You are on page 1of 8

Demystifying Economics

September 9, 2008

By Kath Fisher [has an economics degree from James Cook University and has studied sociology
at Australian National University. She has taught economics at university and TAFE.]

Source: https://www.permaculturenews.org/2008/09/09/demystifying-economics/

For many people economics appears complex and incomprehensible. As soon as the debate turns
to economics, and jargon such as ‘productivity’ or ‘microeconomic reform’ start to be used,
people can feel alienated and mystified and unable to respond appropriately.

It seems that many policy makers rely on this economic illiteracy of the general population to
make sure that policies are not opposed or that serious debate is averted.

It is imperative that the language used so glibly by politicians and policy-makers, advised by the
‘economic rationalists’ whose assumptions and methodology are never questioned, is explained
and demystified.

If we are going to argue for a ‘paradigm shift’, we need to be able to understand and converse in
the language of the old, without appearing naive. For instance, many people who are concerned
about protecting the environment will be strongly swayed by the argument that ‘in times of
recession, the economy comes first… jobs are more important than the environment’, as though
that statement has some meaning and that everyone knows what is meant by ‘the economy’ or
‘the environment’.

So, despite all the knowledge and evidence we have about our situation, social and ecological
concerns continue to be subordinated within the language system of economics. As long as we
allow the language of economics to dominate our thinking and our debate, we will be unable to
perceive the dimensions of the crisis and remain relatively incapable of change.

It is time to take a closer look at this discipline of economics whose language and ideology has so
dominated and constrained our thinking for so long. How did it develop? What are its
assumptions? Whose interests does it serve? Why does it hold the dominant sway over the
thinking of our national and international leaders?
The Measurement of Wealth
Economics is defined as ‘the production and distribution of wealth’, and in conventional
economics, wealth is invariably defined in terms of money. And the wealth of a country, or its
economy, is defined as the Gross Domestic Product (GDP).

“our everyday lives are still affected by the actions of governments lock
systems based on obsolete economic thinking”
GDP, which is the only indicator of the ‘health’ of the economy, is measured by adding all the
monetary transactions occurring in established markets in the economy. The GDP does not
distinguish between positive and negative effects on the environment – everything is added up.

To quote the respected English journal, ‘The Economist’, conventional statistics measuring GDP
are ‘particularly blind to the environment… [and]… take no notice of the value of natural
resources: a country that cut down all its trees, sold them as wood chips and gambled away the
money… would appear from its national accounts to have become richer in terms of GDP per
person. Equally they show measures to tackle pollution as bonuses, not burdens…’

No account is taken of all the abundant activity in the so-called ‘informal economy’ – the unpaid
productive work such as cleaning, cooking, laundry, raising children, taking care of elders and
people with disabilities, gardening, volunteer work, home maintenance, bartering, and so on.

As well, the GDP does not place any value on the ‘free’ benefits of the environment; forests have
no value until they are sold as timber or chips; clean air has no value until a company pays to
clean up its polluting of it!

Hazel Henderson, a major critic of economic theory, has pointed out that all of our human
economic activity, both formal and informal, relies on the natural resource base of the planet
itself – the planet absorbs the costs of pollution and recycles wastes if its tolerances are not
exceeded, thus allowing the so-called ‘external costs’ of the formal economy to be hidden.

The informal economy and the Earth are hardly peripheral, as economic theory would suggest,
but are absolutely fundamental, so fundamental that they have become to be taken dangerously
for granted.

The Fallacy of Economic Growth


The most current economic policy, in fact the whole orientation of its theory, centres on the
pursuit of economic growth, measured by an increase in GDP. The assumption is that growth is
good, that the environment can sustain indefinite growth and growth is the answer to all
economic problems.

To quote Paul Ekins “It is extraordinary that an entire social science, and the dominant discipline
in today’s world at that, can effectively have come to be based on such a simplistic assumption.”

As we have seen above, conventionally measured GDP is no indicator of the true health of a
society and yet we assume that if it is increasing, that is good and if it is falling, we are in trouble.
No other measures seem to count as far as economic policy makers are concerned. Conventional
economic thinking makes no attempt to assess whether economic growth is producing goods and
services that are inherently valuable and beneficial, or whether growth is reducing inequality in
society, or what kind of effect this growth is having on the environment or certain sections of
society.

