What is a Just Economic System?

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One of the key lessons in the study of economics deals with the superficial account of utility maximization. All that we have to do is to unleash the free markets and have as little governmental interference in the market as possible, and we move toward a world with fewer rigidities, freely adjustable prices, wages and rents, and that guarantees the most efficient allocation of resources.

This is the predominant framework of neoclassical economics. Its limitations are already fairly apparent. I don’t know any society that has succeeded by unleashing markets alone. It is certainly true that the best wealth accumulation regime has involved the creation of markets. But usually any country that has successfully developed, had some form of strategic planning and industrial policy-making. The countries with the least amount of centralized planning, the US and the UK, have been most fiercely pushing for the prevalence of non-governmental interference. But the UK was fiercely protectionist in the early stages of development until trade liberalization in 1846 (Social Democracy;  Chang 2002). The US developed a little bit later, toward the end of the Civil War onward, but it had previously not been constrained by any colonial power since independence. A strong internal market thanks to new unexplored territory (from the perspective of the white settlers) also helped. For the later developers like Germany, Japan, and now China, state intervention played a much more important role. It was the German political theorist, Friedrich List (1841), who advocated for infant industry protection in violation of the traditional liberal principle in order to promote quick catch-up growth for Germany. No wonder, the less developed countries are crying foul, when the current developed countries want the less developed countries to accept free markets, i.e. kick away the ladder for poor countries after getting rich first.

My hunch is that the anti-state bias has been used for ideological reasons: to reduce the ability of weaker countries to get themselves a better deal in the international system. (In reality, it is somewhat more complicated, because the elites are divided among themselves, and most are primarily committed to benefit themselves rather than national development.) In domestic politics, the anti-state argument is extremely popular among conservatives. But here there is an apparent hypocrisy: government is only bad when it serves the needs of the common people, who are apparently lazy scroungers, who should find work rather than rest on the government hammock, as Rep. Paul Ryan depicted it. But when it comes to protecting the corporate subsidies, tax breaks, the public infrastructure, the schools, research, intellectual property and other property right enforcement, then the state is suddenly approved of. This is Pierre Bourdieu’s distinction between the left hand of the state (the former) and the right hand (the latter). The function of this hypocrisy is to prevent people from contemplating different and better ways how to use state power to benefit the interest of the masses.

But even if we accepted the neoclassical premise that unleashing markets would maximize utility and wealth, it is still questionable whether this should be the highest goal in the society. The way I see it, the primary objective of the society should be to advance relatively egalitarian outcomes as well as gradually increasing standards of living (if the country starts off poor). But following the narrow neoclassical premises, we ought not be overly concerned with the distribution of wealth, but rather with the creation of the greatest possible amount of wealth.

But this view is simply false. Creating more wealth is not dramatically raising overall levels of happiness if we assume that happiness, or a state of overall contentment, is the goal that society should pursue. Humans are more interested in relative wealth, and not absolute wealth. An investment banker is not going to celebrate his $1 million bonus that already puts him in the global 1% in terms of his purchasing power. He will compare himself with his colleague, who earned $1.5 million, and will, therefore, feel less happy than his colleague (behavioral economists have established it). If relative levels of happiness are more important than absolute wealth, then it is questionable to pursue a national policy that aims at raising the national GDP by 3% every year. Humanity has to reorient its economic and political goals to make do with the same or less. Economic stagnation should be our goal.

My hypothesis can be attacked on several grounds. One is that with the current level of global inequality among rich and poor countries, freezing growth would also freeze the living standard of the poor countries, while the rich can stay wealthy as they currently are. In his book, Thomas Piketty (2014) had pointed out that if the economy grows less than the rate of return on capital, then income inequality has to go up, because the rate of return of capital will accelerate wealth transfer to the very rich, while a sluggish economy will imply a shrinking income entitlement for the poor.

