In January 2017, Oxfam released a report claiming that 8 people between them now own half of the world’s wealth (last year it was 62). If this is true, then how did the other 7.5 billion people let this happen?
The Oxfam 2018 report claims the richest 1% own 82% of the worlds wealth created last year (see the report). We are on still on the trajectory that Thomas Piketty described in his book ‘Capital in the 21st Century’.
YouTube Video, What the 1% Don’t Want You to Know, Moyers & Company, April 2014, 24:30 minutes
One reason is down to the crazy thing we call ‘economic theory’ and how it has helped shape property rights, laws, economic institutions, financial instruments, and the commercial behaviours that we simply fail to question. The emergence of money as a universal medium of exchange, may well have been an amazing advance over bartering, but has brought with an an unbelievable set of distortions to our perception of value.
YouTube Video, Money vs. barter #characteristics of money, EconClips, November 2016, 4:08 minutes
Somehow, we have been so impressed by the utility of money, in comparison to the inefficiencies of the barter system, that we have failed to recognise that the edifice of financial mechanisms such as highly differentiated payments for different types of labour, loans, interest, credit, debt, credit ratings, defaults on debt, bankruptcy, and so on, all the way to derivatives, collateralized debt obligation and junk bonds, are completely dis-functional as mechanisms for the identification, exchange and accumulation of what I am calling ‘true value’. These traditional financial constructs are artefacts that need not be an inevitable consequence of the emergence of money to facilitate exchange, but their wide-spread adoption across a global economy may deliver as much harm as good.
There was a time when currencies were backed by gold. This meant that the money supply was limited. But Britain dropped the gold standard in 1931 when the pound came under pressure from speculation. Following the 2008 financial crisis the US and Britain embarked on a programme of ‘quantitative easing’, or in other words, simply creating money out of thin air. Whilst this may not have necessarily been a bad thing in itself, this money was used to buy back government securities rather than directly stimulate the economy, causing inflation in asset prices as opposed to proactive economic activity. Contrary to what theresa May and other politicians maintain, there is a Magic Money Tree.
BBC Radio 4, the Magic Money Tree, January 2018, 28 minutes
What is True Value?
‘True value’ would correspond to everything that affects us, not just the results of financial transactions. It would value all the familiar clichés, like the sound of birds singing, the sight of the blue sky, the efforts of a care worker, our close relationships and much more. ‘True value’ would accurately reflect our psychological relationship with goods and services so that we could clearly see that the value of a sandwich to a hungry person is greater than its value to someone who is well-fed. ‘True value’ would, for example, build in the costs to the environment and health of using diesel. I am not saying that we should charge money to hear ‘the sounds of birds singing’ but I am saying that our current understanding of value often neglects the value of things that have no price and this leads to their value being ignored or overlooked in individual, organisational and social policy decision making.
We will never actually capture ‘true value’. It is an entirely abstract concept, but it will, at least, help us to understand that what we currently think of as value in a financial sense, is quite mis-leading. If we understood ‘true value’ then we could build a new economics, because, let’s face it, our current theories of economics are pathetically inadequate. They don’t count the things that matter. They make all sorts of inaccurate assumptions about our psychology (that we are rationale and selfish, that gains and losses are equal, that the fifth ice-cream we eat is as valuable as the first, that a banker is worth more than a nurse, that more wealth equates to more happiness etc. etc.). They fail to take into account social costs and benefits.
Whilst our current economic theories do facilitate the trading of value and do help regulate the market by managing supply and demand, there are also a host of unintended consequences that we appear to have been totally blind to. One of these is the way in which they tend to concentrate wealth in the hands of the few, causing enormous inequality. This consequence is now recognised as a mechanism of destroying ‘true value’. Greater inequality is correlated with greater unhappiness.
TED Video, How economic inequality harms societies | Richard Wilkinson, TED, October 2011, 16:54 minutes
Unfortunately, although current economic theory is inadequate in many ways, it is nevertheless self-perpetuating. It rewarding those that are willing to play its game, and leaves the rest without the resources to challenge it. It encourages people that have wealth to protect their wealth – by force if necessary. In short, it’s a trap, and it’s a trap that can only be seen as such, by standing outside it. Whilst our current economic theories have got us this far, in a world where robots will increasingly provide the muscle power and artificial intelligence will increasingly provide the brain power, our current mechanisms for distributing and managing wealth will become increasingly dysfunctional. If we are to head-off the dystopian futures of science fiction, we need to radically re-think economic theory.
