A new economic paradigm - the New Pragmatism

The 12 Great Issues of the Future (GIF) address the challenging questions of long-term future of mankind and the global economy. Traditional, mainstream economics seems to be a matter of the past and useless for explaining the true nature of ongoing social, economic, and ecological processes. We do need a new theoretical framework which must be also useful for policy-advice. And such is the New Pragmatism, which employs a holistic approach to answer fundamental questions about the course of future generations.

Comparative economics and social science analysis are all engaged in a comprehensive coverage of the issues facing the global economy. A complex and dynamic consideration explains how things work and how they will and how they should work in the future.

Economic methodology alone does not provide the most satisfactory answers for fundamental questions. An interdisciplinary attitude is necessary since the future of the world and civilisation depends not only on what happens in the economic sphere but also cultural, social, political, demographic, technological, and ecological processes.

The article discusses threats and opportunities of the future as well as proposes strategies for ways to move forward based on an original proposition of a new economic paradigm - the New Pragmatism.

When arguing over the ways leading to a better future, there's no need to settle the dilemma of which of the imbalances threatens humanity more: the environmental or the social one. The economic imbalance, though it's serious, is not the biggest threat. However, we can't live in peace and develop economically without managing the situation on all three fronts and still, the list of challenges doesn't end here.  

How do we reconcile a practical approach to economy with an uncompromising attitude? Can you be both an economic pragmatist and a man of principles? Is it worthwhile? It is both possible and worthwhile. If we want the world of the future to be a world of peace and of a reasonably harmonious development, and we do want that very much, we need to introduce new values to economic reproduction processes, but, at the same time, we shouldn't, even for a moment, forget pragmatism, which is the fundamental, indispensable feature of rational resource allocation. We need a pragmatism that favours multiculturalism and comes from a system of values that promotes participatory globalisation, inclusive institutions, social cohesion and sustainable development.

There is no inconsistency here because the supreme values guiding the economic activity process in a society and its economic goals are quite identical. In both perspectives, what matters most is a three-fold sustainable social and economic development in the long term. "Three-fold" stands for:

(1) economically balanced development, that is one relating to the market of goods and capital, investment and finance as well as that of labour;

(2) socially sustainable development, that is one relating to a fair, socially accepted income distribution and appropriate participation of basic population groups in public services; and

(3) environmentally sustainable development, that is one relating to keeping proper relations between human economic activity and nature.

Therefore, there's no need to sacrifice fundamental principles at the altar of short-term economic or tactical matters. Meanwhile, we need practical strategic activity to be governed by those principles. This imperative determines the path of evolution of the political economy of the future. Good economics is more than a description of the world; it's also an instrument to change it for the better.

Of great importance is the possibility to achieve two goals at a time which stems from the fact that one of them, socially sustainable income distribution, is, at the same time, a means to achieving another, namely economic growth. Neo-liberal economic thought and economic policy based thereon have failed to comprehend this interrelation and that's why, by causing a major crisis, it annihilates itself. This is also beyond the grasp of the economic thought behind various varieties of state capitalism and that is why there is no bright future ahead of it. It's time for New Pragmatism.

While not underestimating the rivalry between the neo-liberal capitalism and state capitalism, it is not this dichotomy that will have major importance for the future. The shape of the latter will be determined by the result of the confrontation between these two varieties of contemporary capitalism and a social market economy in the form of New Pragmatism. In this battlefield, neo-liberalism, trying to regain its strength and position, and the state capitalism, which is hostile to the former, will be pitted against the concept of genuine social and economic progress. Its benefits should be available, as widely as possible, to the masses rather than only to narrow circles following their own particular interests and to their well-paid lobbyists in the world of politics, media and 'science'. No system where a vast area of economic inconvenience is called a 'margin' of social exclusion, and, at the same time, a narrow margin called the 'elite' swims in excessive wealth, has a great future.

