In a keynote address to a conference on “Geopolitical Changes” at Kozminski University, Warsaw, on January 29, 2024, Professor James Galbraith called for economics to break with equilibrium dogma and re-found itself on the life principles that govern physics, biology and every existing mechanical and social system. Noting the distinguished presence of Professors Francis Fukuyama and E.S. Phelps, Galbraith called attention to the spectacular fallacies of “an end to history” and a “natural rate of unemployment,” arguing that these doctrines have helped blind our generation to the damage inflicted by rising resource costs and neoliberal policies of austerity and precarity, with dire consequences for households in wealthy societies, for their reproduction rates, and for the long-term viability of the species.
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I would ask you to forgive my somewhat portentous title; with Professor Fukuyama present, one is naturally tempted to reach for the big theme. And with Professor Phelps also present, this conference is graced with the most distinguished exponents of the worldview that I plan to demolish – in a friendly way – in the next few minutes. In doing so, I align myself with the pragmatic perspective, the new pragmatism of Professor Kołodko whose philosophical orientation recognizes that there is no end to history, no equilibrium state, and that the task of the economist in the real world is to define, analyze, and address an unending series of evolving problems thrown in our path by economic, social, political, and ecological change.
Equilibrium
The central and distinctive tenet of mainstream economics and its subsidiary disciplines is the notion of equilibrium: the idea that whatever the current unsettled condition of a market, an economy, or a society, there exists some configuration – a fixed point, we used to call it when I was in graduate school at Yale in Herbert Scarf’s classes many years ago – with the property of long-term persistence. This notion underpins the elementary concepts of supply and demand, the Phelps-Friedman construct of a natural rate of unemployment, as well as such latter-day fashions as computable general equilibrium, and the DSGE (dynamic stochastic general equilibrium model).
More dangerously, you may recall how, 35 years ago, the economies of central Europe (and a bit later the former Soviet Union) were labeled “transition economies”, which gave the clear implication that the teleological end state was already known. In 1989, in the Journal Ekonomista, the Journal of Michael Kalecki, in an issue where I shared space with Professor Kolodko long before meeting him in person, I published an article entitled “The False Metaphor of Transformation” which warned that – and I’ll quote myself here – “the East Europeans may go to sleep on the train to Stockholm and wake up as the boat docks in Buenos Aires.” So far as I’m aware, no one at the time noticed or paid any attention to those words.
The grip of equilibrium reasoning is strong. Its roots go back thousands of years to concepts of celestial harmony in classical Chinese philosophy, which were taken up by the physiocrats in France, the utilitarians in Britain, and refined in the late 19th and 20th centuries as the consequence of choices made by rational agents in perfect markets so that equilibrium prices reflect psychological valuations, a separate theory of value being rendered unnecessary. Of course, a market may be imperfect, information may be asymmetric, individuals may be irrational. The equilibrium, nevertheless, is supposed to exist in principle if not in practice. In real life, in modern science, there is no such thing. Evolutionary principles and the second law of thermodynamics preclude and exclude equilibrium.
The grip of equilibrium reasoning is strong. Its roots go back thousands of years to concepts of celestial harmony in classical Chinese philosophy, which were taken up by the physiocrats in France, the utilitarians in Britain, and refined in the late 19th and 20th centuries…
Realigning Economics
The question can only be how to bring economics out of its pre-scientific stagnation and into line with the life principles governing physics, biology, and every real, existing mechanical or social system. This is the task modestly undertaken in my forthcoming book, co-authored with the mathematician Jing Chen, and entitled Entropy Economics, the Living Basis of Value and Production. In brief and intuitively, all biological, mechanical, and social systems must tap into the entropy flow. They draw resources from the environment and they must do so with a usable surplus. This requires fixed investment according to plans. The plans are encoded in genes, in blueprints, in software, in habits, in regulations and laws. A plan is viable if the value of output is sufficient to cover the variable costs plus a contribution to the fixed costs over time. Profit maximization, that iconic objective of mainstream economics, has nothing in common with this. Those that meet the condition for viability survive whether they are maximizing or not. And those that fail to meet it will fade away whether they are maximizing or not.
