Saturday, October 22, 2011

The Coffee Shop Question restated

It has been too long since I restated the questions underlying this blog. Here is my take back in August.
How do we deal with abundance in the economy so we get the most of what we actually want?
I still think this is a good starting point. The different themes are marinating in my mind as I read different books and articles, but every so often they need to be brought together.
Let's break it down into separate arguments and propositions. (This is much longer than any previous entry.)

What people want

1. Most of our economic problems as a society are not problems of scarcity any more. They are problems of abundance.

We can increasingly produce the goods and services that we want for very little money. Our problem (at least in the west) is not hunger. It's obesity. It's not lack of possessions. It's where to put them.
Some things are still scarce , including energy. And much of the developing world, especially Africa, is still lacking in many essentials. But many of our instincts and ideas, developed over countless millennia of scarcity, are now wrong.

2. Problems of abundance require we have to make skillful choices about what we want.

If the "economic problem " as Keynes called it, is solved and basic necessities are taken care of, we have to think about what we want to do with our resources. Keynes thought the problem of leisure would come to dominate society, based on the bored, frustrated wealthy upper classes he saw at the time. Wealthy aristocracies in the past have generally squandered their wealth on status competition, court politics and war.

3. People increasingly want not more stuff, but more engagement, more purpose, more connection, and more meaning.

They want life to be interesting and varied and stimulating. Why do people pay so much to live squeezed in small apartments in cities like New York or Paris? Because every day is different in a big city.
People want to feel independent. They want to feel connected with others. They want to feel a sense of achievement and satisfaction with their lives.

We have a huge welfare state to provide basic incomes to people.But the recipients people are often bored, drifting, disconsolate and socially isolated. Income or monetary transfers alone are not enough to make people happy.

The failure of our frameworks

4. Most of our thinking on ethics and social science and political philosophy in the last fifty years completely ignored what we want.

Consumer preferences were taken as a given in economics. Liberal political theory stressed the neutrality of the state, and process above ends (with the exception of equality).

Psychology has offered some ideas, including, famously, Maslow's hierarchy of needs. And other issues like enviromentalism have supplied some new purposes, like sustainability. But we don't ask enough what our needs are now that basic material needs are largely satisfied.

Markets and evolution

5. The market system is astonishingly good at generating goods and services consumers want in an innovative and efficient way. But it is less relevant if most of the things we want are not goods and services.

People have a natural instinct to barter and exchange. The whole psychology of exchange has been vastly beneficial over time. Western societies have generally been much better off for being "nations of shopkeepers", rather than looking down on commercial activity as most societies did in the past.

6. The economy is also a naturally evolving system.

The market generates both variation and selection pressure. It creates more and more sophistication and complexity over time, just like natural evolution.

This does not mean we have to be socially darwinian, which has a bad track record. But we have to understand the actual dynamic nature of the economy, seeing it as more of a process than a static equilibrium as in traditional economics.

Government and controlling misbehavior

7. We need an immune system for survival.

Evolution of large creatures is always in a 'red queen' with parasites and viruses, which evolve even faster. And in the same way one of the essential things about an economic or political system is to motivate people not to exploit it or misbehave. Crime is just like a spreading opportunistic infection.

8. Not only is the market exchange and money system very efficient, it also is very good at that kind of incentive and control of defectors.

It contains an immune system of incentives and deprivation of income. But it also relies on many other social technologies to work well, like contract law and money.

9. The growth of the state in the 20th century reflected the evolution of the economy.

Many of the things we wanted as society grew wealthier were not goods and services. Democracy gre in the 19th century as a wealthier middle class wanted participation in decision-making. The welfare state grew above all to provide security (next up the hierarchy of needs).

10. But the welfare state, rights, and entitlements do not have a good immune system.

They also changed incentives in a damaging way, and ithe welfare state is rapidly becoming fiscally unsustainable in its current form. This is partly because the welfare state has trouble controlling defectors, and vested interest coalitions build up to seize a permanent stream of benefits. Liberals hate the idea of the "underserving poor", but without that redistribution is increasingly difficult and government itself is undermined. Political allocation of goods and services has limits as a social technology. Sometimes stigmas are actually functional. Culture matters.

11. As government has evolved away from public goods, it has become more controversial and inefficient.

Government was originally about defense and other public goods (such as roads, harbors or the mail). Big government was the new tool of the 20th century, to deliver income security and medical benefits. Redistribution and provision of a social safety net scaled back the operation of the market in society. Much of the political debate in the last thirty years has got stuck on the size of the state versus the market.

