The Path to A Future: Economics 001

The economy, and implicitly the development of wealth, is a core issue that too often suffocates the debate about our options for change. Many of us come to the table with assumptions about the relationship between wealth and prosperity. We need to reevaluate these assumptions if we are to develop solutions to our problems. In this section we will revisit the basic constructs of economics and wealth creation, to make sure we are operating from a realistic and accurate foundation when we formulate the framework for our economies.

The typical policy debate today is about the balance between the social ills of the free market, and economic ills of a state-controlled economy. This suggests a built-in assumption that we must compromise our social security to let markets be free.

Why is that true? Why is it that market freedom is a function of social insecurity? What is it about economic theory that stipulates a need for the population to be prepared to pay a piece of their personal freedom, in order to get to a piece of the market freedom pie? The conventional answer to this is that the labor force needs an incentive to work, and that sometimes the appropriate incentive is survival. Apparently, without the threat of destitution, people will not take the jobs on offer in a free market!

Which leads to the next question: why would a free market create work that only those threatened with starvation would want to perform?

Oh I see, a free market doesn’t necessarily create undesirable jobs, it’s just that the free market rewards low cost, and low cost means work and reward conditions that only the potentially destitute would agree to work in.

Right?

This cyclical assumption that low cost requires undesirable work, which demands an insecure workforce, is fairly deeply embedded in our current cultural psychology, especially in the West. In fact it isn’t really challenged, because it is so widely held and so subtly integrated.

As I will show, the opposite is actually true. Secure populations, working voluntarily in jobs of their choosing, is the most productive economic model available. The “market” is not a policy model, it’s only a mechanism; it is no more an economic, or political, model than the explosion in a cylinder is a car.

Our desired outcome is prosperity. That is the destination everyone understands we are aiming for; everything else is just a means of achieving prosperity. The free market is not the destination, any more than collective bargaining is. So the first link to unhinge in our minds is that the “free market” is what we need. Keep your eyes on the prize: prosperity.

The “market” is a set of mechanisms that naturally directs resources to meet needs. While its principles are simple, in operation it accommodates a bewildering array of inputs, influences and outcomes. It’s like our brains: we know the principles on which they work, but that doesn’t mean we know how to work them.

Cost is a significant input to market mechanisms. When all else is equal, cost drives decisions to the most efficient outcome; that is the raison d’être of the market. But we should note that, almost always, cost is the last criteria in the decision tree; the item has to be fit for purpose first, and affordable second.

What about trade? Within a given market, does the locality need to be the lowest cost producer of the good or service? If trade is possible the answer is no, because if equal and lower cost items are available through trade, then trade will fill the need. Unless… unless the item is so vital to the survival of the population or the basic functioning of the society, that a breakdown of trade, for any reason, would be a strategic threat to everyone. There are certain items that are so strategically important that higher cost is not a barrier to local production, and the market must necessarily be modified in order to accommodate the higher priced, locally secured items.

This leads us to an important place on our journey and we would do well to stop and clearly annunciate our conclusions:

• The market is a great system for almost everything.
• The market is not an appropriate mechanism for the most important things.

Whoa! How did we get here? I’m a freemarket capitalist and I’ve been around for a while so I know a thing or two about the world I live in, and this doesn’t sound right at all! I’m going to have to go back and read those last few pages again. You’ve used some crazy commie logic to trap me into believing that the free market won’t solve these problems. Wait here while I reread.
…
Okay, back again. Well, um, I can’t see where I could disagree. It’s not like it’s complicated, right? There’s just some stuff in the world that’s too important to outsource. I can see that.

Thanks.

Now the other news: if there is no strategic imperative, there’s no reason to interfere in markets. This is where some get caught up in a different false linkage: they think that we can intervene in markets to make them produce social welfare and justice. In fact, the basic social welfare of our societies is not an output of markets. Markets do not have “well-being” as an output in any of their functional logic. Markets efficiently direct resources to fill the needs of consumers, that is all they do. The welfare of society and our quality of life have to be outputs of human endeavor, they are a function of choice. We do not have to choose the common good or a high quality of life, and we certainly won’t get either if we wait for markets to deliver them.

