Toward a New Economics -- Issues & Questions
By Garry Jacobs
A. Theory of Scarcity & Surplus1. As Orio points out, Adam Smith formulated the Wealth of Nations during an age of scarcity, before the onset of the Industrial Revolution, before even the invention of the steam engine, when food, clothing and virtually all other economic goods were in short supply. Since then technological development has multiplied productivity. Combined with the global spread of production capabilities and the globalization of trade, it is now possible for one or few companies or countries to produce the entire world’s requirement of many products. A new economics has to centrally recognize the significance of the shift from scarcity to surplus.
2. Inadequacy of production capacity combined in Smith’s day with severe shortages of land and most raw materials, leading Malthus to postulate that population growth would soon outstrip food production. As Orio also observes, the very basis of economy has largely shifted from production of goods to delivery of services. While services, too, depend on a material basis of infrastructure (e.g. telecom) and products (e.g. computers), they are not nearly as dependent on limited material resources. Increasing the supply of education, health care, communications, transportation, financial services and entertainment is far less constrained by material limitations. Economics needs to evolve a new theory of scarcity and surplus, poverty and prosperity.
3. For these reasons, scarcity is no longer a fact of life to be taken for granted. It is rapidly being supplanted by an economy of overproduction, in which unregulated production leads to economic instability, bankruptcies, wastage and massive dislocation of workers. Today overproduction is a serious threat to economic stability and growth. Moreover, the globalization of production makes it increasingly difficult to manage or regulate production to mitigate the problem, since information systems and controls are still largely confined to the national level. Smith’s economics was based on the capacity of the market to arrive at a natural equilibrium. But as in the case of monopolistic constraints on supply, overproduction can generate conditions in which the equilibrium state generated by the market is far from optimal for economic health and human welfare. The new economics has to replace the 18th century notion of self-regulating markets to establish the precise role of regulation in a market economy.
4. These trends raise basic questions:
- How should the new economics take into account the vanishing limits to supply of economic goods?
- What is the theoretical basis for understanding and managing surpluses?
- How can global production be effectively balanced for economic stability and to maximize the fulfillment of human needs?
- What should be the governing principles and mechanisms for balancing supply and demand in the new economics?
- What will new economic theory postulate regarding the future prosperity of humanity?
B. Human Welfare1. As Orio points out, Smith’s economics is based on the primacy of production. Higher production through specialization and division of labor combined with trade was Smith’s formula for economic growth and the wealth of nations. We now know that all growth is not beneficial to humanity – proliferation of weapons systems and small arms production, drug trade, over-building of real estate, gas guzzling automobiles, etc.
2. Economics may have been founded on a faith in the benevolent wisdom of natural laws, but we now know that the laws of economics are strictly man-made and the outcomes are the result of human values, attitudes, institutions, policies and choices. Reliance on impersonal market mechanisms has been a useful excuse for blatant inequalities, excesses, injustices and inefficiencies that harm rather than nurture overall human development.
3. The essential objective of human economic activity is to meet human needs and maximize human welfare. Human welfare is not merely a part of economics. It must be the fundamental premise and central objective.
- How will the principles of the new economics reflect the primacy of human choice and human welfare?
- How will it effectively and justly reconcile the rights of the individual achiever with the overall welfare of the social collective and humanity as a whole?
C. Globalization1. Smith’s approach is based on optimal performance of a part of society, in this case the nation-state. What works for the part does not necessarily work for the world economy as a whole, e.g. the export-driven growth strategy of East Asian economies and now China cannot be replicated by all nations globally. Today we need an economic theory that is valid for the whole world economy and will maximize benefits for all humanity.
2. According to a report of the NIC (US National Intelligence Council), by 2025 a single ‘international community’ composed of nation-states will no longer exist. International security expert Jasjit Singh (WAAS Fellow) argues compelling that the time has come for nations to abandon the competitive security paradigm in which each nation tries to enhance its national security by measures than increase the insecurity of other nations, in favor of a cooperative model that maximizes security for all. Similarly, Smith wrote in an age of nationalism and his economic conception is based on a competitive model for how one nation can dominate over others. Today there is need for new theory based on a cooperative model that achieves maximum economic security and well-being for all. The EU is based on a cooperative paradigm internally, but remains competitive in its external relations.
1. During Smith’s time, production was entirely dependent on labor and, therefore, economic growth might be largely synonymous with growth of employment opportunities and incomes. This is no longer true. Today technological development makes it possible to multiply production and expand economically, while employment levels decline and wages stagnate.
2. Employment markets are no longer national. The globalization of production by MNCs makes it possible to source goods from anywhere in the world. Outsourcing is doing the same for many types of services. But regulation and economic policies to maximize employment are still confined to the national level. Our employment models and policies are nation-centric. How will the new economics reconcile global labor markets with national-level employment policies?
3. So long as employment remains the principle means by which people acquire the money needed for the goods and services they need for survival and welfare, the growing separation between production and employment can spell increasing hardship and catastrophe.
