|By: Henry C.K.Liu
"Poverty is in reality a phenomenon of social despair. The habitually unemployed, the unemployable, the underemployed and the working poor in developed countries have higher absolute incomes or public assistance payments than the middle class in other less developed countries, whose members nevertheless do not consider themselves poor because they have not
lost hope in themselves or self-respect for their own lot. "
An economy is a comprehensive and complex entity of which trade is only one sector. Yet nowadays, neoliberal economists and policy-makers tend to view trade as the economy itself, downplaying the importance of the public sector and other non-market social sectors of the economy.
Neoliberals promote market fundamentalism as the sole, indispensable path for economic development, despite the fact that data of the past decade have shown that trade tends to distort balanced development in a way that hurts not only the less developed, but the developed economies as well. Currently, in the United States, the mecca of free-market entrepreneurism, the statist sectors - government spending, health care, social and education services and defense - are keeping the economy afloat, while finance, entrepreneurial ventures and high-tech manufacturing languish in extended doldrums.
Unregulated markets lead naturally to the emergence of monopolistic enterprises. Thus "free" markets are inherently self-destructive of their own freedom. Free markets depend on enlightened statism to remain free. Unregulated labor markets lead to slavery. For many human social activities, the market has no positive function. Free markets for human relationships, for example, lead to prostitution. Free markets in power breed corruption. Socio-economic Darwinism will eventually deplete the economic food chain: the fittest cannot survive when all the weak that the strong need to exploit in order to survive disappear. Government, from monarchy to democracy, exists solely to protect the weak from the strong.
Globalization since the end of the Cold War has been viewed increasingly as neo-imperialism by many even outside of the radical left. This view is amply supported by field data. It has become obvious to many in both developed economies and emerging markets that the undervaluation of labor is indispensable for the creation of surplus value that economists call capital. This capital then must seek new investment opportunities in less developed economies where labor is even cheaper. The investment opportunities of this adventure capital point not to the beneficial development of the less developed economies. This capital seeks higher return than it could get at home for the benefit of its owners by exploiting even cheaper labor overseas. Capital has acquired enormous market power for the suppression of the value of labor both at home and abroad. Neoliberals rationalize that globalization, while undeniably exploitative, nevertheless produces tangible collateral benefits, even to the exploited.
The infamous Lawrence Summers World Bank memo, in which he, as chief economist, argued that the export of pollution to poor countries represented "immaculate" economic logic because Third World lives were worth less, is a classic example of warped neoliberal mentality.
This neoliberal approach of course was the same argument presented by the defenders of 19th-century imperialism in which moral rationalization was used to justify economic exploitation. Neoliberal values, namely capitalistic democracy and market fundamentalism, become the new smiling mask for economic exploitation not different from the "white man's burden" of 19th-century Eurocentrism. The recurring financial crises associated with financial globalization in the past two decades have revived economic nationalism worldwide with parallels to the political nationalism against imperialism of the previous century.
John Atkinson Hobson (1858-1940), an English economist, wrote in 1902 one the most insightful critiques of the economic basis of imperialism. Hobson provided a humanist criticism of classical economics, rejecting exclusively materialistic definitions of value. With A F Mummery, he developed the theory of oversaving that was given a generous tribute by John Maynard Keynes. Hobson's second major contribution was his analysis of capitalism on which Lenin drew freely to formulate the theory of imperialism as the highest stage of capitalism. "Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capitalism is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed." (Vladimir Ilyich Lenin, 1870-1924, Imperialism, the Highest Stage of Capitalism, Chapter 7 - 1916)
Thus until the Cold War, practically all anti-imperialist movements were also anti-capitalist. Hobson did not touch on the economics of environmental pollution associated with globalization. For all the evils of 19th-century imperialism, environmental pollution was not one of them.
Critics of globalization, from the left to the right, have focused on four issues: 1) labor standards, 2) corporatism, 3) environmental abuse and 4) global financial architecture.
A new focus on Hobson's ideas may yield useful insights in the current debate on globalization economics. Specifically, Hobson's view of the economic system from the standpoint of human values is worth discussing. Hobson believed that the contradictions of production and consumption, cost and utility, physical and spiritual welfare, individual and social welfare, all find their likeliest mode of reconciliation and of harmony in the treatment of global society as an organism, and not as a collection of competing economies in the market arena.
