Many people, particularly in the developed world, view the political events of the last five to ten years as chaos putting the ultimate blame on certain “malign” individuals, groups, movements, or “rogue” nations. However, this geopolitical turmoil is easily understood if you recall that politics is the most concentrated expression of economics. The rest is just theatrics.
Younger, Poorer, and Unhappier: Why the Young in Many Developed Countries Are Not So Happy Anymore?
The 2024 World Happiness Report shows that the young in North America are less happy than the old, while in many Western European countries they are only as happy as the old.
“In the West, the received wisdom was that the young are the happiest and that happiness thereafter declines until middle age, followed by substantial recovery. But since 2006-10, as we shall see, happiness among the young (aged 15-24) has fallen sharply in North America – to a point where the young are less happy than the old. Youth happiness has also fallen (but less sharply) in Western Europe.
By contrast, happiness at every age has risen sharply in Central and Eastern Europe, so that young people are now equally happy in both parts of Europe. In the former Soviet Union and East Asia too there have been large increases in happiness at every age, while in South Asia and the Middle East and North Africa happiness has fallen at every age (see Reference 1 below).
This is somewhat counterintuitive, if you do not know economic history. The fact is that the current generation of the young people in major developed countries is likely to be poorer than their parents for the first time in the last 200 years.
Bloomberg analysts warned back in 2021 that the Millennials in the United States were approaching the moment when they simply would not have time to build the foundations of their financial well-being by lagging behind the generation of their parents — “the Baby Boomers” — on almost all financial metrics (see Reference 2 and Picture 1 below).
Therefore, it was not surprising that in the United States, the older generation (age 60 and above) ranked 10th in the global ranking of happiness and life evaluation, while the upper middle generation (45-59) came in 17th place, the lower middle generation (age 30-44) in 42nd place, and the younger generation (age 30 and below) came in 62nd place only.
This is the result of much lower rates of technological and economic progress and globalization. How come?
A Short Course of Financial and Real Economics, Financialization, Globalization, Inequality, and Politics
Is there any connection between stock market performance and traditional economic indicators or corporate finance ratios like the real GDP growth rate or the Price-to-Earnings ratio (P/E), etc. these days? Well, if there is any connection, it is usually of secondary importance.
In fact, the most important metric for financial markets today is the rate of growth of available liquidity or simply available money (see Picture 2 below) rather than any economic indicator or corporate finance ratio. You might have a stagnant economy and a booming stock market.
However, if there is too much liquidity or money around due to financialization, it will always chase too few investment opportunities, even if these opportunities are fundamentally overvalued.
That is why the most important financial indicators are long-term interest rates because they reflect the price of long-term money.
In real economy the most important indicator is the growth rate of labor productivity because it determines the growth rate of your real wage and your economic well-being.
So what do we have right now?
In the financial sector of the economy, we have a lot of liquidity around. That is why long-term interest rates are very modest from a historic perspective despite a huge pile of accumulated debt, while the stock market is booming.
In the real sector of the economy, we have a long-term trend of declining rates of labor productivity, a long-term trend of declining real wage growth, a long-term trend of declining rates of real GDP growth. That is why real-economy borrowers, who have accumulated huge debt obligations to finance their consumption, may perceive these historically very modest long-term interest rates as very high.
If you own real assets, while you are also able to substantially reduce your labor costs by outsourcing manufacturing abroad or attracting immigrant labor due to globalization, you might enjoy higher corporate profit margins.
If you own financial assets, you might enjoy rising asset prices because there is a lot of money around. A rise in financial asset prices might exceed a rise in consumer prices, so you might enjoy increasing wealth in real terms.
If you mostly sell your labor, you might face stagnant or even declining rates of real wage growth because the real economy has been stagnant, while you have been competing with foreign and immigrant labor.
As a result, if you are mostly an asset owner from a developed country or a young worker from a developing country with cheap skilled labor that has absorbed outsourced manufacturing from the West (Central and Eastern Europe, East Asia, Latin America), you tend to defend globalization, inclusivity, and diversity.
