The Future of Growth

A- A A+

Max Weber Lecture
Daniel Cohen (Paris School of Economics)
20 January 2016

Summary brief by MW Fellow Jack Seddon (SPS 2015-2017)

Professor Daniel Cohen of the Paris School for Economics delivered a Max Weber Lecture titled ‘The Future of Growth’ to a packed lecture theatre at the EUI on 20 January 2016.

Professor Cohen introduced the topic of growth with some historical background, summarising economists’ perspectives on the agricultural (Neolithic) revolution and the industrial revolution. Cohen drew on Malthus’ classical observation that societies can be subject to laws of growth that are not fully understood but nevertheless condition their development. He then turned to more recent literature to elaborate on the paradox, identified by Richard Easterlin, that increasing personal incomes do not translate into greater happiness or wellbeing. Among the primary reasons for this is that people get happier when then get richer only in relative terms. We are always looking at the person next door. This explains somewhat paradoxically why economic growth, more than pure wealth, is the key to the functioning of capitalism, because it provides the general hope that we can rise above our present condition, even though this dream remains ever elusive for the vast majority of people. These two ideas – that the laws of growth can be opaque and that societal growth and individual wellbeing can be delinked – laid the foundation for Cohen’s intervention into the contemporary debate between the pessimistic stagnation theorists, who believe the age of growth has passed forever, and the optimists, who believe we are on the cusp of a dramatic era of technologically driven growth. Cohen argued that both are somewhat correct and yet both miss something crucial, because growth today is being delivered through the substitution of middle class jobs by technology. This process of middle-class job substitution is increasing economic growth but not individual satisfaction or wellbeing, because people do not feel that they are moving upwards. Economic growth achieved in this way risks fragmenting societies, increasing inequality, and destabilising the social compact that supports liberal democracies. The surprise is that the future is far from certain even with growth.

The following day Professor Cohen gave a Max Weber Masterclass on sovereign risk and return to the Tommaso Padoa-Schioppa Working Group on ‘The Design and Governance of Monetary and Fiscal Policies and Financial Regulation in the European Union’. The guiding question was: why do countries default? The key message was that countries never really want to default, but rather do so after economic crises have set in. Cohen also elaborated on the kinds of economic processes that are more or less likely to trigger sovereign defaults. By using the theory of Lévy processes to combine Brownian (continuous) and Poisson (stochastic) processes in the explanation of what causes defaults, Cohen showed that it is possible to better understand default events and to simulate the enduring puzzle that relatively low levels of debt can still produce high default probabilities. This deeper understanding is important because it should enable Eurozone governments to set safer levels of debt. The key lesson is that Eurozone credit ceilings need to be calibrated to economic conditions, such that they are lower in normal times and extraordinary in extraordinary times. This distinction is often lost in the language of austerity that guides policy debates.