Karl Polanyi is also worth a revisit in this hour of self-induced imminent collapse of the globalized market economy. The principal theme of his Origins of Our Time: The Great Transformation (1945) was that the world market economy in effect collapsed in the 1930s. Yet this familiar system was of very recent origin and had emerged fully formed only as recently as the 19th century, in conjunction with capitalistic industrialization. The current globalization of markets following the fall of the the Soviet bloc is also of recent post-Cold War origin, in conjunction with the advent of the information age and finance capitalism.
Prior to the coming of capitalistic industrialization, the market played only a minor part in the economic life of societies. Even where market places could be seen to be operating, they were peripheral to the main economic organization and activity of society. Polanyi argued that in modern market economies, the needs of the market determined social behavior, whereas in pre-industrial and primitive economies the needs of society determined economic behavior. Polanyi reintroduced the concepts of reciprocity and redistribution in human relationships.
Reciprocity implies that people produce the goods and services they are best at producing, and share them with others with joy. This is reciprocated by others who are good at producing other goods and services. There is an unspoken agreement that all would produce that which they could do best and mutually share and share alike, not just sold to the highest bidder. All find their fulfillment in separate productive livelihoods. The motivation to produce and share is not personal profit, but personal fulfillment, and avoidance of social contempt, ostracism, and loss of social prestige and standing. This motivation is still fundamental in finance capitalism, with the emphasis on accumulating the most financial wealth, which is accorded the highest social prestige. The annual report on the world's richest 100 as celebrities by Forbes is a clear evidence of this. The opinion of figures such as Bill Gates and Warren Buffet are regularly sought by the media on matters beyond finance, as if the possession of money itself represents a diploma of wisdom.
Edward Luttwak explains in his recent book Turbo Capitalism, "Super-winners are not only respected and admired for what they do but also for what they know, or rather for what it is assumed they must know. They are often asked to pronounce on the great questions of the day, even those far removed from their fields of competence. During 1997, for example, both the champion software marketeer Bill Gates and the champion currency speculator George Soros were constantly and respectfully cited in the American media on a great variety of subjects, including public education and the control of narcotics. Their interviewers assumed as a matter of course that the extent of their wisdom corresponds to the size of their incomes. Far from being condemned for greed, winners are held in the highest regard, and the greatest winners of all have almost an odor of sanctity."
Many religions consider the attitude toward money as often more indicative of a person's true worth than the mere possession of it. The same might be even more true for societies. This explains why modern societies, whose members would be obsessed with a single-minded quest for material wealth, would be constantly faced with recurring crises of values. The pursuit of maximization of wealth leads inevitably to the betrayal of human values that would otherwise forbid unconscionable exploitation of and impersonal disregard for others.
Maximization breeds abuse. The Confucian doctrine of the Path of the Golden Mean (Zhongyong Zhi Dao), a concept of avoiding excesses, is instructive on this point. More is not necessarily better; most is seldom best, and best is the mortal enemy of good, as Voltaire has insightfully pointed out. A rich man amid masses of poverty will not find himself a paradise on Earth. A society that celebrates only the best will waste the good. The relentless pursuit of absolute beauty will result in ugliness, which explains why the art world is often infested with revolting characters. The fact that the historical record of socialist politics is littered with betrayals of the humane ideals of theoretical socialism should not diminish the valor of those who have placed their hopes on the noble vision, just as the materialistic efficiency of unregulated market capitalism is no testimony on the moral validity of greed.
It is telling in the manner neo-classical economics treats the trade-off between return on capital and compensation for labor. An increase in return on capital is viewed as economic growth, while a rise in pay for workers is viewed as non-productive inflation. What moral rules enable the pampered corporate executive to receive a generous bonus for abruptly firing thousands of workers in a recession? Maximization of shareholder value through cost reduction is just a euphemism for robbing workers to enrich the owners. It is a very sick society that views as progress the depreciation of human workers in favor of the maximization of appreciation of material assets.
