Economics

(see also Green Economics, Lean Economics)

To the question, “What is economics?”, there are two answers. Economics in one sense is about policy. It is interested in the way that goods and services are produced and distributed, in markets and the conditions that help or hinder them, and in the complex system of the national economy, its cycles of crisis and recovery, and its interactions with other national economies.

Economics in another sense, less widely recognised, is that which brings to problems an understanding of choices and consequences. The starting point for this is the principle that, although people are aware of what they value, and alert to the opportunities and constraints which surround them, the consequences of what they do may be transformed by what others do, or intend to do, at the same time. Here we have patterns of interaction and outcome which, unless considered with close attention, are likely to be surprising and perverse, the opposite of what was expected. Economics makes no claim here to have the gift of foresight, but it does claim that, if the circumstances of choice and consequence are carefully read, actual outcomes can be reasonably forecast. Economics in this second sense is a main ingredient of Lean Logic.E63

But it is economics in the first sense—as policy—which is the stuff of this entry. What we have here is a set of ideas, assumptions and interpretations which have been pieced together since the start of the industrial age. Foundations were laid by the Scottish Enlightenment, notably by Francis Hutcheson, followed by the classical economists (e.g., Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill), who mapped out an anatomy of value, prices, capital and markets. Then marginal analysis focused on the demand side of the market, specifically the utility which the buyer of a product or service would gain from consuming more of it, or which he or she would have to forgo if consuming less of it. And this opened the way to the mathematical modelling around which economics has since been substantially organised (e.g., Stanley Jevons, Léon Walras, Carl Menger, Alfred Marshall). Key sequels were the cool, non-judgmental evaluation of theory, behaviour and statistics known as positive economics (e.g., John Neville Keynes); neoclassical economics, which integrated supply and prices, demand and income into a single frame of reference (e.g., John Hicks); and then the work of John Maynard Keynes and E.F. Schumacher, which brought in the state and liquidity (the availability of money to spend) as having a decisive role in maintaining economic stability. Many variants and refinements followed, such as the principles of imperfect competition (Joan Robinson), savings, growth, employment and inflation (Edmund Phelps), the positive feedback, or multiplier, in national economies (Richard Kahn), the part played by technical advance in economic growth (Robert Solow), and general equilibrium theory (Kenneth Arrow and Gérard Debreu).E64

To some extent, a working synthesis of three centuries of creative brilliance has been arrived at, but there remain variants, interpretations and specialisms more or less without limit—industrial economics, institutional, ecological, development and international economics and others have made their contributions, so statements about “economics” do not mean much without some more exact definition. The economics that is intended in what follows is the dominant paradigm, which sees an essentially free market economy as indispensable to the steady rate of growth needed for full (or almost full) employment, and the reliable flow of tax revenues needed by governments.

Economics in that sense has a lot to be said for it. But there are difficulties, and critics have for many years been pointing them out. Some of the criticism has come from outside the profession, and one of the earlier collective critiques came in the form of The Other Economic Summit (TOES), first held in 1984; a radical shadow-conference which ran in parallel to the (then) G7 summit in London. TOES in turn led to the formation of the New Economics Foundation (nef), whose critiques of market economics and contributions to green economics have been sustained.E65

In 2009, the challenge came from inside the profession with the formation of the Institute for New Economic Thinking, whose aim is “to advance reform in economic thinking and policy worldwide”. Among the difficulties which the Institute believes need attention are the idea that the “efficient market’s” allocation of resources should be more-or-less beyond challenge, and that the swarming turbulence of real life economics can be adequately modelled by mathematics. It also notes the failure of economics to come to an agreed view on such fundamentals as the role of governments in stabilising markets—a severe case of professional indecision which for a generation has been known as the debate on “rational expectations”.E66

Lean Logic’s critique extends further (and the case moves beyond criticism to reform in Green Economics and Lean Economics):

1. Economics builds its understanding of stability on the assumption of sustained growth

The assumption of sustained growth is an intrinsically irrational and impossible basis for any enduring system. As their size advances, large systems must eventually fail under the weight of their own complication; they destroy the natural environment on which they depend and reach energy and material limits, leading to entropy and disorder. The market economy has to grow because technical advances—steadily learning how to make more efficient use of labour—free labour up for other work, and if that work is found, it adds to the economy’s output, and that means growth. With each pulse of technical advance, further growth is needed to keep the labour force fully employed.

