What’s Missing From Economics

Most discussions of economics deal with questions of capital, profit, supply and demand, labor, and so on. My belief is that these elements are significant, but fall well short of the number of factors that are important to people living in the economy. It is not just how well the market functions that should measure the economy, but how the market effects people as well. Wall Street declared the 2008 crisis over by 2009 on the basis of stats, which is an amazing exercise of chutzpah that flies in the face of the ongoing worst economic crisis since the Great Depression. Regardless of what data you come up with, it ain’t over.

Economists treat some of the most important aspects of the economy as external to systems of economics, and partly because of this they have been largely unsuccessful in assuring economics a place in science. I maintain that it is impossible to meaningfully separate politics, economics, justice, and democracy, and that failure to account for all of them renders all four largely meaningless.

It is impossible to meaningfully separate
politics, economics, justice, and democracy.

Traditional Economics rests on several significantly false assumptions that have been largely unchallenged until recent decades. Primary among these is that the economy will come to a sort of stasis, or equilibrium, where supply equals demand and all goods are sold at their optimum price. Moreover, this economics assumes that everyone who buys and sells is fully aware of all economic factors and behaves with perfect rationality. However, few people are so rational and aware, or actually bargain over price, and price as well as almost everything else is almost never stable. All of this grossly distorts our understanding of how the economy functions and how it affects us. If economics is to have practical importance, these assumptions must be altered or eliminated, and the ways the economy affects lives must be part of any analysis.

Those elements that have been considered “externalities” to economic theories must be brought within the walls, their effects accounted for, because their significance is huge. An important example of this is the element of environment, a factor considered “external” to economic theory, and therefore disregarded. But we cannot function as an economy without considering the profound effects our activities have on local and world environment, and that environment has on us. The tragedy is that industry has tended to view “environment” as some sort of special interest to be thwarted, whereas, in reality, the environment is the life support system that allows us to live, and can be ignored only at our great peril.

This has become painfully clear with the onset of more obvious symptoms of world climate change in recent years, which are now strongly affecting our daily lives and are impossible to ignore. But we have largely behaved as if we could continue our profligate ways indefinitely. We may argue about when tipping points will occur with world environment and resources, but we must clearly recognize that there are finite amounts of petroleum, water, and various other resources, and any of them can be irredeemably lost, or at least reduced to a prohibitively expensive level of preciousness. As I write this, most of the country is in the midst of a record-breaking heat wave that is killing people by dozens and destroying large swaths of agricultural crops.

Climate change is now impossible to ignore.

There is a political factor as well. Republicans measure economic health by how rich the richest are, and by how low taxes are. By these measures we are doing great. Democrats beg to differ, because to them it is people who count, and the mass of people are not doing well at all.

Progressive economists have realized that any sort of stasis in the economy is an illusion. The economy is dynamically complex. Thousands of factors change constantly. None of the things that have been considered “external” can be realistically so treated.

The human element of economics is shunted aside in our economic theories in favor of discussions of production, exports, efficiency, and so on. In the US and several other parts of the world, wealth is grossly ill-distributed. This is nothing new. The very rich—from Chinese emperors to European princes to robber barons—have garnered vast wealth for themselves by extracting it from the poor, a process that continues unabated today, and pay no attention to the difficulties this creates for everyone else. But the difference in today’s world is that the population has reached seven billion and continues to grow. Unearned wealth—and all wealth above a certain level is gained by manipulation, by rent seeking, not by working—has the universal effect of stressing people at lower income levels. Combine that with world climate change, continuing environmental degradation, and loss of resources, and you have an unprecedented global catastrophe in the making.

Low income

There are only two possibilities for wealth distribution in the US if we are to have a just economy and democracy. Either everyone’s income must be adequate to pay for life’s essentials—food, clothing, shelter, etc.—or the government must assume the role of making up the difference. Minimum wage will not pay for an inexpensive 2-BR apartment anywhere in the country, and tens of millions of us cannot buy health care. Continuing declines in equality will eventually lead to national breakdown, plutocracy, or even revolution.