Ever since the Club of Rome’s ‘Limits to Growth’ was published in 1972, there has been
widespread awareness of the finiteness of the world’s resources. This awareness does not seem to
have penetrated the thinking of growth economics. Economic policy currently makes no
distinction between renewable and non-renewable resources, does not take future scarcity into
account and does not routinely evaluate the costs of environmental degradation with a view to
arresting that degradation.

Growth and Unemployment


Nowhere is the call for more growth and development stronger than in the debate about how to
solve unemployment. The argument is that by stimulating investment and encouraging
development, more jobs will be created as the economy grows. This assumption is rarely
challenged and the corporate sector, which calls the tune in these times, is ensured of support
from government policy making. The reality is, in most industrialised countries, economic growth
has meant an increase in capital and resource intensity and a consequent shedding of labour.
Increased indebtedness and high interest rates has led to a corresponding inability of capital to
grow fast enough to absorb the shed labour. The result is more unemployment.

So we have the paradoxical situation that pursuing economic growth actually creates the problem
it is meant to solve! Resources are so misallocated that as capital becomes more costly, and
scarce natural resources become more and more depleted (with consequent environmental stress),
millions of people will to work are forced into idleness.

Development and the ‘Third World’


Industrial countries have experienced the benefits of economic growth for a number of decades,
although the costs in terms of environmental degradation, resource depletion and now
unemployment have been high. However, for the countries of the ‘Third World’, the effects of
this model have been disastrous.

Economic imperialism has replaced political colonialism, with many countries now
technologically and economically dependent on the industrailised countries, wiping out
traditional economic activities and depopulating rural areas. Phenomenal increases in the size of
cities in the ‘Third World’ has left millions of people destitute and starving. In 1950 two of the
fifteen largest cities in the world were in the ‘Third World’. Now there are twelve.

The ideology has been that if there is enough growth, there will be a ‘trickle-down’ effect and the
poor will become less poor. The benefits of growth have been confined to the privileged elite,
while the majority of the population has been made worse off. On the global scale, the gap
between rich and poor nations has also widened considerably.

The origins of the Third World debt crisis also lie in the underlying ideologies of industrialism,
growth and ‘free trade’.

The International Monetary Fund (IMF) is the institution charged with forcing debt repayment; an
institution whose charter reflects the interests of the industrialised countries. The orginal debts in
many countries were incurred by military elites to finance expensive defense programs. Now,
because of the need to repay, many countries are forced into an ‘export or bust’ attitude.
Countries that have little export potential except for food will give their best land over to cash
crops, while local people are forced to subsist on marginal land that is soon degraded. Soils,
waters and forests are mercilessly mined to pay the Northern banks.

People like Susan George (‘A Fate Worse than Debt’) are advocating alternatives to the theories
that underpin IMF actions – comparative advantage, ‘perfect’ competition, ‘free’ trade and
markets. The need for a new economics is clear and urgent.

A Closer Look at Assumptions


The assumption of economic growth, a concept associated with macroeconomics, which deals
with individual decisions of the household and the firm, also need scrutiny.
the individual ‘consumer’ is assumed to have the right to consume as much as s/he wants, given
the constraints of income and prices. The consumer is also assumed to have perfect information
about the market. Individual self-interest is paramount. consumption is the prime source of
satisfaction – individuals are assumed to prefer more to less.

On the other hand, the individual firm is assumed to want to ‘maximise profits’, reduce costs by
whatever means and charge the maximum price the ‘market will bear’. Again, individual self-
interest is paramount, competition is assumed to be the ‘natural’ state of affairs, as it was
assumed to be in Nature. These assumptions reflect a value system which cannot take into
account social inequalities, unequal access to knowledge and power and the existence of a finite
planet.

A New Economics
Indeed, there are many writers and thinkers who have been formulating new models that take into
account social justice and environmental concerns. Some of the main principles of this new
economics include: measurement of the informal economy; ecological soundness; rethinking
economic indicators such as the GDP; self-reliance as an alternative to competition and a broad
definition of human needs.