In a money economy, it is a basic truism that only those who have money can pay the bills at the end. If all are to pay their share, ways must be found for all to earn sufficient money to participate constructively on a healthy financial level, without permanent subsidy from the economic order to which the poor have become burdensome wards. In a bountiful world, poverty is seldom caused by someone else's needing more than others. This is particularly true in a society in which both greed and envy are constrained by moral precepts. One does not have to be one of the world's richest men in order to avoid feeling poor. Poverty is the result of underdevelopment in relation to the production and consumption norms in a particular socio-economic order. A case can be made that poverty is a byproduct of the institution of money, with which poverty is often measured. It is the quest for accumulation of money as capital that requires the exploitation of humans at levels that produce poverty.
It is only when some singular segment of society fails extensively to receive sufficient economic opportunity, or sufficient value for its labor to maintain its fair share of consumption, as normatively prescribed in the socio-economic order, that poverty is born. Social cohesion will be threatened when poverty is perceived as the result of institutionalized maldistribution of wealth, reflecting unfairness in the sharing of the fruits of co-operative endeavor among different socio-economic groups.
Poverty, however, cannot be defined by absolute income levels alone, because poverty is actually a social problem with an economic dimension. It is only because it is most conveniently recognizable in a money-based economy by its financial aspect that poverty is often mistaken as a simple matter of income deficiency.
Poverty is in reality a phenomenon of social despair. The habitually unemployed, the unemployable, the underemployed and the working poor in developed countries have higher absolute incomes or public assistance payments than the middle class in other less developed countries, whose members nevertheless do not consider themselves poor because they have not lost hope in themselves or self-respect for their own lot.
Poverty is a symptom of economic inefficiency and social dislocation in society. Its existence in an economy hurts the rich as well as the poor, and its pervasiveness in society alienates its members from one another. Aside from being dehumanizing to those suffering from it, it is destructive to the society tolerating it. Poverty becomes a political issue when the poor are structurally excluded from contributing to the economic process at levels that enable its constituents to support a dignified life in a healthy environment consistent with the cultural traditions of their society. While there may always be those who enjoy higher income than others, there is no socio-economic necessity for the poor to exist. Thus when Ronald Reagan, leader of the free world, proclaimed that there would always be poor people, he was defaulting on the responsibility of political leadership.
Life without growth will become a zero-sum game in which winners will gain only from the losers. In such a game, eventually all would lose because of the game's self-terminating nature. Wealth redistribution without growth always leads to social conflicts, the final phase of which is generally settled with violence, the organized form of which is war and the unorganized form is terrorism, and the end game is revolution.
But growth cannot be defined simply in quantitative terms. Quality of life and the range of available options are often more revealing measures. Chinese society during the early part of the Tang Dynasty (618-907), the golden age of Chinese civilization, was fortunate in that its economy enjoyed long periods of continuous growth. Along with material growth, cultural development and social mobility also accelerated. Poverty in the form of pathological social despair was not prevalent in Tang time. To be sure, there were severe hardship and upheavals caused by war, particularly in the border regions, by policy errors and religious fanaticism, by natural disasters and even by personal misfortune. There were also recurring incidents of governmental abuse and corruption. There were periodic regional famines caused by natural calamities exacerbated by inadequate transportation, despite government-sponsored relief efforts. But these events were generally perceived by people as transient anomalies or force majeure, and not as structural defects of the social system. In other words, such calamities were caused by nature or personal failings of the individuals who ran the system rather than shortcomings of the social order itself. People readily accepted periodic disasters, the prevention of which was beyond the people's expectation of the scope and ability of the political system. However, the occurrences of natural disasters were sometimes interpreted as retribution for the immoral behavior of the ruling sovereign. This connection between the moral image of the sovereign and the fortune of the empire required the ruler to ensure the well-being of the people, not just the efficient operation of the market.
The flowering of Tang culture has its roots in the high quality of life enjoyed by all its citizens, regardless of their social positions and income levels, and the high standard of the efforts of their labor, manual or intellectual, regardless of their commercial values. Since money was only one of the determinants of a good life rather than the all-consuming ingredient, the pleasures of life were not denied to those who did not aspire to financial wealth, or those who were unable to achieve it because they did not care to surrender to society's financial rules. The inner peace preached by Taoist and Buddhist precepts were verifiable by the individual's direct personal experience in the socio-economic realm of the Tang era. The rejection of materialistic concerns did not necessarily reduce one to abject poverty, nor earned society's scorn. On the contrary, hermits were respected by society and donations toward their upkeep were considered as enlightened expressions of the donors' own sagacious insight rather than ostentatious acts of charity. The "Selected Biographies" (Lie Zhuan) section of the Old Book on Tang (Jiu Tang Shu), compiled in 945 by court historiographers, contains a chapter on hermits, with 21 entries, prefaced by a statement that the cultivation of hermitage traditionally encourages the virtue of humility and self-restraint while discouraging vulgar trends of competition and greed, although its Confucian authors failed to address the irony that a celebrated hermit is an oxymoron.
