CC BY
10
пп.............
TOUGH TIMES TO PONDER
A NEW PARADIGM FOR A NEW ECONOMIC MODEL
r. Jaro Berce,
Faculty of Social Sciences, University of Ljubljana; Kardeljeva pl. 5, 1000 Ljubljana, Slovenia; e-mail: jaro.berce@fdv.uni-lj.si
In today's time of crisis most of governments at all levels are "preparing recovery plans" to protect missions, staff, and budgets. While the series of measures are being introduced by the world's governments, there is a persistent notion that the world of politics is being caught under the influence of only one profession - economy. However, "modern" economy is based on the doctrines, models and concepts of the past. Further on the fundamentals of the economic science are containing some models and principles which are in contradiction with the basic laws of Nature. It is not surprising then, that the economic science is not able to cope with any crisis of a larger magnitude. Today we can produce enough food for everybody. We know how to make safe and environmentally friendly products etc. To overcome permanent crisis cycling, we are in need for a new paradigm of a socio-political-economic model, which is based on multidisciplinary approach and would comprise sustainable development.
Keywords: crisis, environment, Gross omestic Product, innovation, laissez-faire , market economy, multidisci plinary, natural science, profit, social science, state capitalism, sustainable development.
Cycles of build-in crisis
While the governments throughout the world are rapidly introducing the economic rescue packages and cost-saving measures, there is a lot of debate going on between different schools of Economics and other professions as what course of change should be taken. Most vocal seem to be the advocates of the »laissez-faire« (French term meaning: "to let people do as they wish") economic theory, which incidentally brought us where are we now in terms of financial situation. The »fight« is over the amount of administration of the state regulation measures versus the free-market principle. In theory, we know of the two opposing archetypes of economies: one is the state capitalism (a state control of the market - Grinder, 1977) and the other is the market economy (left to self-regulation -Samir, 2008). We find a combination of the two in most societies of today. The economists readily admit that the market competition is not achievable in absolute terms, so it is not surprising that many around the world (but the proponents of laissez-faire doctrine) are trying to ascertain the right amount of state intervention needed to fight the deficiencies in economy such as, market failure to fully enable a competition, negative externalities, enabling the access to quality information for all.
The laissez-faire model capitalism is differentiating itself from other models by ignoring the beneficial effect and impact that state regulation may have on the capital and financial markets. Since this was a collective malpractice in the last 10-15 years, we ended up in the economic crisis that is affecting more or less everyone. With crisis it comes the rude awakening from the ultimate dream of consumerism with spiralling patterns of high-earning (or not-so-high ), high-spending, ever bigger profit-making all driven by greed of consumers and consumer goods providers alike. This attitude led us to believe that we have lived in world of limitless resources and it shows! The devastation can be seen everywhere: in the natural environment, economic environment, etc.... We have a polluted nature, we have pollution in financial industry and that's not probably all.
Governments at all levels are "preparing recovery plans" to protect missions, staff, and budgets. While the series of measures are being introduced by the world's governments, there is a persistent impression that the world of politics is being caught under the "invisible hand" of Adam Smith, namely, the economic paradigm of two hundred years ago. The market will get out of its turmoil, as long as, we take care of the banking and replace its toxic investments with fresh supply of money. This is despite the common sense still professed by many economists to most governments. On the other hand the well known Nobel laureate Joseph. E. Stiglitz1 is arguing that in the »eco economy«, it is the perpetrator of the pollution who should pay for the cost of cleansing afterwards. The American financial institutions that in fact polluted the rest of the world's economy with their speculative investment activities are being it seems with every step of the government somewhat perversely rewarded for their wrong-doings. And the same can be said for their banking counterparts in the rest of the world.
Therefore, the public in the world is now dealing with the past and future problem of how to socialize the costs that generate the profits which end-up in the pockets of the few greedy private individuals. Consultations take place. Various measures follow.
