European Transition into a Socio-ecological Market Economy

3. Capital Accumulation, Innovation and Qualification
The key for a transition into an SEME is the augmentation of total capital productivity by means of higher “human capital” inputs. Although a vigorous reduction of financial capital is necessary for a transition we concentrate here on the reduction of productive capital. European economic policy has to refuse the prevailing striving for permanent high economic growth by higher labour productivity via higher real capital intensity. But one has to be clear that this would be a refutation of the classical concept on which traditional economic welfare is based. Historically, high economic welfare was gained by the growth of capital stock, which augmented employment, wages and consumption in the past. But we are at a turning point, because real investment opportunities in Europe have been shrinking, social problems have been increasing and ecological limits have started appearing. Certainly, the “end of the world is not at hand” (Solow), but already for a long time, ever-augmenting real capital accumulation has run into difficulties. After longer waves of increasing capital intensities it had to be reduced by “creative destructions” of new technologies and innovations which emerged as a precondition for new economic growth. It was mainly the economic profit squeeze, formerly without reference to ecology, which needed temporary reductions of financial and/or real capital.6 Approximately the same destructions were needed in short run business cycles, even during the Great Crash in the past and in the recent economic crisis. If we look further, high economic growth after great wars has its roots in disastrous destructions of economic resources. To prevent over-accumulation following crises, which is inherent in our “economic machine” (Keynes), economic growth has to be tamed. This is only possible through a capital saving technological progress, i.e. a transition into lower capital intensity.

The European growth policy does not consider the positive consequences of a capital saving technical progress. On the contrary, it follows neoclassical growth theories, which support capital augmenting accumulation.7 They neglect longer term diminishing returns, which results in a falling profit rate in every type of growth model.8 Then, all advantages of a large real capital stock cannot be earned by consumers. The lack of final demand can only temporarily be compensated by higher public demand and export surpluses. Finally, it is the decline of profitability of over-accumulated real capital, which needs capital saving innovations for a given level of output and increased labour inputs as compensation. In Keynesian growth models the supposed constancy of capital productivity (Harrod) can only be assured by higher labour inputs. Precisely these additional labour inputs prevent a decline of capital productivity and reduce the capital-labour relation. The same follows in neoclassical theories where permanently augmenting capital intensity converges on a labour augmenting technical progress.9 Counterbalancing the decline of returns on capital cannot be derived from price substitution, but needs a politically targeted innovation system.

But innovation has become a wizzleword, becoming increasingly irrespective of its positive or negative societal consequences. For example, “financial innovations” have considerably contributed to the recent financial crisis and “planned obsolescence” is not to the advantage of consumers. To enhance the transition of the European economy into an SEME we have to target innovations towards higher capital productivity and not towards higher labour productivity. Increasing capital productivity cannot be accomplished by higher capital intensity, but only by higher labour intensity.10 As innovation always springs from human brains, more labour – both in terms of hours and qualification – is needed so that these innovations are labour augmenting. In an innovation-oriented economy labour plays generally an increasingly significant role.11 If human resources are largely targeted to prevent a decline of capital productivity, real production becomes a new character and traditional capital investments lose importance, i.e. real capital intensity declines. This “scientification” of the productive system is in accordance with trends typical of dematerialization and the service economy at large and has distributional consequences.12 If labour and capital are remunerated according to their contribution to total output, the wage-profit relation has to increase. During the transition into an SEME the wage quota and final demand increase and economic growth reduces without a decline in the profit rate on the reduced real capital stock. And “scientification” assures international competitiveness, because prices of traded commodities can be stabilized by lower capital costs instead of lower labour costs.

The most convenient way to augment real capital productivity is to slow down capital accumulation, which augments marginal and average capital productivity and at the same time reduces the rate of real macroeconomic growth. But whatever the strategy for low growth is, there is the question of total volume of work. Traditionally, it is measured in hours without reference to quality of work. In face of the enormous educational investments for decades, the executed volume of work has to be measured both in time and quality and rough estimations show that qualified work furnishes about double the volume of simple work.13 Looking at the formal economic sector, – without referring to growing informal and unpaid work – public and private qualification may have augmented the volume of work considerably and the relation between labour and capital may have risen. As higher qualification is mainly mirrored in salary schemes which seem to have risen, the volume of wages per hour has also risen, but much less than the nominal value of real capital equipment. The increase in nominal capital intensity is the result of growth of the financial sector. In physical terms, the relation between labour and real capital may have risen by qualification. Although employ­ment in hours has grown less than total output, the increase in the volume of work may have surpassed the increase in physical productive capital inputs.

Europe 2020 and Horizon 2020 stress verbally the importance of higher qualification both for getting a job as well as for more R&D and innovation. In Horizon 2020 Excellent Science should augment global scientific competitiveness; Industrial Leadership, industrial competitiveness and Social Challenges should alleviate from burning societal problems, which can be considered as market failures. All three mutually reinforcing priorities have some capital saving and labour augmenting effects. But estimations for the year 2030 show that the combined effects of the three priorities augment economic growth with low employment efficiency.14 Horizon 2020 intends still – although with little success – to augment economic growth and create little more employment. Therefore, Horizon 2020 in its present configuration contributes only marginally to the transition into an SEME.

