II

Whose Economy is This, Anyway?
Purpose and Structure of the Economy

You might think that in a democracy an economy is a means to provide a decent way of life for the people. Unfortunately, there seems to be plenty of evidence against this view. In a capitalist democracy (an oxymoron perhaps?) it would appear to be a means of increasing the material wealth of those who own and run the corporations. Here the economy is often viewed as an autonomous system with only coincidental effect on the people. So what is the purpose of our economy? What is the structure of our economy and the economies of the West, and why have they been structured as they have been?

It seems, given the overarching role the economy plays in our lives that we should have a good understanding of its functioning and purpose if we are to be able to properly analyze events. But public understanding of the workings of the economy is hampered by several factors. First off, practically nothing is taught in school about the structure of the economy. Even less about the reasons and goals of the structure. But thanks to popular culture projected by the media, we have been indoctrinated with quite a bit about material desire and playing our role of consumers. What economic discussion we are regularly exposed to consists mostly of stale ideological bickering. We read and see opinions only from either the pure The Gospel according to
St. Adam,
St. John or
St. Milton
laissez-faire school, or from the no intervention is bad intervention camp. We are thus presented with the ridiculous extremes, as if those were the only choices. It’s meant to entertain rather than to inform. If we probe, we’re told that it’s all too complicated to worry ourselves about.

Those charged with special insight about economic realities, the financial professionals, rarely speak their truths outside the arcane business press. If they did, the public would be quite surprised by the actual basis of economic workings. They don’t know what’s going to happen, they predict based on the past, their experience, and the models of the system. And they’re often wrong, wildly wrong. The theoretical specialists, the economists, are for the most part off exploring their theory worlds for more impractical advice.

Economic Bafflegab

Economists lead us to believe that an economy is a means to produce economic activity as defined by the almighty Good for Nothing PredictorGross National Product.5 But the GNP is not itself a good. It is an economist’s means of measuring the performance of a national economy. The GNP only measures the activity of things as valued by money. It has nothing to say about the happiness of the people. It has nothing to say about the distribution of wealth within the society. It has nothing to say about any activity not involved with the exchange of money.

Economists exhibit an inability to prove anything about the economy, economic policy, and the functioning of society. If economists really knew what they were talking about, why are we so consistently making such a mess of our economies, even using their own definitions? Why are there times of boom and bust entirely unpredicted and unexplained by these economists? Why are there so many opposing economic opinions?

Economists are striving to understand and ultimately predict the economy. Unfortunately for them, the economy appears to be so fundamentally complex that their efforts at understanding through simplification result in reducing the meaning out of the questions.

The scientists have jumped into this question with their pet theory ofeconomic chaosChaos, which shows that a small change in a very complex system can have dramatic and unpredictable results. They claim that the economy is one such system, and that our attempts to direct its progress are doomed to having little success toward our goals. With this theory in hand, economic conservatives will attempt to justify the hands-off approach that they propose. The economic liberals will likely find justification for their belief that governments should smooth the harsh effects. The problem with using the Chaos theory to explain the economy is that, unlike another Chaos candidate, the weather, we have no understanding of what we’ll get if we do nothing.

Does the Economy Operate in a Vacuum?

There was a time when economists were known as political economistpolitical economists, in recognition of the fact that the economy is inextricably linked to politics (and in turn to ideology). These people recognized that economic choices were linked to political choices, that economies didn’t exist or work within a vacuum. But the association with politics was demeaning and admitted a degree of uncertainty and choice, so there was a struggle of the economists to break this link, to deny the intertwining of the two fields. This was led by those that truly think that economics is a the dismal sciencescience, that econometrics is the way to a better understanding of these questions.

On the other side of the split we got political scientists, who like to think that the political behaviour of people can be predicted like the movement of chess pieces. Or perhaps manipulated like chess pieces, given the penchant for polling that has become the norm.

