6. The economic sphere

Ch 6

The state of the economic sphere

It’s broken.

Or, to be more precise, the financial system is broken, and the economic system is being run on rules which are not only demonstrably wrong, but also unrestrainedly favour the wealthy.

A sophisticated and global financial system was touted as essential to allowing free flow of capital around the world, to support investment and development.  And it has certainly achieved that.  But with a couple of rather major problems, both of similar importance, and at least one lesser problem.

The first is that, by allowing free flow of capital, it has enabled the real economy to destabilise societies on a massive level.  In capitalism’s race to find the cheapest sources of supply and manufacture, it has rapidly moved production west and south around the world – from Europe and the United States via Mexico to Taiwan and Japan, then China, and it continues west, into places like Bangladesh – while repatriating much of the profit to the “developed” world.

This has been dislocative in the countries which lose the supply and manufacturing work.  The normal excuse is that the dislocated move into “service” work – which, however, is largely a euphemism for work which supports overconsumption by the wealthy.  (I have no argument with any shift to service work which generates or is likely to generate real wealth, notably additional research and development.)

And this is generally accompanied in the “developed” countries by changing statistical measures to understate the number of unemployed and under-employed.  For example, the OECD definition of unemployment only includes those “actively” seeking work, and Australia and New Zealand both regard working for one hour a week or more in paid or certain unpaid roles as “employment”[i].

In the poorer countries through which capitalism’s whirlwind passes, there are undoubtedly some gains made in income…for a time.  But the prevalent use of “sweat shop” production, common use of child labour, and lax standards of safety, conservation and clean energy use, combined with the certainty that production will move on again to somewhere “cheaper”, makes this all a temporary and, probably in the long run destructive, phenomenon.

This, by the way, is often referred to as a “race to the bottom”.  I sometimes wonder what capitalism will do when it gets there.

The second major problem with the world financial system is that it is a giant, ever-growing casino, which is run by the people who most benefit from it.  Its growth over the last 30 years has been exceptional.  New products have been spawned regularly and rapidly.  Manipulation, theft and corruption have been commonplace.  It has facilitated massive transfers of wealth from the poorer to the richer (consider the GFC bank bailouts for example).  And no one really understands how it works in total – least of all the regulators.

This sounds like a good description of a cancer, and that is what the financial system now is – a massive cancer on humanity.

The growth in money supply in the UK over the last 35 years gives a graphic illustration of the rapid expansion of the financial sector:

Ch 6 illus 1

I find it hard to classify this next thing as a “minor” problem, because it is about something dear my heart – the redistribution of wealth.  But, compared to the two problems above, it is minor.

Changes in tax regimes over the last 30 years have consistently favoured the corporations and the wealthy, by reducing taxes on corporate and higher incomes.  This is arguably more a governance than an economic problem, but it has been driven by the economic sphere’s belief in its own relative importance (expressed in mantras such as “trickle down”, “market solutions”, and “free trade”).

And this has not been confined to lowering taxes. Their increased ability to freely move capital and funds has enabled corporations and wealthy individuals to avoid taxes by moving their funds to tax havens – places where they avoid the taxes they should pay on their profits.

There has been much recently made of massive tax avoidance by large corporations such as Google and Apple.  But the obvious injustice of this may never be properly righted, as the large corporations lobby and fight legal battles to delay, water down, or just plain block fairer tax rules, while poorer countries, often with considerable justification, may make themselves tax havens to find some useful income.

It gets worse.  The profits which are under-taxed are increasingly being made not from production of real goods and services, but from “rent-seeking”.  This is making profits without creating wealth, by obtaining subsidies or licenses or regulatory advantages.

Joseph Stiglitz’s “The Price of Inequality”[ii] gives a shocking description of the nature and scale of rent-seeking in the United States by the wealthy and powerful.  His examples include not only regressive tax regimes, but also hidden transfers and subsidies, cheap purchase of state assets and expensive sale of goods to governments, monopolistic and anti-competitive practices, favoured status (for example, bailout and low interest regime) for banks, predatory lending (for example on credit cards)…the list goes on.  Many of the superwealthy have made their wealth through this form of theft of what should be common wealth or property.

Turning now to the rules on which the overall economic system is being run.  Remembering that I defined the economic sphere as “the system for production and distribution of goods and services”.  There are three fatal flaws in the rules being used in this system.

The first arises from the fact that the underlying principles and rules used to develop and regulate the economic system are mainly derived from neoclassical economics.  There will be more about this in Chapter 16, but the central problem is that neoclassical economics sees government as an “externality”, and denies the existence of society per se (it also bypasses ownership, by the way, and only looks at production – thank you Thomas Piketty).  Its central tenet is “the market will provide (through Adam Smith’s invisible hand)”.

It puts the economic sphere at the centre of things, or at the top of them, depending on which best fits your worldview.  And consequently, national and international laws are made which favour production and trade at the expense of social and environmental concerns.  This gives the economic sphere far too much power, which is clearly evident today in the behaviour of transnational corporations.  And the owners of the corporations soak up the consequential profits.

My favourite depiction of this is the illustration of “triple bottom line” accounting which puts economics at the centre, and society and environment at the edges, thus:

Ch 6 illus 2

I think “Mickey Mouse” is a perfect description of this model!  And yet this is how our world is run today.  Karl Polanyi described it as the “market society” – a world at the service of the markets, rather than the markets at the service of the world[iii].

The second fatal flaw is that no-one appears able to, or willing to, calculate and factor in the real costs of goods and services before they are sold.  This is partly because modern economics has no useable “theory of value” by which to assess these costs, partly because capitalism has a genius for externalising its costs – ie getting other people to pay for them – and partly because the methods currently used for assessing and assigning costs are either incomplete or biased.

