Economics2030 is primarily about economics and is essentially designed to promote fresh thinking about economic ideas and business practice.
But economics has never been precise, either in the way it worked or in the issues it tackled. What are now generally viewed as economic ideas were at one time considered to be issues of philosophy and theology. And, as the history of economic thought suggests, economists always had their eye on the bigger picture.
Thomas Aquinas pondered the role of price because he wanted to save souls.
Francisco de Vitoria believed free trade would promote the universal brotherhood of man and heaven on earth.
William Petty needed to make England’s Irish conquests pay (They did, at least for him. He got Kerry).
Jean-Baptiste Say was trying to help the king of France save his realm.
Adam Smith and David Ricardo wanted to reduce the power of landowners.
Karl Marx wrote about economics to provide the intellectual underpinnings for his belief in the inevitability of proletarian revolution.
Ludwig Von Mises used economics to validate his view of the importance of private property ownership, Keynes to empower the liberal state and Friedman to help defeat Soviet Communism.
The reason why these writers still resonate is not because they proved that economics was a science that could not be ignored. Their achievement was to make economics relevant to the times they lived in, not to change the world forever. But in doing so, they established economics as a discipline with enduring intellectual appeal.
The recurring question, however, is this: does economics justify the effort involved in mastering it? Does it act on human thought in the way that a grain of sand in an oyster produces a pearl? Or is it more like a stone in a shoe? Both are irritants. One produces treasure. The other a sore foot.
The way that question has been framed illustrates one of economics’ most enduring characteristics. More than any other intellectual discipline, it’s metaphorical.
Economists have often waxed lyrically on their subject using imagery from everyday life to validate their arguments. Whether they explained economics by referring to a farm or to a factory or drew on physics or biology, they were obliged to be allusive.
Economics claims to be a science. But it is science expressed as parable, or, perhaps, parables rewritten in scientific form. The fact that economics has always been so, and must continue to be, is an abiding reminder of its imprecision.
But the metaphor, the most powerful way to express abstract ideas, is also economics’ greatest strength. It moves the heart as well as feeds the brain. As every economist should. Economics invariably has a message and a mission. Economists who claim that their work is to inform not to convince are missing half of what economics has always been about. The purpose of the discipline is to provide compelling language to describe the way things unchangeably are or should desirably be.
The ideas presented in this website suggest that economics can coherently and simultaneously do both. It also highlights the growing contemporary relevance of subjective and intrinsic, or objective, theories of value. A debate lasted many centuries about the best way of understanding and justifying why different amounts were paid for different things. This ended, temporarily as this book argues, in 1890 with the publication of Alfred Marshall’s Economic Principles, essentially a derivative work though it expressed ideas in a new way. The result was a theoretical explanation of how a market-clearing price could emerge that used logical thought as well as scientific methods and reconciled subjective and objective theories of value. It was a moment that changed the world. And for more than a century, the idea of value as something which could be expressed by anything other than the market-clearing price, or an administratively-determined analogue, fell into disuse, if not disrepute.
The rise of the service economy, which raises profound questions about the role of price, has simultaneously also restored the relevance of the debate about value. If price no longer works, the sole alternative is value. Those who believe that it is no more than what people think it is are consequently once more free to have their say. And those who argue that value is essentially shaped by production costs are similarly liberated to make their case. But this is not the end of economic thought, just a further evolution in a way of looking at the world expressed in terms that make sense of the world as it is today. Economics, as a result of the rise of the service economy, has entered a new era in which different insights about its role in human society can be expressed.
The ideas developed in this book of the value-seeking individual (in place of the consumer and the producer), the interactive relationship (in place of the transaction) and the intuitive community (rather than the market) are novelties. But new concepts are needed to shape the language economists use. The internet and instant, global communications are too pervasive and too familiar for people not to recognise that the world has changed in ways that conventional economic theory has failed to explain. Economics needs a fresh start. Economics2030 will perhaps help those grappling with these changes to think new models into existence.
It is possible that such technologies, unleashed in a divided world, could serve the goals of the anti-value seeking individual and the value-destroying community. The 9/11 attacks, the lamentably misconceived invasion of Iraq, civil war in Syria and other evidence of humanity’s inhumanity are vivid reminders that dystopias exist in reality as well in angry people’s imaginations. Conventional economists often argue this is an issue beyond the capacity of their discipline to address. For them, the market is an impersonal mechanism through which goods are exchanged, and the world is better for it. Whether buyers and sellers hate each other is essentially irrelevant.
