ECONOMIC THEORY.
To a large extent the highly undesirable outcomes of our economic system are due to the dominance of conventional economic theory, which seriously misleads and distorts thinking. Following are some of the most important faults.
It is extremely narrow and limited; there are many economic phenomena it cannot deal with.
Conventional economics is basically only about production for sale; i.e., the volume of business turnover or output or GDP. This leaves out many important economic phenomena. For instance possibly one-third of all the work and production that takes place is not performed for money...because it is housework. People make breakfast and sweep up without payment in money. They give many things to each other freely, including advice, company, help and entertainment. There is also a big voluntary sector of the economy, including many people who work in charities and aged care. Conventional economic theory totally ignores all this, because what is produced is not sold. This fault means that many important costs and benefits of economic actions are not taken into account at all, costs such as the boredom of unemployment or the loss of a view. It also means that the most important benefits of productive activity are ignored, i.e., the feelings of satisfaction people get, for example from the way their workplace runs, or the peace of mind that comes with a secure job.
In many cases values other than money are the ones that should be the main determinants of what is produced and who gets it. Often something should be produced or not produced, or made available to specific people, because it is just, or morally right, or good for society or ecologically appropriate. In other words there are many other important considerations than money value that should be taken into account in economics. Many of the most disturbing problems in the world are due to the fact that the market, i.e., considerations of mere cash value and profit to individual bidders, is allowed to determine what is produced or developed or who gets things, when these decisions should be made mainly in terms of what is just, satisfying, morally right or ecologically sustainable. (Polanyi put this in terms of the need for the economy to be “embedded” in society; Dalton, 1968.)
In these large non-monetary aspects of the real or full economy the rules which hold within the merely cash sector are more or less irrelevant or invalid. Whether or not children get toast at breakfast, or you help a friend with problems, is not settled by calculating dollar costs and benefits. Many things are priceless and in many cases it is meaningless to try to talk about dollar costs or to base decisions on them. Conventional economic theory is totally incapable of dealing with these many economic phenomena. For example it is of no use in understanding the economics of Aboriginal societies where there is no money. In tribes production, distribution, consumption and development are governed by many social and moral rules. The theory is just about as useless in calculating the real cost benefit situation involved in whether to close down a factory. It can’t begin to calculate the psychological cost or the cost to the town’s morale because these cannot be measured or discussed in terms of dollars.
To repeat, if we think of economics as being about what happens in the production, distribution and exchange of goods and services, then it is obvious that a great deal of what happens has little or nothing to do with money or monetary value, i.e., that there are many other criteria, considerations or values which determine what happens and ought to be taken into account.
It is therefore a seriously impoverished, insufficient vocabulary or set of concepts for dealing with the full range of economic phenomena. There is so much you cannot even begin to discuss, let alone represent satisfactorily, if you confine yourself to only talking about the money value of things. It is as if we were trying to discus art but the only terms we could use were those describing the thickness of paint. We could not even begin to discuss so much that is important about art.
The distortion; the warped understand that results.
Even more important is the way the set of concepts or terms conventional economic theory uses distorts our thinking about and understanding of production, distribution exchange and development. Firstly because only terms to do with money value are used we are strongly inclined to think that the only things that matter in economics are money costs and benefits, and that all the other factors noted above are not important or not relevant.
The theory therefore leads us to think that things like producing to share, or to help others, or to meet social obligations, are not part of economics, or are only parts of primitive economics but not proper economics. In tribal societies people produce food primarily to satisfy social responsibilities, such as having to give the first yams to your uncle. Food gets distributed and eaten but that is not the primary goal. Similarly a tribal person will tell you that he will not buy that item of food even if it is very cheap, indeed he will not eat it under any circumstances … because it is his totem and eating it is taboo. Here is a situation in which rules governing production, consumption and distribution have nothing to do with money or personal gain or costs and benefits. Conventional economic theory cannot deal with these kinds of economic process at all, because money values are not involved and things are not done to maximise monetary gain. It leads us to regard these things as not to do with economics. Our thinking is therefore misled, distorted.
