Why This Economy Must Be Scrapped

 

Ted Trainer

9.7.2019

Most of the planet’s extremely serious problems are directly due to the kind of economic system we have. It is fundamentally flawed; it cannot be reformed to avoid generating the problems. They are being caused by the normal working of the system.

Many very different kinds of economic system can be imagined and have existed. It is important to realise that the one we have is not the only possibility or inevitable or ‘natural’; we could choose another kind.

What should be the purpose of an economy?

Most people would agree that the purpose of an economic system should be to organise production, distribution, exchange and development to enable a society to provide itself with the things it needs for a satisfactory quality of life for all. This should be done with a minimum of work, resource use, waste, stress etc., and in ecologically sustainable ways. In a satisfactory economy we would tackle the main decisions in a cooperative and rational way, with control in the hands of society as a whole, so that we could all discuss and work out what seemed to be the priorities and best arrangements.

But the economic system we have is nothing like this. What it does is:

There is a vast difference between gearing production to meet needs and organising it to make as much profit as possible for the few who own capital. When you let profit determine what is produced many needs remain ignored, especially the most urgent needs which are experienced by the poorest people, and the needs of ecosystems. This is because the best profits are never made by producing what poor people need, or what the environment needs, or what is necessary for social cohesion. You always make the best profits producing what middle and high-income earners want and are willing to pay for.

The market.

In other words, we have an economy which allows the market to be the major determinant of what is produced and who gets it. People are free to decide whether to produce or buy, and at what prices. This is claimed to be the most efficient way; the market is supposed to make the best economic allocations.

But the market actually makes the most appallingly bad allocations and investment decisions! The market does some things well and in a satisfactory economy there might be a large role for it. But if it is the major determinant, it will never allocate a fair share of output or scarce resources to those in most need. Nor will it protect the environment and do what is best for social cohesion. This is because in a market, things go to those who can pay most for them. As a result, the rich get most of the valuable resources and goods. For example, it is estimated that one third of the world's grain production is fed to animals in rich countries every year, while 800 million people are hungry. Why? Simply because that is the most profitable thing to do with the grain.

Even more importantly the development that results from market forces is inappropriate; the market develops the wrong things. Investment will not go into what is most needed by poor majorities, or by the environment. It is always much more profitable to develop the factories and infrastructures that will produce to meet the demand of richer people, especially those in rich countries.

These fundamental faults cannot be overcome without a great deal of regulation. A sensible economy would have to be under social control; i.e., the society as a whole would have to be able to decide how production, distribution and development were to be carried out. The best way to do this is of course problematic. Few of us would want it done by a big centralised state bureaucracy. However, it could be done in ways that were quite democratic and participatory, in the mostly small localised economies of the Simpler Way (See TSW: The New Economy.) Such an economy might have many goods produced by private firms and for markets, so long as these operated within guidelines and rules set by society.

The market economy enables and legitimises the process by which richer people take things the weak need, and in many cases take from them things they once had. For instance, people in rich countries take scarce resources poor Third World people need, including the land and forests they used to have, simply by being able to pay more for them in the global market. Corporations can take the sales or markets little firms had, just because they can produce more cheaply and therefore whole industries and regions can be devastated when some foreign corporation comes in and undercuts their production costs. Wall-Mart routinely destroys the economies of many small US towns, by undercutting the prices they have to charge and driving them bankrupt – that’s alright in this economy. Yes Wall-mart can sell at lower prices but that should not be the only factor determining what happens. In a satisfactory economy we would prioritise making sure everyone has a livelihood, that is, the opportunity to produce and contribute something valuable, even if that would not minimise prices.

This economy makes the individual’s fate depend on competing in the market. Some who are energetic or talented or who work hard (or who have great wealth) can be big winners. But many who are not are dumped into unemployment and poverty. A good society must be primarily collectivist; i.e., concerned with the public good and making sure all are provided for.

Growth.

This is the biggest fault of all. To conventional economists, growth is unquestionably good; indeed, the supreme goal. There is never enough producing, selling, investing, trading and consuming going on! The goal in all nations is to keep the GDP growing for ever. But continual economic growth is not just absurd, it is now suicidal. We are depleting world resources and destroying the environment because we are already producing and consuming far too much. There is now a vast ‘limits to growth’ literature showing that the world is far beyond levels of resource use and production that could be sustained (See TSW: The Limits to Growth.) There is now a De-growth movement working to get people to realise that a sustainable economy must have per capita levels of resource use far lower than they are in rich countries today.

But growth is crucial for a capitalist economy. Those with capital invest it to maximise their profits, so at the end of the year they have more capital than at the start, and then they want to invest it all in order to make as much money as they can next year. This can't happen unless there is constant growth.

Inequality.

Inequality is extreme and becoming worse. One fifth of the world's people are getting more than 85% of world income while the poorest one-fifth are getting only 1.3% of it. Oxfam (2017) recently estimated that a mere 9 people now possess about halfthe world’s wealth. A great deal of critical literature shows how the neo-liberal triumph has been responsible for the greatest wealth transfer in history, prompting enormous conflict and social breakdown in regions it has devastated. (Chossudovsky, 2004.)

