This page is part of the site Global Development, dedicated to promoting a new approach to eliminating poverty, reversing environmental deterioration and generating sustained economic growth that benefits all of humanity. The site has been developed by Frans Doorman. No copy rights are claimed, but those using material are kindly requested to name the source.
The need for a new economics
"Money has not been invented to make things that are physically possible financially impossible, but on the contrary, to facilitate things that are physically possible."
In many pages of this web site traditional economics has been heavily criticized. In several instances, it has been argued that a new economics is needed. On the present page this idea is elaborated further. It briefly discusses two key premises of traditional economics that need to be adjusted: the shortage of money, and the equating of demand with purchasing power. It then indicates a first outline of the changes that are needed to arrive at a new economics that is conducive to sustainable development instead of forming an obstacle to it.
Traditional economics: scarcity and demandThe central concept of economic science is scarcity. One of the fundamental questions economists seek to answer is how scarce resources are allocated to satisfy needs. One of those scarce resources is money, meaning that implicitly, economists part from the premise that the available quantity of money is tied to physical limits - as are the production factors labor, land, skills (including entrepreneurship) and capital (meaning production facilities, tools, etc: all man-made assets capable of generating goods and services and thus, income).
Another key trait of traditional economics is that its practitioners assign a monetary value to all variables they work with. Conversely, if economists cannot assign a monetary value to an object or phenomenon it is of no interest to them, and they leave it out of their considerations. This also goes for demand: in economic terms, demand is a request for the supply of goods and services that is backed up by the willingness and capacity to pay, that is, purchasing power. Thus defined, what we’ll call "economic demand" can differ considerably from demand based on needs. People, notably the poor, may have needs such as food, housing, clean drinking water, medical care and education. Yet if those needs are not backed up by the capacity to pay they are of no interest to economists.
The new economics: new ways of looking at money, demand, land and labor
The proposed new economics would have a radically different approach to both the scarcity of money and the linking of demand with purchasing power. As in traditional economics the production factors labor and land, as well as other natural resources such as water and non-renewable energy, would be considered scarce production factors and therefore, as given variables. The same would be valid for capital, i.e., production facilities. However, money would be considered differently: in line with the argument for money creation, it would be considered as a variable to be manipulated. Goal of that manipulation would be to create the money supply needed to optimally use society's productive capacity to satisfy economic demand as well as the needs defined by the goals of sustainable development, without causing demand-driven inflaton. Likewise, rather than having as its central question how to allocate scarce resources to satisfy economic demand most effectively, the new economics would focus on how to use society's resources or production factors to optimally satisfy the needs of humanity in the short, medium and long run. That means that demand would no longer be seen only in terms of the willingness to buy backed up by purchasing capacity. Instead, it would be defined as the combination of economic demand and the demand for goods and services required for setting in motion and completing the process of sustainable development.
The prime question "new" economists would seek an answer to, then, would be how to achieve sustainable development as rapidly as possible - not by overthrowing the current global economic and financial system, but by optimising its functioning. The goal would be to obtain and maintain an optimum balance between the production of goods and services on the one hand, and economic demand and the demand generated by the drive for sustainable development on the other. Money would be considered not as scarce variable to be optimally allocated, but as a dependent variable, to be manipulated to achieve that goal. As in traditional economics, land and labor would be considered as given variables. And as in traditional economics, new knowledge and technology would be considered as key means to improve productivity, i.e., the use of land and labor, and thus, satisfy demand more effectively and efficiently.
Thus, whereas traditional economics focuses on satisfying economic demand, the new economics would focus on meeting both economic demand and the demand generated by the drive for sustainable development. Moreover, there would be a major difference in the way the two approaches would look at the exploitation of land and labor. Traditional economics looks only at the most economic, that is, cheapest way to access and use these production factors. No attention is paid, in the case of land, to the question if the exploitation is sustainable in the long term. Nor, in the case of labor, is attention paid to the question if its price reflects wage levels that allow for an adequate livelihood for workers and their dependents. The new economics would, in line with the concept of sustainable development, take sustainability and social equity as its point of departure. That implies that the costing of land and other resources would reflect the costs of sustainable management, whereas those of labor would reflect minimally adequate wage levels.
