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Dear Ivo and Orio
I must first of all thank both of you for conceiving this remarkable initiative and inviting me to be part of it. For many years I and my associates at MSS have felt the need for a basic re-conceptualization of economics and other social sciences. Your initiative at this time when the deficiencies in current theory and practice are all too obvious is especially timely. I also applaud Ivo’s strategy of starting with a very small, eclectic and unrepresentative group in order to freely explore our common concerns and chart out the scope and boundaries of an effort which may ultimately engage a much broader group of thinkers with many different perspectives. Ivo’s suggestion to include Bernard Lietaer is excellent. I am confident that he can make a significant contribution to our endeavor.
Orio’s recent message is a wonderful beginning. He puts his finger on several nodal issues that are central to a re-conceptualization. Reading it prompted me to try to formulate my own concerns in a more coherent manner than in the past. I attach a list of issues -- Issues & Questions for A New Economics -- that I believe need to be reexamined and reformulated as part of the new economics.
In order to facilitate an independent exchange of ideas among ourselves, I suggest we create a separate discussion forum on yahoo.com or mssresearch.org and host our past and future correspondence on this subject in the forum. That way we can easily keep track of issues and ideas as they emerge. If you both approve, I will set it up and inform you.
I welcome Ivo’s suggestion of a meeting in Trieste immediately before or after the WAAS board meeting, which is scheduled for May 17-18 in Florence. I’d like to finalize the dates so I can block those days well in advance.
Best regards
Garry
New Wealth of Nations
Dear Garry,
I have a real pleasure in our exchange of ideas . I have read a first time your annex of January 8 .....I will read it AGAIN and make later several comments. Very stimulating.
Let me now submit to you right away some " fundamentals to fundamentals" in economics, elaborated through the years and which determine in my view tha real possibility to recreate and revisit the "Wealth of Nations":
- economics was founded by Adam Smith as a CONSEQUENCE of the Industrial Revolution. It is the theory of this SPECIFIC historical phonomenon , and NOT of the economy in general. We are now in a Service based economy.....
- the main preoccupation of classical economists was the supply side . Only over a century after A Smith, Marshall started to consider seriously the demand side ( much later, a key was Hicks ). Because they ( rightly) thought that they had to do with poverty, they did not realize fully that the new production industrial capacities could only be acquired by SOLVABLE demand, that is by money : HENCE, for over a century economic crises were linked with real DEFLATION ( exept in particular when there was a great inflow of gold around 1870 ).
- So came Keynes, who stated that deflation in a crises situation, could morally and politically lead to accept to develop debts ( private and public ). So even the unions requests became a tool for this ( remember that police shoot against unions' manifestations, even in Geveva, until the beginning of last century). So Keynes was thought to be on the "left" side and keynesianism to be equivalent to demand expansion via the creation of money. This is WRONG : Keynes was not so blind to accept debts when they were likely to produce inflation ! ( see the way the inflation crisis developed after l973, when Keynes ideas were really misused ! ).
- Today economists are still turned in fact on the demand side : they have given up studying SERIOUSLY the supply side. The elasticity of supply has been implicitly and explicitly considered almost unlimited because of the triumph of technology . Therefore when the Club of Rome propagated the idea of Limits to Growth, they proclaimed it was nonsense : they proclaimed that higher price in energy would automatically increase production in the energy sector. This happened in part, BUT after many years, at increasing production costs. And in any case the average rate of growth in 1970 of 6% per year, scaled down to 3% and now 1% is considered a great progress.....! And this without considering that more and more af the value added is in fact value DEDUCTED , relative to costs where wealth has been de facto diminished ( I wrote on this ).
- another fundamental point , the philosophy of reference : for classical economics, supply and demand meet at the moment of a transaction and this gives an "equilibrium" price. Taking this ex-post, is just a tautology, taken ex-ante inevitably refers to a deterministic ( at best newtonian) system : predictions could be perfect, only if we could have the best information ( and good, perfect simulation models ). Again ( according to this underlying philosophy which in fact is an ideology) , knowledge will provide better and better information so to approach a "scientific" appreciation of the equilibrium.....
- in fact this equilibrium is linked to a deterministic idea of the notion of value. This could be acceptable as a first approximation at the times of the beginning of the industrial revolution , in a general cultural background, where "science" was equated with the achievement of certainty. But, forgetting that even Pascal said " knowledge is like a ball in a universe of ignorance: the more it growths, the greater is the amount of ignorance to face".
- the key today is to really reappreciate the production system , which at every phase reveals to be conditioned more and more by uncertainties: the game is to face risk management and control probabilities ( like an insurance policy !: in fact it is not insurance to become more"industrial", but the reverse, "industrial" production has been becoming more and more a field to face uncertainties and probabilities ).
- "production" begins at the research level ( from fundmental reserach to market research ), and this well before any real production or even decision to invest can start.
