What do we want from an economy?

(This was originally posted on DailyKos, where it was suggested that I post this here. It has been slightly edited.)

Unless you've been living under a rock you know that we are in an economic death spiral and that things will get worse before they get better. All things will pass, however, and unless things crater for good, we will eventually pull out and begin economic recovery, in one year or three or ten, and we will be ... well, where will we be? What are our economic goals? What do we want from an economy?

Macroeconomic goals
If I may speak rather broadly, since the end of WWII the world has embarked on a few different economic philosophies. In the West our goals were full employment, price stability, and growth that could be sustained, at least in the medium term. In the Soviet bloc, a centrally planned economy had as a primary priority 100% employment, whatever the cost. In the US, the post-WWII approach collapsed under persistent inflation driven by our vulnerability to OPEC and the costs of Vietnam; and with the election of Ronald Reagan came a sea change in US philosophy, bringing the rise of the neoliberals and their insistence on deregulated "free markets". It's not entirely clear to me how "free" those markets were; it seems clear to me that the goal was opportunity unfettered by government (not, of course, to be confused with opportunity for all, much less equal opportunity). Nearly thirty years on the neoliberal experiment has failed from its contradictions and inefficiencies, much as the Soviet experiment collapsed in the late 1980s, and we now reap the consequences.

So now what? We will eventually recover from this failure, but ... where do we go from here? What do we want from an economy? 100% employment? Unlimited opportunity? At least a living wage for everyone? A fiduciary responsibility to the future? The "market" is our creation. President Obama has talked about rejecting the "failed policies" that got us into this mess, which is a major step forward, a necessary but it is not a sufficient condition. We can aim for more than one goal, but some are incompatible with others. At least there is one thing we have conclusively demonstrated: the extremes of too much or too little government involvement end in disaster. That means we need to get involved and take responsibility -- we can't just pass the buck to some Invisible Hand -- but we also need to know when to back off.

I have no answers, only questions. But I think it's not too early to think very seriously about this. Here are a few thoughts, unsystematically thrown out, starting with what appear to be implicit assumptions.

Status quo ante
This ought to be a nonstarter. The problem is that there's something to like about this. Rapidly growing retirement portfolios and 401ks. Double digit returns on investment. Regulatory agencies that prize financial innovation and risk-taking.

Too bad it doesn't work. Too bad it makes only paper money, not real wealth. This is how we got into this mess, going back to it will just result in more bubbles and speculation, and we'll be revisiting 1907, 1929, 2008 sooner rather than later. I hope we are not that stupid.

Status quo ante with financial regulation
Gramm-Leach-Bliley, the Commodity Futures Modernization Act, the encouragement that Greenspan's Fed gave to innovations in speculation have all contributed mightily to the mess we're in now. However, if we insist on transparency of financial activity and we enact regulations that will prevent the worst of the abuses, we can take advantage of the efficiency of free markets while preventing the excesses that an unfettered free market invariably falls into. These regulations could range from higher margin requirements (pre-2004, perhaps) to a crackdown on SIVs and other devices used expressly to increase leverage off the balance sheet to compartmentalization of finance to prevent disaster in one sector from taking down everything with it (basically an updated Glass-Steagall) to regulated exchanges for currently unregulated trades such as credit default swaps, etc etc. We might go farther and demand that banking be boring again, a way to allocate financial capital efficiently to the productive economy, and not to speculation.

It's kind of hard to tell, but it seems that many outside finance would like to see this, perhaps including the new Administration. I suspect many in finance would like at least some regulation to increase confidence in the system and thereby improve efficiency. Is this what we want?

Personally, I say no. Yes certainly to getting finance under control, but no to status quo ante. Financial regulation by itself is insufficient to deal with systemic problems in our economic system. Here are some of those problems: most have been covered elsewhere in detail -- Paul Krugman, Garrett Hardin, Marjorie Kelly, Peter Barnes, Robert Reich, Jeffrey Sachs to name a few -- so I won't belabor the points. But keep in mind that they're all interrelated.

The Ownership Society
The "Ownership Society" is an idea pushed by George W. Bush and the neocons encouraging Americans to take greater control of their personal affairs, though it predates Bush by at least 2 decades. In the Ownership Society, we would have greater personal control of health insurance and our children's education, we were encouraged to buy houses. Instead of fixed benefit pension plans, we contribute employer-matched funds invested in the stock market. This encourages personal responsibility, and by owning a piece of the market, we become stakeholders in its success.