If you are mostly an individual, particularly a young individual, from a developed country who has only his or her labor to sell and no meaningful asset portfolio, you are likely to suffer from, first, meager real economic and wage growth and, second, from foreign labor competition due to outsourcing and from domestic labor competition due to immigration. In this case you tend to defend protectionism, strong borders, and “traditional” values.
Economic Frustration and the Ideological Crisis of Liberalism
New religions and schools of philosophy begin to gain strength when things start falling apart, while the old ideology is not capable of providing any convincing justification for this deterioration. If the economic situation and financial circumstances do not improve, the new ideology, first, becomes attractive. Then it becomes popular. Finally, it gradually transforms into the dominant one.
This is followed by a change of the governance and management system. The new system’s major task is to solve the problems that have accumulated under the old ideological regime. As the economic situation in a society stabilizes, its collective mental mindset may show some signs of improvement. As a result, the role of ideology begins to decline again, while the role of management increases. If the economic situation gets worse, we can expect that a society will be in search of a new ideology to provide a clear and compelling direction out of this new crisis. In this way, we can witness the beginning of a new stage in the leadership and management cycle.
What is the most important global issue today’s leaders and managers should address? It is clear that the current model of liberal consumerism launched in the 1970s and 1980s is obviously stagnating. Liberal consumerism was the attempt to mitigate the effects of declining rates of technological progress that reached its apogee in the 1950s and 1960s Scientists are no longer treated as celebrities. However, relying on loose monetary policy, financialization, and more debt to support consumption as an engine of economic growth has only had a temporary positive effect, while creating serious long-term economic, financial, and social imbalances. The rate of GDP per capita growth in the developed world keeps declining, while income and wealth inequality has reached its highest level in the last 100 years (see Picture 3, 4, 5 and 6 below), while central bankers are rapidly losing their celebrity status.
This is what lies behind modern political instability in the United States and Western Europe and the crisis of liberal consumerism that seriously undermines capitalism itself.
Our Economic Past, Present, and Future: Explaining the Basics of Economics
Capitalism has been buried many times. However, it has been constantly mutating under the influence of internal and external factors to the extent that the people living during the age of “Laissez-Faire” or “Free Market” back in the 19th century would have hardly recognized today’s overregulated society as “free-market capitalism.”
Nevertheless, history never ends and, sooner or later, capitalism will be replaced by a new economic formation. What will it be like? To begin with, we need to understand which socio-economic formations capitalism itself has replaced and competed with.
How does any economic system function? To produce goods and services we need three factors of production:
1. natural resources, that is land, water, climate, weather conditions, etc.;
2. labor, that is economically active population;
3. capital, that is property, plant, equipment, tools, transport vehicles, infrastructure, etc.
However, the production process also requires a certain degree of organization. The effectiveness of organization depends on three aspects:
1. a biological aspect which implies that workers must be biologically — physically and mentally — healthy and competitive;
2. a social aspect, that is a level of social development and cooperation within a society;
3. a technological aspect, that is a level of technological advancement achieved by a society.
Resources and capital may be publicly or privately owned, while labor may be economically motivated or forced. Both ownership and employee motivation have an impact on the behavior of people involved in the production process.
The roles of factors and aspects of production vary depending on a socio-economic formation. Generally, four historical socio-economic formations of the past and present can be distinguished: primitive communalism, slavery and feudalism, capitalism, and socialism (see Picture 7 below).
Primitive communalism: natural resources are the main factor, while competition for access to those resources occurs primarily in accordance with Darwinian, biological principles of natural selection. Social and, particularly, technological aspects play an insignificant role. The factors of production are publicly owned and available to anyone, while labor is economically motivated.
Slavery and feudalism: despite a shift to a sedentary lifestyle, resources remain the most important factor. However, they are now privately owned, while labor is forced since resource owners need permanent workforce. The social aspect plays the most important role. The roles of capital and technological advancements are still low.
Capitalism: capital and the technological aspect become crucial, while labor is economically motivated. The stability of a capitalist society hinges on the pace of technological advancements in a situation where material motivation plays an increasingly larger role, while rising income inequality may become ever more challenging.
Socialism: capital and the technological aspect remain crucial as it was in a capitalist economy, though factors of production are now publicly owned. The stability of a socialist society relies on the pace of technological advancements in a situation where material motivation is often insufficient and social uniformity plays a dominant role.
