The not-so-invisible hand of economics

Last week, I said we can do something about climate change without hurting our economy. I would add “but our economic model is flawed which is why we find it difficult to deal with crises.”

Here is my view of the economy – where it is at and where it could be. I am not an economist so I am sure there are some who will laugh at what I have to say. Have at it.

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The economy is not a thing separate from our society. It is the sum total of all of the different ways we engage in bartering for goods and services. When we talk about the economy, we are talking about the way we have evolved our social engagements allowing us to survive.

Our ancestors had a very simple economy. What you gathered or the animals you killed while hunting provided you with the nutrients to survive. You shared with the tribe when you had an abundance so that they would share with you when things didn’t go well. And if you weren’t willing to engage in a sharing society, you would find yourself ostracized and likely unable to survive.

But as the need for specialized implements developed, some members of the tribe became better at crafting hand axes than others or had superior knowledge about the medicinal properties of plants or knew of a good place to collect fruits and vegetables. Specialization took over and the crafts were born.

As settlements developed, specialization became an economic driver. For example, I could make leather goods in town but at the expense of not being able to spend time collecting food. So I needed to be able to exchange the goods I made for the food you grew. And you needed my leather goods in order to grow your crops so the exchange was of mutual benefit.

Zip forward thousands of years to the 18th century and modern free market capitalism was born. The central idea is you will pay me a fair and reasonable price for my goods and I will do the same for the things you produce. For a worker, the exchange wasn’t necessarily in goods but in terms of time. I will work for you for a period of time and you will provide me with the means to purchase the things I need to live.

The system works well provided everyone is an equal actor and playing fairly. But not everyone is. Indeed, Adam Smith in The Wealth of Nations complains of the avarice of princes and sovereign states. He also points out the inequities that exist between business owners and labourers.

To paraphrase his argument, if labourers band together to form a coalition which results in an increase of wages, the owners will use every means they can – through the courts or government regulations – to destroy the coalition claiming it will ruin their business. But when owners band together to suppress wages, not a word is heard.

This tension still exists today as Amazon is facing its first unionization drive.

What we created is a system in which owners get richer relative to workers. This can be seen in the compensation afforded CEOs. In the 1960s, CEOs earned 20 times their average employee. In the 2010s, the ratio was closer to 300 to 1. It is a system that works very well for those at the top.

And yes, I am fully aware small business owners are not making 300 times as much as their employees and the majority of businesses are small businesses. But even so, most owners are doing better than their employees, even during the pandemic.

In any case, it is in the best interest of those who run multi-national corporations or the local car dealership to keep things going exactly as they are. They are profiting from the present system. And the last thing they want is for the government to step in and change the rules.

Indeed, governments that try to change the rules in democracies get voted out of power. In some parts of the world, they face armed insurrections or interventions by the military. Consider the case of Myanmar.

But when crises occur, be it pine beetles, the COVID-19 pandemic, or climate change, these same owners now cry for the government to step in – unless it hurts their business. Then government needs to butt out and let the economy do its thing.

And so the economy will. 

Electric cars will replace gasoline-powered engines. As the price of electric powered vehicles decreases, more people will buy them resulting in a greater demand which will induce manufacturers to change strategies and produce more electric cars. 

Climate change will spur economic growth and restructuring. This is the way it has always worked from our hunter/gatherers ancestors until now.  

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