To a certain extent what is common sense in natural science looks very "difficult" to be understood by economists. John von Neumann in his solution to the problem of "the existence of situations of equilibrium in mathematical models of market development based on supply and demand' determined that not all the systems are stable. The instability of the subsystem can cause the system to become unstable and fail as a whole. Speaking of the embolic bubbles found in the lungs which can cause the
1 http://query.nytimes.com/gst/fullpage.html?res=9F03E1D6l531F937A15751C1 A9609C8B63&sec =&spon=&pagewanted=all (Oktober 23, 2009)
2. http://homepage.newschool.edu/het//profiles/neumann.htm (April 28, 2009)
Экономика, Статистика и Информатика 49 №4, 2009
fatal failure of the whole organism. In medicine we don't treat partially unlike what the governments currently do with just administering the financial injections.
In any case, we should ask ourselves who is benefitting from the periodic big swings in the prices of stocks? The greatest proponent of the economic monetary concept in recent times is Alan Greenspan who considerably contributed to a creation of present world economic financial conditions, i.e. to making of the house of cards which fell to pieces. It is he who indifferently stated in the Guardian (October 24th 2008)1: "I was wrong about the economy!". Was that a final blow to the laissez-faire school of economics, or to a profession as a whole, who hadn't attempted to stop him? Imagine the biologist in the lab who said that he was wrong, after he released the deadly bacteria into open.
Models of today are models from the past
"Modern" economy is based on the doctrines, models and concepts of the past. For example, the need for cyclical consumption is generating "a planned obsolescence", i.e. the product(s) designed not to last, what consequently creates the abundance of scarcity. As if we are not proficient of manufacturing quality goods that would last "forever".
Economists are advising well constructed argument that speaks in favour of pressing the suppliers in order to lower the input costs. The suppliers are supposedly prepared to lowering prices nowadays. Those are the arguments of someone who doesn't know a thing of the basic (natural) postulates. The suppliers are after all the businesses in their own right. If all in the supply chain are to keep lowering their prices, the output would be invariably smaller, the unemployment would be on the increase, and all shall lead to economic decline. Since people with no job and disposable income cannot spend, "the money does not change hands". And thus, we find the business circle broken.
Furthermore, we can read and listen to the "investing-in-the-infrastructure" arguments, some 50 years old. May be that
Table 1: GDP growth interpretations
Recession Dates Consensus GDP forecast just prior to recession* (%) GDP growth in the recession year % The "niss" hps**
Nov-73 to Mr-75 3.1 -0.9 -347
Jan-80toJul-80 1.4 -1.1 -254
Jul-81 to Nov-82 3.2 -1.9 -505
Jul-90toMar-91 2.3 0.2 -249
Mar-01 toNv-01 3.1 0.8 -232
AVERAGE 16 -Ù6 -318
Now? 2.3 ? ?
* Full year GEP growth in Efeosrberpricr to recessions **bps - basic points
this Keynesian idea is not entirely inappropriate.
But one should certainly not be impressed with a copy-paste application of it which can be found with some economist of today. Why? The era of John Maynard Keynesis2 coinciding with transition from old to a new industrial age which required the new infrastructure to be built (motorways, railroads and so on). But we are in the 21st century. The requirements are different. If someone in telecommunications, which is dominated by mobile technology, was to bring back one Alexander Belland3 the copper based infrastructure of his day, they would be most likely greeted with derision.
The GDP4 (Gross Domestic Product) is the economic indicator which is reflecting the country's economic well-being, and it is one of the indicators most used and regarded.
It was invented by Nobel Prize winner Simon Kuznets5 (died almost twenty five years ago). Although, it is a very old indicator (80 years old), GDP is still regarded as a yardstick that measures the amount of money being spent in a country. Therefore, the more that is being spent, the higher the GDP and the better the "living standard" is perceived to be. For decades, it is known that GDP is not a proper evaluator for economical wealth and in wrong hands can be even misused (see6 Table 1 showing "some" wrong GDP growth interpretations).