Other good examples are abundant with respect to the environment. Just because the damage that economic activity causes to the environment can’t be discussed in terms of dollar costs, conventional economists have the hide to identify these as “externalities”; i.e., as not really parts of economics at all!
Similarly offensive is the way conventional economics treats everything as a commodity for sale. Yet many things should not be treated like that, especially labour, land and money. Whether people get jobs should not depend on whether someone can make a profit buying their labour, as if it were bricks or fish. In the era of globalisation and neo-liberal triumph everything is being made into a commodity to sell, including public assets, personality, loyalty, identity, tradition, culture and things people ought to have a right to like water and health care whether they can pay for them or not.
The ex-head of the World Bank, Lawrence Summers, said it was better to locate toxic industries in the Third World, because the cost of a death there is lower than in the rich world. That’s how conventional economics gets people to think.
“Development” shows how economics does terrible things to the human mind. It gets intelligent people to think that the best way, indeed the only way for a poor country to develop is to increase the amount of production for sale into the global economy, and to think that it is a bad idea to allow more productive capacity to go into meeting needs of poor people immediately and outside the cash economy.
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Economists have a choice here. Either they can
a) define economics as only involving dollar costs and benefits, in which case they will be able to construct neat and precise equations, but their discourse will be largely irrelevant and grossly misleading,
or they can
b) accept that economics is about what happens in production, distribution, exchange and development, and that many factors other than money values have to be taken into account to understand what happens and to discuss what ought to happen, and that economics is therefore a very messy and imprecise realm, overlapping with politics, sociology and ecology.
Some of the essential definitions built into conventional economics are viciously misleading.
This is most obvious regarding the terms “living standards”, “productive”, and “efficient”. When conventional economists talks about the most “productive” and “efficient” investments all they mean are those that will maximise the financial return to the investor. But as has been explained, almost always this will not be the one that is likely to do the most needed things. Thus conventional economists will say it is a much more efficient use of capital to build one luxury mansion than fifty humble cottages for very poor people, or to grow luxury crops for export than food for hungry poor people. But in fact the market is the most appallingly inefficient way of distributing food -- it will not deliver enough to millions who are hungry.
Similarly we are all in favour of improving “living standards”, but all the conventional economist means by this term is increasing the GDP or sales per capita, a definition which is delightful for those with capital to invest. “Living standards” should be defined in terms of overall quality of life…(which is not improved by raising the GDP in rich countries.)
In these ways the theory’s vocabulary is not just very narrow, it distorts our understanding. It inclines us to see things in ways that are not valid, or to see things as acceptable when they are not. We should not see labour as a commodity, or the environment as an externality, or the production of a mansion as the most efficient use of capital for housing – but this theory, this way of discussing economics, leads you to make these mistakes.
The GDP is taken as the important measure.
The supremely important measure of economic progress is taken to be the Gross Domestic Product, i.e., the value of all the production or consumption taking place.
The first problem here is that the GDP is not a measure of wealth or welfare. It only adds together of all the spending that is taking place. Some of this represents benefits but some of it represents costs and therefore reductions in welfare. For instance if we have a social system that generates several billion dollar road accident costs each year, then obviously the amount we have to spend on this problem represents a reduction that accidents make in our welfare. Yet economists add all expenditures to the GDP and pretend that the total represents the level of our income and welfare.
The GDP is not an indicator of anything that matters much. Whether the amount of production increases or decreases is not important; what matters are things like whether welfare or happiness or the quality of life increases, or unemployment and poverty decrease. In fact the most important factors for any sensible accounting for long term economic viability and capacity to produce are ecological. Why don’t we just measure what matters and forget about the GDP? The answer of course is mainly because the owners of capital want us to accept as our top priority increasing the volume of buying and selling that is going on all the time.
Another major fault in the GDP is that it only measures throughput , i.e., production, expenditure or income, and therefore gives no indication of stocks of wealth or changes in these. The GDP of a country which makes a lot of money in one year selling off its forests might give the impression that it has become richer, but if we were to take into account the loss of this stock of timber and ecological wealth we might find that despite the cash income it has become much poorer.
