Economic System

OUR CURRENT ECONOMIC SYSTEM AND ITS FUTURE

Founder Klaus Schwab opened the 2012 World Economic Forum in Davos, Switzerland with the following statement: “Capitalism, in its current form, no longer fits the world around us.”

So, what are the characteristics of capitalism, our current economic system, that make it incompatible with the world we live in? What are the key design features of an economic system that does reflect our reality?

Over the centuries, human societies have adopted different ways of organizing the production and distribution of goods and services; in other words, different economic systems. With its structure, rules and processes, an economic system is essentially the “operating system” of society. It shapes, among other things, the way we interact with each other and with the natural world.

It is helpful to first envision an optimal society and then ask what type of economic system is compatible with that vision. Humans have some fundamental needs – physiological (clean air, clean water, nourishing food, sleep), safety and health, belonging, meaningful participation, sense of contribution to society, and self-actualization. Since humans are part of the natural system and dependent on it for the satisfaction of our needs, maintaining and regenerating the vital cycles of natural ecosystems is also essential.

This suggests a vision for a society in which every human has access to clean air and water, healthy food, safety, education, meaningful employment and the opportunity to purposefully contribute to society with her unique talents and gifts. Such a society would be peaceful and compassionate, since everyone would have their fundamental needs met. This society would also coexist in balance with nature, protecting and enhancing the health of natural ecosystems and their ability to provide ecosystem services in perpetuity (oxygen production, soil fertility, water purification, nutrient recycling, climate regulation, crop pollination, disease control etc.).

Capitalism is the predominant economic system in the modern industrialized world.. A clear understanding of its structure and outcomes reveals that it is incompatible with our vision of a desirable society and with the health of natural ecosystems. In other words, capitalism is incompatible with the long term survival of human life.

Capitalism as an economic system supplanted feudalism in the middle of the last millennium (around the 15th and 16th centuries). Some of its differentiating features included  greater reliance on markets for the provisioning and distribution of goods and services, the pursuit of profit as the primary driver of economic activity, the concept of land as private property, and the transformation of labor and nature into commodities [1] (see Robert L. Heilbroner, Lester Thurow, 1998).

Capitalism’s reliance on markets for the provisioning and distribution of goods and services effectively devalues what cannot be properly measured or assigned a price through market mechanisms, and ultimately restricts the satisfaction of basic needs to those who can afford to participate in the market. Most of the ecosystem services on which our very survival depends are provided for free by nature and cannot be properly measured or valued through market mechanisms. For example, no market mechanism can properly price the value of the ecosystem services (in the form of a continuous cycle of photosynthesis in plants and algea) that maintain free oxygen at 20.8% in the Earth’s atmosphere. Markets, on the other hand, can quantify the commodity value of lumber extracted from forests, leading to worldwide deforestation and thereby jeopardizing planetary oxygen production.

Soil fertility and the ecosystems supported by fertile land have been built over thousands of years, yet if land is considered private property and nature a commodity, landowners have the right to strip it of its fertility and destroy the ecosystems embedded in it. For example, industrial agriculture in the past half century has caused the loss of about half of the world’s topsoil built by natural processes over the last 10,000 years.  Similarly, once labor itself is commoditized and traded based on the law of demand and supply, any increase in productivity leads to a surplus of labor and the impoverishment or obsolescence of millions of workers.

Access to food, education and health care in the US is based primarily on a for-profit capitalist system. Many are denied the satisfaction of basic human needs simply because they can’t afford it – currently, more than 50 million Americans are food insecure[2] and more than 55 million Americans do not have health insurance coverage[3]. Millions of young Americans are forgoing college education as it becomes increasingly out of reach to families lacking substantial financial resources.

Many economists, both supporters and critics of capitalism, have recognized its tendency towards larger entities. As capitalist corporations gain size and market power, they stifle the very competition that brings about the benefits of innovation, creativity, and efficiency touted by supporters of the “free market”. Large corporations are also able to influence the regulatory environment and political processes in order to entrench their dominant position in the market place. Even Henry C. Simons, founder of the conservative Chicago School of Economics, recognized that once capitalist corporations become too big to regulate they must be nationalized to protect free market competition [4].

The profit motive drives economic activity in a capitalist system. Profits are determined by a reductive accounting system that measures certain things and ignores others, like pollution and use of natural capital. A recent UN-sponsored report by The Economics of Ecosystems and Biodiversity found that the top 20 region-sectors of the world economy had a natural capital cost in 2009 that far exceeded their total revenues ($7.3 T of natural capital cost vs. total revenues of $2.4T or less than 5% of world GDP)[5].

There are many examples of capitalism’s pursuit of profits taking precedence over all else and leading to massive losses of human and natural life, though the following example might suffice:

In the past, regulations have been used to “price externalities”, but large capitalist corporations are now powerful enough to overturn those regulations or thwart their enforcement. For example, fracking companies obtained a waiver from the Clean Water Act and the Clear Air Act in the Energy Policy Plan orchestrated by Vice President Dick Cheney and signed by President George W. Bush in 2005[7]. In the last few years such companies have contributed irreversible pollution to watersheds around the US — damage that will last for multiple generations.

Capitalism also suffers from an intrinsic contradiction through its commoditization of labor.  Labor is seen as a cost, so the less a corporation pays its workers, the more profitable it can be. Yet, labor income represents a large component of the aggregate demand corporations rely upon to sell their products and services. What is logical behavior at the level of an individual enterprise becomes self-destructive at the level of the economy as a whole. Henry Ford, the legendary American automobile entrepreneur, understood this problem about a century ago when he said he wanted to pay his workers enough for them to afford his cars. Increased competition among enterprises no longer allows for compensating workers enough to support a healthy and growing economy. The economic boom and bust cycles are in part linked to this intrinsic contradiction of capitalism: labor as cost vs. labor as aggregate demand.