This is also corroborated by conclusions that are easy to draw when comparing the so-called 'big government' economies with those where the government is 'small'. Well, in several decades (1960-95), in countries with a small, around 30 per cent government involvement in national income redistribution (and, consequently, with higher inequality of distribution) the rate of investment or the percentage share of investment in the GDP was 20.7 per cent on average. At the same time, in countries with a high scale of budget redistribution, with around 50 per cent government involvement in the GDP (and consequently, relatively lower inequalities in the income distribution), the investment rate was 20.5 per cent on average. No difference at all. You can have the same capacity for capital formation, which determines economic growth in the future, with a no less balanced income distribution, which co-determines satisfaction with the present state of economy. And that's an important guideline for the New Pragmatism economic policy. That's what things should be like in the future.

It's natural that societies and nations aspire to at least catch up with a richer neighbour, if not with Japan right away. Mexicans dream of the United States, Slovaks wish things were as good at home as they are in Austria, Estonians compare themselves with Finland, while the Vietnamese are planning to outdo Thailand. Once I was even asked at the PNG University in Port Moresby, when things in Papua New Guinea will be the way they are in Australia (never, in a foreseeable future), and recently a Cairo-based journalist wanted to know what I think about Egyptian politicians that announce their country will catch up with Turkey in seven years. Well, it's a sheer megalomania, as it would require doubling of the Egyptian GDP per capita in this seven-fat-years period (unrealistic assumption), on the assumption (also an unrealistic one), that Turkey would experience a complete stagnation due to seven lean-years.

The wish to match those who are better is one of the major driving forces in eliminating development gaps, but if we plan tasks that are impossible to complete in a given time-frame, people may get discouraged. It's worth being an ambitious realist or a pragmatist. Poland may one day reach a GDP per capita of Germany just like the Irish managed to do with that of the UK, or South Korea almost of Japan, but this cannot happen over one generation, and considering the not-so-good policy of the recent couple of years, even two or three might not be enough. There's no telling. While Spain managed to get close to the GDP level enjoyed by the French (US$ 36,000 per capita at PPP in the years 2012-14), the Portuguese ($24,000) didn't catch up with Spain ($31 000). The resulting implication for economic development policy is: aim for what you're strong enough to achieve. If you can, increase your strength, but you shouldn't aim beyond your potential, because then your goals will not be matched by the possibilities to achieve them.

It's not about limiting human needs, but about endeavouring, by all possible means, to maintain a harmony (which is necessary to ensure social satisfaction) between needs, both the old ones growing in strength and the new ones emerging, and realistic, economically reasonable possibilities to satisfy them. Also in this case, just like with the future growth rate, it would be good to leave more room for development to societies from emancipating economies, with a relatively lower increase in needs in rich countries. To a certain degree, this is already happening, as, again, it's similar to gluttony; at some point you've had enough even of what you like and you can't have any more of it.

MEANS AND ENDS OF DEVELOPMENT: If, in a broad perspective, it all boils down to maximising, in a long term the level of social satisfaction with economic activity, we need to look at New Pragmatism from the angle of the objectives of social and economic development, its essence and method.

Fulfilling needs in a way that satisfies people is a development goal that is in line with the guiding values of New Pragmatism. A GDP growth is a means to an end rather than an end itself. It's high time for the highly-developed countries to move away from maximising income mostly from driving the gross domestic product as high as they believe they can. If half a century of ever-increasing incomes did not increase the life satisfaction of rich Americans, why make so much effort and incur extra costs also in the form of extended work time while devastating the natural environment even more?

Incidentally, something interesting is going on in this respect as even during the US presidential campaign in 2012 there was relatively less talk of quantity, and more of quality, less talk of the output growth, and more of other aspects of rational resource allocation such as financial and trade balance, provision of public services, employment, although still not enough about culture and environment. This was due, to a great extent, to the specific nature of the time of crisis, but, partly, also to the evolution of mentality. It's good because we are standing on the brink of a fundamental redefinition of social and economic development goals. In the future, the goal will not be to just maximise income, but to distribute the fruits of such growth in a way that increases the people's true satisfaction; non-material values will be another goal.

The writer is a former Deputy Premier and Finance Minister of Poland and currently the Director of TIGER (Transformation, Integration and Globalization Economic Research) and Professor at the Kozminski University in Warsaw (ALK). The article is adapted from his public lecture, organised by the Bangladesh Economic Association  (BEA), in Dhaka on  Tuesday (February 2, 2016).