"We have always known that heedless self-interest was bad morals;
we know now that it is bad economics."
Franklin Delano Roosevelt, Second Inaugural Address, January 20, 1937
"To me, purpose is a clear, simple statement of intent that identifies and binds the community together as worthy of pursuit. It is more than what we want to accomplish. It is an unambiguous expression of that which people jointly wish to become. It should speak to them so powerfully that all can say with conviction, ‘if we could achieve that, my life would have meaning.’ Making a profit is not a purpose. It may be an objective; it may be a necessity; it may be a gratification; but it is not a purpose !"
Dee Hock, Birth of the Chaordic Age, 2000
Current economic theory reduces all things to one dimension, that of monetary value, in fact that seems to be the whole basis of the science. Yet value is not in itself a one dimensional concept, we value many things that are impossible to classify in such linear monetary terms, air or sunlight for example. Complex notions of value require a type of economics that is itself complex and multi-dimensional, a value system that goes beyond the trade based concept of material exchange and takes into account the wider needs of people and planet. We will try to outline such a complexity based economics here.
First, what is the purpose of economics ? One definition states:
Economics is the study of how individuals and societies, experiencing virtually unlimited wants, choose to allocate scarce resources to satisfy their wants [Economics by Ekelund&Tollison]
It also suggests 3 basic questions are relevant:
- What goods and services are produced ?
- How are goods and services produced?
- For whom are goods and services produced ?
Like many aspects of our world, a large number of hidden assumptions lie behind such phraseology and the ideas behind them, let us identify just a few of these:
- Individuals & Societies: is nothing else important ?
- Unlimited wants: are all/any of our wants thus ?
- Goods & Services: the only wants ?
- Scarce resources: is this always true ?
- Satisfy their wants: does this occur ?
- To the risk takers the reward: is this true ?
- All agents behave rationally: do they ?
- The methods achieve the intended result: do they ?
- Money is the concept needed to do this: is it ?
Before we allow economics the almost dominant position it has assumed in the management of our world, we would do well to look closely at the assumptions behind it and the factors left out. These classify into three types:
a) Negligibility - the factor is always negligible or assumption always true
b) Domain - factor is negligible or assumption true in the cases we consider
c) Heuristic - factor is negligible or assumption true to first approximation
In the last (least general and most likely) case we can see that this precludes any long term planning, since it indicates an over simplification that will not hold for long in a real system.
The chief assumption amongst those listed is the last, that the concept of money is the common factor that relates (or can be made to do so) all our wants to resources, and we will look at this more closely later.
Economics is based in trade, the idea that people can exchange goods to mutual benefit. Within this remit it can be valuable, and here the concept of an abstract 'money' can considerably enhance trading advantages, to the benefit of all. Yet we must ask ourselves are wants always tradable, and if not does economics take this into account ?
The answer to the first part of this question is clearly no. Can we trade air ? The Earth ? How about health ? Is natural beauty tradable ? To trade, two individuals must perform an exchange - but in terms of things they both possess and can freely give away if they choose. Economics can only deal with the above examples by further assumptions, either by saying that they are 'free' (i.e. of zero monetary value) or by saying that they have a value and assigning that not to everyone (as the common resource it is) but to a specified owner (as we do with land and mineral rights) - who can then sell it back to the common people !
In any balanced system of economics we would require actions to affect only those involved in the trade (those gaining benefits). This micro-economic principle suggests that companies or individuals whose trades have effects on third parties must be held responsible for those effects. A profit is the difference between the value and the cost, but the latter must take account of all the costs to be a valid sum, and this includes third party costs also (e.g. pollution caused, amenities removed, time wasted, vocational training, social backup). Such 'true cost' accounting is almost unknown in economics, third party costs are either ignored, treated as a free resource, or only grudgingly met in retrospect (following legislation) - after the damage has already been done.
Let us look now at the goods and services included in economics, how far do they contribute to what we can call 'Quality of Life' or overall fitness ? In trade systems, the whole purpose of the exercise is that following the trade both parties are better off, the trade is a positive-sum transaction. Does economic theory extend this to all areas of life ? It is difficult to maintain that it does. For a factory worker on a production line does the payment made so compensate for his effort that he would chose to do this work if he didn't need to work ? If not, then it would not be a trade freely entered into, so economic theory fails to justify what is in effect forced labour (i.e. slavery!).