Nothying is more probabilistic than doing research , which in fact became a part of the economic system only less than a century ago ( a first case : the Battelle institute around 1930 ), well after A Smith, Ricardo and other Stuart Mill. And some fundamental research takes decades and more.
Producing goods require more services than hard products ( ask IBM or automobile producers ) : planning, security control, storage, personnel maintenance, distribution etc.
The REAL VALUE OF PRODUCTS AND SERVICES concerns the PERIOD OF UTILISATION ( not to mix with the old economic notion of USE, which refers to the destination of the product or system). Here there are two uncertainties : the period ( how long shall I use a product or system ) and the possibilities of interruption ( accidents, occurrrences of any kind and even negative consequences of the utilisation ).
Finally, wastes, which in most cases represent a deferred "production" costs.
All this then can only be referred to a probabilistic system : in fact it happens in reality if one would really observe closely how companies work!
- this also indicates that the classical Industrial Revolution and the present Serevice Economy relate to TWO DIFFERENT cultural and philosophical backgrounds
( like talking of pre- and post- Einstein physics )
- ANOTHER fundamental observation has to be made : the present measurements of "added value" ( i.e. " GNP ") refer to a FLOW AND NOT TO A STOCK. Whereas micro ( not macro ) economics normally establishes also accounts to evaluate the value of a company ( and even of an individual ) at certain moment in time and their variations. Even most "ecologists" concerned often with "stocks" have not remarked this situation, although in practice they can identify actions ( economic or others ) which destroy wealth ( stocks ). See for this my first report to the Club of Rome ( Dialogue on Wealth and Welfare, 1980 ) where I proposed to distinguish between
GNP and D&P ( Dowry and Patrimony ).
Well, that's enough for today. I will come back to your paper in my next email. And other key issues like "money" and non remunerated "productive" work.
Orio ( Vic )
Comments on Issues & Questions for A New Economics
Dear Garry,
I am now reacting to some specific issues from your document Issues & Questions for A New Economics of January 2010, which I find largely very good and stimulating:
A. I would not say that the "economy has shifted from production of goods to delivery of services " : in fact services are part for over two third ( often much more ) of the supply/ production side. Besides this Toffler wrote also about prosumer functions.
I would be careful in overstating "overproduction" : scarcity is still the basis of economics ( only heavens has no scarcity ). There are many specific cases today of overproduction, OK, like automobiles in US and some in Europe, but even in this field and most others is much more a problem of redistribution, with about 1 billion people undernourished.
OK " economics needs to evolve a new theory of scarcity and surplus, poverty and prosperity ",as you say. For this I propose to start by redefining economic value ( see my previous email, etc.)
B : OK, just remember that economic thinking was supply side until the end of the 19th century and the beginning of the 20%. This had nothing to do with beeing "left" or "right" as it has been often said in the last decades : after all A.Smith was rather "left". Understanding this long term shift ( 2 centuries ) is fundamental.
C : Globalisation and international trade : here too we should overcame traditional intenrnational trade theory, often opposing international investment and trade . In fact, because of the great content of services in production and utilisation of goods, international trade and international investment are complementary and go more and more together. Exporting a textile machine to another country means also to invest locally at least in maintenance ( even if in some cases of very high technological and expensive tools, maintenance is often global, but the utilisation of this tool still requires local work, learning and applications , logistics, etc. ).
D. Employment : see the book on the Employment Dilemma. In A.Smith time "production was ALMOST ( not entirely ) dependent on labor". "Separation between production and employment".....again on the basis of which "value"? In any case it is important to consider the expansion of "part time" remunerated work, the complement of subsidies ( pensions , various forms of basic income, etc. ), the value of non remunerated activities. In any case I agree that employment ( at least part-time, see my book) should be guaranteed, part of human rights . This also needs a deep study and undestanding of fiscal systems
E. Money.....the history of money is often misunderstood....it sounds often as if at the time of Julius Cesar, Rome could count on the service of a numebr of local agents of banks. ( Citybank, UBS, etc.).......Up to three centuries ago the majority of agricultural production was self produced and self consumed.( no use of maney ).....and the size of the most famous trading fairs was such to be contained in one or two containers of today.......We lack a serious history of how money's use was extended in the economy and society. Second, of how non remunerated activities and goods and services are passing from the state of a free availability to a remunerated one ( and vice-versa maybe from now on, since the IR ). We should then distinguish : non-monetarized activities, where there is no exchange ( i.e. the "value of the oceans") from monetarized ones ( where there is an exchange, implicit or explicit : in the first case we have a non-monetized exchange and in the second a monetized one ). These distinctions are key to discuss ecological issues ( see my Limits to Certainty ). The Chicago school only made a first step in this direction.
F. Finance.....here is one of the biggest holes in economics, missing the function of insurance ( private and public ) WHICH IS DIFFERENT FROM BANKING.
