Farm Productivity, the Web and the Next Depression
Exports as Means for Managing Excess Productivity: Farms Since the 1920s
In testimony before Congress on February 23, 2000; Federal Reserve Chairman Alan Greenspan was asked about the immediate situation of farms. With short term interest rates rising, oil prices at high levels and farm commodity prices down, farm belt Congressmen are worried. Greenspan replied with an answer which went into the history of farm productivity, but ended with his usual reply, that farms will have to export their way out of the problem. Aside from the fact that farms have been following that policy off and on since the 1920s, even as the actual numbers of farms has steadily dropped; Greenspan's reply showed what could be a crucial fact in understanding his view on the Web economy. It may also have revealed a potentially fatal weakness in how Greenspan hopes to deal with the large productivity increases about to hit the American economy from the merger of business-to-consumer and business-to-business Web systems.
The road to stability in the New Economy cannot lie with the major trading blocs each trying to export their industrial surpluses. That was tried during the late 1920s. Today's New Economy is probably no more than a temporary stage in what will either become a successful or unsuccessful transition to a postcapitalist economy; a Web-based, real-time, input-output model similar to the American economy of World War ll.
The 'Wealth Effect', Inflation and Deflation
First, it has to be stated just how wide and deep Greenspan's knowledge is on the broad sweep of economic and cultural history. Whatever one's views about Greenspan's policies, he is a true Renaissance man. It has been his extraordinary knowledge which has brought us thus far into the 'New Economy'. Having said that, it is fair to attempt to critique Greenspan's views, not in a negative accusatory fashion, but in the spirit in which he seems to operate, that of developing civil society into a global model.
Greenspan may or may not be primarily concerned with inflation at the moment. There is little evidence of inflation internationally or domestically. China and Japan have both been in deflation for several quarters, although recent evidence has appeared which indicates an amelioration in both countries. The euro has fallen from 1.17 to 0.97 per American dollar since its opening last year. In dollar terms, euro-denominated trade items have deflated by roughly 20%, although domestic European prices probably have not deflated much. Even in America, with the energy prices factored out, inflation is almost non-existent.
Greenspan has suggested that the rapid rise in aggregate stock market value over the real GDP could lead into consumer demand for items not already produced and hence into inflation. The idea of a 'wealth effect' as a possible cause of future inflation and consequently as a reason for increasing interest rates has plausibility; but Greenspan may have deeper concerns. I believe that Greenspan is worried about how the productivity increases of the early and middle 1920s may have fed into the 1929 crash, and then into the Depression. He may be trying to delay impending productivity increases from the head long rush onto the Internet in order to try to avoid a parallel problem within the next five years. (See Chart 1)
The Internet and Rapid Productivity Increases in a Stagnant GDP: Formula for a Depression
While fears of inflation are frequently brought out to justify interest increases,
Greenspan's 'creative destruction' model of monetary management is far more
nuanced and complex. The Internet promises to yield
huge productivity savings as it moves into the heart of industrial production.
The problem is that overly rapid productivity increases may damage monetary
policy, perhaps even lead into a Depression. He may believe that
if full conversion of the economy onto the Internet can be delayed some, so
can the speed of the productivity increase and the potentially destabilizing
effects of a large productivity increase may be prevented. This would be in
keeping with his use of a model, where Fed policies are tied into keeping new
innovations moving into the working economy fast enough to absorb workers displaced
by efficiency increases.
The problem with this logic is that while too rapid productivity increases
may overwhelm monetary policy, the primary problem is that once investment
becomes oriented towards productivity increases in a constant size GDP -as
opposed to an increasing GDP, the speed of this shift is less important than
the fact of the shift itself. If the 1800s were a period of profits from increasing
growth in labor-absorbing innovations, punctuated by periodic drops in the rate
of return; the 1930s were a period of stagnant or falling GDP, with unstable
profits maintained through investment in labor-saving innovations in the existing
capital infrastructure. The solution to such a 1930s type of problem lies in
developing a way to deal with a 30% to 50% aggregate productivity increase;
not simply to dilute the rate of increase over more years, rather than face
that rapid rise in only four or five years.