At present we have a de facto case of government or the private sector attempting to make up up for the inability of the poor to pay for essentials, even with full time work. Our population of people living in poverty is far too large, some 45 million, particularly for the richest society in history. This population of the poor is trapped in their poverty by inadequate wages, and are ill-supplied with some very important economic essentials. To prevent humanitarian disaster, there are various public and private programs that can provide certain needs when income is inadequate, but this is not the best solution, and many people slip through the net. The best solution is to assure that everyone is adequately paid.

In the accompanying flow chart, the US is presently stuck in an endless loop at the beginning, because the lowest wages are simply too little. Not only is the lowest wage inadequate, but it is declining as top incomes continue to increase, thus worsening inequality.

It should be noted that even in a best case scenario, there will always be persons who are unable to fulfill their own needs for either temporary reasons such as unemployment or illness, or permanently because of chronic illness, permanent injury, age, or infirmity. In many cases, the family is unable to fully support these persons because of inadequate income. Therefore, everyone has an inescapable role in a command performance to prevent needless suffering.

“We may have democracy,
or we may have wealth concentrated
in the hands of a few,
but we cannot have both”.

Louis Brandeis

I maintain that the vast wealth that has accumulated at the top cannot help but trigger unprecedented suffering among everyone else. It is simply not possible to have an equitable democracy with the extreme concentration of wealth we now have. Supreme Court Justice Louis Brandeis once said, “We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both”. I argue that equitable distribution of the nation’s wealth must be a factor of any economic reckoning, and that the disequilibrium we now have must count heavily as a negative economic health factor. It must be noted again that equitable wealth does not mean equal wealth, as Republicans often claim. It is universally accepted that there will be rich people, and that this is desirable. What is unacceptable is when vast and ever-increasing wealth at the top creates increasing poverty—exactly the situation we have at present.

Inequality of income distribution occurs because the mega-rich not only exercise many forms of rent-seeking (gaining wealth without contributing to society), but also because they have increasing levels of control over the legal and legislative apparatus that channels wealth directly to them.

Health care

Economics cannot realistically be discussed in the modern world without consideration of the role of health care in human life. All the elements of economics mean nothing absent assessment of their effects on our lives, including the provision of health care, which is one of the most important and costly. Abstractions such as profit, trade, wages, and so on, are meaningless by themselves.

There have been few periods in modern history, particularly American history, when inequality of wealth has been more extreme. What does democracy mean if, in a period of unprecedented national wealth, there are so many people in poverty, unable to earn enough income with full time work to provide their families with essentials, let alone something so primary and essential as health care?

While it is possible for health care to be supplied by the private sector, we in the US pay literally twice as much for partial health care coverage that is universal and comprehensive in all other advanced countries.

Health care is not counted as an essential in the US, although it is in most other nations. It is a mistake not to recognize it as essential, particularly in light of its excessive cost here. It is morally unacceptable to deny treatment to anyone when we have inexpensive and effective treatments for many diseases. Moreover, all the advanced nations have great wealth, and ours is the wealthiest of them all. Given these facts, it is unconscionable to deny anyone medical care because of their low income when simple medical care would keep them a productive member of society, and would actually be of net benefit to the nation. But that is what happens: 120 Americans die every day for lack of health care. It is well documented that there is an early death penalty for those living in poverty, deriving from negative life factors like poor diet and foul air as well as lack of access to professional health care. The cost to the nation is huge.

120 Americans die every day
for lack of health care.

As I have mentioned many times, literally all advanced nations, and many less advanced ones, provide health care to all their citizens. Only in the United States is the very subject contentious, which is something that mystifies others all over the world. Recently, news reporters in China were baffled about how to report this strange American attitude. Moreover, only conservative Republicans oppose national health care, a position that literally puts them at odds with the entire rest of the world.

