Wow. What a day. We talked macro-economics today. And macro-economics, that’s a prediction of the history yet to come. Seriously, we got a lot of information about how markets work, but in the end it’s again about how people behave in individual and collective ways.
The aging Population
Let’s take the first part of today’s program on the impact of the aging population. People that are born at the end of the 20th century have a life expectancy of 100 years. My daughters will live until 2098 and 2100. I hope they will do that in the best of circumstances. And then the question arises: how can I help them achieve that? A clear message: instead of doing recreation we should re-create. We will not be able to span a career of 60 years based on the formal education we got in the beginning. We have to re-invent ourselves and have a second or third career. And also organisations need to change the way they do things.
I co-authored a book on this. It’s called “customized work” (published in Dutch and French). The main idea is that work should not be standardized but customized according to the needs and strengths of people. The focus is sustainable employability. If we achieve that, we can help people to have longer careers.
The second half of the day was much more abstract. And more difficult to use. The basic idea is that if we as advanced economies cannot grow through capital accumulation, we should focus more on technology-based efficiency enhancement. That’s a mouth full. The worrying part is that we live in a part of the world that has low growth rates. And unfortunately for us our economic system is based on growth. And we should ask how we can achieve efficiency improvements, hoping that efficiency increases are not asymptotic and more than marginally effective.
In advanced economies growth has become more difficult. And it’s not to be expected that high investments will boost growth. Nevertheless shareholders require companies to keep on growing faster than macro-economically possible. We did not talk too much of innovation – and I forgot to ask the professor. Innovation is also a source of growth.
And here’s the question. Do we need to focus on prosperity or growth? Or on both? When the emerging markets have caught up with the advanced economies, do they still need to focus on growth? Difficult to say. But somewhere we are convinced that growth is limited. It depends on new inventions to stir op things (so innovation). And we do not know if these will ever come. That’s the question.
We are pretty confident there will be a solution. But if there’s not, we might be in trouble. The emerging markets can go on investing for some time before they catch up with us.
And here’s the question: should we focus on growth or on prosperity? I’d say prosperity. And there are many ideas on that. What we did not discuss so far is whether or not growth is really a good predictor for economic performance. We assume that it is. But this implies many things. Growth assumes spending, consumption … We know that this idea is at the basis of the success of the West. But it is also at the basis of the demise of our economic system.
Economic growth is supposed to deliver prosperity. Higher incomes should mean better choices, richer lives, an improved quality of life for us all. That at least is the conventional wisdom. But things haven’t always turned out that way.`
Here are the 12 steps as mentioned in the book on prosperity without growth.
1. Developing macro-economic capability
2. Investing in public assets and infrastructures
3. Increasing financial and fiscal prudence
4. Reforming macro-economic accounting
5. Sharing the available work and improving the work-life balance
6. Tackling systemic inequality
7. Measuring capabilities and flourishing
8. Strengthening human and social capital
9. Reversing the culture of consumerism
10. Imposing clearly defined resource/emissions caps
11. Implementing fiscal reform for sustainability
12. Promoting technology transfer and international ecosystem protection
Check that report for more.
The financial Crisis
The origins of the crisis or 2008 lie in this human vice called greed. This is not a macro-economic term. It started actually in 1996 with the Asian crisis. And was reinforced by the dot com crisis of 2001. These events forced financial institutions to become very creative in offering high yields. High yields mean high risk. So because of the speculation on e.g. the increase of housing prices in the US, banks offered loans based on their future value. What happened was that due to monetary policy the interest rates started to increase. And that increased the mortgage payments. And this brought people who were over-leveraged in problems. This led to the resignation of many contracts. And this again led to the fact that banks needed to overtake housing assets which were then overvalued. The fact that these assets were flooded on the market made prices fall. And this aggravated the problem. And this again led to a reluctance for interbank loaning. In this way a local US problem became a global financial problem. A fine example of the domino effect.
That’s sad. The 2008 collapse was due to a wrong understanding of the risks. Many businesses suffered because of speculation on the increase of housing prices in the US. And now macro-economics can tell us what has happened.
What does that teach us? It teaches us that the financial sector needs to be reorganised. And it will. This is called deleveraging. Because of the decrease in assets, equity is decreasing. And instead of having a balance sheet that is covered for 25% by equity, we have a banking sector that has 5% leveraging through equity.
What should be our focus? If we are going to live 100 years, it’s not growth, but rather prosperity. We need to launch our children into a society that will require much more self-reliance, resilience, creativity and autonomy then we had to come up with ourselves. In Europe prosperity has come from a social system that took care of people. In the future, people will have to take care of themselves.
It’s a topic that will require some more debate. But the debate has started and let’s see if we can make something out of it. For our children.