(Another long and important read – I’ve tried to make this accessible for people who normally switch off when the word Economics is mentioned.)
One of the most painful aspects of a recession is the many people out of work, sometimes for a long time.
Mainstream economic thinking says that jobs are created by entrepreneurs and by more investment, so this should be encouraged with tax breaks for the wealthy.
There’s a partial truth to this, but it ignores an even more important fact that jobs are created by customers with money in their pockets.
In a recession painters are out of work although there are still houses that need painting. Cafes go bust even though people still like coffee, tourism operators close down even though people still want holidays.
Money is the oil in the machine
In its simplest form, money is a way to facilitate barter. I exchange my goods and services for other goods and services. This is still (or should be) the most important function of money. People contribute value through their skills, training, effort and time and in exchange they receive value in the form of money, which can be used to buy the fruits of other people’s skills, training, effort and time.
Money is like the oil in the machine which keeps the wheels turning and keeps the flow of value circulating from person to person. We might call this part of the economy the “Value-Circulating economy”.
In a recession the oil stops circulating and so the machine grinds to a halt. People are unable to contribute value and earn money because other people have no money to pay them.
Assets and rent-extraction
As well as contributing value, there is a second way that people can get money: and that is through owning an asset. The asset might be a second house that they rent to tenants, or some intellectual property like software or a drug patent that people have to pay to use, or money lent to others with interest, or shares in companies that you own either directly or indirectly through your pension fund. We might call this part of the economy the “Assets and Rent economy”.
This is an over-simplification, but bear with me.
Assets don’t create value on their own, but they can magnify the value created by people in the Value-Circulating economy.
By using advanced machinery, tools and software and innovative collaborative practices, an individual worker can produce many times more value than he could working on his own. An example of this was Henry Ford’s invention of the production line for manufacturing cars. Before Ford many car manufacturers were bicycle shops building artisan cars individually at prices only the very wealthy could afford. Ford’s mass-produced Model-T made it possible for the middle-classes to own cars, and he paid his workers more than the average wage so that they too could afford to buy a car.
But assets can also simply be like a leech, draining money from the Value-Circulating economy without giving real value in exchange. For example a patent on a drug that has long since paid for its development and where the licensing fees are not being used to develop new products, or some land owned by an absentee landlord who simply collects rent.
A system out of balance
A healthy economy would balance the “Value Circulating economy” with the “Assets and Rent economy”.
However, left to itself the system always moves towards being out of balance.The reason is simple: There tend to be limits on how much a person can earn by selling his time and the value he creates because we are all limited by the same number of hours in the week and even rock-star workers can only command so much hourly rate. Equally there tend to be limits on how much we spend on goods and services. We can only eat so much, drive one car at a time, own so many pair of shoes etc. So the Value-Circulating economy is relatively stable and tends to grow relatively slowly.
But with assets there is no limit. If I have more money than I need to live, then can buy assets which will return even more money, which I can use to buy even more assets.
The growth imperative
If I own a factory employing 100 people and I invest in new technology (e.g. robots) I might be able to produce the same number of cars with just 10 employees. The wages of the 90 people I let go now come to me as additional profit (minus the costs of buying the technology and the severance costs of the sacked employees). I can use that extra profit to buy even more assets, or develop even better technology so that I can employ even less people.
So long as the economy grows at the same rate as productivity increases, there doesn’t need to be unemployment and everyone benefits. Many more cars get sold, so new factories employ the workers displaced by robots. Capitalism needs us to keep buying more and more stuff to keep people employed.
But there are limits to growth – environmental limits and human limits.
The nature of assets and investment tend to accumulate more and more wealth in the hands of the wealthy. If we think of the total amount of wealth as a pie, then the wealthiest 1% of the world’s population now have more than twice as much wealth as 6.9 billion people – ie almost all the rest.
This has consequences on, for example, property prices as the wealthy compete with each other to buy investment properties pushing up prices for everyone.
The corrupting influence of concentrated wealth
Another factor in the growing wealth disparity is that the very wealthy often also invest in politics, donating large sums to political parties, lobby groups, political “think-tanks” and media organisations in order to influence political decisions. This benefits them in the form of tax breaks and subsidies, weakening of environmental and social protections, awarding lucrative contracts and making sure that government picks up the tab for any social costs or damage to the environment. These “investments” in politics often offer bigger returns than any other kind of investment (for Australians, think Clive Palmer for example).
For most of the history of capitalism the wealth gap between rich and poor has mattered less than the fact that the overall size of the wealth pie has grown bigger. This has meant that the average person has had more buying power each year. Also, the gap between the wealthiest and the average person has been kept in check by progressive taxation policies until the last few decades.
A failed economic system?
But recently this model has hit a few problems:
- We are reaching environmental limits to growth – continuous growth on a finite planet is simply unworkable.
- The speed of advances in technology is accelerating beyond the normal capacity of the economy to adapt and grow. Even jobs previously thought to be safe, such as doctors, lawyers and truck drivers are soon going to be lost due to A.I.
- The political influence that has been bought by the Assets and Rent economy is now so great that in many countries the system is seriously rigged against people who actually create value and towards people who own assets.
For the first time, people in regular jobs who don’t own assets are seeing their buying power decrease as wages stagnate at a time when the cost of housing – whether owning or renting – is at all-time highs, and personal and household debt levels are also at all-time highs.
In summary, the system (in fact multiple systems – economic, political, ecological, social) are way out of balance and are not going to self-correct. The tired old policies of tax-breaks for the rich and cuts to welfare and public services are not going to get us out of the coming global recession.
We need more people to understand at a deeper level what is going on and embrace radical solutions. (Radical – from the Latin Radis – meaning “root”)
This isn’t about Left-vs-Right (terms which have become almost meaningless). It’s about really understanding how the current system is broken in ways that no major political parties are addressing. I’ve got a few ideas of my own about radical solutions. What are your ideas?