[Published at Post Growth 14th November]
Not only do many people agree we need to change our economic system, many are already doing really good things, like forming cooperatives or firms with a social purpose, promoting repair and recycling, growing healthy local food, reducing greenhouse gas emissions and so on. But all these good efforts struggle against the ever-rising tide of ‘growth’. What if our economic system supported the good things instead of subverting them? Could that be possible?
To usefully sort out these issues, and hope to find some answers to them, we need to have a clear understanding of how our economic system works. Mainstream economics is no help here, because its theoretical version of a market economy is an irrelevant abstraction. That is a big part of why we are making such a hash of managing our societies and living in our biosphere.
A more useful approach has been developing below the radar for some time. It identifies a modern economy as a complex, self-organising system. Complex systems, for short, have radically different behaviours from mainstream predictions. They alternate periods of reasonable stability with small or large erratic shifts. This has some rather big implications.
For example, there is no basis in theory for expecting an unregulated market to be efficient, nor for it to yield desirable results. Oops, there goes the whole neoliberal ideology that has dominated the world for the past forty years.
Perhaps that is why economies globally are performing so poorly, for example by booming and crashing, promoting extreme inequality, degrading the land and threatening planetary apocalypse.
Mainstream economics has nothing to say about booms and crashes because its central ‘neoclassical’ theory of markets is contrived to predict a general equilibrium, in which all supplies balance all demands. This mythical equilibrium is, in its abstract little world, an optimal state, hence the evangelical claim that free markets deliver the best possible world.
The trouble is if you allow a little reality back into the theory, by changing some of its absurd assumptions, your theoretical system becomes an erratic, metastable, shifting, complicated, far-from-equilibrium complex system. Instead of your economy being like a gentle rocking horse it is like a mob of wild horses.
Does that mean we have to give up on markets because they are unmanageable? Well no, we just need to treat them sensibly, like the living systems they resemble. A good horse trainer understands the horse and works with it, not against it.
We can work with markets too, by managing their financial incentives. Markets will go where the profit is. If it is profitable to exploit people and trash the planet, then people will be exploited and the planet will be trashed. If we make it profitable to support people and nurture the Earth, then perhaps we’ll get a better result. For example, a price on carbon emissions is supposed to make it more profitable to use clean energy.
Adjusting the financial incentives under which markets operate is nothing new, we do it all the time with taxes, subsidies and regulations. The problem is we manage markets incoherently, often perversely, and with feigned reluctance because we’re not supposed to have to do it.
But there is a very positive message here as well. Living systems are also complex systems. This means there is no reason in principle why our complex economy could not be made compatible with living things, including people. It means we might shift our economy so it supports all the good work many people are already doing to improve life and save the planet.
To begin to sensibly manage our economy we need economists who understand the kind of beast they are dealing with. The trouble is most economists have no experience with unstable or complex systems, so we need to teach a new kind of economics. Kate Raworth’s Doughnut Economics does a great job of identifying key issues, but is not meant to get into much analysis.
My new book Economy, Society, Nature is aimed at beginning economics students, and anyone else who would like a better grasp of what is going on. It has minimal mathematics and focusses on getting ideas clear. It uses simple examples to illustrate, for example, the role of feedback in generating complex behaviour, explaining basics as it goes.
The book also covers a number of other aspects of economies. Some are fundamentally misunderstood by mainstream economists, including money, social interaction, accounting and land, whereas others need better consideration, such as excessive financial trading and collective ownership.
My book covers what money is and how it profoundly affects the behaviour of the system. Money intrinsically involves debt, yet mainstream economics excludes debt for spurious reasons. That is why they did not see the Global Financial Crisis coming.
An economy is also profoundly affected by the social interactions of people, but social interactions are also excluded from the mainstream theory. This pretence that we are asocial, calculating brutes has had seriously bad effects on our societies. It is important to be aware of the modern evidence that we are in fact highly social beings.
We also need to use proper accounting, with balance sheets, instead of the deficient and conflicted Gross Domestic Product. The financial system needs to be reduced and stabilised, possibly with transaction taxes. We need to treat ‘land’ and natural resources appropriately. We can use a wider range of collective ownership models, so wealth flows more fairly. Governance systems are pertinent, because an economy is not separate from the society it is supposed to serve.
To address ‘growth’, it helps to distinguish quantity of resources, which can and must be reduced, from quality of life, which can be improved indefinitely. We need to recognise that unfettered competitive markets drive new technologies and growth of resource use, taking us, in effect, to armageddon on automatic. Taming those drives will be no easy task but correctly identifying the beast we are dealing with is the essential beginning.