Open Engineering
Environment and Development.

Why The Economy is Failing

The economy had already failed most people for decades before the current crash. Massive over-consumption by the rich maintains the unsatisfactory level of employment that we actually have. Resource shortages and environmental damage mean that trying to boost the economy by consuming even more, will cease to be an option.

The Failure

Before the onset of the current 'credit crunch' recession, free market capitalism had already failed. It's operation has resulted in:

How Much Production

Let us consider first of all this long-term chronic failure of the economy, rather than the short-term boom and bust fluctuations. What determines how much the global economy produces? Free-marketeers have a demonstrably silly idea that the economy if left to itself, will employ everyone. The real limits that set maximum output are the three essential ingredients to any economy, without which there won't be any production:

  1. Want: Human beings want things: most of all they want the necessities of life: food, shelter, safety, a mate. All animals want these things – why? Because any creature that evolved not to want the necessities of life and couldn't be bothered to eat or reproduce, would quickly die off as a species. Wanting things is the first essential ingredient of an economy. Whether the things that are wanted are essential needs or desired for other less obviously essential reasons is not our concern at this stage (other animals can also desire non-essential articles: dogs like balls, magpies collect shiny things).
  2. Resources: Once we want things, where are we going to get them from? Our planet earth provides a wide variety of environments where it's possible for animals to obtain the things they want. Some animals are adaptable and can live (find what they want) in many different environments and others have become specialists, adapted to just one. Of course it's not chance that the earth fulfils our needs: we have evolved to be able to take advantage of what the earth offers. The Earth's resources are the second ingredient of any animal's economy.
  3. Work: But the Earth's resources don't just drop out of trees into our open mouths (well very occasionally). To obtain the things they want animals must 'work', i.e. they must expend energy moving around to find the 'raw materials' they need and to 'process them' usually to produce food or to build shelter. Work is the third ingredient.

The total amount the economy can produce is limited by which of these ingredients it runs out of first, i.e. of:

The mass of ordinary people are likely to be happier if it is Work Effort that is most in short supply. In this case all of them will be needed and they may be able to extract a better deal from employers than just basic subsistence. The 1950's and 60's in Western Europe and the USA were perhaps such a time. But unfortunately, if Wants or Resources are the limit on the economy, capitalism won't provide an acceptable life for the common people. Today's global economy is failing to provide a reasonable standard of living worldwide for because it cannot create enough things to want. How can this be? Surely the poor have lots of things that they want and indeed need? But an economy based on private enterprise and exchange recognises only the wants of those who possess something trade-able that they can offer in exchange, and most people possess nothing except their ability to work.

If the means of production were accessible for all, there would be no unemployment. Each person or family would work when they needed to because they wanted food, clothes or whatever, and would stop when they felt they had enough and preferred to rest or play. Such a society is hard to imagine in the modern world where work is so specialised that even if everyone were permitted to enter any factory they liked, they would still not be able to work the machines because they wouldn’t have the necessary skills. Perhaps a primitive hunter-gather society where every family fended for itself could come close to these conditions.

Unemployment arises when society is divided into workers who have only their labour to sell and owners of productive capital (farms, mines, factories, offices, etc.). This division can occur even in the life of one person: weekdays you can be a worker with an interest in a high salary, while at weekends when shopping you favour companies employing low-waged labour, and any investments you have are managed by the bank or pension company in your interest as a 'part owner'. The owners of the productive capital will want that capital to produce all the things that they themselves want to consume. This will require a certain number of workers. But workers must be paid so there will be additional production to provide the goods and services that are their wages. The more unequal society is, the lower the total level of production will be. And when the rich begin to spend less than their income because they have satisfied most of their wants, the economy will slow.

Some people may object that capitalism has not failed but is very successful in Western Europe, the USA and Japan: other poorer countries have simply failed to emulate it properly. This fails to acknowledge that such poorer countries have long been part of the global economy and have structured their economies to serve the needs of the global rich. The wealthy and powerful in each such country are not satisfied with the limited range of products their own workers could produce: they want the best the world market can provide. To this end they structure their nations' economies to produce cash crops or any other product that is in demand on world markets that they can then exchange for the imported luxuries they crave. These countries are the world's ghettos, so among the products they seek to import will inevitably be weapons and other instruments of control needed to maintain the position of the ruling elite in societies with far greater extremes of inequality and poverty than exist in those countries that are the world's middle class suburbs.

