CIAO DATE: 11/04

Thinking About the Future: Economic Aspects

Emilio Gerelli

Occasional Paper Series No. 34

November 11-12, 1999

European Union Studies Center

Forecasting belongs to knowledge
Auguste Comte

Never prophesy,
especially about the future!
Sam Goldwin

Summary

1. Introduction

2. Structural Change

3. The Long wave of Post-industrial Society

4. The Co-ordinates of the Post-industrial Society

5. The Market Scenario

6. The Social Scenario

7. An Example of GDP scenarios

8. Conclusions: A Geo-political Framework for Scenarios

1. Introduction

   Building scenarios of the future has been defined "the art of thinking the unthinkable". And in fact the successful author of scenarios must be able to combine both an open and creative mind, and analytical capabilities to envisage different and sometimes counterintuitive combinations of actors, factors and trends. Our author is often also "heroic", since he knows that most probably he will be disproved by facts. However it is worth bravely accepting the challenge of uncertainty, since "illustrating the future by means of scenarios is a way to overcome human beings’ resistance to change. Scenarios can thus open mental horizons to allow the individual to accept and understand change, and so be able to shape the world. Scenarios may help in seizing new opportunities ahead as well as avoiding undesirable effects of misconceived actions". In this connection a historian notes: "it is desirable, possible and even within certain limits necessary to forecast our future…However the process of forecasting must be based necessarily on the knowledge of the past".

   Therefore in this paper we shall stay mainly on the safe side of known factors worth taking into account when writing scenarios. In para.2 we briefly describe the technological change of the post-industrial or knowledge society. Based on Kondratieff’s long cycle theory we then argue in para.3 that a new and fairly stable main paradigm could characterise the structure of advanced society. This contributes to the robustness of the framework for scenarios. Having established this point of departure, in para.4 we analyse the characteristics of the post-industrial society. On the basis of this analysis we describe in paras. 5-7 two scenarios, which are then put in a geo-political perspective in para.8.

2. The Structural Change

   The technological structure of to-day’s society has been in a phase of profound transformation. We have in fact, entered into the post-industrial era. In which the importance of material resources is reduced in favour of immaterial ones - such as information -, and of services. In addition, creative capacity has replaced passive learning, in response to external stimuli, producing much greater levels of knowledge than in the past. Already, about thirty years ago, in an anticipatory study, it was stated: "The scientific age differs in kind, and not only in degree, from the preceding mechanical age. Not only ingenuity but, increasingly, understanding; not luck but systematic investigation, are turning the tables on nature, making her subservient to man". In this connection suffice it here to note that in the top knowledge-economy, Germany, knowledge-based industries accounted for 58,6% of German business output in 1996 (more on this matter in para.4 below).

   Development is therefore changing tracks. As we will see in para.3, from the long cycle 1930-2000, characterised in the initial phases by the techniques of mass production — from the automobile to television —, we are entering a new historical period dominated by a bunch of new technologies: electronics-computers, bio-technologies, and new materials.

   This structural change of economic development also causes changes to the composition of the productive factors used to obtain a given level of wealth. In fact, it increases the contribution of capital and knowledge that incorporate the new technological and scientific discoveries. Instead, it may reduce the use of two other factors: employment — decreasing work gives place to long-term unemployment; and material resources - such as the free environmental inputs of air, water, and so on.

   The turning point taking place is very relevant, but not without precedent: think of the disturbances brought into the agricultural world by the industrial revolution that had condensed violence, creativity and well-being into a relatively short phase of human history - conventionally from the middle of the 17th century to the middle of the 19th century.

   The actual situation becomes much more comprehensible if put into a historical framework. For this reason, it is useful to be guided by a particular interpretative scheme: that of the socio-economic long waves, that we will utilise in the next paragraph.

3. The Long Wave of the Post-industrial Society

   Historians and economists - the last with some debate - have identified the existence in the industrialised world (excluding those developing countries) of "long waves" (or cycles) which correspond to fundamental transformations, first of all, in the technological scenario but also in the socio-economic and institutional. The average duration of these waves is about sixty years; they are characterised by an initial phase of prosperity, followed by a depression. In Table 1 we give a brief account of the four long waves observed from the end of the XVIII century till now; we also identify the most important cycle for us now, the fifth, that is taking off (see the last section of the Table).

