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Politics, Not Economics, Is What Keeps Left And Right Apart

Neither left, nor right, confronts the reality of an economic system built on the assumption that certain inputs, notably energy and minerals such as phosphorus and copper, are limitless and always easy to access...

As I write, oil costs $95 a barrel. The cost of running our cars, heating our homes, buying a ticket for a train or airplane, or buying anything that is made out of plastic or that has to be transported in some sort of way is so visibly high that it hardly needs pointing out.

The logic of recessions, such as the one we have just been through, is that uncertainty creates a drop in aggregate demand, prompting a fall in prices and a re-balancing of the economy. Following the Great Recession this has not happened for the one product that we are least able to live without, and that should be most sensitive to overall demand.

After the global economic near-collapse of autumn 2008 the oil price fell by three-quarters in just three months, but has crept back up to around the psychologically-important $100 a barrel (it has, in fact, been as high as $130 within the last two years.) Since the stabilisation of the British and global economies from early 2010 - I hesitate to say recovery - the oil price has returned to a stable, but high level, whereas economic performance has stagnated. (Just as an aside - why is it that it takes TWO consecutive quarters of negative growth to qualify as a recession, and yet ONE quarter of robust growth, Q2 2013, is treated like a new boom?)

A significant feature of this recovery has been the pronounced decoupling of the price of oil from economic growth. While not perfectly correlated, oil tends to be a good proxy for economic growth given high demand, the uses it can be put to and the UK's historical role as a net exporter (something which may be changing.)

Hence a cost of living crisis which political parties are trying their best to blame on their opponents, Conservatives blaming Labour for the legacy of the Great Recession, and Labour blaming Conservatives for hijacking a recovery in the interest of ungrateful financial services that created the crisis in the first place.

The Schumacher Institute is holding a conference in Bristol - the first British European Green Capital - on November 21 devoted specifically to how the present economic and environmental crises are interconnected. We strongly suspect that a major part of the story is being left out of the media narrative on the economy and economics.

E F Schumacher's book Small is Beautiful opens with the line "One of the most fateful errors of our age is the belief that the 'problem of production' has been solved". Writing in the late 1960s, Schumacher noticed that the discipline of economics took certain things for granted, and among these are metals that we extract from the ground, fuels that create our energy, and the processes that govern these. Problems when they arise, are largely believed to derive from failures in the human systems governing production, and particularly from the inefficiencies that government introduces, rather than from any problems with overall supply.

E F Schumacher might have seen the present crisis as a wider failure of production, both in terms of supply shocks as well as a failure of the political management of economic and distribution systems. Over-leveraging deflated the true cost of goods over several decades - just look at oil and agriculture subsidies - and it is no wonder that a serious market failure occurred after such a long period of decoupling of market prices from the actual prices of basic supplies.

Schumacher focused on a fundamental level, the level of production, to imagine an economy whereby environmental and production shocks would not come to be as disruptive as the demand shocks of the time in which he was writing, and that have characterised the global economy since 2007. This key difference marks him out from both Keynesian and Marxist approaches on the left and from free market approaches on the right, both of which were targets of Schumacher's criticism.

Even in the depths of recession, there is an argument that Schumacher has just been proved wrong, especially on the basic economics of energy production. He kept talking about coal, seemed to underplay oil and gas, and thought the nuclear industry too slight and with too many inherent dangers to be taken seriously; a strain of anti-nuclear feeling that the green movement retains. But even if dated, he wasn't too far out. He estimated that by 2000 the word would be using 20bn tons of coal equivalent (TCE), whereas with increases in efficiency, and a switch to oil, gas and nuclear in many economies that he couldn't have foreseen, the current use is 18.6bn (TCE).

The most depressing thing about a supposed return to growth, even more depressing than a re-inflation of the housing bubble that contributed much to the mess in the first place, or that the rise in incomes for a few is reported as broad-based growth, is the missed opportunity to re-focus the economic debate on the long-term drivers of debt and risk.

Conservatives, at least, are sure of where the blame lies. Public spending incentivised unproductive welfare spending, fuelling public debt and legitimising a 'something-for-nothing' culture that resulted in private debt: both of which are fatally holding the economy back.

Labour seem to tie themselves up in knots when talking about the economy. Milliband, and to a lesser extent Balls, have landed a few blows on the coalition on the costs of living and the recovery not trickling down to ordinary people. But they have been too timid to stand up for the actions taken by the Labour Government to stabilise the economy, nor for defending things such as Working Tax Credits, a Minimum Wage, and Sure Start that have prevented depression-era economics from becoming depression-era misery.

From a Schumacher point of view, both sides are wrong. Neither side questions the consensus that rampant, resource-blind, consequence-free, free-market economics should be the norm. Neither side treats the Great Recession as a systemic failure, preferring instead to see the crisis as a moral failure of either bankers (left) or of scroungers (right).

This is a supply-side shock, not a demand-side one. Both parties have for decades signed up to the consensus that individual economic agents (that is, people) need help to consume as much as possible in order to keep demand high and the economy growing. The right have quietly accepted such notions as minimum-wages and tax credits in order to keep consumers spending. The left have quietly dropped any pretensions to socialism, and have moved from a European model of collective bargaining to an American model of cheer-leading, in order to preserve high standards of living.

Neither left, nor right, confronts the reality of an economic system built on the assumption that certain inputs, notably energy and minerals such as phosphorus and copper, are limitless and always easy to access. The standard response to this is that we will just innovate our way out of the problem, but the problem is that running out of multiple things at once leads to the sort of negative-feedback that our systems are not equipped to deal with. It is the uncertainty as to our overall resilience that is in question, not (as the denialists would have it) our record in overcoming specific and limited problems in the past.

Ways of new economic thinking offer a surprising opportunity for both left and right to come together. The move towards a steady-state economy offers the left an opportunity to focus on sustainability and rebalance the economy away from value-subtracting financial services. The same move offers the right an opportunity of a low-debt economy that does not provide the temptation of morally and economically unsustainable consumerism for all.

Let's see if anyone takes the opportunity.

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