The major problem with economics is that it has lost hold of the basis of the whole system, people. Economists work under the assumption that the behaviour of people, the actors in the economic drama, can be described by formulae and models. By abstracting out the role of people, economists have sanitized their deliberations. No messy human consequences to deal with, no destroyed lives, just utility curves, exchange rates, and structural unemployment levels.

Unfortunately to use these models, the economists have to make oversimplifying assumptions about the nature of economic interaction. These simplifications are responsible in large part for the draconian economic actions that are taken in the people’s name. Like the fight against inflation.

Inflation

Throughout the 1980’s we had the juggernaut of the war on inflation. During the 1970’s the West experienced an unprecedented (for them) increase in prices that, we were told again and again, would destroy our economic system. Thus was born the Western obsession with inflation to the exclusion of all other policy objectives.

The Sin

But what exactly brought about this terrible inflationary period. The standard explanation is the shock of the OPEC oil price increases, but this alone can’t explain it all. Could it be the orgy of consumerism carried out since the Second World War and praised as the birthright of democracies? This materialism was induced and maintained by an efficient system of indoctrination, centred around television and defined by advertising. Artificial demand was created and incessantly reinforced for a ludicrous array of goods.

I still think the trash compactor holds the distinction of most ridiculous household product. The electric can opener and toothbrush are runners up.

Cheap credit was foisted on a gullible public, ready to cash in on keeping up with the Jonesprosperity. The public, responding like good sheep, spent themselves silly. Shopping became a defining social activity. Horror of horrors, artificial demand, supported by unsustainable credit produced Inflation. Don’t worry, we’ll be rescued from ourselves in a moment.

But first, I would also argue that in part the measurement of inflation, as reported in statistics like the Consumer Price IndexCPI is also a cause of inflation, is a self-fulfilling prophecy. Economists say that inflation is caused in part by the expectation of a rise in prices. Wage demands reflect the expectation that earnings will not keep up with price increases. This is brought about, in large part, because the public was trained to think that the CPI was an absolute reflection of price increases as they affected each person. Indeed, the CPI (among many flaws) is based on some hypothetical average person (household) that consumes a fixed basket of goods, and whose purchasing preferences do not allow for substitution of one good for another now more expensive one. In other words, people would never willingly stop buying something because the price went up.

Interestingly, when the inflation rate dropped (deflation) because of the drastic lowering of cigarette taxes, the economists were quick to point out that not everyone would experience this, only those who smoked. The pensioners would however, because their pensions are linked to the CPI.

Thus since prices are reported to be going up we would naturally demand higher wages to compensate, which causes the prices to go up, and the ugly spiral of inflation starts.

Penance

Fortunately, the central bankers of the West decided that enough was enough. They, not being controlled as the politicians are by the fickle voting public, would eliminate inflation for our sakes. And they did just that. Unfortunately, in the process they caused the worst economic malaise the West has seen since the Great Depression. And the rest is, well, the present. We in the prosperous and now inflation-free West currently enjoy unemployment, food banks, homelessness, hopelessness, and disparity of income at near record levels. Bravo.

But wait, the story doesn’t end there. We were told that we had to suffer the medicine of high interest rates to ensure that inflation was held low, and that rates would fall when inflation was licked. But now we’ve also seen rising rates to combat a falling dollar, caused we are told by higher rates elsewhere and a lack of confidence in our economy, and especially in our government’s ability to manage the deficit and debt, which were themselves inflated by the high interest rates.

The American Federal Reserve has such fear of inflation that it has deliberately dampened economic activity with higher interest rates. The stated policy goal was to engineer a a soft landing for whom?soft landing, where growth is suppressed in hopes of preventing rekindled inflation. The flip side is that growth suppression brings with it lower employment, so a soft landing for the sake of inflation means a hard landing for thousands of workers.

The global economy has made the old simple interest rates vs. inflation tradeoff into a much less predictable game.