My response to that argument is that this issue has to be analyzed on two different levels. On the one hand, there are significant levels of inequality between the rich and the poor countries, and nobody can support such enormous discrepancies in wealth. On the other hand, there is the larger argument that we don’t need more global growth, because since we think in relative terms, more wealth does not increase our happiness. Is there a dilemma to be resolved between these two positions? I don’t think so. Zero-growth policies can happen in a context of income redistribution on a global scale. Of course, having no growth and having the strong enforcement of the private property of wealthy rentiers would have devastating social consequences, but that puts into question the system of rentiers and not so much the no growth hypothesis. How to accomplish such a grand redistribution is the more complicated question, but it has to be done. In the mean time, I endorse the economic growth project of all lesser developed and emerging countries. Capitalism will continue to remain dynamic in those emerging markets, and I absolutely encourage a reduction in between-country inequality. It is only when full economic equality is achieved, that any new global political order, that is not unilaterally skewed toward the West, become realistic.

Another counter-argument to the no-growth hypothesis is that it is arrogant for me to assume that we don’t need more wealth and that we should not be asking for it. If I am such a consumer culture denying hippie, then I should better join such a hippie community and leave the rest of society alone with my radical proposals!

I can only respond to this argument that those critics don’t want to take the claim seriously that more wealth fails to make people more happy. It is true that the differences in outlook and satisfaction is completely different when comparing very poor countries with medium-rich countries. But the differences in happiness are markedly smaller between medium-rich countries and rich countries. There is a declining marginal utility (here comes my partial agreement with neoclassical concepts!) in the consumption of more goods.

In addition, the huge costs that we impose on the environment certainly do not make it worthwhile to pursue more consumption. In a planet with literally infinite resources and an unchanging climate, there is no objection to greater wealth accumulation (except the relative happiness hypothesis, but with unlimited environmental resources one may still make the case about being indifferent to more wealth accumulation). But I don’t see the earth to have limitless resources for humans to exploit. Peak oil has arguably been reached. Oil and gas companies have to shift from regular ground extraction to fracking, and devise other costly methods to suck dry the last planetary reserves of oil, which needed millions of years to develop to begin with.

In addition, there is this problem of global warming, in which the Intergovernmental Panel for Climate Change has already made it clear that we are inevitably facing rising average temperatures, and the only thing we can do with the current rate of rising CO2 production is to reduce the temperature increase, rather than stop and reverse it. Rising temperatures have already meant more droughts and higher food prices, which can easily spark riots in the poorer countries, such as in the Middle East (Arab Spring). The enormous drought in Somalia has already induced thousands of Somalis to flee to North Africa and Europe. Lampedusa, the Italian island in the Mediterranean, is a major recipient of climate refugee flows inward. Given the current climate trends, this exodus will simply increase with huge socially explosive potential (see the rise of right-wing xenophobia across Europe). It is, therefore, clear that the burden of proof for reasonable policies has to come from the growth promoters, not its deniers, myself included.

The third objection is in my eyes the most important. It is that even if a zero-growth environment were desirable environmentally and philosophically (with regard to happiness), it might not be so economically. How so? Social stability, which is an important goal in itself, hinges on full employment and jobs, particularly since the beginning of capitalism and the demise of independent producers. But jobs in turn depend on overall level of investment (public and private combined), and these depend on profits. In the big picture, profits in turn depend on overall economic growth. (Profit for individual firms is also possible in a no-growth environment, but it would be zero-sum, and would not last long, because it leads to consolidation and monopolization.) In other words, social stability is threatened without economic growth. Any Greek politician confronting a very discontent public that is unemployed and impoverished can attest to that. What are we going to do about the social crisis in a low-growth environment?

Politicians, economists and business people are united in making renewed calls for restoring economic growth to mitigate the social crisis. If they were serious in what they are saying, what should they be doing? As I would argue, it is always easier to follow the current paradigm, even if there are some risks associated with it, rather than to change the paradigm. Imagining a different paradigm, on the other hand, is much more difficult to imagine. But we have to pursue those alternatives if the philosophical and environmental objections to economic growth are so huge.