Such people frequently claim that American health care is the best in the world. Perhaps, although that is far from certain. What is certain is that American health care is excellent if you are rich, if you are a member of Congress whose insurance is subsidized from tax money, or if you are among the declining numbers fortunate enough to have an enlightened employer who is able to provide insurance. But if you are among the tens of millions who simply cannot afford health care insurance, you may soon be among the 120 Americans who die every day from curable conditions because they lack access to affordable health care.

Because health care is so central to human life and wellbeing, theories of economics must include it as a primary economic factor.

Retirement

The third item of great importance to individuals is retirement. Social Security has largely eliminated the specter of elderly ladies eating from garbage cans, which was its original inspiration, but SS was never intended to do more than prevent abject poverty. It is important for every earner to save for retirement from the first, but it is very difficult for the millions whose earnings are inadequate to pay even for life’s essentials. They simply have no money for savings, and there is no mandatory savings program. In addition, tax breaks for the rich in recent decades have assured that SS will eventually require new funds to assure solvency, effectively making the poor pay for the rich at the expense of their own fortunes in retirement years.

Like the personal elements above, the funding of retirement years cannot be ignored by any theory of economics that professes to reflect reality. These factors are not a result of economics; they are central.

Changes in the world of the economy are important only because of their effect on the lives of humans. The fortunes of corporations are largely irrelevant to most of our daily lives, although you would never know that from the news, which never fails to report the lives and fortunes of people with incomes in the millions or wealth in billions.

Nor would you know it from government actions. Government did not adequately address the central concern after the 2008 crash, how it affected ordinary people, leading to vast unemployment and millions of home foreclosures. But in 2009 Wall Street’s criminal perps of the disaster declared the problem solved and once again paid themselves outrageous bonuses in tens of millions. Three years after that, the crisis continues unabated, millions having lost their jobs and everything else, their retirement threatened or postponed.

Environment

It has been a huge historical error to consider environment as a factor “external” to economic theory. In fact, environment is only one of several factors we have ignored to our economic and national peril. Environment is, in fact, of central importance to macroeconomics, a determining factor, not to mention of central importance to human life on the planet, and must be accounted for realistically.

The classic instance is pollution caused by industry. Placing pollution outside the economic realm allowed industry to pretend it did not matter, that it was of concern only to “radical environmentalists”, as conservative environmentalists working to preserve our life support system were called. Fortunately for the US, a number of significant laws are on the books from times past, preventing industry from completely ignoring its responsibility, and helping to preserve our air and water, imperfectly, but far better than many places. One has only to experience the extreme level of air pollution in China to understand how important this is. In many Chinese cities (above, my photo), vision is limited to one or two blocks, beyond which the buildings are lost in the smoggy haze, which stings the eyes and makes breathing uncomfortable, and no doubt extracts an enormous health cost.

We cannot “destroy the world”.
We can only destroy the conditions
that allow us to live.

Failure to account for the effect of pollution on economics has caused us to believe we are far better off than we actually are. In so saying, I refer only to our own situation, our national situation. The far more significant concern is the continuing general decline of the global climate condition, which may soon make all local considerations moot as we are forced to adapt to a vastly changed planet in a very short time period.

We should be reminded that we cannot “destroy the world” no matter what we do. We can only destroy the conditions that allow us to live. If all human life were to vanish—which has happened to millions of other species—planet earth would continue as before, only we would have no part in it. Unfortunately, we may now be on the path that brings human life to an end. Certainly, we’re on the path that will bring serious compromise in the quality of all human life.

GDP

We are belatedly coming to the realization that Gross Domestic Product is a poor indicator of the health of our economy, giving us false figures that suggest improvement when the opposite is the reality. The reason GDP is such a false prophet is that every dollar spent is registered as a plus factor, whereas spending in huge parts of the national economy is in fact decidedly detrimental, contributing to the decline of our economic and personal wellbeing. Guns and crime provide a ready example.