The U.S. simultaneously dampens and stimulates the economy. It increases interest rates (lowering growth) to ward off signs of inflation, while joining trade organizations and reducing middle class taxes which will boost growth.

So why have we endured this fight, that has so devastated other parts of our economy and society in the process? Without inflation, the thinking goes, economic decision making becomes more predictable, leading inevitably to better results. Voilà.

Magic Prosperity

It’s odd that our political and business leaders profess a belief in magic, free market magic that is. Perhaps it’s not that they believe it, but that we’re supposed to believe it.

Abracadabra

Nothing could be more damaging to our society than the idea that the magic of the free marketmagic of the free market will provide the optimal solutions to all our complex problems. Indeed, the exponents of this theory claim that by definition the free market provides optimal allocation of resources and effort6 and produces optimal results. At least in the long run. Also known as market efficiency, the idea is that a free market must provide the best mechanism for regulating economic activity, and its resulting distribution of wealth must reflect the relative worth of the individuals involved.

But this whole economy is based on uncoordinated self interest producing the magical result. People are only supposed to consider their own circumstances when making decisions. Companies are supposed to act only in their bottom line financial interests, disregarding any effects their decisions may have on any individuals. Indeed, by including non bottom line criteria in decision making, individuals and corporations are acting to subvert the market efficiency mechanisms, which of course cannot be done.

As governments have focused on engineering a technical soft landings, we have paid no attention to the fact that the economic professionals have been steadily increasing their definition of the unnatural rate of unemploymentnatural rate of unemployment. This rate is supposedly natural because that is best the magical free market can provide. Our economic policy has worked its way towards a state where inflation is low, growth is high, but unemployment also remains high. Record profit does not imply employment.

But this is taking the whole question as if the economy were a separate entity, to be considered outside the questions of how the people live. The orthodox view cannot accept that the decisions we make regarding social welfare can also be appropriate input to the magic formula. The magic result doesn’t have to be the theoretical maximum money output of the system. The magic can still operate without being a free for all.

The Western Advantage

Unfortunately, the way our economies are organized our prosperity in the market also depends on inherent advantages and disadvantages. The relatively cheap labour and increasingly important lax environmental standards of the Third World allow us to leverage our wealth in a way that we can’t with comparably developed economies. Comfortable middle class citizens are all too willing to ignore this exploitation of the poor and undereducated, both within their countries and outside.

I suspect that our political and economic leaders assume that we have natural advantagesunnatural advantages in education and sophistication that will keep us at our high level of prosperity. When this myth starts to erode from pressure from places like India and China, they will surely modify their slavish belief in unrestrained trade. It is then we will see how solid is their belief in the tenets of the free market.

Our ability to utilize our relative advantages is based on the ability of corporations to produce and trade as they please. They need to be able to move production of textiles and trees, agriculture and airplanes to wherever is cheapest. We of course will be left with the high-skill, high-wage, high-tech jobs because of our natural superiority.

The export of jobs will leave an underclass that can’t find employment in the new economy. The resulting drain on those that have jobs will lead to a reduction in support for programs that ease the pain.

There was no better description of the way the economy really operates than the Regan-era phrase trickle down economicstrickle down economics. What trickles down is prosperity, but as the term implies, it’s a trickle, one that tends to dry up.

Rigged Freedom

There is of course nothing free about the way the market is run. Through rules, legal and social, the market is manipulated to provide the best results for the only actors that matter in the drama, the corporations. The government in a free market society is expected to maintain the freedom with great effort. The law is mainly a tool to regulate behaviour in the market. There are laws to enforce contracts, to provide protection to property, to regulate bankruptcy. The government is also expected to provide education and training and to maintain civil order. Government provides a monetary system, and a raft of rules regarding corporate governance and practices to facilitate a stable and efficient system of commerce.