Economics2030 argues in contrast that constructive co-operation is the sole source of value-creation in service economies. If that argument is accepted, then the founding principle upon which economics should be constructed is that conflict is always bad and must be reduced. It is the author’s argument that the compulsion to collaborate — which has permitted humanity to survive everything the natural world has thrown in its direction — will be facilitated by the growth of the service economy. But it cannot be assumed that it will all just happen automatically, as conventional economics seems to imply. People have to make it happen. Each of us has his or her part to play in our value-creating activities and within our value-creating communities. The ordinary person’s role in humanity’s wider struggles has been restored by a technological revolution the implications of which are still barely understood. You can make a difference, here and now.
Economics2030 is about economics and economic ideas. But it inevitably raises political issues as well. A reassessment of the role government should play in economic affairs is briefly outlined in the Services & the State chapters. The larger opportunity is for stakeholders in the world’s remarkably diverse network of value-creating communities to work together to remove the obstacles to value-creating interaction and to the production of high-quality, low-cost processes that make that interaction possible.
But there is a larger agenda to ponder.
The increased production and exchange of goods brought about the mechanisation of agriculture and industrialisation based on hydropower and fossil-fuel combustion coincided with the emergence of liberal ideas. These championed individual property and political rights against the claims of absolute rulers and institutionalised religion. But liberalism was never a single body of thought. After the American and French revolutions, which established constitutional government as the liberal ideal, it divided into elitist and populist forms.
Elitist liberals believed the full rights of citizenship should be restricted to those qualified by education, wealth and, usually, by gender and race as well. Populists argued for them to be extended to as many as possible. Populist liberalism became dominant after the First World War, but immediately split between those who wanted a minimal state and others who justified government action across a wide spectrum of social and economic affairs.
Maximalism was adopted by parliamentary socialist and social democratic parties. They presented themselves as distinctively different from liberals but accepted most of their principles. Like minimalists, they viewed the individual as the building block of society. Through education and political agitation, they sought to develop the individual’s political consciousness, but principally for electoral advantage rather than to change society fundamentally though the impact of maximalist state policies was often far-reaching. Like minimalist liberals, maximalists regarded the state as a means to an end. The dispute was about the extent of government intervention, not whether it was right in principle; even cautious minimalists believe the state matters. And the debate about the distribution of the benefits the market delivered was, for both maximalists and minimalists, essentially an argument about outcomes.
There were two apparent anomalies in populist liberalism: Marxist Communism and Fascism.
Marxism’s apocalyptic forecast of permanent class warfare and utopian vision of a stateless society smacked of the Christian millenarian concept of the world in the grip of a war between good and evil and inexorably heading to a moment where history came to an end. But its intellectual origins were in classical liberalism.
Never developed into a coherent programme for political action by the author himself, the writings of Karl Marx, nevertheless, coloured the policies of socialist parties contending for votes in constitutional liberal states in the decades leading up to the outbreak of the 1914-18 war. The war undermined European constitutional government, discredited parliamentary populist liberals and created the opportunity for a Marxist sect to seize power in Russia.
The Communist regime in the former Soviet Union used bureaucratic methods to manage economic development. Private property was largely abolished and investment and production were entirely controlled by the state. In its most advanced form, Soviet Communism seemed to allow the market-clearing price no role and individual choice in practically every area of life was denied. Tens of millions were put to work as slave labour and uncountable millions were executed or killed through overwork and starvation as the state sought to displace the market with plans. It was quickly obvious that Communism was brutally inhumane. Its deficiencies as a system for raising tangible production were only comprehensively exposed in the 1980s.
Communism appears to be the polar opposite to liberalism, and, indeed, to the libertarianism of Marx himself.. But the Soviet Union and the regimes it inspired owed more to liberal thinking than its rulers and critics could admit. The abolition of the monarchy and land reform, the Bolsheviks’ initial objectives, were populist liberal goals. Communist programmes of collectivising agriculture and nationalising industry had political objectives but were also designed to advance economic development more swiftly than liberal economic prescriptions apparently could. They were usually presented externally as technocratic innovations and secured the admiration of foreign liberals, and not just maximalists, for that reason.