This economy inevitably makes inequality worse. It is an economy which attends mostly to the rich, and further enriches them, for instance because the market mostly produces and sells what richer people want. Investment obviously goes where profits can be maximised, so little or none of the available capital goes into the poorest regions most in need of development. Over time the rich get more influence over the political process – for example, they can contribute to parties likely to adopt the policies the rich want. They get to own the main media and can reinforce the ideas they want people to hold. (In TSW: Human Nature it is argued that throughout history the greed of the rich has eventually been the main factor destroying civilisations.)

Trickle down.

A key assumption underlying the economy is that if there is growth then the increased wealth will in time ‘trickle down’ to enrich all. The claim is that the best way to solve problems such as poverty and unemployment is simply to encourage more business turnover, as distinct from taking deliberate action to redistribute wealth and jobs.

There are a number of reasons why this claim is offensive. Firstly, there is usually very little trickle down, and often just the reverse. This is most obvious in the Third World where there is often rapid growth resulting in accumulation of much wealth by the rich while the poorest people actually get poorer. It is also evident in rich countries like the USA where tax cuts for the rich have often been put through on a trickle-down rationale but result in little or no benefit to anyone but the rich. Over the last forty years US GDP has more than doubled but the income of almost all workers has not increased at all.

Even if it did work, trickle down would be an extremely inefficient way to meet needs. We urgently need more cheap housing and more hospitals, but instead our economy allows those with capital to devote it to whatever will maximise their profits, on the pretext that this will generate more jobs and incomes, enabling the government to collect more tax to devote to important tasks – when all of the available capital could have gone directly and immediately into meeting urgent needs.

Then there is the fact that if trickle down worked it would take a very long time to make a difference. Hickel (2017) is one who shows that at present growth rates it would take at least one hundred years for the average Third World income to reach the present rich world average – and by then rich world living standards would be literally more than fifty times as high as they are now, and the ecosystems of the planet would have long since disintegrated.

Smage (2019) presents graphs showing how very little trickles down to poor countries. Between 1960 and 2017 the poorest one-fifth of the world’s people increased their per capita income by $500 (deflated) but the rich one-fifth increased theirs by $34,000. The ratio of the income of the rich group to that of the poor group went from 28/1 to 48/1.

Finally, it is obviously morally unacceptable that the rich are allowed to develop whatever further enriches them while very large numbers of people suffer deprivation. The trickle-down rationale is no more than a myth perpetrated to legitimise a system that allows the owners of capital to gear the economy to their interests.

Globalisation.

Conventional economists are happy to see movement towards one integrated global economy and the passing of the era in which national economies were largely independent and in control of their own affairs. Now the fate of any country or town depends on whether it can survive in competition with all others in the world, finding something it can export more cheaply than any other, in order to be able to pay for the crucial imports from the global economy it is now dependent on. The supreme and sacred neo-liberal principle is that there must be minimal interference with the freedom of enterprise, investment and trade. Corporations must be free to invest in whatever will maximise their profits, and to close their factories and move somewhere else if it suits them. The most powerful corporations are free to come in and take over (buy up) a country’s firms, markets and resources, and a country is not able to ensure that its own productive capacity can be put into meeting its people’s needs. Corporations are free to put that capacity into producing for exporting into the global market. One consequence is that some of the hungriest people live in countries that are huge food exporters.

Critics of conventional economics argue that the top priority now is to turn against globalisation and develop small scale localised and self-sufficient economies which enable people to provide for themselves most of the basic things they need, using local resources and labour. This frees a country from having to devote its resources to exporting frantically in order to have the money to import everything it needs. Above all it enables a country to take control over its own fate, and to directly apply its land and labour to producing what people most need. Hickel (2017) is among the many who point out how the rich countries have fiercely opposed and prevented such ‘nationalist’ development (…even though their own erarlier development was achieved by protecting their infant industries.) They oppose regulation and insist on ‘freedom’ of trade and investment, because they want resources, labour and markets everywhere to be accessible to them.

Labour.

Conventional economists treat labour as just another commodity or ‘factor of production’ that can be used or ignored in order to maximise profits. However, labour should not be treated as just another commodity or input into production. Labour is people. It is alright to leave a brick idle or to scrap it. It is not alright to leave a person unemployed and without a reasonable income. Often, we should plan to keep people in jobs even though this would be ‘inefficient’ in conventional terms. In the present economy whether or not people have jobs is determined by whether the few with capital want more labour in their factories. It is wrong to let profit maximisation determine whether people are unemployed.

Unemployment is unnecessary, morally intolerable, and easily eliminated. We could simply develop arrangements whereby no one was unemployed. If only a limited amount of work is necessary to produce simple but comfortable lifestyles for all then we should just share that work between all who need work.

Unemployment provides a good illustration of how the rules of this economic system suit the owners of capital far more than they suit the rest of us. And the fact that unemployment is taken for granted and accepted as normal illustrates the dominance of capitalist ideology, which conventional economic theory reinforces.

