The central tenant of this materialistic religion has been the notion of "the free market." The notion is wrong because the modifiers within the phrase are wrong. There is no such thing as the market. Look around and note the many markets. Note too that each one is organized, manipulated, regulated or otherwise shaped by some group or other with an avid interest in doing so. No market is truly, purely free, or, in the jargon of economists, perfectly competitive.
Nor should they be. The closest thing to an economic free for all in modern times is the lawless Gangsta Capitalism practiced for a time in post-communist Russia. Resurrected Cossacks are no economic model for a civilized society. On that we can all agree.
Less agreeable is the inconvenient truth (thank you, Al Gore, for that useful phrase) that our corporate cowboys, Wall Street raiders and hedge fund pirates have become our Cossacks. In suits and ties they wield computer screens as effectively as sabers. To risk another metaphor, in the name of the free market theology we let them off the reservation Franklin D Roosevelt allotted them and now we have to corral them again.
To round them up we must revisit another central tenant of our economic theology, most aptly phrased by Ronald Reagan: government is the problem, not the solution. The Great Communicator was not totally wrong. History backs his assertion all too often. The more enlightened concepts of Adam Smith, for example, replaced mercantile dogmas that had strangled ambition and innovation for centuries. Now, though, Smithian theory has congealed into a computer modeled theology that hides its basic over simplifications behind the elegance of its math.
The first modern economist to find a principal (rather than supporting) role for government was British economist John Maynard Keynes. It is his play book that the principal actors in Washington today are reading from. It started with the Bush administration Treasury and Federal Reserve, continued even more strongly with the Obama team, but is now bucking the headwinds of a frustratingly slow recovery (typical, the pundits say, of financial panics) and the Tea Party tide's incoherent ways.
Keynes demonstrated that economic downturns such as the one we lately enjoyed are not always self correcting. Supply and demand can reach a stable equilibrium well below the level of economic activity that fully employs us all. When, as lately, this happens ever more frequently to nations so wealthy that what they fail to produce is only marginally necessary, governments cannot and, after Keynes, should not, fail to fill the gap. Free market theologians will argue that governments simply can’t, and on the record they have a point. But there is nobody else to do it so we had best bend ourselves to learning how.
Still, following past Keynesian fixes will not be enough, if not now then in the not too distant future. We have lately rediscovered that dumping mounds of cash into the coffers of reluctant lenders and traumatized consumers is like pushing on a string and expecting the other end to go somewhere. Government investments in infrastructure (bridges and roads, hopefully to somewhere; a smart electrical grid, electronic medical records and such) are agonizingly slow to ramp up. They tend to stimulate just as business, too, revives, and the reinforcing combination can twist the economy into an inflationary spiral.
If Keynes as traditionally applied is not enough, what is? What will the brilliant young man or woman who is destined to be the next Lord Keynes contribute to the economic system of tomorrow?
In the beginning were the fundamental factors of production: land, labor and capital. The witches brew we call wealth was concocted presumably from the toil and trouble of their proper mixture. Capital was the active ingredient, though. Land was passive and labor docile or reactive. At least equally fundamental today as this trio are two equally active ingredients: energy and information, and tomorrow’s theories would do well to take them fully into account.
Our approach to designing markets should be scientific and creative rather than prayerful and passive. Such thin theories as perfect competition, rational actors and perfect information need to be demonstrated or discarded. With personal consumption counting for two thirds of all economic activity, "economic man" needs to be replaced with homo sapiens in all his and her evolved glory. This will not go down easy, for economists just love the simplifying assumption, and do not like fuzzy minded psychologists, political scientists, game theorists, evolutionary biologists, ecologists and (especially) sociologists mucking up the elegant simplicity of their take on humankind.
Some markets cannot abide unfettered competition. We have recently learned anew that the financial markets are first among them. Governments and international institutions cannot let go of the reins of money and credit without risking a runaway every now and then. That fact needs to be enshrined in the DNA of all political parties serious enough to be allowed to govern and conduct diplomacy.
Another such market is the financing and provision of health care. The best care anywhere in the US is provided entirely by government to our aging veterans of past wars. The Veterans Administration builds and operates the hospitals, hires the doctors and nurses, bargains hard for low drug prices and exports the only electronic medical support system in the country worth mentioning. And they do it in the face of resources that are chronically delayed by a dithering Congress that continually forgets the immediate consequences of the wars it funds.
Other critical economic activity would never occur if we waited on markets to join supply with demand. Still other markets, like some weeds, can’t be eradicated except by the most draconian methods. Thus government succeeds when making the market for basic science research, struggles to shape an equitable market for equities, and utterly fails to quash the booming market for illegal drugs.
We need better measurements of what we do economically to replace the gross national product and other such aggregates. A system that adds Katrina’s and Sandy's recoveries without subtracting their losses only measures what is easy not what is real.
Equally a system that doesn’t deliberately include "externalities" -- from garbage disposal to polluted land, air and water to accelerated species extinction to global climate disruption – in the cost of goods and services bought and sold, should not be called capitalism.
Finally, as John Kenneth Galbraith, the finest student of economic phenomena never to win a Nobel Prize, long ago said, and I paraphrase: None would select the squirrel wheel as a model for the economy. Growth, in other words, must end some day. Either we achieve wealth beyond measure just before our well deserved extinction or we learn how to create and equitably distribute basic material needs and agreeable comforts for that somewhat longer journey called a sustainable future.
The next economic system will not be handed down from above as holy writ. Nor will it evolve from the vacuum of Laissez Faire. It will have to be deliberately invented and continuously perfected by some smart members of humankind for all human beings. We will probably call them economists and politicians for lack of better four letter words.
Last revised December 25, 2012. Merry Christmas to you, too.
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