It is key here to understand what is the contemporary Service Economy ( based on performance in time ). This means that various institutions ( of an insurance type ) have to accumulate reserves linked to future probable accidents and events of any sort. The accumulation of such reserves gives another dimension to the notion of Capital ( they go beyond the simple notion of Savings). They are linked to the "production-utilisation system" of the present Service Economy. And they grow more and more. It is clearly visible how in many instances Insurance today is relatively more and more important with reference to the Banking system as compared with only few decades ago.
Here was the great mistake of AIG, not recognizing their very strength, insurance ( a paradox ! ) : they believed that financial banking was the place of brilliance.....But this is and another world . The distinction is still a very fuzzy case for traditional financial economists.....A clear case is the way in which the regulators in Basel are discussing about the financial world, on the basis of the connotations of banking, and little understanding of insurance........Somewhat of a mess.....
G. OK. But it seems to me that the fundamental issue, conditioning everything else, is the will and the battle for power ( whatever the excuse, ideological or not ). The human species is not yet quite "civilized" on this. The so called "class struggle" is in most cases just a "leaders class struggle". It derives ( in a positive sense) from the need to survive, but ( in the negative sense ) to the "pleassure" exercise control on others. This within the framework of the necessity of society to remain stable as much as possible.....which leads in my view to see federalism , locally and worldwide, as the great political challenge of tomorrow ( probably after tomorrow....) . This is linked also to my comment on your project about "individuality".
H. Ecology......as I already mentionned, ecology is about economics in a lager sense, a cost , monetarized and not, monetized and not, in the production process of wealth ( mostly at the end of the chain of value, but not exclusively )
Sustainability is a useful word to promote "lorg term" views and actions. The word is new, the concept not.
I. Social development.....OK !
OK for the meeting in Trieste in May : which dates?, with whom? how many people ? what about costs ?
Best wishes
Orio
Reply to Orio’s Comments on Issues & Questions
Dear Orio
Thank you for your thoughtful, constructive comments on my note, which help me better understand your thinking and give further stimulus to my own thoughts.
A. Scarcity & Surplus: Your comment on overproduction is well taken. I should have said that humanity now has the capacity to produce enormous surpluses, a condition that did not pertain in Smith’s time when production capacity was severely limited and increasing production appeared to be the main objective. I do not use the phrase ‘surplus capacity’ here in the traditional sense of existing production capacity which is unutilized, but rather with reference to the capacity of the society to increase production to almost any level if it decides to do so, as the US demonstrated during WWII. In that sense, we need to evolve theory that recognizes this unutilized surplus social capacity. As you say, redefining economic value is a crucial step. The essential basis should be contribution to human welfare.
E. Money: I fully concur with your observation that we need a historical perspective which reflects the growing use of money and monetization of society. This trend reflects a shift away from self-production and consumption as you noted. It also reflects an increasing interaction and interdependence between human beings, based on a division of labor, specialization and exchange. In this sense we could say that the spread of money reflects increasing social integration and that this increasing integration taps previously unutilized potentials for production, exchange and consumption. Society at any time can be viewed as a set of linkages and positive relationships between individuals and groups. Over time the number, variety and complexity of those relationships increases dramatically, resulting in increased social opportunity, economic productivity and human welfare. This evolutionary integration of social organization is one of the principle sources of increasing prosperity, i.e. social relationships create wealth.
F. Finance: You have made an important distinction between banking and insurance which is worth fully examining. Insurance is a uniquely creative social organization. From one point of view, it increased the welfare of the group by spreading the risk associated with indeterminate events. From another point of view, it converts indeterminability for the group into security and stability (definiteness) for individual members. Ideally, the theory should identify the maximum extent to which the principle of insurance can be applied for the welfare of humanity.
G. Equity & Equality: You have rightly pointed out that the struggle for political power and social dominance are at the bottom of this issue. That means economic theory, political theory and social theory cannot be considered independently of each other. What current theory fails to tell us is that a more equitable distribution of wealth, rather a concerted effort to raise the living standards of the lower levels, is the very soundest, most secure basis for social stability and increasing prosperity at all levels. That is intuitively obvious, but it needs to be theoretically formulated.
Regarding the meeting in Trieste, Ivo had suggested we keep it very small, including Bernard Lietaer if he responds positively to Ivo’s approach to him. Since Ivo and I must be in Firenze on May 17-18, I suggest we meet in Trieste on 19-20th. I assume that each of us would bear our own travel expenses. I’d like to hear back from Ivo to confirm this arrangement.
Best regards
Garry
Reply to Garry’s comments on Orio’s comments
Dear Garry,
A,E,F,G very well taken !!!!
19-20 may : OK. I can make available for free a small apartement right in the center ( via della Torretta 10 ) , just 50 yards from the central square( piazza Unità ), where two persons can have a separate bedroom, and about 6 or 7 can meet.
Best wishes
Orio
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