Every handgun and bullet sold contributes to the GDP. Every day brings another story of someone, often someone young, being murdered by a handgun. The police frequently catch the perps, who end up in prison for long periods. The entire process contributes to “improvement” of the GDP.

GDP is a poor indicator
of the health of our economy.

The cost of the weapon and ammo, policing, jail costs, attorney costs, the huge social costs, the court costs, the cost of incarceration, which is higher than average income, are counted as improvements. The incarcerated felon is lost as a potentially productive citizen at least as long as he is incarcerated, a double loss. Yet all these things register as an increase in the GDP.

Obviously, none of these are positive contributions, and they should be accounted for by deducting them from the GDP. Many others, such as the cost of fires, weather disasters, pollution cleanup, corporate and government corruption, war, loss of nonrenewable resources, lost wilderness, and so on, are also negative. In fact, when these negative items are factored into the calculation of the GDP with such measures such as the Genuine Progress Indicator, an entirely different picture emerges (Boston Univ., by Talberth, Cobb, et al. 2007).

The GPI, seen as the bottom line in this measure of per capita change since 1950, accounts for dozens of negative factors, giving us a sobering and vastly different interpretation of the steady climb of wealth as measured by GDP (dashed line). If GPI is even remotely realistic, we have made no significant improvement in our national wellbeing since the 1970s, although we have spent huge amounts on negatives such as guns and prisons and on further enriching the wealthy.

If we should adopt the GPI as our central economic measure, the chances are greatly enhanced that we would account for negative factors realistically, as negatives. By paying more attention, we might well be able to transform such things as our enormous losses because of imprisonment. In California, we presently spend more money on prisons than we do on education, a preposterous, future-killing situation that must be reversed. Presently, we see every dollar spent as a social plus, regardless of its true effects on our wellbeing.

The GPI disallows this rosy-lensed view, preventing us from believing that a rise in GDP can only be good, whereas we could be much more confident that we see true progress when GPI increases.

Government role

It is an item of faith among conservative Republicans that only the free, unencumbered (i. e., unregulated) market can maximize benefit to all people. The error of this belief is readily seen in many ways, from terrible environmental abuse, corruption, Ponzi schemes, rent-seeking among the rich, bribery of public officials (including Congress), manipulation of laws and regulations favorable to the wealthy, and much more, all of which have become increasingly rampant with ongoing destruction of regulatory control over the past three or four decades.

Republicans also believe that private enterprise is inherently more efficient than government, and therefore most government services should be privatized. We need look no further than the vast abuses that occurred during the war efforts in Afghanistan and Iraq, and the loss of tens of billions because of such things as multi-billion dollar no-bid contract awards to Halliburton and others to see how false this is. The health care and Big Pharm industries give us another example, with nearly one in three healthcare dollars wasted on insurance, which provides absolutely no health care, plus the corrupt 2003 Congressional process that handed Big Pharm an anti-democratic, overpriced monopoly that will hurt us until it is rescinded. Republican belief in the “free market” is a bitter irony in the light of such obvious abuses.

Republicans believe that only the free, unregulated
market can maximize benefit to all people.

Given the obvious malevolent effects of this attitude on the wellbeing of literally everyone, I find it difficult to understand how anyone can continue to believe it is beneficial. Absent stringent controls, criminal activity is guaranteed. When the money involved is measured in billions, billions will be lost. The newly uncovered Libor rate-fixing scandal in Europe involves trillions, which few of us can even envision.

Moreover, it is clear that government agencies can indeed perform efficiently. To begin with, no government agency is compelled to produce a profit, as every private corporation must. Nor is it required to grow, as all capitalistic establishments must. In addition, top officers in government agencies are very well paid, but are not paid by tens of millions, with additional ten million dollar bonuses and stock options, as corporate officers are. Nor can one reasonably claim that government workers at lower levels are incompetent simply because they work for the government. Government jobs at all levels require the same educational preparation and experience that private enterprise does, and are adequately paid, with significant benefits.