- How will the new economics reconcile optimal efficiency of production with full employment?
- What place is there in a human-centered economics for theory based on the premise that employment is a natural right which must be guaranteed?
E. Money1. Money originated as a medium of exchange and store of value backed by and representing actual goods. Its central purpose was to promote trade. It has gradually evolved into a purely symbolic medium backed by political and social institutions and intangible public trust, which can be created and multiplied without relation to production, products or economic activity.
2. A purely material or even an economic theory of money is inadequate to explain how trillions of dollars in wealth can be created on the basis of rising expectations or destroyed as a result of falling public confidence due to war, election results, or future expectations. A theory of money must reexamine fundamental questions such as
- What is money and what does it represent?
- What is the role of material, economic, political and social factors in the creation of money and determination of its value?
4. Originally money was created as a token to represent products that were already in existence. Today money is created to represent future as well as past production, e.g. banks create money in the form of student loans to develop new skills and capacities for future production. Thus, money is a means for converting undeveloped and unutilized social potential into a usable form. A theory of money needs to examine the factors that govern and limit the creation of current money based on future wealth or underutilized social capacities.
5. In addition to national currencies, a variety of local and complementary currencies have come in to use to supplement and compensate for the inadequacies of official money. New theory should explain precisely how and why these complementary forms of money are viable and what unutilized social capacity they monetize.
6. Money is not merely a thing. It links together and integrates all the other activities of society. It has gradually evolved into a complex social institution that wields enormous economic, political and social power and is interchangeable with many other types of power. It plays a role similar to that of government which is an organization of political power. The new economics needs to develop a theory of money as a primary social institution of enormous power and complexity, itself both the source and result of political, economic, social and psychological factors.
- What is the ultimate source of the power money represents?
- What determines its limits of that power?
- How is money creation related to freedom and democracy?
F. Finance1. Financial markets were originally established as a means to support investment in trade and industry. Now they have become an end in themselves and, at times, a threat to the stability and health of the real economy. More than 95% of international financial transactions are unrelated to actual trade in goods and services. So too, an equal proportion of financial market activity is unrelated the real economy. Yet as the recent financial crisis so painfully demonstrates, a subsidiary activity (finance) when given unbridled freedom can jeopardize the underlying economy it was intended to serve. Nobel Prizes have been awarded for computerized trading models that foster financial instability. A new economics needs to define the rightful role of financial markets in economy. It should has examine the value and role of speculation in economic development.
2. Economic theory is based on national level currencies controlled by national governments. Today more than $3 trillion circles the globe every day in search of speculative returns, destabilizing currency values, inflating and deflating share prices overnight, creating an unpredictable and dangerous environment for long term business investment decisions. A new economics has to consider how global financial markets can be most effectively regulated. It needs also to theorize on the potential benefits of instituting a single global currency to support evolution of a single global economy.
3. Global financial assets have multiplied from $12 trillion to $180 trillion over the past three decade, representing a huge surplus of money that is not being effectively utilized for productive purposes. As in 1929, again in 2008 the huge unabsorbed surplus of money that was not absorbed for productive purposes destabilized the world economy. Surely there is something inherently defective in an economic theory and practice that is unable to utilize this money for productive and socially constructive purposes, when so much of the world is still in dire need of economic development. A new economics needs to evolve a comprehensive theory of the role of global financial markets in economy and human welfare.
G. Equity & Equality1. For decades, development economists and social leaders have condemned on ethical grounds the blatant and growing inequalities between rich and poor within and between nations. In response, what is morally unjustifiable has been justified economically as materially beneficial to the welfare of society. The history of human progress over the past two centuries has been characterized by increasing equality in terms of political and social rights, freedom, voting rights, universal education, etc. The justification of economic inequality is inconsistent with the abundant evidence that the extension of benefits to lower sections of the population is both beneficial and essential for the maximum welfare of society as a whole. A new economics has to take into account the role of equity and inequality in terms of both ethics and social welfare. What is the true place of equity of distribution in economics and human life?
2. Freedom and equality are complementary values. Yet since the demise of communism, economic theory has swung back in favor of an extreme form of unregulated wealth-creation leading to rising inequalities. A new economics should examine the rightful role and reconciliation of these complementary values.
3. Jasjit Singh’s WAAS project on Revolution in Human Affairs is predicated on the hypothesis that growing inequality between communities and nations rather than absolute levels of poverty is the principal cause for terrorism and rising social unrest in the developing world. Lack of employment opportunities is believed to be a significant factor in the propensity of youth to join terrorist movements. According to the NIC, “unless employment conditions change dramatically in parlous youth-bulge states such as Afghanistan, Nigeria, Pakistan, and Yemen, these countries will remain ripe for continued instability and state failure.” The same is true of the poor and unemployed in China, India and other developing countries. This suggests that valid economic theory cannot be isolated or divorced from concerns regarding political and social stability. The principles of a new economics must take into account the wider goals of social stability and human welfare, not just the narrower goals of wealth generation by producers.