Greenspan, 'Long Waves' and 'Creative Destruction'
Greenspan seems to derive some of his thinking from the 'long wave' model of capitalist growth. This idea was first developed and popularized in the 1920s by Russian economist Nicholai Kondratieff. The model claimed that capitalism had gone through 3 'long waves' of approximately 40-year lengths since 1790. Kondratieff believed that capitalism had an internal, self-stabilizing mechanism. Long waves evolved into a direct argument against Marx's falling rate of profit model. After the crash of 1929, Stalin imprisoned Kondratieff in the Gulag where he died. Later, Austrian economist Joseph A. Schumpeter developed the term 'creative destruction' in describing certain aspects of the long wave. Greenspan frequently uses the term 'creative destruction' when describing his own model of the economy, but perhaps with different meanings than Schumpeter; thus Greenspan seemingly relies upon long wave concepts in his work.
Over Productivity and Production Increases in 1920s and 1990s: Disaccumulation
The productivity increases in America over the last five years have been extraordinary, perhaps unprecedented. Greenspan is not shy about telling people that he too is perplexed and somewhat unsure of the existing situation. The only era which seems comparable is that of the early and middle 1920s. What caused the 1920s increases, as well as how they should have been dealt with, remain major questions.
The key to understanding the 1920s is that at some point between 1923 and 1926, employment began to drop, even as manufacturing output continued its rapid rise; productivity began to increase faster than production itself. That is to say, the percentage increase in productivity began to rise faster than the percentage increase in the GDP. In 1968, economist Martin Sklar defined this employment-output gap as 'disaccumulation'. Since the non-inflationary rise in GDP is normally seen as being a function of the annual increase in productivity, plus the percentage increase in the working labor force; a temporary rise in productivity which is itself faster that the rise in GDP causes a problem in the mathematics of the GDP formula. Such an inversion over several years could lead to a decline in the employment level. By 1927, the continued rise in industrial production and decline in factory workers kept profits strong and fed into the stock market boom of 1928.
How this productivity rose so rapidly for so long during the 1920s is understood by a handful of economic historians, but has not become part of the mainstream view of economics. What seems to be missed even by the economic historians, is the relationship between this 50% productivity increase in the early and middle 1920s, the rapid rise in stocks in 1928 and 1929 and the collapse in October 1929. Hundreds of thousands of individual electrical motors were installed on assembly lines at the point of production and replaced the long belt-driven systems common since the beginnings of capitalism. A five year period betweenabout 1922 and 1927 marked a productivity increase of almost 50%. Small mechanical tractors began replacing mule and horse-driven farming, bringing similar efficiency increases to the farms.
High Productivity on the Farms Since the 1920s
The factory system has not seen annual productivity increases in the 10% range since the 1920s, but the trend towards high productivity increases on the farm has continued until the present. Farm productivity increases have exceeded the percentage increase in domestic demand for food and fiber almost every year since the middle 1920s. This explains why the number of commercial farms and farmers has dropped almost every single year since the 1920s as well. Where productivity increases continually outstrip the domestic demand in a sector, either that sector must send the extra production to external markets, or that sector must shrink its employment levels. In the case of farms, both things have occurred, even as the indebtedness and capital intensity of the surviving farms has risen.
Continued federal efforts at controlling these productivity increases since Roosevelt's first years have basically failed, so far as farm families are concerned. Before World War l, well over half of the population was required to produce the needed food and fiber, while less than 4 % remain on the farm today. What is so threatening about the Internet is that it has the potential to bring back the middle 1920s era of 10% annual productivity increases to the general economy and a medium term increase of perhaps 50% over five years. It should be recalled that the dictum in computers has been Moore's Law, which translates into roughly 70% annual productivity increases.
