THIS IS THE FIRST IN A SERIES OF POSTS ABOUT THE FAILURE OF THE US ECONOMY, the failure to create an economy meeting the expectations of a rational society.
Introductory economics courses emphasize how economies decide to allocate the society's resources: do we produce guns or butter? Supply and demand curves illustrate how the interaction, and factors that modify them. The supply of goods and services is decided by the society, which may reflect the demand curve, but some are independent, as in military spending in peacetime. The demand for goods and services differs throughout the society, and a hierarchy of needs alters what different economic classes demand, and the supply. Theses and research papers are written to address special cases. Economists avoid value discussions, claiming the principles are “value neutral” so true whatever the values of the society in they apply. Yet economic studies may favor one value system over another, and are adopted as “correct” by the political group that is most likely to benefit from the plan. The idea of optimizing decisions for the entire society is a political, not economic, issue, but the data to measure this requires an different approach to economics. The economic questions for a society (country):
1) Is there an “equitable” dispersal of goods and services?
2) Are the available resources used efficiently?
3) Is the production of goods and services “stable”, in the sense that disruptions of production or consumption do not result in major failures in 1) and 2)? (To this might be added another goal based on the extensive development of globalization:)
4) Is the production of goods and services efficiently integrated into broader global markets?
These metrics for evaluating the operation of an economy, are not consistently achieved by the American economy, for most of its history. The American economy, a “regulated” capitalist economy, is unable to fulfill those simple objectives. Why?
1) Capitalism is based on return on investment, ROI. The rewards of the society are dispersed based on how capital is invested. It might seem that investing would favor those activities most likely to provide a significant return, and that these would benefit the overall society. But this is generally not the case. Predicting the likely return of investment requires knowledge of future demand an inherently risky problem. So efforts are made to limit this risk by reducing competition, and choosing modes of investment like financial manipulations in which risk can be managed directly. None of these adjustments are responsive to an "equitable distribution".
2) Efficient use of resources does not occur because of the competition for consumer access. A new neighborhood will have several supermarkets, gas stations, and other providers. The excess building results occurs when companies seek entry into the region. The ones that fail waste investment and create “dead” stores that must be repurposed. This is often taken as proof that capitalism is efficient, emphasizing the re-purposing and ignoring the losses of inefficiency of initial investment. This has been accelerated by the recent transition to online marketing and sales.
This problem of waste in fair competition is managed by oligarchy. In development of American business from the “golden age” of the early 1900s to now, achieving competitive advantage by monopoly has always motivated business. Strong anti-trust laws emerging after the crash in the 1920s prevent some of this, but were weakened in the 1980-90s. Once monopoly is achieved the society pays far more than what would be needed for the good or service and competitors are undermined and eliminated, but this does not lead to reduced waste but instead to elevated prices when there is no optional alternative supply. Capitalism attempts to lower the costs of business in every way possible and this means limiting labor costs where possible in the current competitive labor market. At times it creates labor “sweat shops” with poor return on labor for the worker and eventually demand for unionization and government regulation. While efficient in using labor resources, this interferes with achieving goal #1) equitable distribution of resources.
3) Every introductory economic textbook explains “business cycles” as an inevitable feature of capitalism. The uncertainty in investment and inherent risk predicts failures in businesses, but it does not predict that these must be correlated and occur in cycles. The “Chicago School” explains these cycles as variations in the “cost of money” or interest rate. When the rate is low, starting new ventures or expanding is less costly and more businesses attempt it. The demand on money raises the “cost” (interest rate) and eventually the multiple businesses don’t all succeed resulting in defaults and losses, and the rate falls. This explanation does not take into account several external factors that have impacted over the last 100 years. Technology innovation drives business expansion and exaggerated valuations, seen in the railroad boom of the 1870s, the radio boom of the 1920s, the computer hardware boom of the 1990s, and the “internet” boom of the 2012s. Each is a real advance in technology overvalued by a public seeking to “strike it rich” creating transient exaggerated values, "tulipmania" (along with some fake businesses that exploit this). The 2008 crash was the result of an intentional effort on the part of a government-financial industry partnership to create a false stimulus in the economy by driving the housing market beyond the capacity of buyers to afford houses, with falsely valued mortgages, and secondary insured collateral to cover this fake stimulus. The collapse brought down Lehman Brothers, and triggered a major contraction. In 2020, another sort of contraction is occurring due to the collapse of consumption in certain industries related to the covid pandemic. This is another test of whether an economic system can manage the external destabilizing challenge of an event. And the crypto-currency collapse is another result.