Value, economic value, in turn, is governed by two factors. One of them is scarcity in relation to market size (things which are more scarce are more valuable). And the other is market power, which you can proxy, or indeed measure, by the number of suppliers of a specific good or service. In our representation, we model this, we represent it, with a simple logarithm function whose argument is a probability measure representing scarcity, and whose base is the number of firms that are producing a particular good or service. This notion that the base can represent this was an innovation introduced by my co-author, which I think has really a great deal of explanatory power. Where one generalizes to multiple products or processes, the formula exactly replicates Shannon’s measure of information as entropy. Thus, low entropy and high economic value are exactly parallel. Mathematically, they are the same thing. It is also the case that entropy clearly underpins a utility notion of value since we instinctively prize the young, the fresh, the new, and the efficient.
Value, economic value, in turn, is governed by two factors. One of them is scarcity in relation to market size (things which are more scarce are more valuable). And the other is market power, which you can proxy, or indeed measure, by the number of suppliers of a specific good or service.
This is a simple, practical, mathematical theory with many straightforward applications. It can cover such issues as: trade policy, the introduction of free trade between two economies with different resource intensities; regulation, the role that firms often play in using regulatory mechanisms to reduce the amount of competition that they face, forcing the weaker players out of the market and raise their own economic value; antitrust policy; stock market valuations can be modeled this way; and many similar topics which we illustrate in the book.
The Family and its Reproduction
Do these ideas tell us something about the future of humanity? I regret to say that I think that they do. I address this question in another recent paper, which was published a month or so ago by the Economic Democracy Initiative of the Open Society University Network. It’s entitled “Will Austerity and Precarity Finish Off the Human Species?“. A household unit is an economic unit. It operates like every other economic unit on biophysical principles. It has fixed costs to cover. It must access resources abundant enough, at low enough variable cost, to ensure viability over time.
The household unit is, well, it’s the ultimate micro foundation of an economic society. In simple societies, as Professor Kołodko has witnessed many times on his travels and has described in his writings, the fixed costs of the household are low. They consist of food, rudimentary housing, basic clothing – a few other things, not very much. Children add little to these elementary burdens and indeed can contribute to meeting costs from a relatively early age. Adam Smith was well aware of this, writing that in 18th century North America a child was worth about a hundred pounds net gain, a very large sum at the time, to the family. And he said that a young widow with four or five children, whose prospects in Europe would be terribly bleak, would be courted in America as a sort of instant fortune.
In complex societies, the kind that we all live in now (almost all of us), the fixed costs of the household are actually very high. I include houses, cars, utilities, taxes, healthcare, education; the list goes on. Children have to be raised, educated, entertained, and tolerated to the extent possible for almost two decades. During this time, they bring no economic return – very, very rarely do they bring any economic return – to the household. And afterwards they move away, making, generally speaking, no further specific contribution to the economic welfare of their parents. While there is often a psychological contribution, that can be either positive or negative depending on the case.
Complex societies, therefore, enjoy – or should I say did enjoy – population booms, only when resources are cheap, as they were in the early post-war America and a bit later in Europe. Well, that era ended in the 1970s when costs rose, energy, food, taxes, interest rates, and tuition. While incomes stagnate, thanks partly to deindustrialization and the migration of productivity gains to other parts of the world, households face a viability crisis just like any business firm. To meet it, they redouble their efforts and reduce their costs. Now what is the great economy that’s open to them?
While incomes stagnate, thanks partly to deindustrialization and the migration of productivity gains to other parts of the world, households face a viability crisis, just like any business firm.
The answer to that is obviously to have fewer children. Now this, I think, explains in a fairly simple way, and it is very hard I think to argue with it, why fertility declined with the onset of neoliberal austerity policies in the 1970s. Then the decline deepened after the 2008 crisis, which did a great deal of damage to the established wealth of households in North America and Europe, certainly. It affects all wealthy societies whose fertility is systematically lower than in poorer countries (even though in most, if not all, poorer societies also, there has been a decline for similar reasons, just from much higher levels).
