THE ECONOMY; A CRITICAL SUMMARY.

(7 pp.)

7.11.13

What should be the purpose of an economy?

Most people would agree that the purpose of an economy should be to organise production and distribution to enable people to provide themselves with the things they need for a satisfactory quality of life … with a minimum of work, resource use, waste, environmental impact, stress, etc.

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 decide on what seemed to be the best arrangements. (We might decide that it was best to have many things produced by private firms and distributed via free markets.)


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

a) allow a few very rich people to own almost all of the productive capacity in our society, the factories, mines, farms and corporations. Most of the world's corporations are now owned by about 2% of the world's people.

b) allow the owners of the productive capacity to decide what is to be produced simply in terms of what will maximise their profits. 


We do not say "What do we need, what should be produced... let us organise our productive capacity to produce those things." There is a vast difference between organising production to meet needs and organising it to make as much profit as possible. When you let profit determine what is produced many needs remain ignored, especially the most urgent needs which are experienced by the poorest people. 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 more 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 scarce resources to those in most need, it will never protect the environment, and it will never do what is best for social cohesion.  In markets 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 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; investment will not go into what is most needed by poor majorities, or by the environment. It is always much more profitable to develop and produce to meet the demand of people 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 now 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 localized economies of The Simpler Way. (See The New Economy http://socialsciences.arts.unsw.edu.au/tsw/TheNewEc.html.)  Such an economy might have a large role for private firms and for markets, so long as these were carefully regulated.

The existence of many distressing problems is directly due to the fact that we allow the economy to be determined by what those who own capital want. For example unemployment and poverty could be easily eliminated if society was in a position to allocate the necessary work among all who want work, or to give everyone a basic minimum income. But in this economy whether or not people get work depends on whether or not it suits corporations to employ them.

Most important is the way this economy enables and legitimises the strong taking things from the weak. For instance richer people take scarce resources poor third World people need, including resources they once had such as land and forests, 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 towns, by undercutting the prices they have to charge…that is alright in this economy. Again it is an economy which allows market forces to be the main determinant of what happens and that enables the richest and most powerful to do what they want, rather than one which ensures that what is best for all is done, e.g., ensures that all can work and produce and earn a reasonable living and that communities are protected.

Growth.

To conventional economists growth is unquestionably good and it is the supreme goal. There is never enough producing, selling, investing, trading and consuming going on!. Their goal is to keep the GDP growing for ever!  But continual economic growth is absurd. We are depleting world resources and destroying the environment because we are producing far too much already. The world is far beyond levels of resource use and production that could be sustained.  A sustainable economy must be a zero growth economy, in which per capita levels of resource use must be far lower than they are in rich countries today. (See The Limits to Growth Analysis. LIMITS.htm)

Growth is crucial for a capitalist economy. Those with capital want to invest it to maxismise their profits. At the end of the year they have more capital than at the start, and then they want to invest all this in order to make as much money as they can next year. This can't happen unless there is constant increase in the amount of producing and selling going on. Capitalism's biggest problem is that there will be insufficient investment outlets for all the capital that is constantly accumulating. This is the major force pushing for globalisation; i.e., the breaking down of all the protective and regulatory barriers that previously kept corporations out of many fields.

Consider the absurdity of pursuing growth when we already work at least two times too hard! If we designed a sensible economy we would do far less producing, resource consuming and work. Yet we have an economy in which the top goal is to constantly increase the amount of producing going on.

Trickle down.

The assumption is that if there is growth then the increased wealth will in time "trickle down" to enrich all. The best way to solve problems like poverty and unemployment is claimed to be simply to encourage more economic activity, as distinct from taking deliberate action to redistribute wealth and jobs.

However 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 and accumulation of wealth, while the poorest people actually get poorer.

Tickle down is an extremely inefficient way of meetings 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. The government then collects a fraction of these as tax to devote to important tasks -- when all of it could have gone into meeting urgent needs.

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.

Inequality.

Inequality is extreme and becoming worse. One fifth of the world's people are getting 86% of world income while the poorest one-fifth are getting only 1.3% of it. About 1% of people now hold about 40% of wealth.  About 500 individuals have as much wealth as the annual income of the other 6+ billion people on earth.

This economy inevitably makes inequality worse.  Investment goes where profits can be maximized, so little or none goes into the poorest regions most in need of development.  It is an economy which attends mostly to the rich, and further enriches them.  We do not ensure that all are provided for, e.g., that all have a livelihood.

Globalisation.

Conventional economists are happy to see the emergence of one 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. The supreme and sacred principle is that there must be no interference with the freedom of enterprise, investment, trade.  Corporations must be free to invest in whatever will maximize 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 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.

Critics of conventional economics argue that the top priority now is developing small scale localized economies which enable people to provide for themselves most of the things they need, using local resources and labour. This frees a country from having to export 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.

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 critical economists insist that labour should not be treated as just another 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 very 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, avoidable, and morally intolerable. We could easily develop an economy in which it did not exist. If only a limited amount of work is necessary to produce simple but comfortable lifestyles then we should just share that work between all who need work.

In this economy there is constant effort to create jobs, and all must constantly strive to find work to do. However the 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 cut production, work and employment. Similarly it is wrong that we must all constantly search desperately for something we can sell, when this is difficult because technology makes it easier all the time for a few factories to produce what people want to buy.