All in all, the conservative Republican attitude about government vs. private enterprise is nothing more than an item of faith in a system of beliefs that has little basis in reality, the entire system precariously balanced on an unsupportable conviction that government and taxes must be restricted to an absolute minimum. None of it can be shown to be economical or democratic in practice.

New economy

It is apparent to many that economics as currently understood is deeply flawed, that the very construction of our economic institutions does not tell us what we need to know, and particularly, does not help us achieve equity and the rule of law. Capitalism and democracy are strange bedfellows. Gar Alperovitz quotes Charles Lindblom, who concludes his prize winning book Politics and Markets with this: “The large private corporation fits oddly into democratic theory and vision. Indeed, it does not fit.”

The present system must give way to new forms that move us toward democratic equality and account for the important things in people’s lives. Capitalism is a relatively recent phenomenon. It is not permanent. For several decades now, futuristic thinkers have been exploring what might become of economics in the not distant future.

Most of human history has been a story of very small numbers of the extremely wealthy who rule by the extraction of wealth from large numbers of the poor, and who regularly wage war to further satisfy their infinite greed. In all history, those at the bottom have tried to claw their way upward as best they could. To do so, they have usually had to battle the rich directly to keep themselves alive, or had to build an economic situation that allowed them to demand equitable treatment through sheer power in numbers. Usually, though, they have been held in poverty their entire lives, with no opportunity to improve their condition. The New Economics has found ways that simply sidestep this circumstance.

Some promising developments have occurred in certain European countries, which have attempted to put their terrible destructive and impoverishing wars behind them and structure their economy to avoid the extremes of inequality. Lest there be misinterpretation, the reader must be frequently reminded that equality does not mean that wealth is redistributed to the poor, as conservative Republicans frequently claim, but that the society must provide the democratic equal opportunity that is part and parcel of our founding laws, and prevent extreme poverty.

“New Economy” is the term most commonly used to describe the new directions that have been discussed and researched for several decades. The “post-capitalist” society is another, and “beyond growth” another. The goal is to structure society so that the benefits of wealth are available to everyone, the environment is protected, and the unscrupulous are prevented from enriching themselves at society’s expense. The genuine progress made in this direction is so far largely centered around ownership.

Worker ownership has so far been
the most successful way
to shield people from the
inherent evils of capitalism.

The greatest flaw of capitalism lies in the profit imperative. Capitalist enterprises exist for the sole purpose of enriching capitalists, who provide the money that allows the enterprise to exist. But a significant problem arises because of the fact that profit is imperative, regardless of how it affects other workers and the public. Typically, corporations have had utterly no compunctions about firing tens of thousands of workers in an economic downturn, rather than pay diminished profit to owners. This is disaster for those workers, who frequently lose everything, including health care and often their homes and savings. Older workers commonly never work again. Loss of 10,000 jobs can mean ruined lives for 40,000 people, and probably more, for the sole purpose of preserving profit for a few rich people who don’t really need the money.

There are a number of other ways to deal with inevitable economic downturns, which more enlightened businesses have used, including shorter hours, mandatory furlough, and pay reduction, as well as paying no dividend to owners. But the worst corporations view their employees as replaceable mechanical devices to be paid as little as possible, and care not the slightest what effect corporate strategy has on the lives of them and their families.

New Economics does not view workers as dispensable cogs, but as valuable humans, whose wellbeing is the very reason for working institutions.

Worker ownership has so far been the most successful way to shield people from the inherent evils of capitalism. Another inherent evil, besides the profit imperative, is the imperative to grow. Many have remarked that only capitalism and cancer are characterized by infinite growth. Moreover, it is inherently impossible to grow infinitely in a finite world, a limit we have already bumped against. Worker ownership avoids these two fatal flaws.

In a worker-owned enterprise, there are no rich owners to be paid, because every employee is also an owner. The only way to become an owner is to work there. Workers are paid a salary, which is typically higher than similar jobs in capitalist companies, but never puts anyone into top income brackets. Salaries vary according to the skills and training required. When the worker-owned company decides to distribute profit, every worker from the highest paid to the lowest, gets an equal share. This can be of huge benefit to the lowest paid workers.

