Basics

A system in crisis
Economics is generally understood to be about goods and services; how they are produced, distributed and consumed. Economies arise spontaneously, but they are influenced by many things and in that way  they are chosen. Economies are affected by policies, law and the media, which all influence behaviour. The economy has a dramatic effect on our quality of life and environment. Manfred Max-Neef reminds us that Aristotle’s oikonomia (the Greek word from which economics is derived) means ‘the art of living and living well’. The economy we pursue should serve society, not the other way around.

This is a system in crisis, that urgently needs to change. You can develop mathematical models for parts of our economy, but this doesn’t mean our current system reflects the “way things naturally are”, as if it’s the inevitable beast produced by our collective greed.   It’s often argued that “communism failed” as if all that is left to choose is the current system: this just isn’t correct. Our economy, is hugely influenced by politics – people have agendas and there are alternatives. The current economic system is blind to ethics and yet effects our ethics.

Economic models
Current economic science is desperately poor, it is dominated by this one school of thinking (neo-liberal / neo-classical) which contains fundamental flaws. It is propped up by the vested interests who benefit from a system that helps the rich get richer. Neo-liberal economics have massively increased poverty, inequality and the destruction of the environment.

The neo-liberal or neo-classical school:

  • Takes as its basic unit one householder working in a firm, who also buys goods from that firm. The whole economy is then modelled as millions of these units. In science this modelling method simply doesn’t work for complex systems (you get what are called “emergent properties” or new features that you couldn’t have predicated from the behaviour of components).
  • Ignores the role of banks in money creation and debt – core features of our economy and central to the mess we are in.
  • Cannot predict the spectacular economic crashes that have happened – no scientific theory would be seen as suitable if it was unable to predict reality!
  • Diminishes key issues like inequality and damage to the environment.

Markets
Neo-liberalism promotes the dominance of individuals making choices in a market economy, but neglects the reality of differences of power in the market. Markets are the mechanisms that allow exchange to happen. On a good day markets help ensure a fair price for goods and services and can spark innovation leading to economic growth. Prices can pass information – what failed was a completely planned economy, which didn’t use prices in this way.  Markets can be hugely damaging when they operate in a corrupt, debt-based system. “Good capitalism” (if there is such a thing) relies on perfect access to information and markets, but this isn’t happening in our corrupt system. Markets are like a blind person, tapping towards a resting place.  To get to the right place all curves have to be smooth. They don’t see hills, bumps, ravines, so are not responding to impending energy shortages and climate change.

Economic Justice
There are other schools of economic thought (see Wikipedia for a good outline).

Ordinary folks shouldn’t have to examine every aspect of economic thinking and debate. It’s useful to know some basics and to think about what outcomes you do and don’t want from the economy.

We want to see a Just economy that:

  • Doesn’t destroy the planet.
  • Ensures everyone has enough to live a decent life – an end to poverty
  • Allows people to reach their potential and be as happy as they can be.
  • Doesn’t rely on cruelty to animals and doesn’t result in species extinction.
  • Values all the work that is done and that needs to be done
  • Doesn’t force people to be idle who want to work, allows access to land
  • Allows democracy to flourish
  • Supports our cultural development learning, arts and sciences.

There are many well thought through proposals and tested solutions for delivering a Just Economy, see the references below and Future.

Land, Commons, Wealth, Capital, Capitalism, Work and Money!

Land is central to our well-being and economy, it is the primary source of value, though strangely has less prominence in debates. We all need a place to live and do our work. The land is our common heritage; cultures that manage to survive for a long time enhance the land they occupy, whereas we are depleting it at alarming rates.

In the UK 0.3% of the population owns 69% of the land. Acquiring land, most commonly by buying a house, has become increasingly expensive (this is discussed further in Debt).There has been a property bubble, where prices rise to unsustainable levels; currently there is much speculation on land, creating another bubble that will burst.

Historically in the UK there have been massive “land grabs” where land that had been occupied by people for centuries was simply taken. This pattern is and has been repeated across the world. In 2011 in China there were 180,000 demonstrations by peasants in one year, about their land being taken away. Speculators hope that land will increase in value and they will make a profit. It helps if Governments allow land to be used for new purposes, hence the move to allow building on green-belt.

Publicly owned, shared resources (commons) are sold in neo-liberal policies and this is increasing in these times of forced austerity. The UK Government has tried to sell off our forests. In Greece whole islands have been sold.