The growth assumption.
The absurdity of holding the growth of GDP as a goal, let alone the supremely important goal, has been emphasised above. Conventional economic theory does not give any attention to the possibility or merits of the steady-state economy we must have in a sustainable society. It can tell us nothing about the way to run such an economy, the problems that will arise, the kinds of institutions we will need. For instance there is no discussion of the implications of an economy in which there cannot be any interest payments.
Acceptance of the market as the basic mechanism.
As has been discussed above, no aspect of conventional economic theory has more disastrous consequences than the assumptions that economics is about what happens in markets and that the best way to conduct economic affairs is via markets. The market is claimed to be the most efficient way to allocate resources and incomes and to determine production and who gets output. In fact it is only efficient at maximising returns to investors, purchasers and sellers and it is appallingly inefficient at meeting needs, ensuring justice, maintaining social cohesion or caring for the environment. More importantly, there are many other ways to organise an economy than in terms of market relations, but you would never realise this from conventional economic theory.
As has been explained, the market mechanism does some things well and might have an important place in the transition to a satisfactory society, but market forces are far more responsible than any other factor for the misery in this world. Globalisation is being legitimised in terms of the sanctity of market forces, when in fact it is causing a holocaust of impoverishment and corporate plunder. To argue for freedom for market forces is to argue for freedom for the rich and their corporations to do and take whatever they like. We cannot have a satisfactory society without far more social control and regulation than we have now (not necessarily by the state), and therefore without greatly reducing the scope for market forces.
Conventional theory also assumes that markets are self-regulating, i.e., they automatically adjust supply to demand. If things are not working well the conventional economist will say it’s because the market is not free enough to work it’s miracles. Yes, indeed markets will automatically adjust, but that does not mean the adjustment will be socially desirable. For example if the supply of petrol becomes very scarce the market will raise the price and bring supply and demand into line – but then only the rich will be able to afford petrol. That’s not an acceptable way to distribute a vital resource. This is a grossly unjust way. It is not a way that attends to needs or rights. If the poor are to get a fair deal or if the environment is not going to be sold off for profit then there must be a great deal of regulation, i.e., “interference” with and contradiction of market forces. We do not expect machinery like cars, sewer systems or a tennis club’s administration to run smoothly without any effort on our part to control what happens. A good economy is social machinery that will need a great deal of guidance and regulation if it is to work well. (Of course we must admit that we are not very good at doing this; and to date attempts have mostly involved big, clumsy, authoritarian state bureaucracies. The new economy will be small and stable, making the social control much less difficult.)
The human nature assumptions within the theory.
Conventional economic theory is firmly based on assumptions about the nature of humans which are highly challengeable or wrong. We are assumed to be self-interested individuals who enter economic relations to get as much as possible, to maximise their own advantage in competition with others. This is an acceptable statement about tendencies and behaviours that can be observed, but it is not valid as a summary description of human nature. Humans are also capable of cooperating, caring, sacrificing and nurturing others, and production and distribution and is often motivated by these more admirable tendencies. Much work is done because it is seen as meeting moral, religious or traditional obligations, not because it will lead to gain for the individual. If you put humans in a situation where their survival requires competitive self-interest, and this is what our economy does, do not be surprised that that's the way they will tend to behave. But set up situations in which people benefit materially and spiritually by helping and cooperating and giving, and humans will happily behave in those ways.
Conventional economic theory therefore is only about the ways of going about production and exchange that a particular and nasty kind of human would engage in, and the economy we have obliges us to behave in these ways. This is as silly as if we had a theory of plant growth that was only about the way plants grow when soils are salty, i.e., a theory that only deals with some of the conditions plants can experience, and then we developed an agricultural practice which tried to make plants grow only in salty soils.
Again there are ideological connections. It suits the rich and powerful if we see humans and the economic situation as "naturally" being about competition between individuals to get as much as possible…because if we all accept this we are accepting a situation that works mostly for the rich.
It is not a general theory of economics; it is only about a particular kind of economy.
