Modern economics has lost sight of people – By KEN WOLFF


This is the first of four articles looking at particular changes, and potential changes, in our economic environment and approach to economics generally.

For those who have followed my pieces on TPS you may recall that I am qualified as a social anthropologist. I take the anthropological view that economics is about how a society uses and distributes its resources — that is any society, whether hunter-gatherer or a modern technological society. It is a view that raises some questions about our modern approach to economics.

Basically the ‘use’ of resources includes a social responsibility for sustainable use so that resources can be utilised by others when required and also be available for future generations. And ‘distribution’ of resources includes a social responsibility to ensure that everyone in a community gets a reasonable share to enable them to survive comfortably within the context of their society.

Classical Western economics, however, is based on the tenet of the rational self-interested individual: that people make rational choices in the market that best provide ‘utility’. ‘Utility’ is something that provides the user/purchaser with satisfaction and/or meets their desires in some way. Adam Smith also introduced the concept of the benevolent ‘invisible hand’ whereby decisions made in an individual’s self-interest actually prove beneficial for society.

In classical economics there are also the concepts of ‘perfect knowledge’, by which the individual makes rational decisions based on information about all the prices in the market, and ‘perfect competition’ by which a product reaches an equilibrium (supply matching demand), and its price also reaches an equilibrium for all suppliers of that product, meaning there is then no competition nor need for advertising of the product. Of course these do not exist in the real world. Neither are individuals always rational in making their decisions in the market. So what was classical economics actually describing?

Even the concept of the market needs exploring. Markets of course go back millennia but the concept of the market has changed over time. Early in human history people shared goods, then exchanged surplus goods for other desirable goods and, as villages and towns developed, for services. Money eventually became the medium of exchange for any good or service.

Markets were not always based exclusively on the individual. In medieval Europe if a merchant from town A left debts when he departed town B, the merchants from town B didn’t pursue that individual merchant directly but would detain the next merchant who arrived from town A and hold him until he, the original merchant, or anyone from town A paid the debts. In that sense, the role of the individual in the market wasn’t as important as it later became — at that time it was believed that the community from which the merchant came also had a responsibility for his behaviour (and his debts). Subsequently merchant guilds were formed in which debts could be settled and over time that grew towards individual responsibility for the settlement of debts.

The other concept relevant to the modern market is private property. While the idea of private property now dominates our economic and social thinking it was not always so. Even in medieval England when land was held by dukes, barons and the like, there was common land used by the serfs, so both common and private property co-existed. It is estimated that, although serfs had to provide labour to the rich landholders, by using the common and small plots around their own dwellings they were actually able to keep from 50% to 70% of the product of their own labour. An industrial labouring class was created during the industrial revolution with the enclosure of the commons (in modern parlance, the land was privatised) and poor farmers and rural labourers no longer had access to that land to supplement their incomes and so had little choice but to work in the factories.

In the market, the logic is that to exchange something I must own it in the first place and the other party must also own what they are exchanging. The logic of that seems apparent when one considers what a thief may offer for exchange: we undoubtedly consider that not to be a fair exchange because the thief does not actually own the item of exchange — or does he? The thief clearly has ‘possession’, so is there a logical difference between ‘ownership’ and ‘possession’ in the economic system?

The emphasis on private property as central to a market economy goes back at least to the 1700s in England. C B Macpherson, a political scientist also trained in economics, argued that political freedom came before economic freedom and was first obtained by the property-owning elites who then used their new political power in their own self-interest to entrench private property rights. And it also goes back in history in the sense that much modern ‘ownership’ is based on past dispossession of previous owners and yet the economic system is based on the modern possession not the historic ownership.

Now private property, whether physical or intellectual, is central to thinking in a modern market and in modern economics.

These concepts were put together by the philosophers Hobbes and Locke but Macpherson also argued that they were bound by the values of their time and hence developed their philosophies around the market, contractual obligations and property; and the concept that an individual is the sole proprietor of his or her skills and owes nothing to society for them — what Macpherson called ‘possessive individualism’.

In rejecting a social element to ownership, economists refer to the ‘tragedy of the commons’ to justify that individual ownership, that is private property, is superior to common or social ownership. Although the idea has a longer history, the phrase came from a paper by Garrett Hardin in 1968. It was suggested that, when people grazed their herds on a ‘common’, a self-interested individual could improve his situation by adding one animal to his herd. The individual would gain the benefit. But if each individual added an animal the common would quickly degrade. While the individuals retained the benefit of having an extra animal, the ‘cost’ (the degradation) was shared, leaving them with a self-interested benefit — before the failure of the system. Following this argument, and its corollary that Adam Smith’s benevolent ‘invisible hand’ of individual self-interest does not work for the commons, economists argue that private property, and the individual’s responsibility for that property, remedies the situation and that became central to modern economics.