Sources of Value
One reason current economic theories fail is because they only take into account a fraction of the value each individual experiences every day. If I ask you what did you value most today you might say that it was, for example a chat with a friend or maybe a walk in the woods, or maybe the experience of being introduced to a new idea. We know that financial value is only part of the story so we don’t bother that much to think about and question it. We just accept current economic theory and the consequences for the way money works as a historical fact.
YouTube Video, Angus Deaton – How to Persuade Sceptics of the Value of Measuring Wellbeing, Legatum Institute, March 2014, 2:00 minutes
You might also say that you got value from the pleasure of driving your car, or buying a new coat. However, the fact is, that only a proportion, perhaps for less than half of the value you get in a day comes from anything to do with the economic system.
This is perhaps one reason why wealth above a certain level seems to confer little benefit in terms of wellbeing. Another reason is explained below.
What you have to pay for and what comes free is a rather haphazard mixture. The air we breathe, on which our lives depend, has a very large value but cost nothing. On the other hand food, also necessary to sustain life, does cost money. So, does shelter and somewhere to sleep. But then the value that you can get from other people in terms of their friendship and support usually comes for free, although there may be a cost in terms of obligations. This is like having a separate currency where there is also an exchange of value, debt and credit, and even an exchange rate with monetary currency , because you could, for example, pay off a social debt by buying a gift.
Even in the quasi-monetary system there are a multitude of currencies, for example, loyalty and reward points.
At the same time, the concepts in economics are increasingly used to refer to forms of wealth other than financial. We now talk about social capital, cultural capital, educational capital and so on. This is because like money they are resources that can be utilised and that confer benefit on the owner. However, they may differ from financial capital in the sense that drawing down on them doesn’t deplete them. But then again, just like financial wealth, the more you have the easier it is to get more.
YouTube Video, Social Capital Theory, QUT IFB101, February 2015, 4:09 Minutes
Transactions for Mutual Benefit
Looking at contracts and transactions, another perspective emerges. If I go into a shop and buy a pair of shoes then the value of the shoes to me must exceed the value of the money, otherwise I wouldn’t do it. Similarly, the value of the shoes to the retailer is less than the value of the money that they get from the sale, otherwise they wouldn’t do it. This is a contract or transaction of mutual benefit.
We can distinguish between healthy and unhealthy transactions. Healthy transactions are ones where both parties benefit. Unhealthy transactions are ones where one or both parties lose out. Similarly we can distinguish between healthy and unhealthy contracts. These may regulate a single transaction, or multiple transactions over time.
Next we can distinguish between explicit and implicit contracts. An explicit contract may be agreed in writing or maybe verbal but, at least, the parties to the contract are reasonably clear about what the terms are. They may or may not be clear about what would happen in the event of a breach of the terms.
An implicit contract is one where the terms have never been discussed and agreed. Sometimes they are assumed and sometimes we are not even consciously aware of them (or at least until a breach occurs). So I might put the bins out every Tuesday night, whilst my partner will always cook the breakfast on Saturday morning. We may never have discussed this arrangement and indeed one or other of us might repeatedly default or substitute some other activity that is of value to the other party, without anybody being unduly concerned.
So, now we are describing a world in which there may be a preponderance of implicit contracts, and beneficial transactions where value is gained (and also perhaps lost) and exchanged without any reference to finance. If we could measure this value, then we would be a long way towards a viable theory of economics.
Let us say, for the sake of argument, that half of the value that we receive or exchange every day is non-financial in its nature but there can be exchange of value between the financial and the non-financial systems of value.
Now, let’s consider some of the assumptions that our economic systems rely on but which are patently not true. One such assumption is that we are all rational and that we make decisions in a consistent and rational way that maximises our own interests. If this were true then the advertising industry would be bankrupt. Another assumption is that losses and gains of the same amount are seen as equal. It is now well demonstrated that a loss may have twice or more the psychological impact as the same gain.
Richard Thaler has built a career on noticing that economists have got it wrong and in October 2017 won the nobel prize for it.