The problem is that growth-dependency puts the economy in a dynamic equilibrium which, like a bicycle, is stable only so long as it is moving forward. If it stops, it falls over.

If economic growth were zero or negative for an extended period, while technology continued to advance in response to competition, the economy would crash; and “crash” would mean unemployment rising to rates so high that—at the level of hyperunemployment—tax revenues would fall below the level the government needs to provide subsistence payments for the unemployed (even if supplemented by borrowing). What that means—no job at all means no money at all—merits reflection.

So there is a flaw. Market economics is a system which is damned if it grows, and damned if it doesn’t.

And there is another flaw: growth is not just a problem with economics; it is what populations do when they have easy access to abundant food and energy, few predators and no effective culture of population restraint. It is intrinsic to the process of intensification. And in due course attention needs to be focused on the problem that the sustainable carrying capacity of the ecology is lower than the numbers that it is being required to carry. The temptation to attribute to economics—rather than to its fertile and fortunate beneficiaries—the responsibility for growth, leading to insupportably large scale, should be resisted.E67

2. It gives insufficient recognition to turbulence

Cyclical boom and bust is intrinsic to large complex systems and ecosystems (Wheel of Life); the most graphic example perhaps being the fire forests, which burn and start again. Economies are no exception, and crash for many reasons. One is that, while banks’ assets and liabilities can keep pace with each other at a time of growth, assets can fall much faster than liabilities at a time of decline—and rescuing banks when they hit this problem has been one of the key roles of the Bank of England since it was founded in 1694.

The system can be tipped into shock by events such as a sharp rise in oil prices (households’ fuel costs soak up money needed to repay mortgages) or, more generally, by anxieties about being able to repay high levels of borrowing (the more households try to repay their loans, they less they spend, so demand and incomes fall, so they find it harder than ever to repay their loans . . .), or by a combination of these and other effects. The more taut, connected and efficient the system, the more often, and violently, will it crash.

Economics is comfortable with moderate cycles, and the practice of economics is in part about the stimulus and restraint that can be applied to smooth them out. Normality is its aim. What it finds harder to think about is the shocking turbulence that from time to time disrupts a complex system to the limit of survival, or beyond (Systems Thinking > Form > The Power Law). And the implications of this are profound. In a famous article on debt and deflation as drivers of the 1929–1933 depression, the economist Irving Fisher used the analogy of a boat which constantly rights itself in response to moderate turbulence—up to the point at which . . .

[t]here is . . . no tendency of the boat to stop tipping until it has capsized. Ultimately, of course, but only after almost universal bankruptcy, the indebtedness must cease to grow greater and begin to grow less. Then comes recovery and a tendency for a new boom-depression sequence. This is the so-called “natural” way out of a depression, via needless and cruel bankruptcy, unemployment and starvation.E68

The “of course . . . then comes recovery” does not apply if there is no oil to fuel it. But the analogy of the boat does apply. There need to be bulkheads to hold back the water, lifeboats . . . In marine engineering, damage limitation is routine, yet the existence of failure and the limits of control are not recognised as intrinsic to the structure of the system to which economics belongs; they are recognised only as part of the debris that remains when that structure has failed .

3. There is an uncritical presumption in favour of economies of scale

It can be shown that, in some situations, you get better results when you do things on a large scale (see Sorting). In fact, microeconomics is aware that there are limits to this, after which the assumption that larger means more efficient no longer holds, and knows that it is advisable to prevent production at (say) a single factory from growing any further. Despite this, the presumption of economies of scale has become self-evident, along with other things seen as too obvious to argue about, such as competitiveness, free entry to—and exit from—a market, and the other golden rules of perfect competition. This has led, more by association than by logic, to choices such as these:

• The 1999 repeal (in the interests of economies of scale) of the US Glass-Steagall Banking Act, which required a separation between high street banks and the much riskier business of the merchant banks. This was copied elsewhere, and it was part of the same thinking that produced the demutualisation of the building societies in the UK—allowing building societies to operate as banks.E69