For some people of course the system works very well, yet the structure of most companies is feudal, the boss controls the lives of the employees - a pure dictatorship. Free enterprise suggests that this should not be the case, that all agreements should be voluntary and kept due to the mutual benefit expected. Again economic practice fails to deliver what the theory promises. Who does benefit from the system ? Chiefly those who are free to play the game as it was originally devised, able to select from the offered trades only those from which they can personally see value add, an increase in quality, something for nothing. Yet the whole emphasis of traditional economics is that it never voluntarily gives something for nothing, all goods are priced at the maximum possible, for best one-sided profit - preferably in a monopoly situation !
Looking towards the other assumptions mentioned we can see similar problems. Do we have unlimited wants ? At the risk of sounding like a protest march: "what do we want and why do we want it ?" What would it mean in any case to have an unlimited want, e.g. for food ? Clearly any want should only be of value if it fulfils a need, and what we want depends upon our greatest need at that time. Once fed, do we want more food ? Clearly not, food (and other consumables) follows a distribution, too much is as bad as too little. What is there then to confirm this economic assumption of endless greed ? It seems to relate solely to the idea of possession, that more is better, but if this isn't true of consumables then to what does it apply ? Presumably non-consumables, but if these are not consumed the possession of them by one person effectively removes that possession from the rest, obviously a negative-sum operation and clearly a rather silly principle on which to base any system ! Starting with universal access, there can be no justification for imposing such an access restriction, and if the resource isn't consumed (i.e. is a public good) then why need we restrict access to it ?
Now on to the scarce resources. Again the assumption is that not everyone can have as much as they wish to consume (but are hamburgers really so scarce or is knowledge?). Therefore logic would suggest that resources are not used unnecessarily, yet modern economics does exactly the opposite - the maximisation of production (GNP/GDP - the economic criteria for 'growth') clearly maximises resource usage also. In a sensible economic system we should look to meeting needs by minimising production !
Production growth is a mirage, masking decay in other aspects - humans can only live 24 hours per day, so consumption is static overall (except for population growth perhaps). If we do one thing then we cannot do another at the same time - but suppose we did nothing originally, we could grow consumption then surely ? Yes, but presumably we didn't then previously have any unsatisfied wants (otherwise we would have fulfilled them), so why should we have them now ?
But we can also ask, does the current way of doing things actually satisfy the world's wants, as claimed ? Who is satisfied with their lot ? Certainly not the starving millions (with or without hamburgers), but neither it seems are the billionaires, they always want more. In overall terms then this supposedly crucial purpose of economics isn't even met for a minority of people. And do production methods make the best use of these scarce resources (e.g. by recycling) ? Clearly they do not, most resources are actually thrown away - it is a disposable society ! The methods being used fail to achieve the proclaimed end.
Turning now to the source of wealth, labour (and should only humans be considered here ?), we see this cast in economic theory as a cost, to be minimised as much as possible, both by employers and employees. The ideal situation on this view would be for the company to operate with no paid labour and for the worker to be paid for doing no work. No wonder conflict predominates in labour relations ! Yet contrast what happens when a person is free to work or not, as they choose. Invariably they want to occupy themselves in some way, they enjoy working when it is something they wish to do (e.g. hobbies, creativity, sport). Again we have an economic system that reverses the true values of people.
In the past, the general idea was that people were the important occupants of the planet, and that the resources (and science) were to serve them, yet now our economics makes the 'goods' king and relegates the 'people' to unwanted hindrances. Whereas all the promises of mechanisation claimed that people would not have to work on menial tasks in future (and thus could be paid for no work, with labourless robot factories !), the reality is that it has taken away the artisan creativity that previously existed and replaced it with high-pressure repetitive support of the machine ! Production of goods/services is now the measure of company economic success and level of income denotes an individual's success, people values (creativity) are no longer even considered. A strange reversal that makes production superior to consumption, the tail wags the dog...
