13 – SUMMARY
What have I learned from my digging into economics?
First of all, don’t listen to the nay-sayers. Capitalism is a success. Over the generations it has benefited millions; it’s the best anti-poverty program ever discovered. Big changes happened in the last three centuries. Industry, trade, finance, invention, and development expanded as never before. The world’s economy has grown faster than its population. Economic growth went up sharply and has continued. Wealth, incomes, and living standards rose and are still going strong around the world. Disease went down and population went up. Governments became less authoritarian and education more widespread. Slavery, the economic foundation of many previous societies, nearly vanished. This has been immense progress. There have been disasters, setbacks and dead ends but the trend has been upward. People’s needs are slowly being met in many countries. It’s foreseeable that someday there could be a chicken in every pot. And now changes are accelerating. Things are moving so fast today that it upsets many people; too much in a lifetime. Their world is turning upside-down.
Secondly, and on the other hand, capitalism has created staggering differences in wealth between the very poor and the rich, and smaller but unheard-of wealth inequalities between the rich and almost everyone else; just the things that Jeremy Bentham wanted to eliminate. In the times of kings and titled aristocrats such discrepancies were on open display as finery and huge estates. Today they are invisible – titles to real estate, control of shell companies and unseen overseas capital.
Third, every big step forward has caused upheavals and reorganizations in society. The grand sweep lurches upward, not in little increments. Every big advance has made society better off but has hurt many others. There have been losers along with winners. We couldn’t seem to make someone better off without making someone else worse off. Pareto efficiency has been just a dream. Injustice and misery came along with the capital accumulation that relieved poverty. We who now live in comfort tend to think it was all worth it. We have forgotten how our ancestors struggled. Maybe they would have wanted to see the sparrows fed without having to feed the horses.
Fourth, there is another great fact about capitalism: it smashes up repeatedly. It has manic-depressive episodes, up and down. Hopefully a tranquilizer could be found but no one has discovered one. Many economic theories don’t even recognize that the disease exists. They deal with the business cycle but not the violent crashes. They accept the one without question and don’t really address the other. Some of today’s economic theories are going to be abandoned as surely as the story about angels dancing on the head of a pin.
I believe that new paradigms will be pressed upon society by technology and cultural shifts. Some are coming into view. A big one is the automation of jobs. Work is now done by fewer people, raising their productivity and disemploying others. Look at what farm machinery did to agriculture: its productivity soared and millions lost their jobs but new jobs were created, as economists had predicted. The oncoming loss of jobs due to automation may not be as self-correcting. In our market economy, jobs are the only way to distribute income to the masses. We will need emerging industries that can employ many millions of people, both skilled and unskilled, to support prosperity. Farming and manufacturing once did it but no more. Biotechnology doesn’t seem to have that promise.
Income inequality is a related paradigm change. It’s a slippery banana peel under society’s foot. It’s now become noticed, even in the mainstream media, that the distribution of incomes in the U.S. has gone far out of whack. The “99 percent” and the “1 percent” are now familiar terms. The rich make lots of money but now everyone is starting to realize just how much more. Some of those who’ve ‘made it’ are looking ahead and their vision is not soothing. They see storms ahead. America’s work force will naturally divide. Income will shift even more toward the top. Globalization has already held wages down for people with routine skills while incomes at the top have skyrocketed, and the gap is expected to widen. Success in tomorrow’s economy will requires very big changes in education and politics. An interview with Mark Andreessen, a Silicon Valley venture capitalist, is an example of this outlook: [1]
“The spread of computers and the internet will put jobs in two categories. People who tell computers what to do and people who are told by computers what to do. . . . If you tell the computer what to do – product development, marketing – the last 30 years have been phenomenal. In the next 30 years it gets more extreme. . . . We’re in a bubble for people with a non-Ivy-League, non-technical education. If you have a degree in English from a Tier B state school, you’re not prepared. . . . Big companies are not going to take care of you. . . . You can’t let history happen to you.”