We should first notice that the existence of a job is a social creation. If the society thought that keeping people employed is essential to maintain national happiness, then it will do things to ensure such an outcome regardless of the conditions in the economy. There has already been an increase in so-called bullshit jobs, i.e. jobs that contain very little actual use-value, but still exist as part of a larger corporate bureaucracy, e.g. extra auditors, secretaries, consultants etc. (see Graeber 2013) I find it questionable why these jobs can’t be maintained even without a growth engine in place. For individual investors and businessmen, the profit-motive will likely disappear, but individuals will have to make investments without any profit criteria. It is not the case that in the current low-growth environment that there are not enough resources available to create enough jobs for everybody.

Quite the contrary: there is tons of it, but that is not spent to expand hiring. Corporations sitting on trillions of dollars of idle capital buy bonds or expand investment overseas, or they purchase their own stocks. They often cite the uncertain business environment (no growth) and government regulatory policies as reasons for not investing. Well, with regard to the business environment, it is obvious that we have to stimulate job creation regardless of their profitability and that perhaps requires centralized action to coordinate it. The second objection about government red tape is nonsense, because businesses have shown themselves to quite readily make investments in booming markets regardless of what regulation exists.

Besides, even if we can’t create jobs, because the community can impossibly employ labor usefully (which I don’t think is the case, because we have a lot of unmet neds, such as for good roads and health care), then we can reduce the work week of the average workers, and thereby produce full employment. This should certainly be discussed, even though it is not currently on the political agenda.

In the current labor market, there is a split in employment terms for low-wage and high-wage workers. In the low-wage jobs we have such abundance of labor that many workers can remain underemployed and on the brink of destitution. If government social programs (food stamps, Medicaid etc.) did not exist, they would be even worse off. No wonder these workers are asking for full-time hours. This is certainly not to express their love of labor, but because their wages are so low. On the other hand, we have middle-class professional workers like bankers, consultants etc., who are being overworked. The capitalists calculate here that since such a high wage has to be paid to them, as much labor as possible needs to be extracted from these workers. This arrangement is insane. What would work better is if the corporations hired more workers, even if that is at a lower rate. If that happens on a large enough scale, then the wages of low-wage workers can also be bid up. But given the current incentives in corporate governance, where short-term shareholder value matters more than a content workforce, it will be hard to overcome this irrationality in the labor market.

In any case, a no-growth environment- assuming a few other factors like a constant population and equitable wealth distribution- does not have to mean that there will never be any jobs or that we can’t take care of all people. It should also be stressed that the two assumptions listed are important as well. In a society with a constant population having no economic growth would mean that per capita consumption has to decrease. Luckily, we experience greater growth rates in countries, where there is large population growth, say Nigeria, India, and even the US among the more developed countries (thanks to immigration). For countries like Italy or Japan, where population growth is limited in the near future, the tendency toward economic stagnation has set in, but this does not have to be problematic if managed well.

A relatively egalitarian wealth distribution is also crucial. As Piketty pointed out, if the rate of economic growth converges to zero, the rate of return of capital remains the same, and the rich keep getting richer at the expense of everybody else. The most concentration of wealth in Europe occurred in early twentieth century France and Britain right before the beginning of World War I. There was some growth rate, but capital returns outpaced the growth rate, labor unions were very weak, and the rentier capital owners enjoyed the fruits of society’s wealth creation. But if wealth is so grossly unequally distributed, then a no-growth environment would be a complete social disaster, because if the wealthy take a larger pie, then all the non-capital owners have to take a smaller pie. This breeds social conflict, and so we return back to the growth-or-death logic.

