A New Wealth of Nations

A New Enquiry Into the Nature and Origins of the Wealth of Nations

and

The Sustainable Learning Arrangements Needed for a Sustainable Society

by

John Raven - 1995

Chapter 1 - Section II


Section II - Index


A World of Problems or Opportunities?

When considering the problems of modern society it is vital to recognise that choice of an appropriate way forward presents us with major opportunities to enhance, not reduce, the general quality of life. It is not just a question of dramatically reducing the damage done by our lorries, the time we spend in our cars, and changing our lifestyles. There are also opportunities to eliminate many of the unproductive, unsatisfying, and stressful aspects of work. New societal arrangements could mean less unproductive paperwork and committee work. There could be real opportunities for large numbers of people to get off the employment treadmill without being subjected to demeaning treatment at the hands of "welfare" agents. There could be many more opportunities to engage in work which is personally satisfying - creative work, or work which directly meets the needs of others, rather than the requirements of bureaucracies or the demands of profitability. There could be more opportunities to labour together for the common good. What we are faced with, therefore, is a real opportunity to meet the needs of those who espouse new personal as well as social values and to enhance the quality of life of all.

It will be shown that our quality of life depends hardly at all on the quantity of manufactured goods we possess.
It depends on such things as the quality of our relationships, our opportunities for accomplishment, and the extent to which we feel we have been able to influence what happens in our organisations and society. It depends on our opportunities to contribute in ways which please us or extend us. It depends on the human scale, levels of amenity, and more general livability of our cities, our personal security, our ability to give and receive help, and our security for the future. It depends on our freedom from demeaning inquisitions into our private lives by "welfare" agencies, and harassment by tax collectors or the police. It depends on whether we have sufficient security to be able to think about the future without fear and to think creatively about the steps needed to create a desirable future. It depends on whether we are allowed to take the kind of action which is needed to create a secure future - something our current welfare legislation denies the "unemployed".

In later chapters we will discover that one reason why the market mechanism is incapable of recognising - let alone delivering most of the potential sources of life satisfaction mentioned in the last paragraph because they cannot be monetarised.
And most of those it can recognise - like security - can only be purchased collectively, not individually. Since our quality of life depends hardly at all on the factors with which the market engages it is obvious that it could be greatly enhanced at the same time as our consumption of resources and the impact which such consumption has on the global environment was greatly reduced.

But make no mistake about it: We cannot allow ourselves to hope that finding a way forward will somehow evolve through trial and error.
We cannot secure the future by proceeding in an academic or leisurely fashion. As we will see in the next chapter, we may, from an environmental point of view, already be beyond the point of no return. We may have already done irreparable damage to the soils, seas, and atmosphere. The problem of the environment is upon us. It is no longer something which, just might, occur in the future and which we could, by taking thought, avert. Nevertheless each of the problems we face is accelerating exponentially. The great danger is that, as they interact, the whole situation will spiral out of control. Thus the strain on our food base will interact with the population explosion and, in all probability, global warming, to threaten the very substance of human life. At that point it is virtually certain that governments and terrorists will deploy our massively destructive arsenal of biological and nuclear weapons in an effort to retain or increase their own chances of survival. We will be trapped in a self-reinforcing cycle spiralling irrecoverably toward disaster.

Historical Connections

The need for this book as it emerges from the above discussion has been identified by Bookchin while discussing how Green economics might be distinguished from visions of a Green economy:

"The current celebration by writers such as Susan Meeker-Lowry of entrepreneurs who voice Green pieties within an economic system that makes a mockery of their most well-meant ecological aims requires forceful criticism ... In the absence of a coherent critique that goes to the heart of the present ecological crisis ... we run the very real risk of slipping back into economic apologia, dressed up in formulas such as `backyard revolution', `steady-state economy', `consumer responsibility' ... I do not wish to depreciate the very good intentions of proponents of these formulas. Their solutions ... may in the best of cases plug some holes in a sinking ship, but they ultimately fail to address the damage a market society must inexorably produce unless it is radically replaced.

