Sunday, 26 August 2012

Second Order Change

I spent most of my time at University not studying, and besides it was thirty years ago, so it's not surprising I don't remember much.  However, one thing that has stayed with me is the idea of first and second order change.

We were introduced to the idea by Mal McCouat, a long-standing social work lecturer at the University of Queensland, and a 1974 book by Paul Watzlawick, John Weakland, and Richard Fisch which went by the rather unpromising title of Change: Principles of Problem Formation and Resolution. 

The idea of first and second order change is simple in the way that so many brilliant ideas are.  Most of the changes we make in our lives, or in our society, are first order changes.  These are changes made within the established order or the normal pattern of relationships.  One of Watzlawick et al's examples was in the field of illicit drug supply.  In response to concerns about drug use, authorities bring in new laws which increase the penalties for supply of certain drugs and introduce new strategies to catch smugglers.  In response, the smugglers get cleverer and more ruthless.  Illicit drug use continues and even increases, so the authorities increase the penalties again.  The cycle continues.  This is first order change or, as they say, "more of the same".

Another way of illustrating this is by imagining two sailors aboard a small sailing dinghy.  The boat begins to lean to one side, so to prevent it from capsizing one of the sailors leans out over the opposite side of the boat.  Unfortunately he leans a little too far, and so to correct the problem his companion leans out over the other side.  In response, the boat begins to lean in her direction, and the first sailor has to lean a little further to compensate.  This process could continue indefinitely, with each sailor progressively leaning further.  Each extra lean is an act of first order change.  The boat remains on a roughly even keel, but the effort of keeping it there becomes less and less sustainable.

You can see what needs to happen next.  The sailors need to change their behaviour completely, and stand up.  To do this without capsizing the boat, they need to communicate clearly about what they are doing, and both haul themselves up at the same rate.  After some nervous moments, if all goes well they will soon be sitting back in the boat and enjoying their sail together.  This is second order change.

As social psychologists, Watzlawick and his colleagues applied this approach primarily to psychotherapy but they also ranged widely over other fields.  For instance, in the drug use field they used it to argue for legalisation of marijuana, which they said had led to reduced use on the odd occasions it had been tried.  Drug experts continue to make this argument today, and it continues to fall on deaf ears.

I've been thinking about something else, though.  Prior to the Great Depression, governments largely operated on the "household model" of budgeting.  In good economic times, their tax revenues went up so they could spend more.  In bad times, their revenues went down so they cut their spending so as not to go into deficit.  In the Depression they were forced to cut, then cut again as the world economy plunged.  Classic first order change.

British economist John Maynard Keynes was at the forefront of efforts to change this after the Depression, and his arguments were largely successful.  He argued for the economists' version of second order change.  Governments should do precisely the opposite of what seemed intuitively correct.  If they cut their spending in a recession, he argued, they made it worse as they added to the slowdown, and risked lengthening and deepening it. 

Instead, they should increase their spending, as well as lowering interest rates, to make up for the decline in activity in other sectors of the economy.  This would counteract the recession, increasing economic activity and confidence, and quicken the recovery.  It would mean that in the short term governments would go into deficit, but this would literally pay for itself over time as the economic recovery pushed their income back up while reducing the need for expenditure (for instance, by lowering the number of people on unemployment benefits).

While Keynes has been criticised on a number of different grounds, these aspects of his policy have become the common currency of government response to economic recessions, as seen most recently in the response to the 2007 Global Financial Crisis. 

However, something has happened.  I'm not a good enough economist to understand quite what.  Governments have become very nervous about the deficits they are running, believing them to be unsustainable.  Ratings agencies have agreed and have drastically downgraded countries we generally regard as quite wealthy.  As rated by Standard and Poors, Greece is currently at CCC which is a signal for investors to avoid lending them money, while Spain is at BBB+, which suggests you could still invest there but be wary. 

The European Union and international financial agencies, led by Germany and other stronger nations, have responded by offering financial bailouts on condition that the countries drastically reduce their spending to get their deficits down.  This sounds remarkably like a Depression-era approach and protests have broken out in countries threatened with austerity measures as people see their jobs disappearing.

Interestingly, here in Australia the same thing is going on, even though the same credit rating agencies rate our governments much more highly.  Our national government has a AAA rating, while here in Queensland the government is panicking about its debt level and talking about us becoming the "Spain of Australia" even though S&P rates us at AA+.  Jobs are being cut, funding programs axed, asset sales are in the wind.

I think there are two ways of viewing this.  It is possible to just see it as evidence that the conservatives have got the upper hand.  Conservative economists and politicians have never liked the Keynesian approach because it is highly redistributive.  Its focus on maintaining jobs and wage levels for ordinary workers reduces the effectiveness of unemployment as the "reserve army of capital", reducing downward pressure on wages and keeping taxes relatively high.  Good for the poor in a modest way, not so good for the rich.

However, another perspective is that Keynesian economics has proved insufficient for the intensively globalised economy we now live in.  Its focus on the actions of national governments has become increasingly ineffective in an economy dominated by global financial and commodity trading.  The power of national governments to counter global cycles is greatly reduced, particularly when these global cycles have winners as well as losers.  If the reserve army of capital now includes China's and India's teeming millions, how can struggling Western nations spend their way out of such massive trouble?

Perhaps in this context, Keynesian counter-cyclical spending becomes a new form of first order change.  Governments borrow and spend to boost their economies, but capital continues to fly to locations where labour and resources are cheap.  Government spending continues to increase, capital continues to fly.  The boat stays afloat, but the sailors are leaning way out.

The question is, what to do?  Our current approaches aren't working.  But the prevous approach - cut and wait for things to right themselves - led to untold suffering and will again.  Even here in Queensland, our 20,000 newly-unemployed public servants will no longer eat out at city coffee shops in their lunch-hour, or be able to afford holidays to Queensland's already struggling tourist destinations.  The cycle will continue downwards.

What is the second-order change for this situation?  How can we sustain our globalised economy without selling out our poorest people, or indeed those in China or India or even worse, Africa?  Is there a way of combining Lord Keynes' desire to maintain the livelihoods of ordinary working people with the global reach of 21st century internationalism?  It's beyond me to answer that question, but I sure hope someone can.

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