I wonder, will it be a dystopia or a golden age? Wealth lets people live well; will they live wisely? The rich don’t consume much more than the poor, certainly not in proportion to their wealth. There are limits to grandiosity. McMansions can only get so big. Will luxuries, consumerism and frivolous entertainments be the result? The poor will always be with us – will the prosperous retain the belief that the poor are undeserving? Keynes predicted the accumulation of wealth but didn’t anticipate the modern preference for work over leisure; the need for human contact and achievement that’s now provided by work. He also didn’t anticipate the wide availability of contraception. Keynes was one of the outstanding social philosophers of the 20th century but no one could have imagined such astounding twists and turns.
Looking it all over, what is to be done in the world’s economy today? Can booms and depressions be smoothed? Could wealth and income be spread more equally? Are there reforms or checks and balances that could help? I’m afraid that today’s arguments about the minimum wage and financial regulation are only tinkering with minutia; fiddling while Rome burns. There are bigger problems. Outsourcing is pushing people out of work and there is no place for them to go. Machines need only a few people to tend them. Demands for energy and fresh water are beginning to dislocate the world economy. Some real limits to growth are coming into sight.
Big questions are being asked: is growth necessary for our economy to function? Can a growth economy operate when there are few young people and more old people? Can mass markets exist in a service economy? Can consumer demand be supported if most people don’t have a job? It seems obvious that people must have income if money is to keep churning. If they can’t go shopping everything will stop. The so-called circular flow of money in the economy will halt. No one will need a production job if automated machines can make whatever is wanted. If no one buys anything nothing will be produced. Zero equals zero.
What would society be like if current trends in mechanization and automation were carried to their conclusions around the world? Many manufacturing and office jobs could disappear. We are drifting toward a new social-economic revolution. What’s to be done? Instead of work defining a person’s life, we ought to be thinking of avocations instead of vocations: full-time hobbies, travel, and chances to be-all-that-you-can-be. This may appeal to some, but not to all.
Many minds have been busy with the idea of a guaranteed basic income for individuals and families in the United States. It would be hard to accept in our culture. We shouldn’t be concerned with the supply of goods and services but with the income to buy them, along with its certainty, purchasing power, and distribution. But the guaranteed income keeps coming back as a cure for the basic problem. Proposals have been made to give everyone a huge inheritance at birth, or provide everyone an annual payment, or perhaps just guarantee a small basic income to the poor.
If every person was granted an immense fortune at birth, far beyond his ability to spend during a lifetime, everyone’s supply of money would feel as if it were effectively limitless like grains of sand at a beach. Unspent money would be returned to a common fund at death to be re-issued to a newborn. This scheme would fail because such money couldn’t be a store of value. People would realize that it was pointless – anyone could outbid anyone for anything – and everyone would switch to some other form of money.
Another idea was to give every citizen an annual bonus payment based on a natural flow of wealth as Alaska now does with its Oil Extraction Allowance. Other resources might be used for this purpose – natural gas, mines of all kinds, agricultural harvests or electricity generation. Industries already exist which are easy to assess and monitor. Other parts of the Earth’s wealth are provided in huge amounts, such as oxygen emission and carbon dioxide absorption by the oceans and forests. Some part of each citizen’s annual bonus payment could be based on these ‘free’ benefits which we are totally dependent upon. Annual bonus payments have the advantage that they could vary with the value of the currency, the value of the assets taxed, on inflation or deflation, and thus stay relevant over time. They are not big one-time payments that will tempt swindlers to cheat people out of their due and could not gradually be ‘cornered’ by a small group. Proposals like these would essentially be lifetime annuities where a reserve of capital provides a flow of income to those entitled to it. But we are not yet familiar with ways to monetize stocks of natural capital. A first step has been made with Alaska‘s Oil Extraction Allowance.
A means-tested guaranteed income was seriously considered in the U.S. in the 1960s but got nowhere. There was a good reason why. It was tried in 1790 as Britain’s Poor Law. It was called the Speenhamland system and had very perverse effects. Karl Polanyi described it in his book The Great Transformation. It guaranteed a very small annual income to poor families regardless of whether they worked or not, and had the effect of keeping them poor. Polanyi wrote that the system allowed employers to hire workers at well below a subsistence wage because they had a guaranteed basic income. Employers were happy to let the local parishes supplement low wages with charity. Thus Speenhamland effectively put a cap on wages. Poverty rates went up and income supports down. The long-term result was increased misery among the poor. In 1969, President Richard Nixon was mulling over his Family Assistance Plan. The proposal would have guaranteed a monthly income of $1600 plus $800 in food stamps to every poor family of four. When Nixon learned about Karl Polanyi’s work he asked Senator Daniel Patrick Moynihan to investigate the historical accuracy of Polanyi’s claims. Nixon was reportedly greatly troubled by the results. The Family Assistance Plan was ultimately defeated in the U.S. Senate.