This elaborate governmental infrastructure is there to correct for market failuremarket failures. This is when the market is incapable of arranging certain things, like basic education of workers, for its own benefit, so our governments must give it a helping hand. This is the only way our governments are supposed to intervene, otherwise they are accused of government interference.

Free is just a badge of honour that has been successfully attached to market so as to create the illusion of freedom. In fact, much of our governmental system is there to provide for commercial interests, even at the expense of the direct interests of the citizens. In exchange for giving up political control of the economy we’re free to buy what we like, work where we like, live where we like, do what we like. At least as our supply of money permits.

Corporations are even legally defined as peoplefor the benefit of the people, so in this sense, you could say that the system is for the benefit of the people. Remember, this free market magic is not about producing prosperity but rather efficiency.

Efficiency of What?

How do we define this goal of efficiency? It is to allocate scarce resources in a manner that will make the best use of them, that is, will produce the most profit from the least input. But input of what? Capital of course, this is capitalism! humans, a renewable resourceHuman effort is included in the equation only as it is measured by the scale of wages and that definition of relative worth of work. As such, the system encourages the use of the least amount of labour, just like our minimization of capital and materials. Is it any wonder that unemployment is a persistent problem?

Value is Money

Anything not measured in monetary terms cannot be included in the definition of efficiency, and thus cannot be part of the consideration of economic policy in a free market system. This thinking is what’s behind ideas that the way to solve problems like the environmental crisis is to factor in the environmental cost into the market equation.

carbon taxProposals for a carbon tax, a tax based on the level of consumption of fossil fuels, are attempts at factoring in the environmental cost of burning these fuels.

There are even extreme arguments as well that there is no environmental crisis because the market has done its bit for efficiency and cannot be wrong.

Assuming we recognize a problem, the way to solve it is of course to let the market work its magic by making the undesirable result, in this example the environmental degradation, a cost of production. Abracadabra, no more problem. The problem we have is to put a price on the undesirable results. This is a social problem and if we fix too high a price we are warned, we will stifle production and therefore prosperity. Social problems don’t really belong in the market calculation, but our weak non-capitalist tendency to consider human well-being has led us to this result.

Policies like minimum wages, unemployment insurance and welfare are all distortions of the absolute reign of the free market and are attacked as such. Released form these constraints, the argument goes, and business would make much better decisions about the allocation of resources for production. But these policies are the very price that society has put on human cost of human sufferingsuffering, and thus are exactly like the price we are told to put on the environment. When we are chastised for these distortions we should realize that our goal is not maximum economic output.

These policies are society’s way of factoring in the human opportunity costs. They can be considered on two levels, one the lost wealth to society of unproductive or burdensome citizens, and the other more human and intangible cost of suffering and lost hope.

Need is a Relative Term

Why are we working so frantically to increase efficiency? What’s our goal? It’s to provide for our needs, and once done, to provide for our wants (our leisure). This as we can now see, is an endless cycle. As we become more efficient at producing the basics, we can devote resources to producing discretionary items. As these items become more prevalent they take on the characteristic of need. This then requires a new round of efficiency so we can produce the new basics more easily.

In so called developing countries, need can be very basic indeed. Things like food, shelter, clothing, and primary medicine are what is needed most. So efficiency in these economies means a decent, yet basic, standard of living. As the developing countries reach the plateau of developed nations, they too have entered the quest for material luxury that seems to have an insatiable appetite.

Items that were once luxury becomes necessityluxury goods become needs. What North American doesn’t consider a refrigerator, a telephone, a television, even a car as a basic need? How about a VCR, stereo, or dishwasher, going to movies or restaurants, or going away on vacation? When our wants are converted into needs, we are obliged to work harder to satisfy them. At the same time, the average family now requires two incomes to support the same standard of living that one supported only decades ago. Efficiency means the same work no longer produces the same wage.

Eventually, efficiency becomes a goal in itself, which leads us to bizarre results entirely disconnected from real life. This is symbolized in the worst way by the money games that we play.