Due to the emphasis on production, we now have the situation that consumers must ever be persuaded to consume more, by massive intrusive advertising drives (which, because they take time from consumers, are actually a forced cost !). Companies (often with Government collusion) indulge in conflict with competitors to force their unwanted production onto unwilling consumers, mostly using dishonourable and deceitful marketing techniques. And since we claimed that consumption overall is static, this means that consumers are being forced to reduce consumption of those goods that are not produced, the free goods - hardly in the peoples best interest ! The non-evolving nature of most production lines also forces conformity, making ongoing gradual improvement impossible, step changes occur only when forced (by a failure to sell) not by a genuine wish to value-add. And this unnecessary growth in consumption of mostly non-renewable resources generates additional conflicts and blight at global levels. So we replace the desired 'Quality of Life' by 'Quantity of Death'.
Yet this competitive system is said to reward the risk takers and protect the workers, does it even do that ? Not at all, the workers take all the risk - their livelihood depends on the firm's success, yet they get none of the reward (only a fixed minimised wage). Directors nowadays have employment clauses that actually pay them handsome 'severance' benefits if the company fails, whilst giving them a share of the profits also - a no lose situation, and another reversal of economic dogma ! But maybe their responsibility justifies this reward ? No again, any negative effects of their 'success' (e.g. pollution, relocations, redundancies) are borne socially by others. It is power without responsibility, let alone any agreed democratic control.
Any system under stress cannot be regarded as a balanced one, so we must consider changes to those dogmatic 'theories' that create such unstable systems. The prime human advantage is in our flexibility, the ability to be creative. This is a major resource, yet the failure of economics to even consider it shows how far it has drifted from its original (Adam Smith) goal of exchanging skills to mutual advantage. We desperately need a form of economics that properly takes into account both the benefits available in terms of resources and the genuine costs that exist. This means seeing people as benefits not costs, and seeing production as a cost not a benefit !
Let us look now at some of the high level aspects of economics and the macroeconomic theories employed. These are usually divided into three types, Classical, Keynesian and Monetarist.
Sadly such economic theories have not been subject to test, as a scientific theory should be, and are perhaps best viewed as religions - their 'holy books' of methods each exclude ideas, as dogmatic assumptions, that the others include. Bias from both game theorist economists (academics, who treat the subject as an abstract mathematical game, therefore anything goes) and ideology economists (who pursue a political end with any means necessary) ensures that few economists treat true scientific objectivity as even important ! Whilst the ubiquitous use of mathematics gives a false sense of accuracy to these theories, we have seen that almost every assumption made is questionable, and whilst theories deliberately exclude important aspects of the subject (e.g. people values) we can only say 'let the buyer beware' !
There seems to be no predictable or quick connection between the spend/tax or loan/rates policies of these macroeconomies and the actual effects - these are untested simplifications. And if an intervention policy can be neutralised (anticipated or bypassed) by the market then of course it will be - making such controls largely impotent in a coevolutionary world very different from that of the static equilibrium assumptions adopted.
No general theories seem possible for macroeconomics due to this non-passive aspect, suggesting that intervention should take place at the microeconomic level, leaving macroeconomics with a monitoring role only. Maybe economists can all then agree at least about valid microeconomic actions, and make a basis for a valid economic science ? But distortion of microeconomics results when mega-firms become macroeconomic in size, and can shape the economy overall by their behaviour, leading to a breakdown of yet another economic assumption, that competitive pressures make the effect of any one firm irrelevant to the overall behaviour of the economy. Anti-competitive practices (monopoly creation or price fixing) show imperfect competition operates even when a firm is relatively small in size, giving the lie to another assumption - that the market will act competitively.
