I have the audacity to believe that peoples everywhere can have three meals a day for their bodies, education and culture for their minds, and dignity, equality, and freedom for their spirits.
– Martin Luther King Jr.
If we can find money to kill people, we can find money to help people.
– Tony Benn
The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have little.
– Franklin D. Roosevelt
Aside from understanding the fundamental nature of money and commodities, the other thing that any economic analysis must do is to define the aims of an economic system. It is useless for a worker to understand their tools if they misunderstand the task to be done. This is where traditional economics has been somewhat thin on the ground; its aims seem to be as little as standing back, observing what happens and then declaring it “the way the world works”. The closest it seems we really get to objective aims is our obsession with GDP, stock market values and the more vague concept of “growth”. The reality is that the world is far more complex and with the challenges we face today, we absolute require concrete objectives. The aim of this paper is to look at the current measures of success used, and propose improved metrics which more-accurately reflect our ethical priorities. We can then judge capitalism against those metrics.
There are several methods used by politicians, analysts and the public to evaluate the performance of national and international economies. A large percentage of these are simply ‘gut’ measures and fuzzy approximations that we can safely ignore. Even amongst serious economists, there is a tendency to talk of the economy loosely getting ‘better’ or ‘worse’ with little further definition. That leaves us with a small amount of real figures to examine.
The most well-known measure of economic performance is GDP and the related GDP per capita. This can be thought of as the turnover of any given economy. It is a measure of the movement of money, which, assuming that for every movement of money, there is a corresponding movement of some equally valuable product, is also therefore a measure of the movement of produce, i.e. a measure of productivity. If GDP rises, more produce must have been produced and sold; if it falls, then vice verse.
The problem with GDP as a measure of economic productivity is that not all production is equal. Of course, one aspect of this is already handled through price; more valuable production is priced higher and therefore contributes to GDP more. On the other hand, the fact that an exchange was worthwhile at a price does not necessarily mean that the transaction and the cause for the transaction, combined, have added value. To give a simple example, if my window is broken and I have to replace it, I will contribute to window sales and GDP. The result however leaves no better situation than if the window were not broken. In fact, quite perversely, a society that builds fragile windows which break easily and must be replaced, would therefore have a higher rate of window sales than a society with sturdy windows. In turn, if everything else was identical, it would have a higher GDP.
The accompanying microeconomic effect is the well-known tendency of companies operating in capitalist societies to build flawed products. This is very common place; in fact, many product designers actively design their products to last only as long as the accompanying warranty. There are certainly many who do not and who design to last, but according to free market economists, these people who take pride in their work are in fact acting ‘irrationally’.
The effect is demonstrated in several other ways. There are products deliberately designed not to work with new standards and requirements, even if meeting those requirements added no extra cost. There are products deliberately ‘crippled’ so that the full-featured version can be sold at a higher price level; the ‘light’ version acting as a price anchor. These are all perverse incentives to create deliberately weak products, in order to increase sales in future. In any other economic system, creating unnecessary production would be regarded as wasteful and unthinkable; under capitalism however, since profit results from the corresponding sales, it becomes rational, at least on a individual level. I will take the opportunity here to point out this pattern that we will return to later: that the rational behaviour of an individual, repeated, does not equal a system operating rationally.
To return to GDP, another good example of wasteful production is in private healthcare. In a country with private healthcare, treatment costs contribute to GDP. That seems perfectly rational; what could be more worthy of regard as ‘good work’ than medical care? On a long term, macroeconomic level however, a country with an unhealthy population may generate millions of dollars more turnover for its medical industry than a country with a healthy population. There is an incentive to maintain an unhealthy population for profit. On a microeconomic level, there is a perverse incentive for providers to refuse or overprice preventative treatment, in order to reap the profits from corrective treatment later.
At this point it is interesting to note that criticism of GDP does not come only from angles such as my own. The Austrian School economist, Frank Shostak, argues:
The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption. For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.
To free marketeers, this highlights why governments should not spend frivolously to generate growth. At the same time, there is a paradox, whereby essentially useless activity may generate economic productivity. Rather than trying to answer the paradox, what is really required is to acknowledge the paradox as a flaw in capitalism.