Conventional economists proceed as if their economic theory states the way things happen in that realm of the natural universe we label economics, just as chemical theory gives an account of what happens in the realm of chemical substances and reactions. We are therefore led to believe that conventional economics has discovered certain laws about the economic realm, such as when supply decreases price increases. All this is seriously mistaken.
The “laws” conventional economists state only describe what happens in a particular kind of economy, the one adopted in our society, and one which works as it does because of the particular values and habits people in our society have. For example it is not true that if demand increases price increases. Sometimes in some economies and in some situations this is what happens, but it is not a general law describing what happens in economies. For instance it never happens in a good household economy or tribe. If you find that there are not enough weet-bix in your house for all to have their normal breakfast it is not the case that the price you all have to pay for breakfast increases. What happens is something that conventional economists cannot explain; i.e., you share the weet-bix without any change in their price, indeed without any thought about their price. The household economy runs according to totally different rules compared with those the conventional economist assumes, rules which include considerations of morality, justice and environmental quality. The calculations conventional economists make and their laws are in terms of a unit that household economies almost completely ignore in making distribution and production decisions, i.e., dollar values. The conventional economists units and laws refer only to the kind of economy found in countries like Australia. They do not apply to the economies of Aboriginal societies.
What’s more, it is only a theory of capitalist economics.
Conventional economic theory is basically only about an economy in which
· Things are produced etc. for money, and only money costs and benefits are taken into account.
· Outcomes are mostly determined by market forces and competition,
· Some people have capital, and they are allowed to decide what to produce in terms of what will most enrich themselves.
These are the defining characteristics of a capitalist economy and there are many economies that do not have these characteristics.
It is therefore not a theory about economics in general; it is only a set of concepts that apply to a capitalist economy. “Socialist” or “communist” economies have also been capitalist economies, i.e., based on the assumption that investment of capital is essential, the difference being that the capital is not owned by private individuals. (On the huge difference between capitalist and alternative/appropriate development where capital is not important, see Appropriate Development.)
Consequently thousands of students studying economics think they are learning about what happens in the economic realm of human behaviour and experience, but in fact they are only learning about what happens in one type of economy. They are also learning that no other kind of economic system exists or is worth thinking about or is even conceivable.
Economic theory as part of capitalist ideology.
It is not just that conventional economic theory gives a limited, partial and distorted account, nor that it is only about one kind of economy. More important is the fact that it gives the view of economics that it suits the owners of capital to have the rest of us accept.
Consider again some of the key themes in conventional economics and ask ourself, who benefits most when these ideas are accepted as normal, legitimate or the only way?:
· It deals only with the monetary costs and benefits of production for sale, enabling many costs like the boredom of work, noise, pollution and the stress of unemployment to be ignored by the producer, and therefore paid by someone else.
· It therefore ensures that considerations of morality, justice, social and ecological effects (which should sometimes prevent profitable activity) can be ignored – because the only factors taken into account are dollar costs and benefits.
· It takes the supreme goal of economics to be increasing sales as much as possible, for ever. It assumes that economic growth means more wealth and therefore more welfare and higher living standards. It defines GDP as “wealth” or “welfare”. So we are led to endorse any action that will increase the GDP or sales. Helping to increase business turnover seems to be the way to increase welfare (when we now know that the quality of life does not increase with GDP growth.)
· It endorses and never challenges the right of a very few very rich people to own a society’s productive capacity, i.e., its factories, mines, resources etc.
· It takes for granted that those with capital have the right to decide what is to be produced, and to do this solely in terms of what will maximise their profits.
· It legitimises the market as the supremely effective and efficient way of allocating things and of determining what will be done or developed. This gives those who are rich and powerful the freedom to produce and to take what they want, by outbidding others. It means that the idea of society regulating the economy is regarded as in principle a bad idea. The most serious sin now is to “interfere with the freedom of trade.”
· It encourages governments to sell off profitable public enterprises and assets to private corporations, because it is taken for granted that private enterprise must be more efficient.
· It defines labour and the environment as mere commodities that can be bought and sold without concern for their welfare, or as externalities that can be ignored because they are not really relevant to economics. Again this means producers can ignore those costs.