In this economy there is constant effort to create jobs, and all must constantly strive to find work to do. However, the core ‘limits to growth’ point is that there is already far more work and producing taking place than is desirable. We should be trying to move to an economy in which we have dramatically reduced production and work. Similarly, it is wrong that people must all constantly search desperately for something to sell, when this is difficult because technology makes it easier all the time for a few factories to produce what people want to buy.

Automation: The robots are coming.

There is now much concern that robots will cause huge problems by taking over task’s workers perform at present. In a satisfactory economy, robots would be an unmixed blessing as they would reduce the work we all need to do. But in this economy their arrival is a major problem. Why? Simply because it is a capitalist economy. Automating tasks delivers benefits to the owner of the factory who no longer has to pay wages, but it inflicts damage on workers who no longer have incomes.

This is a good illustration of two crucial principles to which Marx drew attention. Firstly, a capitalist economy has deep contradictions built into it. The biggest contradiction in the system is that production to meet needs contradicts production to make profits. Secondly Marx argued that these contradictions will eventually bring about the self-destruction of capitalism. For instance, as we move towards the situation where all the factories are automated there will be fewer workers earning income enabling them to buy the factory’s products. That is, the system will strangle itself.

Booms and slumps.

There is something seriously wrong with an economic system in which booms and slumps occur. They occur when those with capital see lucrative profit-making opportunities and rush in but end up over-investing in them, often speculating wildly and borrowing heavily to do so (e.g., causing housing price bubbles). At some point the opportunities fade out and activity can collapse causing recession, unemployment, bankruptcy of firms, waste of resources, loss of jobs and immense damage to people and communities.

In a sustainable economy we would make sure booms and slumps didn’t occur, mainly by controlling capital flows, i.e., by limiting investment and production to what is necessary, and handling any fall off in demand in ways that prevent unemployment and bankruptcy. Again, this cannot be done without much social control over the freedom of the owners of capital to chase maximum profit.

Money, interest, banking, and debt.

It is not widely understood how important the finance sector is in causing many of our difficulties. It is the major determinant of the purposes that receive investment funds, because it is the banks who decide what ventures to lend to, and in a market economy loans go to the firms most likely to maximise profits. As a result, vast amounts flow into producing trivial things that will sell well and little or no money is lent to many projects intended to do socially necessary things. A major determinant throughout history has been the power to decide what purposes are to receive funding. The Duke of Wellington, for example, might have lost the battle of Waterloo had not the Rothschilds bank lent money to equip his army.

Fifty years ago, the finance industry was a relatively minor part of the economy, confined to routinely providing loans to industry and home buyers etc. But in recent years it has become enormous, making over 40% of US corporate profits (Sinn, undated). As wealth has accumulated the quest to invest it all profitably has intensified and led to wild speculation, causing numerous crises and melt-downs, notably the GFC.

Obviously, the more money that is borrowed or lent the more debt there is and the debt levels in just about all countries are very high and rising fast. Total global debt is now enormous, around three times global GDP (Turak, 2018). Why is it so large? It mainly represents the astronomical amount of wealth that the rich have accumulated and are seeking frantically to invest profitably somewhere, anywhere. The Marxist analysis by Baran and Sweezy (1966) stressed the problem of ‘surplus’ for capitalism; the need to find investment outlets for the ever-accumulating volume of capital. There is not much scope now to make good profits setting up another fridge factory or potato farm, so great effort has to go into searching for opportunities to lend and they are having to resort increasingly too speculative and risky possibilities. For instance, the GFC was partly cause by lending for ‘sub-prime’ housing mortgages.

It is widely recognised that the existence of the huge debt problem shows that the economy is deteriorating and is going to result in a crash before long. But the (poor) economic growth that has been achieved in recent years would have been far worse had it not been for all this borrowing; for every dollar increase in GDP debt has increased from $3 to $5 (Derived from Cochrane, 2019).That means economic activity has mostly taken the form of spending borrowed money.

Debt is a marvellous device for enriching the rich, because it means they can siphon wealth out of borrowers. All firms must borrow capital at some stage and add this to the cost of their products, so the lenders receive money from all of us. Interest on debt increases the amount we pay for everything. Kennedy (1988) estimated that 40% of the amount we pay for things is due to interest charges compounding up the production chain. For instance, if you borrow a sum from a bank to build a house you will probably pay back more than twice as much.

Interest is also the means whereby the rich get richer by acquiring the assets of borrowers who can't meet the repayments. Banks force indebted house owners and farmers to sell up, at low prices, and can then resell these assets.

The same process traps whole nations. When a country can’t meet its debt repayments the banks can force them to sell national assets such as airlines and ports, to the banks or to corporations eager to get the business. Thus, big European banks have taken possession of many firms and public institutions in Greece.