Employment, Jobs and Work

12. The pace of change can outrun our ability to deal with it.

Productivity is going through a major acceleration again. Much of the routine jobs in society may disappear. But social technologies take time to adapt and compensate.

13. It may also outrun our ability to create new jobs.

In the past, technological change destroyed old jobs but created many new ones. 95% of people used to work on the farm. Now in developed countries like the US less than 5% do. Manufacturing grew, and then the service economy. There are more people employed than ever.

But this latest wave of change may not create new jobs in the formal economy, because we do not want more traded exchanges. Money can't buy you love, as the song goes.

14. The new goods and services that we enthusiastically embrace don't employ many people, and are often given away free because the marginal cost is so low.

Apple is the most valuable company in the world, but does not employ many people. It employs even less if you count out the retail stores. Many people are employed producing iphones and macbooks in factories in China, but even there, the manufacturing company is planning to automate most of the production.

15. This is a major problem because jobs are the bedrock of the market economy.

We have known for decades that GDP is not closely related to happiness or social welfare or sustainability. The reason that we still persistently care about GDP data so much is because it is closely linked to availability of jobs.

Jobs are far and away our source of income, and we need income to survive. Jobs define much of people's identity and provide (at least in better jobs) much of their sense of purpose. But the whole notion of the paid job in the formal sector could be in trouble.

Income, Wealth and Assets

16. The problem is we think primarily in streams of income, rather than assets and ownership structures.

Ownership and property are both social technologies and institutions which constantly evolve. We used to have a feudal system in the west, with grants from the monarch in return for services owed. Land used to be the primary form of wealth and ownership. Communal forms such as monasteries and colleges owned much of the land. Precious metal was the primary form of liquid wealth.

But we have created new kinds of assets - joint stock corporations and equity markets, paper money, fractional reserve banking, Financial markets display far too much ingenuity for their own good creating new kinds of assets and legal structures, such as credit default swaps or esoteric options.

17. Many of the valuable things in society are increasingly intangible, with very low marginal costs.

Many of the most important assets in the economy are intangible altogether, like human capital, organizational skills and culture, or patents.

Capital is not factories any more, so much as knowledge. But knowledge is very different from tangible ownership. It needs skill and education to acquire, but it is easily replicable, transferrable and non-rivalrous.
18. We get confused about assets and have serious problems with asset bubbles and ownership.

The whole nature of the economy is changing as it is driven more by the balance sheet - valuation of assets - rather than the flow of income - GDP. We get increasingly serious booms and busts like the housing bubble. An asset-based economy is driven by expectations about the future, the discount rate (interest rates) of future events, emotions, risk and psychology. Our legal system is getting mired and blocked up dealing with patent litigation, copyright and intellectual property.

19. The changing nature of assets means we need to rethink what wealth is.

We need to think about what wealth is in a substantive sense rather than simply an accounting total. If you have one hundred million dollars in the bank, you are obviously regarded as wealthy. But what does it mean to your life? What can the wealth get you? How do you recognize wealth?

Of course it means the ability to buy luxuries or property. But that is less of a differentiator than it used to be. Every secretary in Tokyo can get her Hermes handbag. It is hard to recognize variations in wealth from clothing on the street any more. Everyone has access to latest technology and trinkets, like the new iphone. Wealthy people do not even necessarily have larger apartments or houses, even if the address is better. They just live in the Upper East Side or Kensington, rather than Crown Heights or Peckham.

Changing relative prices

20. Many of the historical changes in society are driven by changes in relative prices.

There are long-term variations in inflation, the price of land or commodities or labor, the terms of trade between manufactures and commodities, the price of different kinds of energy, and may others. Current economic changes are also driving deeper relative price changes.

21. Deflation is already taking care of much of the basic needs of society, with the exception of real estate, education and medical care.

The rising cost of university education in the US is squeezing the middle class, and the rising cost of medical care is having an increasingly devastating effect on other areas, including fiscal policy and disposable wages.

Time, Work and Leisure

22. The thing that is most scarce is time.

There is never more than 24 hours in a day. Yet we mostly squander it. We have deeply confused ideas about work and leisure. The relative cost of leisure compared with another hour of work rises as wages rise. This perversely means people are working more, driving up asset prices more, and have less time to use the things they buy.