Next - GDP indicator ignores depletion of resources and damage to the environment. Let us use an imaginary profit-making company that is polluting environment, and it not having the external costs. In the process of cleansing the environment from the pollution, some people get sick. If we use the impact on GDP, the work and costs for cleansing the polluted environment is added to the GDP figure. So the core business of the company, the work generated by pollution i.e. the environment cleansing, the costs for the repairs and treatment of people, infrastructure and environment affected by pollution, all add up to the GDP growth. The GDP therefore does not necessarily reflect on e.g., the quality of life, the health of environment, the destruction of woodlands or the exhaustion of water resources etc. The question is: "what the hell is GDP all about then"?
OK. Little is known of a study done by the university academics just over a decade ago where it is proposed to establish a sustainable measure of GDP (Index of Sustainable Economic Welfare7). But they were not alone. These method(s) of
1 ■ http://www.guardian.co.uk/business/2008/oct/ 24/economics-creditcrunch-federal-reserve-greenspan (April 28, 2009)
2 http://www.maynardkeynes.org/ (April 28, 2009)
3 http://www.alexandergrahambell.org/ (April 28,
2009)
4 Source: http://dsp-psd.tpsgc.gc.ca/Collection-R/ LoPBdP/BP/prb0022-e.htm (April 28, 2009)
5 Source: http://nobelprize.org/nobel_prizes/ economics/laureates/1971/kuznets-autobio.html (April 28, 2009)
6 Source - Blue Chip Consensus, Philly Fed Livingston Survey, Bureau of Economic Analysis, Merrill Lynch and http://bigpicture.typepad.com/comments/ 2008/05/positive-gdp-re.html (March 29, 2009).
7 http://www.foe.co.uk/tools/index.html (September 14, 2009)
calculating GDP by adding to the traditional economic value of GDP the negative costs of poor environment e.g. pollution, excessive poverty; unemployment, health etc. and so creating a composite measure are still not being used.
Economy science in need for a new wind
Apart from their antiquity, the fundamentals of the economic science are containing some models and principles which are in contradiction with the basic laws of Nature. It is not surprising then, that the economic science is not able to cope with any crisis of a larger magnitude.
For instance, no natural scientist would entertain a notion of making something out of nothing. Not the economists though: the central bank would print the money (as a means of payment); it would lend the money to other banks and in doing that make the money (earn) - the central bank thus creates the new value. We don't want to go on with what is then going on with that money in the banking system, when the value is being reinvested and "multiplied". The banks and all of the payments system are in need of a revamping to address the aforementioned and other anomalies. Money should be left to its historical role as a means of payment rather than allowing the financial and capital markets to manipulate its value. The current arrangement where the central bank is responsible for "churning out the value", is a generator of the cyclical crisis and leads to exhaustion of the real sector.
Second example of not following the law of Nature is the continual growth of the enterprise and/or the expectation for permanent increase in profits for the enterprise stakeholders. Nothing can grow infinitely. Even the Universe is limited. The so called economic monetary logic is creating the "perpetuum mobile", which we know does not exist as sustainable system looking from the viewpoint of the naturalist, off course.
Next example of the economic system shortfall is demonstrated when the economists state that a growth of economy is dependent on:
• Human resources (jobs, education, motivation...)
•Natural sources (land, minerals, fuel, quality of environment... )
• Capital (machinery, factories, roads,
• Technology (science, engineering, management, entrepreneurship, ...)
National output is a function of the levels of technology (automation), productive use of capital, labour and natural resources. The knowledge and especially the quality of environment (ecology) are usually on the "wrong" side of the balancesheet, and they are regarded by all school of economics (classic to neo-classic) as a cost. Investments into technology, machinery and buildings are the capital investments which diminishing value over time is managed and demonstrated through depreciation process. The departure from an organisation of an individual with toplevel expertise and knowledge is, however, not shown anywhere on the balance-sheet. The knowledge is, though, promoting the education. The education and knowledge together trigger the development of the new technologies. In principle, the knowledge acquired through targeted educational process which serves the organisation purposes, and the quality of environment should be treated as investments, too. Without them, the economic growth is not assured, but they don't feature in economic models as such.