Companies and individuals can make higher profits when they are based in better locations. However, improvements in the quality of a location is usually determined by the efforts of a nation or community (e.g. by improving infrastructure) so increases (and decreases) in the value of property and land (assets) should be reflected in payments made back to the collective (Land Value Tax is discussed in Future).

Commons is the collective term for cultural and natural resources such as air, water, land, 3G/4G spectrum (used by mobile phone companies for sending data) the internet, literature, heritage sites and the human genome. When commonly held property is transformed into private property this process alternatively is termed “enclosure” or more commonly, “privatization.” Many would argue that governments and generations can never own the commons; we are the stewards who need to protect them for future generations.

Wealth is a vague term meaning “anything of value”. The word is more often associated with financial assets, but that is only one aspect of wealth. You might agree that people want to accumulate “sufficient” wealth, if you consider the widest definition of value (which can include friendship, community, connection with nature, etc). Capitalist economies focus on the things of value that can be sold for a profit and squeeze out the other things we value where profit isn’t made.  In the extremes of neo-liberal economic thinking, everything has a price and the market should decide all areas of life. This leads to an increased intrusion in the areas of our lives that we value (e.g. family time), a selling off of the “family jewels” (our water, public spaces, etc) and a pressure to work in the market economy, rather than undertaking the work we want to do.

Capital Wealth is a form of wealth that helps you produce further wealth (so capital wealth is the “means of production”). Capital can come in many forms (such as machinery, money, human skills, social networks, the bounty of nature in a given location, etc).

In capitalism there is private ownership of capital. Goods and services are provided in exchange for the wealth required to produce the goods and services, plus a profit. Profit can be complex to define, but is generally understood as the “extra on top”.  Creating such a surplus is great when its shared out or re-invested, that is one way we can improve the quality of our lives.

When someone owns the means of production, s/he can, through profit, either acquire more means of production or get more wealth for little or no work. This leads to the growth of inequality and the ability of some to buy undeserved advantage. For that reason capitalism can be considered as inherently unjust.

Capitalism also has inbuilt contradictions. In order to extract a profit, workers are paid less than the wealth they have created, but are ultimately required to buy what they have produced with insufficient money. Capitalism’s answer to this is to enable debt and to shift the debt around the globe. We are now seeing the limits of this process, which has, frankly, gone mental over the last 30 years. Nevertheless, business processes, much streamlined in capitalism are great things to hang on to.

Are we anti-capitalists then? Well this author is, though this space is aimed at anyone interested in reform (some have described the current system as “socialism for the rich”, because the rich are the ones that are getting bailed out by poor people).

Work – people have a human need to work, to apply our efforts in the world to support our own lives and each other. We need to work to produce our own wages, in order to buy the things we want and need. The current system:

  • Results in most people and companies being in debt and so having to work to re-pay debt, plus interest
  • Doesn’t value caring work, often the work undertaken by women
  • Forces people into unemployment who want to work, while there are loads of jobs that need to be done in the world
  • Makes “labour markets” compete, whilst controlling the movement of labour, so that hard-working people don’t have the money they need to live on.
  • Expects everyone who can to have a job (flipping burgers, etc) whilst removing the opportunities to do the real work that people value.

Money is simply a token representing a claim on wealth (recognised by society and at a national level supported by Government; local currencies don’t need Government backing). In our current system money is created out of thin air, as a debt by banks, and yet when the debt is repaid by a person’s labour (plus interest) the bank gets to keep the money (nice work if you can get it!). In the section on Debt we show how interest payments force us to focus on Economic growth, leading to more debt and environmental damage.

We tend to think of money as notes and coins, but this is less than 3% of the money in existence. The rest is made up of credits and debts registered as numbers in computer databases, including our bank accounts. This isn’t backed up by a pile of gold in a central reserve, as it has been in the past. Money, along with globalisation, inflation and the International Financial System, is discussed in more detail in Debt.

Measuring Economic Development
If you want a Just economy you would measure progress based on indicators like how fulfilled people feel, health and well-being, resource availability, income inequality, CO2 levels, rates of species extinction, etc. You would measure whether the right things are being developed, namely the things that are most needed at that particular time for example more renewable energy supply or an increase in social housing stock.