That approach is based, however, on a misunderstanding of how commons worked. They were not ‘open access’ as the theory implies. Throughout the world where people shared resources there were usually social and cultural rules that controlled that sharing. In Iceland, for example, the common resource of the fisheries was traditionally controlled by kinship rules that allocated spaces on the beach, that were necessary for launching fishing boats, to individual families. In some communities in India the allocation of the common resource of water for farming was determined by community meetings. People accepted these approaches as essential for the well-being of their communities or, in other words, social responsibility was more important than individual self-interest.

The modern market idea of private property and individual self-interest has basically destroyed social responsibility and the concept of the common good and allowed polluters to pour their waste into the ‘commons’ of the rivers, oceans and atmosphere.

We now use GDP to measure the ‘success’ of our economy but the use of GDP to measure economic activity only arose after the Great Depression of the 1930s when the American government was concerned that it did not see the depression coming. The government asked economic experts for a model that would allow it to keep track of the economy and so have a chance of foreseeing such events in the future.

The use of GDP, however, was being questioned as early as the late 1950s. Even its creator, Simon Kuznets, said that ‘the welfare of a nation can scarcely be inferred from a measurement of national income’.

A major problem with GDP is that it measures only productive activity and takes no account of the losses or costs associated with the activity:

… it tends to go up after a natural disaster. Reconstruction and remediation spur intense activity that is registered by GDP, while the destruction, lives lost, suffering and disruption to families and communities in the wake of a flood, cyclone or bushfire are ignored.

Or as Robert Kennedy said in 1968:

… the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. [emphasis added]

Yet we still rely on GDP as a measure of a nation’s progress although it has nothing to say about the well-being of the people. Gross GDP per head is sometimes taken as a measure of the economic prosperity of individuals: if that is rising people are said to be better off but it does not tell us whether that prosperity has enhanced ‘happiness’.

There is a long history in which ‘happiness’, or well-being, was removed from economics. A chapter in the World Happiness Report 2013 provided a potted history of the changes in the Western view of happiness: from the Greek philosophers and early Christian church’s view that happiness was achieved by being virtuous, to the economic theory of ‘utility’ in which individualism and consumerism prevailed — the early economic theorists brought material goods into the happiness equation, suggesting that people purchased that which brought them pleasure or happiness (‘utility’). In the twentieth century, however, economics came to be dominated by mathematical formulae and the question of whether market consumption could increase happiness and well-being was no longer a consideration.

Economists claim their field is a science and value free but the economy depends on social values like trust. We cannot even have a ‘market’ unless we trust each other. In a shop, the shopkeeper trusts that I will hand over the money after he hands over the goods or I trust that he will hand me the goods after I give him my money — otherwise we could be there all day arguing over who should make the first move. It could be argued that the behaviour of large multi-national corporations is destroying that trust, as is the use of tax havens to avoid social responsibility. And are we now so distrusting that we require automated payment systems, including even when paying for our goods in supermarkets? — now we have to trust a machine! Human interaction is being removed from the basic market process of exchange.

As Jeffrey D Sachs wrote in the World Happiness Report:

A prosperous market economy depends on moral ballast for several fundamental reasons. There must be enough social cooperation to provide public goods. There must be enough honesty to underpin a stable financial system. There must be enough attention paid to future generations to attend responsibly to the natural resource base. There must be enough regard for the poor to meet basic needs and protect social and political stability.

After all the economy does not exist in its own right. The market and the economy is people, as producers and consumers, as it has always been. It is the approach to it that has changed.

In an article in The Monthly, Richard Denniss argued that we are being led to believe that governments, in making their decisions, have to be conscious of the reactions of ‘the markets’. He wrote that we should remember that ‘markets’ per se do not have feelings, do not have needs or demands. What we refer to as ‘markets’ is actually people buying and selling and attempting to manipulate trading for their own advantage.

So historically we have moved from social co-operation in economic activity to twentieth century economic theories that have reduced people almost to invisibility. We discuss economics in terms of markets, GDP and monetary and fiscal policy as though these are entities in their own right. There is no economy without people, no markets, no goods and services without people as producers and consumers but this now gets less attention. The economy is deemed to have its own ‘scientific’ rules that operate irrespective of people and, as mentioned earlier, can now be analysed simply in terms of mathematical formulae.

Until people are re-introduced into the equation (both metaphorically and literally), the economists will not be describing the real economy nor will those utilising economic theory, such as governments (and their advisers), pay enough attention to the needs of their people. When ‘markets’ and GDP come first, people come last.

We need to measure the well-being of the people rather than only production; we need to pay more attention to the sustainability of our use of resources, not only for future generations but to ensure that current generations have reasonable and continued access; we need to ensure a fair distribution of resources, not only within our own society, but for all people globally; and only then will we have an economic approach that is realistic rather than the narrow view of current economic theory.

Next time, continuing the economic theme, I will discuss ‘an economy without people’ as robotics and other changes reduce the size of the workforce.

What do you think?
Who benefits from economic theory if it does not pay enough attention to people?

Why have we accepted the propaganda that even social progress hinges on the economy?

Let us know in comments below.

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