Confidence Games

The 1980’s orgy of money games finally collapsed because it was based on the notion of profit based on no underlying real world structures. Money is a fiction we have all been taught to believe. It merely represents value, and only does so as long as there is confidence that it can be exchanged for real goods and services.

The paper profits from leveraged buyouts, junk bonds, arbitrage, programmed trading, futures and options markets, real estate speculation, and foreign exchange manipulation, could only be sustained until the music stopped and the physical chairs had to be counted. It was all an elaborate game of confidence, albeit on the rather grand scale of national and international economies.

Never mind that real lives were destroyed in the process, that communities were wrenched. If a company was worth more money as the sum of its parts, scattering jobs to the winds was a simple side effect.

It has become perfectly acceptable to make money by manipulating money, not investing in production or providing services. The connection of money to real life becomes a game on paper. The fact that these money games manipulate and distort the real economythe Real economy is considered, if at all, as an unfortunate side effect. This term the real economy is telling. As now used by business analysts, it recognizes that the financial economy is often divorced from the economy as experienced by people.

Foreign Exchanges

Manipulation of foreign exchange rates has become a major activity for business and government alike. The theoretical purpose of floating foreign exchange rates is to provide a natural balancing mechanism for the other aspects of international commerce, trade and investment flows. The magic hand of the market is supposed to be the regulator, with exchange rates acting as the escape valve for any unbalanced economic activity. Thus when there is an excess of exports over imports, the exchange rate should, in theory, rise to offset the unbalanced trade flow.

The naïve would expect that the price of something in a country’s currency would equal the price at home in our currency multiplied by the exchange rate. As any foreign traveller can attest, this is often not the case, not even close. This is the little used notion of purchasing power disparitypurchasing power parity, where a given amount of effort would allow you to buy a given good anywhere. Remember, money is a fiction that only purports to represent labour to be exchanged for goods at a different time or place. Foreign exchange rates don’t attempt to balance out on the micro (or real life) level, just at the wish-washy level of national economies.

In practice, the the foreign exchange process is treated as just another money game to be manipulated by foreign exchange traders. These people make money in two ways. First by skimming off the top a percentage of the transaction value, with no risk. Second, traders speculate on the value of currencies in the future, often manipulating the rates in the process.

EEC governments watched basically helplessly as their European exchange rate system was rocked by speculators in the early ’90s.

In early 1995 the North American currencies all suffered at the hands of currency speculation as the Mark and Yen became the speculators bet.

The resulting currency speculation is a game of chicken where governments are always the loser. Economic doctrine and a regulatory vacuum forces them to prop up the currency under attack while speculators gain huge profits. Governments are currently powerless to moderate the exchange rate game, as they have deliberately left the currency trading system unfettered. It’s not that they couldn’t act, just that the current doctrine of free markets hinders them. It will be interesting to see if governments can renounce the economic orthodoxy long enough to act for the benefit of the world’s economy.

A proposal by a Nobel winning economist argues that even a minor tax on currency exchange would make currency speculation much less attractive, thus leading to more stable exchange rates.

Governments themselves can also use exchange rates as a strategic weapon. Don’t like another country’s trade surplus, just engineer a rise in the value of their currency. Of course governments regularly manipulate their own exchange rates through their central banks, under the guise of inflation. So this natural equilibrium has been undermined until it became just another money game.

Debt Doubt

Now confidence about our nation’s ability to repay its debt is the latest game. Under the threat of credit rating downgrades and lack of foreign bond investors, our governments are madly cutting backhitting the debt wall in an effort to maintain confidence in our ability to repay.

The deficit and debt have meant paralysis for our governments during a terrible economic recession. Decisions were made because of the debt that exacerbated the recession, further weakening government finances, raising the debt, bringing further predictions of doom. Fear of an international currency or debt crisis has ruled. Dire warnings of IMF intervention, like in delinquent third-world countries, are heard.