Creating Wants

The question then arises, “Why are employment rates in Europe and North America as stable as they are?” Would we not expect the automation of much of agriculture, industry and now office work, to leave most of the population unemployed? In fact there is a corrective mechanism: modern capitalism has created a huge number of new products and services, and has persuaded us to want them. The production and sale of these new products soaks up at least some of the workers displaced from earlier industries by automation, even if that is not enough to maintain full global employment.

The mechanism works because the urge to at least survive and often to increase our share of wealth, gives us an incentive to produce products or services that others want: in short, to invent new wants. As a player in this market game, your aim is to create desire in the minds of potential customers for the new products that you dream up. Also you want to maximise the desire for existing products and to persuade customers to desire your version of a product in preference to a competitor’s as this will allow you to sell more or charge more or both. The ability to generate a continuous stream of new products is a powerful way to expand demand. With only two or three products in your shop there is a limit to how far you can expand demand for them: the novelty will wear off and customers will only buy what they use up. But with an ever-growing range of new products to buy, demand can grow indefinitely. The originator of a new product may also enjoy monopoly profits by being first to market and possibly by having patent protection. Thus creating something new that people want is one of the most effective ways of and individual or corporation growing wealthier: consider the spectacular growth of computer companies and latterly mobile phone companies. New wants don’t always have to be technically sophisticated: people make money by selling socks from kiosks at railway stations, by delivering telegrams dressed as gorillas and delivering pizzas.

What sort of wants must be created? It’s of limited use creating more desires among the very poor because they have little or nothing to give you in exchange. So instead you need to concentrate on creating desires amongst those people who have a surplus of the goods you want in exchange. Our economy now depends on dreaming up enough ‘wants’ to ensure that the richer part of society spends its money and so keeps the rest of us employed.

Recession and Instability

The economy is also naturally unstable, and because we are a short-lived creature, we tend to focus on its ups and downs more than on its long-term failure. The booms and slumps occur because there is 'positive feedback' in the economy – i.e. if it starts going in a certain direction, the very movement makes it go even faster in that direction until some limit is reached. This happens because investment decisions are made on the basis of likely profit. For example, if a new thing to want is invented – say mobile phones – investors see an opportunity to make money ... but first they must spend money to build that factories to produce the phones. That creates extra employment so there are more workers with money to spend and demand for other goods also increases. There is a knock on effect because manufacturers of those goods may then also invest in new factories to meet the demand. Making credit widely available will prolong the boom but deepen the subsequent slump.

Running Out of Resources

Maintaining employment by creating more and more things to want is not sustainable. Sooner or later we will run out of resources and trash the environment so completely that we threaten our continued existence as a species. Unfortunately, since the economy takes no account of finite resources, only short term availability, we probably won't realise the desperate state we are in until the last tree is cut down.

A sustainable economy would have to limit production to what the earth can support and share out work among all. This is impossible without regulation of wages and working hours, because without it companies are obliged to pay the minimum for labour or be undercut by competitors. Without such regulation, no firm will want to share out work among more workers that the minimum necessary while still paying them all an acceptable weekly wage. As regulation is difficult to achieve internationally, governments should shift from taxing wages (which disadvantages local firms, suppressing employment nationally) to taxing consumption (which affects all goods equally, wherever they are made). Consumption taxes can target use of scarce resources and environmentally damaging activities. To create extra employment, tax revenue can then be used to finance public works. If necessary, the working week can also be shortened.

Communism also failed due to a quite different set of problems: the monolithic centralised soviet system removed competition (which took away firms' incentives to maximise quality and reduce costs), it reduced motivation by limiting the scope for individual betterment, and it concentrated decision making in the hands of remote bureaucrats. An effective sustainable economy would need to achieve the necessary regulation without losing the advantages of economic freedom and pluralism.