The most notorious practices of this kind are the Structural Adjustment Packages (SAPs) of the World Bank. Poor countries unable to pay off their debts are given more loans on condition that they implement neo-liberal policies such as opening their economies to foreign investors, reducing regulation, protection and subsidies, diverting spending away from social necessities into paying off their debts to rich world banks, developing the infrastructures foreign investors want, putting national resources into exporting to rich countries, and devaluing (which decreases the price we must pay for their exports while increasing the price they must pay for imports from us.) This basically just means increasing opportunities for corporations and banks to do good business. Needless to say, there is a huge literature on the fact that these policies are a delight to the corporations and consumers in rich countries while having devastating effects in poor countries. (Shah, 2013.)

Debt has been a menace throughout history. Hudson (2015) explains how in the ancient world it was realised that debt would lead to the ruin of a kingdom or a country if not dealt with, so after several years the common practice was to write off debts. Otherwise the king would find himself without workers or farmers or soldiers as all would have been taken into slavery by the few rich lenders, as payment for their debts. Thus, Hudson stresses that interest and debt are powerfully destructive, and that this explains much about our situation today. Increasingly things that were once free, such as university education in Australia, are being turned into commodities that must be purchased, and people must borrow to be able to pay for them, setting up lucrative income strands for lenders, and siphoning wealth from lower income people to the rich. Overall the interest system enriches the rich, because they don’t need to borrow much, and they do the lending that impoverishes the poor because they have to borrow more and have little capacity to be lenders. Hudson explains the significance today of the relentless push to get control of assets that then continually yield interest payments.

The fact that interest must be paid means debt must increase. When a new loan is made to a firm it creates that amount of money (just by putting numbers into the account), and adds it to the amount in circulation, but it does not create the additional money that the firm will need to pay back the loan plus interest. The interest can only be paid if more money is lent into the system somewhere later, enabling the firm to get/earn from the economy a sum equal to the loan plus interest. Thus, interest and growth are connected; if interest is to be paid the economy must grow over time, and in the zero-growth economy we must shift to there must be no interest (see below).

A slight complication is that in a zero-growth economy it would be possible for some to own capital and lend it for interest and then spend all this income back into the economy, thus paying for their lifestyle by hiring out capital. That economy would not grow as the interest would be a rent drawn from the economy and wholly spent back into it; there would be no accumulation of wealth by the lender. However, no sensible society would tolerate this when the public banks could be holding all savings and lending sums for a minute administrative fee.

Anyway, why should anyone receive interest payments? The question is never asked. If I lend you my surfboard how many should I expect to get back? If I borrow a book from a library, I am only expected to give one back. Why is it that when someone lends money it is taken for granted that they should be given back more than they lent. Various societies in the past have banned interest as immoral (including the Catholic Church in Medieval times.)

The conventional view is that interest (and profit) are the rewards to those with capital for risking their capital investing to set up businesses and create jobs. Yes, people who invest capital do take a risk; but what exactly is the risk they are taking? They are risking losing their capital and then having to work for an income like the rest of us!

In a zero-growth economy, to which we must move, there can be no interest payments. As Marx and many others have insisted, money should not be able to earn money.

Another highly unsatisfactory issue is to do with money creation. It is not widely understood that in the present economy private banks are allowed to create the money that continually goes into circulation. When trading banks (not savings banks) lend to a firm they do not first have to get the money from anywhere; they simply write numbers into the borrower’s account. Later they get all this paid back with interest.

There is no problem about money being created out of nothing; the amount needed to enable economic activity continually grows so has to be created somehow. The problem is that the government should be doing this and benefitting from any interest received, not private banks.

This is one of the most absurd and incomprehensible faults in the present economy. Vast amounts of wealth are allowed to flow to private banks as interest on money lent when it could be going to society’s own banks. The most ridiculous consequence is that governments go to the banks to borrow and then have to pay them billions of dollars every year in interest, when they could be ‘borrowing’ from government-owned banks at no interest. Australians pay out more than $15 billion every year this way as interest on the Federal debt to banks and individual lenders in the country (and much more is paid to foreign lenders). Many monetary reform groups emphasise all this, but little notice is taken.

Another highly unsatisfactory aspect of the banking situation is the ‘fractional reserve’ system. A dollar deposited in a bank can in effect be lent many times at once, yielding interest from each lending. Let's say you deposit $100 with a bank. If the bank is legally required to keep at least 10% of deposits to cover any sudden increase in withdrawals (i.e., must retain only a 10% fraction of reserves), then it can immediately lend out $90 to someone else. Let's say that person spends it and the recipient puts the $90 in a bank. That bank can immediately lend out $81. This process can go on until the original deposit of $100 has actually led to the lending of about 10 times as much money by the banks as a whole. In effect the deposited money has been lent 10 times, with the banks getting interest on each lending.

A similar ‘money printing’ process is involved where the US gets an enormous unearned/free amount of the world's wealth because the US dollar is the unit of currency used for most trading, especially paying for oil.  As trade increases there is a need for more dollars in circulation. The US meets the need by ‘printing’ more dollars – and then spending them to pay for imports! In this way the US gets a huge volume of the world's wealth without paying for it.

Many groups are now working for a totally different monetary system. However, few realise that in the new economy of the Simpler Way most of their concerns would not even arise because the zero-growth economy would only need a fixed amount of money circulating, so there would be no money-creation and fractional-reserve problems, and there would be no interest paid.