Gross National Product (GNP) and Gross Domestic Product (GDP), the most widely used macroeconomic measures add, as a supposed benefit, such 'value adds' as social support, litigation, health care, accidents etc. In a sensible economic system these should be negative, they are failures of the economy to work efficiently for the good of the people. Growth at present could be wholly concerned with decay, and yet be taken as a sign of economic health ! This is too simplistic of course, but the general idea, that progress statistics should measure the acts of creation not those of repair, stands and follows the principle that 'prevention is far cheaper than cure'. As Senator Robert Kennedy once said (18th March 1968):
“The Gross National Product [and GDP] includes air pollution and advertising for cigarettes, and ambulance to clear our highways of carnage. It counts special locks for our doors, and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm and missiles and nuclear warheads... And if GNP includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials... GNP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”
Two related concepts are needed to enable us to see economics in perspective. One is the relation between the economic model and reality, the second concerns the value system on which our economics is intended to work. Taking the first, economic theory like so much science adopts a linear perspective to its subject. This implies that there is a progression between causes and effects, a bigger cause produces a bigger effect and there is no movement the other way. This is quite wrong, and in itself accounts for much of the failure of economic policy to foresee the future. Real economic systems are nonlinear and contain causal loops. We have seen the first effect already, the utility of food goes down past a certain level, cause and effect are not proportional, whilst the second effect reflects the negative self-maintaining (homeostatic) actions of market forces. But this effect can also operate in the opposite way, with positive feedback - stock market greed and fear setting up loops that make prices gyrate wildly, out of control.
In any economic system there are very many such feedback loops and nonlinear effects. This makes even microeconomic forecasting more art than science. and failure to take account of all the interactions in a complex system can invalidate the results predicted. Financial curves aren't smooth as generally assumed (either straight lines or simple curves), but punctuated equilibria, a sum of multiple nonlinear interactions, highly dependent upon the factors included and those considered negligible. Isolating of variables for intellectual discussions does not mean that the real world system will then behave according to the simplified model (due to nonlinear combinatoric effects).
The emphasis on competitive behaviour in economic theory, as a way to maximise consumer's utility, neglects the large role played by cooperative or synergistic behaviour. Trade is a cooperative act, not a competitive one, it is positive-sum. Competition between producers is a costly and negative-sum operation, with much duplication and loss of resources. We tend to neglect many of the negative aspects of this in the models used, which make unrealistic assumptions about isolated and simplified cases. Let us not forget that economics, and trade generally, is about cooperation, two groups interacting for mutual benefit, not about conflict and its imagined ability to defeat the other party without cost !
Complex systems science emphasises interactions, and the effect of these on evolutionary fitness, using the concept of attractors or stable equilibria to determine what states a system can occupy. These systems are dynamic, and bear little relationship to the static assumptions of traditional economic theory.
In the economy, as in all complex systems, multiple equilibria are possible (these include depressions and booms, whether stable or unstable). The connections between variables generates transients - disturbances or perturbations of the system. Overall these form a power law distribution for each good, fluctuations that occur on many scales, mostly small but occasionally so large as to take the 'good' to extinction and replace it with another. The global balance achieved is thus not a stable equilibrium but a highly dynamic and evolving statistical balance of multiple interacting sub-systems.
Business cycles can be generated in this way, by the co-evolution of government taxes (predators), trading exchanges (symbioses), the resultant (ecosystem) balances, plus transients towards new equilibria. Production capacity however is not a constant as often assumed, it changes with technology and new inventions. Planning for a static set of conditions is thus generally invalid. Macro changes cannot ensure the correct micro effects or even the emergent macro effects desired - since many alternative optima can be reached within any complex system ! To control these systems effectively microeconomic shaping factors must be used, then allowing self-organization to shape the system to an unpredictable (but hopefully better) new balance. The changing microeconomic fitness criteria (cost/benefits) thus drives the system, not top down control (in any form), the system dynamics involved results in jumps to new stable positions, not the incremental and gradual changes expected from simplified economic models.
Bureaucracy (red tape) reduces supply and production (by inhibiting opportunity and flexibility) and causes damping of the economy (a static move). Entrepreneurs and inventors do the opposite and perturb the economy (a chaotic move). Thus the complex systems principle is to get a balance between the two (called edge of chaos), by restrictions when things are unstable and freedoms when things are stagnant. This perhaps is best done at an individual level, as these are the actors or agents that ultimately are the supposed beneficiaries of the system. However, uncertainty in policy or fast changes to it creates chaos (a dynamic move) which can cause in turn a panic jump to a new stable system - but all too often not what was originally intended !
