Biocapacity constraints and full employment – Part 1

This week, the Australian government (Labor) did the unthinkable. It approved three thermal coal mine expansions in NSW – the Environment Minister approved the expansion of the Whitehaven Coal mine until 2044, the Mount Pleasant mine until 2048 and the Ravensworth mine until 2032. For a government that claims to hold superior ‘green’ credentials to the main opposition this was a major disappointment and once again demonstrated that the lobbying power of foreign-owned capital, which is only chasing massive profits and care little about the well-being of the environment or its workers, is dominant in public decision-making. It brings into question whether there is a solution to the environmental crisis (the 1.7 times biological capacity problem) while resource allocation remains determined by those seeking private profit, who reluctantly bow to regulative constraints, while continually trying to get around them. In this blog post, the first of a few, I provide some insights drawn from my current research that will come out in my next book (with Dr Louisa Connors) on degrowth and related topics. The question that has to be answered is whether the solution to a sustainable future includes maintaining the capitalist system. Today, I talk about how capacity constraints may prevent full employment from being possible and extend that analysis to the current context where environmental capacity is more important than productive capacity.

All three mining companies that are involved are largely (if not completely) foreign-owned and repatriate profits.

One of the companies (foreign owned) involved was alleged to have engaged through a labyrinth of shadow companies in an illegal forest clearing exercise to facilitate an oil palm expansion in Papua in 2016 (Source).

Another of the three has been labelled “Australia’s worst coal company” see – Stop Whitehaven Coal – and has been:

… fined or investigated 35 times for offenses including stealing water, destroying Aboriginal artifacts and illegally clearing protected forest. Its track record of reckless and illegal behaviour has made it the one of the most frequently litigated coal companies in Australia.

None of the companies employ that many workers, which is a characteristic of the capital-intensive mining sector.

Their tax contributions are no-where near what we would expect given their revenue.

The Government claims it is just acting within the legal framework governing environmental matters and will continue to monitor the emissions involved.

But we all know that this is a really backward step given the climate challenge facing us and the damage that the coal industry creates.

Australia is beset with extreme weather events now – floods, heat waves, bushfires, extreme storms – and the on-going pollution that emanates from the production from these mines is certainly part of it.

The Government claims the export revenue is too large to miss out on but fails to tell the citizens how much it has to spend on dealing with the outcomes of these extreme events among other costs that the mines generate – including the elevated resources needed in the health care sector to deal with the health consequences of the mining.

It is almost unfathomable that a government that is touting its ‘green’ credentials would bow to the lobbying pressure from these foreign-owned entitites.

The problem of full employment and the future of work

One of the chapters I am working on at the moment for my new book (with Dr Louisa Connors) on degrowth and related topics concerns the future of work.

When I was a graduate student in the early 1980s, the debate about ‘Classical’ and ‘Keynesian’ unemployment was all the rage.

One of my earliest papers, while I was still a graduate student, was published in 1985 – Real Wages, Unemployment and Economic Policy in Australia – which challenged the orthodoxy at the time about the causes and solutions to the rising unemployment that had emerged in the late 1970s as the federal government abandoned its commitment to full employment.

(Reference: M. Burns and W.F. Mitchell (1985) ‘Real Wages, Unemployment and Economic Policy in Australia’, Australian Economic Papers, June).

In that paper, we noted that:

A number of Australian economists have argued that the level of real wages is too high and, that until this situation is reversed government attempts to induce expansion may, in fact, do more harm than good.

This was written in the aftermath of the devastating 1982 recession which saw unemployment increase significantly.

The mainstream economics narrative, which dominated policy circles, was that government should deal with the persistently high unemployment by engineering a cut in real wages – by constraining money wages growth to trail the national inflation rate.

The corollary was that government would then improve international competitiveness and we would have an export-led recovery (via the mining sector) from the recession.

The paper cited above was technical but challenged this narrative and exposed its inconsistencies.

We showed that the mainstream analytical framework was not fit for purpose because it assumed the unemployed ‘were on their supply curve’ – that is, were making optimal decisions between work and leisure based on their preferences.

However, the clear evidence was that the unemployed are powerless to influence their job prospects overall when the labour market is constrained by a lack of spending (and production) in the goods market – that is, with the mainstream framework, the unemployed are forced ‘off their curves’.

This difference was characterised in the literature as the difference between ‘Classical’ (the former position) and ‘Keynesian’ unemployment (our position).

In this sense, we developed a critique of the work by the French economist – Edmund Malinvaud – who had published his book in 1977 – The Theory of Unemployment Reconsidered – which constructed the concept of unemployment within a disequilibrium framework – that is, recognised that workers could victims of quantity constraints.

His work was seen as an advance on the equilibrium ‘new labour’ economics that dominated in the early 1970s and saw unemployment as a voluntary, maximising outcome of worker choice.

Malinvaud still found that if real wages were ‘too high’ then Classical unemployment would result and the solution would not imply any demand-side policy intervention.

We showed in the paper cited (which is fun re-reading given it was written 40 odd years ago) that within such a Malinvaud model, lack of effective demand will usually be the cause of mass unemployment and attempting to cut real wages will only worsen the situation.

There was a lot of technical mumbo jumbo involved to reach that conclusion – but that is what it was.

We qualified our analytical findings in this way (in part):

We can outline two problems which may hinder expansion or make it futile. First, following Malinvaud (1980, 1982), it may be that capacity constraints will create bottlenecks in production before unemployment has been significantly reduced (this would be exacerbated if there are significant procyclical labour supply responses). In this case any expansion in government demand may have insignificant real effects and the crowding out argument has some validity. Second, there is the question surrounding the profitability of investment. While recovery need not be investment led it must quickly stimulate new investment so that its durability is guaranteed. The urgency of this depends on how much capital has been lost in the downturn through shedding, on the utilisation rates and the state of health of the retained capital.