23. Working hours are surprisingly inflexible.

People have little choice about the number of hours they work. The full-time job of 35-50 hours a week is still the core feature of most people's lives - all the more so as women moved into the labor force in the past fifty years. There is surprisingly little scope for trading off more income for more time. This is partly because it is often more efficient for employers to spread fixed costs such as benefits or office space over fewer people working longer hours. But it also reflects that our social institutions surrounding work have failed to evolve much.

24. You need some skills or education to make the most of leisure.

Few people find doing nothing at all attractive for long. More leisure time is not attractive for many if it just means more time slumped in front of the tv rather than more money.

What is the economy for?

25. We need a positive vision of human functioning, a teleology.

We need to go back to a more Aristotelian view, in which we can say some ends are better than others - at least for purposes of setting up society to further them. There is a common human nature, even if it is expressed in different religions or ideologies. Of course, people differ in their natural personality, traits and inclinations, So we always need much complexity and diversity and intricacy. But they differ within a range.

26. There is a great deal of common ground on what makes people flourish.

People have different ideas and wants and beliefs and ends. But modern liberalism has exaggerated the differences. There is a common core. And it is about more than just provision of basic means, like Rawl's primary goods. It is about more convergence on ends.

One of the most interesting things about recent work in positive psychology is it offers more unified, coherent evidence on what makes people satisfied, engaged and happy. We can move closer to ends, even if we do not specify them, instead of just focusing on providing general purpose means like money. We may never agree on people's beliefs, or theological systems, or particular cultural references for individualism or group cohesion. But we can agree on a core of practical things that help people flourish.

27.The purpose of the economy ought to be to stretch and engage people, to allow them to develop themselves, to offer stimulation and joy.

It already does much of that - as a byproduct to providing goods and services. The economy is steadily evolving to provide more engagement and stimulation. A city like New York is a vast buzzing kaleidoscope of stimulation. But we need that to be the primary aim, not to generate income to pay for market exchange of goods and services. Our intermediate objectives are increasingly leading us astray. We need to refocus on the goal itself.

New social technologies

28. The problems in the economy are not ones of scarcity. They are problems of worn-out social technologies.

Ways to cooperate and work together evolve, just as cars or microchips do. Over time, we generate new social technologies (or institutions in the broad sense). Development economists have come to realize that the main obstacle to growth in poorer countries is not actual technology or physical capital - like building factories or highways - but institutional flaws like corruption, kelptocratic government or poor protection of property rights. In the same way, in the developed world the main challenge is institutional. Many of our institutions and structures, like 20th century bureaucracy, traditional managerialism and the welfare state, are now obstacles.

29. Market prices do not capture many of the things we want.

The market will always be an important arena and social technology. But as goods and services become less of a primary aim, the market and monetary exchange ought to become less of a primary institution as well.

30. New social technologies are rapidly evolving. The software underlying the economy's hardware is rapidly being rewritten.

Examples include open source production of goods and services (like Wikipedia). and the astonishing availability of knowledge on google. The real significance of social networks or twitter may turn out to be they evolve into new ways of coordination, cooperation and participation.

Some actual technologies become social technologies, if only by displacement. Television is often a social technology for passivity and passing time.

Religion is a vastly important social technology. But it has come to play a much less central role in the west, which creates many social gaps.

31. We need new and better social technologies for our current concepts of income and wealth.

We need an institutional "land reform" to make the new economy work. People should have some assets as a matter of membership or citizenship. But we need strong incentives and ways to control defectors, or the system will rapidly lose all legitimacy.

That means proportionately less will flow through market exchanges. But this does not mean more should flow through government. This does not mean a "third way" 1990s style, with a mix of market and government solutions. It means something new, a rethink of assets and how we measure them.

32. We need new social technologies for the 21st century to help people flourish and stretch their skills.

We need new incentives for people to acquire skills and education and stimulation. Some may not be interested, or want to engage with anything. We need to understand people's preferences and choices when they have freedom much better.

33. We need to orient the system away from more provision of goods and services and towards more provision of stimulation and purpose and meaning.

We also need a more concrete sense of what the economy should deliver - the boundary of utopia. We need to focus on what it means for daily life. What would an ideal day be like? And how do we get more of them?

And that will do for today! The coffee is drunk, the table is vacated and I am about to press upload at home. I will gradually refine, rewrite and hone this in the future.

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