One could also argue that the significant capitalism subject named "Market" doesn't exist in Nature. We got our beautiful planet Erath for free as well with all his resources. We are to be grateful for Life and energy to our Sun which is still after few billions of years providing us daily with energy - for free. Imagine that somebody one day declare the Sun (as in primary accumulation or primitive accumulation - Gunder, 2005) as his/her property and then charge us the energy coming from it. The world has experienced a single, all-embracing, albeit unequal and uneven, process of capital accumulation that, for at least past five centuries has been capitalised on terms and laws that could be questionable. So what is then the point of "market" - just a more sophisticated name for "slavery" maintained by economical models?
Last but not least the economy is also prone to a particular system error. The natural resources are in the limited supply, and once they are exhausted, the life on
Earth will cease. No life - no reason for economy! Economy is, though, not concerned with the final outcome, but only to show the increases in the cost of natural resources as they are becoming scarcer. This is the reason why known economic models do not suffice any more. The profit cannot be the only measure of success! The world free market economy driven by greed of individuals and ever so increasing profit margins can lead to a fatal mistake. For instance, the former chairman of NASDAQ Bernard Lawrence Madoff8 is a perfect example of a greedy and corrupt individual who was abusing the current economic capitalist system to his personal benefit and breaking all human, ethical and legal norms in the process.
Anyhow, such important decisions about the state of the real economy, the markets and the nature preservation issues shouldn't be influenced by views of only one profession. Economic science does not often use the system approach to the problems which is facing. The economist in a predictive modelling use ceteris paribus9 ("other things being equal") as the most common approach employed in order to simplify the formulation and description of economic outcomes. This approach does not always give the full picture.
We have to accept that science bit in economic science is positioned between the natural (pure and more exact) sciences and the more »esoteric« social sciences. The economic science the hybrid in itself, sits in between the two, by using the exact methods and tools borrowed from the natural sciences whilst adopting the softer and more flexible stance on implementation and interpretation found in the social sciences. For this reason, the same topic can create such a variety of responses (some of them of dubious value).
8 http://www.nypost.eom/p/news/regional/ invest_big_fesses_to_fraud_ELEWjBAF8FvEl5UHSAQE3M (October 23, 2009)
9 http://www.auburn.edu/~johnspm/gloss/ ceteris_paribus (August 10, 2009)
Экономика, Статистика и Информатика 51 №4, 2009
Despite of all fundamental failings, funnily enough, there is an economist emerging as Nobel Prize winner every year. No such luck (under their name) for the plethora of more productive and propulsive disciplines like IT, electro-technical science, biotechnology, mathematics etc. which throughout the year spring up the new products, services, theories and help promoting the growth of the real economy.
The world economy is far too important pillar of a society to be managed only by economists.
Re-think a new paradigm
Off course, many of the mentioned examples of the economic practice are from the point of view of economic logic perfectly sane. Checks and balances may have worked, the profits may be enormous, but not all is in the figures. Life is more complex than that.
In any case, and to our fortune, the Earth's orbit follows the natural rather than economic logic. Our planet is unique but it has limited resources. We live in a world of plenty. We are able to make the products which can last "forever". We can produce enough food for everybody. We know how to make safe and environmentally friendly products etc. All of this is achievable, if we could only control our greed and profits. Unfortunately, the current myopic economic logic prefers the short-term gains which cause the long-term destruction over the long-term sustainable development. As a consequence we have been facing the global instabilities such as the current financial crisis, and before the food shortages, the fuel price rampage etc.
Today's "creationist" economic approach fails to address the global crisis in the conditions of the meltdown of the world's real sector. The attempts of monetarists, ecologists and such like, who are trying to think of partial solutions can only have a short lasting effect. So current up-take is just a click away from next crisis... We are in need to reorganise our production, possibly go for the basics first - starting with a food - in totally new ways and models.
Here we need the new school of thought - multidisciplinary approach. Let's abandon the old models which outlived themselves. It was Einstein who once said that "the significant problems we have cannot be solved at the same level of thinking with which we created them"10
We need a radical thought shift. A new paradigm springing from the ashes of the current doctrines; A paradigm which will help influence the restructuring process of the real sector of economy, help create a blueprint for a new world order based on
permanent sustainable development. The paradigm based on the experience of more than one discipline, in which the economic greed is not a primary driver but the well-being of the society as a whole, now and in the future. The paradigm that helps researchers who wish to commercialize the results of their research based on respect for a healthy environment and quality of life as top priorities. Therefore, sustainability and symbiotic co-existence with the whole eco environment where we humans are a part and not above Nature is the goal of humankind.
