The Fundamental Flaw in Modern Economics

Copyright 2014, John Manimas Medeiros


For a few centuries we have been subjected to the persistent error of a handful of thinkers who assume that economics is a science of money, a science of how the marketplace affects money and how money affects the marketplace. What if we say instead that the science of money is "finance" and not economics. Finance is a set of principles, possibly even rules or laws, that govern how a business operates in an economic system, or in society, and how a business is affected by the marketplace, and how a marketplace affects a business. That is in fact what most people talk about, especially "economists" when they think they are talking about economics.


If the science of money is "finance" or "business science" or "business administration," then what is economics. Before I respond to that question, let me point out that we do suspect the truth of my argument here, because a person who studies the world of business, money, investing, supply and demand, the price of labor and the price of goods and services, gets an "MBA" a Master's degree in Business Administration. The person who gets a Master's Degree in Economics studies something else, or something more. The economist is supposed to know how the entire economy works, what specific inputs produce specific outputs on a "macro" or broad scale, in the society, in the nation, or in the world. If we had a tribal economic system, then the economist would know these things, or seek to know these things, as they apply to a tribal economy. Anyway, here is the answer: economics is the science of what people do in the marketplace, with the marketplace, and to the marketplace. It is the science of how people use money, goods and services to say something, or to have a specific impact on another person or an identifiable group of people. In fact, economics is the science of what we do to and for one another, using everything available to us: goods, services, weapons, art, money.


What happened is this: From about 1700 through 1900, the people in the west, especially in the United States of America, became so hopelessly in love with mechanized production, with the factory system and industrialization, they unconsciously without careful thought adopted the invalid idea that the economic goals of the society should be the same as the financial goals of a factory. If you think about it I strongly recommend that you think about it to this day when we talk about economics we talk about what an industrialist, or factory owner, or industrial investor, wants: lower labor cost, fewer employees, faster production, cheaper supplies, higher prices, and then, the two things that right-wing conservatives and corporations want more than anything else, government support and government interference in the free market in order to minimize competition and guarantee profits. This will come as a surprise to many, especially those who accept the manipulative and deceptive economic news that suggests investors and business corporations want a "free market" with a minimum of government interference. This common and persistent lie is ridiculous both for its content and its effectiveness. In the beginning, the government gave away mineral rights and land to variety of people, and gave huge quantities of land and investment opportunities to those who said they would build railroads.


A list of corporate subsidies would be larger than a medieval Bible. It might even require as many pages as an old Encyclopedia Brittannica. The myth that giving money to the rich, or helping them keep the money they have, will motivate them to employ people and stimulate the economy is possibly the most persistent falsehood in our society. The industrialists and bankers are better at lying than anyone else. The truth is and always has been that economic activity, buying and selling, what economists call "demand," has one cause and only one cause: lots of people with lots of money. They cannot have only enough money to pay for rent, food and clothing. They must have some extra money, what economists call "discretionary income." That means some money that they can spend voluntarily, on something that they want, not on something that they need desperately or that they have to pay by law, such as payment on a loan. Demand, legitimate demand, is the only thing that stimulates investment and hiring. No corporation can make a profit and survive just because they manufacture something that is terrific or provide a service that everyone wants. If no one has the money to pay for it, all the investor gets is a warehouse full of bicycles or a nice location. No customers, no business, no profits, no nothing. That is exactly what happened during the Great Depression. For some reason I distinctly remember, have always remembered, what my Social Studies teacher said way back in the early 1950s. He said that one of the primary causes of the Great Depression was that there had been "over-production," meaning that factories produced good refrigerators and good cars and household goods, but the demand was low, and the products were not being sold. Business was bad and businesses closed and could no longer pay their employees. Later, of course, we all learned of some other causes for the Great Depression, such as the Great Selfishness and Great Stupidity of the rich who become addicted to gambling and persistently try to "win big" by changing nothing into money, by lying, cheating and stealing. But that idea that there was "over-production" made a profound impression on me. As young as I was, I immediately thought of questions. What would happen if there was "under-production?" What if there was over-production but people had "over money?" Would they buy two refrigerators instead of one? And what does "over-production" mean anyway? It must mean there are so many things to buy, that there are either more things for sale than people need, or there are more things for sale than people are able to buy. If the people do not have the money to buy all the goods that have been made (by the same people), why not just print some money for them so that the can buy it, keep the factories open, and keep the employees employed? Well, of course over time I (we) learned that helping ordinary people by giving them a "subsidy" of money is socialism, and that is against the law of God (the God of Capitalist Heaven). So, the fundamental principle of the American economic philosophy was stated beautifully, and accurately, by Ralph Nader: We have socialism for the rich and competition for the poor.