Generally, an imbalance existed between donors and recipients, the number wishing to give frequently exceeding the number prepared to receive. Whenever a seng (Buddhist monk) or a dao'shi (Taoist priest) or a wandering free spirit should show up in a village, his presence would be celebrated by an spontaneous outpouring of generous giving by the villagers that would resemble an instant festival. Even in modern time, sengs in Southeast Asia still receive daily meals by simply walking through villages, without begging, while the pious lay population awaits their habitual schedule with the finest food in the house ready to give with eagerness, the way bird-lovers feed their ornithic idols.
Presumably examples of this kind of non-monetary behavior would be village communities where men made hunting parties and women grew vegetables and tended to children. No money changed hands but all contributed according to their abilities to the common welfare, and all shared according to their needs. The family structure in modern societies, while under constant financial attack, is still precariously based on non-monetary bonds. Families still do not trade their children the way professional sport teams trade valuable players. The widespread bending of free-market regulations and peer pressure to rules of behavior against predatory trading on Wall Street in the days following September 11 also highlighted this motivation.
Redistribution is involved where a chief gathers together a harvest into safe storage, then redistributes it to members of his group by holding communal feasts and festivals. This serves both to share the communal wealth fairly, and also to reinforce the social structure, allocation indicating status and importance. These festivals may also be used to reinforce relationships with neighboring tribes, and the store may be used to supply the community's warriors if circumstances require.
Polanyi recognized that marketplaces existed in ancient times, and were present in primitive economies, but he argued that they existed within a context of reciprocity. Money was often present, but it was unimportant, and also operated within the context of reciprocity. Often, money was used to settle the difference of value between exchange of goods. These money-using daily markets were merely convenient localized exchange places operating within the broad system of reciprocity. There were also marketplaces for long-distance trade, such as ports. But these were only for items which could not be obtained within the area, and therefore could not be provided within the local system of reciprocity.
Ancient and primitive economies had marketplaces but they were not market economies. They were embedded economies. According to Polanyi, a market economy is an economic system controlled by prices, these prices determining how much is produced, and how what is produced is distributed. Social considerations have no part in this system. Money exists, which serves as purchasing power and enables its possessors to acquire goods and services, which are priced in money terms. People are motivated to acquire money with which they can then purchase whatever they want, often including political influence or privileges above the law.
Polanyi believed this monetary-based market economy sprang suddenly into existence in the 19th century, thrusting aside the old systems based on reciprocity and redistribution.
"The outstanding discovery of recent historical and anthropological research is that man's economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interests in the possession of material goods; he acts as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end." (Polanyi 1945) Of course, in a culture that celebrates wealth accumulation for its own sake, people will work to accumulate wealth. Napoleon belittled Britain as a nation of shopkeepers.
Polanyi challenged Adam Smith, who suggested that the division of labor depended upon the existence of the market, or upon man's "propensity to barter, truck and exchange one thing for another", because the market economy had not appeared to much extent in Smith's time. Even where it had appeared, it was a subordinate feature of economic life.
In his Trade and Market in the Early Empires, Polanyi wrote, "What is to be done, though, when it appears that some economies have operated on altogether different principles, showing a widespread use of money, and far-flung trading activities, yet no evidence of markets or gain made on buying or selling? It is then that we must re-examine our notions of the economy."
Polanyi wrote on the formal and substantive meanings of the term "economic". This distinguishes the methodology of economics from that of economic anthropology. He argued that economics as we know it depended on "formal" principles. Thus a set of allegedly self-evident assumptions are made, which become premises used as the basis for a sequence of logical deductions to a set of irrefutable conclusions. Thus one can take Smith's statement about man's "propensity to barter, truck and exchange one thing for another" and develop it to show how money and markets came into being, and how they led in turn to specialization of function, and increased productivity. But the method of economic anthropology was "substantive" and depended upon empirical observation from which principles of economic behavior were induced from perceived evidence. Societies are first observed and the principles of their economic activity recognized from their actual behavior.
