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Demystifying Economics


Tigger Economics

For many people economics appears complex and incomprehensible. As soon as the debate turns to economics, and jargon such as ‘productivity’ or ‘microeconomic reform’ start to be used, people can feel alienated and mystified and unable to respond appropriately.

It seems that many policy makers rely on this economic illiteracy of the general population to make sure that policies are not opposed or that serious debate is averted.

It is imperative that the language used so glibly by politicians and policy-makers, advised by the ‘economic rationalists’ whose assumptions and methodology are never questioned, is explained and demystified.

If we are going to argue for a ‘paradigm shift’, we need to be able to understand and converse in the language of the old, without appearing naive. For instance, many people who are concerned about protecting the environment will be strongly swayed by the argument that ‘in times of recession, the economy comes first… jobs are more important than the environment’, as though that statement has some meaning and that everyone knows what is meant by ‘the economy’ or ‘the environment’.

So, despite all the knowledge and evidence we have about our situation, social and ecological concerns continue to be subordinated within the language system of economics. As long as we allow the language of economics to dominate our thinking and our debate, we will be unable to perceive the dimensions of the crisis and remain relatively incapable of change.

It is time to take a closer look at this discipline of economics whose language and ideology has so dominated and constrained our thinking for so long. How did it develop? What are its assumptions? Whose interests does it serve? Why does it hold the dominant sway over the thinking of our national and international leaders?

The Measurement of Wealth

Economics is defined as ‘the production and distribution of wealth’, and in conventional economics, wealth is invariably defined in terms of money. And the wealth of a country, or its economy, is defined as the Gross Domestic Product (GDP).

“our everyday lives are still affected by the actions of governments locked into systems based on obsolete economic thinking”

GDP, which is the only indicator of the ‘health’ of the economy, is measured by adding all the monetary transactions occurring in established markets in the economy. The GDP does not distinguish between positive and negative effects on the environment – everything is added up.

To quote the respected English journal, ‘The Economist’, conventional statistics measuring GDP are ‘particularly blind to the environment… [and]… take no notice of the value of natural resources: a country that cut down all its trees, sold them as wood chips and gambled away the money… would appear from its national accounts to have become richer in terms of GDP per person. Equally they show measures to tackle pollution as bonuses, not burdens…’

No account is taken of all the abundant activity in the so-called ‘informal economy’ – the unpaid productive work such as cleaning, cooking, laundry, raising children, taking care of elders and people with disabilities, gardening, volunteer work, home maintenance, bartering, and so on.

As well, the GDP does not place any value on the ‘free’ benefits of the environment; forests have no value until they are sold as timber or chips; clean air has no value until a company pays to clean up its polluting of it!

Hazel Henderson, a major critic of economic theory, has pointed out that all of our human economic activity, both formal and informal, relies on the natural resource base of the planet itself – the planet absorbs the costs of pollution and recycles wastes if its tolerances are not exceeded, thus allowing the so-called ‘external costs’ of the formal economy to be hidden.

The informal economy and the Earth are hardly peripheral, as economic theory would suggest, but are absolutely fundamental, so fundamental that they have become to be taken dangerously for granted.

The Fallacy of Economic Growth

The most current economic policy, in fact the whole orientation of its theory, centres on the pursuit of economic growth, measured by an increase in GDP. The assumption is that growth is good, that the environment can sustain indefinite growth and growth is the answer to all economic problems.

To quote Paul Ekins “It is extraordinary that an entire social science, and the dominant discipline in today’s world at that, can effectively have come to be based on such a simplistic assumption.”

As we have seen above, conventionally measured GDP is no indicator of the true health of a society and yet we assume that if it is increasing, that is good and if it is falling, we are in trouble. No other measures seem to count as far as economic policy makers are concerned. Conventional economic thinking makes no attempt to assess whether economic growth is producing goods and services that are inherently valuable and beneficial, or whether growth is reducing inequality in society, or what kind of effect this growth is having on the environment or certain sections of society.

Ever since the Club of Rome’s ‘Limits to Growth’ was published in 1972, there has been widespread awareness of the finiteness of the world’s resources. This awareness does not seem to have penetrated the thinking of growth economics. Economic policy currently makes no distinction between renewable and non-renewable resources, does not take future scarcity into account and does not routinely evaluate the costs of environmental degradation with a view to arresting that degradation.

Growth and Unemployment

Nowhere is the call for more growth and development stronger than in the debate about how to solve unemployment. The argument is that by stimulating investment and encouraging development, more jobs will be created as the economy grows. This assumption is rarely challenged and the corporate sector, which calls the tune in these times, is ensured of support from government policy making. The reality is, in most industrialised countries, economic growth has meant an increase in capital and resource intensity and a consequent shedding of labour. Increased indebtedness and high interest rates has led to a corresponding inability of capital to grow fast enough to absorb the shed labour. The result is more unemployment.

So we have the paradoxical situation that pursuing economic growth actually creates the problem it is meant to solve! Resources are so misallocated that as capital becomes more costly, and scarce natural resources become more and more depleted (with consequent environmental stress), millions of people will to work are forced into idleness.

Development and the ‘Third World’

Industrial countries have experienced the benefits of economic growth for a number of decades, although the costs in terms of environmental degradation, resource depletion and now unemployment have been high. However, for the countries of the ‘Third World’, the effects of this model have been disastrous.

Economic imperialism has replaced political colonialism, with many countries now technologically and economically dependent on the industrailised countries, wiping out traditional economic activities and depopulating rural areas. Phenomenal increases in the size of cities in the ‘Third World’ has left millions of people destitute and starving. In 1950 two of the fifteen largest cities in the world were in the ‘Third World’. Now there are twelve.