The environment.

Because the present economy is about maximising production and consumption it inevitably causes extreme and increasing damage to the ecosystems of the planet. We are taking far too many resources from nature and turning them into waste and pollution to be dumped back into nature (for more detail, see TSW: The Limits to Growth.). Technical advance cannot reduce these impacts to tolerable levels (for more detail, see Part Three in this volume).

Too many green people do not realise that the environmental problem cannot be solved unless there is dramatic de-growth to a zero-growth economy in which there are far lower levels of production and consumption. Obviously, this cannot be done in a capitalist economy where any slowing of growth results in recession.

The accelerating social breakdown.

Indices of social cohesion, ‘Genuine Progress’ and social breakdown are deteriorating. There is rapidly increasing discontent, evident in the Trump and Brexit phenomena. The numbers of homeless people on the streets is rising. More and more things are turned into commodities. Many people have little or no experience of community or solidarity or pride in their society. There are high levels of obesity, domestic violence and large numbers turn to alcohol, cigarettes and drug abuse. It is no surprise that the biggest health problem now is probably depression, or that the UK has a Minister for Loneliness.

The causal connections with the economy are not difficult to see. This economy forces everyone to behave as a competitive self-interested and isolated individual. All must focus on struggling to beat others to scarce jobs or to sell something. This economy stresses almost everyone, forcing many to worry about high living costs, debt, boring work, insecurity, unemployment, poverty, aged care and homelessness. Most people have to work at least twice as long as they would in a sane society. Many neighbourhoods are little more than dormitories for isolated families who have nothing to do with their neighbours. The economy needs workers fed and rested up ready for the factory, not thriving communities. They must also be able to move to new factories and mines, so they are nuclear families, unhindered by grandmas and aunts. So there is loss of the extended family and all the support it can provide.

A sensible economic system would devote resources to establishing the cooperative and caring arrangements that ensured that such problems did not arise. This economy cannotdo that; it must prioritise cranking up more and more production for sale, or recession and depression will occur. Budgets focus on building the infrastructures and assisting the industries the economy needs, not on building cohesion. Big tax breaks and subsidies go into purposes likely to boost the GDP. But try finding a budget line detailing spending to build cohesive communities or improve the quality of life.

Social cohesion depends primarily on non-monetary factors such as cooperation, mutual assistance and support, familiarity and friendliness, feelings of gratitude and debt and obligation to reciprocate, generosity and giving, trust, reputation and admiration and good citizenship, helping, reliability, concern for the other and the public good, and pride and admiration for one’s community (For more detail, see TSW: Social Cohesion and the Quality of Life.) None of these has any monetary value and when the priority is merely boosting the amount of production for sale these socially bonding factors are damaged and driven out.

Most disturbing is the culture the economy has produced. Nasty and brutal dispositions become normalised, taken for granted, and seen as acceptable. It’s acceptable for Walmart to come into a town and take all the business opportunities and thus destroy livelihoods and community. It is acceptable to drive rivals into bankruptcy, to pounce on a fire sale, to see the rich as having earned their privileges, and to take advantage of the misfortunes of others. Seeking to maximise one’s wealth is admired, it’s not being greedy. Luxury and the lifestyles of the rich sell magazines. The constant dishonesty in advertising is not offensive. Unemployment is natural and to be accepted, as the existence of losers left to beg on the street…

The basic cause of the situation is the market system (for more detail on the critique, see TSW: The Case Against the Market.) in this volume). Marx and Polanyi are among those who have analysed the damaging contradictions between society and the economy. Polanyi’s influential The Great Transition (1944) explained that no economy prior to ours has ever allowed the market to be a major determinant of what happens, and that the transition to our system marked an extremely important and undesirable step. Previously the economy was a minor component of society. Economic activity was controlled by the moral, customary and religious rules governing all behaviour in society. Market forces were either not allowed to determine what happened or were subject to strict social control by the general moral code. Gain and profit were either not involved; or if so, they were not important. What mattered was sufficiency, subsistence or producing for use to meet needs. Polanyi’s core theme is that by allowing the market to become separate and free from social control our society has made a serious mistake. It allowed the economy to be regarded as an arena in which those general rules no longer applied – rules such as care for others, don’t take advantage of others, make sure no one gets more from an exchange than the other, and charging interest is immoral – and instead the only consideration is maximising gain for the individual. Limitless self-interest becomes the driver and little or no attention needs to be given to the welfare of others or the public good. Polanyi argued that if not carefully controlled and limited, in time the market will destroy society and its environment. (See TSW:POLANYI.htm) These themes are highly relevant in understanding what’s happening in our society today.

Clearly a satisfactory economy is not achievable unless it is possible forall relevant considerationsto be taken into account when economic decisions are being made. Polanyi’s core point is that the present economy enables everything to be ignored except monetary costs and benefits. In the Simpler Way town assemblies will make the main decisions, not corporations and banks operating in the market, and therefore all considerations bearing on town welfare will be taken into account

Third World ‘development.’