The fundamentals of the new paradigm are not lying on the remnants of the outlived economic models e.g. infrastructure build, fact learning, indexation of expenditure etc. Not only the economic growth, procyclicor11 competitiveness, but the science, education and innovation are stimuli for human development. Knowledge becomes a vehicle of the global economy. It is a variable which influences the competitiveness of any economy and the quality of life society in general. Knowledge is not only leveraging the continual growth of so called real economy, but it is also the most powerful weapon to combat the current global challenges. Reaching over the boundaries whether geographic or topical, leads to a greater collaboration which is a necessary ingredient of the future global management and economy.
Let they be the words of warning for all who do not think the same from the EU commissioner Viviane Reding12 argues that in crisis time we are tempted to decrease the funding for development, but this is the worst path to take. This paves the way to knowledge economy and society, based on stronger synergies, which may be encouraged or discouraged by individual country governments and parliaments by way of their internal strategic decisions, policies and financing.
We, therefore, need a socio-political-economic model, which is based on sustained development and not only on profit-making. This model is taking into account the limitations of available resources and does not promote the greed. The model supports the ecological equilibrium on this planet, and it is not here to solely serve the prerogatives of humankind or even part of it. The natural
10 http://www.quotationspage.com/quote/ 23588.html (October 20, 2009)
11 http://www.answers.com/topic/procyclical (May 5,2009)
12 http://www.europa-nu.nl/9353000/!/ j9vvh6nf08temv0/vi0bhevs5fzh?ctx=vgg51g6u 28xn&start_tab0=20 (Mach 20, 2009)
and social science should work together towards devising the measures to reduce the unwanted effects caused by the old or new technologies in use. Wider body of knowledge and innovation should be employed for that purpose. In turn, the new economic model should facilitate the acquisition of the new knowledge by not treating it as a mere cost but as an investment for a better tomorrow.
It is true that we may not know all the bits and pieces of this future model but unless we get rid of the old paradigm and embrace the new, we'll never try to find them out, will we?
Literature
Amin, Samir. (2008). 'Market Economy' or Oligopoly-Finance Capitalism? (source: http://www.monthlyreview.org/ 080428amin.php May 15, 2009).
Friedman, Milton; Kuznets, Simon. (1954). Income from Independent Professional Practice. NBER Books, National Bureau of Economic Research, Inc, number frie54-1.
Hall, Ben. (2009). France to count happiness in GDP. Financial times, Global economy. Published: September 14, 2009 (Source: http://www.ft.com/cms/s/0/ 1af2 194c-a12f-11de-a88d-00144feabdc0,s01=1.html?nclick_check=1 October 23, 2009).
Grinder, Walter E. HAGEL III, JOHN. (1977). Toward a theory of state capitalism: ultimate decision-making and class structure. Journal of Libertarian Studies, Vol.1., No. 1, pp. 59-79. Pergamon Press 1977. Printed in Great Britain.
Gunder, Andre Frank. (2005). On so-called primitive accumulation. Journal of Dialectical Anthropology, Springer Netherlands, 87-106p. ISSN 0304-4092.
Samuelson, Paul A.; Nordhaus, William D. (2006). Economics. Tata McGraw Hill; 18 edition (January 1, 2006). 776p. ISBN-10: 007059855X.
Sechrest, Larry J. Larry J. Sechrest (Author)
E Visit Amazon's Larry J. Sechrest Page
Find all the books, read about the author, and more.
See search results for this author
Are you an author? Learn about Author Central
(1993). Free Banking: Theory, History, and a Laissez-Faire Model. Quorum Books. 224 p. ISBN-10: 0899308155.
Stiglitz, Joseph. E.; Sen, Amartya; Fitoussi, Jean-Paul. (2009). Report by the Commission on the Measurement of Economic Performance and Social Progress. (source: http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf October 23, 2009).