Playing Nostradamus and the Oracle of Delphi: What Can We Expect from Our Economic Future?
Happy post-capitalism: a rapid pace of technological advancements will ensure a comfortable level of universal basic income, regardless of whether people work or not, thanks to robotics and automation. Perhaps this will help mitigate social tension caused by rising income inequality within a society. However, the biological predisposition of humans, as a species, to social justice may present a challenge when transitioning to this stage of socio-economic development.
Communism: what is the difference between happy post-capitalism and communism? The transition from socialism to communism also requires a rapid pace of technological advancements. However, unlike in capitalism, factors of production are publicly owned. The traditional guiding principle of communism stipulates that “from each according to his/her abilities and to each according to his/her needs.” In principle, this implies that the biologically inherent motivation of self-interest should play an insignificant role. Perhaps this may also require for humans to evolve biologically even further.
Both of the above scenarios can be considered favorable, despite the obvious challenges posed by biology: at the current stage of our biological development humans, as a species, need material motivation, while simultaneously striving for social justice.
What might less favorable scenarios look like?
Scarcism: a declining pace of technological progress and the evolutionary impasse of the “consumer society” put the issue of restricting high-level consumption to the forefront of the public’s agenda. Access to resources is gradually coming under public control within the framework of “green transformation and sustainable development.” The roles of private capital and the technological aspect are on the decline. The social aspect becomes the most important one in a situation when there is an urgent need to maintain social peace in times of scarcity and consumption restrictions.
MadMaxism: development, or rather regress, occurs along the lines of the Mad Max movie plot. Our society undergoes a gradual process of social degradation and eventually descends back to competing for resources on a biological level. When compared with primitive communalism, however, competition occurs at a higher level of technological development which is inherited from the previous socio-economic formations.
The Current Political Scene: the Battle of Human Minds, Hearts, and Guts
At the elite governmental and managerial level, representatives of the liberal school still have a dominant role. However, at the ideological level, we have been witnessing a noticeable stagnation of the liberal school of thought and the beginning stage of an ideological crisis.
At the same time, there are competing ideological movements offering their solutions to the current crisis of liberal consumerism:
1) conservative and libertarian movements that call for a return to the “roots.” It usually implies a return to the idea of classical capitalism that facilitated high rates of economic growth in the past, while respecting the principles of fiscal discipline and self-reliance;
2) socialist movements that propose, first of all, to solve the problem of social inequality by creating fair and meaningful living conditions for the most disadvantaged and vulnerable groups in our society;
3) environmentalists who insist on curbing consumerism, while focusing on the development and use of new green technologies.
It is certainly debatable whether the policies advocated by these movements are able to solve the current problems that have accumulated over several decades. However, we cannot deny that they focus on discussing the real underlying causes behind today’s economic and social issues. We cannot also deny that these movements have charismatic leaders.
This is why traditional politicians have become outdated, unattractive, and outright boring. They are managers rather than leaders. If you successfully manage day-to-day administrative and business operations, you can become a good manager. But you are unlikely to become a leader because charismatic leaders emerge in times of crises.
And in recent years these ideological movements have been gradually gaining ground in many countries at the national and municipal level.
The liberal camp offers its “Counter-Reformation” solution by proposing to create a society focused on the right to various individual freedoms. In this way it tries to avoid discussing the issues of economic development and economic inequality.
As it usually happens in history, the ideology that would be able to offer a pragmatic compromise between individual freedom, public order, social justice, and economic prosperity is most likely to emerge victorious at the end of this battle of human minds, hearts, and guts.
And always remember that in politics, as Lenin put it, “there are decades where nothing happens; and there are weeks where decades happen.”
References:
1. “World Happiness Report 2024”, John F. Helliwell, Richard Layard, Jeffrey D. Sachs, Jan-Emmanuel De Neve, Lara B. Aknin, and Shun Wang (editors), University of Oxford: Wellbeing Research Centre, 2024.
2. “Millennials Are Running Out of Time to Build Wealth”, Olivia Rockeman, Catarina Saraiva, Bloomberg, June 3, 2021.