This all sounds good, and there are positive aspects, but there are also serious ramifications, possibly unintended. I don't want to get into school vouchers or how the framing conveniently confuses health insurance with health care or or real estate here: for now I am concerned with two aspects of the Ownership Society.

The first is the opposition of personal responsibility with governmental responsibility. This is a democracy -- it's our government, and if we disagree with it it is our responsibility to throw it out. It is our responsibility to become educated, to stay informed, and to be politically active. We're off to a good start this past January 20th, but it's only a start, and there is a long way to go. Now it is certainly true that a government can provide too much and that the individual loses initiative -- the Soviet Bloc is the extreme example -- but the opposite is also problematic. For many things, such as infrastructure or health care, the individual cannot exert economies of scale. Here governmental action is far more efficient, and to oppose governmental responsibility in the name of personal responsibility is really a way to transfer power to those with greater means. This is fundamentally undemocratic. The government is -- or should be -- the voice of we the people, and we must remember that.

The other aspect is the idea that one becomes a stakeholder in the market by owning a piece of it. Why is "ownership" so important here? Why this Divine Right of Capital? as Marjorie Kelly asks in an excellent book by that name. Kelly notes that the shareholder is a type of absentee landlord, one who contributes very little in a real sense but to whom the governance of the corporation is accountable. Labor, who provides the real productivity, is treated as a commodity; that is more than can be said of community and resources held in common. Kelly and Robert Reich among others point out that the fact that a large fraction of the population is invested in stocks, either directly or through things like mutual funds, retirement accounts, or state pension funds, puts systemic pressure on corporations to maximize shareholder value. This means externalizing all costs possible and minimizing remaining costs. One of the major costs will always be labor: so jobs are outsourced to places with low labor costs and weak (or locally bribable) environmental regulation; so wages are flat while productivity keeps rising; so (until the Big Crash) the stock market was rising while employment stayed weak. Wall Street heralded Chainsaw Al Dunlap for his ferocious cost-cutting -- sacking workers -- at least until he drove Sunbeam into the ground and was investigated by the SEC; the same Wall Street criticized Costco CEO Jim Sinegal for being too generous to workers, even while Costco was profitable. This leads to contradiction: in our consumer economy we are told to increase aggregate demand (spend) while at the same time jobs are outsourced and wages do not keep up with inflation. We managed for a while by going to 2-income families, and when that was not enough by increasing household debt, until one day we woke up to find ourselves impossibly overextended. Now with one eye we look at how our 401k is performing, with the other we worry about job security. Sorry, but in this system we can have one or the other, at least until the system breaks and we get neither. We need Something Better.

I am by no means saying that the shareholder should have no stake, but I am in agreement with Kelly in that it is only fair to require that labor have an equal stake. They are after all the ones who provide the productivity; they also provide a significant fraction of aggregate demand. To those who object that labor is indeed a commodity, that it provides no creativity, I say that shareholders provide no creativity either, and that treating labor only as a commodity fails the reality test, as we see now. To those who object to the wage-price spiral, that's a bigger problem related to the necessity of growth, and another reason why we need structural change. Right now we keep inflation in check by keeping wages flat, by marketing increasing amounts of disposable and unnecessary must-have junk (Peter Barnes calls them "thneeds"), and by moving money to the rich, who will spend relatively less of it. Not just labor but perhaps community too should have a formally defined stake. Right now community interests are protected by government regulation, in which corporate lobbying plays a disproportionate role. But communities too can be and have been bought.

Tragedy of the Commons
In 1968 Garrett Hardin published a paper in the journal Science titled The Tragedy of the Commons, in which he argues that individuals acting in their own self-interest will ultimately destroy a shared resource, because the gain they get from extracting more than their fair share accrues to them, but the damage they cause by overextraction is shared by the community. This is more than the case that profits are privatized, costs are socialized, which would be bad enough: it is in fact in everybody's short term interest to extract as much as they can before the commons is ruined. The only way out is by social compact, or, in Hardin's words, "mutual coercion mutually agreed upon".