• The legislation (in the interests of opening up the market) which required US banks from 1977 to make sub-prime mortgages available to applicants who would formerly have been considered too risky.E70

• The breakdown of all barriers to competition and access to markets worldwide, which gave us the global market, with its extreme vulnerability to a firestorm of shock.E71

The problem is that economics has no non-trivial concept of scale. The vague presumption that, up to a point, efficiency (an idea which is itself accepted uncritically) comes with size, says nothing at all. It is as useful as “this situation is good apart from the ways in which it is bad”, unless there is some sense of why the economies of scale break down at certain levels and in particular situations, and what those levels and situations are. Should any such arguments briefly surface, however, they are quickly eliminated with references to competitiveness, to the need for a global reach, to being able to take on the big players, and (of course) the need for a level playing field.

There is a tragic quality in centuries of insight about the political economy we live in failing to survive the transition to policy, and being displaced by half a dozen clichés, capable of easy use with confident and passionate conviction: the mountains laboured, and brought forth a mouse.E72 It is understandable that the little idea of being big should come to dominate, since the whole of the industrial process—at the level of both the factory and of the economy as a whole—was a spectacular demonstration of how large scale could transform productivity, and build a civilisation with a technical sophistication and living standards for some that had never been imagined before. Crowd behaviour is understandable. But a coherent acknowledgement of scale would have made economics a different discipline, less at risk to the simplifying parodies of mathematics, and turning instead to rich and specific application of what we know about motivation, cooperation, information, ecology, systems, thermodynamics and spatial geometry. Having, however, gone for abstractions in support of the large-scale, it is committed to the eventual dismantling of the structures which make a civilisation.

4. It has no rational sense of time

Neoclassical economics lacks a coherent concept of time—or, at least, it has a mechanical technique for dealing with time which can be applied uncritically. Three aspects of this are especially significant.

First, there is the case of time-lags (Systems Thinking > Feedback > Time). The market cannot pick up a price signal until the prices in question actually move and, by that time, it may be too late to act on the signal with any hope of success. For instance, it would take some fifty years to provide a comprehensive replacement for oil and gas, so waiting for high prices and (later) interruptions in supply to trigger a response is a way of ensuring that the response, when it eventually comes, is fifty years too late.

Secondly, there is the Fallacy of the Permanent Present (Time Fallacies)—the presumption that conditions now are a good guide to what they will be in the future. Variants are that the path being followed now (growth, technical advance), will be straight, and that it is all right to fix short-term irritants in ways which will bring long-term disaster.

A third problem is that the key principle underlying the treatment of time in economics is interest. Economics recognises that if a person needs to borrow money from another person with whom he or she is not in a close reciprocal relationship (e.g., family or friendly neighbour), then the lender will reasonably expect to get something back for the money he provides (usually interest), in the same way as any other provider of goods and services (see Usury). That introduces the principle of “discount”—money you won’t have until a future time is worth less than it would be worth if you had it now. The problem arises when the discount principle is applied to other assets. For example, the value in a hundred years’ time of a stock—such as a fishery—discounted at a rate of 3% per year, is just 5% of its present value, and if a valuation of this kind is taken literally, it can be used as a justification for fishing it to destruction now, because it is a depreciating asset. The fact that the interest rate calculation can be made does not necessarily mean that people will be foolish enough to make it, or to apply it uncritically, but, if they do, economics provides an apparent justification.

5. It has trouble with values to which no price is attached

Good and bad things to which no price is attached (bad things can have prices attached when people pay to avoid them or to prevent them, or have to bear the cost of the consequences) are “external” to the market, and known as “externalities”.E73 It is no longer true that externalities are overlooked by economics; since at least the 1960s, schemes have been devised for bringing them into the market: punitive tobacco taxes and carbon trading are two examples, so we know that responses can be developed. Finding solutions is another matter.

There are, then, two main kinds of externality:

a. The external cost of bad things.

