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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?

This article was originally published on The Political Sword

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29 comments

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  1. Patricia Fraser

    Well said.

    In a similar vein, it bothers me that so few people remember that money is *imaginary*. It symbolises something; it only exists because we agree that it does.

  2. Freethinker

    When we talk about growth I agree 100% with Manfred Max Neef, who said, quote:

    Growth is a quantitative accumulation. Development is the liberation of creative possibilities. Every living system in nature grows up to a certain point and stops growing. You are not growing anymore, nor he nor me. But we continue developing ourselves. Otherwise we wouldn’t be dialoguing here now. So development has no limits. Growth has limits. And that is a very big thing, you know, that economists and politicians don’t understand. They are obsessed with the fetish of economic growth. End of Quote

  3. lindsayms

    There is an aspect of newspeak about modern fiscal policy
    We live in an economy not a society.
    We are customers / consumers not citizens.

  4. Matters Not

    Don’t want to be too picky but the statement that:

    take the anthropological view that economics is about how a society uses and distributes its resources

    needs clarification. Can I suggest that ‘economics’ is first and foremost a ‘concept’; a mental construct that we humans use (in a shorthand way) to explain or give meaning to a whole host of activities. Thus the claim(s):

    the ‘use’ of resources includes a social responsibility …

    distribution’ of resources includes a social responsibility

    also need clarification. While I may agree with all that, I can’t see how your assertion ‘flows’ without an ‘ought’ perspective. Clearly what you assert is not based on what actually happens.

    (I won’t go on because when it comes to detailed arguments, my posts don’t proceed.) Bitten too many times.

    I will comment further.

  5. Matters Not

    Even the concept of the market needs exploring

    Can only agree. Again, as you point out, the ‘market’ (in economics) is a mental construct.

    Agree also.

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

    Again I agree. (Really enjoy reading your thoughts in this piece.)

  6. Kay Schieren

    The plethora of disciplines which we have created in order divide our worldly illusions into bite-sized chunks create competing empires and confuse the issue. We have to first make a choice whether we are feeling humans with a mission to promote that which promotes life, or whether we are intent on using our ego-centred energies to speed up the demise of the life support system, and us, on this planet. The effort of preservation starts at whatever place each of us are at, and we move from there, either towards the darkness of death or the light of life. They are related inextricably of course. But when we promote death without renewal, we are tragically perverting our purpose for existing. That is the ultimate misery. When we accept sacrifice for the sake of renewal, we are part of the ultimate joy – the cycle of life. When all disciplines and constructs are grounded in this awareness, we have a chance to become a bit more human each day, and perhaps extend our tenancy on this planet long enough for many of us to become spiritually alive beings again. Right now, many are the zombies of the apocalypse, from what I see happening in the world.

  7. Matters Not

    Well said Kay Schieren. Beautiful ‘insights’ into a better world.

  8. paulwalter

    Very, very good writing..revolves around the comment to do with the Commons..a communities shared set of resources or common wealth and its Enclosuring by Vested interests…we see it today via the often criminal processes of Privatisation.

  9. Trish Corry

    An excellent piece of work. A thoroughly enjoyable read. This really spoke to me. I am indeed not an economist, but my view of economics is the aim should be about quality of life of the individuals and community. Otherwise, why does it exist? If our quality of life and ‘measures of happiness’ don’t exist or are very poor then….. economics – they are doing it wrong!

  10. townsvilleblog

    It may be worth mentioning that 1% of the global population owns 50% (and growing) of Earth’s economy, and thus a redistribution of wealth is urgently required, to have ‘fairness’ for “people.” Unregulated capitalism makes no allowances for “people” the concentration is purely on “profit.”

  11. townsvilleblog

    Trish, economics – they are doing it wrong! I couldn’t agree more!

  12. michael lacey

    Michael Hudson adds to the argument as well when he rights Economic theory today is in some ways a step backward by expunging the nineteenth-century view — and indeed that of medieval economics and even of classical antiquity — with regard to how banking and high finance intrude into economic life to impose austerity and polarize the distribution of wealth and income. ……….he talks about Finance Is Not The Economy; Rent Is Not Income!

