What Went Wrong?

By all appearances, something went wrong. The world is not as we would wish it to be. Economies are stagnating, not growing. What can we do to right these floundering ships of state?

According to Professor Aaron Benanav, the solution lies in socialist redistribution. By his lights the problem lies in slowing economic growth. Benanav does not explain how wealth redistribution will improve economic growth. Or better, why you will feel better about stagnation if we redistribute Elon Musk’s fortune.

Benanav writes in the New York Times:

Across the world, governments have been losing elections — or barely holding on — in the face of rising discontent. From the United States to Uruguay, Britain to India, an anti-incumbent wave swept through democracies in 2024. But not only democracies are in crisis. China, too, is grappling with social unrest and economic instability. Strife, these days, is global.

By his lights, the cause lies in slowing economic growth:

In the past, G20 economies regularly grew 2 to 3 percent per year, doubling incomes every 25 to 35 years. Today, many growth rates are 0.5 to 1 percent, meaning incomes now take 70 to 100 years to double — too slow for people to feel progress in their lifetimes. The significance of that change can’t be overstated. 

Stagnation does not have to be absolute to collapse expectations:When people no longer assume their or their children’s living standards will improve, trust in institutions erodes and discontent rises.

Why have world economies all ceased to grow? The author says that the reason lies in the shift from manufacturing to services. Apparently, this has undermined productivity growth:

One reason is the global shift from manufacturing to services. This has stalled the primary engine of economic expansion: productivity growth. Productivity — the output per hour worked — can rise quickly in manufacturing. A car factory that installs robotic assembly lines, for example, can double production without hiring more workers, perhaps even firing some. But in services, efficiency is much harder to improve. A restaurant that gets busier usually needs more servers. A hospital treating more patients will require more doctors and nurses. In service-based economies, productivity is always slower to rise.

This seismic shift, in the making for decades, has a name: deindustrialization. In America  and Europe, we know what that looks like: lost manufacturing jobs, amid declining demand for industrial goods. But deindustrialization is not limited to wealthy economies. The move from manufacturing to services is happening across the G20, dragging down growth rates nearly everywhere. Today about 50 percent of the world’s work force is employed in the service sector.

You might imagine that someone must be producing things. Not everyone is pushing paper. Curiously, the Trump administration is saying that America lost manufacturing jobs because they moved overseas. 

One hesitates to mention it, but over the past four decades China has grown its economy, significantly. So, the notion that growth has stopped in all the world economies is short-sighted.

It is a fair point that a lower birth rate requires less construction, less housing and less food. 

There’s another reason for global stagnation: slowing population growth. Birthrates surged after World War II, creating strong demand for housing and infrastructure construction and spurring the postwar boom.

This is a big problem for the economy. Shrinking workforces mean smaller future markets, discouraging businesses from expanding — especially in service-based economies, where, along with limited productivity gains, costs tend to rise. Investment falters. At the same time, a falling share of working-age people means fewer taxpayers supporting more retirees, driving up pension and health care costs and pressuring governments to raise taxes, increase debt or cut benefits.

Must we remark that, for all we know, the shrinking workforce might well be a temporary phenomenon. And, there are certain third world countries where the workforce is expanding.

For another, the industries generally targeted for revival — semiconductors, electric vehicles and renewable energy — employ relatively few workers. The era when manufacturing could provide mass employment is over.

You might think that this analysis is hiding something. As we read on we discover that the author is shilling for renewable energy sources, for overcoming fossil fuels, and for instituting more socialist programs, especially for income redistribution:

A major push toward a green transition, for example, could drive economic activity for years to come. 

In truth, European countries have been promoting a transition to green energy solutions. They have discovered that the push toward renewables has damaged their economies. In Germany they are looking to return to coal plants. They are shutting down their windmills. As is America.

As I said, the author is a socialist. He favors redistribution. Dare we say that this policy has been tried and has failed miserably. In Great Britain today, the Labour Party believes in redistribution. Wealthy Brits are naturally moving their fortunes out of the country. Why are we not surprised?

The second approach is redistribution. In the past, the primary rationale for policies that enriched wealthy households was to stimulate growth from the top down, but this strategy has evidently failed. Instead, governments could place much higher taxes on the rich and redistribute income to the rest of society.

Naturally, this economic historian does not recognize that wealth is relative. It is not absolute. It’s about market value more than about intrinsic value. If you are taxing people excessively they will not work as hard. They will not be as productive. Or they will take their talents to places where they are appreciated.

That requires investing to improve people’s lives: repairing ecosystems, rebuilding infrastructure and expanding housing. Doing so could also help create conditions for poorer nations to pursue export-led development on fairer and more predictable terms.

In a stagnant economy there will be neither the money nor the human capital to do these things. The author sounds clever, like the academic he is, but his solutions have largely been tried and failed. They are the problem, not the solution.