Polanyi's claim is that the empirical observations of the substantivists reveal economic life in archaic and primitive economies to be entirely different from that assumed by the formalists. The McCarthy-era witch-hunt left an intellectual aversion to Marxism in the US that Polanyi conveniently filled because of his broadly socialist perspective.
Utilitarian ethics presumes that moral discussion originates from the point of view of the individual ego. It consequently construes all values as personal possessions. Christianity, Islam, Buddhism, Confucianism, Marxism and other similarly comprehensive outlooks believe that utilitarianism is mistaken in this. These outlooks begin by recognizing that individuals do not atomically exist: "The real nature of man is the totality of social relations," as Karl Marx asserts. Hence values are social and cannot be adequately defined by an inventory of personal possessions. Quality of life cannot be measured by a bank account or by similarly assessing personal possessions, including, perhaps, how a person is progressing in his or her self-chosen life purpose. Somehow the public dimension must also be assessed, not as utilitarians would do this - to reduce obstacles to private projects - but in the sense of measuring dedication to a goal, such as justice, or realization of other social values, such as brotherly love.
The issue of wages is a serious one in market economics. The suppression of normal wage rises from truly free-market forces is accomplished by government anti-inflation policies based on a "natural" rate of unemployment - what economists call non-accelerating inflation rate of unemployment (NAIRU).
American writers such as Henry Demarest Lloyd (Wealth Against Commonwealth), Ida M Tarbell (History of The Standard Oil Company), and Lincoln Stephen (The Shame of The Cities) exposed the inequity to herald the rebirth of American populism in early 20th century. In 1912, a third political party came into existence in the US, known as Progressives. In response, monopolists rallied around Herbert Spencer's Social Darwinism of "survival of the fittest". The problem of Social Darwinism is that all workers will eventually die off and the rich would have to wash their own dishes, a fate the rich avoid by keeping the unfit surviving at subsistence.
Social Darwinism went out of fashion in the US in the 1920s, defeated by undeniable socio-economic litters of its failure, but conservatives found a new line of defense against organizing the economy for collective benefits. They argued that while the aim was desirable, the task was beyond human capacity and that even if doable, the direction was alien to American values. The October Revolution gave this line of argument substance. If Russia had it, Americans did not want it, despite the fact that much of the economic planning by the early USSR was copied from highly successful US war planning efforts.
During World War I, while money wages increased all around, the lower wages increased more than the cost the living. Labor benefited from full employment. The railroads, shipping and shipbuilding were taken over by government, resulting in huge increases in productivity. The same happened after World War II.
The theory of rising wages asserts that employers should understand that rising wages are the only venue of assuring strong demand for their products, supported by the theory of technology-driven productivity increases, and the broad-based ownership of securities to spread wealth. The historical data show that the largest average increases in purchasing power have taken place at recession times when employers and bankers tried their beast to keep wages down, but the stickiness of wages made wage deflation slower that price deflation, as in the 1920-22 depression. The result was that when full employment returned in 1923, US workers had higher purchasing power than they had in 1920. But average manufacturing worker's yearly income decreased by $55 between 1923 and 1928, a miner's income by $187. Falling wages amid prosperity was a major structural cause, albeit little noticed, of the 1929 crash. If wages had been higher, equity prices would not have risen as much, thus dampening the speculative fever. Wealth effects from the speculative boom made low wages tolerable and caused a corresponding rise in debt without altering prudential debt to equity ratios. But when the speculative bubble burst, debt-equity ratios skyrocketed and there were insufficient wage levels to sustain consumption. Similar conditions appear to be facing the US economy now.
After the 1929 crash, the economic downward spiral was caused mainly by falling wages. Despite all promises of maintaining production, goods could not be sold as fast as they were produced because of a collapse of income due to layoffs and wage reductions. Globalization in the past two decades temporarily kept US purchasing power increasing despite a slow growth of domestic wages. This resulted from still lower wages in the emerging markets. Now the world is awash with overcapacity in relations to low demand caused by insufficient wage levels. For the past three years, China is the only nation that has adopted a wage policy to stimulate domestic demand, which has been largely responsible for China's continued growth in the face of global recession.