Let’s be fair to markets while we’re here: they don’t know how to benefit society, and it’s extremely unfair to ask them to do so. Markets, especially those catalyzed by modern banking systems, are good at creating wealth; but wealth is not the same as prosperity. Prosperity is a mixture of wealth, peace and freedom that delivers a high standard of life. So if we want prosperity, we have to mix the output of markets, with the output of our choices to promote peace and freedom.

When we can clearly see these distinctions, and the properly differentiated roles for economics and politics, we can formulate more coherent policies that are more likely to deliver our intended outcomes.

Economic policy should concern itself with:

• the maintenance of markets
• the management of the monetary system
• the administration of strategic resources

Political and social policy should focus on:

• the cessation of hostilities
• the protection of liberty
• the general welfare of society

Let’s look at each of these policy areas in turn, so that we may more clearly demarcate their boundaries. Once we have separated them in our minds, we will be better able to act in the right places to produce our desired results.

Economic Policy

The maintenance of markets involves trying to ensure that they function as freely as possible by correcting naturally occurring defects as much as is possible. The two most common defects in market function are the imperfect distribution of information and the exclusion of external costs.

• Making as much information as possible available to consumers, with the lowest barriers to acquisition, is the best we can hope for; you can take a consumer to information, but you can’t make them know.
• External costs, “externalities” in official parlance, are those costs that can be directly attributed to the lifecycle of a product or service, but for which there is no one to demand payment during that lifecycle. Nature is a good example of a non-payment-demanding party to many transactions. When these externalities are recognized, the proper maintenance of market function requires that these costs are imposed on behalf of the non-paymentdemanders, usually in the form of some kind of tax, duty or other loading of the item’s cost profile.

The management of the monetary system is primarily about preserving the value of the currency. Given that there is no real basis of tangible value in a modern currency unit, it is important that the quantity of money in circulation be managed in line with the output of the economy. Furthermore it is essential that the banking system charged with the care of private deposits, debts and equity be regulated for stability. Modern economies based on monetary systems require a trusted banking function in order to operate, and so the maintenance of that system’s stability is paramount. (Banking is entirely different than investment management, which is not really a banking function at all, and should be kept separate from banking. In fact, the term ‘investment bank’ should be abolished.)

The third leg of economic policy is the administration of strategic resources. As discussed earlier, there are resources that are so important to the sustenance of a society that trade cannot be relied on for their procurement and distribution. These resources must be identified and their supply purposefully managed, such that their availability is as guaranteed as it is possible to achieve. Chief amongst these resources are shelter, food, healthcare, education, transport, energy, information and the legal infrastructure of democracy (the same services that form super-security). In most situations only a subset of the total market for each of these resources is strategic, and only that subset need be the subject of public policy. For example, the availability of clean drinking water is a matter for public policy but this does not need to extend to the bottled water market. Similarly the provisioning of primary health care as a public service, does not preclude the availability of specialized procedures in the private market.

Those are the elements of economic policy and maybe you’ve noticed certain absences that you might normally expect to be part of contemporary policy portfolios. Before going further, let’s do a quick review of the complementary political policies that accompany our economic policies, to shed some light on those absences.

Political Policy

We have said already that political policy should concern itself with the establishment of peace, the protection of freedom and the provision of welfare. As regards the economy, the establishment of peace and the rule of law are precursors to enterprise and trade. The freedom of the people is necessary for proper market function, the development of business and the fostering of innovation. Indeed, the freedom to choose and the freedom to fail are essential to the fluidity and effectiveness of market mechanisms.

The provision of public welfare is commonly understood to be the primary function of government, but the policy framework to deliver effective results has eluded most, if not all, to date. Public welfare policy has been colored by our history and has yet to free itself from the shackles of our legacy perspective. During the last century or so we have developed levels of efficiency and productivity that have created the capacity to provide universal welfare. The capability of the population to sustain itself, without reliance on the grandesse of a ruling elite or the magnanimity of magnates, means that we can truly deliver the bare necessities of life to all, at a reasonable cost to all.

The cost of universal shelter, sustenance, healthcare, education, transport, information and democratic freedom is about one third of the total output of modern economies. That’s right, for about 30 cents on the dollar we can afford basic housing, a healthy diet, primary health care, reasonable education, local public transport and universal digital information access for everyone. Not everyone is going to want or need every service, but if they did, we can afford to provide them today; with the same tax rates we are already paying.