Even if we were, despite all this, to assume that GDP is a realistic measure of the creation of real wealth, that still leaves it unqualified a measure of economic success. For a start, the total wealth production of an economy tells us little about the distribution of that wealth. Rising GDP combined with rising income inequality simply means stagnation for the working class. The same thing can be said for using stock market indexes as a measure of success, although these also fall foul of distortion by speculation.
It is quite conceivable to have an economy with a very high GDP, while at the same time, having the majority of the population endure a famine. Even GDP per Capita — and even taking into account relative purchasing power — can mask significant poverty provided that the rich are rich enough. In the United Kingdom, the GDP per capita, adjusted for inflation, has more than doubled since 1970; conversely, the median wage, adjusted for inflation, has increased by just over 70%. This means that in real terms, wages have fallen as a proportion of GDP; in other words, less of the nation’s produce is finding its way into the hands of the workers who create that produce.
So if GDP is a poor measure of economic performance, then what should be used instead? In considering the answer to this, we really must reconsider what the core objectives of economic policy should be. It seems that the creation and acquisition of wealth, particularly in the form of money and real estate, has become an objective in itself. It is therefore evident that, with the fetish of hoarding money and property for its own sake set aside, the primary purpose of money and an economic system is to allow people access to what, to borrow a phrase from Keynes, might be called, “the enjoyments and realities of life”. The secondary effect is of course, to regulate the production of these things in proportion to requirements. The most important thing then, is to somehow measure general access to those means. Since the value of these means to consumers forms, through marginal utility, their money price, it is reasonable to assume that one’s access to money also determines one’s access to these means. As we have also seen however, it is quite possible to have great means and yet also great needs; a population with more money, but poorer health, which must spend the difference on healthcare costs, is not better off than a population with less money and better health. In the same way, a population may find more real enjoyment from something that is common and therefore less valuable, but is not present elsewhere, where something more valuable but less enjoyable is.
So what does this tell us? On an individual level, money must be considered in real terms, relative to prices; and also relative to needs. A person may become wealthier by reducing their needs for the same quality of life. We must also consider the value of goods and services available to a person. While taxation may make someone poorer in monetary terms, the value of services returned to them may exceed the value contributed. Taxes paid for access to socialised healthcare are lower for most than health insurance would be for the same level of coverage; therefore, while monetary wealth is decreased, total access wealth is increased. Thus, the idea of the public sector as a black hole in the economy is a complete fallacy; the public sector must be judged on its value returned, including any ongoing side effects. For example, the value contributed by free access to education is not just the equivalent to the cost that would be charged by a private provider, but also the cascading benefit of a more educated society. Wealth may be gained not only by an increase of production, but also by a better distribution: if a product or service that could be shared by ten people is only used by five, and it is opened up to five more to maximise its utilised value, then an increase in wealth has occurred. If a product suddenly, due to an advance in technology, becomes abundant, but thereby also worthless in money terms, then an increase in material wealth has occurred, if a reduction in money circulation.
So, as we stand now, we desire to measure the total wealth available to an individual, minus their needs and any increase thereof; relative to prices and accounting for those things which are free and abundant, but also valuable; and including indirect purchases and common wealth; taking into account potential utilisation rather than production. In this case, the simple objective for economic success is to increase this value.
It would be tempting to assume that this measure, if it can be done for one person, must also work correctly when scaled to a general population. Certainly, this would not be a problem in a population where wealth was distributed evenly. In present society however, wealth is distributed more unevenly than ever, so we must consider the effects of this. We must also consider that our objective should not only be to increase wealth access for the existing population, but for future generations to come, in line with the principle of stewardship.
For a start, there are aspects of income distribution that inherently form part of measuring success:
Firstly, let us consider fairness. Even though one person may be slightly better of than they were yesterday, if everybody else is twice as well-off, then the question of fairness is raised. Free market economics makes a very large assumption, rarely questioned, about the fairness of income distribution: since the value of a commodity is determined by its marginal utility, which sets its purchasing price, and labour is nothing more than another commodity, then the purchasing price of labour, or what the worker knows as wages, must inherently be equal to its value and therefore fair reward; unemployment is therefore only due to a refusal by workers to sell their labour cheaply enough. It may seem self-evident, but when we step back for a moment, we must realise that it is an assumption: that the value of a person’s labour in the market and what they morally deserve to be paid as a person is always exactly the same.