The fundamental flaw of American or western economics is this dysfunctional habit of equating what is good for banks and corporations is the only thing that is good for the economy. We see the power of this myth in our news broadcasts, on radio, on television, in newspapers and magazines. If the "climate" is good for investors, return on investment is good, stock sales are doing well, stock prices are stable or generating profits, that must be good for everyone, right? God is happy, the angels are singing their best songs, the people who live on other planets are even happy to know that the rich are still rich, still comfortable, still safely protected from descending downward into the hell of having to perform real labor. We want upward mobility in America, and the preferred method to protect upward mobility, engineered and defended by the rich, is to do everything possible to prevent downward mobility. We don't want anyone who is rich becoming less than rich. That is not acceptable. So, we are glad to increase the number of rich people from the ranks of the poor and middle class, so long as the rich are safe and secure in their position of wealth and do not have to take any undesirable risks. That is why the investors and bankers love to invest in a "sure thing," why they do not take a chance on anything really new. They are glad to invest in a product or process or marketing plan that is guaranteed to produce profits. They have financed colleges and universities and think tanks all for the purpose of studying how a profit is made and how to guarantee profits. But, unfortunately, that is NOT ECONOMICS, that is business. Daily we receive reports on the stock market. If we were to receive reports on real economics, we would receive, daily, reports on the relative prices of necessities, the cost of food, shelter, transportation, health care, medicine, clothing and education. Think about how that would look. The news is on, and the anchor says: "Now we are going to hear the economic report from our economics consultant." And then we hear it, while viewing charts on the TV screen:


"Rents continue to rise and while they were once about one-fourth of monthly income they are now one-third and in some cases nearly half. The cost of a college education has become out of reach for most of the middle class, and certainly for the poor, and the young adults who normally would be seeking a college education are losing interest in buying one, because they have to borrow enormous sums of money to do so, more than what is required to purchase a car, and in some cases the same amount they would borrow to mortgage a house. [This being what most young adults would do before they got married or bought a house.] A very high percentage of discretionary income is being spent on communications technology: cell phones, computers and internet and phone services and entertainment [bread and circuses]. In some cases, the amounts that young people spend on phone and internet services, and devices, is about the same as what they spend on food."


The reality that Americans need to awaken to is that the economic goals of a rational society are very different from the goals of investors, bankers and industrial corporations. The society has no interest in whether wages are deemed to be low or high by business owners, but only that wages are sufficient for people to pay for what they need and for some things that they want. Therefore, a very important economic goal of society is that there is a practical relationship between earnings and the costs of living. The society wants everyone who is willing to work to be working. And, if the corporations invent so many machines, and develop systems of production that require little or no human labor, then the society has to develop a system that provides people with money to spend even though they are not employed. The corporations hate to accept responsibility for eliminating jobs, but that is what they do. It is an imperative of business to reduce the need for labor. We have been doing that with industrial and business technology for the past three to four hundred years, and there is no good reason to be surprised that the efforts to eliminate the need for human labor is a great success. So, now we need to develop a new economic system that thrives even though people do not need to work. Corporations want to be free to dismiss human employees because they are no longer needed. That is okay. The corporations should not be forced to hire people they do not want to hire. But neither should the people allow the corporations to insist that the way that they run a corporation is the same way to run a society. That is not true, never was, and never will be.


Society wants every citizen to be constructively occupied, doing something good that is helpful and not harmful. Society wants everyone who participates in the productivity of the community to also participate in the wealth of the community. Be aware here that my use of the word "wealth" in this context does not mean "money." The wealth of the community is all that results from the economy of the community: food, clothing, shelter, transportation, fuel, toys, games, sports, entertainment, news, literature, theater, movies, new ideas, music, and on and on. And it is a legitimate goal of a rational society that everyone who wants to participate in the work should also participate in the product, in the wealth of the community. The problem is we are stuck in a viewpoint that is older than the Bible. St. Paul the evangelist and Karl Marx were in agreement, based on the standards of an economy of scarcity, that only those who work should eat. But we no longer have an economy of scarcity. We have established to anyone with brains that we can produce enough of everything that everyone needs, and now our only problem is how we distribute it. How do we share? The question is not how do seven people share three applies, but how do seven people share eleven apples? In an economy of abundance, and a money economy, it is neither fair nor reasonable to tell anyone that if they have no money they have to drop dead or just sit at home and feel sorry for themselves while they ponder the injustice of their treatment. The truth is known to virtually every social scientist and every civil servant and social worker in the world that there is no one whose economic participation is not needed, that is, not needed by the society. The corporations want us to believe that their function is to decide who shall work, who shall have money, and therefore who shall participate in the wealth of the community. But NO, a thousand times NO, we never assigned that role or authority to banks or investors or business corporations. They have no business telling us who will participate in the economy. They only have a right to dismiss a person from employment by them. They have no right or power to dismiss a person from society. A member of society has a natural right to participate in the work and wealth of the community, AND, if the private sector of the economy dismisses an employee, that person and citizen has a right to appeal to the social contract of democratic political science. The individual has not been dismissed by society, but only by a factory. He or she is still a citizen with a right and desire to participate in whatever the society needs or desires: pick berries, sort nuts, paint old houses, water plants, pull weeds, sweep a floor, or a street, pick up trash, receive complaints by telephone, supervise children, and on and on. Just because a self-serving profiteer says to a citizen "We don't need you. No more pay available. Go home." Does not require the society itself to do the same. It is neither wise nor practical to tell a citizen that the society does not need them. What are they supposed to do, put themselves into suspended animation. Jump off a bridge? Get discouraged and get drunk? Take drugs? Commit a crime? They can do all of these things if society acts as though they no longer belong, are no longer a member of society. They are no longer an employee of the "Big Pig Junk Production Toxic Pollutant" corporation, but they are still a member of society. All we have to do is think about how to keep them in the role of active member, and not allow them, or anyone else, to talk or act as though they have been dismissed from society.

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