This chapter will look at how an individual interacts with a modern free-market economy, within the rules that typically apply. What roles do we play? How can we do what every animal needs to do: earn a living?
In modern societies, most of us play three quite different roles in the economy. Firstly for much of our lives we are workers who produce goods and services, and by doing so earn money. Secondly we are consumers: we spend money buying in the market the things we want. Thirdly we are citizens who can influence society and the economy in other ways apart from shopping and working – by for example, voting, joining a trade union or political party, supporting a charity, or having a cultural or intellectual influence.
The worker is like one of the horses that pulled heavy carts before the advent of motor vehicles. For as long as a horse is useful to his or her owner, it is kept fed and stabled, but when it ceases to earn its keep it is sent to the knacker’s yard to be turned into pet food and glue; only the luckiest animals are put out to graze for a dignified retirement. Similarly, when we go out to work, we are of no interest to the giant corporations who employ us except in so much as we are useful. The executives who decide whether to maintain or close the factory or office where we are employed, probably have no knowledge of us except as a collection of ‘human resources’: they may well live in a distant country, speak a different language, and be complete strangers to the places their decisions affect. When we cease to be useful, there is no sentiment in sacking us or if there is, it is suppressed: your boss may shed a genuine tear but will do ‘what the business requires’ . Happily, since we are of the same species and thus more capable of defending ourselves than the horses are against their human owners, the knacker’s yard is not normally an option, though unemployment may still lead to destitution.
The consumer is like an eighteenth century lady or gentleman, waited on by a variety of servants. The eighteenth century gentlemen sought out the cheapest workforces, often slaves, and benefited from the labour of oppressed labourers working on far away sugar, cotton and tea plantations. When we go out to shop, we become today’s version of that gentlemen or lady consumer. We seek products made by the most exploited workers: those working the longest hours for the least pay, often in countries where trade unions are weak or suppressed, and sometimes involving child labour. We give little or no importance to employing workers in our own town or country, preferring the cheapest available globally. Of course, we don’t think of ourselves as behaving in such an uncaring way; what we have in mind is ‘getting good value’ or ‘finding a bargain’. We also may be short of money ourselves and under pressure to make it go as far as possible.
As well as being workers and consumers, we are also citizens. As a citizen we have the potential to engage in a variety of social and political activities to try to influence the economic rules we have to live under as workers and consumers. This might well have caused us to be seen as a threat by eighteenth century polite society, or indeed by many governments and authorities today. They could be concerned that we may undertake political activity which threatens the interests of the ruling elite, whether that is the governing party in a democracy, or a totalitarian hierarchy or dictatorship. Or that we may proselytise for a religion frowned upon by the authorities. Or that we may seek to form trade unions or become more militant in some other way. Or that, if disaffected, we may turn to crime or engage in mob riots, posing a direct threat to the possessions of the wealthy and to civil order. But that is to focus only on the more rebellious citizens – there will of course be others, particularly the more privileged, who engage in politics and civic society in order to maintain or reinforce the status quo, not to change it. Typically however, a large part of the population for most of the time, exercise their roles as citizens only a little or not at all. They are either too busy with their own lives and earning a living, or in some countries fearful of repression, or they feel powerless (that nothing they do would make a difference), or are simply not interested.
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Martin Luther King, Civil Rights March on Washington D.C. [WMC]
Since the interests of worker and consumer are opposed (one wants
high pay, the other wants low prices), and the majority of us have both
roles, we can be drawn to opposing points of view: on Friday after a
hard-day’s work we’re fed up with being paid ‘peanuts’ – “the
government should make people pay more for the service we provide”; on
Saturday our well-deserved holiday is ruined because airport workers
have gone on strike – “there should be laws to stop them doing that”.
Thus ordinary citizens can be drawn to support quite different political
parties, depending on whether their individual circumstances and the
influences upon them, cause them to side more with workers or with
consumers.
Because we have these multiple roles, we have conflicting interests. As workers we want high wages and short working hours. As consumers we want the opposite: low prices which creates pressure for lower wages and longer hours.
While most of us are restricted to the three different roles of worker, consumer and citizen, a minority have an additional role as owners. This minority own such substantial wealth that most or all of their income is generated from that wealth (via rents, profits, interest, etc.) and therefore they do not need to work, only consume. Being in this situation potentially gives them more opportunity to act as citizens, since they have greater leisure to do so and have the money to buy influence.
A market economy may be thought of as a sort of game in which we are the players. We are free to make our own economic choices provided that we keep to the rules of the game. These rules encompass such things as the recognition of property, acceptance of money, taxation, conditions of employment, how companies may be organised, and more. The rules are accepted by most people, not only because we are obliged to do so since they are enforced by the state, but also because we see many of the rules as natural and just. Some of the rules may actually be natural in the sense that they accord with basic human drives, but whether they are natural or not, humans are wonderfully adaptable creatures and what we were taught as children and grew up with, tends to seem to us the proper state of affairs.
The economics game starts for each of us, when we first go forth to earn our living in the world. Our task is to find something that we own and others want, that we can exchange for the things that they own and we want. In terms of possessions, most people in the world start out as young adults possessing almost nothing except for their own bodies and minds. Swapping your worn-out childhood toys won’t earn you much. And while some desperate people do actually sell bits of their bodies (blood or a kidney for example), most of us expect to ‘work’. Working involves either renting out our physical and/or mental abilities to someone else as an employee, or finding something we can do or make that we can sell directly to customers.