There is now a plenitude of goods available and an incredible amount of choice among them. Many brands of every kind of food scream for our favor. There are grapes from Chile, chilies from Mexico, six kinds of bottled water, all for very good prices. The biggest fear in our society is not of a shortage of things to buy but of unemployment; a lack of income to buy things with. Some call this a prod to the lazy and indolent – get a job, you jerk. But when our present economy has spasms of severe recession how can you tell all of the unemployed to get a job? How can you believe that all those people are jerks? Unemployment insurance is inadequate and clumsily administered. Corporations continue to raise productivity by adding machinery and outsourcing jobs. The number of good jobs continues to shrink. If companies can make good profits while there is high unemployment, consumer demand and the standard of living will go lower. Ever-falling domestic demand and production spells economic shrinkage, not growth.
Many businessmen wish that the labor market, like other markets, was more ‘flexible’ and would more quickly accommodate to current conditions. In their ideal labor market, when firms shed workers, other firms would rehire them within a reasonable time. This implies in turn, a belief in equilibrium economics – that the economy operates stably at a level where workers are employed practically all of the time and only a small percentage of them are jobless at any given time. Although economists teach this ideal they know it’s a dream. If laid off, a ‘reasonable’ time to be re-hired has to be short since few workers have savings to fall back upon. Our economy can do this only at the peak of a boom with nearly full employment. It soon gives way to the so-called “natural rate of unemployment” of 5 percent or so, and often falls into recession with unemployment rising to 8-10 percent or more. Workers can wait for many months to be re-hired.
What’s to be done about involuntary unemployment and the loss of an income to live on? That’s the big problem for present-day capitalist societies; the ferment below the surface. There are books and articles being published on the miseries of the long-term unemployed, on how to compensate those thrown out of work by technological change, on trade deals, and the dangers of a slowdown in China. It seems clear that these are long-term problems. There is an aversion to ‘welfare as we know it.’ Speenhamland has been tried and found wanting. Some form of a guaranteed income seems to be inevitable if our economy is to keep its extraordinary success and complexity. It will require wrenching social changes taking lots of time and it will have to be worldwide. There will have to be new attitudes about what ‘human nature’ really is.
So where do we stand?
Malthus made his famous prediction in 1798 that the world’s population would always outrun its food supply. That catastrophe hasn’t happened because of improved agriculture and because the poor, rising out of poverty, have had fewer children. This has already happened in Europe, Japan, and other rich countries. It has happened to the wealthy in all times and places. Contraceptives becoming available around the world will make it still easier in the future. If living standards for the poor keep improving, the world’s population may stabilize and then decline slowly. The world’s wealth may go up twenty-fold in the next hundred years if the population stabilizes. Who knows, technology might halt global warming and genetics may give us longer lives, free of disease and disability. Wise men, however, from the Buddha to Veblen, have always said that wealth does not bring virtue; perhaps it brings ease and improves the arts. Do we have another hundred years to see this vision come true? History is not too encouraging. Empires come and go, as witness the Egyptian pyramids and ruined Inca temples. The story remains to be told. We live in interesting times.
And then, there are the economists. I found out that, as a profession and a field of academic study, economics is in deep trouble. Economists are well paid for their advice but no one in a position of authority actually believes in them. Their advice isn’t acted upon unless it supports a preconceived purpose. If need be, another economist can be found. They regularly insult each other about their assumptions and calculations. Comedians make jokes about their predictions. President Lyndon Johnson once said, “Did you ever think that making a speech on economics was a lot like pissing down your leg? It seems hot to you but it never does to anyone else.”