The knowledge and the expertise exist. In many ways we are transforming our own economic
realities through local exchange systems, bartering, sharing resources, creating local employment
initiatives and so on. However, our everyday lives are still affected by the actions of governments
locked into systems based on obsolete economic thinking.

We need the confidence and the knowledge to see through the jargon and reclaim our right to be
creatively and actively engaged in our own economically, socially and environmentally viable
communities.

The Development of Modern Economics – a Brief History


The word ‘economy’ is derived from the ancient Greek world “oikonomikos” which means the management of a
household.

In ancient and traditional societies human economic activities were submerged in general social relationships. Archaic
societies used money, mainly for the payment of taxes and salaries. In general, householding meant production for
one’s own use. The motive of individual gain from economic activities was unknown in early societies with the focus
being on production and storage for the self-sufficiency of the group, household, village, tribe or manor.

Aristotle, the earliest economist, distinguished between production for use and production
for gain, arguing that trade was “natural” as long as it was a requirement of group self-
sufficiency.

A Greek scholar, Polanyi, claimed that economists incorrectly translated Aristotle’s word
“metadosis” which in Greek usage meant “giving a share” as “exchange” which gave rise
to Adam Smith’s (the “father” of modern economics) belief that exchange and propensity
to barter must be a trait of human nature. St. Thomas Aquinas, writing on economics in
the Middle Ages, claimed that “just prices” were a part of moral law (i.e. economics
could not be separate from morality) and that private property was justified only to the extent that it served the welfare
of all.

The world “private” comes from the Latin “privare” which means “to deprive others”, an indication of the widespread
ancient view that property was first and foremost communal. Before the seventeenth century, the moral and religious
dimension dominated, but with the coming of the Age of Enlightenment in the 18th century, religious dogma was
rejected in favour of “rational” thought, scientific and technological achievement, the domination of nature,
materialistic goals, individual rights and democracy.

Modern Economics is a little over three hundred years old. It developed as part of a rationalisation of individualism,
property rights, free markets, contract law and democracy. Private property was no longer thought of as those goods
that individuals deprive the group from using, but as an individual right, i.e. that property should be private and society
should not deprive the individual.

Adam Smith introduced the idea of the “invisible hand” of the market that guides the individual self-interest of all
producers and consumers for the “betterment” of all, betterment being equated with the material production of wealth.
So the new “scientific” and “rational” discipline of economics became the rationaliser of industrialism and gave
legitimacy to unconstrained accumulation of wealth and private property.

Economic theory incorporated the new ideas of scientific method which advocated dominion over nature as well as the
notion of splitting social life into two distinct spheres – the public and the domestic. According to this scheme, the
public domain is associated with men, culture, “reason”, and competition, while the private domain encompassed
women, nature, emotion and co-operation. The public domain was superior to the domestic, just as men were thought
superior to women. Economics was therefore concerned with what happens in the public domain of the marketplace.

By the end of the 18th century this rationalisation had become a consolidated set of dogmas. So what we have inherited
is a system of thought, loaded with biases, which ignores the structural issues of power and prior distribution of wealth
and fosters an unrealistic view which equates real wealth (natural resources and the creativity of resourceful human
beings) with money

Comments Online:

Pete Murphy says:


September 11, 2008 at 10:33 pm

Regarding “new economics,” I think you may find my book very interesting. I am author of a book titled “Five
Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for
America.” My theory is that, as population density rises beyond some optimum level, per capita consumption
begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes
ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity
(per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration
policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these
effects of an excessive population density – rising unemployment and poverty – are actually imported when we
attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our
economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while
the more densely populated nation gets free access to a healthy market, all we get in return is access to a market
emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade
deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis
reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the
population of the country in question), eighteen are with nations much more densely populated than our own.
Even more revealing, if the nations of the world are divided equally around the median population density, the
U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median
population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms,
our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita
deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated
than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a
nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than
China’s. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should
have expected when we suddenly applied a trade policy that was a proven failure around the world to a country
with one sixth of the world’s population.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my
web site at OpenWindowPublishingCo.com where you can read the preface, join in the blog discussion and, of
course, buy the book if you like. (It’s also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to
inject this new theory into the discussion of economics without drawing attention to the book that explains the
theory.

Pete Murphy
Author, “Five Short Blasts”

You might also like