4. A New Regime of Accumulation and Income Distribution
The European economic policy outlined in the Europe 2020 Strategy aims at a “new economy” by modifying reluctantly the content of economic growth, but it does not question growth itself. By discussing capital saving innovation and labour augmenting qualification we found that Horizon 2020 has some potential for turning into a low growth path. But even these moderate contributions are neutralized by the macroeconomic concept of Europe 2020, which intends definitely to augment economic growth by higher real capital inputs. The real capital intense supply has – under conditions of restricted public demand – to be absorbed by a large financial sector with high debts so that “financialisation” has to assure economic growth on the demand side. As the supply-demand relation has lost contact with real production, we have to abandon the neoclassical circular relation between capital and labour in favour of investigating primarily productive capital accumulation. This corresponds to post-Keynesian growth models, which refuse production functions, the most curious of which are Cobb-Douglas versions. Capital and labour have to be considered separately, with capital split up into man-made and natural capital, which comes close to Schumpeter`s view that only labour and nature are productive.15 Then, man-made capital is just an intermediary transformational instrument between nature and final consumption. Keynes, who did not directly refer to nature, went further and had sympathy for the labour value theory, which considers only labour as productive.16 In face of the strongly increasing importance of innovation and qualification which are intimately connected with human activities and their creativity, economic welfare increasingly depends on labour. Certainly, both man-made and natural capital play an important, however declining, role in an SEME, which is visible in a step by step reduction of real capital inputs. Consequently, education and “human capital” become the main driver for a socio-ecological transition.

Therefore, the transition into an SEME needs a new regime of capital accumulation, income distribution and economic growth. The new regime follows from “scientification” of real production. Already in the Lisbon Strategy, knowledge-based development had priority and is now partly reinforced by Europe 2020 and Horizon 2020. At the microeconomic level the European economic policy goes programmatically in the right direction. The reluctant steps towards an SEME are mainly neutralized by the macroeconomic policy for higher economic growth instead of structural changes, which ultimately concerns the composition of the capital stock and the resulting income distribution. In fact, prevailing distribution of productive and financial capital and the demanded rates of profits and money interest absorb too much of the total income. Labour is – enhanced by weak bargaining powers – not remunerated anymore according to its continuously increasing contribution to overall real production. To ensure a transition, income distribution has to be changed towards wages; a higher consumption-investment relation and the new low growth equilibrium would reduce the volume, but not the rate of profits.

“Transition into an SEME needs a conscious societal evolution and full development of the human potentials for active learning and knowledge transfer.”

The new regime is bound to have higher investments in education, research and innovation, i.e. in “human capital”. European educational policies intend to increase spending in the public and private sectors, but actually in most countries such investments are reduced in favour of financial investments. Moreover, reflections of the traditional concepts of qualification are urgent and this may lead to a new paradigm of human-centered education.17 Transition into an SEME needs a conscious societal evolution and full development of the human potentials for active learning and knowledge transfer. It is not through primarily capital equipment, but through educational investment in people at all levels of the economy that societal welfare can be derived. Innovation in material and immaterial equipment produced by highly qualified workers is just a means for higher welfare and the final target should be human development. It is the enhancement of people themselves and their personalities – on which depends a peaceful human-centered development – which can bring about economic, social and ecological sustainability.

6. Ernst Helmstädter, Der Kapitalkoeffizient (Stuttgart, G. Fischer, 1969).
7. Luigi Pasinetti, Structural Change and Economic Growth (New York: Cambridge University Press, 1981), 206.
8. Erich Hoedl, H. Lierenfeld, J. Reinartz, Nicht-neutrale technische Fortschritte und Profitratenentwicklung in Wachstumsmodellen (Wuppertal: Fachbereich Wirtschaftswiss. d. Berg. Univ., Gesamthochsch, 1986), 89.
9. Ernst Helmstädter, “Wachstumstheorie,” in Handwörterbuch der Wirtschaftswissenschaft (Zürich: Vandenhoeck und Ruprecht, 1988), 486.
10. Erich Hoedl, “Resource Productivity and Economic Wealth: A theoretical criticism of Europe 2020 growth policy,” World Resources Forum, September 19-21, 2011, Davos/Switzerland.
11. Arnold Picot, Ralf Reichwald and Rolf Wigand, Die grenzenlose Unternehmung (Wiesbaden: Betriebswirtschaftlicher Verl. Gabler, 2003), 451.
12. Herman Daly, Beyond Growth (Boston: Beacon Press, 1996).
13. M. Schlegel and C. Szolarz, “Volkswirtschaftliche Gesamtrechnung mit Input-Output-Tabellen unter Berücksichtigung der Komplexität der Arbeit,” 2008
14. Horizon 2020 (Brussels: European Commission, 2011), 88.
15. J. A Schumpeter, Theorie der wirtschaftlichen Entwicklung (München und Leipzig: Duncker und Humblot, 1964), 29.
16. John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace, 1936).
17. Garry Jacobs, “Towards a New Paradigm in Education,” Cadmus 2, no.2 (2014): 116-125.

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