Comparisons to New Zealand’s debt fate are repeated while honorary third world membership is bestowed.

Governments now routinely make stark choices previously avoided thanks to what was assumed to be a never ending path of expanding government resources. The true picture of government tradeoffsmilitary helicopters vs. welfare is now coming into focus. How governments make these choices is now being driven by debt fears. Reducing government has become the fashion as taxpayers threaten to revolt.

That much of the debt was accumulated thanks to deliberately high interest rates meant to curb the fear of inflation is largely agreed. The policy of high interest rates for low inflation had the known tradeoff of low growth, high unemployment and higher debt. It may even have been a deliberate tactic to force spending cuts later, in an effort to serve a belief in less government. What is odd is that none of this matters when discussing deficit reduction. We have a myopic focus on social spending as the culprit in the deficit game. Like those slight-of-hand games.

In fact, the whole economy is one big game of confidence. Consumer confidence, business confidence, investor confidence, these terms aren’t simple catch phrases, they are the essence of the system.

The Not So Invisible Hand

Laissez-faire capitalism, the idol of the Right, does not as it might appear, mean a free for all. It means producing an environment that fosters business growth, and getting out of the way regarding any societal consequences. The evangelists who preach this doctrine don’t really believe it though, they believe in a baser variant. Practised by many Western nations, and particularly the United States, it is a form I would call I'm alright Jack capitalismI’m alright Jack capitalism. That is, what’s good for us is good capitalism, and what’s good for you but bad for us is not.

This is the classic desire to control the definitions, and has succeeded quite well. Capitalism is what the Americans, the defenders of freedom and democracy, define it as. Alternative definitions and implementations are all represented as experiments with socialism or communism, representing a loss of freedom, and are thus doomed to failure. And if they aren’t, they can be helped along that path with a little trade intervention.

Whose Trade is Good Trade?

This what’s good for us attitude is seen in U.S. trade policy as well. While arguing in international negotiations that they are adamant free traders, they are party to an incredible web of trade manipulating policies. Usually these policies are dressed up as supporting the American family farmthe importance of being earnest, or protecting national security, but when other countries try to do the same they are slapped down by U.S. sanctions.

The U.S. threatened unilateral sanctions on Japanese luxury car imports unless Japan opened its auto dealership system. The Japanese were ready to go before the new World Trade Organization, but the Americans found it in their interests to ignore this official trade mechanism.

The American government argues simultaneously for the elimination through GATT of import restrictions on their goods (for example agriculture) while they are subsidizing them; the abolishment of export restrictions on our goods (energy) through the FTA and NAFTA; the imposition of export restrictions on our goods (softwood lumber); and restricting imports of our goods (too numerous to mention).

Using U.S. definitions, all California produce should be regarded as unfairly subsidized, due to their water subsidy to farmers.

There is no consistency in their position because they want the best for themselves and are willing to argue disingenuously for whatever policy will produce it. They can always argue the now standard Congress made me do itCongress made me do it excuse, and everyone will nod their heads in resigned understanding. Of course all countries do this, trying to gain the advantage in the game of the fake free traders.

Trade for Our Sake

The American attitude that government intervention, and especially government ownership, is bad, is a basic policy now of international trade. It has been administered most effectively by the IMF with a helping hand by the GATT. In exchange for international economic help, Third World countries have been forced to privatize government industries and open their markets to imports and exports.

The policy is based on the idea that government is badgovernments can’t be trusted to allow free markets to operate and thus shouldn’t be allowed to own businesses or to control trade. That government intervention might be the preferred way to serve a society in particular areas is considered unacceptable, because this would prevent U.S. companies from providing those services, and making the profit.

The American view is twofold. First, that any state ownership is a loss of opportunity for U.S. private economic interests, and second, that any successful state enterprise is by definition an unfair subsidy. These two doctrines are used effectively to curb the idea that state management can be a better way to organize for society’s benefit.