The ideology has been that if there is enough growth, there will be a ‘trickle-down’ effect and the poor will become less poor. The benefits of growth have been confined to the privileged elite, while the majority of the population has been made worse off. On the global scale, the gap between rich and poor nations has also widened considerably.

The origins of the Third World debt crisis also lie in the underlying ideologies of industrialism, growth and ‘free trade’.

The International Monetary Fund (IMF) is the institution charged with forcing debt repayment; an institution whose charter reflects the interests of the industrialised countries. The orginal debts in many countries were incurred by military elites to finance expensive defense programs. Now, because of the need to repay, many countries are forced into an ‘export or bust’ attitude. Countries that have little export potential except for food will give their best land over to cash crops, while local people are forced to subsist on marginal land that is soon degraded. Soils, waters and forests are mercilessly mined to pay the Northern banks.

People like Susan George (‘A Fate Worse than Debt’) are advocating alternatives to the theories that underpin IMF actions – comparative advantage, ‘perfect’ competition, ‘free’ trade and markets. The need for a new economics is clear and urgent.

A Closer Look at Assumptions

The assumption of economic growth, a concept associated with macroeconomics, which deals with individual decisions of the household and the firm, also need scrutiny.

the individual ‘consumer’ is assumed to have the right to consume as much as s/he wants, given the constraints of income and prices. The consumer is also assumed to have perfect information about the market. Individual self-interest is paramount. consumption is the prime source of satisfaction – individuals are assumed to prefer more to less.

On the other hand, the individual firm is assumed to want to ‘maximise profits’, reduce costs by whatever means and charge the maximum price the ‘market will bear’. Again, individual self-interest is paramount, competition is assumed to be the ‘natural’ state of affairs, as it was assumed to be in Nature. These assumptions reflect a value system which cannot take into account social inequalities, unequal access to knowledge and power and the existence of a finite planet.

A New Economics

Indeed, there are many writers and thinkers who have been formulating new models that take into account social justice and environmental concerns. Some of the main principles of this new economics include: measurement of the informal economy; ecological soundness; rethinking economic indicators such as the GDP; self-reliance as an alternative to competition and a broad definition of human needs.

The knowledge and the expertise exist. In many ways we are transforming our own economic realities through local exchange systems, bartering, sharing resources, creating local employment initiatives and so on. However, our everyday lives are still affected by the actions of governments locked into systems based on obsolete economic thinking.

We need the confidence and the knowledge to see through the jargon and reclaim our right to be creatively and actively engaged in our own economically, socially and environmentally viable communities.

The Development of Modern Economics – a Brief History

The word ‘economy’ is derived from the ancient Greek world “oikonomikos” which means the management of a household.

In ancient and traditional societies human economic activities were submerged in general social relationships. Archaic societies used money, mainly for the payment of taxes and salaries. In general, householding meant production for one’s own use. The motive of individual gain from economic activities was unknown in early societies with the focus being on production and storage for the self-sufficiency of the group, household, village, tribe or manor.

Aristotle, the earliest economist, distinguished between production for use and production for gain, arguing that trade was “natural” as long as it was a requirement of group self-sufficiency.

A Greek scholar, Polanyi, claimed that economists incorrectly translated Aristotle’s word “metadosis” which in Greek usage meant “giving a share” as “exchange” which gave rise to Adam Smith’s (the “father” of modern economics) belief that exchange and propensity to barter must be a trait of human nature. St. Thomas Aquinas, writing on economics in the Middle Ages, claimed that “just prices” were a part of moral law (i.e. economics could not be separate from morality) and that private property was justified only to the extent that it served the welfare of all.

The world “private” comes from the Latin “privare” which means “to deprive others”, an indication of the widespread ancient view that property was first and foremost communal. Before the seventeenth century, the moral and religious dimension dominated, but with the coming of the Age of Enlightenment in the 18th century, religious dogma was rejected in favour of “rational” thought, scientific and technological achievement, the domination of nature, materialistic goals, individual rights and democracy.

Modern Economics is a little over three hundred years old. It developed as part of a rationalisation of individualism, property rights, free markets, contract law and democracy. Private property was no longer thought of as those goods that individuals deprive the group from using, but as an individual right, i.e. that property should be private and society should not deprive the individual.

Adam Smith introduced the idea of the “invisible hand” of the market that guides the individual self-interest of all producers and consumers for the “betterment” of all, betterment being equated with the material production of wealth. So the new “scientific” and “rational” discipline of economics became the rationaliser of industrialism and gave legitimacy to unconstrained accumulation of wealth and private property.

Economic theory incorporated the new ideas of scientific method which advocated dominion over nature as well as the notion of splitting social life into two distinct spheres – the public and the domestic. According to this scheme, the public domain is associated with men, culture, “reason”, and competition, while the private domain encompassed women, nature, emotion and co-operation. The public domain was superior to the domestic, just as men were thought superior to women. Economics was therefore concerned with what happens in the public domain of the marketplace.

By the end of the 18th century this rationalisation had become a consolidated set of dogmas. So what we have inherited is a system of thought, loaded with biases, which ignores the structural issues of power and prior distribution of wealth and fosters an unrealistic view which equates real wealth (natural resources and the creativity of resourceful human beings) with money.

Kath Fisher has an economics degree from James Cook University and has studied sociology at Australian National University. She has taught economics at university and TAFE.

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2 Comments

  1. Regarding “new economics,” I think you may find my book very interesting. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

    This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

    One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China’s. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world’s population.

    If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)

    Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to inject this new theory into the discussion of economics without drawing attention to the book that explains the theory.

    Pete Murphy
    Author, “Five Short Blasts”

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