Capitalism externalises costs by “taking and not paying” (as in much harvesting of eg fish stocks, and mining of mineral resources), “buying low and selling high” (keeping profit that rightly belongs to others), “leaving and not paying” (as in pollution and release of carbon), and “selling and neglecting” (ignoring downstream and disposal costs).

The best and simplest illustration I have of this is the “$200 hamburger”.  In his 2009 book, “The Value of Nothing”, Raj Patel, an ex-World Bank economist and outstanding thinker, quoted a calculation of all the “real” costs of producing a Big Mac by the Centre for Science and the Environment in India, including the types of cost summarised above.  The calculation came out at about $US200 for an item which retails at about $US4.

In other words, McDonalds externalises more than $196 of the real costs of producing a Big Mac.  Even if the calculation is wrong by a factor of ten, that’s still a $20 Big Mac.

Would you pay $20 for a Big Mac, let alone $200?  And are you happy that McDonalds makes a 50c profit on that Big Mac by outsourcing costs of somewhere between $16 and $196 to the rest of society and the environment?  I hope not.

But, before you go boycotting McDonalds (although that’s probably a good thing for lots of other reasons as well), remember that all our food needs to be subjected to a similar assessment before we can make sensible decisions about which foods offer us the best trade-offs of cost, nourishment and pleasure.

My own profession, accounting, has gradually got into the game of accounting for real costs, but is not really making a lot of progress, mainly because it is working inside a for-profit paradigm.  This leads to the “incomplete or biased” methods of accounting for costs which I referred to above.

For example, the basic methods for valuing things are based on “discounted future cash flows”, which always favour the present over the future.  An asset you have now is considered more valuable than it will be in future – everything deteriorates, or “depreciates” in our accounting language.   This may be true of machinery and manufactured objects (which, if untended, can only deteriorate), but it is not true of Nature.

Nature produces and reproduces through processes which flourish if left alone.  It allows us to harvest its renewable bounty (ie crops) without decreasing its ability to produce them again in future – if we do it right.  Nature actually gains value over time, yet modern economics assumes it will deteriorate, and uses accounting methods which encourage the stripping and overuse of nature’s assets[iv].

Another current example is accounting for the costs of carbon use[v].  Countries are required to account for their emissions, but emissions from international transportation (which have expanded exponentially with the increase in trade over the last 30 years) are not attributed to any country, so no-one is responsible for reducing them.  Also, countries only account for their own production, not their consumption, so they “outsource” the true costs of their consumption to the newly industrialised countries such as China.  This is more a political than a technical accounting problem, but regardless, it leads to incomplete and biased reporting of real costs.

This fatal flaw of not accounting for real costs transfers wealth to the rich because it is taken from the poor, and the lands of the poor, who by and large pay the real costs, in terms of under-priced raw materials or production, and spoiled social and physical environments.

It also extracts wealth at the expense of future generations by doing this.  The spoiled environments, and reduced materials available for future consumption, are the obvious examples of inter-generational theft.

The third fatal flaw in our economic system is that it only deals with monetary and market transactions (again, largely because that’s where neoclassical economics comes from).

“Production of goods and services” is a far larger sphere than “markets where money changes hands”.  In the human sphere, it mainly also includes large amounts of voluntary and unpaid work.

Gross Domestic Product (“GDP”) is the key indicator of social progress used these days by those in power, despite the fact that it has little or nothing to do with social status or progress.  Marilyn Waring’s brilliant “Counting for Nothing” (1989) exposed very clearly how measurement of GDP ignores much truly productive work which generates wealth, such as producing and nurturing children, while counting unproductive work which actually consumes wealth, such as “defence”, “justice”, and the conduct of war.

GDP has some value, as a measure of production in the monetary sector of the economy, but it tells us nothing of production in the non-monetary sector, or of changes in the state of the personal, governance, or environmental spheres.

In the biosphere, of course, Nature produces, in one way or another, the raw material for ALL the goods and services we consume.  It acts as a source of the materials we use, a source of the energy we use to transform them, and a sink for the costs of use and disposal.

And, in the not too distant future, Nature could well have a major job to do to process, dispose of, and add back into the circle of life the remains and leavings of humanity and our rather short time on the Earth.  I’m sure it will prosper.  But not necessarily in a way that includes us.

Back to the economic sphere – the point of this third “fatal flaw” (dealing only with monetary transactions) is that the current economic system values the wrong things, and in doing so, transfers wealth to the wealthy.  It does this because most unpaid work is done by the poor (perhaps they are poor because they are unpaid), and the wealthy get the benefits; and because the unpaid use of the biosphere is, again, generally paid for by the poor or by future generations.

In summary, the current economic system, with its free flow of capital, its financial laxity, its subsidisation of the wealthy and the corporations, and its inability to deal with society beyond the economic sphere, or to assess the real costs of goods and services, or to value anything outside market transactions, is primarily a system designed to transfer wealth to the corporations and the wealthy, at the expense of the poor and middle income earners, and of the Earth’s long term capacity to sustain humanity.

Read on, about “The land…”>>
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[i] Keen, “Debunking Economics”, Loc 8294, NZ Department of Statistics, Definition of workforce status

[ii] “The Price of Inequality”, Joseph Stiglitz, Penguin, 2012

[iii] Karl Polanyi, “The Great Transformation”, 1944

[iv] Alan Atkisson’s “The Sustainability Transformation” gives an excellent account of the negative effects of this practice – see Page 55/Loc 1377ff

[v] This example is taken from Naomi Klein’s “This Changes Everything”, Page 78/Loc 1451ff