Economic Crisis and the Science of Economics
“Focusing on growth of the part without reference to its impact on the whole is a formula for social disease.”
The American subprime mortgage crisis, the international financial crisis that followed and the European financial crisis presently centered on Greece are all expressions of a deeper and wider crisis that has been preparing to surface for decades. This crisis encompasses not only government fiscal deficits, exchange rates and financial markets but spreads out in concentric circles of rising unemployment, growing economic inequality and environmental devastation which now threaten to undermine the very fabric of the world economy. The sources of that crisis are no more difficult to identify than the sources of the American and French Revolution. Their origin can be traced from the mechanization of production during the industrial revolution to the computerization of financial markets in recent decades, but the heart of the crisis is neither machines nor intelligent systems. The real crisis is a crisis of thought, a poverty of ideas, a world view justified by specious formulas disguised as scientific theory, based on the fallacious conception that the infinite complexity of social life can be measured and mapped mathematically and the misguided faith in the benevolent wisdom of the unregulated market place, a fallacy which would have made Adam Smith cry laughing. The real problem is nothing more than ideological ignorance and narrowly selfish self-interest run amuck. The world does not suffer from poverty or shortages. Like the European church at the time of Copernicus, it suffers from insistence on dead conventional feudal conceptions and beliefs that are out of tune with our times.
Economics does not and cannot exist in a vacuum. It is an integral part of a wider reality which is society as a whole. Focusing on growth of the part without reference to its impact on the whole is a formula for social disease. Current economic theory focuses on secondary causes based on extraneous measures. Managing economy based on budget deficits, interest rates and inflation is like managing human health by monitoring miles walked or gallons of liquid consumed, which may on occasion be distantly correlated with physical fitness and nutrition. A real science of economics has to be founded squarely on human welfare, individual and collective, not money and markets. Economics is the science of wealth creation based on production and exchange between human beings. Real wealth cannot be measured in monetary terms, but solely in terms of its impact on all members of society. Statistical averages may be appropriate for tracking subatomic particles, not for measuring the welfare of human beings. Every single person counts disproportionately.
Money is a means, a remarkable instrument designed to facilitate mutually beneficial exchange. Its value depends entirely on how far it aids in the production and distribution of sufficient goods and services to meet the needs of all. The twenty-fold rise of global financial assets over the past three decades demonstrates the remarkable productive capabilities of modern society, but the extreme and growing inequality of its distribution proves that it is a cancerous growth rather than healthy prosperity – an accumulation and concentration of wealth diverted from its real purpose of promoting human welfare into destructive speculation that impoverishes the many for the benefit of a small elite.
The true source of money and the true basis for wealth creation is the society, not industry or financial markets. Money is a symbol for social trust and a vehicle for social power which is the capacity of the society to accomplish its goals. Today, that power is being concentrated and grossly misused for political control and domination by a small minority instead of greater welfare of all. Today, the world has the organizational and technological capacity to create sufficient money and to generate sufficient goods and services to meet the needs of every human being. The present stunted and distorted system cannot be corrected. It has to be discarded and replaced by a system based on right human values. It is not merely a question of leveling the playing field. It is a question of changing the basic objectives and rules of the game.
The very foundations of the current system of valuation and distribution of economic benefits are based on false measures and accounts. The system fails to recognize that all resources and all wealth creation are based on the cumulative knowledge, expertise and experience of humanity as a whole and belong to humanity as a whole. The most dynamic entrepreneur adds but a tiny increment to the cumulative achievements of his predecessors, yet claims a disproportionate share of the result as his own personal property. Did the investment bankers discover the materials and invent the processes by which their computers generate billions in speculative returns? The Nobel prizes awarded for developing computer trading algorithms should be revoked in recognition that these programs have nothing to do with real economics and wealth creation. Did the venture capitalists create the product, the market, the educational, transport or communication systems which make their latest investments so lucrative? Who pays for replacement of the non-renewable petroleum resources mined by a landowner based on organic material which has been brewing under complex biological and geological processes for millions of years only to be exhausted for the benefit of the present title deed holder? By what right do those who came before him and those who come afterwards get nothing, not to mention the rest of his countrymen or the rest of humanity?
“The remarkable progress of the past century has been made possible by the growing realization that wealth increases by serving the needs of the greatest number.”
During the Industrial Revolution, production in the field was supplanted by production in the factory. Today, the market has replaced the factory as the principal field for wealth generation. Exchange between people creates wealth. Production and exchange that omit human beings from the workforce or from consumption is like a digital symphony performing to an audience of machines. However great its beauty, it has no human value whatsoever.
Today, the world possesses the capacity to generate sufficient food, clothing, housing, education, health care services and every other essential aspect of life for every man, woman and child on earth. No one has a right to claim what is theirs is theirs alone because no one has acquired or can acquire wealth without the active contribution and countless past achievements of thousands or millions of other living or dead human beings. Industry and merit can be rewarded, rewarded handsomely, but not by a plutocracy of the 1% which rivals in inequality with the 2-3% of English aristocrats who at the time of Adam Smith garnered nearly all the power, wealth, privilege and opportunity under the rubric of democracy based on hereditary rights.
All are responsible for wealth creation and all have a claim to its fruits. The remarkable progress of the past century has been made possible by the growing realization that wealth increases by serving the needs of the greatest number. That was true until financial markets became so divorced from the real economy that money could make money without any benefit to society, indeed by diverting wealth from its rightful application to legalized gambling and insider trading.
“Economic activity that does not generate jobs is irrelevant to human life. Economic activity that destroys jobs in the name of efficiency is irreverent to human life.”
It is time to tax capital gains and speculative investment to redirect money for productive purposes.
One need only compare speculative investment with insurance which occupies the other end of the financial spectrum, to see how far it has drifted from its true social purpose. The principle of insurance is to provide economic security to all by spreading the risks and the costs among the greatest number. By so doing, it generates real human welfare 50 to 100 times greater than the total value of insurance premiums, making it by far the largest source of wealth creation. In contrast, speculative investment generates profit for one at the expense of one or 100 others and in doing so draws capital away from investment in real production and job creation. Money chasing money may raise the value of global financial markets ten or a hundred fold, but what purpose can it serve if in doing so it does not generate employment and incomes for the entire human race? Economic activity that does not generate jobs is irrelevant to human life. Economic activity that destroys jobs in the name of efficiency is irreverent to human life.
Today, speculation lays claims to the sanctimonious virtues of capitalism, but it has nothing to do with the original purpose for which Adam Smith extolled savings and capital investment two centuries ago. His objective was the accumulation of sufficient capital to produce sufficient goods for all members of society, not to multiply money simply for its own sake. It is no wonder that trickle down theories based on tax cuts for the rich fail so dismally to generate the anticipated benefits to society. That only works when capitalists invest capital in building factories and creating jobs. It is time to tax capital gains and speculative investment to redirect money for productive purposes.
Orio Giarini, Garry Jacobs & Ivo Šlaus