So why aren’t we doing it? The primary reason goes back to the starting premise of this section: the idea that the provision of such welfare would fatally undermine the economy, the very system that produces the wealth that makes it all possible. And we’re back to the same logic we questioned at the start. Do we believe that the motivation to work, to innovate and to be more productive will disappear if we aren’t afraid of starving to death in the gutter? This is not reality. It misunderstands human nature, and the meaning of “welfare”.

Human nature is full of aspiration; that is what has driven our development over time. Once we have filled our bellies we desire taste; once we have rested we desire comfort; once we have seen color we desire lights and once we are satisfied we wish to contribute. The religions of the world are the ultimate examples of our capacity for aspiration, far beyond the mundane practicalities of life. Providing a roof, a bed and a bowl of soup does not satisfy the aspirations of anyone. Would it satisfy you? Wouldn’t you still want to see a movie, eat some chocolate or wear different clothes? Perhaps you’d rather own a mountain bike, become a photographer or grow some vegetables? To believe that providing the bare necessities of life to someone will blunt their motivation and dull their aspirations, is to negate what you know about yourself. It’s simply not a reality, not of anyone, anywhere.

So what should public “welfare” policy actually provide? The policy should aim to satisfy a basic, mutual social contract between neighbors: that no matter what fortune befalls you, you will have the bare necessities of life, and as much opportunity to make the most of your life as can be afforded. Viewed in this light, welfare policy is not a benefit that anyone is entitled to, it is a service delivered to the best of their neighbor’s ability.

Public welfare policy is really about delivering personal security and opportunity. As such it does not involve the transfer of payments, instead it delivers services that fulfill the social contract. Housing is made available to provide secure shelter, food sufficient to maintain health and medical services as can be afforded for all. Think of them as services, not dependent on the largess of some individual or group, but provided universally, as a birth right of citizenship. No cash, no luxuries and only what can be universally afforded from a reasonable tax.

Now start to imagine the impact of such a public welfare system on the economic system. No need for a minimum wage. Everyone has their basic sustenance taken care of, so they are free to provide or pay for labor at whatever rate they choose. On almost every level required for a flourishing market economy the situation is improved: workforce mobility, propensity for risk, innovation capacity, skills development, productivity, confidence and satisfaction. The implementation of universal personal security will have a dramatically beneficial impact on economic output, at the same time that it enables “low cost” production.

Because delivering universal services frees labor to be priced according to its marginal value added, the “cost” of labor throughout the economy is significantly reduced, especially at the lower skill levels. This in turn, has the knock on effect of reducing the nominal cost of delivering the universal services themselves, because a high proportion of the cost of delivering those services is labor related. In effect, providing universal services reduces the cost of delivering those same services.

A fundamental and progressive effect of universal personal security will be the stimulation and expansion of micro-enterprise. Freed from the pursuit of mere survival, the population will be able to use their more unique skills and interests to create micro-services and products that meet the needs of very small markets. This micro-economy has the ability to boost general satisfaction by allowing specific needs to be met more directly, at the same time that it further enhances the economy by dramatically increasing transaction volumes and efficiency. Child care that allows bicycle repair, that saves resources, that are diverted to power buses, that get people to work faster, that allows more family time. The feedback loops that reinforce the productivity, efficiency and diversity of the economy are endless. Additionally, as more needs are satisfied more directly by micro-suppliers, the dependence on mass production and long-distance transport is lessened, the resilience of local economies is strengthened and production becomes more environmentally sustainable.

Conclusion

When we can separate and distinguish between economic and political policy, we can make effective choices that will lead to the prosperity we desire. We don’t need an economic policy that creates jobs, we need a political policy that allows jobs to be created. We don’t need economic policies that encumber businesses with social responsibility; we need political policies that deliver real social security.

For our economy we need economic policies, and for our welfare we need political policies; each, unto their own. Far from economic growth resulting in social ills, or social growth resulting in economic ills; economic and social growth are mutually enhancing. Delivering universal social security will not erode productivity, it will enhance it. Unfettered markets will not drive social well-being into the ground, they will lift it up.

If we can just uncouple our unfounded assumptions about the relationship between enterprise and welfare for long enough to see again with clear eyes, based on what we know about ourselves, we can pave a Path to prosperity for all.

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Part 17 in the serialization of the The Path to A Future.
A new section will be posted every 2 weeks during 2011. Enjoy!
To get a free PDF of the book go to www.standardsoflife.org/thepathtoafuture.