Gordon Pearson
Right now, even without the relearning experience of the coronavirus pandemic, humanity would not be in a good place and not headed in the right direction. The real economy, which has contributed so much to human progression, has been damaged almost beyond repair. We need to decide if we want progression or destruction. It really is our choice: we, the people, still have time to act decisively.
Humans have been around as a separate species for almost 200,000 years and ‘mother earth’ has accommodated us pretty well until now. For most of that time we numbered a few hundred million. Then the industrial revolution changed everything.
World population grew to an estimated 1 billion by 1800, 2.5bn by 1950 and has since exploded to around 7.75 billion today, forecast to be 9.5bn by 2050 with some forecasts of over 11bn by 2100. Moreover, average real income per head in the advanced economies is now estimated at around 1000% higher than before the first industrial revolution.
Those increases in population and affluence were enabled through human enterprise, inventiveness and industry. We are still achieving extraordinary gains from new technologies with their newly globalised reach. The opportunities are there to change fundamentally the ways we develop, improving the richness of life on earth and at the same time making it permanently sustainable. But instead we are being led to destruction by an economic belief system which, despite having been shown many times to be utterly false, has only increased its power and influence, especially over the past few decades.
Though leading us to destruction, democratic governments have long accepted certain responsibilities for their citizens which have been widely identified as falling into three broad categories: protection, provision and progression. But it is unclear whether those responsibilities are accepted for real, or are just given lip-service.
Protection from each other and from foreign threats requires adequately trained and equipped police and military forces; appropriate courts and jailing system; plus the election and appointment of officials to pass and implement the laws citizens are ruled by.
Provision includes the goods and services that individuals need but cannot provide themselves; the basic infrastructure of everyday life such as health and social security, education, support for citizens in their youth, old age, sickness and disability, and support for those who are unemployed for reasons beyond their control. Thus a prime provision responsibility is to maintain full employment or to pay the consequences.
Progression refers to the services and technologies which enable and support citizens seeking to develop their own capabilities through further training and education, plus the long term investment in sustainability technologies which could benefit society at large including future generations, but lie beyond the scope of private business.
Government as protector, provider and progressor, requires taxes to be raised and a democratic commitment to justice and fairness suggests all those taxes should be levied according to the ability to pay. Those broad governmental responsibilities require engagement with and understanding of how the economy works, so that the most effective political-economic decisions can be made.
The catastrophic position we find ourselves in today, coronavirus apart, has largely resulted from political-economic decision making being based on highly theoretical assumptions and hypotheses which completely ignore real economic systems and processes. The sudden and unprecedented economic growth achieved by the industrial revolution prompted Adam Smith’s inquiry into the nature and causes of The Wealth of Nations which he commenced with observation of the real world processes involved in pin manufacture. By specialising in the different processes of production, ten people, working in collaboration with each other, could produce ‘upwards of 48,000 pins in a day’ whereas a single individual could perhaps make one a day and ‘certainly could not make twenty’ – a productivity gain of at least 240 times.
That specialisation of the tasks and roles of production achieved huge gains across manufacturing industry. Much could no doubt also have been learned from analysis of the motivation and performance of the individuals involved, the structure and viability of their employing organisation and how the organisation engaged with and delivered to their customers and markets. But that observation and learning opportunity was set aside for around a century and a half, until what Drucker referred to as the ‘management revolution’ was finally achieved. That was prompted by the need for an alternative to the accepted economic orthodoxy based on mathematical modelling rather than reality, which finally imploded with the Wall Street Crash and subsequent austerity driven Great Depression.
The economic theorizing which had been adopted instead of empirical analysis of real systems, was based on the artificial concept of ‘economic man’, made to fit mathematical expression by being driven simply to maximise its own monetary self-interest. Similarly economic production and services were modelled as existing solely to maximise profits. And the forces of supply and demand resolved into markets which were assumed to provide the most advantageous allocation of resources for the overall economy, so long as they were free from extraneous regulation.