Consider in more detail how wages are determined. An employer purchases the requirements for a product and sells that product. The value when sold must, if the business is to be profitable, exceed the total value of the requirements, when factored per-unit. The requirements can be broken down into two parts: other products and services bought in from other businesses, and labour, bought in from employees. The distinction, in terms of market forces, is relatively artificial, but we are separating out what interests us. In turn, each of the products bought in that is not employed labour likely comes from a company that uses employed labour itself, but that is built into the price at which it is sold and here purchased.
We might think of the difference in value between the purchased-in supplies and the final product, as increased by the work of the employed workers, to be the value added by those workers. The aim of the employer is to maximise profit and to that end, to minimise the amount paid in wages. The most that could ever be paid in wages sustainably then, would be exactly equal to the value added by each worker. This however, would leave absolutely zero profit for the owner. Still, up until this point, so long as the value created by the worker and acquired by product sale is even slightly greater than the cost of the worker, it is still rational for the owner to hire the worker. What then, is the minimum? Some have theorised that this is the minimum required for workers to live on, but there is nothing that says, especially in an age of credit, that businesses cannot turn over workers at unsustainably low pay. In reality, when making a selling decision, any person must, just as they do when selling, consider the alternatives. When selling a product, benefit gained must outweigh the benefits of whatever else might have been purchased with the same money. When selling a product, including one’s own labour time, one must consider the alternatives: does the price offered constitute a greater benefit than alternative offers? and does it outweigh the benefits of not working? In other words, considering the marginal disutility of the labour to the worker.
Let us make some assumptions to simplify. In a free market society with no welfare state, for a baseline worker with no financial reserves, any price offered for their labour exceeds the benefits of not working, i.e. starvation. Therefore the only benefit to be comparatively surpassed is that of any other job offer; in other words, the wage offered is merely in competition to other wage offerings. There is therefore competition by companies for workers, but at the same time also competition for jobs by workers. The balance between the two, overall, depends largely on the employment rate. It is therefore quite preferable for any individual employer that there be a high rate of unemployment, creating significant competition between workers to accept a lower wage for any given job, but very little competition in job offerings for each worker. Since in general it can be observed that there is very rarely no employment, and therefore a gross demand for workers, the balance of competition is usually tipped in favour of the employer, driving wages to a very low point at the bottom end; the reason we have a minimum wage in this country.
We realise therefore that wages will deviate based on the rate of employment, even if workers invest just as much effort into their work. This is not even because their work is less valuable to society by any natural measure, but merely because their labour offering is more common, devaluing that offering. This makes sense economically, but there is little moral case to suggest they deserve less reward as a result.
It should be noted that the level of competition by employers for workers, while flexible, does exercise qualitative preference. Businesses will first seek out the most qualified workers and there will therefore be more competition for these workers. Furthermore, while for the majority of workers the choice of whether to work is clear-cut, more-qualified workers usually have the choice between all jobs of their qualification level and below. Therefore, employers must pay at least slightly more than the next-lowest skill level, in order to incentivise qualified workers to take higher-skilled, often more difficult jobs. At the same time, this need not be great, since there are many people who would take the more difficult job for the prestige or challenge anyway and if there happens to be a surplus of qualified managers, their pay may fall. In many regards, the idea that more senior people are paid significantly more is a self-fulfilling prophesy. One incidental observation that can be made at this point is that, because of this hierarchy of relative incentives, the pay levels of most workers, at least up to middle management, are very much affected by the pay levels of the lowest earners.