Attempts to control imports or exports considered vital to the local interests are similarly disallowed by the international financial institutions. There can be no good or service that can’t be either imported and exported.

Measures to encourage the export of processed rather than raw materials have met stiff opposition from the U.S. and international trade and financial organizations.

And if others persist in using state intervention, the U.S. can whip up a fury of fear, uncertainty and doubt, causing capital to flee from the economy.

So now we know that government intervention is bad and will not be tolerated in the world trading system. Government cooperation with business is an unfair trading practice because the Americans don’t do it. Of course they do, they just don’t call it that.

Their Industrial Policy

The American government has regularly engaged in planning its economy and in intervening to produce certain results. We may believe that they don’t, thanks to the steady propaganda flow from politicians and the media. They insist that government is bad and has therefore been kept out of economic planning. The New Deal may just have been the last time they admitted to having a plan to infuse the economy.

industrial strategy or

Military Industrial Complex

psychological ailment?
The biggest manipulation of the U.S. economy was and is done through military expenditures. That they are unable to admit that this was an industrial strategy is amazing. Whole sectors of the current economy were propped up during their unprofitable phases by defence funding, that is, were subsidized by the government. And this is not just the weapons industry, these include the nuclear, aerospace and computer industries as well. Without direct and steady government intervention, the computer industry would still be undeveloped.

This is a massive regional development policy as well. Military bases and weapons contracts are scattered around the country in a deliberate attempt to engineer prosperity in the regions. Ironically, this turns out to be the biggest obstacle to defence budget cutbacks, since most congressional districts have a military base or a supplier to protect. The end of the cold war has meant regional economic devastation.

Now the government is acting more openly, in the HDTV arena and in the convergence of the telephone, computer and television industries. The government is officially trying to promote competition, code words for ensuring that U.S. industry is on the forefront of this technological revolution. Never let it be said the U.S. government believes in the strict free hand of the market.

Whose Economy is This?

We have no choice but to globalize. This is now accepted as fact. Yet evidence of this necessity is rarely offered.

One of today’s business mantras is that our economy must be quickly and completely integrated into the global economy to ensure our standard of living. Why is this so, and was it an accident or a natural result of our human development? Do the people have any say in how their society should evolve?

The Elephant and the Mouse

In a sense Canada has been under the influence of these same globalization forces since its colonization. First it was beholden to the French, then the British. Now it is under the thumb of the Americans.

There can be no truly independent Canadian economic policy simply because of the extreme similarity of our economic system with that of the U.S. The sheer dominance of the U.S, both economically and emotionally is even more true now under the Canada-U.S. Free Trade Agreement and NAFTA. We’re playing by their rules, and not surprisingly, their rules favour their way of doing things.

The fights over book publishing and film distribution are prime examples of clashing views of the world that we are bound to lose.

The traditional economic levers available to governments are severely constrained for our policy makers. Our interest rates, regardless of our inflation rate, basically cannot fall below American rates or it will cause a run on our dollar and debt financing problems. Our taxes, especially corporate ones, cannot be significantly higher without risking massive corporate abandonment. The same is true of wage rates. Our social programs can only be so generous without risking similar cost comparisons with the U.S.

Whither the Nation State?

It has frequently been opined that globalization represents the death of the nation state, as corporations operating internationally become more important to citizens than their countries. Borders would become unimportant when citizens realize that national governments exert little influence on their lives.

But people are the one factor of production that can’t and won’t move freely, and blithe corporate willingness to abandon employees will ensure citizens’ loyalty is not transferred to the employer.

The nation state is a vessel for identity, shared values and for culture. And corporate culture is a flimsy substitute for ethnic culture. Corporate loyalty will not replace national loyalty. States exist to protect and promote a particular kind of society and culture. People, given the choice, don’t trade their ways of doing things for the nebulous benefits of free trade. Our governments though, have currently chosen to throw our lot in with others, in the process abandoning many of their traditional levers to direct and assist our society.