Communism in power also assumed some of the features of elitist liberalism. Provided he or she paid homage to the leaders of the party and worked within its rules, an individual Communist could continue to think and act autonomously and enjoy career progress through structures of government and production that mimicked American corporations, the apotheosis of minimalist liberal economics. Equality of income was quickly dismissed as unnecessary. Wage differentials between government officials and technical specialists on the one hand and, on the other, the rest of the labour force were often larger in Communist states than they were in their capitalist equivalents. It was the clearest possible evidence that Communism couldn’t survive without the market-clearing price. The language of Communism was literally fabulous, but its practice was rooted in ideas about the best way to promote efficient tangible good manufacture accepted by Western economists. Prices were needed to act as incentives to people to produce more.
Fascism, a radical variant of elitist liberalism, was based on deemed ethnicity rather than social status, the form it took in the US, Britain and France. In Germany, it was combined with theories of social Darwinism to produce genocidal Nazism. And yet, essential liberalisms remained central to Nazi ideology. These included the importance attached to the self-mastering individual provided he or she conformed to the Nazi ideal, and to rationality, the highest liberal competence, warped though it was under Adolf Hitler. And like liberal economists, Nazis were obsessed with the challenge of increasing tangible good production.
The Second World War destroyed Naziism as a political ideology, though milder, non-racial variants survived in Spain, Greece and in parts of Latin America and the Arab world. And despite its victory on the field of battle, the Soviet Union was forced to change course.
Communism in power stopped being a goal that would be achieved through spontaneous popular action and became something to be imposed by force from above. This was radically at variance with every strand of liberal thinking. Moscow’s economic policy, however, was principally motivated, like the West’s, by the desire to maximise tangible production. Soviet economic policy after 1945 was increasingly based on the conviction that markets were technically and socially inefficient and that government intervention increased the output of tangibles and distributed them better. This was essentially a managerial issue, not a political one. The gap between Soviet and non-Soviet economic practice narrowed further after the death of Soviet dictator Joseph Stalin in 1953; the subsequent closure of many of Stalin’s concentration camps was at least partly due to a change in the way the Soviets priced prison labour.
In Western Europe, the theory of market failure was acknowledged as providing the intellectual basis of social democracy, a form of maximalist liberalism. Anthony Crosland, the seminal post-war thinker of the British left, renounced nationalisation for any other reason, though the Labour Party retained a formal commitment to public ownership until 1995. Crosland argued that less inequality, rather than abolishing capitalism, was Labour’s proper purpose and it was to be achieved through tax and the state welfare system. These are impeccable populist liberal policy instruments. The market-clearing price, managed where occasionally required, would do the rest.
The theory of market failure which justified government intervention to increase tangible production was a strand of liberal economic thought. It was consequently vulnerable to challenges from within the liberal intellectual tradition itself.
By the end of the 1960s, an alternative approach to market failure had been developed by minimalist liberals critical of the expanded peace-time role of the state. They coherently argued that structural market failure requiring direct government ownership was rare. And where it did exist, market failure was best addressed through regulation designed to increase competition and make the price system work rather than through government ownership and control. Minimalists demolished the intellectual foundations of Keynesianism, a term used to cover a range of maximalist liberal policy options designed to counter perceived market failure at the macroeconomic level.
By the end of the 1970s, minimalist liberalism was triumphant. It was largely a bloodless victory. Most maximalists recognised their intellectual position was hopeless and surrendered. The market-clearing price, unadorned and obvious, was seen by many as the solution to most economic problems. The gap between minimalist and maximalist thought narrowed as a consequence.
The resurgence of minimalist liberalism, and the failure of planning to promote tangible production, also precipitated the collapse of Communism. In 1987, the Soviet Communist Party approved limited economic and political reforms but continued to assert its attachment to Marxism. But its leaders had already accepted the compelling logic of the minimalist case. Tellingly, former Communists were the most prominent beneficiaries of free market policies introduced before and after the end of the Soviet Union in 1990. Communist regimes in China and Vietnam have travelled a similar road. Cuba is now moving in the same direction. Only North Korea continues to adhere to Communism in a form that Stalin would recognise and approve.
The collapse of the Soviet Union in 1991 has been seen as the moment that practical socialism expired. But socialism had never existed as anything other than a maximalist version of populist liberalism. The end of Communism in Europe was the consequence — and not the cause — of disillusion with the maximalist principles that supported many socialist economic policies.