   Table 1

   Looking at the situation in this manner, we observe that we actually find ourselves in a full phase of transition. Modern society is changing tracks: we are in fact abandoning the Fourth Cycle, the Keynesian-Ford Cycle that occupied the period 1930-1995. In synthesis, this has had these characteristics: in the ascending phase (1930-1973) there has been a peculiar institutional modification by the intervention of the State through a Keynesian policy for the management of the demand to support jobs and income. This policy has also favoured public spending for infrastructures instrumental for the development of mass production. In fact, the correlative technoeconomic paradigm - that is the common framework for the technology of the period — was precisely that of the Ford period of mass production of goods: for example, in transport - cars and aeroplanes; in consumer goods - televisions and fridges, and lastly, armaments. In particular, between 1955 and 1970 the majority of people in the developed world possessed, in addition to a car, also a telephone and a television.

   The descending phase (1974-1995/2000) of this long wave has a strategic importance for us, and we are both actors and spectators to its levelling out. In fact at the beginning of this phase, the heir to the throne of the new technological paradigm makes its appearance: microelectronics, whose main key is the microprocessor (the central elaboration unit of the calculator, constructed on a single integrated circuit). It concerns a radical innovation, that is able to challenge the old paradigm, to gradually substitute it, after an inevitable phase of coexistence.

   This innovation constitutes an important technological revolution, since it drastically reduces the costs of production from a high number of sectors and noticeably increases the quality of their products. Furthermore, in addition to this wide sectorial impact, a pervasive modification is shown in the functioning of the whole productive system; in fact, microelectronics substitutes or modifies the work and is therefore useful in each assignment. Mass computerisation could therefore be, for the Fifth long wave, that which motorization has been for the Fourth, electrification for the Third, the construction of railways for the Second and mechanisation for the First.

4. The Co-ordinates of the Post-Industrial Society

   We have examined the framework for the birth of post-industrialism; we now specify its fundamental characteristics which constitute a necessary information for devising scenarios linked to the present structure of society.

   Technological-scientific progress (a strategic element as already noted) is not random but systematic and dominant. Its exponential growth is made possible by the very high capacity available for the transmission and elaboration of data that have been produced at an unprecedented rate. The possibility for collaboration among researchers makes it possible that the scale of "big science" - formerly limited to very few fields characterised by very high costs and long term results, as in particle physics -, extend to other branches of research and innovation. In them, hundreds of scientists formerly separated join together as well as their available resources.

   This progress slows down or eliminates the scarcity of material resources exchanged on the market and stimulates pervasive innovations (microelectronics, new materials, biotechnology) that modify the way of being and to operate collectively. We are at present in a transitory stage from the industrial mode of production to a "scientific" one, in which intelligence and automation dominate. Thus, science itself has come to be a productive force.

   Following the progress indicated, information with an economic value becomes a fundamental good, widely available also via telematics (that is the combination of the telephone, computer and, in the short-term television). "In its form of information goods indispensable to productive capacity, knowledge is already and will be more and more one of the main stakes, if not the most important, of world competition for power". According to a recent OECD study, investment in knowledge (i.e. R&D expenditures, investment in software, education spending) in advanced countries is already half the physical investment in plant and machinery: 10% of GDP and 20% respectively.

   The greater availability of information concerning the whole of the economic structure enables operators to approach conditions of market transparency and to the optimisation of the entrepreneurial decision-making. This reduces the imbalances between the objectives of the economic operators and their actual realisation. In fact, the greater availability of economic data makes it possible to introduce innovative management techniques, e.g. benchmarking which enables a company to adopt the strategies employed by successful rivals; just-in-time to minimise the supply of items in store and the relative costs; the connected ecologistics: the management of the transport of goods not only for outward journeys, but for the whole tract involving the coming and going in which the recovery of packaging, recycling of containers and energy saving play a central role; analysis of the life cycle of the product to minimise wastage "from cradle to grave"; the engineering of processes such as marketing, and so on. As hypothesised in the theory of neo-classical economics, this makes it much easier for businessmen to maximise their profits.

