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New Economics






























1 What is ‘New’ Economics?

by Margaret Legum

‘New’ Economics asks questions about why ‘old’ economic theory is not working: and looks for alternatives that accord with reality. The unregulated market mechanism should spread wealth – moving it from where it is in surplus to where it is needed. It should allocate resources to where they can produce the greatest output from the least input, so satisfying the greatest needs at the lowest costs. That is why ‘old’ economists advocate an unregulated market.

New economists accept that the market mechanism is the only effective and humane way, generally speaking, to allocate resources to meet human needs. But it is not working in the modern world.

The opposite happens. Resources flow from people and places most in need, to sites of plenty. Capital and goods move relentlessness from poor to rich countries. Wealth concentrates, and poverty deepens between and within countries, especially where there is least interference with the market. The most abundant resource – people – is discarded in favour of the scarcest – depleting energy sources that fuel machines. Poverty co-exists with surpluses; hunger with farming losses; unemployment with skills scarcities; climate change with relentless dirty-fuelled growth. Planes traverse the skies, polluting the planet, carrying identical goods globally. The result is incalculable distress, dangerous anger and environmental destruction. Is that efficient?

Why does it happen?

First, allowing capital to flow globally gives it an advantage denied to other resources. Capital’s mobility fundamentally distorts the market. It enables capital-owners to define the terms of their engagement as a condition of their presence – in a way denied to labour or the earth’s resources, which are not mobile. Capital’s conditions include low taxes, low wages and few labour and environmental regulations.

So over three decades the reward to capital has been roughly doubled, compared to other factors of production, including labour. They call that ‘the market price’ of capital: it is the result of deliberately created scarcity.

Second, that distortion of the market has progressively diminished effective demand outside the capital-owning class. Employed people at all levels globally receive a lower proportion of national income. Relative and even absolute real income levels have fallen for waged and salaried employees; and unemployment has risen (with caveats for India and China currently). That reduces buying power and therefore the demand for consumer goods.

Third, high proportions of top incomes are not spent in the productive economy that would create employment and spread wealth. The money is entrusted to asset managers, who multiply its value through trading in financial instruments, shares and currencies, as well as property. Hence the shortage of capital for direct investment, either foreign or local: it is more profitable, easier and less risky, to speculate on a market which is mostly rising because it is so highly funded. The result of all this is declining demand for the growing output of modern economies.

That global systemic failure explains why the conventional markers and economic instruments that old economists use to predict and correct economic trends do not work. The rand value, the growth rate, share values, inflation and interest rates, foreign hot money: these explain very little, and their manipulation only tinkers with a diseased body. Worse, focusing on them takes attention from where it belongs: modern capitalism’s flawed relationship with the market mechanism.

The truth is that the private sector, in the age of digital technology, cannot expand jobs and incomes enough to create a demand for its own output. To compete successfully, business must replace labour with technology. It has no choice. Business must cut labour costs to attract global capital that expects high returns. So they are forced to reduce their own market, competing with others for shrinking demand. Unless regulated, they must reduce the wage bill.

But the idea that only private enterprise can efficiently create jobs runs very deep, so old economists continue to seek solutions to make the private sector employ more people. The search for competitiveness, outsourcing, privatization, second economy, small business – all these are products of that fruitless search for a way that the private sector can reduce unemployment; many make it worse.

An alternative

A clue to the alternative arises from the private sector’s strength: its capacity to create new wealth. Using individual ingenuity, it is creative, innovative, responsive, and good at finding a way to make something from nothing – to make a surplus from applying resources to need. In the global competitive market the private sector creates far more wealth than can be sold; but not employment. It makes jobless growth, and cuts its own throat.

So new economists seek ways to harness the wealth-creating capacity of the private sector to the job-creating capacity of the public and the non-profit sectors. Only the public sector can respond to society’s need for expanded universal public education, public health and transport, housing, energy, sanitation, crime prevention and rehabilitation of outcasts, public spaces, subsidized arts, disaster management, research in all these areas, and many others.

These sectors are people-intensive; and they carry the ethical, compassionate and communal values of society, which are outside the purposes of the private sector. They make a society proud of itself; and the whole of society suffers when they are not attended to.

To follow

The question is how the wealth of the private sector can be used by the other sectors in ways that enhance all of them. This series will consider innovative ways to do that by using the market mechanism. It will suggest how government can more effectively deliver more goods and services, while avoiding bureaucracy. And how they can easily and painlessly raise the necessary much higher revenues.