Since I said that at this stage of development, more economic growth can not be a good human objective, I need to clarify what the role of economic studies should be. In my opinion, the rigorous study of economic reality is absolutely essential for humans. If we don’t understand how the economy works, we can not formulate clear and sensible proposals of what policies to pursue, and create the economy that is worthwhile for us to live in. I agree with the classical social theorists Marx, Weber and Durkheim that the economy has to be studied in the way how it is embedded in politics and society. The greatest economist (or political economist) Adam Smith, was a trained philosopher, who saw economics and morality as being intertwined. What does the economy look like? Who are the actors? Who wins? Who loses? What is the ideal polity? These are questions that are essential to answer, but the ruling economics profession does not want to confront these important questions and gets stuck in the construction of economic models that bear little resemblance to addressing the needs of real people.

But economists are the modern day priesthood, and thereby carry a lot of power in the important institutions, such as governments, corporations, central banks, the World Bank or the IMF. Wallerstein and others (2013) have described economists as modern day astrologers, who received a lot of reverence in their society for predicting droughts and floods based on the position of stars. Whoever studies uncertainty is highly revered in society. But the development of better agricultural methods, and more widespread literacy and education spelled the death knell for the astrologers. (There are still some astrologers around, but they cater to a small group of superstitious people.)

But simply because humans understand more today does not mean that they understand everything. The rise of capitalism as a historical mode of production created the need to understand the business cycle and other economic phenomena. It gave rise to economists, who were responsible to explain the origin of prices, the role of governments, markets, businesses, consumers, workers; trade, money, productivity, FDI, GDP, inflation, debt etc., but most importantly economic crises. If there was no economic crisis, and the world would work as neatly as the textbooks describe it, then there would be no need for so many economists, or their social status would be much lower.

But are economists now less important in my account, since I assume that philosophical and environmental goals are paramount to purely economic concerns of maximizing growth? I would reject the premise that philosophy, politics, economics and society are separate things, or that they can be studied in isolation from each other. Obviously, economic tools are important to describe important processes that happen in the economy and society. The important challenge in economics is to overcome the narrow premises of neoclassical economics, and re-examine the means and ends of the economics discipline. Piketty is quite right to point out that economics is a sub-discipline in the social sciences, and that a fruitful economic investigation will freely draw from the insights of political science, sociology, history, anthropology and psychology. Such a broad social science inquiry would make economic studies more relevant for the society, and could open up a discourse that would more rigorously produce research results that contain people-friendly policies.

This description opens up the criticism against social scientists that they should not be partisan, and that in order not to cloud their judgment and analysis of society, they should only discuss empirics and theory without any particular preference for an outcome. My objection to this idea is that it is technically impossible to be completely unbiased and unpartisan, especially in the policy-making realm. An economist for the IMF is certainly biased in his pursuit of neoliberal policies of austerity in IMF debtor countries. I don’t see any moral neutrality in recommending austerity policies that immediately hurt the income and well-being of the poor in that society. Oddly, it is only left-wing economists, who are denounced for taking a strong moral stand for the less well-off. There certainly is a strong conservative bias in public opinion and especially in elite discourse. Rather than proclaiming a moral veneer of impartiality, which does not exist, it is better to be honest with one’s political affiliation, and then defend it with good reasons.

But even if we assume that one can be politically impartial simply by refusing to discuss current political problems, that would still be a problem in my view. Huge intellectual energy is wasted in discussing game theory and various rational choice models without any references to what real people are doing. But this non-political social science is problematic insofar as scholars, intellectuals and professors, who have the leisure and privilege to study social phenomena, have the best opportunity to gain insight into real world problems, and confront them. Noam Chomsky (1967) correctly pointed out that it is the duty of intellectuals to not only grasp social problems, but also articulate them very clearly, even if it could harm the ruling elite. Marx (1845) pointed out that philosophers have so far tried to understand the world, but the point is to change it.

In any case, the goal of the society and the economy should be the advancement of the interest of all, and not just a few people, and this can likely be achieved with an end of the growth model if it is well-managed.


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