To survive in the game, we need others to be willing to offer us enough to live on in exchange for our work. Of course, the better the qualities and capabilities we are offering (in terms of strength, intelligence, education, training, attractiveness, health, etc.), the more chance we have. But ultimately, if people don’t want what we have to offer or can get it cheaper elsewhere, we are out of the game and will have to look for support from the state, family or friends, or if that’s not possible turn to begging or theft.
When you are consuming goods and services, you are ‘consuming’ the labour of the people who made them – it’s as if they work for you for the time it took them to produce those things. Of course it is the other way when you are working: then others who consume what you produce are ‘consuming’ your labour.
Now the amount of labour available cannot be more than the world population, so the world average amount of labour ‘consumed’ per person cannot be more than one person’s labour. In fact it will be considerably less than that since many people do not work, e.g. children and the elderly. But of course we don’t all receive the average, and how much labour each person ‘consumes’ is a ‘zero-sum game’. In other words, if one person gets more, another must get less. Only technical progress that increases the productivity of labour, can make the world as a whole wealthier.
What this means is that we should not expect to get much richer than our neighbours by working in fairly ‘ordinary jobs’ – ones which many other people can equally well learn to do. The reason is that if we were demanding in exchange for what we produce in a day, more than the ordinary amount of goods and services that others produce in a day, then we are asking them in essence to do more than a days work to get a days work. Why should they? They could just learn our job and do it themselves.
There are however ways to trade in the market and get more than average earnings, potentially very much more. Two ways in particular:
Albert Einstein [WMC]
Let’s look at the second case in more detail. It could be that you have something valuable that you simply sell off bit by bit – some land or shares or gold, perhaps. Eventually it will all be gone, but if that takes longer than your lifetime, you may not care. However, there are other possessions which have the interesting property that you can exchange them (or what they produce) for things that you want, and they don’t get used up in the process. Examples of these are factories, farms, houses and other property that can be rented out. With these possessions, you can allow others to use them for a period in exchange for goods that you want, and at the end of the period you still have them and can do it again. In fact our own capacity to work also has the same property – we rent it out one day, and it is still available the next morning to rent out all over again. If you own an office, factory or farm and don’t do the work yourself, then it is also a sort of rental: you allow other people to use it in some way such as managing it or working it, in return for a share of what is produced.
Since there is no limit to how much one person can own, it is possible to live entirely off rental income without having to work at all. Some are born inheriting such wealth, while some others are able to reach that point by accumulating rental possessions during part of their working life. However, clearly everybody cannot live off rental income unless – we totally automate all work. The majority of us live by our labour, although the better off among us may acquire some rental income as well, such as the earnings from savings invested in the stock market or simply by renting out a spare room.
In the board game Monopoly, players move their token around a board by the number squares given by a throw of dice. The squares represent properties which players landing on them can purchase if they are as yet unsold, and thereafter charge ‘rent’ to other players unlucky enough to land on them. If by a combination of luck and judgement, one player manages to acquire more properties than the others, then that player will probably continue to grow richer at the expense of the others as they are more likely to land on her properties than the other way around. Engineers call self reinforcing trends like this ‘positive feedback’. The game ends when all the players except one go bankrupt, so a player who has gained a significant advantage, benefiting also from the effect of positive feedback, is likely to continue to get richer and to win.
Games with rules have probable outcomes dependent on those rules. Those that we play for amusement are usually intended to have winners and losers. So in Monopoly for example, it’s intended that someone ends up rich and the others end up with nothing. However, rules can be changed: if Monopoly had rules that incorporated a system of income tax that was used to finance hard up players, then perhaps no-one would go broke. Such rules would make Monopoly boring, but are widely considered desirable in the real economy.
A free-market economy has a similar positive feedback mechanism to Monopoly. If the only thing you have to offer the market is your labour, most of your pay is likely to get spent just on day to day consumption. If however, you have inherited or managed to acquire sufficient ‘capital’ (cash that you can loan or property that you can rent out like houses, factories, farms), then you can potentially receive many times what you need for your own consumption, and the excess can go into acquiring yet more capital – allowing you to grow ever richer.
Thus it is that under free-market capitalism there are clear winners and losers, with all-too-often inadequate protection for the losers. In most wealthy countries today, there is some sort of social security system intended to assist the worst off, but in the past and still in many parts of the world, losers may be worked or starved to an early death. This is not to condemn the free-market economy in its entirety, but if we accept that it tends to concentrate wealth, we may wish to have rules that limit inequality and protect the poorest. Many governments do so to some degree, especially those with strong social democratic traditions; the extent to which they do so is usually a major part of the political debate between left and right.
Most of us have three roles in a free-market economy: as workers, as consumers and as citizens. Our double lives as both workers and consumers mean that our political interests as citizens can be contradictory.
Earning a living as workers in a free-market economy is like playing a game with rules. Most of us bring to this game only our own capacity to work, which we hope to exchange for the things we need. A few privileged players bring ownership of the places where goods and services are made. In return for our work in these places, they give us a proportion of what gets made and retain the remainder for themselves.
The likely outcomes of a game depend on the choice of rules. The rules of a free-market economy mean that wealth tends to concentrate in a few hands while others may be left with nothing. If we don’t want that outcome and want a fairer society, we need to add rules that regulate the operation of the market.
In this chapter we looked at how we participate in the economy as individuals. Next we look at the dynamics of the free-market economy as a whole system.
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