This is a direct continuation of my previous entry, and precedes subsequent, directly related ponderings, now in the mental pipeline.
Money circulation is what keeps an economy functioning. That money tends to collect at certain nodes, and once it has collected there is unlikely to leave, is a block in the smooth flow of economic activity. The problem is nicely characterised as hoarding, which occurs simply because being rich is better than being poor. (That there will always be ‘rich’ and ‘poor’ is accepted, the only question, as we take this forward, is: rich and poor in what?) So the challenge is to keep the flow going, despite the pressure scarce money systemically creates to be richer than the next guy, and keep it that way.
In our current dominant myth The Market circulates money well, whereas The State does not. This is, if one peers under the bonnet, something of a circular (no pun intended) argument, in which: “black = bad (because it does)”, “white = good (because is does)” where “Market is white” and “State is black.” “Good” is the flow of money from place to place, from person to person. Trade is good. Strangely, as a ‘happy’ – though unintended – spin-off of this, some succeed to riches, while others fail to poverty, where many will be poor and few will be rich. I say this is strange, because these quite fixed and stubborn outcomes are logically contrary to The Market's primary function of promoting smooth money-flow. Poor people neither have nor can circulate money, rich people have but don’t want to circulate all their money. They want to possess more money. This is a systemic issue with money, though not the only one.
Again, smooth money flow is necessary to keep an economy functioning well. And yet as money flows around it ends up unevenly distributed. This uneven distribution inhibits maximum money flow, which means it inhibits maximum economic activity. What to do?
To answer this, I believe an analysis of The Market and The State is vital. An impartial, unbiased analysis. My efforts are those of an amateur of course, and yet I see very little work being done out there to look at this issue dispassionately. Ideology rules almost every roost.
The myth we all know so well relates that markets are efficient distributors of goods and services, and thereby serve society well. Economists call this myth the Efficient Markets Hypothesis (EMH). Markets are blind mechanisms powered by self-interest yet guided by an Invisible Hand, which, over time, ensures maximum possible societal good. Leave them be, let them alone to work their strange magic, and all will be well. Interfere, tinker, regulate, and The Market doesn’t work as it should. It is a force of nature, and best respected as such. Hence the correlation of ‘free’ markets with ‘freedom’. ‘Freedom’ is a social good ensured by ‘free’ markets. Also, selfishness is the inbuilt and unshakable human trait which, counter-intuitively, ensures maximum societal freedom and health.
To find out how we have come to ‘know’ that ‘free’ markets work this way, we must look to economics, and in particular the long journey economic thought took from Adam Smith, through Keynes, and into the neoclassical school. Economics is a strange discipline shot through with bizarre and impossible assumptions, and is seemingly incapable of making accurate or reliable predictions. It has been torn to shreds repeatedly by mighty thinkers, and yet soldiers resolutely on, convinced the nirvana of perfectly free markets it seeks is out there somewhere. Amazingly, despite its perpetual swagger (and I urge the reader to buy and read “Debunking Economics” and “Econned” for further information) orthodox economics has not proved anything, and most of all, has not proved there ever was, nor that there ever can be, a perfect (or ‘free’) market. They have likewise failed to prove that as-close-as-possible-to-free delivers social good.
To refresh, the conditions for a perfectly free market are:
1. forever rational market participants
2. perfectly informed market participants (knowledge of all prices of all goods and services for all time)
3. ease of entry and exit
4. total transparency
These conditions are of course impossible to meet. And yet only these conditions can prevent cartels/monopolies from forming. Cartels and monopolies do not serve the public good, distorting the market’s functioning. Some even become Too Big To Fail. Because the market cannot be perfectly free, it cannot, with or without the Invisible Hand, prevent these distortions from arising. Indeed, its necessary imperfection guarantees that settled imbalances occur.
Enter The State. How we hate The State. It is corrupt, nannying, bullying, dissembling, greedy, and to cap it all off, takes our money and wastes it on useless projects that no one wants. And yet, how could there be a market without a state? Can the infrastructure that enables markets to exist, such as roads and other transportation components, trade laws, criminal laws, courts, police, education etc., be established and maintained without The State? Can even one of these necessary components be run well by market processes? I believe not. If it were possible it would already be so.
The problem with maintaining societal infrastructure is money flow, how to effect it without ruffling too many feathers. We do not charge for education, and yet schools must be built and run, teachers and other staff paid. Money goes into the process, but does not generate money-profit. This is true of establishing laws; running courts; paying the police, armies, navies; road building and maintenance, and so on. Money flows out from The State into the state sector, but not arrive back as private spending from the private sector. In terms of The State making a profit, it has but one revenue stream; taxes. Or, in fantasy land, it plays the markets and charges citizens for all its services at point of use, thereby becoming a business. This cannot be. So, because The State relies on taxes to draw existing money to it, making a 'profit' would mean taxing back more than it spent. Is such a thing possible? Can such a business demand on The State make sense in any circumstances? (Absolutely, it's called interest and paying off the bill, should you choose to create government money that way.)
Remember, we are talking about money as a created tool. Isn’t it unrealistic to expect the same monetary performance/behaviour of an entity whose function is to spend money, as that of another entity whose function is to circulate money (while profiting from that circulation where possible)? As discussed in my previous post, for some to save or make profits, others have to spend or make losses. For this to be otherwise, there would have to be an abundance of money, and everyone would have to be rich. This is of course logically impossible. Money works as an incentive precisely because it is scarce. Money exists to deal with scarcity, and has to stay scarce in order to ensure competition and productivity.
In my view we have, therefore, a false dichotomy. Comparing The Market with The State is worse than comparing apples and oranges. It is in fact like comparing the right hand with the left. You may be right handed, but that doesn’t mean you’d be more efficient, or benefit, if you chopped your left arm off! The entire debate around this false dichotomy is a manifestation of a power struggle to control money, because money is the best tool humans have for controlling and shaping society. People in positions of power are there because they like it. Control is what they enjoy. The Market/State battle is in some ways a smokescreen, a pantomime in which the actors and actresses are sincerely convinced the right wing/left wing battle lines are helpful and genuine. Ideology rules the roost.
But there are systemic reasons why it must stay this way (for a while yet). Experimenting with entire societies is not easy, so what is done, what is determined to be the ‘best’ way, is the result of battle, propaganda, consensus, and contrived argumentation, not by scientific methods. This means that arguments such as those laid out here are almost bread and circuses for the masses. I can make any claim I want, show any assumption I find to be false, show the entire socioeconomic apparatus to be flawed and doomed, and it makes no difference whatsoever. The show must go on.
Except, except, except... I am part of the process of understanding ‘Life, the Universe and everything’, just as everyone else is. As our understanding changes, so, in time, will our societies also change. Change is the only constant. Sadly, Great Big Global Change is likely to be very bumpy indeed.
More on this in due course.
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