The failed first Hoover Plan of holding the industrial status quo and injecting "confidence" was built on the theory that nothing much was fundamentally wrong and that what was needed was for everyone to go on as before. When this theory failed to arrest the downward spiral, US president Herbert Hoover shifted to a second phase, admitting that something was amiss, that in mysterious ways the system had gone off track, but the remedy was to let the excesses run their natural course without government interference. The economic system if left alone was deemed a self-compensating mechanism through market forces, and would eventually restore equilibrium. Wages should be allowed to sink, which would reduce costs and profit would return and give incentive for renewed production, which would create jobs, etc. No one asked how falling wages could promote sales and what good were low production costs without sales. This was the forerunner of supply-side economics, which even in the early phase of a boom would accelerate the downturn because it by design leaves demand behind supply - a classic case of increasing speculative risk for production in hope that demand will follow. Production in the absence of ready demand is pure speculative investing. It is suicide as a cure for a recession. Yet current policymakers in many countries subscribe to the same faulty theory, hoping for a "recovery" without having to correct structural defects of the system.
The notion that market capitalism is superior as an economic system is only a recent invention. And its success in the past decade has been propped up by complex geopolitical factors. From the 1930s to the 1950s, the US in fact adopted many aspects of the Soviet model of planned economy. In 1931, a book about Russian planning, New Russia's Primer by M Ilin, was one of the more popular monthly choices in the Book of the Month Club. Stuart Chase, an economist at the Massachusetts Institute of Technology (MIT), proposed a Peace Industries Board as a successor of the War Industries Board of 1918 and historian Charles Beard suggested a National Economic Council to organize industrial syndicates regulated under the theory of public-utility control and supplemented by planning agencies for agriculture, public works, foreign trade and the rebuilding of cities. A committee of the National Progressive Conference in 1931 published a memo on "Long Range Planning for the Stabilization of Industry". Schemes for planning by separate autonomous industries according to the principles of trade associations or cartel came from many business sources, from Gerald Swope of GE and even the US Chamber of Commerce. National planning was the mantra of the day. The National Bureau of Economic Research put together the figures that came to be known today as GNP (gross national product), NNI (net national income) and other indices. The growth of US higher education was a centrally planned affair. The Federal Reserve Bulletin on money credit and industrial production was issued for the purpose of planning. The profession of economics itself grew up in the US under the aegis of planning. Hoover was also a planner. He attempted to save capitalism through government planning by abandoning laissez faire and threw government credit into the breach to protect the great capital hoard from the onslaught of deflation, not unlike what US Federal Reserve chairman Alan Greenspan is trying to do to prop up the over-valued equity markets today.
Hoover, while in the name of laissez faire vetoing government measures to help the unemployed, was at the same time unleashing government to interfere with the free play of market forces to protect the centers of economic power. The net result was history. Not until president Franklin D Roosevelt adopted Keynesian and many so-called socialist measures of demand management did the US economy stir, and it remains controversial today whether a Keynesian program could have succeeded without World War II. The RFC (Reconstruction Finance Corp) was established at the end of 1931 to prevent pending bankruptcies by lending government guaranteed funds raised from tax-free debentures ($1.5 billion) to banks and business corporations that were frozen out of the credit market - and the loans were even kept secret to protect the credit ratings of the corporate borrowers. Its original two-year temporary life was extended to well beyond the end of World War II, until 1950, financing war expenditure in the interim. The planned economy did not came under attack in the US until well into the final phase of the Cold War, with the rise of supply-side economics in the late 1970s.
Warren Nutter made a well-known study in 1962 for the National Bureau of Economic Research: The Growth of Industrial Production in the Soviet Union. It estimated the percentage of planned output achieved by important industries at the end of successive five-year plans, in "value-added" terms. The first five-year plan (1928-32) achieved 75 percent of its target, the second (1932-37), 76 percent. The plan ending in 1950 achieved 94 percent and 1955 achieved 99 percent. The area of trouble in Soviet planning was in agriculture, not so much in the state farms but in the collective farms made of small farmers. The knotty problem of reward and incentive in collective enterprise has yet to be solved by human ingenuity. The same was also true in China. When China abandoned collective farming, the agricultural problem also eased. Even in the US, free-market principles never touched agriculture, which has remained a fortress of government subsidy.