Moore's Law, the Internet and the Wider American Economy
My belief is that the Web has become the transmission belt for bringing Moore's Law to the wider economy, although full 70% annual productivity increases are unlikely. To damage the American economy, productivity need increase only a few percentage points above the GDP, in the range of perhaps 5% to 8%. Increases above 10%, without corresponding export increases may almost immediately lead the American economy back into the 1930s. America's lead onto the Internet is perhaps 60 months ahead of Europe and Asia, but probably not much more, so exports are not likely to be a way out. During the early 1930s, few countries were able to peacefully increase their export markets sufficiently to resolve domestic unemployment. By the late 1930s, alternative means were increasingly used to obtain export markets.
The Stagnation Investment Model in America: Farming 1919-1929 & Service Sector 2000-2010
What probably predicts a period of secular stagnation is a rising ratio of annual efficiency increases to GDP increase, yielding ultimately such a ratio greater than 1:1. That is to say, an innovation applied to the capitalist system begins to allow efficiency to increase much faster than the overall GDP growth rate. Normally non-inflationary GDP growth is defined as the percentage addition of employment to the increase in productivity. Thus a 2% increase in productivity added with a 1 % increase in employment should yield non-inflationary growth of about 3 %.
When several quarters occur, in which productivity is higher are higher than the increase in overall GDP; something is amiss. Inflation becomes anticipated by the Federal Reserve, whatever the immediate balance between inflation and deflation. Thus in much of 2000, Alan Greenspan was pushing up interest rates- not to slow actual inflation, but to prevent anticipated inflation, whileglobally deflation seemed much more prevalent than inflation. And in the technology field, annual productivity increases of 75 % have become common. The Internet is the means by which the secular stagnation investment model may be transported into the general economy, especially the service sector.
Although it seems counter-intuitive to assert than efficiency may increase much faster than the over all GDP, manufacturing and agriculture America between about 1921 and about 1927 saw such a period with close to 10 % annual productivity increases. In fact, America agriculture has remained mired in Depression levels of overly-rapid efficiency increases. About 75 years of continuing rapid efficiency leading into rising farm debt
and huge overproduction of foodstuffs, has resulted in declining numbers of farms depending ever more on exports for basic survival, and requiring increasing federal subsidies simply to survive. Again, the Internet is the means by which the stagnation investment model may be transported into the general economy, especially the service sector.
Greenspan's Dilemma: Is a Conversion from the New Economy to Postcapitalism Possible?
What may be the worst problem for Greenspan, is that while he may see the need for slowing down implementation of the Internet, he cannot let it be known why. For if large numbers of investors came to see the1920s relationships in productivity being replicated in the early 2000s, this might not only slow down the Internet, it might begin to abort it and crash the market over night.
The reason that I broach this view is not to upstage Greenspan, but because it probably does not matter whether the Internet productivity occurs more slowly. If anything, the more rapid the process starts, the better chance civilization has that enough of the infrastructure will be in place before investors realize that profits are unlikely to result. In ways similar to the early 1990s fights over Russia's conversion to capitalism, the nascent argument over the conversion to postcapitalism is over whether it should be made in one fast leap or in slower stages. The argument in favor of one great leap used the analogy of trying to jump a wide canyon in 'stages', leaving the usefulness of 'stages' irrelevant. Seemingly the great leap has fallen short for Russia. Now it may be America's turn to try a new 'great leap forward'.
My belief is that the transition to postcapitalism must be done at close to full tilt. Whenever the market finally realizes that profitability on the Internet has become irrelevant, the political structure will have to pick up the pieces, just as it did in the 1930s. Only this time, the possibility of a Keynesian, debt-driven solution may not exist, nor will countries be able to deal with excess production through exports. The next American input-output model will not likely have a foreign military attack as a basis for political legitimacy, nor can it be developed on a platform of cultural diversity.
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