4) Understanding the economy from the perspective of one country is no longer adequate. The free transfer of goods, services, and information across national boundaries makes the idea of a closed economy incorrect. What does an effective role in the global economy look like and how should it be measured? The current US idea that it is the “dominant” economy and can manipulate others is incorrect, in the process of failing, and weakening the US role in the broader economy. The competition between countries try to draw investment from outside bringing capital for development into the country. They try to draw capital by exporting more in $$ than they import. This gives a favorable balance of payments and increases the relative strength of the currency compared to other currencies, but that makes export goods more expensive and tends to equalize the effect. Many corporations in the modern world are “multinational” and how they report their income affects their tax and other liabilities to the countries in which they are located. This confuses the economic national boundaries. Is Apple an American company? Much of its sales are in China, and much of its manufacturing is done outside of US. It reports income for much of the world in EU countries with lower income taxes. Where is the “real” Apple located? Natural resources including foods grown, and material commodities like oil and mined substances are local to the country in which they reside. But their trade may be managed by companies that grow or extract them, which are not located in the country of extraction. Whose oil is it? Few everyday Americans recognize the extent of the globalization of the economy.
What values should guide the economic regulation of a country?
A The economy should produce sufficient goods and services to sustain all the population. Everyone should have enough food to avoid starvation, adequate clothing, and housing to avoid injury of exposure to elements, and facilitate protecting a family (if desired). It might include basic healthcare and some non working time for recreation. How the material goods are distributed, and what productive work is required to access them must be specified. The term “economic inequality” indicates that in the US this goal is asymmetric: significant numbers of the population who do not have adequate food, clothing, or housing. Many others live in marginal security which any change in life circumstances will disrupt.
B The Country must decide if other values beyond economic ones are important. These might include preservation of environmental features, opportunities for recreation and other social activities, distribution of education across the population, etc. Most of these other values have an “opportunity cost” that reduces the available capital to the society as a whole. The US system of valuations is suggested as:
*Recreation activities including sports, gambling, hospitality travel, and alcohol consumption are major economic industries with high valuation.
*The consumption of disposable consumer goods like stylized clothing, shoes, and music etc. are an important driver of the economy. They are marketed as essential to defining personal identity of the user, although they are mass produced and therefore actually not personal at all. Their rapid loss of value after purchase creates an enormous burden of trash waste for the society.
***Non-material values in the society are minimal: Religion is an important value for a minority of the population, but is closely linked to financial success. Tradition, old styles and standards, exists in limited parts of New England. Cultural interests are increasingly too expensive for most to afford, and the educational experience that would prepare readers, viewers, and listeners is not provided.
*The emphasis is on the experience of audio-visual media as primary recreation, along with electronic competitive gaming is supported for its economic value, while creative audio-visual production is not distributed to the creative artists as the digital distributors take most for themselves.
*Preserving the natural environment is a conflicted value with a small group committed to this, pitted against the majority who wish to exploit the environment for economic gain.
The political process must manage the economic decisions of A) and B). Regulation of economic activity occurs at the private and government level. Private companies have significant freedom to specify the work parameters of employees, compensation, and other factors in the delivery of services. These are generally regulated by competition between local entities, or national competition in the case of airlines, etc. The role of the state and federal governments in requiring private entities to abide by specific restrictions (think, non-pollution) is variable and strong influence is exerted by large corporations to limit this role of governments. The orderly function of a society demands some structure of rules/laws which specifies individual relationships. Although great emphasis is placed on the police in preventing theft, robbery and burglary, the total amounts of these crimes is trivial compared to the massive fraudulent “white collar” crimes of the last several decades. This represents a fundamental failure to manage the distribution of goods and services.
Future posts will suggest alternatives to our current dilemma.
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