There is also something seriously wrong with an economic system in which booms and slumps occur.  In this economy people with capital over-invest (often speculate wildly) in what seem to be highly profitable new opportunities, these eventually collapse and then there is recession causing unemployment, bankruptcy of firms, waste of resources and immense damage to people.

In a sustainable economy we would make sure booms and slumps didn't occur, mainly by controlling capital flows, limiting investment and production to what is necessary, and preventing any unemployment and bankruptcy. (We would arrange to sensibly de-deploy workers and restructure firms without dumping anyone.)

Money and debt. 

It is not widely understood that in the present economy private banks are allowed to create, in effect print, the money that goes into circulation, lend it to borrowing corporations, and then get it back with interest.  The most absurd aspect is that governments go to the banks to borrow and pay them billions of dollars every year in interest, when they could be "borrowing" it from the government's bank at no interest. Even more important, banks determine what the money is lent to do, by deciding which investors to lend to.  Thus huge amounts flow, into and out of national economies causing booms and crashes (e.g., the Asia crisis, Ireland…), and into speculation in risky ventures (e.g., housing lending to people who will not be able to repay.)

This power private firms have to create money, lend and control debt and interest rates causes immense problems.  For instance because Greece is in impossible debt it is being forced to accept even greater debt, loans, at higher interest rates, and to pay the interest it is having to divert funds from pensions and welfare, and sell national assets.   If Greece could print its own money (prohibited by the EU) it could enable much development of local industries to meet local need using local labour and resources. (This capacity to create our own money and not have to go to banks for it is a crucial element in The New Economy.)

In other words the present money, banking, debt and credit system works massively in the interest of the rich who own capital and banks, and actually produces a flow of wealth from the poor (who have loans and pay interest) to the rich (who have capital to lend).  More importantly the monetary system allows the rich few to control what is developed and who can get loans on what terms, and traps many into unpayable debt, and therefore into having to pay high interest no matter how poor they are, and ultimately into having to sell their assets the banks cheaply (e.g., home repossessions.)  This mechanism has been central in the history of power and inequality (See The History of Debt http://socialsciences.arts.unsw.edu.au/tsw/Debt.notes.htm).  Obviously a totally different monetary system is needed. In a satisfactory economy communities could get cheap or costless capital (money printed by government banks and lent at no interest) to develop the ventures they need.  (See The New Economy, http://socialsciences.arts.unsw.edu.au/tsw/TheNewEc.html.)

            The environment.

The present economy 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.  Technical advance cannot reduce these impacts to tolerable levels.  The environmental problem can only be solved by shifting to a zero growth economy in which there are much lower levels of production and consumption.

Putting economics in its place.

In present society economics is supremely important; the overriding concern is producing and consuming and increasing these constantly over time.  In a satisfactory society these would not be very important issues. We would arrange to supply what all people need for a good life with a minimum of work and production, and then give most attention to much more important things, like cultural activities, learning, enjoying ourselves, arts and crafts, solving social problems etc.  Economic criteria would be far less important than moral, social and ecological considerations, e.g., often we would not do what was most economically efficient or profitable because it is much more important to do what is good for people or the environment.

"There is no alternative."

It is widely assumed that there is no satisfactory alternative to free market or capitalist economy. The only alternative most people can think of is big-state, centralised and authoritarian "socialism" or "communism". But socialism as we have known it has also been for affluence and growth. The Simpler Way is based on a new economy that is mostly made up of small, localised, largely self-sufficient, cooperative economies, in which the market is at best relatively insignificant, we control our local economy via participatory democratic processes (e.g. town meetings), there is a large cashless sector, involving working bees, free goods, giving and mutual aid. (See The New Economy.)

Economic Theory.

Conventional economic theory is extremely narrow, warped and misleading. It is not about economics-in-general (for instance it only deals with things that have a monetary value, so it does not take into account housework or mutual assistance, and it cannot be applied to aboriginal societies). It is basically only about a capitalist economy, and it provides powerful ideological support for such an economy. It gets people to take for granted an economy in which capital is owned by a few, who  produce not what is needed but only what will make most profit, corporations are given great freedom to do what they want while devastating the lives of billions of people and the environment, and in which the top priority is endlessly increasing sales when this is incompatible with sustainability.

Economic theory rationalises and legitimises an economic system that is massively unjust, causing tens of thousands of avoidable deaths every day, destroying social structure and cohesion, is leading us to ecological destruction, and lowering the quality of life in even the richest societies… and now rapidly increasing the wealth of the obscenely rich. Conventional theory, and the economics profession, help to reinforce acceptance of the situation, for example by insisting that the free market works best for all, by never questioning private ownership of capital, by asserting growth to be the supreme value, etc.

Economic theory and the current economic system deliver most of the world's wealth to the rich, including the professional classes who work for capital, while they deprive the majority of a just share, especially billions of people in the Third World.

The future?

It is obvious that the economy we have is destroying the ecosystems of the planet, depleting resources, and is decreasingly capable of providing for all people.  Resource scarcity, especially energy prices, will increase, and climate and other ecological problems will become more serious.  The fragile financial system is likely to trigger very serious breakdowns from which we are not likely to recover.  It will become more widely recognized that there must be transition to a very different kind of economy.  Many within the Ecovillage, Transition Towns and Simplicity movements are working to enable this.  (See a lengthy discussion of the transition issue; TRANSITION.htm.)

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More detailed accounts

GROWTH. GROWTH.htm

MARKET. MARKET.htm

MONEY. MONEY.htm

THIRD WORLED DEVELOPMENT. ThirdWorldDev.long .htm