Reading James Galbraith’s The End of Normal 

The idea and ideology of equilibrium has a long tradition in human history. In Bible, God created the world in six days. After that, God only intervened occasionally, such as in Noah’s time, to restore equilibrium. The concept of equilibrium permeates in today’s social sciences. Communism and capitalism may may be deadly rivals. But they are united by their common belief of equilibrium state. In communism, it is the optimality of the communist system. In capitalism, it is the optimality of free market system.  They are all equilibrium systems.

In a world dominated by equilibrium theory. Galbraith’s book, The End of Normal, is a wake up call to the troubled time ahead and the need for a new theory to understand and cope with the more difficult time. It is written by a prominent economist and great writer who are trained in and familiar with the traditional economic theory. The book is a great pleasure to read. The following are some quotes from the book.

Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable. (Title page)

While the omnipresent real-world situations of “diminishing returns “ (in farming) and “increasing returns “ (in industry) lived on and could still be captured in the mathematics, most economists presented them as special cases and, for the most part, more trouble than they worth. (p. 30)

But not only were wages fixed. So were American oil prices, which were set to a good first approximation in Austin, Texas, by the Texas Railroad Commission, which could impose a quota (as a percent of capacity) on all wells in Texas. These measures ensured against a sudden, price collapsing glut. This simple and effective system, supported by the depletion allowance in the tax code, gave America a robust oil industry that could and did reinvest at home. ... And since the price of oil was under control, all prices that incorporated oil as a cost had an element of control and stability built in. (p. 31)

“Environmental economists “ do exist, but they are a subgroup within the profession, removed from substantial control over academic resources (especially appointments) and very far removed from the broader economies policy discussion. Resource and environmental economists are not integrated into the discussions of the financial matters or macroeconomic performance; they have no substantial say about the nature of economic growth or the desirability of pursuing it. ... Technical innovation and private saving remains, for most economists, the path to a prosperous future, provided that well-meaning meddlers do not screw it up. 

For this reason, the notion that there might be a link between resource costs and the Great Financial Crisis will, I think, still strike most economists as far fetched. In what follows, I shall try to explain how and why a link exists. It runs partly through the direct effects of higher costs, but much more through the indirect channels of market instability, financial speculation and investment uncertainty. All of these help to explain why we must think again about the inevitability of a return to sustained growth. After a daydream of thirty years’ standing, it’s time to consider again the possibility that the 1970s were not an interlude brought on shocks, bad management, and policy mistakes — but instead, in certain respects, a harbinger of the world conditions that we now face, and from which we will not, on this occasion, so easily escape. (p. 51)

If resource costs facing the industrial world have been first a propellant to and then a restraint on growth, then it is necessary to examine the role of military power as a guarantor of acceptably low resource costs. Since the start of the industrial revolution, the world has been dominated by those who had access to resources on preferential terms: the British and French empires, Russia, the United States. Those countries and empires lacking cheap resources, including the Ottomans and the Chinese, found themselves weakened, thwarted, and in decline. The German and the Japanese, attempting to create such empires and gain such access, were turned back in major wars. (p. 113)

The First World War was a contest between empires, a clash of industrial systems, draining to all of them whether defeated or victorious. The Second World War was fought in large part to prevent Germany and Japan from creating new empires on the models of Britain, France, America and Russia from just a couple of generations before — empires based on territorial expansion, the subjugation and sometimes extermination of native peoples, and the use of colonial territories as a base for resources and a sink for industrial goods. The outcome of that war discredited empire generally. (p. 117)

Yet a peculiar feature of crisis-discussions by economists is that the topic of fraud rarely comes up. (Chap 9)

It is worth remembering that the resolution of the savings and loans scandal saw more than a thousand industry insiders indicted, prosecuted, convicted and imprisoned. So far in the work out of the Great Crisis, the comparable number of senior bankers most responsible indicted is: zero. (p. 163)

One way to sum up the Soviet system is to say that is operated with vey high fixed costs. ... (p. 257)

In truth, this analysis is simple. It is rooted in ideas that were explored fully in the theory of the business firm developed by Alfred Marshall, the great English economist and the author of the first widely used economic textbook, Principles of Economics, first published in 1890. The key ideas — fixed and variable costs, increasing returns and monopolistic enterprises, the effects and confidence and uncertainty about costs on investment — are elementary. But for some reason, these ideas don’t usually come up when leading economists, policy advisors, and politicians think and talk about economic issues.

This is a puzzle. It could be a fatal puzzle. Understanding what is happening to us — what could be happening to us— is a first step toward being able to change it, or, for that matter, to cope with it, if it cannot be changed. That is what the economic profession should be about. And sadly isn’t. ( p. 261)

This is a fairly gloomy work, and a departure, for me, from the optimistic Keynesian I have expressed in the past. For bring me to these dire straits I thank, in particular, Jing Chen of the University of Northern British Columbia. These pages contain many of his ideas, expressed as clearly I could manage without any mathematics. (p. 263)

Other works by Jamie

An interview 

https://theanalysis.news/resource-limits-to-american-capitalism-the-predator-state-today/

Galbraith, J.K. and Dörre, K., 2018. The great financial crisis and the end of normal. Berliner Journal für Soziologie, 28(1), pp.39-54.

https://link.springer.com/article/10.1007/s11609-018-0368-4