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Strategies, scenarios and predictions: between science and mythology

Published on February 19, 2010 by: in: Economy

Pitfalls of one scenario or projection

The following considerations do not aspire to give  a systematic presentation of prognostication issues. Nevertheless, having been relatively close to this area since 1970s (i.e.: in the Committee ‘Poland 2000’ at Polish Academy of Sciences PAN) I believe I posses certain observations in the  matter, which are worth presenting to the readers. They are relevant, especially since not too long ago we were swept with waves of commentaries from the mass media on the government ‘Poland 2030’ report. However, it is not my intention to criticise that strategy; I will focus primarily on contradicting certain myths, which exist among the creators on numerous projections, scenarios, strategies and other contemplations on the future.mythology

Firstly I will review a myth of one scenario or one projection, or the only imaginable, orderly future. Orderly in two meanings: firstly, in the sense of the glance at the future, based on the assumption that we know all the most important factors which determine the future state of affairs. Secondly, that we can establish the relationship between the actors. Without a reflection that considerations of the future are burdened – as Nobel prize winner, Friedrich von Hayek described – with irremovable unawareness.

The ‘Poland 2030’ report assumes almost one-dimensional world, in which everything will continue to be as it is nowadays. And this is an optimistic world, in which Polish economy will grow on average 5% a year. It would make more sense if the authors wrote that Poland will be catching up with the countries of the old European Union regardless how fast or slow the world and the old Europe will be developing.

In the meantime the world in the perspective of the next 5 to 10 years, or ever more, will be going through a difficult time of a slow growth in conditions of high inflation. Reaching annual growth of 5% in that world seems to be an delusion, whereas catching-up with an ‘sclerotic’ old Europe  does not. Poland is catching up with the EU even today when its growth is estimated on the level nearing zero (while the countries of the ‘old’ Europe deflate in a rate of 3-6% annually).

More importantly, the report in question does not notice that we find ourselves in the period in which very diverse scenarios of the future are possible. Very diverse paths which the world can choose to follow (or at least the part of the world which has been dominating for the last couple of centuries: the Western world) depend on the choices made either consciously, semi-consciously or unconsciously. This must influence our fate in the forthcoming decades at an economical and broader: civilisational  level.

If the West, having falsely diagnosed the causes underlying the current global crises, will choose the path of imposing more restricting rigours to the private sector it will not result in 5-10 years of  slow growth and high inflation. Instead we would see a classical stagflation: lack of growth and high inflation fuelled by the activities of the sponger social groups, defending their privileges at the taxpayer’s expense.

In turn, national egoisms, employed in a misunderstood defence of various, so called national interests (mainly interests of influential lobbies) would ‘mangle’ the vast area of free commodity and derivatives exchange such as the EU. And then we would be hit by the impact of the ‘despecialisation’ of the national economies.

It is possible that my considerations are one-sided and focused on the worst (or almost the worst!) scenario. But their aim is to counterbalance, to make the reader aware that various directions of change are possible. Not only this optimistic one, based on the efficient functioning of liberal capitalist market economy, but a pessimistic one in which the West can shift to the paths of stagnation, inflation and trade wars.

Repeating prognostic nonsense

Drawing on the visions of future for the next 20-30 years one should be careful not to fall into ridicule. However far away these visions seem to be all that will remain is a historic joke. The  world-wide repeated opinion: ‘look what kind of fools thought that…’ would apply to the discredited prognosis and their authors.

There were a large amounts of nonsensical predictions, concerning many subject matters, in the history of the West. For example it was predicated many times that the world would run out of petroleum. At the end of 19th century the mining agency in the United States raised the alarm that this was to happen in 4 years. The Germans in 1930s were predicting this would happen in 12 years, and during the petroleum crisis of 1970s the petroleum sources were expected to run out in about 2000.

There have also been nonsensical predications on a gigantic scale. The so called Club of Rome, self-appointed group of suffering from Weltschmerz hypochondriacs concerned with the state of the world ordered various reports left and right . All of the reports contained a great number of nonsenses, but the Second Report to the Club of Rome  broke all  records. Published in 1972 based on complicated models created by mathematician, physicians, dynamic systems specialists and others, it predicted that about the year 2000 (so 10 years ago!) our civilisation would collapse due to running out of almost everything: fuels, raw materials, food etc.