We must also examine some of the peculiarities in the nature of marginal utility. For example, when dealing with something vital such as water, the marginal utility is initially very high — someone with no water will pay a lot for water if they need it — but as the supply is increased, the need for more decreases — once someone has enough water to drink, cook, wash, &c, the comparative value of acquiring more decreases — so the marginal utility and therefore the price decreases. This is illustrated in the so-called ‘paradox of water and diamonds‘. Therefore, even if those who do the vital work to keep water running are paid up to their maximum potential wage, this ends up being relatively low because of the low price over a large amount. If we also ignore the market forces for a moment and think about how we would set prices in some kind of planned economy, we come to the realisation that we would want to price water very cheaply, since it is vital that everyone can afford it. So either way, the workers who provide what is actually a vital service must be rewarded relatively poorly if their pay is linked only to the price of their produce.
Yet surely those who do less valuable work should receive less reward? Consider, firstly why one might choose to do ‘less valuable’ work. There seems to be a trend in Neo-Liberal thinking that the majority cause of unemployment and of low wages is a lack of qualification and skill among those workers. Yet, in reality, our workforce has never been better qualified than it is now. Despite all its flaws, our state school system has produced a working class better educated than any previous generation. At the same time, graduates are unable to find employment when once it was almost guaranteed for that level of qualification. Some have quickly blamed ‘Micky Mouse degrees’ and ‘grade inflation’ and while there are some individual examples of less-arduous degrees, in general, people are still better-educated in real terms.
The result of all this is that graduates are now often stuck doing basic jobs which do not challenge their skills. Many of them now earn less in real terms than graduates in the past. The problem is simply one of competition: our average level of education has increased faster than our demand for better-educated people. It is certainly not a negative thing to have better-qualified people in all positions, but the downside is that in a competitive economy, someone who invests just as much time and effort in their education may now see less reward, purely because other people are also doing the same. To go back to the original question then, the answer to why people would choose to do ‘less valuable’, less well paying work is simply because of competition; there is ‘only so much room at the top’.
The ultimate point is this: suppose we have a society composed entirely of PhD-educated, highly intelligent, highly-motivated, hard working people. There are still streets to be swept, sewers to be maintained, toilets to be cleaned and burgers to be flipped. Technology and automation help in these regards, but until a technological abundance is reached, there will still be relatively miserable, demeaning, boring and ‘less valuable’ jobs and once the jobs at the top are taken, people will be pushed down to fill those jobs regardless of their effort and ability. Now consider how absurd it is on a ethical level, that someone highly capable, who has put in a great deal of effort and continues to do so, should be punished with low reward… because they volunteer to do the most demeaning and arduous job required? This is certainly the complete opposite to what would happen in, say, a household or any other community where tasks and rewards were divided in a deliberate manner.
We should also consider the impact of need on our ethical evaluation. There are the obvious points of the old, the young, people with disabilities, carers, &c having greater needs. Fortunately however, these are accepted by all but the most cold-hearted free marketeers, although there does seem to be a view that people who are unable to work for a living should be given only a baseline existence with no sentiment of pleasure in their lives. Beyond this however, there is also the degree of need experienced by much of the working population. Particularly, what is called the ‘cost of being poor’. I will examine this more closely in the following chapter on inequality, but the simple fact is that as a result of being poor, people on lower incomes are forced into an array of expenses avoided by the rich; from having to ‘buy cheap and buy twice’ to the interest paid on credit due to lacking up-front capital, there are a host of expenses that naturally incline the poor to become poorer. Conversely, the ability to gain money from interest inclines the rich to get richer.
It is therefore only logical that any ethical economic system must compensate for this, whether that be through forcing wages up or through taxation and benefits. Absolute need must be directly addressed, since the consequences — starvation, death through preventable illness, &c — are ethically unacceptable, particularly for a society as advanced as our own.
Finally, we should consider the effects of inequality on supply and demand. A rationally acting business owner has to balance the increase in profit on each item versus the loss in sales quantity if they increase prices, and vice verse. For any given increase, there are some customers for whom the utility of the product will no longer be greater than whatever else they could purchase with the same money, at the increased price. Therefore, there is an optimum point on the price-demand curve to yield the greatest profit.