Instead we measure economic growth (through GDP- gross domestic product) in an unquestioning assumption that growth is good and necessary. Instead we measure economic growth (through GDP- gross domestic product- the sum total of money transactions) in an unquestioning assumption that the more money transactions the better, including those resulting from  crime, catastrophes, ill health, arms sales, liquidating forests etc. Alternative measures for economics, such as measuring the wellbeing of people and planet have been proposed (e.g. the New Economics Foundation’s (NEF) Happy Planet Index).

The Obsession with Economic Growth and globalisation
A functioning economy, with strong business processes, can lead, happily, to economic growth – the increase in goods and services. This happens by finding ways to be more efficient and using innovative processes and technologies. In this sense, the pie to be divided up gets bigger. We all could have more wealth and free time. We might choose to invest our collective surplus in science, arts and further education, for the cultural life of humanity.

However, economic growth created by efficiency and innovation are only a very small part of the picture. The majority of economic growth is currently created by undesirable and limited processes, such as:

  • Increasing the amount of debt in the economy
  • Using up cheap energy sources, which also creates climate change
  • Exploiting people and treating animals inhumanely
  • Depleting the very resources we need to sustain ourselves, such as good soil
  • Creating pollution
  • Squeezing people for more productivity and offering less support (thus creating other problems such as physical and mental health issues)

These problems are termed externalities, as if they are the sideshow. In a globalised economy, regulation and employment rights can be avoided by moving somewhere else. Enormous energy is taken up campaigning for justice as a result.

Why Economic Justice especially matters now – reaching limits
Justice has always mattered, but we are now at a critical life or death stage because we have reached the limits to growth.

We have been living in a way that results in exponential growth of many factors: green house gas emissions, resource depletion, population growth, debt, etc (a depressing list that we could continue!). In exponential growth the rate of growth changes (increases or decreases) over set periods of time. It may be by a small rate of change, like 1%, but over time you experience a speeding up and the scale involved becomes huge and catastrophic. We have entered that turning point – we are reaching our limits, we have turned the corner on the hockey stick graphs and the fall out will be the biggest mess ever encountered in our human history.

In Corruption, we discuss why the system stays in place and gets worse.

For more information:

Steve Keen – Debunking Economics – a book, or you-tube clips
He covers neo-liberal economic flaws and debt. He also says most neo-liberal economists are well-meaning people who believe the theories because they haven’t examined fundamental flaws in the original papers behind the neo-liberal school, which are carried over into text books. He likens this to having Space science run by physicists who think the world is flat and the sun goes around us. These people are running / ruining our economy!

Chris Martenson – Crash Course chapters 1 and 2 set a good scene of key issues. First of all he addresses the difference between facts, opinions and beliefs and then raises the interrelated areas of the Economy, Energy (peak oil) and Environment (resource depletion and destruction). These areas are interrelated by exponential growth; we are now at the limits of growth and massive change has begun we are just at the beginning. He believes we have the tools to find a new way, but the change may come quick and fast that we aren’t able to make the changes- hey it’s worth a go.

The Unlearning Economics blog does some great, detailed debunking including this Questionable Record of neo-liberalism post

Crash course 1 – massive change is upon us.
Crash course 2 – Economy, energy and environment.
Crash course 3 – Exponential growth – the most important key concept
and followed up in Crash course 4
in Crash course 5 Chris points out that Growth does not equal prosperity

We’ll refer again to Chris’s course as he covers the issues we do.

You can watch a full run through here.

Tony Weekes has put together an overview, taking a Economics and the Quaker Way.

Richard Murphy’s book –The Courageous State : an overview of what an economy could focus on (achieving potential) and how a State run for the people would act to support that. Lots of useful focus on taxation.

Manfred Max-Neef – Economics Unmasked (there is a good review of this book here).

Molly Scott-Cato – Green Economics, an overview of economic systems and a Green response to the challenges faced, includes an interesting overview of the history of green Economics and lots of practical examples.

David Harvey describes the current crisis of Capitalism in a talk for the RSA which has been matched with an animation; a great watch!

Affordable introductory economics courses from the School of Economic Science and there are useful materials on the website (book of same name) Economics for Everyone by Jim Stanford.

The Renegade Economist has some great interviews and posts.

Charles Eisenstein talks about Sacred Economics and the gift economy.

To find out more about the financial sector here are a collection fo short videos from the New Economics Foundation on tax havensshadow banking, capital controls and private investment for development.

The Khan Academy is a great resource for basics on different aspects of finance. These 60 second adventures in economics from the OU are “sweet” and give fast, animated overviews of some established theories (all questionable!).

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