As has been emphasised, in this economy development is determined by whatever will maximise the profits of those with capital to invest. Need is irrelevant and ignored. Your country will get investment in factories or plantations only if some corporation thinks that will make more money than investing in anything else anywhere else in the world. One consequence is that investment never flows into developing what is most needed. It goes mostly into producing things to export to consumers in rich countries, or to sell to elites in the poor country.

Conventional economics cannot envisage any alternative to this ‘trickle down someday’ approach, which inevitably results in development mostly for the benefit of the rich, i.e., those who own corporations and those who shop in rich world supermarkets. Meanwhile about 5 billion people live in poverty although they have around them most of the resources they need to produce for themselves thriving communities and a high quality of life. (For the detail, see TSW: Third World Development.) But the conventional economist insists that the only way to raise their ‘living standards’ is to produce more to sell into the global market economy so they can earn more income, then purchase goods from that economy, and accumulate the capital needed for developing the power stations, freeways, ports, houses etc. to enable the kind of industries and lifestyles the rich world has.

The Simper Way shows that this entire world view is not just totally mistaken; it masks the plunder that conventional development involves. Conventional theory is an ideology endorsing practices that enrich the rich by enabling mostly the kinds of development the corporations want, transferring to the world’s rich the resources the poor used to have, while asserting that this is the only way to satisfactory development. But highly satisfactory Simpler Way communities could be developed quickly, by ordinary people and with very little need for capital. The amount of resources that would need to be imported to build the necessary infrastructures is quite small and could easily be afforded if that was what national government’s prioritised.

The conventional view mistakenly and unwittingly makes the ‘uni-dimensional’ assumption, i.e., that countries vary only along one line sloping up from low GDP to rich world levels, and development is a process of moving up the slope; all good things become more available as they do this. That model fails to grasp the possibility that some countries might prioritise developing towards other goals (Bhutan seeks to maximise the Gross National Happiness not GDP); it fails to see that often increasing GDP reduces desirable development (as when land is transferred from peasants to corporate export plantations), and it ignores the fact that many desirable goals are independent of GDP (Cuba has a far lower GDP per capita than the US but has far better performance on health, equity and on environmental measures.) A definition of development solely in terms of GDP growth is of course precisely what the owners of capital want us to accept.

Simpler Way alternative development, however, is no good for global corporations and banks or local elites; they prosper most when people have no alternative but to work in corporations for wages which they then have to spend purchasing necessities from corporations. It is no good to them if people grow their own carrots rather than buy them from supermarkets. Conventional capitalist development maximises the amount of business for people with capital to invest. Simpler Way communal self-sufficient development is a mortal threat to that. Hence it gets no attention from the development industry (nor from the left, who also think only in terms of rising to rich world industrialisation and ‘living standards’.)

This economy inevitably generates armed conflict.

This might at first sound implausible, but it is an economy that must ceaselessly and fiercely go after more markets to sell into and thus more resources to put into producing goods to sell. This means a great deal of effort goes into trying to pressure countries to let corporations in to mine, buy up land, set up factories and sell. When this is resisted rich countries often provide money and arms to rebel factions and organise coups to install regimes willing to adopt the policies we favour. Increasing the scope for trade and investment is the basic concern in foreign policy, and often this involves the exercise of force, sometimes subtle but sometimes brutal. Much of the armed conflict in the world today can be understood in terms of the determination to maintain and expand ‘spheres of influence’. (For the detail see TSW: Peace and Conflict, and TSW: Our Empire.) The take home message is, if you want to remain far more affluent than all people can ever be, then you would be wise to remain heavily armed.

Contradictions leading to self-destruction.

Marx saw that major contradictions were built into the foundations of capitalism. For instance, workers interests contradict those of the capitalist class, for example it is in the interests of the factory owner to automate but that means fewer workers will get pay packets and therefore there will be less capacity within the economy to buy his products. In addition, many socially valuable investments are not made because they are not profitable, and there is a head on clash between boosting production for sale and saving the environment. Marx argued that in time these contradictions will lead to the self-destruction of capitalism.

The economy’s difficulties are increasing. Long term growth rates are falling and global debt has risen to enormous levels. It can be argued that a process of self-destruction is gathering pace. The neo-liberal onslaught that has triumphed since the 1970s can be seen as a highly successful push by capital to break down the barriers to profitable investment opportunities. Globalisation involved the sweeping away of much of the regulation that was hindering its access to resources and markets. Investors got into the many operations like power supply that governments sold off. Governments eagerly worked to free trade and capital flows. All this was a bonanza for the owners of capital, but not for ordinary people even in the richest countries. As has been noted the super-rich have risen to obscene levels of wealth but there has been no significant increase in their real incomes of US workers. Levels of inequality are rising, ordinary people are having more trouble getting by, and discontent is increasing, evident in support for Trump and Brexit and the French ‘yellow vest’ and European neo-fascist movements. Two effects are undermining the system, firstly the reduced capacity of the majority to purchase is driving the economy towards recession and secondly it is fueling discontent and disenchantment with existing economic and political institutions.

