An optimist hoping for the markets' defeat

"I am not pessimistic," said Lester Thurow. "It's just that if the world changes, you have to change with it."

So the doyen of popular American economists, a professor at the Massachusetts Institute of Technology, prefaces his analysis of the industrial society's ills. Massive inequality and unemployment will lead to growing social tension, the spread of protectionism, more religious fundamentalism, even the disappearance of entire nations, he predicts.

"Sooner or later the pressures will explode if conventional leaders do not come up with the answer. If 80 per cent of the people are making nothing from the economy, why should they vote for the economy?"

It perhaps helps Professor Thurow avoid pessimism that he has an answer. It is one that finds almost no support in the treasuries and finance ministries of the industrialised countries today.

"We have to go back to higher growth. Cut interest rates and see what happens," he suggested.

To understand this conclusion, consider the subject of downsizing. Professor Thurow says the arithmetic is simple: "If I'm a businessman and my market is growing at 2 per cent but my productivity is growing at 6 per cent, I'm going to downsize."

Slow growth has made dangerous "five fundamental forces" affecting the industrialised economies, diagnosed in a new book, The Future of Capitalism, which he was publicising in London yesterday.

These five are: the fall of communism; the switch to brain-power-driven industries; demographic change; globalisation; and the absence of a dominant world economic power for the first time in two centuries.

In case it is not yet clear, it should be emphasised that Professor Thurow is talking about the big picture. His confidence in painting it, borrowing from other disciplines such as psychology and sociology, sends shudders through more conventional and cautious economists.

But to return to the argument, in America the huge waves of redundancies have been mopped up by the creation of low-paid jobs. Professor Thurow seems to admire the French for rioting when their government proposed public sector cuts smaller than those announced by the telephone giant AT&T. Americans, however, think they can work their way out of trouble and will accept a more lowly paid job.

"There has been a more inegalitarian income shift in the US during the past 20 years than any society has ever had without a revolution," he says. The bottom three-fifths of US incomes have at best stayed flat in real terms for the past quarter-century.

He is scathing about the excesses of executive pay. The ratio of top- to-average pay in US corporations has risen from 35:1 to 216:1 over the same period. Professor Thurow thinks the defeat of communism meant bosses shed all restraint. The "five forces" have combined to cut the wages of many workers in the West through the channel of competition with vast new low-paid markets in Asia.

Unlike many economists, he does not believe that new technology alone is destroying old jobs while creating not enough new ones. He is sure trade is to blame, and predicts that it will put downward pressure on pay in the industrial world for at least another generation.

Professor Thurow said he could understand why the President of the United States and other leaders do not want to take on the bond market, especially when social upheaval and unemployment have had few electoral repercussions. But eventually, he believes, there will be a choice between upheaval in the market and upheaval in society. The optimist in him thinks the markets will lose.