· It defines “productive” and “efficient” only in terms of what will maximise profit when often that is appallingly inefficient at achieving crucially important economic goals, such as eliminating hunger. This is delightful for capital owners – whatever will maximise their profits is defined as the most “efficient” and “productive” use of capital.
· It defines “development”, “living standards” and ”progress” not in terms of improving the quality of life but in terms of raising the volume of business turnover or GDP. As a result development becomes development of whatever will maximise the profits of transnational corporations. Who is most delighted when increasing the GDP, business turnover, is taken as the supreme national goal?
· It rejects, indeed ridicules any concept of subsistence or self-sufficiency. “Don’t ever try to produce anything to use – always producer things to sell, to get money to spend buying the things you want.” This prevents the Third World from adopting appropriate development. It is delightful for capitalists because it means that instead of people ignoring those with capital and providing for themselves people have to sell commodities and labour to firms and buy what they need from them.
· Conventional economic theory is built on the assumption that human beings are self-interested separate individuals seeking to maximise their income in competition with each other. This is the way the owners of capital want you to think, because you will then accept struggling in the market place for what you need, and accept that it is "natural" and inevitable that some do better than you in the competition. But humans have a strong tendency to work together, cooperate and help each other and do what is best for society. The possibility of organising a society on these lines is ruled out when the other view of human nature is constantly reinforced in statements of economic theory.
Obviously all these ways of seeing economics are the ways that suit the owners of capital. Those people are delighted when we think about economics in these ways. These ideas should therefore be understood as part of capitalist ideology . They make up a world view which greatly benefits the rich when the people in general accept it. There is no better example of what Foucault identified as a “discourse”, a way of talking and thinking, a vocabulary, which gets people to see things in a way that serves the interests of the rich and powerful.
This is not to say that it is all a deliberate conspiracy. Often the dominant or taken for granted ways of thinking in a society end up being those that it suits the dominant class to have every one believe, simply because those in power tend to talk and theorise only in those ways and in time everyone hears nothing else. It is not surprising that all people come to accept these ways of thinking without question. Usually even the ruling class sincerely believes the dominant ideology. There was a time when kings as well as serfs believed kings have a divine right to rule. In our society people are exposed to nothing but neo-liberal rhetoric so it is not surprising that they come to see that representation of the economic world as normal and the only way things could be.
We should therefore study POLITICAL ECONOMY, not economics.
Any economy can be seen as a particular, selected set of rules governing production, distribution, exchange and development. There are other possible sets. There is no natural or inevitable way to organise an economy. Aborigines have elaborate rules for economic affairs but these do not involve money. Communes have rules to do with sharing and access to free goods and contributions to working bees. In our economy the rules are to do with trading for money within competitive markets.
Also in any economy some individuals and groups have more power than others to get what they want. Maybe in a tribe priests or the old people or the men have more privileges and authority enabling them to have the best parts of the animal killed. In our society the rules of the economic system give much more power to those with capital. Consider the extremely high fees charged by lawyers and specialist doctors. These exist because these groups have the power to set their fees as high as they like. They are not set by competition in a market. The rules of the economy in our society give little power to disabled or poorly educated people. And many of the biggest and most juicy prizes are monopolies given to one corporation by government, especially in telecommunications, gambling, media and many other fields.
You cannot analyse what happens in an economy satisfactorily without considering these power phenomena, especially the capacity to influence governments to set the rules and they often set them to favour one group over another. You will not understand what’s going on in an economy if you attend only to market phenomena.
So the study of economics should include the study of the differences in power of groups to get what they want, including their power to establish the rules of the system. Some have more capacity than others to get the rules to suit their interests. Therefore it is essential that the focus of study should be not economics but Political Economy, a discipline that includes far more than market phenomena and especially one which deals with the political or power factors affecting production, distribution, exchange and development.
Economists.
All this is a dreadful indictment of the economics profession, especially the academics. How can it be that theories and practices that are often so patently unsatisfactory, indefensible, misleading, unjust, vicious and damaging, and have had such catastrophic consequences on the lives of almost all people on the planet, can go so unchallenged? This is quite a disturbing and puzzling phenomenon and it has depressing implications for the capacity of the human race to recognise, confront and deal with its problems.