    Finance is Not the Economy

  13. nexusxyz

    Economics and its many flavours is a dead end. Economists and also conventional business models promoted by academics cannot adequately explain why we are in a swimming in a sea of debt. More importantly they have no clue as to how we can change the status-quo and create a new path going forward. For a national economy this can only be done if an economy is ‘competitive’. This can only be achieved via the systematic and repeatable acquisition, manipulation and application of technology to create either a ‘competitive’ advantage’ for a business or a nation, or a ‘superior outcome’ in terms of, say curing a disease, that benefits the community.

    Technology in its broadest sense underpins everything we do in our daily lives and underpins our civilisation. Creating a ‘competitive advantage’ or a superior outcome is key as this provides a purpose to then undertake and effectively allocate R&D, innovation and funding. Without having purpose all that happens in the current ‘financialised’ system is a massive waste of resources and the creation of hundreds of billions of Dollars of ‘mal-investment’. A technology approach which is called Technology-Based Planning applies ‘constraints’ in terms of the laws of physics to investments so those that have a purpose will tend to earn a return or create a benefit for the community.

    Why is this important? It is important as the acquisition and manipulation of technology is the only way to create a ‘competitive economy and this is a fundamental prerequisite to the evolution of existing industries, creation of new industries, creation of jobs and then balancing trade. This then pays for the things that support our community. Without this you have the following options – implement austerity and cut programs, create more debt to try and maintain living started or a combination of the two. No matter which option chosen the system will eventually collapse in one way of another. Nations that use technology-based planning will run rings around those that do not.

    There is only one economist that I know of that has looked at the impact of technology. His understanding is very superficial and he does not join the dots. The above is infinitely more sophisticated, created by a physicist and could be enabled across Australia.

  14. nexusxyz

    The whole neoliberal economic thing is a crock of crap. It has been no more than a front justify the stealing of ‘public goods’ and the ‘commons’ via privatisation. Only a half-wit could reason that society is no more that a market. It is not and never will be. The narrow objectives of the joint-stock firm and its shareholders are totally at odds with the broader needs of the community. We need a mix of social and economic ‘structures’.

  15. jimhaz

    Here is an example today of business losing sight of people, by technology that does not lose sight of people – ie it is over-tracking, excessive control and will be misused for certain.

    The employee badge that monitors where you are and who you are talking to

    “A Boston company has taken technology developed at the Massachusetts Institute of Technology and turned it into special badges that hang around your neck on a lanyard. Each has two microphones doing real-time voice analysis, and each comes with sensors that follow where you are in the office, with motion detectors to record how much you move. The beacons tracking your movements are omitted from bathroom locations, to give you some privacy.”

    http://www.smh.com.au/business/workplace-relations/the-employee-badge-that-monitors-where-you-are-and-who-you-are-talking-to-20160907-grbc4e.html

    30 years ago a somewhat mad religious mate of mine who is inclined to conspiracy theories used to carry on about 666 the number of the beast.

    Just for amusement I copied the biblical extract and replace the words Beast with Capitalism and Dragon with Globalisation. Though I see no reason to have any form of faith in non-scientifically determined prophesizing, it is interesting how one can see parallels with the biblical crap and the direction the business/financial/technological world is heading.

    “The Capitalism out of the Sea

    Globalisation stood on the shore of the sea. And I saw Capitalism coming out of the sea. It had ten horns and seven heads, with ten crowns on its horns, and on each head a blasphemous name. The Capitalism I saw resembled a leopard, but had feet like those of a bear and a mouth like that of a lion. Globalisation gave Capitalism his power and his throne and great authority. One of the heads of the Capitalism seemed to have had a fatal wound, but the fatal wound had been healed. The whole world was filled with wonder and followed the Capitalism. People worshiped Globalisation because he had given authority to the Capitalism, and they also worshiped Capitalism and asked, “Who is like the Capitalism? Who can wage war against it?”

    Capitalism was given a mouth to utter proud words and blasphemies and to exercise its authority for forty-two months. It opened its mouth to blaspheme God, and to slander his name and his dwelling place and those who live in heaven. It was given power to wage war against God’s holy people and to conquer them. And it was given authority over every tribe, people, language and nation. All inhabitants of the earth will worship the Capitalism—all whose names have not been written in the Lamb’s book of life, the Lamb who was slain from the creation of the world.

