Economics is often presented as addressing the problem of unlimited wants and scarce resources. How should resources be allocated to production, what should be produced, and who should receive what is produced?
However, the idea of unlimited wants is a fallacy. I could challenge it on the basis that humans need much more than material goods for their well-being and contentment, and indeed that contentment actually comes from a non-materialistic approach to life. If this is the case, then a school of thought promoting the idea that we have unlimited material wants, and that human happiness is founded on acquiring as many material possessions as possible, is likely to do much damage to human society.
However, such philosophical questions cannot be resolved through scientific analysis, so instead let’s approach this through simple logic.
There is a limited amount of time every day, and each human has a limited lifespan. Therefore our wants are limited: they are limited by the amount of time that we have to consume material goods and services.
So we can therefore conceive a notional amount of goods and services which is the maximum amount that the human race can consume. What happens if we become so productive through automation that only a proportion of the human race is required to produce this amount of goods and services?
If everything is left to the market, with no government intervention, and therefore no welfare payments, the proportion of the human race not required for production starve to death. It’s as simple as that. This is the logical conclusion of free market fundamentalism.
So let’s assume that people are not simply left to starve – you are left with a welfare state on an unbelievable scale. You either leave those who are not needed for production to starve, or you need the state to take on, as a primary role, an unprecedented redistribution of wealth to ensure that those who are now unable to work have the means to stay alive.
Mainstream economic theory always emphasises a minimum role for government, and provides a pseudo-scientific justification to leave everything to the market. But in fact, this thought experiment has shown that, as a point of principle, the state must assume a role for distribution of wealth. The question is not whether the state should have a role, but what should that role be, and how can the state carry it out effectively.
Mainstream economic theory has nothing to offer on this subject. It has nothing to say about how we ensure an even distribution of the opportunity to participate in the human race’s productivity. It simply says that we leave everything to the market – but doesn’t point out that in a situation of ever-increasing productivity, the market will allow those not needed for production to starve.
Of course, very few economists rule out a welfare state altogether, and most advocate some degree of support for those who cannot work through ill health or disability. But this is done grudgingly, within an assumption that such interventions should be kept to an absolute minimum. This then becomes the above mentioned pseudo-scientific justification for political actions that always seek to reduce government intervention. The current assault on welfare in the UK, which has led to extreme poverty, is driven by a mix of political ideology backed by the pseudo-science of mainstream economics. Orthodox economics actually argues that those who do not work are choosing leisure over work! And therefore the failure is never of the government to stimulate an economy that provides enough employment, the blame always lies with the unemployed for not accepting low enough wages. It’s no wonder this is an attractive argument for governments, and that the parties that embrace such policies are so popular with the rich.
Two weeks ago I argued that increases in productivity usually result in job losses in the relevant industry. Part of the orthodox economics argument against this is that the additional income for consumers from having one product cheaper will enable them to purchase more of other products. The circulation of wealth through the economy will mean that eventually all increases in productivity will lead to higher employment in the end. You just need to look at the real world to see that this marvellous balancing simply never happens. Last week’s post gave the example of the loss of coal mining in the South Wales Valleys to show the real, decades-long impact of a significant loss of income within a region. This dynamic is repeated all over the world, whenever one region loses out to another that can produce goods more cheaply.
The thought experiment presented in this post – what happens when increases in productivity mean that just a proportion of the population needs to work in order to produce everything that the world’s population has the time to consume – shows is that it is a logical fallacy to suggest that there is no role for the state in redistribution, or to only begrudgingly accept the minimum possible role and then always seek to reduce that role further. Left to its own devices, the free market will simply allow those who are no longer needed in the workplace to starve.
But isn’t this all a bit ridiculous? This seems like some utopian (or dystopian) fiction. But in fact, it’s something that economists are now starting to wake up to. Adair Turner, former head of the Financial Services Authority in the UK (the regulator of the financial sector) recently published a paper on the implications of increasing automation in the economy, predicting exactly such widespread mass unemployment. We will explore this paper in more depth next week.
But at this point I want to emphasise the conclusion of this post, which will be central to this section of the blog. Just as the earlier sections of the blog demonstrate that we need coordination and regulation in financial markets to ensure that savings are channelled to investment in productivity, the distribution of participation in the economy will also require coordination and management. If you leave it to the free market, most of us simply starve.