   A management historian has pointed out in regard to the role that enterprise plays, thanks also to the actual management methods indicated above: "in many sectors of the economy the visible hand of management has replaced what Adam Smith called the invisible hand of market forces: this has remained the original point for the demand of goods and services, but modern companies have been able to coordinate market flows through the process of production and distribution and to allocate capital and necessary personnel for further growth ";

   Also as a result of the greater productive efficiency attained, the economy dematerialises in the sense that each unit of gross domestic product is obtained from a decreasing quantity of material resources utilised. These results are brought about by changes of the productive techniques; and also by the fact that new or transformed immaterial goods, based upon idea and knowledge with an economic value have entered onto the market, creating added value. As we have shown elsewhere, the fifteen-year period 1970-85 was particularly favourable to de-materialisation, also because of the energy crises in 1973 and in 1979 which increased oil and related prices. Material resources were saved and more efficient techniques were introduced. In subsequent years a slow-down in process of de-materialisation took place. This recent pause should not be however emphasised as irreversible. In fact in the past 10 months before the time of our writing (September 1999) the price of oil has increased again from its low, more than doubling from $10 per barrel in December to $23 in September 1999, also the highest price in the last three years. This may give a renewed incentive to energy saving and efficiency and, in time, to a new de-materialisation wave.

   Another important phenomenon partially related to dematerialization concerns the fact that in the advanced countries, the growth of gross domestic product is taking place without a parallel increase of many pollutants. The phenomenon - we shall call it de-pollution - is surprising at first sight. In fact, one would think intuitively that greater production causes more polluting emissions and more waste. In reality, the dimension of economic activity is only one of the determinant factors for the production of waste and of emissions. The composition of the production and the techniques used to obtain them are as important. From this point of view, there are reasons for hope. In fact, as we have seen, the structural modifications that lead to dematerialization in the post-industrial society also determine beneficent collateral effects for the environment.

   Let us first of all observe the facts. Starting with the 24 advanced countries of the OECD. During the twenty-year period between 1970 to 1990, their economies grew by about 80 per cent. In spite of this growth, the quality of the air has noticeably improved: the emission of particles has been reduced by about 60 per cent and those of sulphur oxide by 38 per cent. Lead emissions have fallen by 85 per cent in North America, from 70 per cent in Great Britain and by about 50 per cent in many European cities. Japan, which has spent considerable amounts for the reduction of pollution, has obtained the most substantial improvement for the situation of the atmosphere: the sulphur oxide emissions, the particles of nitrogen oxide are a quarter less than the average OECD. In general, in the OECD countries, there have also been reduced the persistent pollutants of DDT, polychlorinated-biphenyls and the compounds of mercury, as well as the frequency of major naval accidents and oil spills. These improvements have been obtained with an annual expense from the policies for de-pollution that varies between 0,8-1,5 per cent of gross domestic product. The burden of this expense is distributed half and half between the public and private sector.

   Nevertheless, it would be unjust to nurture a total optimism. It is true, for example, that in London the notorious "pea soup" atmosphere has not been repeated, that in 1952 killed 4,000 people in a week due to various respiratory problems. All the same, in December 1991, again in London, the mortality rate increased by 10 per cent, in a week when the air stopped above the city blocking an increasing quantity of gaseous emissions.

   The OECD also brings to light the existence of many unsolved problems and emerging phenomena, that need to be dealt with. The nitrogen oxide emissions, most of which are derived from cars, have increased by 12 per cent (always starting from 1970) in the countries of the organisation (Japan excluded). This reflects a lack of technological progress, but above all, a lack of political courage to deal with the modern taboo about cars and transport on wheels in general. Solid urban waste has increased by 26 per cent between 1975 and 1990, and carbon dioxide by 15 per cent in the last decade. The human exposure problem to the toxic pollutants such as cadmium, benzene, radon and asbestos have yet to be resolved. Underground water supplies are progressively polluted as a result of salinisation, infiltration of fertilisers and pesticides, and the contamination derived from urban and industrial areas.

   However, it is possible to affirm that notable progress has been made, and that more can be obtained in the future, if the pledge persists for the protection of the environment.

