Opinion Sur
We must move to a theory that is not only based on observed reality, but that also gives attention to what kind of economy is necessary, possible, and desirable. Without trying to predict which path will be taken, I will now turn to a consideration of the issues for economic theory that arises in contemplating the likelihood of the major changes in economic systems that will be required. This will not be as boring as you might expect; the relationship between theory and reality is dramatically overdue to be realigned. In the 20th century, economic theory, regardless of its realism, was allowed to direct policies – some self-fulfilling, and some disastrously different from the announced intentions. We must move to a theory that is not only based on observed reality, but that also gives attention to what kind of economy is necessary, possible, and desirable.
Therefore the first challenge to the old economic theory is the question: what are the goals for the economy? The existing theory claims no overt goals, but it has implicit ones: economic growth, for macroeconomics; and maximization of consumption for micro.
The second challenge derives from the critical reality that the scale of an economy must not exceed its supporting ecosystem.
This is related to a third point that has been left out of the 20th century economic theory: Any economy is embedded in and completely dependent on its ecological and social contexts. An economy is a sub-system of a human social system; and that, in turn, is a subsystem of the ecological context. Each of these systems affects, and is affected by, the others.
Those three points have to do with how we think about the economy. The next point is about action as much as it is about theory. The requirement for transition to a post-growth economy begins with constraints on production. It is critical, at this juncture, for humanity to join with (or, if we are smart, to anticipate) nature in limiting those goods or services whose production requires throughput of materials and energy of kinds that are ecologically damaging, or that are becoming depleted in ways that threaten future ecological and economic sustainability.
This is not a new idea: there are always supply constraints, which normally feed, through markets, into prices. What I am talking about, however, is not adequately recognized in 20th century economic theory. It is about constraints that are based on projections regarding limitations that will be more binding in the future than they are now. Such projections are well-documented in scientific literature, but they are not translating adequately into current prices: The various futures markets either are too short-sighted, or not knowledgeable enough, or not powerful enough, to perform this translation. Therefore a major challenge to economic theory that will emerge from this situation is the question of how to insert scientific knowledge of future constraints into near-term behavior, when market-derived price signals have proven inadequate to do so. [[The organization 350.org is attempting to address precisely this question as it urges endowments and other shareholder groups to anticipate events that will make it necessary to leave a large proportion of known carbon-based fuels unused because of their climate dangers.]]
Using prices to achieve goals
A proposal to set prices by something other than market mechanisms, though breathtakingly heretical in the current economic ideology, is not, of course, really new in the history of Western economics. As one example, during World War II John Kenneth Galbraith oversaw a system of price controls designed to ensure that priority would be given to resources that were needed for the war effort.
That heresy of Galbraith’s was significantly different from John Maynard Keynes’ earlier argument that the federal government must act as a major generator of demand, for labor and for the products of labor. The Keynes era, which is reluctantly (but increasingly) accepted by modern economists as a rational response to severe economic recession, was similar to the present in two important respects: it accepted without question the desirability of economic growth; and it supported this growth through the market, using government as an engine of demand. The government accepted responsibility for increasing the demand for labor, with a resulting increase in household income. Markets responded to rising household incomes, hence rising consumer demand, with price signals that enticed investors and producers to increase their activity.
The Galbraith price-control system, in contrast, could be said to have overridden the market, rather than using it—and for this reason is hardly remembered today as a part of economic history. While Galbraith did not at that time imagine a situation when it might be necessary or desirable to end or reverse economic growth as we know it – [[Galbraith did however write one essay near the end of his life in which he considered the possibility that there could be a limit to how much consumption is needed for a good life; see “Afterword: A Japanese Social Initiative” in Jonathan M. Harris and Neva R. Goodwin, eds., 2003, New Thinking in Macroeconomics: Social, Institutional and Environmental Perspectives (Edward Elgar). We should also, of course, remember Keynes’ famous 1930 essay, “Economic Possibilities for our Grandchildren.”]], he was notable for his casual attitude toward markets—as compared to the reverence accorded them by, for example, Milton Friedman and his disciples. Galbraith did not see any reason to believe that markets would generate, at least within the urgent time frame required for the war effort, the prices needed to direct production appropriately. Among the things that Galbraith and Keynes did share, however, was the broad recognition that market prices can generate sub-optimal results, whether in terms of a national aim, such as war production, or in terms of maintaining the level of demand for output that would ensure full employment.
A third example of price-setting outside of markets is perhaps even more telling, as it continues into the present, with little attention to the fact that critical prices are being determined by other-than-market forces. Countries that decide to increase exports and decrease imports regularly regard the exchange rate for their currency as a tool for affecting the buying patterns of their own citizens as well as of people in other countries. This may fail if the country in question is inflation-prone, but otherwise it often succeeds in changing the price of the currency as desired. The alternatives to a central government taking charge of a country’s exchange rate are either to simply peg the exchange to some other currency—in recent years a number of Latin American currencies have been pegged to the dollar—or to allow it to “float.” The latter is, indeed, a choice to leave the decision to international markets; but, for strong economies, some degree of currency manipulation is an accepted way of influencing prices.
The point of these examples is simply to say that the magic of the market is not always sufficient, without strong guidance, to achieve desired results through internally-generated price signals. That observation challenges the economic theories of the 20th century which ignoring examples such as these, maintained a never-meddle-with-the-market ideology.
This raises the next great challenge to an economic theory that, for most of the 20th century, has claimed to be value-free. Using markets as well as other means we need to find ways to set prices that will appropriately recognize human values, including equity, ecological realities, and present and future needs.
In fact, the 20th century economics claim to a purely objective, value-free theory has worn very thin. The theory, as taught in universities and as used in policy-making, implicitly accepted the goal of maximizing efficiency, so that the pursuit of self-interest could deploy the available resources to achieve “the most desired results”. Please note the values assumed in “most desired.” The phrase raises the question, “desired by whom?” There is an answer to that question: When efficiency is pursued through the price system, the only kinds of self-interested motives that the system works to maximize are those that go through the market: specifically, the consumer’s desire to make purchases and the producer’s desire to make profits. Only these desires—and only if they are backed up by money, which allows the economic actor to participate in the market—benefit from the efficiency characteristics of the system. In the “one-dollar, one-vote” price system, the market minimizes recognition of the needs, wants and values of those who have few dollars with which to express them. Since standard economic theory has no way of formally recognizing the validity of needs and wants that cannot achieve market expression, the emphasis on efficiency crowds out attention to issues of equity.
I am making the claim that markets cannot always be left alone to set prices that are fair, that take account of the future, that will guide human behavior to desired results, or that adequately reflect human values. There is an automatic response to this: “At least the market is objective; if we step outside of the market to set prices, who will choose among subjective values?” I have proposed some preliminary answers to this. First, market prices are not purely objective: they reflect the wishes of the rich and powerful much more than of the poor; and second, the government is widely accepted as an appropriate meddler in markets in times of national emergency, such as war, deep recession, economic catastrophe, present or future, or in subjects of broad national interest such as exchange rates.
Wages, as discussed in the next article, are a particular category of prices. This topic turns out to be the essential starting point – but not the end point – for understanding how an economic system that is ecologically sustainable – that is, a post-growth economy – can provide good lives for people. The conundrum that is often the stopping point for this conversation is the perceived requirement for economic growth in order to keep providing enough jobs.