We showed at the time that neither problem was likely to be binding.

But the point of referring to this paper after so many years is that we referred to Malinvaud’s 1980 book – Profitability and Unemployment – which argued that to avoid future unemployment, an economy had to generate adequate profit rates, sufficient to engender on-going investment in productive capacity.

Relating back to Monday’s blog post – More economists are now criticising the British government’s fiscal rules – including those who influenced their design (September 23, 2024) – Malinvaud deployed a version of the Harrod-Domar approach to economic dynamics to demonstrate how inadequate rates of capital accumulation can result in a shortfall of productive capacity, which then means and expansion in effective demand (spending) will not be able to restore full employment because there is a capacity constraint hit before enough jobs can be generated.

This was a problem that I returned to some years later in my work with Martin Watts which is captured by this 2013 paper – Capacity constraints and the Job Guarantee – which was later published in a volume Reconstructing the Full Employment Narrative (edited Graham Wrightson).

(Please note that my personal publications page on my Home Page – https://billmitchell.org/publications.php – has not been updated for some years – it is a very time intensive job and we have been busy doing other things. I will eventually get around to updating the page with downloads to the present day).

In that paper, we analysed the theoretical work of Edmond Malinvaud again noting that:

Aggregate demand and income rationing in a monetary economy will impact on the product and labour markets. Thus, consumers in aggregate could receive a level of
income, which was constrained by involuntary unemployment, and, in turn, firms would face constrained sales due to a lack of demand. Malinvaud argued that it was possible that there would be insufficient capacity after a recession to enable workers who were involuntarily unemployed to be re-engaged in the productive workforce, following an increase in demand. In other words, in the terminology used at the time, the unemployment was neither Classical nor Keynesian, even it had originated as one of these causal categories. Instead, the unemployment was a consequence of low investment during and after a recession, which reduced the growth of capacity. Thus, following a recession, mass unemployment could persist and be capacity constrained, rather than demand-constrained or Keynesian. Malinvaud showed that even with real wage flexibility (the Classical case), mass unemployment could persist under these circumstances.

I also published papers with Joan Muysken earlier in the 2000s, for example – Labour market asymmetries and inflation (this was the working paper version and the final publication is behind a paywall) – which developed a technical model to show how expected profitability influenced investment decisions by firms and could constrain a return from a recession.

In the paper with Martin Watts, we argued that governments could still generate full employment despite the lack of private profitability which militates against a private employment expansion, by introducing a Job Guarantee.

We argued that “the JG creates its own productive capacity each time it takes on a new worker.”

There was a lot more to our argument but we emphasised that this was not a complete solution because it would be undesirable to base a sustainable employment strategy on the production of socially-inclusive minimum wage jobs (the characteristic of the Job Guarantee).

Meaning that the public sector would also have to see career-based creative solutions to public employment to resolve the capacity constraints in the private sector.

What has all this to do with climate?

I noted Phil Lawn’s comments on my blog this week where he correctly noted that a nation could find itself caught in a situation where the Ecological Footprint (EF) was greater than the Biocapacity (BC), which would make it difficult to achieve and sustain full employment.

I wrote about this problem recently in this blog post – Delinking and degrowth (September 5, 2024) – where I noted that the global economy is operating 1.7 times over regenerative capacity and urgent changes are required.

The 1.7 represents the aggregate situation – the global status.

Within that aggregate, there are clearly nations that have various positions.

It is possible that some nations have EF less than BC, while others, clearly (to get the aggregate) have to be running EFs well above their BC.

Phil Lawn correctly pointed out that some nations:

… have a population (labour force) that is too large to fully employ should they operate where EF ≤ BC – they will simply run out of natural resources before achieving the full employment of labour.

This sort of argument is a twist on the Malinvaud argument presented in his 1980 book which focused on how lack of productive capacity can constrain an employment expansion.

In the current context, it is the biocapacity that has become the constraint.

In the Malinvaud case, as we explained in some of the papers cited above, there are workarounds.

And a lack of productive capacity is not an existential threat.

But the lack of biocapacity relative to the EF is clearly more challenging because it poses such a threat.

We simply cannot continue to run at 1.7, which means that many countries have painful adjustments to be made.

First, some short-term adjustments might be possible by exploiting the fact that some countries are working within their BC – which means resources can transfer to those working above their BC via trade.

In a world that is becoming increasing unstable in a geopolitical sense, that is not likely to be a possible solution.

Second, these possible resource redistributions ignore the fact that we urgently have to reduce the global imbalance between EF and BC, which means pain is inevitable.

This is the problem I have been working on lately as part of my next book.

There are solutions but whether they can be accomplished in the context of a capitalist system where decisions about resource usage are based on private profit expectations is the question.

The decision by the Australian government to bow to those private profit needs (by extending the coal mining leases) doesn’t augur well.

A recent paper in the journal – Sustainability: Science, Practice and Policy (Vol 20, No. 1) – Democratizing provisioning systems: a prerequisite for living well within limits (published September 2, 2024) – bears on this topic.

I will come back to that issue next week as my work progresses.

No Smith Manga until next week

Our little team that produces the Manga endured a family death recently and we decided to suspend production of the Manga for 2 weeks to allow for appropriate person responses.

Episode 6 was due out last Friday but will now appear next Friday.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.