The unfettered free market cannot deal with the tragedy of the commons. A company cannot pay the full price of what they take from the commons because another company that does not will drive it out of business. The only ones left standing are the ones best at externalizing their costs. At some point the community might (or might not) step in, using the club of social compact (government regulation). There are obvious and potentially catastrophic problems involving the commons that are coming and that we've been warned about for years, and piecemeal, ad hoc treatments are not going to be terribly effective. Yet even now it is difficult to get the public to think about them.

Climate change, ocean acidification, overfishing, rainforest clearing, many other issues all involve the commons. Is it time to think of a structural approach to these problems? Peter Barnes, in Who Owns the Sky and Capitalism 3.0 suggests a "sky trust" approach, a cap and dividend system in which fees from the right to use the commons (say, GHG emissions) is paid back to the citizen as a dividend. This puts a price on the resource and provides incentive not to use that resource or at least use that resource more efficiently. The "commons held in public trust" approach does seem to work where tried -- in the US, the Alaska Permanent Fund (while this one is extractive, the benefits accrue to all Alaska citizens), or on a smaller but more comprehensive scale, the Marin Agricultural Land Trust, are two examples.

The concept of a commons held in trust also requires a fiduciary responsibility to the future. If we are to maintain a healthy commons, which we must for health and prosperity (poverty is just as destructive as affluence), it must be held for the future. In the long term, we may all be dead, but our children won't be, or theirs. That markets price-in the future is if not false, clearly inadequate. It took government action ("mutual coercion mutually agreed upon") to enact the Clean Air Act, the Clean Water Act, it will take government action to deal with depleted fisheries and rainforest clearing. But we need a structural approach, not a piecemeal one. In fact we have a working model for ensuring a fiduciary responsibility to the future: Social Security. (Of course we also have a nonworking but popular antimodel for that -- running huge deficits and calling for more tax cuts.) There may be other approaches, but one thing we must keep in mind: this is a finite planet, with finite resources, and overuse of the resource is destruction of the resource. If it comes to a fight between the market and physical reality, I know who wins.

Growth
Growth may be an odd thing to worry about when we are facing deflation -- Obama emphasized the need to return to growth in the presser -- and we do need growth in the near term to get back on sound footing. At some point, however, we need somehow to reconcile the reality of a finite planet with the economic necessity of growth. The idea of a steady-state economy goes back at least to John Stuart Mill but more recently explicated by Herman Daly. I don't pretend to know how such an economy would really work: there are many economic theories out there, not all that many are tested, and of those that have many have failed. Nor do I know how we would get there. But ultimately our options are either steady-state or overshoot-crash-recover-repeat with increasingly lower crash thresholds as resources get used up. At the very least we need a serious discussion.

In the end, these are questions of cultural values, of national priorities, not economics. After all the economy is a social construct, and we define what we want, keeping in mind what is possible and what isn't, the certainty of unintended consequences, and that too much and too little management are sure to fail. And one other thing to remember: economics is all about the allocation of scarcity. When we make a choice we also choose to give some things up. What are we willing to give up? What is nonnegotiable? Even those things we know we need to give up -- double digit returns year after year, fossil fuels, etc -- are very difficult to let go. We will not achieve a long-term sustainable economy without changes in what we value.

President Obama said in a Feb 11 town hall meeting that this is a time for "turning crisis into opportunity". We have not just a tremendous opportunity but also a real responsibility now to fix major structural issues: call it Shock Doctrine in reverse, call it creative destruction of the existing system. Getting there will not be easy, will not be quick. But to get there we need a vision of where "there" is. So once we get past the current crisis -- where are we going? What do we want from an economy?

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Comments

Welcome to EP davet!

This is awesome, we're getting a lot of new bloggers putting out some interesting writing.

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strong middle class

I'm for...what works. Call me the common sense society or a member of the new elitist group called the math class. What works, what adds up. For example, raw nasty capitalism can work for startups. Yet obviously putting up people's health as a place to get rich....isn't working out to well and should be considered a right, a public work, a moral imperative. It happens to be more cost competitive and economically competitive on the side.

Too much comrade and it's enough to drive ya nuts with regulations, rules, red tape.....too much capitalism and you have your sociological mutually assured destruction experiment.

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A strong middle class ...