   A further phenomenon of the de-linking between development and the use of the factors of production, is in the fact that wealth increases using always a lower quantity of human resources due to continual technical progress. This is likely to createlong-term unemployment. European enterprises in particular have been substituting workers with machines. In the 25 years between 1970 and 1995 the capital-labour ratio has more than doubled in Europe, increasing by 225%, whilst increasing only by 25% in the USA, as a consequence of lower labour costs. Furthermore, rationalising on what type of work will be available in a completely robotized economy, one arrives at an extreme conclusion: employment will be maintained but not for producing goods, but rather for the distribution of goods and services. Therefore, this leads to Jobless Growth, economic growth without an increase in employment.

   Globalisation is in progress as well. Its main catalyst is international capital. In fact "cross-border financial flows have risen spectacularly over the past two decades, and the scope and depth of financial integration has far outpaced that of goods markets. The abandonment of fixed exchange rates in the early 1970s opened the flood gates to short-term capital flows; average daily trade in the global foreign exchange market has risen from $15 billion in 1973 to $880 billion in 1992 and over $1,300 billion in 1995. From 1980 to 1983, cross-border sales and purchase of financial assets rose form less than 10 per cent of GDP in the Unites States, Germany and Japan to 135 per cent, 170 per cent and 80 per cent, respectively".

   Institutional flexibility is needed to take advantage of new technologies and of globalization. The business sector has widely changed because of the pressures of an increasingly dynamic and global market. Managerial and technical changes are countless: from the transnational business for which borders are nearly irrelevant, to the just-in-time management of stocks of goods which reduces warehouse costs to zero. On the contrary innovation is much less satisfactory in the organization of the Public Sector. The traditional Nation-States and the global market do not operate on the same territory. The State is prisoner in its borders whilst the economy is released form the territory, changing from a structure based on motorways and railways to an economy based on telecommunications and airways. National Governments loose part of their powers. From them escapes, first of all, the control of private financial investment, thanks to the possibility created by the combined forces of deregulation and electronic markets to choose the most convenient solutions even outside national boundaries.

   High income tax-payers may also take advantage of geographically different economic situations changing their fiscal location towards fiscal heavens. By a shrewd lowering of their tax rates some countries as well may take advantage of the possibility of attracting taxable income from other countries thus shifting on them part of their tax burden. A race to the bottom with regard to tax rates may therefore develop. As a matter of fact national dimensions may often prove unsatisfactory. They are too small to manage transnational policies or too large to deal efficiently with local problems.

   Notwithstanding such difficulties the death of the Nation State is still a far distance away, and may in fact never come. At least three main reasons underlie this conviction:

   A first factor which keeps the traditional State in operation relates to the necessity to provide for a social control of violence in order to guarantee a peaceful internal and external coexistence of the community living in a State. Army, police and judiciary, i.e. the instruments to implement such control are managed by the States existing at present. A shift of such instruments to a supranational level to cope with the problems of a global society seems difficult, as shown by the experience of the United Nations Organization in dealing even with local conflicts.

   A second factor of cohesion for the Nation State its the national and local identity, the feeling of being special, which is often historically rooted in the prevailing political circumscriptions. Many conflicts prove the relevance of this argument.

   Finally it seems reasonable to assume a common interest of both the ruling classes of the traditional States and of those of the emerging transnational business to minimize changes in the status quo . In fact the Nation States now existing may fear to be deprived of part of their power in favour of public supranational agencies which would be able to manage the failures of markets extending beyond historical borders. Also a part of the managers of the transnational market may fear changes to the prevailing political situation, since they may be difficult to manage in the delicate balance of a global but politically decentralised world.

   To conclude, the traditional States lose a part of their importance; instead the levels of supranational government acquire more importance, such as UNO, the European Union, NAFTA (North Atlantic Free Trade Agreement between USA, Mexico and Canada) and the OECD will assume a greater importance;

   In this new type of development, the tertiary (or service) sector of the economy prevails in respect to the industrial. The fundamental traits of this last sector come to be modified or abandoned: the factory as the central place of production and therefore, of the conflict for the distribution of social goods, salaries and profits, and the rhythm of machinery. The increasing replacement of white collar workers as opposed to blue collar workers has already taken place in the United States in 1956; in Italy a quarter century later in 1982. Today, 72% of the United States GDP is supplied by the service industries, whilst in Italy the percentage is much lower by about ten points (but still well above half of GDP). The class of professionals and technicians therefore acquire pre-eminence.