These are the undesired by-products and consequences arising from the supply of a product or service. All forms of pollution are externalities in this sense, and they can be “internalised” if a price is attached. Tax (e.g., on leaded petrol) can be a clear, simple instrument if there is a readily-available alternative (unleaded petrol). If the alternative would take a long time to develop, and/or if an additional tax burden is to be avoided, and/or if some flexibility is to be conserved, schemes which require producers of the bad things (e.g., carbon emissions) to buy and trade rights between each other may have advantages.

But the benefits of such means of internalising bad things—giving them a cost which the producer has to pay—are mixed. There is obvious common sense in making bad things more expensive than good things, and yet, this is a principle rich with unintended consequences:E74

• A scheme that is focused on the market may be seen more as a way of making money than as a means of getting rid of the problem: the “bad” thing then tends to turn out to be rather a “good” thing, because of all the money that can be made out of it, so there is an incentive to keep it going—and to keep the “bad” thing circulating in abundance—for a long time. That aim is assisted if the scheme is confined to a group of institutions which qualify on the basis of, for instance, their size: the sense of wider dialogue and common purpose is lost.

• The scheme will almost always be reductionist, focusing just on the internalised cost and not on the context and culture within which it is produced. Far from drawing focus to the fundamental underlying challenges, it can tend to endorse everything else that an institution is doing on the strength of its stellar performance in, say, reducing carbon emissions.

• . . . and see also Carbon Offsetting and TEQs (Tradable Energy Quotas).

b. The external cost of good things.

There may be benefits supplied by a service which are not represented in its price. For example, the decision to close down a local post office, hospital or railway line is made in terms of whether the service is cost-effective to the owners (such as the government department acting on behalf of the public). The costs that have to be borne by a consumer when the service is closed are not registered, though they may be much greater than the savings achieved by the change. If a maternity ward is closed down, so that parents now have to drive a long distance to another hospital, arrange accommodation, take time off work and organise care for their children at home, it is likely to turn out that—had that money (plus the extra costs borne by the centralised hospital) actually been paid to the (now closed) maternity ward—this would have amply covered its costs. That is, if the cost of all the externalities—whoever finally picks the bill for them—were counted in public decisions, outcomes would be sharply different.

And there is the case of the entire unpaid informal economy, including child-rearing and cooking, which has no price attached to it at all, and which is therefore devalued and overlooked. The neglect of the informal economy—the economy with presence—has been encouraged by the presumption that it is in the world of work that a fulfilling life is to be found and aspirations fulfilled, and in which society’s claims to justice and equality are tested. Money is the perfect measure: transparent, precise, universally desired, objective, non-judgmental. The informal economy, in contrast, not only resists measurement, but lacks money. The problem is that we fall for a dominant idea with the awed deference of worshippers observing their fetish—and money fetishism induces blindness to the informal economy, devaluing the work of the men and women who devote their lives to it.

This matters intensely. It means that it is possible to do good economics, complete with rigorous mathematical modelling, and to overlook the whole set of informal reciprocal arrangements and loyalties—stable community, culture, leisure, friendships, a sense of being at home, citizenship, making people, being young, growing old, being beloved; things that are not measured and made visible by monetary exchange. Where economics has the last say, all these are ignored.

The problem is not that that the informal economy is not “internalised” and paid for—that would really destroy it, though indeed encroachments, setting prices for things that might be done better for love, have been relentless for three centuries—but that its absence from the accounts makes it inaudible. Money speaks a language that the market can hear. The informal economy doesn’t.

The conclusion that has been drawn from economics’ recognition of the externalities problem is that money is, by default, the instrument to use. It is presumed in a strange, intuition-busting way that people will not do anything that needs to be done unless supplied with a financial incentive. But, as the entry on incentives shows, financial rewards can actually be demotivating. They successfully get people in through the door; they can provide a reason to persist in simple repetitive tasks like picking strawberries; they do not, however, provide the frame of reference in which people are motivated and inspired to think through a shared problem, to invent new solutions, to achieve something difficult. They buy participation reduced to the simplest reflexes and geared to material rewards. As the anticulture of material incentives extends towards comprehensive coverage of our lives and of our response to environmental change, it reduces the possibility of recruiting the intelligence, imagination and passionate, self-motivated commitment which, together, represent our one chance of building a resilient relationship with a damaged and angry ecosystem.