Consistent with evolutionary principle, there is no equilibrium. There is no equilibrium state. Each phase leads to the next: to cut costs and raise incomes, households work more and they procreate less. We observe a transitory rise in what we measure as GDP (money value of incomes and output) as secondary earners flood into the workplace. That happened heavily in the United States in the 1980s into the 1990s. With fewer children and a strong commitment to general welfare, the population ages. Investment shifts from support for children and child-rearing to the needs of the elderly (clinics, hospitals, nursing homes, hospices). It is all very natural and there is nothing to be said against this. This is just the way in which a society changes its priorities to meet the needs that it is facing.
The relative burden on the young grows while the birth cohort relative to the population shrinks. With a smaller birth cohort, the population becomes ever harder to replace. Immigration can help, but only as long as the conditions are relatively attractive – that is to say only as long as living standards and the receptivity for immigrants makes it worthwhile to leave their countries of origin to come to wealthier societies. This is largely true at the present, but it will not be true indefinitely. And even while it is true, immigration is resisted by incumbents because they don’t like the social dislocation that it inevitably brings. We are seeing this played out rather dramatically on the southern border of my home state here in Texas at the moment.
Over-Burdened
Where does this end? So far as I am aware, no society whose individual fertility rate has fallen below the replacement value, which is about 2.1, has ever recovered. So far as I’m aware, only the Russian Federation, among wealthy societies, has seen even a partial recovery thanks to very assiduous, pro-natalist policies. But Russia suffers from the small birth cohort it inherited from the chaos of the 1990s. China is an extreme case, having implemented a one-child policy which has greatly reduced the birth cohort available to it at the present time, and it is already suffering a fairly rapid rate of population decline.
So far as I am aware, no society whose individual fertility rate has fallen below the replacement value, which is about 2.1, has ever recovered.
At the present time, in fact, amongst the large countries of the world, only two that I am aware of, Pakistan and Nigeria, have fertility rates that are significantly above replacement. Apart from that, only some relatively small, sectarian communities enjoy that status, and they are probably too small to be likely to inherit the Earth. Over time, therefore, and thanks largely to the way in which rising resource costs affect the fixed cost structures of any modern society, the human species (I think we can reasonably infer, though it is going to be a rather dramatic inference) has placed itself on a glide path toward extinction.
Those doctrines have worked over time to obscure the real conditions that we face, to blind us, as it were, to evolutionary and biophysical dangers while the neoliberal policies of austerity and precarity have worked to accelerate the processes that I described.
This argument does not rely in any way on the four horsemen of the apocalypse: famine, pestilence, war, and death, the checks that were known to Malthus and that underpin neo-Malthusian arguments. I am not really referring to those at all, nor will I place direct blame on the equilibrium doctrines of which Professor Phelps and Fukuyama are such distinguished representatives. I will say that those doctrines have worked over time to obscure the real conditions that we face, to blind us, as it were, to evolutionary and biophysical dangers while the neoliberal policies of austerity and precarity have worked to accelerate the processes that I described.
So, absent radical change – including reductions in the over-burdens, the military and financial predatory structures, that have come to be such a heavy part of the fixed cost of ordinary life in so-called advanced societies – this combination of circumstance and incomprehension seems quite enough to do us in.
I will close here just by noting that I’m far from being the first or the only figure to offer a warning along these lines and I will give you references to three canonical texts.
The first one is Kipling’s Recessional:
“Far-called, our navies melt away; / On dune and headland sinks the fire: / Lo, all our pomp of yesterday / Is one with Nineveh and Tyre!”
The second one is Archibald MacLeish’s poem called The End of the World, and I’m extremely fond of it. This is the last stanza:
“And there, there overhead, there, there hung over / Those thousands of white faces, those dazed eyes, / There in the starless dark, the poise, the hover, / There with vast wings across the cancelled skies, / There in the sudden blackness the black pall / Of nothing, nothing, nothing — nothing at all.
And finally, one that I’m sure everybody is familiar with from The Hollow Men, T .S. Eliot:
“This is the way the world ends. / This is the way the world ends. / This is the way the world ends. / Not with a bang but a whimper.”
James K. Galbraith is Lloyd M. Bentsen, jr. Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin. He holds a PhD in Economics from Yale.