   With the move to second place of the factory, the time lived changes its rhythm. In fact, the life-cycle of an individual will become much more flexible: education, work and retirement are no more a rigid sequence. Passing from a highly synchronised social organisation of time-use, in which the daily patterns (for example, working hours) and the day to day activities of life (for example, school) will increasingly become less time regulated and flexible. In addition to reduced working hours, individual free time will acquire its own "value" and will no more be a 'left over' from the traditional working time, the management of it becomes a socially important choice.

   Given the central role of technical-scientific progress, social hegemony will no longer belong to the owners of the means of production, but to those that are able to manage knowledge and can programme innovations.

   Social programming, based on scenarios, is therefore a pivot for collective management; it comes to be facilitated by the possibility to forecast the behaviour of citizens collecting from them opinions through the modern techniques of survey. In the future, telematics will connect the television to the telephone and transform it into a permanent electoral kiosk. This allows, above all, the risk of a manipulative democracy, in which the responsibility of the choices does not find a precise reference.

   These innovative elements exist together in the actual phase of transition with those of the industrial society. In Table 2, we present a synoptic version of these two epochs: the industrial and post-industrial.

   Table 2

   Summing up, the following elements should be taken into account when thinking about socio-economic scenarios:

   1. according to the so-called Kondratieff model we have been entering a long wave lasting about 60 years, in which the present technical and economic paradigm should maintain its main feature.

   2. Technological-scientific progress is systematic and dominant.

   3. Knowledge with economic value is one of the main stakes of competition.

   4. Thebusiness management is becoming sophisticated towards the goal of making profits.

   5. De-materialisation and de-pollution per unit of output is taking place, though cyclically.

   6. Long-term unemployment may be a characteristic of a robotised economy.

   7. Economic globalisation is taking place.

   8. Because of globalisation a partial de-linking between Nations States and global business is taking place.

   9. The tertiary, or service sector is predominant.

   10. The time lived changes from a synchronised to a flexible pattern.

   11. Social hegemony is being transferred from the owners of the means of production to the managers of knowledge and innovation.

   12. Social programming, also using the tools of scenarios, is a pivot for the management of society.

   To help understand how these forces shall mould our future we shall outline qualitative guidelines for two simplified alternative scenarios. They are like guard-rails within which future trajectories may take place.

5. The Market Scenario

   Our first and simplified scenario is based on the following assumptions.

   • Markets apply the rules of competition. They, and society in general, are connected in many ways including an efficient telecommunication network. E-business, i.e. E-commerce and E-banking, are fully developed.

   • Inflationary pressures are nearly non-existent, since prices are kept down by a rigorous competition policy which makes which prices low. Monetary policy interventions become nearly unnecessary.

   • Globalisation is widening because of the sustained opening of markets.

   • Public sector interventions are radically reduced. The State limits its role to "night warden" only concerned with its administrative, judiciary an military functions and with minimum regulation. All social services are left to the market and as a consequence the public budget is reduced.

   • Such a reduction increases the pace of innovation and growth. This in turn gives rise to a reduction of interest rates, which reduces the costs of public investment.

   • Employment problems might however arise particularly in the high employment intensity sectors like banking, due to combination of cost reductions and the increase of technological progress fostered by competition. However unemployment is only short term since it is assumed that salaries can be reduced in the perfectly competitive model. For this reason full employment can be automatically maintained.

   • An increase in de-materialisation and de-pollution per unit of output takes place, because of the sustained technological progress and of competitive pressures pushing towards the saving of material resource inputs. However the sustained increase of GNP may give rise to an increase of the total consumption of material resources, notwithstanding the decrease per unit, unless the output is sufficiently knowledge-oriented.

