Butterfly Economics by Paul Ormerod

Author:Paul Ormerod [Ormerod, Paul]
Language: eng
Format: epub, mobi
ISBN: 978-0-307-81941-3
Publisher: Knopf Doubleday Publishing Group
Published: 2012-05-15T16:00:00+00:00

FIGURE 7.1 Change in average GDP growth and profit share: OECD economies, 1974–95 on 1960–73

The interpretation is as follows. Japan is marked on the chart in the lower left-hand corner. The axis on the left tells us that the change in the average annual growth rate in Japan was around 6 per cent – as mentioned above, growth fell from over 9 per cent a year to just over 3 per cent, a fall of 6 per cent. The axis at the bottom indicates that the average share of profits in national income in Japan fell by 12 per cent. This does not mean that profits in Japan fell in terms of their absolute size, but that they grew much less quickly than the Japanese economy as a whole. The share of profits in total income fell, not profits themselves.

There is a very clear negative relationship between the change in profitability and the change in growth. The more profits as a share of total income fell, the bigger was the drop in the average annual growth rate between 1974 and 1995. In the top right of the chart are Norway, the United Kingdom and the United States. Growth in these countries fell on average by only 1.4 per cent, compared to an average of 2.9 per cent for the other sixteen Western economies in the chart. And the fall in profitability of these economies was much lower. (The experience of Norway owes a great deal to the discovery of North Sea oil, for the finds have been very large in comparison to the overall size of the Norwegian economy.)

In part, lower growth itself tends to depress profitability, but much of the longer-term erosion of profitability took place in the late 1960s and early 1970s, so the 1974–95 period as a whole experienced distinctly lower profitability than had previously been the case. The chart is not conclusive proof that a revival of profitability is required in order to raise the longer-term growth rate of the Western economies. But it certainly suggests that this is a policy guideline which merits close examination.

Another example of the advantages of taking a broader, systemic view is provided by current anxieties about inflation. Central banks throughout the West, and especially in Europe, are paranoid about a resurrection of inflation. If economic growth becomes too strong, if unemployment falls too much, inflation might get out of control. This way of thinking has dominated the central banks of continental Europe for the past fifteen years. Keep credit tight and screw down public spending for fear of inflation. Little wonder that unemployment in Europe is now higher than at any time since the 1930s.

But what is all the fuss about? In the United States, except in the black inner cities, there is now full employment. Yet inflation is low, between 2 and 3 per cent, the sort of rates which America had during the 1950s and 1960s when there also was full employment. In Britain, since 1993 the economy has expanded and unemployment has almost halved.

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