Maximalists everywhere were on the defensive and this led to the emergence in Western economies of a synthesis between liberalism’s minimalist and maximalist strands. It entailed maximalists conceding that the state should limit discretionary intervention in economic affairs. But minimalists were also required to accept the validity of a welfare net to safeguard the increased proportion of the population exposed to the improving exigencies of the market. In the UK, the liberal synthesis was articulated in the programme of the Conservative government led by John Major (1990-97). It called for market principles to be applied to state-owned service industries whilst increasing government expenditure on them. The liberal synthesis was adapted and adopted by the Labour government of Tony Blair (1997-2007).
Until the summer of 2008, the liberal synthesis seemed to work. In the UK, the economy grew robustly and public expenditure expanded while private wealth increased and income differentials widened. Derided as intellectually incoherent and unloved by minimalist and maximalist purists, the liberal synthesis nevertheless had the merit of appealing to the majority for the simple reason that it seemed to benefit everyone. It may have been bad economics, but the liberal synthesis was electoral magic.
The credit crunch of 2008 and its aftermath have undermined, but not destroyed, the conviction that the synthesis constitutes an imperfect but lasting solution to what was the biggest unresolved issue within liberal economic thinking: the proper size and role of the state. Most analysis of the causes of the present economic downturn, consequently, falls into two categories.
One asserts that the minimalist prescriptions for the UK economy have failed to produce the hoped-for increase in production and should now be reversed, though not renounced. The minimalist counter-attack is that the credit crunch is in reality a delayed reaction to inflationary government policies and a failure to pursue market-based policies with sufficient vigour.
Despite the rhetoric both sides deploy, the two views are in reality calls for the maximalist-minimalist armistice to be renegotiated, not rejected.
The rise of the service economy presents a profound challenge to those seeking to re-set the maximalist-minimalist armistice. It is calling into question the foundations of liberal thought itself.
The liberal era was shaped economically by tangibles that can be commodified, stored, processed and traded on a mass market. The economies of most advanced economies, in contrast, are dominated by intangibles, invisible items that can’t. In the liberal era, relationships were institutionalised in contracts and secured with tangibles. In economies dominated by intangibles, people interacting to create value will be essentially motivated by faith in the existence of things that do not have a physical form.
Tangible production required impersonal markets or detached government administration. In the service era, direct and engaged interaction will be preferred because it increases confidence at the level of the individual that promises will be kept.
In the liberal era, the community was defined by the individuals around whom it was constructed. In the new era, the individual will be defined by the community or communities of which he or she is part.
In the liberal era, the individual was active in a hierarchy of managed organisations including the family and the state. In the new era, an individual must work horizontally and simultaneously across communities without institutions.
In societies dominated by tangibles, efficiency was delivered and value created simultaneously through the workings of the price system. In service economies, efficiency depends upon the technical capabilities of those vested with responsibility for building and operating the supporting processes: the physical and social infrastructure. Value production results separately from constructive human interaction and can only be maximised when it is voluntarily shared among all those involved. The former may invite state or corporate intervention, control or ownership. But the latter is spontaneous and requires no form of corporate intervention, whether public or private.
This reconceptualisation of how technical efficiency and economic value is delivered allows greater understanding about the way service economies might be managed. It suggests the dispute between the maximalist and minimalist strands of populist liberalism about the balance between the individual and the collective institution, whether it is the state or the corporation, is redundant in economies dominated by intangibles. Value-creation requires maximising individual freedom to interact constructively with others. The proper role for the collective institution, whether it is for profit or non-profit, is in delivering and operating the requisite physical and social infrastructure.
A new discourse is therefore required that will reflect the economic realities of the daily lives of the overwhelming majority. They need policies that will help them develop value-creating competences and sustain communities they are active in; action to release the value-creating capacities of those working in service production in government and the private sector, and measures that will reduce the cost, increase the quality and expand the availability of the processes that value-creation requires.
Economics2030 argues that the credit crunch crisis of 2008 is not a bump in the road of the liberal era, but the start of a radical transformation. Out of the ashes of rational individualism, a new vision is emerging where the community is the defining organisation and obligations, freely accepted and willingly discharged, become the engine of human progress.
This should be an encouraging prospect.
For if Economics2030 serves any ultimate purpose it is as a reminder of humanity’s limitless capacity to love family and friends, to befriend a stranger and to forgive an enemy; as an affirmation of the belief in the possibility of a better world and as an expression of hope that we will be there to see it.
Edmund O’Sullivan, May 2009