   Let us now consider the negative aspects of our scenario:

   • The close and sophisticated economic and technological connections linking all parts of the world shall make global crises difficult to manage, because of the speed and depth of their contagion. The same is true of local problems of relevant size. For this reason, in the absence of a supranational arbiter a strategy of constant respect of rules would be attempted. Political decisions would be limited, to avoid any relevant international conflict which would tear the extended but delicate fabric of international relations. The fundamental global rule would be: quieta non movere, mota quietare. Needless to say that this would be a fragile situation, which could give rise to relevant difficulties. To manage such difficulties, from a global institutional point of view the management of the Market Scenario could give rise to two subsequent solutions.

     At present it is realistic to recognise that "The defeat and the collapse of the Soviet Union was the final step in the rapid ascendance of a Western Hemisphere power, the United States, as the sole and indeed the first truly global power…In the long run [however] global politics are bound to become increasingly uncongenial to the concentration of hegemonic power in the hands of a single state…In the course of the next several decades, a functioning structure of global co-operation, based on geopolitical realities, could thus emerge and gradually assume the mantle of the world’s current "regent"…". This quasi-empire would resemble a come back, as it were, of a global political space like that of the Chinese Empire (which lasted until 1911) or of the late Roman Empire, in both of which sovereigns exerted less power than the constant order which had outlived them.

     In any case the private sector has already progressed also in this area. Since traditional States are unable to introduce the changes needed in the global market, the rules determined by the concerted action of firms become equivalent to those determined by the political process. Something like a new lex mercatoria, a business law as developed in the fragmented States of the middle ages, is emerging, i.e. "a regulation created by business, without the intervention of the legislative powers of the State, and composed by rules the purpose of which is to introduce a uniform regulation, beyond the separate policies of the States, concerning the commercial relationships taking place within the economic unity of markets"

     The free working of a competitive market without sufficient social measures — by assumption minimum within a country and non existent at the global level - gives rise to "market failures". First of all it increases the differences in income distribution both within and among countries. In a fully deregulated globalized society the market divides into two parts. The first one is involved in traditional productions and remains linked to the territory. Its labour and consumption income will be comparatively highly taxed, since taxation of mobile factors like profit and saving will be reduced to avoid their flight to fiscal heavens. This will constitute therefore the societas pauperum, or society of the poor, regulated and assisted by Nation States. On the contrary the advanced society is self-administered, avoids government control and tends to coincide with the societas divitum, or affluent society. The unpleasant conclusion we must draw is that in a world in which capital is mobile, workers, especially the less specialised and less mobile, must bear the greater part of the fiscal burden. Social conflicts may therefore arise because of the dissatisfaction of blue collars. With regard to the USA – an economy approaching our stylized Market Scenario - a recent study by the Centre on Budget and Policy Priorities shows that the 2.7m people who comprise the richest 1% of American households will receive in 1999 in total much as after-tax income as the 100m people with the lowest incomes. The rise in income of the top 1% since 1977 exceeds substantially the total income of the bottom 20% this year. (At the global level, although the percentage of the world’s population living in poverty declined slightly between 1987 and 1993, the absolute number of people living in poverty increased from 1.2 billion to 1.3 billion people.)

   • Since full employment is guaranteed by downward flexibility of wages and salaries, a "working poor" class emerges. They do not qualify for social assistance (health in particular) because they earn a salary, but their income is too low to be able to buy private insurance. The worst of both the private and the public world. They are generally dissatisfied also because of the demonstration effect brought about by the widening income gap.

     According to a theoretical view, public policies for environmental protection (which are necessary because of another market failure) would be limited because such protection causes additional business costs in many cases. Therefore in a highly competitive international market it will be difficult for a single country to play the role of the first mover to protect the environment. Thus a "prisoner’s dilemma" takes place. Everybody awaits the first mover and the global situation does not improve. The competitive pressure on countries may even cause a "race to the bottom", i.e. a negative competition in reducing environmental standards, in order to reduce costs and conquer market shares. To avoid unwanted environmental regulations an extensive use is made of voluntary agreements between Government and industry. However this gives rise to "regulatory capture" and therefore to low standards.

     The above view may however prove to be to theoretical. Public pressure and the limited waste assimilative capacity of the environment may in fact make it necessary to perform relatively ambitious environmental policies in the Market Scenario framework.