1st -- thanks for this forum

2nd -- We've been told over and over that a strong middle class is the backbone of America, the basis of our economy. We compare that to third-world economies, with their oceans of poverty and delta-function distribution (for you math elitists) of wealth. So why have we spent the last 30 years gutting the middle class? Why is banana republic something to aspire to? And why oh why does the middle class buy it?

But a strong middle class does not by itself deal with either the commons or sustainability (though I would argue without it we'll get neither -- poverty is just as destructive as affluence).

Maybe someone can talk me down, but I fear the Rubinites in power just don't get any of this.

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middle class[2]

Well, from all of my studies the world has been most Democratic, most fair, with strong middle classes. Then, in terms of how people are the concept of putting one's self last for the common good doesn't seem to work out too well. So, (hey NDD, you reading this?) there are some invisible sociological and psychological strings being implied here with architecting an economy.

I think they have sucked the life blood out of the middle class because ....they could and it's glorified wealth redistribution to a few elites and that too, throughout history leads to major suffering and eventually social unrest, corruption and implosion.

I think they believed, bizarrely that they would raise up middle classes globally, which of course is absurd and if it happens the timeline is such that they replaced the U.S. middle class...i.e. traded the US to become a banana Republic.

From what I'm seeing from other nations is our nation has very short term "quarterly" thinking and not a lot of long term strategy and especially in the national interest. They also do not seem to put any weight in the synergistic elements which make a great economy....i.e. they forgot Henry Ford's rule that the workers have to afford the products.

On the other side of the coin, one get get so many efficiencies in a system when designed by bureaucrats and special interests. I think there should almost be an "efficiency czar" to look at bureaucratic bottlenecks in a system and make it a point to get rid of them.

For example, back in the day of strong unions, well, a non-union person could not touch say a piece of furniture to move it in an office because that was a union job...well, things like that are inefficient and silly.

I think a middle class will also generate sustainability as well as the common good. We already have examples like state police, fire department, public libraries and we need more of those, the obvious being health.

Like right now I am looking at how this Stimulus will be distributed and very much who is going to get the contracts. Depending upon how that goes, this could be a disaster. Fraught with lobbyists, bureaucracies, inside deals are states so the devil in details is on the distribution of funds for projects.

I'd like to scream bloody murder on those I.T./tech projects but if and when those come up for bid/award, I will be posting on that like a mad dog. If they offshore outsource those I think America is going to blow up in outrage.

I'll have to go read up Herman Daly's stuff again. He's listed in the studies page on EP but a Herman Daly primer post would be cool.

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Several interesting topics here

hard to know where to start. So I'll pick one at random.

there are some invisible sociological and psychological strings being implied here with architecting an economy

It seems to help if there is academic justification for behavior that is clearly self-serving, especially if reality is providing precious little validation. I'm thinking in particular of Adam Smith's Invisible Hand (taken out of context as necessary) and Milton Friedman. OK, so I just bought out Company X using their income to pay off the debt and I had to fire 2000 people, but it's all to the good because I'm purging inefficiency and the Invisible Hand maximizes the public good. OK, so I just invented a new derivative so we can take on more leverage without incurring more risk, and see, S&P rated the bonds AAA. OK, so I just imposed harsh monetary policies on TinyDevelopingCountry which may cause ruinous inflation, unemployment, and starvation now, but that's for the best even if my banks make out like bandits because once TDC learns fiscal discipline (which of course is only for the little people) they will reap the wonders of the Free Market.

If I were in any other line of work I'd be taken out and shot. But the amazing thing is, I might actually believe I'm doing the right thing, because that's what the system selects for.

Which gets us to:
I think they believed, bizarrely that they would raise up middle classes globally, which of course is absurd and if it happens the timeline is such that they replaced the U.S. middle class...i.e. traded the US to become a banana Republic.

Geithner's tax issues did not bother me nearly as much as his stint with the IMF, where they actually believe this, or used to anyway, even if it meant destruction of the economies they were helping out. His early policies smack of Rubinomics to me; but I'll be optimistic and hope he turns things around in time.

a Herman Daly primer post would be cool
I'd like to see one that can lay out a critical assessment. Because there are plenty of models out there which sound good in theory but don't work in practice. The necessity of what he says is clear; the implementation is murky to me.