Decisions such as when to distribute profit are commonly made by consensus. Persons who are hired to manage the company are employee owners like everyone else. Typically, managers and others with particular expertise are paid more than the lowest workers. However, they answer to all the worker-owners, and can be fired by them. No single person can fire a worker, but a worker can be fired by agreement among other worker-owners.

Worker-ownership is so far a relatively small part of the overall economic picture, but it is growing. I urge young persons to get into one of these enterprises if at all possible. Or find a way to start one, perhaps by going together with fellow workers to buy out a retiring business owner. I regard the many IT startups as a different class of worker-owned businesses, because the usual motive is to sell to a big company and get out, which is quite different from building a bakery or car repair business.

There are a few such organizations with employee-owners in the tens of thousands. These include the Mondragon Corporation in the Basque region of Spain, founded in 1956. This is a federation of companies that manufacture various things, including household electric devices. There are currently nearly 86,000 employee owners. There are few minimum-wage workers, and the highest pay is rarely as high as the maximum allowed of five times the lowest. (Contrast that with pay of top corporate CEOs, whose pay can be more than 2000X the lowest pay.)

England has a lengthy history of worker-ownership, and the government is currently trying to encourage more such companies. The largest is the John Lewis Partnership, which operates 66 department stores and 210 supermarkets. The firm first opened in 1864, and was converted to a cooperative in 1928. There are presently about 81,000 worker-owners.

Most worker-owned companies are considerably smaller than these two examples, typically consisting of a few dozen to several hundred persons. Locally in San Francisco these include Rainbow Grocery, Recology recycling and waste management, Arizmendi Bakery, and a number of others, which total hundreds of workers.

There are many more corporations that maintain the typical corporate structure, but encourage their employees to invest in part ownership of the corporation, frequently by matching employee investments. This investment, however, does not give the employee any control over his fate. Aside from this investment, such corporations operate like other corporations, and can ruin the lives of workers at will.

Other types of ownership are proving beneficial as well. Cooperative arrangements between smaller governmental units, larger district-wide agencies, and various governmental functions have helped. In Boston, the Faneuil Hall Marketplace was developed cooperatively. Boston maintained ownership, and assesses no tax, but takes a percentage of profits. The city’s share of profits has been worth several million yearly. Similar arrangements have been very beneficial with hotels, civic centers, and other structures in various parts of the country. Municipalities have also profitably owned power companies, internet providers, television and radio, sports teams, health agencies, and so on. Virtually all such enterprises offer services at rates lower than commercial rates, and earn the city a useful income. Community land trusts and community development corporations operate in many ways that are beneficial to both participants and the city or county. (See Gar Alperovitz’ book America Beyond Capitalism for a discussion.)

I have not heard of worker-owned businesses that function under local government cooperative arrangements, but nothing prevents it. All such arrangements are more beneficial to workers than typical capitalistic companies, as well as to the municipal or state agencies that support them. Additionally, the public often benefits from better pricing.

New Economics has already made a difference in how we view the world of economics, politics, environment, and human wellbeing, even though the field is less than a half century old. Two additional books help us understand where we have been and the options we face: Prosperity Without Growth, by Tim Jackson, and The End of Growth, by Richard Heinberg. A quick online search will uncover several New Economics organizations, including “the new economics foundation” (always lower case), an English group. The English have been particularly active in the field.

What’s Missing

Many important things are missing from discussions of economics. Traditional Economics functions under several essential errors, among them the basic belief in how markets and people function, the absence of the element of environment and a number of other important elements considered “external” to theory and therefore of no interest. But the most important failure is the failure to include the effects of economic functions on real people. It is not markets and corporations that are important, it is people. How the economy affects people is the critical element that must be part of any useful economic theory. Without it, economics is an empty exercise in academics.

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