And yet, it is not fair, either, to dump all the blame onto economics. The market, seeing value as money, took the colour out of society, burying loyalties and cultural detail in a blizzard of prices. Economics described the whitened, smoothed-out landscape that it saw; and it was attractive to people who, on the basis of simple assumptions, could build mathematical models to describe parts of it with precision and sparkling brilliance. It is called being “parsimonious”.E75 There is pride taken in reducing complex problems down to the essentials, preferably essentials which can be used as assumptions on which to build mathematics. It can be a good thing: mathematics is a way of exploring an idea and testing common sense; its models are often elegant and beautiful, and they can be used to produce unexpected results, some of which are true. But its models are caricatures of reality, offering sharp observation sharpened by what they leave out, and what they exaggerate—not to be mistaken for the whole story. The difficulty is that the models do tend to be taken literally—a case of what Alfred North Whitehead called misplaced concreteness—and they have a hard time accounting for value, unless there is a price attached. They become icons; and in common with most icons, they can lead you astray.E76

Neoclassical market economics engages with the things that fit neatly into the market, and which can generally look after themselves anyway. The things that are most needed and vulnerable—culture, mental health, families, belonging, character, happiness, household skills, reciprocity, community, empowerment—are either left out in the cold to die, or else become latchkey kids, gathered up by an authoritarian, overstretched government which takes over the responsibility because the rightful carers are away from home.

6. It treats all goods as if they were produced

Goods which are made—in factories, workshops and on farms, for instance—tend to obey the laws of supply and demand: if they get scarce, the price rises, so producers make more of them (and vice versa). Economics is comfortable with this, and models of great sophistication can be constructed around it, exploring implications—taxes, inflation, technical change, competition. But not all goods are of this kind: some are not produced—or are produced too rarely and slowly for their production to rise in response to demand. Their supply is fixed and, if they get scarce, there is not much that can be done about it. Non-produced goods are of two main kinds:

First, there are the natural resources, such as agricultural land, phosphates, water and oil. The depletion of these essential assets is hollowing out the material basis of our economy and civilisation. However, when economists have applied their discipline to the question of oil depletion in recent years, they have followed a simple logical sequence: as current reserves are used, prices rise, and it is argued that this will act as a stimulus for further exploration, for improved extraction rates, and for the development of unconventional supplies like oil shales, heavy oils and tar sands.E77

This is no mere carelessness; it is based on an influential principle of resource economics. Harold Hotelling, professor of mathematics (Stamford, Columbia and North Carolina in the 1930s and 1940s), published a rule to follow when the aim is to optimise the present value of a non-renewable resource. It is expressed and proved in abstract terms of maths and money and, in summary, it says that the resource should be depleted in such a way that the rate of growth of its price is equal to the rate of discount (i.e., the interest rate). This means that an abundant resource may rationally be extracted relatively quickly without the risk of the price of the remaining reserves rising too far (that is, faster than the discount rate); whereas a scarce resource should be depleted only slowly, in order to prevent the discount rate being overtaken by the rising price of the resource. One implication of this is that the optimal rate of extraction changes with the interest rate. Another, more reassuring one, is that, as a resource gets scarcer, its price rises, so extraction must fall if Hotelling’s rule is to be obeyed, and there is therefore an incentive to provide an alternative.E78

That is (as summarised by David Pearce and Kerry Turner) . . .

. . . as the price of the finite resource rises there will be some substitute for the resource. For example, oil from conventional sources is much less expensive than oil from tar sands or shale. As the price of oil rises it must eventually ‘hit’ the cost of extracting oil from these more expensive resources.E79

A smooth hand-over to alternative resources, then? So the mathematics tells us. What it does not realistically take into account are the sheer practical problems of technology, the dirty detail of the quantity of energy you have to put into tar sands to get any net energy back, the problems of logistics, fierce Canadian winters, the other resources that are required (such as water), the environmental and climate impact, the long time-lags and, at the end of all this, the small-scale output relative to the abundant flow of crude oil. The mathematics occupies a rigorous high ground: you can’t argue with its combination of proof, precision and transparency—but it is a misplaced analysis which dismisses the practical pains and impossibilities and sees in the maths a concrete response to the energy shock.E80