Multilevel interactions are normal in complex systems, in society these occur at local, national and international levels and usually take the same form (e.g. bargaining). In these cases we may reasonably assume the components at the higher levels (firms, countries) will self-organize in the same way as individuals, thus the same microeconomic principles can be employed (with appropriate variables at the new level) to help control their behaviours - in other words fitness or 'Quality of Life' controls. These of course are not restricted to the single dimension of money, but can take into account all those other values (previously ignored in economics) which are remarkably effective in controlling behaviour (freedoms and conveniences, rules or choices, time, hassle - many of which are the bread and butter of bureaucracies, but are not there used positively !). We make evolution easy in socially preferred directions and difficult in undesirable ones.
Can we use money as a measure of the multi-dimensional fitness that we now need ? Firstly we must ask: can we even relate all the concepts that we must take into account to quantitative measures ? This is more difficult than it seems (how do we rate music/noise or a beautiful view for example), yet some attempts have been made to try to do this, largely by naïvely asking people what the value is 'worth' to them in financial terms. However these answers are invariably meaningless due to the many psychological biases completely ignored by economists, in fact all 6 axioms of consumer preference or utility theory (Completeness, Reflexivity, Transitivity, Continuity, Strong Monotonicity and Strict Convexity) are well known to be invalid. However in a complexity viewpoint it is more natural to have multiple measures, so we only need to be able to put some form of quantification to the issues (e.g. we can measure noise in decibels, without trying to ask silly questions as to the monetary 'worth' of a decibel - as if you could 'trade' it).
A multidimensional fitness cannot realistically be mapped to a single dimensional measure without considerable distortion - imagine giving someone directions and saying only that it is 50 miles (80km), without saying which way ! For a meaningful result a single 'bottom-line' is not adequate, we need to get into a new mode of thinking that can deal with such issues, ones related to a more visual 'fitness landscape' mode. This needs a new form of decision logic, one capable of dealing with continuous values and performing mathematical operations on them.
Luckily such logics do exist, and have already been found useful in the performance of complex decision operations. The best known is that of fuzzy logic, which is often illustrated as a single dimensional example but is fully consistent with multidimensional use. For example we can take three measures of fitness: purchasing power (money), time, and intellect (free capacity) and interrelate their contribution to overall fitness (the true 'Quality of Life' economic good). It is clear here that the variables are not independent - gaining more money usually reduces available time and takes thought, so pursuit of just one dimension causes trade-offs in the others. Fuzzy logic allows us to derive the landscape corresponding to this and see what optima actually occur.
To develop a rough outline of a new form of economics based on complex systems science, let us first list those assumptions and aims that we wish to meet, in other words our axioms (these are not intended to be definitive, but something to spur discussion):
We shall not attempt to do more than sketch such a system here, let alone a method of implementation (which requires a gradual shift of values and laws, not the sort of utopian revolution which is unplannable and uncontrollable even in theory).
The first axiom is natural and uncontroversial, but must all trades be positive-sum ? If they are not, then one person takes from another and we generate a stress - potential conflict. The resolution of such conflicts are always negative-sum, both sides lose (even if lawyers gain !), and we enter a downwards positive feedback path that destroys the system, whereas we wish to have the opposite, a positive reinforcement that grows the quality of life of all parties.
Using wholelife costing allows us to ensure that bread today doesn't cause starvation tomorrow, the future costs (as with nuclear decommissioning) exceeding the short-term profits. Using renewable resources is the same idea, we ensure the long term stability of our economy. And if people say such resources are too expensive the answer seems simple, make sure they are not - either by taxing non-renewable resources appropriately or by developing the alternatives sufficiently to be economic. In all forms of complex system we can drive the system in the direction desired by weighting the fitness options appropriately, recalling that the people overall are the important value, not any selfish vested interests involved.
It is here that our emphasis on third party effects comes to the fore. It should be the rule not the exception that the wider effects of business decisions on their communities must be either agreed with that community or costed in an appropriate way. Failure to wish to do this seems a clear indication that those effects are known to be negative - otherwise they would be obviously used by company management to support their case ! We live in a supposed democracy, whose laws should protect the citizens from harm by third parties, yet such protection is notoriously missing where business is concerned. It is time we asked why ?