In the longer run there are much more powerfully destructive forces tightening the noose, most obviously to do with increasing resource and energy scarcity and cost and increasing ecological costs. These factors are also reducing the capacity to afford goods. The system is holding up mainly because the huge and accelerating debt is putting purchasing power into the economy. Gail Tverberg is one who argues that because demand is repressed, primarily due to low and stagnant wages (while profits and 1% wealth soar) the demand for and price of energy has been low. There is a strong case that oil from ‘fracking’ will soon peak, with sudden and seriously destructive effects. (See TSW: Your Oil Wake Up Call.)

Collins (2018) points out that the economy has shifted into a ‘catabolic’ or ‘canabalistic’ phase. As the capacity to do good business producing useful things deteriorates, investors turn to activities that plunder the economy. It’s as if a hardware firm starts selling its own roofing iron. The illicit drug industry and the Mafia are similar; rather than producing new wealth effort goes into extracting previously produced wealth. Much financial activity is of this nature, such as ‘short selling’ and ‘asset stripping’. Before the GFC a lot of money was lent to home buyers incapable of meeting the payments, because investors could not find less risky outlets. When the borrowers could not pay their houses were repossessed by the banks and sold off.

Similarly, in the US some of the money in the worker’s pay packet is put into a pension fund to be paid out to on retirement, but many corporations have taken these funds to invest, and ‘lost’ them. Many smart operators in the financial sector swoop in to speculate with the funds and siphon out fees. Sometimes they use the money to buy weak firms, arrange for them to borrow too much and thus drive them into bankruptcy, and thus sell them off, and as the pension money has become an asset of the firm it goes to the lenders and is lost to the workers who set it aside. So, accumulation and profit making are being kept up by activities which enrich big and smart investors (lenders) by getting hold of the wealth of little/dumb investors (borrowers), through granting them loans they cannot repay.

Another common mechanism is simply commercialising activities that the state once carried out without charge. A good example is where students must now pay for college and university education, meaning large loans must be taken out, generating large interest payments flowing to lenders from the earnings of parents and students. Again, the process does not involve lending to produce anything, it just enables wealth previously produced to be acquired by lenders. Collins and others see this process accelerating as the ever-increasing volumes of accumulated capital find it increasingly difficult to find investment opportunities in producing anything of value.

Merits?

Over recent centuries this economy has been remarkably effective in increasing production, raising living standards, and driving innovation and increasing efficiency. It also largely self-regulates - that is, it automatically determines what is to be produced and what firms are to exist or be phased out, avoiding what would be very difficult problems if they had to be handled by rational social decision making. Above all it has lifted almost people in rich countries to very high material living standards. It is therefore not surprising that most people would say that despite some faults it is the best kind of system we could have and there is not a good enough reason to scrap it. However, there are two major arguments against this view.

First, the few in rich countries could not have such good conditions if they were not getting far more than their fair share of the world’s resources, and they get them because of the grossly unjust way the present economic system works. Secondly, the system is unsustainable for resource and ecological reasons; it cannot go on like this for long and is likely to crash catastrophically within decades.

Economic Theory.

It should be said again that there are many different kinds of economy. Some do not use any money. Some do not have a market. In some New Guinea economies food is not produced to eat; the first yams of the season might have to be given to one’s uncle’s wife to meet traditional tribal obligations. Pigs are produced and given away or accumulated as signs of prestige. The food ends up being eaten but that is incidental. Conventional economic theory can tell us nothing about such economies, because it only deals in terms of monetary values and market processes. So, it is important to see it as no more than a theory about the workings of the economy we have; it is not about economics-in-general.

If we define economics as about production, distribution, consumption and development it is obvious that all factors relevant to these processes need to be considered. As the above discussion of Polanyi shows, this includes things like the anxiety an unemployed worker experiences, the noise the airport inflicts, the loss of carbon from the newly ploughed field. Because conventional economic theory leaves out all but monetary costs and benefits it is extremely narrow, warped, and misleading, and cannot be a good framework for thinking about economic issues.

But it’s worse than that; it provides powerful ideological support for the present economy. It gets people to take for granted an economy in which the market mechanism is central, capital is owned by a few, who are free to produce not what is needed but only what will make most profit for them, corporations are given great freedom to do what they want while impacting heavily on the lives of billions of people and on the environment, and in which the top priority is endlessly increasing sales when this is not improving the quality of life and is incompatible with ecological sustainability.

Firstly, the narrowness must be stressed; it is a theory and practice which considers only one factor, the monetary value of goods or actions. For instance, it allows the decision to build a factory to be decided by referring only to what its monetary costs and its monetary returns would be when there are many other considerations that ought to be taken into account, including, is the product important or a frivolous waste of scarce resources, will the factory be noisy, ugly or polluting, will the work conditions be enjoyable, what will be the social costs and benefits to the region? The few seeking to invest their capital don't want to have to take these kinds of costs into account, and conventional economic theory and practices allows them to be ignored. Therefore, the costs have to be paid by society, not the investor. (The political process often takes up these issues, but in a society believing in freedom for market forces, governments typically do not make sufficient effort to get firms to pay such costs.)