Large capitalist corporations are controlled by a handful of individuals: the largest shareholders, the board of directors and the top executives. Their decisions affect thousands, sometimes hundreds of thousands of workers, communities and ecosystems around the world. Decision makers rarely experience the full impact of their decisions. For example, the 1984 Bhopal disaster at the Union Carbide India Limited pesticide plant was preceded by a series of smaller accidents due to lax maintenance and cost cutting measures affecting safety compliance.  Half a million people were exposed to methyl isocyanate gas and other chemicals, causing the death of more than 15,000 people. One could speculate that, had the executives of Union Carbide and its major shareholders lived in the vicinity of the Bhopal plant, or if their sons were working there, they might have decided not to pursue such cost-saving. In Collapse (2011), Jared Diamond explains that throughout the course of human history, the civilizations that collapsed due to environmental factors were those in which the ruling elites were able to shield themselves (at least initially) from the negative environmental and social consequences of their decision making. The few individuals running the largest capitalist corporations are similarly able to insulate themselves, at least temporarily, from the environmental and social damage their profit-maximizing decisions are causing. Even if they are aware of the environmental and social impacts, the pressure to deliver ever larger quarterly profits compels them to ignore the long-term consequences of their decisions.

On the other hand, those most affected by such decisions have no say in the decision making process. While celebrating the principles of democracy, the majority of people in large so-called democracies like the US and Europe actually live lives constricted and limited by undemocratic decisions made by the few individuals running large multinational corporations. One could argue that political democracy is ineffective without economic democracy.

So what sort of economic system should  replace capitalism?

The fundamental flaws of capitalism briefly outlined above can be our guide for designing a better economic system.

Clearly, natural systems cannot be commoditized, dismantled and sold for parts, since our lives and long term survival depend on their integrity. This suggests a stewardship model as opposed to a private ownership model for land and natural resources. Soil fertility, for example, was built over the last 10,000 years by the cycles of nature and by millions of life cycles of billions of organisms. If soil fertility is required to support life for millennia to come, we cannot allow this generation of humans or a few individuals to squander such a unique natural endowment for their own fleeting and ephemeral economic benefit.

Indigenous communities have imbued nature with a sense of the sacred, therefore ensuring its long term preservation. The nascent legal doctrine of the rights of nature might represent a modern strategy for protecting nature for future generations and all species. Other property-based models might require collective ownership with strong conservation clauses like land trusts, natural parks and marine ecosystem reserves. Harvesting of renewable resources need to be limited to their rate of regeneration, a covenant that must supersede property rights . Climate stability is also the result of billions of years of fine-tuning of the bio-geosphere by life evolution. Economic activities negatively affecting climate stability must be eliminated and prevented. Given the current carbon concentration in the atmosphere and its impact on climate change, the new economic system needs to provide incentives for rapid carbon capture and the immediate cessation of carbon emissions.

A new economic system would also recognize that human labor is not a commodity but instead a meaningful human activity and a way for individuals to contribute their talents and gifts to the wellbeing of their community. Worker-owned cooperatives exemplify  a new paradigm in which labor is not treated as a commodity, since each worker is also an owner of the enterprise and the success of the cooperative is not predicated on a race to the bottom in terms of labor compensation. Public enterprises run for the benefit of communities and their workers are also illustrations of business emancipated from the narrow focus on profit maximization and the commoditization of labor. One example is the US Post Office, employing half a million workers at living wages and providing mail delivery services at a cost that no private for-profit enterprise can match.

The new economic system also needs to be democratic in the sense that anyone affected by economic decisions needs to be involved in the decision making process. This also includes representatives and spokespersons for future generations and for natural ecosystems and species that cannot represent their interests and needs directly, but might nevertheless be affected by those decisions. One important principle of such an economic system would be subsidiarity, with the goal of reversing globalization and absentee ownership.

NOTES

[1] Robert L. Heilbroner, Lester Thurow, Economics Explained: Everything you Need to Know About How the Economy Works and Where it’s Going (Touchstone Press, May 1998)

[2] http://www.worldhunger.org/articles/Learn/us_hunger_facts.htm accessed 7/23/2013

[3] http://www.huffingtonpost.com/2013/04/26/health-insurance-market_n_3158280.html accessed 7/23/2013

[4] Henry C. Simons A Positive Program for Laissez Faire (1934)

[5] Natural Capital at Risk: The Top 100 Externalities of Business

[6] http://en.wikipedia.org/wiki/2008_Chinese_milk_scandal accessed 7/23/2013

[7] The federal Energy Policy Act of 2005 exempted fluids used in the natural gas extraction process of hydraulic fracturing (fracking) from protections under the Clean Air Act, Clean Water Act, Safe Drinking Water Act, and CERCLA.[19] It created a loophole that exempts companies drilling for natural gas from disclosing the chemicals involved in fracking operations that would normally be required under federal clean water laws — see exemptions for hydraulic fracturing under United States federal law. The loophole is commonly known as the “Halliburton loophole” since former Halliburton CEO Dick Cheney was reportedly instrumental in its passage.[20]The proposed Fracturing Responsibility and Awareness of Chemicals Act would repeal these exemptions. (from http://en.wikipedia.org/wiki/Energy_Policy_Act_of_2005 accessed 7/23/2013)