"But replaced by what? Certainly not by a mythical "revolution" occurring in the backyards of the world or by investment in Green mutual funds ... A Green economy, qua economy, would no longer be describable in economic terms. It would be, above all, a political and ethical project ... Green economists would be obliged to ask whether market exchange relationships should exist at all ... They would have to ask whether ownership of the means of production should be ... replaced by free civic assemblies of the people ... whether our present metropolitan urban belts should be replaced by ... a polis-type network of humanly scaled communities. Finally they would have to ask whether the nation-state should be replaced by a ... confederational association of municipalities united by mandated, recallable, and rotating deputies of civic assemblies ..."

Our book's title links it to Adam Smith's Wealth of Nations.
Historically, Smith can be seen as someone who both gave society insight into the dramatic changes which had recently come about in the way in which it was organised, and as facilitating those very changes. We hope we can, in some small way, emulate him.

Our book is directly linked to the most fundamental question Smith sought to answer in providing an intellectual justification for the market mechanism.

The problem was the following: It was noticeable that decisions taken by politicians and government officials were often far from wise.
No one had anything approaching complete information on anything. The information individuals possessed was often not verbalised, never mind formalised. And the actions any one person took on the basis of the information which was personally available influenced the decisions everyone else took on the basis of the information available to them.

The problem was to create a dynamic system which would enable these widely dispersed, inarticulate, incomplete, and reciprocally determining bits of information to have a cumulative and continuously self-correcting impact on what happened in society.

Smith suggested that the emerging market economy would solve the problem. People could vote with their pennies to give effect to their preferences on the information they possessed. They could vote separately on a myriad of issues. They could change their minds as they saw what transpired. The mechanism, without centralised or deliberate control, would automatically result in the greatest good accruing to the greatest number. Nothing could differ more from a political system offering people a single vote every five years or so and requiring them to vote for or against a package of issues.

The three most fundamental problems with this solution are, as we shall see in later chapters,

(i) that too many costs and benefits elude the mechanism,
(ii) that the cost of the time required to calculate and weigh the costs and benefits of alternatives and negotiate deals with others - that is to say, the transaction costs - are enormous, and
(iii) that the system has been used to derive cumulative indices (such as GAP) which are used to as a basis for political intervention instead of allowing the guidance to come from the operation of the system itself.

Nevertheless, it cannot be too strongly emphasised that the most important problem facing society is still to find an alternative way of solving the problem with which Smith sought to grapple.

The primary purpose of this book is to propose an alternative solution.
It is in no sense to list specific requirements for a sustainable society. It will outline an alternative, dynamic, system for social experimentation,learning, and management.

It is not only the central problem on which we have sought to focus which links our book to Smith's. The solution we propose also has much in common with his. Smith proposed a process which was anything but tidy and centrally controlled. What was proposed was a learning and management system which was decentralised, dynamic, and characterised by a ferment of innovation and evaluation. So too is ours. It will not appeal to those who are preoccupied with centralised planning, control, orderliness, and narrowly defined types of efficiency.

It will be argued that many of the difficulties our society currently faces arise from four fundamental errors in Smith's analysis - errors which were of no particular importance at the time but which have been been elaborated into belief systems which, when applied in a very different world, result in utterly dysfunctional activities.

The first of his errors was that, while acknowledging that public servants contributed significantly to the improvement of the quality of life, and, indeed, by enforcing ground rules, to the very functioning of the economic system he proposed, Smith regarded them as "unproductive" members of the community.

Yet surely those who contribute to the creation of an infrastructure which makes the provision and distribution of food and goods possible - by providing roads, transport, sewerage systems, new knowledge (research), medical systems, security, insurance and so on are productive. To take a simple example, if one desires the production of more eggs one would be better advised to invest in civil servants who will do research into the feeding and lighting arrangements required to make hens lay more eggs, who will disseminate such information, make the economic arrangements required to stabilise farm prices, and arrange to get foodstuffs to farmers and eggs to consumers, than simply to offer farmers more money for their eggs. Farmers alone without investment in the public sector activities required in these domains - simply cannot control key aspects of the productive process. It follows that public servants, by developing an understanding of biological, social, and economic forces, and inventing ways of harnessing and bending those forces, have contributed much more to the production of eggs than have farmers. It is often argued that the public servants don't do any real work: They only manage. But, on that logic, is it not true that the farmers "only manage" the "real" workers - the hens? It follows that public servants have produced wealth every bit as surely as have the farmers.