YouTube Video, Economics Nobel winner Thaler shed light on how real people behave, PBS NewsHour, October 2017, 9:48 minutes
And if you want to dig a little deeper into the context and theory, then watch:
YouTube Video, Behavioural Economics – A Quick Primer, tutor2u , January 2017, 11:44 Minutes
Then there are factors that are recognised within economic theory but which also shake the idea that we act consistently and rationally. For example, the law of diminishing marginal utility shows that the first ice cream we eat has more value than the next one, and that more value than the next and so on. Diminishing marginal utility applies to money as well as ice cream. So, if you were to take away say 5% of the wealth from the 8 people that own half of the worlds wealth and distribute it to the half that are struggling to survive, there would be an enormous surge in value created. The wealthy would hardly notice the loss while everybody would gain a huge amount relative to their current situation. What kind of economic theory is it that doesn’t recognize this basic principle of value creation. This is, of course, what the system of taxation is supposed to correct, but it is becoming increasingly apparent that in a global economy, no individual state has the power to control the activities of trans-national corporations and international flows of wealth.
Social Costs and Benefits
As if all this were not enough to discredit the way we think about economics and organize our financial systems, there is also the question of social costs and benefits (referred to by economists as ‘externalities’). These are the costs and benefits associated with activities that are not costed into transactions and affect third parties. So if I buy a car that pollutes the atmosphere contributes to the premature death of tens of thousands of people (to say nothing of medical costs arising before that) I am paying a sum of money that does not take into account this social cost. Neither the car manufacturer nor I incur the cost of the pollution, that instead is born by all air breathers (particularly those that live near busy roads). Inequality itself creates a social cost because of the perceived unfairness, and the frustration and helplessness this can cause.
YouTube Video, Episode 32: Externalities, mjmfoodie, January 2011, 7:38 minutes
Motivations and Incentives
It is often argued that financial incentives are needed to motivate people who would otherwise not do the jobs that needed to be done. It’s true, I want somebody to clean the toilets as much as the next person. But I also have a little more faith in human nature than to think that it is only financial incentives that drive behaviour. I don’t think that if, for example, everybody was given a universal basic income that would at least enable them to buy food and shelter that the whole world would put their feet up and sit in the sun. Some people will, I’m sure, but then for every one of those it would release another person from the basic chores of staying alive and allow them to contribute much more.
YouTube Video, Universal Basic Income, Inequality Media, September 2016, 3:39 Minutes
We really do have an extremely impoverished idea about what constitutes value and how we can maximise value to the individual and society by focusing our efforts on healthy contracts and exchanges. Our current theories are a breeding-ground for the creation of perverse incentives and concentrations of wealth.
Given all of the above, it’s a wonder how current economic theory holds up at all. Could it just be a house of cards held together by those with influence to sustain a consumer society – a society in which much of the so-called value is an illusion (created in part by wealthy corporations funding the advertising industry) and which plays on our need to compare ourselves to others.
YouTube Video, When Bankers Were Good, thefrockdoctrine, November 2011, 59:09 Minutes
Can it last much longer?
Whilst people’s lives have dramatically improved over the centuries, most of this is the result of education, science and technology. Free market economics has worked to regulate supply and demand and still forms the basis for transactions of mutual benefit. However, it’s ‘side effects’ in creating perverse incentives and encouraging people to build and preserve wealth at the expense of those without power, and who are increasingly marginalised, has created a new and divisive social morality. Let’s face it, the economic theories we run with today are based on false premises and false understandings of ‘true value’. Current economic theory and financial systems are an invention of the powerful to serve the interests of the powerful. They are damaging to almost everybody else. They have created a global economy where extra-ordinary concentrations of wealth severely disadvantage the many. They have turned people into consumers and dispensable units of production, and created social costs that satisfy the current greed of the rich at the expense of future generations. These global systems separate act from consequence in a way that makes big business and the wealthy more or less unaccountable.
As we move towards a world where machines are increasingly replacing people in doing both our manual and intellectual work (e.g. see: Post-work: the radical idea of a world without jobs, the Guardian, January 2018), we have to question a system in which the wealth created can be so unevenly distributed. We really need to get a better understanding of ‘true value’, how to measure and maximize it and how to distribute it more sensibly through healthy contracts and transactions. Where is the economic theory that will provide a credible way to maximize and fairly distribute ‘true value’?