This relates to the way the theory allows firms to define many real but non-monetary costs such as environmental damage as ‘externalities’, and thus to avoid having to deal with them. The term implies that these costs are not really part of the economic calculus. When Walmart sets up in a town and takes most of the business the little shops previously had and thereby destroys the town’s economy it doesn't have to pay or even think about any of the devastating social costs. Yes, it produces cheaper goods, and yes, the locals chose to buy them, but that does not mean the decision-making calculus was satisfactory.

As noted above, economics should be defined in terms of all the factors involved in production, distribution, exchange and development, including especially the psychological, social, ecological and quality of life costs and benefits. Those who own capital are delighted that economic decisions can be made via a theory which ignores everything but maximising their profits and minimising their dollar costs. By contrast the discipline ‘Political Economy’ is based on the recognition that ‘economic’ decisions involve power and politics and deliberations about a range of considerations including morality, environmental impact and social justice, and if you attend only to monetary costs and benefits you will not represent the situation satisfactorily and you will not make the right decisions.

This narrowness makes conventional economic theory like a theory of art which dealt only with paint thickness; precise measures and equations would be possible, but it would not deal with the important questions and decisions.

Thus, economic theory rationalisesand legitimises an economic system that is massively unjust, causing thousands of avoidable deaths every day, destroying social structure and cohesion, leading us to ecological destruction, and lowering the quality of life even in the richest societies – all the while rapidly increasing the wealth of the obscenely rich. Conventional theory, and the economics profession, help to reinforce acceptance of this situation, by insisting that the free market works best for all, never suggesting that unemployment is morally unacceptable and easily eliminated, never questioning the power of private capital to be the overwhelming determinant of what’s produced or developed, never questioning the acceptability of private banks creating money, never questioning the acceptability of interest, and above all by asserting growth to be the supreme value.

It is also remarkable that the theory normalises and legitimises and never questions the right this economic system gives a few to receive vast incomes without having to do any work at all. In a satisfactory society this would not be tolerated.

Conventional economists fail to recognise that they ignore and cannot handle the biggest sector of the present economy, the sphere in which most production and work takes place. This is the household economy. In the household economy people share jobs, distribute benefits according to need, cooperatively produce what is best for all, prevent inequality from occurring, focus on the welfare of the collective, are not motivated by profit, give generously and share, do not seek to maximise individual wealth, and never use market principles to decide anything. Grandma gets what she needs even if she can’t do much work. Conventional economic theory can tell us nothing about the working of this economy. Its principles flatly contradict all those expounded in standard economic theory. In fact, a good family has an economy that is communist as Marx’s described it; the driving principle is ‘from each according to their abilities, to each according to their needs.’ Many other economies operate on principles that are totally foreign to conventional theory, including those in communes and eco-villages, ‘primitive’ tribes, many remaining peasant societies, the ‘moral economy’ of Medieval peasant communities, tennis clubs and monasteries.

As Polanyi and Tawney pointed out, there are enormous difference between our economy and that of Medieval Europe, in which merely monetary transactions made up a tiny proportion of the economic activity and were tightly controlled by strong moral and religions principles. This shows how current economic theory has powerful moral implications; it defines as acceptable many practices that are morally objectionable, such as deception in advertising.

The theory is also based on warped and misleading assumptions about human nature. It proceeds as if everyone is always out to maximise their own personal advantage or wealth in a competitive situation. This is what the winners would like you to believe because it legitimises their ‘success’. But in fact, much if not most of what humans do is motivated by quite different ideas and values. They help each other, volunteer, care, give, and often put the welfare of others ahead of their own. Behaviour within that huge sector of the economy that is the family never conforms to the assumptions the theory makes about humans.

Conventional economic theory is therefore a major element in the dominant capitalist ideology, i.e., the view of the world that it suits those with capital for us to hold but that deceives us into accepting arrangements that are not in our interests. This is not to say that it is a conspiracy. It is likely that few if any of its advocates are deliberately out to deceive us. The situation exemplifies Marx’s insight that the dominant ideas in a society usually reflect the ideas of the dominant class.

Is there any alternative?

It is easy to imagine an alternative economy that is just and ecologically sustainable, and a delight to live in (See the economics section in TSW; The Alternative, Simpler, Way.) The big global problems we have cannot be solved in or by this economy. As has been explained, its core elements are the basic causes of the problems, most obviously its commitment to growth, the market system, the freedom and power of capital to do what it wishes and allowing profit maximisation to be the driving force. It is a system with self-destructive contradictions built into its foundations and we are in an era when these are reaching critically unsustainable levels. The big global problems cannot be solved unless we manage to shift to a radically different kind of economy. It must be one in which:

Needless to say, this means a satisfactory economy cannot be anything like a consumer-capitalist economy. It would be quite easy to build and run such an economy – if that’s what people wanted to do. Many in eco-villages and transition towns are working on the task. Unfortunately, because the mainstream knows and wants no alternative to the growth and affluence way, our chances of making the required transition in the short time available are not good, but in view of the ‘limits to growth’ it is of the utmost importance to try to do it.

 

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