    The Capitalism out of the Earth

    Then I saw a second Capitalism, coming out of the earth. It had two horns like a lamb, but it spoke like a dragon. It exercised all the authority of the first Capitalism on its behalf, and made the earth and its inhabitants worship the first Capitalism, whose fatal wound had been healed. And it performed great signs, even causing fire to come down from heaven to the earth in full view of the people. Because of the signs it was given power to perform on behalf of the first Capitalism, it deceived the inhabitants of the earth. It ordered them to set up an image in honor of the Capitalism who was wounded by the sword and yet lived. The second Capitalism was given power to give breath to the image of the first Capitalism, so that the image could speak and cause all who refused to worship the image to be killed. It also forced all people, great and small, rich and poor, free and slave, to receive a mark on their right hands or on their foreheads, so that they could not buy or sell unless they had the mark, which is the name of the Capitalism or the number of its name.

    This calls for wisdom. Let the person who has insight calculate the number of the Capitalism, for it is the number of a man.e That number is 666.”

  16. paulwalter

    Jimhaz, I needed that (smiles).Can I pat you on the back?

  17. paulwalter

    May I include something that contributes to both this and the Corry and Kaye Lee threads currently up:

    https://www.theguardian.com/business/grogonomics/2016/sep/08/48bn-found-down-the-back-of-the-couch-doesnt-leave-much-confidence-in-gdp-figures

    from Greg Jericho?

    Can it mean that all the “budget repair”/ austerity stuff is largely a rather cruel bluff to manufacture consent for mass appropriation of the nation’s wealth into a few hands?

    It seems there is a constant bad news flow from msm, that ratchets up fatalism and despair in a public operating in an info vacuum, but he seems to suggest that the sky is not about to fall in. Once again, whose “economics” and who wins?

  18. jimhaz

    [Can I pat you on the back?]

    lol, that would be a first 🙂 Cheers

  19. paulwalter

    No mate, it was epic.

  20. Ken Wolff

    Sorry I’m a bit late to this but I thank everyone for their comments. And jimhaz, I too like your juxtaposition regarding the Beast.

    I will come back to neoliberal economic approaches in part four of this economic series, so be sure to keep up over the next three weeks.

  21. Florence nee Fedup

    I was always under the impression, no matter what economic theory one followed, results could be changed by how people reacted. People stop buying and all goes down the gurgler. Capital stops investing, same outcome.

    Neoliberals seem to leave people out of the equation completely.

  22. cornlegend

    Florence nee Fedup
    ” People stop buying and all goes down the gurgler.”
    Sorry, It doesn’t work like that, just some get eliminated from the market, others merrily nuy away
    We are eliminating investment properties in the Sydney area as the ability to rent at a sensible rate vanishes.
    There were just over 500 property Auctions in Sydney on the past weekend 3/9/16
    Over 250 sold in the $1 to 6 million range.
    Plenty of cash around, just not with those who need it most

  23. Bacchus

    People stop buying and all goes down the gurgler

    That’s exactly how it works Florence, but I would go further and say people stop buying the productive output of the economy and instead invest in non-productive wealth-accumulating areas and it all goes down the gurgler.

    Capital only moves to productive areas IF they have a market (demand for their goods & services) to meet.

  24. paulwalter

    Most pertinent point, Bacchus.

  25. win

    It has been bothering me that our government seems to have lost is way ; It is no longer “for the people” but for the economy and business generally. People exist to serve business rather than the reverse, Of course the lords of business do very nicely, thankyou!

  26. wam

    Sadly, I struggled with your heading because the economy is all about people. Too many on the dole – cut – too expensive for penalty rates – cut – too many using medicare – cut. too many women needing shelters cut too many pensioners smoking and gambling stop cash(i wish) for Aborigines

    when the slimey pollies were going to introduce the ‘CARD’ my brain couldn’t get past the old ‘papers please’ command from the nazis in the movies. Imagine the little hitler pollies and their zealous bottom line soldiers???

  27. Harquebus

    When the credit cards stop working, everything will stop. We have borrowed from the future which, is now arriving in ever greater quantity every day and will very soon overwhelm us.

    “The Federal Reserve is one of the most corrupt institutions the world has ever seen.” -– Congressman Louis T. McFadden, who was assassinated

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