Most economists have a vital interest in working within conventional theory and not questioning it, because most of them work for corporations, banks or governments whose interests are well served by the neo-liberal way of thinking about economics. But why do the academics teach this doctrine, without even telling their students that it is so problematic? These days universities have to attract students in order to pay their way, so schools of economics are going to teach the things that corporations and governments want students to learn, and students are going to want to learn only those ideas that will get them a good job in a corporation. The result is that large numbers graduate from economics courses without ever having been introduced to the kinds of criticisms dealt with in this discussion.
We should be very angry.
We should be extremely angry about conventional economic theory and practice. They produce and legitimise many actions and situations that are dreadfully bad. Thy are responsible for most of the chaos, deprivation, poverty, illness, waste, misery and environmental damage in the world, especially for the gross injustice generating the poverty of two to three billion people in the Third World. The theory is therefore responsible for much of the armed conflict in the world, because much of it is caused by the injustice this economy inflicts. The deaths of tens of millions every year are directly due to the fact that this economy lavishes scarce resources on a few while taking resources from the poor majority and gearing their productive capacity to the benefit of the rich, and due to the fact that economic theory makes most people think this situation is somehow inevitable or normal, or to be accepted as legitimate.
Especially important is the fact that the limits to growth analysis of our global situation discussed above shows that this economic system has put all countries on a path that is grossly ecologically unsustainable. Rich world rates of resource consumption are far higher than all could ever rise to, yet the supreme goal is to raise “living standards” and the GDP all the time.
Even if this economy were not causing extreme injustice and ecological damage it would still be causing huge social problems and damaging the quality of life. It is dumping increasing numbers into stress, insecurity, poverty and deprivation. It has hooked most people in rich countries on the consumer treadmill (e.g., they have to pay 10-20 times too much for a house.) It makes you work far too hard, and it condemns you to a much more difficult, insecure, stressful and spiritually impoverished life experience than is necessary. Virtually all our social, economic and ecological problems are getting worse, at an accelerating pace. The basic cause of all these things is an economy in which abundant productive capacity is not geared to meeting need. People should be extremely angry at the system which has these effects, and those who benefit from it, and especially those whose ideological output legitimises it.
For a discussion of the form that a satisfactory economy must take, see The New Economy.htm
For documents supporting the above analysis see For a collection of documents supporting th above analysis see Docs.ECONOMICS.htm
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Baran, P., and P. Sweezy, (1996) , Monopoly Capital, Harmondsworth, Penguin.
Brouwer, S., (1988), Sharing the pie, The Big Picture Books.
Campbell, J., (1997), The Coming Oil Crisis, Brentwood, England, Multiscience and Petroconsultants.
Dalton, G., (Ed.), (1968), Ancient, Primitive and Modern Economies, Boston, Beacon Press.
Easterlin, R. A., (1972), “Does economic growth improve the human lot? Some empirical evidence.”, in D. A. David and M. W. Reder, (Eds.), Nations and Households in Economic Growth, Stanford, Stanford University Press.
Chossudowsky, M., (1997), The Globalisation of Povety, London, Zed Books.
Clairmont, F. E., (1996), The Rise and Fall of Economic Liberalism, Penang, Third World Network.
Eckersley, R., (1997), Perspectives on Progress, Canberra, CSIRO.
Daly, H.E. and J. Cobb, (1989), For the Common Good, London, Greenprint.
Dyer, B., (1999), Prout Newsletter. (www.prout.org.)
Ekins, P., The Living Economy,
Finn, E., (1998), The new world order, (Email letter ) Canadian Centre for Policy Alternatives.
Goldsmith, E., (1997), “Development as colonialism” in J. Mander and E. Goldsmith, Eds., The Case Against the Global Economy, San Francisco, Sierra, Chapter 22.
Hixon, W., (1992), Economic Reform Journal.
Layard, R., (2006), Happiness, Penguin, New York.