     The negative aspects of the pure Market Scenario should be taken into account seriously, remembering also the failure of the first globalisation wave. In fact the period between the first half of the 19th century and the First World War showed a strong increase of international trade: the growth of global exports at the rate of 3.5% overtook that of real production (2.7% yearly). A massive influx of capitals from the great Western European countries towards the fast-growing economies in America, Australia and elsewhere took place. Such globalisation of the products and capital market, which took place before 1914, brought about a considerable convergence of the life standards in industrialised countries. However, not all segments of society were reaping benefits from the greater economic integration and international openness. Therefore negative reactions were caused by those damaged by the decrease in trade protection who requested an increase in customs duties. At the same time the decrease in growth rates in those countries which had received massive immigrations brought about a strong decrease in population movements. Depression, in particular, hindered capital movements. An instructive experience in case we believe that historia magistra vitae.

6. The Social Scenario

   The philosophical foundation for this scenario is the remark by Adam Smith and his wise followers to the effect that the market is not a state of nature designed to make the strongest win, but rather a delicate system of rules and regulations without which capitalism loses any ethical credibility and its possibilities of success. Therefore the major positive features are:

   • The public sector aims at implementing appropriate measures to make the improvements of the technological progress and of it diffusion available to the whole of society in an equitable way.

   • Innovation and socially useful technologies are fostered by public expenditure for goods and services and by incentives to R&D. Technological dynamism is sustained by the development of knowledge also through basic research, more oriented to specific objectives and more open to their wide distribution. Detailed priorities are set e.g. with regard to health, instruction, transport and communications. On the contrary bio-technologies are linked to socio-political choices.

   • In contrast with the preceding scenario, at the top of the technological agenda is the objective of ecologically sustainable development. Dematerialization and de-pollution become aims of public policy.

   • With regard to global governance, the general problems are similar to those of the Market Scenario (see above). However because of the assumption of an efficient public intervention we can also assume that full use will be made of the instruments of multilateral negotiations and of the adaptive capacity of international organisations. Global governance would therefore improve, and correspond to the second stage of Brzezinski’s view quoted above. The final (and alas probably impossible) outcome of this process would be a World Federation of States as imagined already by Kant and based on the principle: e pluribus unum. Such an outcome would in fact assume the unlikely growth of a supranational sense of identity without which a supranational governance cannot confidently wield the instruments of supranational economic and military power.

   The negative aspects of the Social Scenario are:

   • Ceteris paribus, growth rates of the economy will be lower in this scenario in comparison the preceding Market Scenario. This is due in particular because of the lower technological progress in the social services managed by the public sector. In fact these services are not submitted to the pressure of competition and cause a greater burden for the public budget, thus draining resources from the private market sector.

   • Because of the lower growth rates and a lower flexibility in the labour and capital markets, the latter shall meet with greater difficulties to absorb unemployment. This may however become a more general problem. Assume the extreme case of an economic system in which technological innovation has brought about a complete robotization. This extreme assumption leads to a drastic conclusion. Employment would be kept not to produce physical goods but just to distribute goods and services. In such a case an OECD study states that we could reach the point in which income should be redefined or even de-linked from labour earned income (e.g. with the introduction of a minimum guaranteed income).

   • Further complications arise because of the possibility of public intervention failures. According to a pessimistic view (e.g. that of the Public Choice School) based on the assumption of selfish behaviour, the real target of politicians would not be the improvement of Social Welfare but the pursuance of their personal interest, especially vote maximisation. Bureaucrats would not implement efficiently politicians’ decisions, but would maximise their power and the budget of their departments. The "rational" citizen would not vote because the probability that his vote is decisive is so small that it is lower than the probability that he gets run-over by a car when going to the ballot-box.

7. An Example of GDP Scenarios

   A scenario for GDP growth in Western Europe as a whole for a 10 years horizon until 20010 is depicted in the figure below. The "golden scenario", with growth rates between 2 and somewhat below 3%, corresponds by and large to the optimistic view of our market scenario. To quote: "the combination of the technological advance, market liberalisation and sound macroeconomic policy deliver a prolonged period of relatively strong growth in Western Europe with comparatively moderate cyclical fluctuations; this would only be possible if the global economic environment also remained stable and there was further progress on free [international] trade…"

   The "eurosclerosis scenario" is largely consistent with the negative view of our social scenario. Growth rates vary between 1 and somewhat below 1.5% because "progress on market liberalisation and structural reform to labour markets and welfare regime stalls, leading to a prolonged period of relatively sluggish growth."

