro zone, after a strong rise until 2008, they have since been shrinking 102% Real eal household in incomes es Net ether erlan lands 2007 to to 2015 100% 98% 96% 94% 92% 90% 2007 2008 2009 2010 2011 2012 2013 2014 2015 1st quitile 2nd quintile 3rd quintile 4th quintile Source: Eurostat (real household incomes)

Germany, the “powerhouse” Even in Germany, one of the most successful European economies in recent years, real incomes were flat or shrinking for most people 104% 102% 100% 98% 96% 94% 92% 1st quintile 2nd quintile 3rd quintile 4th quintile 90% 2007 2008 2009 2010 2011 2012 2013 2014 Source: Eurostat (real household incomes)

Averaged CPI data masks losses Average CPI numbers mask that core essentials of low income households (and those of the 1%) are appreciating much faster than the average 20% Inc ncome ome-de depe pende ndent nt inf nflation r on rates 15% 10% 5% 0% Low incomes Medium incomes High incomes Top 1% Source: Food Mortgages Luxury real estate • • • BLS Energy Electronics Luxury goods • • • Transportation Travel Collectibles • • • Health care Communications Investments • • • Rent • Education •

What people think of the future When asked about the economic prospects of their children (“how will they be financially?”) a majority expects a shrinking economy 10% 1% The same 8% 8% 72% 85% Worse off 58% 62% 18% 14% Better off 34% 30% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Japan France Germany United States Source: Pew Research 2015

…despite unprecedented interventions Inter In eres est r rat ates es belo elow in w inflat latio ion Dir irec ect liq liquid idit ity to in instit itutio ions at at r ris isk k (countries/banks) “real” market economy “augmented” economy Guar aran antees ees f for cred edit it mar arket kets Ex Explic licit it an and im implic licit it too-big ig- to to-fail g ail guar aran antees ees On On-going g government def efic icit it s spen endin ing Cen entral b al ban ank b k balan alance e sheet eet expansions

The past 200 years were just amzaing Between the years 1820 and 2010, the global economy grew 77-fold, with only very few (short) interruptions Globa obal GDP in t n trillion on 1990$ f 1990$ from om 1820 1820-2010 2010 60 50 40 30 20 10 0 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020 *Sources: Angus Maddison, World Bank, IIER

Most impressive: per capita GDP growth Even more impressive was that during this period, while going from less than 1 billion humans to around 7 billion, per capita incomes also exploded Globa obal GDP pe per c capi pita 1500 1500-2010 i 2010 in n 1990$ 1990$ 8'000 7'000 6'000 5'000 4'000 3'000 2'000 1'000 0 1500 1600 1700 1800 1900 2000 2100 *Sources: Angus Maddison, World Bank, IIER

Economics interpretation of the data Almost all economic forecasting is based on variations of a Cobb-Douglas style production function (Y = AL α K β ) where output (GDP) is a product of available factors labor bor and cap apital tal (typically a grouped category for existing and new infrastructure), further enhanced by growing fac facto tor p r producti tivity ty. This is largely consistent with the experience of the past 250 years until 2008. To Total tal Fac acto tor Human man Out utput put Cap apital tal Produc oduc- Labor bor = tiv ivit ity

Economics vs. ecosystems science Economic science Ecosystems science  Simplified models  Complex systems  No integration of natural  Integrates physics, chemistry science and biology  Looks at recent history (200  Includes long-term human years) ecosystem history  Little to no interconnection  Highly interconnected between elements components  No/weak feedback loops  Strong feedback loops outside supply/demand view  Systemic failure risks accepted  No inclusion of breakpoints and integrated In reality, our human economic system is nothing but a (very complex) ecosystem with many more parameters

Critical areas in economic science Production Substitution Macroeconomic Views on finance function theory modeling issues •Economic theory •Economic theory •Economic theory •Behavioral assumes that assumes that has conflicting science is not at economic output there is always an views on credit. all integrated is primarily driven equivalent or While basic except for by human labor, better substitute theory sees credit supply/demand capital, for inputs that as neutral, other views supported by become scarcer schools (e.g. •Financial ever-improving (too expensive), Keynesian) dynamics are not factor and that supply acknowledge a integrated productivity, and demand role in demand •Physical limits of ignoring other always regulate generation based a finite planet are factors switchovers with on credit volume not integrated a beneficial growth outcome

How economic science evolved Before the broad arrival of fossil fuels, economic theory was based on land and productivity. Only after the introduction of fossil fuels (equaling to access to millions of years of past biomass production), the limiting aspect of those resources became (we think: temporarily) irrelevant. Ene nergy gy s sha hare by by s sour ource* v * vs. pr predom domina nant nt econom onomic t the heor ory 100% All relevant economic 90% theorists (including Smith, 80% Ricardo, Malthus and others) During a transitional 70% operate with land and phase, labor and capital Macroeconomic systems 60% land productivity as get higher emphasis are ultimately reduced to 50% key parameters (e.g. Marshall) labor and capital, leading 40% to today’s predominant 30% views 20% 10% Fossil Renewable Nuclear 0% 1790 1796 1802 1808 1814 1820 1826 1832 1838 1844 1850 1856 1862 1868 1874 1880 1886 1892 1898 1904 1910 1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 *Source: EIA (U.S. energy mix)

This is what macroeconomics expects Even most conservative macroeconomic forecasts project more than a doubling of global GDP between 2015 and 2050 in real (inflation-adjusted) terms Globa obal GDP i in t n trillion on 1990$ 1990$ from om 1820 1820-2050 2050 120 100 80 60 40 20 0 *Sources: Angus Maddison, World Bank, IIER, OECD, The Economist Intelligence Unit

…but at one point, there are limits In n the he l long r ong run, un, no e no eco( o(nom nomic) sy syst stem follows ws expone ponent ntial gr grow owth h pa patterns ns. E Even n hum human hi n histor ory confi firm rms th that. t. size ize During the industrial age we humans tem s yste have come to believe that exponential ic sys conomic s growth is the norm, mistaking part of the curve for the whole Eco A.D. D. 500 00 1000 00 1500 00 1600 00 1700 00 1800 00 1900 00 2000 00 2100 00 2200 50 0 A. Year 10 15 16 17 18 19 20 21 22 Global GDP patterns from 0 A.D. Source: Angus Maddisson, IIER calculations

IIER economic (and ecosystem) model IIER’s Economic Systems IIER Economic Systems Model (Consumption and Investment) Model identifies challenges: Human Behavior  Economic activity today is Indivi- Insti- Groups Markets largely (>95%) tied to resource duals tutions and energy conversions Financial Systems Trade and  We have used credit as a turbo (Money, Credit) Exchange charger for fast resource access Technology (access enabling) Biophysical Processes  Both systems are exhausted Natural Resources  Today, human behavior is Energy driving ups and downs

What truly drives growth Key Key d driver ers Energy and resource • availability and Behavior affordability (ERoEI/RRoEI*) Credit availability and Credit • Availability conditions Human future Energy and • Natural Resources expectations *Ener Energy/ gy/Res Resour ource ce ret etur urn on Ener n on Energy gy Inves nvestment ent determines the output received from one unit of energy input. This amount is irreversibly declining