One of the most important changes in perception to which it is hoped that this book will contribute is, in fact, to the recognition of the key creative, managerial, contribution which public servants make in the creation of wealth. It is on finding ways of getting them to perform this role more effectively that we must focus.

Smith's second error was to identify the wealth of a society with the quantity and quality of the manufactured goods it produced, thus overlooking the significance of other determinants of quality of life.
In actuality, any index of the wealth of a society should take into account such things as the ability of its members to lead satisfying lives (mainly associated with quality of working and family life) and their ability to avoid plague, disease, urban blight, and the horrors of economic depression. Not only are many of these missing from traditional economic indicators, the quality of working and family life is, as we shall see in Part II, actually driven down by market processes, and the contributions of those who do most to enhance the quality of life- such as parents, wives, and friends - are not recognised because their work cannot be commoditised and exchanged for financial reward.

Smith's third major error was to misunderstand the nature of money.
This led him - and still leads classical economists - to seriously flawed conclusions.

In the first place he believed that, by and large, money circulates; that the price system is self-liquidating. When money was mainly a medium of exchange, if I paid you 10 pounds for some chops then that money got distributed. You spent it on food, clothes, housing, education. The recipients then spent it on other things. Such a system could go on indefinitely.

But now it is obvious from the fact that world debt is increasing at an ever increasing rate that, on average, it costs us more to live than we earn. We have to borrow more and more.
One consequence of this is the money distributed through the system as a result of the sale of an article becomes less and less.
What is happening is, however, seriously obscured by the fact that much of the debt is collective, not individual. What looks like taxation to pay for services is, very largely, money syphoned off through taxation to pay collective debts.
One vitally important consequence of this process is that the banks have come to have a lien on more and more of the real wealth of society.
Another is that the gap between real wealth and monetary values has become wider and wider.

Money is not wealth. Its possession gives its owner a claim on wealth. Smith's assumption that money and wealth are much the same thing is now seriously in error.
Today it is the international banking community which has by far the greatest claim on the real wealth of nations.
Classical economists continue to believe that, by and large, money lent by banks comes from savings. Unfortunately, as will be shown at some length in later chapters, it does not. Only a fraction of the money that is lent by the banks comes from this source.

The banks mainly lend money which they have themselves created. Not only does the money sucked in as "interest" on this self-created money undermine the foundations of the self-liquidating price mechanism, the assets offered as security for these astronomical "loans" gives the banks a lien on far more of the real assets of any society than Smith would ever have believed possible.

Smith's final error was based on this, for it had to do with savings.
This oversight continuously worried Keynes, although he never understood it. Smith realised that it is what is done with money which is important ... but he went on to advocate saving. Unfortunately savings may or may not be invested. Keynes noted that they may simply be taken out of circulation. This produces the disastrous results to which he drew attention. It follows that the issue is not one of savings per se but the direction in which savings are invested.

Responsibility for the direction of investment cannot safely be left to the marketplace.
For example, insurance companies sell land, property, and companies to each other at higher and higher prices in order to generate the inflation they need to appear profitable. Although such an arrangement increases the monetary value of assets, it does not lead to an increment in the quality of life - or even to the capacity to improve the quality of life. That is, it does not lead to any increase in the genuine wealth of society. Even in the more restricted sense of promoting traditional forms of innovation, insurance and pension companies as owners of other companies are unable to make the kind of judgments of people which would be required to guess which investments are really likely to pay off in terms of successful innovation.

What one has is, not the endless decisions taking account of a multitude of non-verbalised bits of information envisaged by Smith, but a few powerful people making world-shattering decisions on the basis of a single criterion being as certain as they can of a high level of profit. Those who run these organisations - far larger than any economic entity known to Smith - have no pretensions to the concern with humanity evinced by the wise men Smith castigated and whose power he sought to erode.

It follows that Smith failed to solve the problem he most centrally set himself - namely to invent a system which would take account of widely diffused and disjunctive information without the need for wise men making complex judgments. It follows from this discussion that it is on the decision-taking process which guides investors who have power, wealth, and international connections that we must focus.

Continue to Section III
Return to NWN Introduction    
Continue to Chapter 4  Some Observations on Money
Continue to Chapter 17  which is a Summary of Parts I, II, and III, and an Introduction to, and Overview of,
Part IV
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Copyright : John Raven, 1995

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