   

   Source: Price Waterhouse & Coopers
   European Economic Outlook – September 1999

8. A Geo-political Framework for Scenarios

   Achilles’ heel of the Market Scenario is the unfair distribution of income brought about by a freely competitive economy with an only "night warden" State. Its advantage is sustained GNP growth. The weak point of the Social Scenario is public sector’s failure and therefore inefficiencies and the risk of profligate public spending. Its advantage is social fairness. An appropriate mix of the two extreme and simplified scenarios should be chosen as a target. The choice very much depends on the future geopolitical situation.

   Let us simplify again a complicated problem. We already mentioned Brzezinski’s vision of a US global power for the next few decades (para. 3 above). American predominance would however create genuine partnerships and facilitate the emergence in time of global co-operation – perhaps a non imperial empire.

   An alternative, or perhaps opposite, view is the "clash of civilisations" as viewed by Huntington. In his latest view in the coming century big powers will "compete, clash and coalesce with each other in various permutations and combinations."

   In contrast to Brzezinsky, Huntington argues in fact that the world is moving toward a multipolar system made up of regions defined in some cultural terms, and that each of these regions would contain a major power. In a development of Huntington’s views, in the map of world power in 2050 we would find two big powers: the Atlantic Alliance if America and Europe hold together (or America alone if they do not), and China. The other four possibilities for great powers are the European Union (if it breaks away form America but also accepts the doubling or trebling of its defence budgets to make up for the present inferiority with respect to the USA), Russia, Japan and perhaps India.

   To finish this very brief review let us remind Fukyama’s optimistic view about the "end of history", i.e. the belief that after the collapse of communism liberal democracy and a market oriented economic will constitute a stable horizon. Unfortunately this view is similar to the one that Hegel had in mind when he talked about the end of history after Napoleon’s double victory in the same day (14th October 1806) against the strong Prussian army at Auerstedt and Jena. A victory which was the culmination of the politico-economic process completed with the peace of Tilsit (1807) which divided Europe into two zones – one under French and another under Russian influence (to the detriment of Prussia). However, notwithstanding the Emperor’s feat, history went on…

   Our simplified Market Scenario seems more homogeneous with the geopolitical assumption of a US benign global power – in our personal view the most probable and at the same time perhaps realistically more acceptable alternative. In case a multipower world à la Huntington will prevail, things get more complicated. An Atlantic Alliance with US leadership would act according to something like the Market Scenario, and the same would be for the US in case Europe goes alone. In this assumption Europe might be closer to the Social Scenario if socialists governments of the continental blend (i.e. not à la Blair) prevail (which at the time of writing, September ’99, is doubtful according to opinion polls). We leave to the interested reader to go on with our puzzle, remembering that we are not making forecasts but just thinking in a flexible way about the future – a useful exercise to prepare and assess decision making under uncertainty.

   In this connection the Aristotelian wisdom condensed in the saying in medio stat virtus holds true. As suggested in an OECD paper, the good middle-of-the-road solution with regard to the paths sketched in our scenarios would consist in enlarging the sphere of competitive markets whenever this is possible. At the same time the public sector should efficiently support the adaptive capacities of the economy, social and technological dynamism and welfare. A few years are needed to reap the advantage of such virtuous solution. For this reason it can be implemented only by stable governments which would be able to take into account Adam Smith’s wisdom to the effect that "in reality the progressive state is serene and cordial with regard to the different sectors of society. The stationary is pale; the declining melancholy".

   The bad solution is a half-way policy in freeing the market and in providing an appropriate guidance by the public sector. This policy produces short term political rewards from the protected economic sectors which should be liberalised but are kept protected by a merciful government, and allows for an inappropriate political use of public incentives. Therefore such a course is often chosen by unstable governments who choose, or are constrained by, a short-term horizon focussed on a doubtful survival until the next election.