The problem with this prognostication, like with many others, was that these were non-economists who dealt with them even though these were economical matters that were being forecasted.  That is how all the colossal nonsenses came about. Their authors were young and talented science academics. The punishment of their youth was that they lived long enough to see the day they predicted the end of the world. Today they explain themselves with insolent charm, that did their prognosis not come true 10 years ago it surely will in the next 30 years… Poor ignoramus, who did not understand – and after 30 years will still not understand – that economy does its own thing: when something is lacking, the prices rise and people start saving. After the energy crisis of 1970s washing machines and refrigerators became several dozen percent more efficient and cars began to cover a distance of 62 miles using an average half of the fuel they had previously used. This is the simplest kind of technical advance, as a result of price rises substitutes appear: aluminium for steel, polymer composites for wood,  glass fibre for copper in telecommunication, and so on. The most considerable deficit, one could say, concerns economic knowledge and elementary logic.

That is why it is difficult to forecast the new ‘progressive’, ‘developmental’ and ‘science-consuming’ branches of production, which ambitious scientists and no less ambitious politicians would like to develop. As generals who are said to prepare their army for a war which had already taken place (the only one they know) the same could be said about the authors of predictions who forecast the development of the branches which they know.

That is why incidentally the forecasters in the communist countries with a considerable effort (but less efficiently) kept reconstructing heavy industry based on coal and steel. Heavy industry created in the 19th century the foundations of the Western European economies, but it was still they only industry they read about in their textbooks.

The creators of various visions, scenarios and more formal predictions do not notice that since 1970s fewer and fewer forecasts have been undertaken since so many forecasts as well as forecasters disgraced themselves. In 1950s, 1960s and 1970s the world was drowning in various forecasts, however they were discrediting themselves so often and so thoroughly that the last 30 years has seen significantly fewer. Apparently science was not in vain.

Myth of the economy knowledge-based economy

The primary problem of all the governmental, parliamentary or other public diagnostic and prognostic enterprises is their wrong way of thinking. Here the state will plan a ‘complex development policy’ and under the wise management of far-sighted government the citizens will enthusiastically implement it, achieving the planned goals. I will elaborate on considerations about etatist and command mentality some other time; its origins and implications; here I will only deal with the application of that mentality to the unfortunate ‘knowledge-based economy’.

A greater collection of scientific misunderstandings, economic nonsense and obvious failures of ‘knowledge-based economy’ can hardly be possible. The economy has always been based on knowledge:, i.e.  the knowledge of the subjects participating in the economy, using ‘the knowledge of time and place’, as described by the Nobel prize winner Fredrich von Hayek. That widespread knowledge, which  is hard or even impossible to articulate, grants an enormous advantage to the decentralised capitalist economy over the centralised etatist economy, which is deprived of that knowledge.

Meanwhile the advocates of that conception do not care about that knowledge, but rather about the formal knowledge, stemming from education. Which, according to a bureaucratic mentality, is to ensure and to create new technologies: products and processes. This is the same attitude that imposes a certain method of teaching. For example associating the industrial revolution with the steam engine, loom machines and other inventions, without asking first why exactly they had been used in practise.

It was long known to the economy historians that many of these inventions had been known even centuries earlier in other countries (or even on different continents: in China in 9-12 century AD) however they had never become innovations, i.e. they had never been used on a vast scale in economic practise. This is simply because there were  no institutions favouring development, whereas there were such institutions in England. The patent law (established in the 17th century) and the joint stock company, are examples of  such institutions which have enabled the collection of a considerable amount of capital for huge industry enterprises since the 19th century etc.

The same goes for the knowledge-based economy. The EU in its etatist-command wisdom has come up with an idea that if the states spend a lot of money (at least 3% GDP) on scientific research and implementation works this will somehow translate into innovations and will make the UE the most innovative economy in the world.

Spending more money on Research and Development than results from demand, not only doesn’t benefit medium developed economies like Poland, it can also do harm. It will win away a proportion of employees of actual innovations to better paid theoretical jobs. Reducing the public expenses and taxes will increase the business innovation by eliminating bureaucratic obstacles (in terms of excessive regulations Poland is on the last position in OEDC).

‘Take a dozen of eggs…’ or how not to develop the economy

The old 19th century sand cake recipe begun with the words: ‘take a dozen of eggs…’ (‘It’s easily said: ‘take’ –  my mother used to sigh during the thin years of communism). Whenever I listen to  discussions about how the industry or services should develop I am under the impression that the striking  naïvety of their postulates comes from thinking in categories of “industrial policy”, “structural policy”, “innovative policy” etc. In which their creators are convinced that if they take the right ingredients in right proportions and they will act according to the instructions of the recipe, they will get a tasty cake – or rather a modern industry.