This all works very well provided economic actors have relatively equal purchasing power. If that is the case, the difference in the price they are willing to pay comes mainly from how highly they value that product or service, comparative to whatever else they could get. If there is a massive inequality however, between some purchasers and others, then it may be preferable for the seller to increase their price, making a larger profit selling at a high price to a minority than selling at a low price to a majority. This, in turn, hurts the majority by increasing the price far beyond what it would be in a market of the majority. Where the commodity is a common with an open supply chain, this is often counteracted by competition, at the least by a competitor creating a similar offering for the majority. Where the supply chain is closed, limited and there are high barriers to entry with poor competition however, inequality in purchasing power can have a distorting effect. From luxury goods to commodities such as diamonds, prices are held high by unequal purchasing power.
For the richer person, they are able to offer a higher price rationally because there is a higher comparative benefit; not because the product is any more valuable to them than the poorer person intrinsically, but because comparatively, the utility of all other goods they could purchase instead is diminished by already possessing, or having enough money to also possess, those other goods. For example, a poor person who has only five bottles of water to their name could not give up those five bottles for a luxury good, but a rich person would happily trade five bottles if they possessed five thousand. The relative utility is changed even though the absolute utility remains the same for both actors. In turn, this affects how society judges the importance of production; commodities that are ‘more valuable’ are produced with a higher priority, but with this distortion in effect, luxuries for the rich may be prioritised above life essentials for the poor, which is unethical.
It should be noted that this has a particularly harmful effect where the good in question is finite, such as land. It is perfectly conceivable that a wealthy minority might purchase up a majority of the land in a country to use for their multiple homes and private establishments. This, of course, would effectively reduce supply by removing a lot of property from the active market. In fact, if they so desired, they could simply outbid ordinary people on every house purchase, taking over ownership and, if they so desired, leaving everyone else with nowhere to live. Of course, it would take some irrational behaviour, but a minority acting irrationally would not be unheard of.
Much of this I will cover in greater detail in the following chapter regarding the tendency of inequality to increase. The purpose of mentioning these points now is simply to understand that they must be considered when measuring the success of an economy. It should be noted therefore that relative inequality does matter. It is not, as some would presume, perfectly good for the rich to get twice as rich and the poor to have a marginal increase.
The role of inflation should be briefly considered. A economic system that we are to evaluate may use inflation as a tool, or see it as a negative side-effect. There is certainly a feeling within capitalism that inflation is entirely negative and that the purpose of fiscal policy is primarily to prevent inflation. Yet most economists have accepted that a small rate of inflation is preferable to deflation. Inflation is merely the general increase in the level of money prices, this in turn being a decrease in the relative value of money. The real problem with inflation for the majority of people is that their wages, pensions and benefits often do not keep up with increasing prices; if they do keep up, then inflation affects accumulated money, and debts, which isn’t beneficial for the rich, particularly lenders, but does have the positive effect of reducing inequality. Regardless, inflation is too complex an issue to simply label as good or bad, so provided the rate is under control, it does not itself form a measure of economic success or failure.
So, then, how do we judge an economic system in an ethical manner? To get us started, I propose:
- Total wealth available to the median, minus their needs and any increase thereof; relative to prices and accounting for those things which have become abundant; and including indirect purchases and common wealth; taking into account potential utilisation rather than production. The complete physical and intangible wealth available to the average person. The greater, the better.
- The sustainability of that figure, preferring to plan for the long term and sacrifice some wealth now for a better future.
- The level of wealth and income inequality, preferring less inequality and monitoring any distortative effects. In a well-designed system, inequality should tend to reduce, rather than tend to increase.
- The fairness of income as it relates to the actual efforts invested.
- The distribution of labour: are some people forced to work excessively hard while others struggle to find work? The goal is to eliminate involuntary unemployment.
- The actual means of those with the least, whether the cost of being poor is compensated for, their access to vital services; healthcare, housing, food and water, clothing, education, &c.
- Inflation is not inherently good or bad, but it must be under control.
- The ethical impact of externalities, such as pollution.
It’s not hard to picture a utopian vision that meets those requirements perfectly. It’s far harder of course, to come up with a real world system that comes even close. Going forward however, the purpose of this book, in many ways, is to evaluate how well capitalism stands up to those criteria. We can also use those criteria in future to evaluate proposed alternative systems.