All manner of impossible assumptions had to be made simply in order for the mathematical models to be internally consistent. The maths was then solved and the results inflicted on the real world by indoctrinated decision makers. That was what became known as neoclassical economics, its false micro-models increasingly driving macro-decision making. It could take no account of time, nor of the evolution of markets and technologies. Nor could any accommodation be made with any defined and agreed democratic purpose or moral value such as fairness or integrity, including any such relating to the common good.
The mathematics was incapable of realistic representation of real businesses, real markets, real products and services, or any of the roles fulfilled by real human beings. Moreover most of the quantities it dealt with were actually immeasurable. Moreover, it could take no account of any social effects or consequences which might be critical to civil society and for which government was required to be responsible. It could also take no account of the global ecosystems on which it has had such profound destructive effect.
Guided by such neoclassical belief, regulation is minimised, taxation is minimised and levied at a flat rate, leading inevitably to ever increasing inequality between individuals, the monopolistic exploitation of markets and minimised state protection, provision and progression, notably including the frustration of investment in and operation of sustainable ecological systems on which future generations will depend.
Right from the beginning, neoclassical economics was subject of criticism. As early as 1862, Ruskin pointed out it that it lacked ‘applicability.’ Nevertheless it was applied. No economists have ever claimed the modelling was realistic. Even Friedman agreed it was not, but argued that what mattered was its ability to predict. But since it was obviously self-fulfilling that is no criterion. Routh nicely summarised the critique in 1975:
‘Economics … ignores facts as irrelevant, bases its constructs on axioms arrived at a priori, or ‘plucked from the air’, from which deductions are made and an imaginary edifice created. … Man and society are stripped of their attributes, as if they could exist without psychological, political, legal, historical or moral dimension. Thus verification is both impossible and regarded as unnecessary. In effect, then, orthodox economics becomes a matter of faith and, ipso facto, immune to criticism.’ [1]
Nevertheless neoclassical economics continued, not as a theory but a belief system, which ruled political-economic decision making. It was taken a stage further by the Mont Pelerin set, notably including Von Mises, Hayek and Friedman who moved neoclassical belief from profit maximising with the assertion that,
‘Few trends could so thoroughly undermine the very foundations of our free society than the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.’ [2]
That justified the predatory extraction of value from corporate entities rather than its creation, which was a further step in the destruction of real economic activities.
The most important point about the theoretical modelling of people, organisations and markets is that it is simply not needed. The reality is there to be observed and understood and has long been the subject of extensive empirical research. We know what motivates human beings and how real economy organisations are made most effective, and we know a lot about how markets work best.
We know where neoclassical belief is leading us and we also know what should be done (as I outline in Remaking the Real Economy). But if all that is known, how is it the neoclassical belief system has remained so powerful for so long?
The answer is, its prime beneficiaries gain so much from the status quo and have accumulated so much power as a result. In the aftermath of 1929 and subsequent Great Depression, Roosevelt referred to those beneficiaries as ‘organised money’. His experience was that ‘Government by organised money is just as dangerous as Government by organised mob” [3]. The 2007-9 crash relearning experience has shown organised money to be far more dangerous than that, threatening survival in a myriad of ways.
So far, it remains unclear whether ‘organised money’ will be defeated and neoclassical belief replaced in its entirety by empirically based understanding of how economic systems really work. That story lies beyond the scope of this article. We may be close to a tipping point. The coronavirus pandemic might just make the difference, so that past errors are not repeated yet again but are actually put right.
References:
[1] Routh, G., (1975), The Origin of Economic Ideas, London: Macmillan.
[2] Friedman, M., (1962), ‘Capitalism and freedom’, Chicago: Chicago University Press.
[3] Roosevelt, F.D., (1936), Speech introducing the second wave of New Deal economic stimulus.
Gordon Pearson is now an Honorary Senior Researcher in Management at Keele University, having spent half his working career in industrial management and half in academia teaching what had been learned on the job. He has authored nine books mainly on strategic management, business ethics and co-operative organisation. His latest book, Remaking the Real Economy: Escaping Destruction by Organised Money is due to be published in July 2020 by Bristol University Press.
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