Moving onto public goods, we have more of a problem. We should assign these in total to the people, as a common ownership, but of course we will suffer from the 'commons' problem of overuse or lack of responsibility for their upkeep. The current alternative of making them privately owned is unsatisfactory, making them inaccessible or expensive to the real owners. State ownership often is no better and divorces control from those who actually use the resource. It is suggested that a new form of trust is employed for these resources, whose public shareholders are those individuals who use that resource, and they elect democratically a management team to take custody of the resource and maintain or allocate it. This method would treat public resources as a form of non-profit company or charity (similar to the National Trust in charge of historic buildings in the U.K.)
Reform of work practices is obviously a major undertaking, yet the benefits to society of releasing the suppressed creative talents and enthusiasm of the majority of workers is enormous. The transformation from hunter/gatherer society to our current one has rested entirely on the ingenuity of people, finding better ways to do things. All humans have this inherent ability, although many do not employ it in their work, yet we only need look at the undirected use of it in hobbies and sport. This is talent that, given the opportunity, could vastly improve society overall. Computers are ideally suited to repetitive tasks, there seems little reason to waste humans on such work, nor on the myriad of bureaucratic tasks that litter every firm and government department, most of which are self-serving and irrelevant to the main purpose of the exercise.
But how do we do this ? Here our next axiom comes in, that of a subsistence wage for all. The idea here is that we pay each adult citizen whatever we regard as the minimum wage for the basic standard of living in our society. In other words nobody need work if they do not wish to do so. Although this 'social credit' sounds controversial it actually makes good economic sense. All governments spend a vast amount on social support and the bureaucracy to administer it, so we are already doing partly the same thing anyway - but at a higher per capita cost. We can adopt a simple negative income tax (which pays you at zero income, whilst tapering to pay the state at higher income levels). It should be possible to arrange tax rates so that the net effect of this change is neutral overall, enabling us to implement such a change with immediate effect if desired. We then solve two problems at one time.
Firstly, we remove the worry that concerns most families about job security (being able to provide the essentials) whilst removing the need for wasteful and degrading state support, in addition this simplifies the economy and gives freedom to all citizens. Secondly we then enable each worker to choose what level of commitment to put into work and how to allocate it, the more work that is done the more extra benefits are enjoyed, but they can also work for enjoyment itself, employing their creativity without having to worry about financial success. Zero production in one week is then no longer disastrous, so firms need not produce for production's sake. We can treat work as if it were a hobby, done when desired (and recall that most entrepreneurs start working part time on their pet schemes, precisely the mode of flexible trial that we envisage for all workers !).
Control of such an economy has already started if we are at this stage, we have removed pure money as the driving force to work fitness and given a microeconomic choice to workers. We don't know what will happen macroeconomically, but this is irrelevant. Our economy is intended to benefit individuals, and they are where the fitness measures must be concentrated. All changes to economic parameters should be effective there, with the exception of the management of non-renewable resources and public goods, to which our previous trust approach applies. Suitable criteria need to be developed to manage these however, as if such groups were individuals at a higher level.
For every choice our new free workers have, there will be a opportunity cost, the difference between the 'Quality of Life' value of that choice and the other choices available. We have seen that such a fitness is a multi-valued one, not just based on monetary income - yet traditional work practices have only considered that one dimension, either work or do not, get paid or do not. We now have the opportunity however to add extra value by other choices, saying how we shall work, when we shall work and where we shall work, choices that were largely precluded due to subsistence issues in previous economic systems. The choice and control is moved from the organization back to the individual, as it was in the past. Many people will of course continue as they are, at least in the short term, but even if a small proportion take up their new freedoms this will lead to national benefits in increased creativity and satisfaction. It should also lead to better conditions for all, as employers realise that unless they adapt also, they will lose competitiveness to the new more focused, innovative and dynamic entrepreneurial cooperatives.
The main area that still needs development is in accounting for this multidimensional shift in values. A single bottom-line monetary value (Profit/Loss) is now inadequate, a business can be highly successful if it makes no profit, but instead increases the quality of life of employees and/or customers. We need a new value system to achieve this and this needs to await fuzzy logic improvements and its application to accounts. Yet work is already underway here, along with refinements in complexity theory, and we can hope that in the near future we can generate a suitable quantitative measure applicable to complex systems, complementing current accounting techniques.