Reformed Economics

Like any other biological entity, human beings must satisfy their vital needs in order to survive. Societies are formed around the different ways people have found to procure their sustenance. Hunter and gatherer societies developed weapons and tools, and had to move as seasons changed to follow the migration of their prey or to seek richer lands. Commercial societies formed around strategic locations or where abundant natural resources were found, lived off the profits from trade, and created small towns—many of which grew into the large cities that exist today. For almost five thousand years after the beginnings of written history, life for most people, most of the time, was harsh; scarcity and deprivation were commonplace; and thrift was the necessary virtue.

For the ancient world, the origin and nature of wealth were absolute mysteries:

Effort does not bring riches. Rites and regular work bring nothing, but fortune comes by chance, without logic. Fortune depends on destiny. Since it is without logic, effort serves no purpose. It follows its whim. It appears unexpectedly. This is why the texts that explain the means to acquire it are useless.

[Vatsyayana]

Early in the 18th century, economics as a discipline was taking shape as part of a science of governance. James Steuart published his Principles of Political Economy in 1767 in five volumes, describing his work as an “attempt towards reducing to principles, and forming into a regular science, the complicated interests of domestic policy”; namely, as an attempt to elevate the understanding of the domestic policy of the country to the level of a science.

Economy in general is the art of providing for all the wants of a family, with prudence and frugality…What economy is in a family, political economy is in a state…The principal object of this science is to secure a certain fund of subsistence to all the inhabitants, to obviate every circumstance which may render it precarious; to provide everything necessary for supplying the wants of the society, and to employ the inhabitants (supposing them to be freemen) in such a manner as naturally to create reciprocal relations and dependencies between them so as to make their several interests lead them to supply one another with their reciprocal wants.

[James Steuart]

Economic philosophers before Steuart were, with few exceptions (notably Cantillon in the 1730s), concerned with how the government could alleviate the glaring social injustices existing at the time. Adam Smith’s book came as a siren song, enticing his early followers with the illusion of perfect understanding of the economic mechanism. In contrast to the arid language of statecraft employed by Steuart, Adam Smith’s described in almost lyrical and awe-struck words the new world of plenty which the division of labor was capable of creating. With a superior rhetoric, he was able to convert economics from the subject of state policy to an academic subject; from how “to secure a certain fund of subsistence to all the inhabitants,” to how the “annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life…” He described the economy of his time as a natural and immutable phenomenon, where not only the production of goods, but also the ‘production’ of people, was regulated by the natural mechanism of the economy:

Every species of animals naturally multiplies in proportion to the means of their subsistence, and no species can ever multiply beyond it. But in civilized society, it is only among the inferior ranks of people that the scantiness of subsistence can set limits to the further multiplication of the human species; and it can do so in no other way than by destroying a great part of the children which their fruitful marriages produce.

[Adam Smith]

The fate of the poor may have been a concern of Adam Smith, a professor of Moral Philosophy; however, since he considered it to be a fact of life, as natural as birth and death—one can imagine—he assumed there was nothing the state or anybody could do about it.

Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations (1776) in order to explain the new abundance and the new poverty. No other book in history has had, and continues to have, such a tremendous effect on the lives of so many people, initially for good, but now mostly for ill.

The good thing about Adam Smith’s book is that it taught us that the seemingly chaotic economic activity—the cause of our prosperity—was in reality a self-regulating process, akin to a well-oiled machine, driven by individual self-interest. Slowly, but surely, other authors began to elaborate on Smith’s ideas. Some tried to straighten them, but were rebuked; those who adhered most closely to Smith’s work were praised. By the mid-19th century, almost simultaneously, John Stuart Mill, a veritable child prodigy, had written the summary of what was to be known as Classical Economics, and Karl Marx had multiplied Smith’s errors with his Das Capital. Almost two and a half centuries after Adam Smith’s book, its contents are still the foundation of the many different economic schools into which Classical Economics has degenerated.