They are contaminated, as Hayek would say, with the sin of constructivism, since it is not an accident that certain countries are poorly developed and their industry is at its infancy. Others develop, but the best way to describe them (Poland among them) is medium developed countries. Yet other countries found themselves on top of the technology and production races. In every one of them the structure of manufactured products is different: from the simplest (textile, clothes, leather,  woodworking industry etc.) through to the more complicated (furniture, glass and ceramics, metal products, automobiles) and the most complicated (machines and devices, means of transportation, including aircrafts, industrial electronics, pharmaceutics).

It is more sensible to think about economy in categories of an escalator, as it was once described by an international trade specialist. The country on a low level of industrialisation steps onto the escalator by manufacturing and exporting products of simple labour. The country does not stand still, but it produces more complicated products, i.e. moves upwards on the escalator.

Poland is a great example. The  companies that created the biggest sensation almost 20 years ago were for example Nowy Styl  – a chair producer or Groclin – a car seats producer. But as Poland grew richer, better educated and of higher wages it became uncompetitive on the level of simple production. But still for example Poland is a competitive producer of buses. The simple production is overtaken by the countries which just started getting into car production.

At the same time the changes in production structure are accompanied by the changes in the money supply. The education level of the labour force increases. The capital increases, the managing skills improve, the financial system becomes more developed i.e. diverse. Poland becomes more competitive in the new branches of production (or we manufacture more complicated products in the old branches). And all thanks to the more modern and of better quality factors of production: labour and capital (and additionally the amount of capital per unit of labour  increases). Consequently Polish institutions (financial and other) function better.

When you read in the “Poland 2030” report that the share of  high-tech product in export should reach 40% you can just smile indulgently over the naïve ignorance of those who established these  aims. The rule: to want means be able to, is good in edifying readers for kids. In 21 years Poland undoubtedly will not be at the top of the escalator with a production and export structure of the USA, Japan, Switzerland or Germany. Like of the old picture: two small boys are standing in the gents’ toilet and can not reach the urinals. One of them says to the other: “Now I understand when my parents tell me I have to grow for something”. And so the economies have to grow to a certain structure of production…

Pitfalls of state-worship

In old times idolatry used to be problematic for some religious communities. If today I was to diagnose the number one problem in Polish politics it would be: it is the communities that suffer from state-worship, imagining that the state activities will fulfil their various needs. After WW2 the economy of development was dominated by the “helpful” thinking. Various models of “developmental gaps” were invented, which could be bridged by the external aid. The great people of the world at that time were mocked from 1950s by professor Peter Bauer, who wrote that if that was the case in no country today would have a developed economy since there would be no help for the first ones.

Additionally in Poland, students who want to write their dissertations about their regions do not usually think about using the region’s own resources but they expect that the state (and since 2004 EU) will level the development differences. Unfortunately, not enough is being taught to students (and not only students) that that at the beginning of all the deliberations are spontaneous economical processes. The policy to to the best of its abilities (generally speaking modest ones) attempts to correct them. Most often without much effect. Moreover the regional policy cannot do much, or even less. Most of the time its aims are wrongly determined., i.e. it stipulates that the differences in development levels should be reduced or even eliminated. Meanwhile the development processes are not only spontaneous, but also strongly determined with impulses coming from regional poles of growth.

That is why it is no wonder that this kind of reduction (not to mention elimination) of development differences hasn’t in practice been successful anywhere or accomplished by anyone. Unsuccessful were the British attempts after WW2, unsuccessful was the EU and, as indicated by professor Winiarski in 1980, it proved to be unsuccessful in communist Poland. Despite the incommensurable strength of state influence in centralised economy the differences between Polish  provinces in years 1951- 80, measured with the average wage level, didn’t change.

Sometimes something else turns out to be successful, as is the case of Ireland; the economy of the whole country advances, joining after certain time a group of richer countries. At the time all regions grow richer; however the order of regions within a country doesn’t change.

Maybe the problems of regional policy not only originate from the natural course of developmental processes, which the policy cannot influence but also from wrongly determined aims. The aim should be to favour natural development processes and thus help in increasing the level of region’s wealth (not to “reach” and “overtake” as in old Worker’s Day communist slogans).

Moreover,  every policy, especially the regional policy,  conflicts not only with the spontaneous processes but also with different policies, for example with the transport policy. Regional policy attempts to reduce the differences in development level differences (measured in GDP per capita), shifting the sources from outside the region to a given region. Whereas the transport policy strengthens the net of connections between main economical regions of a country. Thus it strengthens the strongest.  First of all one should depend on oneself and to a limited degree only on a policy of external support. This is still a universal truth, even in times of inflow of the EU funds …

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About Jan Winiecki

Economist, professor of Aalborg University and European University Viadrina in Frankfurt, co-founder and president of the foundation of Adam Smith Center, former member of the EBRD board, co-founder and former president of the Polish Economic Society, laureate of Kisiel Prize.

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