The problem is, of course, that reality on matters of depletion comes in bits and pieces of information which are hard to fit into a model of any kind. It is about the detail of production rates around the world, the decline of new discoveries, and the present scarcity of any alternative source of energy, renewable or otherwise, for transport. Clearly, Hotelling was by no means making the gross error of supposing that oil was a produced good—made in factories like waistcoats—but his analysis derives from deep assumptions governing the supply, demand, price and quantity of produced goods—that is, the guidelines, or heuristics, which give economics its foundation. In the domain of this logic, a rise in price has to lead to a response in terms of increased supply. It is not the economist’s business to get into how that increase is achieved—economists do not need to know how to make waistcoats nor how to get oil out of tar sands—but it is the economist’s task to understand and explain how the universal essentials of supply and demand work.

And that is the tragedy, for depletion is not to be understood in terms of abstractions, but of anomalies. This is data of a kind more suited for the detective or even the barroom gossip than the mathematician (Expertise). In such a setting of anecdote, tip-offs, lies, bluff, politics and detail, broad economic principles have nothing to offer but error, just when the detection of anomalies, lurking there beneath the surface, is the one thing that could save the day.

The second class of non-produced good with an impact on economic thought consists of positional goods: composition goods with the common characteristic that they can be enjoyed only by people whose income or other bargaining position is large relative to others. However high average incomes rise, access to positional goods remains unchanged. When desirable goods are available only in a fixed quantity which is significantly less than people want or need, their distribution is generally by some form of auction: the high bidders get the goods—but note that “auction” here may consist of many kinds of competition, including money, connections or battle. Examples of positional goods include the house that you want to live in, but can only just afford, leadership positions, the alpha male role in a group of baboons, and access to land, energy (TEQs), food and other assets at a time of scarcity.E81

There are several ways in which positional goods may throw economic analysis off balance. For instance, there is the basic problem of wealth and welfare: if the incomes of everyone were to rise by equal amounts—or even if they were to rise faster for the worse-off than for the better-off—this would not necessarily reduce inequalities or improve living standards, so long as those standards were due in part to being able to bid high for the inadequate supply of positional goods that happens to be available. Positional goods in this way represent an impassable limit to aspirations about the benefits of higher real incomes being shared by all. And a substantial proportion of households’ spending on positional goods (such as houses, where purchasers on average bid up to the limit of what they can afford) may actually become a form of saving (by the seller) along with debt (by the buyer), both of which can have an effect on demand, providing a further source of volatility between boom and recession in the economy.

The presence of the rigidities imposed by non-produced goods in a market are substantial complications to a neat concept of economics which supposes that producers produce what buyers want to buy—and that if they run out of stock, they can always make some more.

7. It is predatory

On some matters, market economics is far from neutral. It is normative: it has an opinion. It takes the view that the competitive market is the only sound basis for a political economy, and it advocates its case with evangelical conviction: if there is a society somewhere which is not based on the market, it needs to be saved. Here is an example, from E.F. Schumacher. Imagine the case of a small, unambitious, labour-intensive local economy that has existed happily for years in a remote region without being troubled by its backward condition—or saved from it by a more efficient producer with a mission to introduce it to the joys of life in the global market. One day, the efficient producer, along with its associated industries, does finally arrive. At first, the new arrivals, whose prices undercut those of our inefficient mini-economy, enjoy buoyant sales. However, this puts the mini-economy’s own producers out of business: unemployment follows; so its households can no longer afford to buy the competitive firms’ goods; the result is that both the inefficient traditional economy and the competitive one collapse.