The Agenbeguan report, published on July 9, 1965, in the New Statesmen, gave a revealing assessment of the Soviet economy as still backward in industrial production compared with other developed economies, even though Russia had come from a lower base. The USSR had as many machine tools as the US, but some 50 percent of them were in constant repair. Production was siphoned off to maintenance. The report proposed a form of just-in-time inventory (in 1965!). And the agricultural problem had not been solved (and would not be solved by the end of the USSR and is still not solved today). The report focused also on rising unemployment, which had been denied in official figures. The report identified the defense sector as the cause of these problems. It was a direct attack on incompetent management disguised as planning.
This is an important point. The US excels in corporate and strategic planning, despite the myth of free enterprise and competition. The Soviets erred by neglecting the science of management and suffered from both excessive centralization and excessive democracy at the operational level. Workers could not be fired or laid off by mangers and were not particularly obliged to carry out instructions, on the ground of political equality. China was faced with the same problem with its copying of the Soviet model, which Chinese planners did not correct until after 1978. In management terms, production increased in the Chinese economy when management was given more autocratic power, not less, despite Western wishful thinking. General Motors was not run by democracy. There is no democracy in the corporate organizational structure or governance, power being vested in the number of shares rather than the corporate population. In fact, the American managers in the GM joint-venture operation in Shanghai repeatedly complained openly about increasing Chinese political liberalization and its damaging effect on productivity. They longed for a return of the good old days when the Communist Party commissar called all the shots and problems could be solved by getting the approval of a few powerful persons rather than endless levels of power centers. The Central Intelligence Agency never predicted the collapse of the USSR, especially from structural economic shortcomings.
There is a fundamental relationship between wages and prices. Pricing policies of firms as they are actually practiced in the real world, both by cartels such as the Organization of Petroleum Exporting Countries (OPEC), and by market leaders in pharmaceuticals, software, communication and by commodity producers, have one thing in common. Pricing policies across all these different economic sectors are predicated on the proposition that price is seldom, if ever, set by the intersection of supply and demand, as neo-classical economics textbooks teach. The bottom line is that price determined not by supply and demand but by strategies that aim at optimizing the long-term value of assets and political power.
OPEC pricing is a good example. Throughout the history of oil, price has been set by highly complex considerations and supply has always been adjusted to maintain the set price. In pharmaceuticals, price is set neither by cost nor demand. The pricing model of any new drug aims at achieving maximum lifetime value of the drug that has very little to do with current supply and demand. Microsoft's pricing model for Windows has nothing to do with supply and demand, or marginal costs, which are close to zero. Telephone charges are similarly disconnected from supply and demand, or marginal costs. Even in the auto industry, the dinosaur of the old economy, where cost input is high and discounted return on capital low, pricing is based more on complex considerations than demand. With 80 percent of autos financed or leased, subsidy of financing costs is the name of the game, not sticker price. Farm commodities prices are definitely not set by the intersection of supply and demand. They are set artificially high by political considerations by practically all producer governments; and both supply and demand are artificially distorted to maintain the politically set price. The general consensus of mainstream economists on the global steel overcapacity problem is to reduce capacity, not to let prices fall. The Bank of Sweden Prize in Economic Sciences (Nobel Prize) was awarded to Joseph Stiglitz, George Akerlof and A Michael Spence for "their analyses of markets with asymmetric information". In his acceptance press conference, Stiglitz said, "Market economies are characterized by a high degree of imperfections."
Price in fact is the most manipulated component in trade. That is the fundamental flaw of market fundamentalism. Friedrich Hayek's rejection of socialist thinking is based on his view that prices are an instrument of communication and guidance, which embodies more information than each market participant individually processes. To Hayek, it is impossible to bring about the same price-based order based on the division of labor by any other means. Similarly, the distribution of incomes based on a vague concept of merit or need is impossible. Prices, including the price of labor, are needed to direct people to go where they can do the most good. The only effective distribution is one derived from market principles. On that basis, Hayek intellectually rejects socialism.
The only trouble with this view is that Hayek's notion of price is a romantic illusion and nowhere practiced. That was how the native Americans sold Manhattan to the Dutch for a handful of beads.
