This section of the blog has been exploring a foundational concept first presented in the opening “Models” section:
“The distribution of wealth is critical to the future path of the economy.”
I have shown how improvements in productivity will frequently lead to lower wages or less employment among a workforce, and how this then leads to a wider economic decline within that region. I have refuted the argument of orthodox economics that the free market will cause this to all balance out in the end and make everyone richer overall.
A key feature of this analysis is the importance of total demand (what economists call “aggregate demand”). It is obvious that the total demand of a region or country depends on the total income of the people in that region, but it also depends on the distribution of that income, because different income brackets spend their income in different ways. This is explained in more detail here, a post that also serves as the best summary of the ideas in this section of the blog.
For this final post in this section, I’m going to combine these ideas with other conclusions reached on the blog so far. At the end of the “Financial Markets” section I posted a summary of some of the reforms required to create an economy that provides enough for everyone. I was very clear that this is not an “armchair manifesto”, a comprehensive statement of everything that needs to be done. Rather, my purpose was to draw out the key ideas that emerge from the very detailed and often highly technical analysis of the previous 64 posts.
The seven points suggested were:
1) New money must be created each year and spent into the economy by the government – the most logical use of this money would be investment in future productivity
2) The creation of new money by banks should be limited to loans that support investment spending
3) Household savings held by insurance companies and pension funds (ICPFs) should be channelled to financial assets that are funding productive investment
4) Reform and regulate financial markets to ensure that they channel saving to productive investment (requiring extensive international cooperation in regulation)
5) Use taxation to redistribute vast pools of wealth
6) Address global trade imbalances
7) Acknowledge and actively implement the role of the state in funding innovation and shaping markets
The distribution of wealth is already included in point 5 in this list. This point was lifted directly from Pozsar’s work, in which he observes how the intense concentration of wealth in relatively few hands destabilises financial markets. The conclusions about the importance of distribution drawn out in this section of the blog go far beyond Pozsar’s analysis. Ensuring wealth is spread throughout the population, geographically and demographically, stimulates demand and enables the development and survival of industries serving all these sections of society.
It is an entirely symbiotic relationship. Ensuring all people have spending power enables the development and survival of the widest range of industries, which in turn provide enough goods and services for everyone in society.
The primary way to achieve this more even distribution is not, however, through redistributive taxation – simply taxing the wealthiest and redistributing it through welfare. Rather, it is through active management of the economy, particularly through points 4 and 7 above, to ensure that those industries that are needed to meet the needs of society receive the necessary investment (described in more detail in this post). This involves both direct investment by the state (point 5), and the regulation of financial markets to ensure that investment funds managed by private sector bodies on behalf of the general public are focused on these industries (point 4).
Taxation is another tool that should be used to regulate the economy by redistributing “spare wealth” (i.e. saving) where it can be put to most productive use. While one function of taxation is funding public sector expenditure, we need a deeper understanding of its role in the economy: the primary purpose of taxation and public expenditure should be to regulate the flow of wealth around the economy, such that the economy produces and distributes enough for everyone. This requires an overhaul of current taxation systems all over the world, including a clamp down on all tax evasion and avoidance. Richard Murphy’s book The Joy of Tax gives an excellent description of how this can be achieved.
So what this section of the blog adds to our understanding of the economy probably requires a recasting of some of the points above rather than adding to the list. However, I’m not going to do this because, as stated, my purpose is not to come up with a complete theoretical economic system, a simplistic “answer” to the “problem” of how we create enough for everyone. The discovery of how to create such an economy needs to emerge from the conscious efforts of society as a whole, a point I will address in the final section of the blog. Once this section is completed I may attempt to write a summary of the blog, seeking to achieve my original objective of writing in a brief, clear and digestible way. It’s tricky, because the economy is a complex system, and most of what people think they know about it is wrong!
The entire blog so far is built around observable, empirical facts about the functioning of the economy. In my studies I have frequently discovered that such facts are the opposite of what is taught by mainstream economics and also what is considered “common knowledge” – what “everyone knows…”. I have found that following the facts where they lead is both fascinating in its own right and also reveals clearly how an economy actually functions, and hence my desire to try and write about this in a clear and understandable way on the blog. But I didn’t start out with a grand plan of how we create an economy that provides enough for everyone. Rather, through the act of writing I’ve been following the path that these facts lead us along, and never expected this to take so long or become so detailed and technical! (As an avid hill walker, I am well used to starting out on a walk towards a distant peak, and finding it much longer and more difficult terrain than I had imagined.)
But an obvious question this all raises is why mainstream economics, political ideology and much of popular opinion is based on fanciful myths that have no basis in reality. Indeed, mainstream economics functions much like a religious orthodoxy, and like the myths of the Roman or Egyptian gods its serves to justify the dominant political system. If we understand this we can understand how to change it.
This will be the focus of the final section of the blog, but it will not be about political philosophy, it will examine history. It will follow the same pattern of the earlier sections, of establishing empirical facts then proceeding by logical arguments, but this time it will build from established facts of history. It will look at how the most materially developed nations in the world achieved their economic growth. And we will find that the steps they took are the complete opposite of those recommended by both mainstream economics and by the globally dominant political philosophy of the modern era.
And we will ask ourselves why this is and what we can learn from this situation about how to bring about change.
As usual, there will be a short break before I start the next section, while I take time to sketch out the first few posts. If you want to be notified when I begin posting again I recommend subscribing using the form in the menu bar to the left.