How did economists get themselves into such a predicament? I think it’s because they began with the philosophy that it is man’s nature to act from self-interest during “truck, barter and exchange.” Adam Smith knew better. In his book The Theory of Moral Sentiments he wrote that sympathy, the ability to imagine another person’s point of view, to put one’s self in someone else’s shoes, was the basis of human nature. It was sympathy that made negotiation and trade possible. Economists continued to put self-interest ahead of sympathy so that, over time, academic economists became like some religious orders. The brothers instructed novices, granted degrees and published books of instruction, yet many of them had lost belief in their basic tenets. Their orthodoxies, frozen like glaciers, were even attacked by students as “autistic.” They went astray because, as a group, they mistook beauty for truth. Even after the shock of the Great Depression their romanticized vision of the economy led them to ignore the things that can go wrong. They turned a blind eye to the limitations of human rationality, the problems of institutions and the imperfections of markets, especially financial markets.
Every field of academic study is fundamentally based on a philosophy, acknowledged or not. The physical sciences believe that nature is independent of man and that it can be studied and understood. The beliefs of the social sciences, economics included, must be different since all of them deal with the nature of man in some way. Economics assumes that man is by nature acquisitive, self-centered and seeks his own advantage. Nonetheless, economics likes to thinks of itself as a science, a dispassionate explorer of the world. It suffers from so-called “Physics envy,” the belief that rigorous deduction from basic axioms and the use of mathematics are scientific. But they often misunderstand the nature of a scientific process. Dr. George Stigler, for example, misstates the nature of a scientific theory – an economist’s usual failure: [2]
“Clearly a general theory must ignore a thousand detailed variations or it cannot possibly be general. Yet only general theories are useful. In fact general theories are the only useful theories even if they are to be used only once.” Or, “Suppose an alternative theory is very poor . . . . The answer is that it takes a theory to beat a theory: If there is a theory that is right 51 percent of the time, it will be used until a better one comes along.”
Surely it should be obvious that a theory that’s wrong half the time has been falsified. And, why consider it at all if it’s no better than a coin toss?
The economic ideas that now dominate society are extremely confused. The concepts of Value, Utility, Consumer Preferences, Full Employment, etc. depend on the arguments pursued by their believers. If, for example, Utility were to be maximized for all of society then wages & benefits would be higher, not lower. That would be revolutionary and demolish laissez faire. What are the rules? All the major economists have struggled to reconcile the aims of business capitalism with society – satisfaction of desires, maximum of happiness or utility, generation of surplus value, benefits of investment and growth, etc. None of them got around to including group spirit or class consciousness. For economics, it’s essential to combat an ideology which pretends that only the values measured in money matter. Everyone benefiting himself doesn’t always do good for all. Choices and judgments are always needed. The idea of equilibrium seems to transcend reason.
If employment were to be established as a public good, the question of what employment is for becomes a political question. The government can’t be neutral. A long period of healthy growth, for instance, will convince people to take bigger and bigger risks, and when a lot of people have made risky bets, a few disappointments can have very big consequences. Capitalism’s dynamic activism is by far the best way to create worldwide wealth, but its excesses in finance will cause periodic crashes. The central banks really should be more sensitive to “irrational exuberance.” William McChesney Martin, Fed chairman during the 1950s, famously said that the job of the Federal Reserve was “to take away the punchbowl just as the party gets going.” It should learn how to do it again. That will never be a popular job.
It’s hard to say where the economics profession will go from here. It will certainly have to learn to live with messiness and to accept that irrational and often unpredictable behavior is important. Economists must face up to the idiosyncratic imperfections of markets, and acknowledge that an economic Theory of Everything is a distant goal. If this leads to giving more cautious advice to policy makers, that’s all to the good.
Capitalism was truly a Revolution since it remade societies all around the world. It diminished folk traditions and religion while magnifying business and the State. The new field of economics was born trying to make sense of this confusion. Adam Smith was its founding father. In a similar way Isaac Newton advanced the physical sciences and many old ideas were put to rest. But economics has not yet been renovated and it just muddles along. Its Ptolemaic school argues with its Heliocentric school. Its present sorry state is explained, or is at least justified. Someday a new Newton may point the way and give economics its deliverance. As Alexander Pope wrote: [3]
“Nature and nature’s laws lay hid in the night.
God said, Let Newton be! and all was light!”