There is much evidence of a national backlash in the European Union, as it tries to standardize practices that are deeply ingrained in culture.

What is the purpose of this international economic organization? Should it be to promote the greater good of all, even at the expense of the wealthy? Should it be to promotemarketing trade a free for all, a frenzy of competition, the outcome of which is bound to be prosperity? This latter statement is a pretty good description of the arguments put forward for the global economy, and what has come to be know as global free trade.

We seem to be locked into a debate about our economy between economic nationalists and neo-conservatives. The nationalists insist that anything related to free trade spells doom for our country, the conservatives think that any constraint on free market capitalism will lead us to third world status – or worse, socialism. Unfortunately, this debate is doomed to ideological bickering and bravado, because our economists can’t really prove anything worth debating, about our society and especially about global economic organization. Our politicians are no better though. They tout free trade as if it were a result of divine intervention. Indeed, Canada-U.S. free trade was aptly described by its proponents in 1988 as a leap of faithleap of faith.

The truth is, no one knows. Globalization is one massive experiment with our economies. No model, no ideology can possibly claim to predict the outcome of this gamble.

Most political leaders are faced with the prospect of joining the group or being left behind. The scheme has been devised so there is little middle ground. The hope is that the trend of increased standard of living will be accelerated or at least sustained by combining into one big economy. In the process the old economies are being abandoned. The old securities must be withdrawn, the old compacts broken.

We must remember though as we rush to join the EEC or NAFTA, APEC and GATT that capitalism often produces bad results. Not everyone is a winner.

It Doesn’t Just Happen

The economic system we toil in is not the result of divine intervention. It is also not the completely natural product of human nature that others would have us believe. Our economic system is highly structured, with many rules that attempt to prevent or promote certain outcomes. Once we realize this, we are poised to begin the process of analysis and debate that should take place around this fundamental societal mechanism.

Once we realize that most of the economic practitioners are out for their own gain, are emphatically not looking after society’s goals, then we will begin to take responsibility for our own fate. These professionals include economists, lawyers, financial traders, bankers, regulators and politicians. Each has their own reasons for acting as they do, but rarely do these include societal well-being, in the non-ideological sense.

Economists are trapped within their models of theoretical purity and practical improbability. Lawyers are bound by their own system of advocacy, unable to pursue the common good. Financial traders have every incentive to subvert the system to their own gain, distorting what natural mechanisms might exist. Bankers seek stability, as orderly exploitation is just as lucrative as cooperative endeavour. Regulators strive to perpetuate the system as it is, while politicians seek to remake it in their own image.

The economic system has been created by and for these kinds of people. They can be expected to defend it vigorously. They do not view the economy as the means by which society provides for its members. Instead the economy is viewed as distinct from society and attempts to meddle in its operation are harshly denounced. It’s not a grand conspiracy, at least not a conscious one. It’s how these people think, no active collusion is required.

Economic news and business analysts act as if politics is just getting in the way of business. They hate political uncertainty and wish it would just go away. It’s a view that society should be arranged for the benefit of these economic actors, and that politics has no business interfering with business. So, should we organize our society with business interests foremost in mind? Is that what our economy is all about?

Society as part of the economy rather than encompassing it. Two radically different views, that produce often opposing diagnoses of problem and cure.


5 Oh, any economic activity will do. In fact, if everyone went around doing the housework for their neighbours, and were paid for it, we would have a substantial increase in GNP with clearly no increase in standard of living (lots of new taxes as well).

6 You many notice that I distinguish between resources and effort (labour). Most business language is now describing human effort as human resources, a term intended to reinforce a lack of distinction between these two fundamentally different factors of production.

>> III In Capitalist Paradise Everyone Would Starve
Corporate Goals, Restructuring and The Jobless Recovery


<< I Represented Democracy
The Nature of Questioning


© 1995, 1997 Mark Nairn Hume