In Hayek's social philosophy, value and merit are and ought to be two distinctly separate issues. Individuals should be remunerated purely on the basis of value and not in accordance with any concept of justice, whether it be the Puritan ethic or egalitarianism. Hayek went so far as to deny that the concept of social justice had any meaning whatever, on the basis that justice refers to rules of individual conduct. Since no rules of the conduct of individuals can determine how the good things of life should be distributed, the question of justice is moot. Since a free market is the natural outcome of a multitude of individual decisions, how the market decides is amoral. Yet basic human needs such as safe shelter, food, health care and education are not distributional issues. The world's economy can supply every human being with adequate needs, but for the "market".
But according to Hayek, a spontaneously working market, where prices act as guides to action, cannot take account of what people need or deserve, because it operates according to a neutral distribution system that nobody has designed. Such a distribution system cannot be just or unjust. And the idea that things ought to be designed in a "just" manner means, in effect, that one must abandon the market and turn to a planned economy in which somebody decides how much each ought to have. And the price for that justice is the complete abolition of personal liberty. So, in the name of liberty, the world is forced to go hungry while economies suffer overcapacity.
Hayek's free-market ideas have been applied to much of unregulated globalization in recent decades, and the socio-economic damage is now very visible. Not withstanding Hayek's repugnant social philosophy, even his "scientific" claims on the effectiveness of free markets has not been substantiated by events. A transaction requires a buyer and a seller at a price. It is easier for a camel to go through the eye of a needle than for both buyer and seller to be satisfied with any given price. One side of a "win-win" transaction is always an idiot.
All economies are planned. Some are planned through "market" mechanism in order to deny societal values, while others are planned according to societal values. Demand, in the sense neo-classical economists use the term, has to do with untainted market forces. Yet the manipulation of demand against market forces is widely practiced. It is intervention against "free" markets. Free marketeers consider the unseen hand of government as intervention, but the unseen hand of price setters as a cannon of natural laws.
What about supply? Neo-classical economists do not propose supply curves for non-competitive markets. However, supply curves in competitive markets are just cost summaries, and every firm has a cost structure. So in that sense, the supply considerations are also completely relevant. Supply and demand are two sides of the same coin and in fact quite inseparable. In pharmaceuticals, demand is related to the illness, not the availability of drugs. Many useless drugs are marketed and sold with proper warnings, often at great profit (a perverse version of Say's law - supply creates its own demand). Addiction to cigarette smoking creates demand that leads to supply in the form of tobacco production, which for centuries received government subsidy in tobacco farming. Smoking causes cancer. The tobacco industry contributes to cancer research on cure but not on prevention, because the hope of a cure for cancer will neutralize the great threat to the future of the tobacco industry, while prevention directly threatens the industry. Now, all that eventually comes out of the wash in cigarette pricing models. Take the case of drugs for AIDS. There is an intense debate going on regarding the pricing and availability of "promising" drugs for human immunodeficiency virus (HIV) infections. And the drugs are not available for those who need them most, nor in areas that need them most to reduce HIV's spread, but to those who most are able to pay for it or who are adequately covered by health insurance.
It's time for a fundamental rethink of the theology of supply and demand and the function of price in so-called free markets. To start with, all markets are coercive, participants are seldom, if ever, free to act, but are compelled to act, with very little room to reduce their individual disadvantages. The law governing markets is power, with government, being as institution endowed with the most power, always the most influential participant. Some governments choose to control the market indirectly while other choose to control it directly. All governments reserve the right to set the rules of the market. Some governments subscribe to ideologies that tilt toward equalization in the name of fairness, while others subscribe to ideologies that tilt toward hierarchy in the name of efficiency. These rules predetermine the winners and losers, while the average market participant innocently hangs on to the Horatio Alger myth.
Friedrich List, in his National System of Political Economy (1841), asserts that political economy as espoused in England, far from being a valid science universally, was merely British national opinion, suited only to English historical conditions. List's institutional school of economics asserts that the doctrine of free trade was devised to keep England rich and powerful at the expense of its trading partners and it must be fought with protective tariffs and other protective devises of economic nationalism by the weaker countries. Henry Clay's "American system" was a national system of political economy.
Market fundamentalism has wrecked economies all around the world. Yet neo-liberals continue to promote the false hope that the market will save the world from the onslaught of a severe depression. It is time to rein in this monstrous institution known as the market and to plan rationally for human development.
Henry C K Liu is chairman of the New York-based Liu Investment Group.
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