Schumacher called this, variously, “mutual poisoning” or “maldevelopment” and he often watched the sequence at work when efficient companies arrive in third world communities, with the intention—naïve, patronising or just greedy—of “helping” them to achieve lift-off into the industrial age. They arrive in an inefficient but stable economy, in which there is a carefully protected environment, full employment, and no requirement for economic growth; they leave behind a destroyed economy with mass unemployment, none of its former skills, a collapsed social structure, alcoholism, an exploding population and a degraded environment.E82

In response to the problems faced by undeveloped economies in the globalising world of the 1960s, Schumacher and George McRobie developed the principle of intermediate technology (aka appropriate technology). It was in radical contrast with the assumptions of the time—which have proved persistent. Here they are summarised by Colin Ward:

In those days, it was thought that access to high technology held the secret of success for all nations, great and small. [Schumacher and McRobie] grasped the fact that then, as now, the dilemma of the poor regions was their dependence for imports on the export of cash crops and raw materials. If they tried to diversify, they found that there was always some other country which could produce more cheaply. If they sought to build up their own modest production units to supply local needs, on the Gandhian pattern, they found that another country could mass-produce the same goods and deliver more cheaply too, while the industrial plant they would like to buy was geared to the advanced technology of the rich countries.E83

This is a form of Gresham’s well-known Law about the effect of a debased currency: bad money drives out good money.E84 The market state (in which price displaces reciprocity and cooperation) drives out social ecology. This is the tragedy of economics.

Schumacher was, by any standards, one of the leading mainstream economists of his time—substantially the author of the “Keynes Plan” leading to the establishment of the International Monetary Fund; the main author of Sir William Beveridge’s (1945) Full Employment in a Free Society; and Economic Advisor to the Economic Sub-Commission of the British Control Commission in Germany. He recognised, however, that economics dances to more than one tune: there is the Economics of Materialism, but . . .

. . . other systems of Economics are possible and necessary and are even already available in rudimentary form.E85

The difficulty is that it is hard, even impossible, for two head-to-head systems of value to coexist. Gresham’s Law stands in the way: the cheap will win. Unless very deliberate measures are taken to protect the other economics (Buddhist Economics, as Schumacher came to call it), the mainstream will dominate—in the short term. In the longer term, it will be necessary to find ways of protecting economies that have devised or inherited another way of doing it (Lean Economics, Local Currency).

Unfortunately, the critics of economics have had a tendency to discuss the whole structure as a tissue of misconceptions. It is a critique that fails. The strength of economics is its considerable, if far from complete, understanding of the flows and comparative advantages that underlie trade, jobs, capital and incomes, and the logic of optimising behaviour, all backed by glittering accomplishments in mathematics. That makes it a powerful analytical instrument, so that just a few misconceptions—such as a failure to understand the informal economy or resource depletion—can have leverage: like a baby monkey at the controls of a Ferrari, they can turn it into an instrument with extraordinarily destructive potential. If it were a tissue of errors, it would not be dangerous: it is its 90 percent brilliance which makes it so.

Economics has therefore been seductive. It has appealed to minds glad of a cognitive technology which enabled them to make decisions according to mathematical models, and with little fear of contradiction. Its professionals, with careers and families to think of, are under some pressure to sustain a close and uncritical embrace with the form of political economy in which they happen to live, accepting the irrational proposition of sustained growth, and being associated with (this always helps, though other motives are stronger) a discipline from whose practice they can make money. But the reduction of a society and culture to mathematical, growth-dependent economic abstraction has infantilised a grown-up civilisation and is well on the way to destroying it.

Civilisations self-destruct anyway, but it is reasonable to ask whether they have done so before with such enthusiasm, in obedience to such an acutely absurd superstition, while claiming with such insistence that they were beyond being seduced by the irrational promises of religion. Every civilisation has had its irrational but reassuring myth. Previous civilisations have used their culture to sing about it and tell stories about it. Ours has used its mathematics to prove it.

 

Related entries:

Economism, Galley Skills, Elegance, Green Economics, Lean Economics.

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David Fleming
Dr David Fleming (2 January 1940 – 29 November 2010) was an economist, historian and writer, based in London. He was among the first to reveal the possibility of peak oil's approach and invented the influential TEQs scheme, designed to address this and climate change. He was also a significant figure in the development of the UK Green Party, the Transition Towns movement and the New Economics Foundation, as well as a Chairman of the Soil Association. His wide-ranging independent analysis culminated in two critically acclaimed books, Lean Logic and Surviving the Future. A film about his perspective and legacy - The Sequel: What Will Follow Our Troubled Civilisation? - was released in 2019, directed by BAFTA-winning director Peter Armstrong. For more information, including on Lean Logic, click the little globe below!

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