Ever since, economics has become the study of how people go about creating wealth, and how they could do it better and more efficiently without the interference of government. The fortuitous coincidence that the then-new economic ideas happened to propagate throughout Europe and the rest of the world at the same time that the Industrial Revolution was beginning to show its fruits reinforced the conceit of the economists.

Economists claim, unabashedly, that the economic prosperity of our times is based on Adam Smith’s ideas. It is a rather curious claim, if you think about it, considering that his main idea was that the economy does better when left alone by the state; and that all the countries that have followed that advice, wittingly or not, are now mired in the worst poverty and helplessness ever known to mankind. To be fair, economists acknowledge some crucial defects in Smith’s view of the economy, but most believe that state intervention would make things even worse; their mantra is: “One can surely trust the individual self-interest, but only a fool would put his trust in the good intentions of the state bureaucracy.” Thus having declared victory and withdrawn to the high towers of academia, they now use their expertise for self-gratification and to ‘solve’ problems in other fields such as psychology, human behavior, and law, when not castigating those seeking real solutions to mankind’s plight.

The failure of conventional economics is terribly obvious. A large fraction of the world’s population is living in poverty, including about one tenth of those living in the wealthiest nations. Most of the horrible conflicts around the globe can only be understood as struggles for survival, fought by one group of people against others. Millions of people die, and will continue to die, every single year as a consequence of economic ignorance. Most of the great unsolved problems facing the world today are, at their core, economic. For instance, global warming, which may seem far removed from economics, is not being tackled in most countries because they claim to lack the resources to do it. At the same time, there are billions of unemployed people, unable to use whatever skills and talent they might muster toward such a great undertaking. The often-quoted wisdom of John M. Keynes, “…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economists,” should give us pause.

Conventional economists do not know how to solve any of the urgent problems facing the world today, short of asking for government austerity and invoking the cooperation of the business communities and the civic virtues of the wealthy class.

In a recent book, Robert Skidelsky, the most notable of Keynes’s biographers, analyses the causes of the Great Recession and, after considering the prime suspects—the bankers, the credit-rating agencies, central bankers, regulators, and the government—puts the blame squarely on the ideas of the economists:

To understand the crisis we need to get beyond the blame game. For at the root of the crisis was not failures of character or competence, but a failure of ideas…the present crisis is, to a large extent, the fruit of the intellectual failure of the economics profession.

[Robert Skidelsky]

If one were to understand how money is actually created, and how it flows into and out of the economy, the entire issue would not be a problem but a great investment opportunity. Such investment, partly by government, would create a sizeable number of jobs. Those jobs, together with others created with additional government and private investments in other sectors, would make unemployment disappear, together with poverty, as well as the struggle of the middle class to make ends meet. Where would all that needed money come from? The flow of money into any economy comes now mainly from ‘re-circulating’ (lending) the money saved by people, and over which government has little control, except for the fraction it gets from taxes. One of the keys to economic reform is for the government, through its central bank, to raise the reserve requirement on all private lending operations to 100%, while authorizing its central bank (the nationalized Fed in the U.S.) to lend directly to all levels of government at low or no interest. That would allow the government to exercise its constitutionally mandated monetary powers and become the sole source of lending funds for the financial system. The central idea of the financial reform is to replace bank credit using private funds, with bank credit using the central bank’s money. The central bank would then be able to direct a fraction of the credit into government investment. In other words, the needed government investment money can only become available after a thorough reform of the financial system, which cannot occur before an even deeper reform of the economic science itself.

The Reform of Economics is an escape from the Dark Age started by Adam Smith; it will have tremendous effects on our civilization. It may even ensure our species’ survival. The Reformed Economics has the potential not only to end world poverty within a few decades, but also to transform economic life on the planet from the struggle to survive to a collaborative competition to realize humanity’s hopes and dreams. Above all, the reform of economics will be instrumental in restoring to all the neglected people of the world the dignity they deserve as members of the human race.

[From the Introduction to “100 Theses for the Reformation of Economics” Nov 11, 2011.]

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