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oh those guys

There is a middle ground, not justifying sociopathic behavior. But there are limits on self-sacrifice and I am referring to Marxism, or magically people would put aside self interests for the common good. It's more people will contribute to the common good....when it's also good for them.

Herman Daly. Well, a lot of us on EP spend a lot of time on own posts. So, if someone wants to take up the cause and do an analysis, research, essay on Prof. Herman, that would be good.

Yeah on the IMF. My concern is there Geithner was in the NY Fed while all of this went down. What was he doing, spending time writing up vague and non-concrete press releases?

But right now the IMF is issuing dire warnings with people in Thailand praying the IMF comes into the U.S. and puts their evil conditions on our economy like they did to Thailand. Most interesting...what goes around....?

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Tragedy of the Commons

Excellent writing. I think you've answered your own initial questions. Consider what has happened with Citi Group as a metaphor. It consolidated to achieve scale efficiencies, and now it's toppling...because it lacks a local organic basis. Hence, we need to re-examine what the new structures will look like...the Local credit Unions of the Future, as one example. Huge aggregate farming interests are also crumbling. Yet it need not fall into atomized chaos necessarily, but might just revert into older pre-consolidated systems. Again, great work.

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I'm a distributionist

I don't really see a way forward with macroeconomics- every attempt at building an economy bigger than two degrees of friendship is highly vulnerable to centralization and fraud. The answer to me seems to be extreme decentralization, solidarity, and subsidiarity. We now have a worldwide information system that can make it work.

Start with agriculture- our main problem with agriculture right now is the gigantic risk genetic monoculture presents in any biosphere. So stop it- interview anthropologists and natives, find out what they ate during the hunter-gather period, and farm those plants and animals. This permaculture technique results in lower resource farming with increased yield, because you're using plants and animals that have evolved for your local climate. A good business model for this would be subscription farming- where the end consumer pays for the planting and land ahead of time, for a daily, weekly, or monthly delivery of produce.

Second, manufacturing. Even going organic/native with agriculture will produce a labor surplus. I suggest that the macroeconomics be for intellectual property only- local factories buy plans off the internet for local production of needed goods, employing local people. It isn't efficient, but it does mean that you get to meet the person who built your TV set or etched your microprocessor.

Third, services. Services I see as primarily government sector businesses- and as such, better done by machine than by any human. Which gives the manufacturing sector more to manufacture. One big service should be subsidies to make local manufacture and farming cheaper than any import.

I see us breaking humanity into over 6,500,000 small communities, of under 1000 people each. It's hard to commit fraud if doing so means you have to see your victims at family reunions.

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Maximum jobs, not maximum profits.

It is inevitable.

I think it was Jim Kunstler who, last fall, wrote that "the next 20 years will be far different than the last 20 years." Certainly, if you read up on "peak oil" theories, anything but the current configuration will be the new order. It's ironic that the wisdom of pursuing smaller, more self-sufficient communities, which was so prevalent in the 60s and early 70s, was discredited as so much hippie talk. Well, they have a leg up on the rest of us and we need to find out what they have learned over their generation.

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The main thing they learned

is that capitalism is not the enemy. BIG is the enemy. Big anything. If a commune or church grows to big, it splits in the pain of schism. If a corporation grows too big, it forgets the community that spawned it. If a union grows too big, it becomes a money making scheme for the union management instead of being about the workers.

Big is bad is the most important lesson their experiment has to teach us.

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Maximum jobs, not maximum profits.

Efficiency

You lose efficiency of scale at
I see us breaking humanity into over 6,500,000 small communities, of under 1000 people each. It's hard to commit fraud if doing so means you have to see your victims at family reunions

Of course there are many ways to define efficiency, but one will be that a few of those communities get together to take over many.

I don't see how you're going to build TVs and microprocessors this way. But you could build clubs, axes, and ballistas.

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Efficiency of scale

Is overrated to a large extent once you hit robotic labor for most manufacturing processes. CNC and 3D Print technologies are quickly making up the difference- I'd give it another 10 years to mature, but someday soon a microprocessor will just be a 32nm printout of gallium ink on a silicon substrate, and while it may still take $50,000 to build a fab, it won't be taking the billion or so that Intel pours into theirs.

Once you reach that level of tech, then the only thing worth shipping is information- what the microprocessor or TV set should look like, plans to feed into the machines.

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Maximum jobs, not maximum profits.