In short, the idea of money creation for sustainable development, as presented on this web site, implies the need to adapt economic science to both the realities of today and the drive for sustainable development. The old economics is unable to cope with either. The new economics, however,should promote sustainable development within today’s economic and financial system. It should do so by utilizing and further developing the world’s productive potential in an ecologically sustainable and socially equitable manner, as effectively and efficiently as possible. It should do so not by overthrowing the current global financial and economic system, but by adapting, stabilizing and attuning it to the needs of all of humanity rather then those of the happy few.
A new methodology
In addition to the above change in approach other, even more fundamental changes are needed in economics – notably, in the field of methodology. Faulty principles, converted into dogma, and poor methodology have converted economics into a backward science. The need for a radical overhaul becomes all the more urgent when the stagnation and even, regression of economics is compared with the enormous progress that has been made, in the past few decades, in technology and the natural sciences. In stark contrast economics is not only still mired in theories developed hundreds of years ago, but it also applies those theories to today's situation as if they were universal and timeless truths. Very likely, the people who developed those ideas – economists avant la lettre as well as much more broadly interested intellectuals such as Adam Smith and David Ricardo – would turn over in their graves if they could see and hear how today their theories are used and in some cases, abused.
The basis for a new methodology should be the acceptance of the fact that economics is not a natural but a social science. Its practitioners should abandon as soon as possible the present (natural science) concept of economics as the study of phenomena that are determined by laws that are universal in time and space. Rather then drawing conclusions on the basis of a series of unrealistic assumptions – such as the profit-maximizing individual known as homo economicus - economists should consider economic phenomena for what they really are: the outcome of economic decision-making by human individuals. A new economics would no longer rely, as traditional economics does, on drawing conclusions from massive sets of data that are fed into models drawn up on the basis of assumptions that are at best, gross simplifications of reality. Instead, as practitioners of a science that studies human behavior, their central research object would be human individuals and groups, to be studied through observing and registering behavior. Even more important, "new" economists should, rather than drawing conclusions from theoretical models, discover the motives behind economic decision-making by actually asking people about those motives - through interviewing.
From an a-social to a social science
From a methodological point of view, then, economics should become a social science. The same can be said from a moral point of view: economics should become a social science. The wording is the same, but the meaning differs. If morally, social is seen as attuned to the needs of all human beings, not just particular individuals, economics is, at present, definitely a-social. Due to its tendency to look at demand only in monetary terms economics remains oriented towards the satisfaction of the needs of only that part of humanity that is able to back up their demand for goods and services with the capacity to pay for them. Worse, it does not take account of the fact that the production to satisfy that demand largely takes place in ecologically unsustainable ways – thus threatening the satisfaction of the needs of future generations. This a-social approach is particularly discomforting as, thanks to huge advances in technology and corresponding increases in productivity, there is enough productive capacity in the world today to satisfy the needs of the have’s as well as the have not’s. Moreover, the technology and policy instruments exists to do so in ways that are both ecologically sustainable and socially equitable. However, as long as traditional economics remains mired in its antiquated theories and dogmas it will fail to address the pressing issues that confromt humanity today – both theoretically and practically. Most notably, it will continue to fail in answering the question of how today’s resources, especially humanity’s accumulated body of technology, knowledge and skills, can be used to set society on the path to sustainable development. Instead economists will, when confronted with the issues of poverty and environmental deterioration and its consequences, continue to do no more than reconfirm their faith that, sooner or later, the invisible hand of the market will put everything right. And that therefore, that invisible hand should be given as much freedom as possible.
The result of this form of thinking is that today, much technology and productive capacity that could greatly contribute to sustainable development is not or insufficiently exploited. The reason is that according to traditional economic arithmetic, it would be "uneconomical" to do so. On the one hand it would be uneconomical because, however badly needed to alleviate the plight of the poor or safeguard the quality of life of future generations, there is no economic demand for the goods and services involved. (The reason for that lack is, of course, obvious: neither the poor nor future generations have the money needed to convert their needs into economic demand). On the other hand, traditional economists consider most much-needed action and use of technology as uneconomical because its long term benefits or immediate costs are not immediately apparent and therefore, are not taken into account. For example, measures to protect the environment will only yield benefits in the longer term – if only, because future costs to redress the problems caused by pollution and the destruction of ecosystems will be avoided. Alternatively, not taking those measures and hence, continuing with old, unsustainable practices and technology means that those costs will have to be made at some point in the future. Environmental economists have made considerable progress in calculating such costs and arguing they should be included in current prices. However, most mainstream economists continue to ignore their work and in some cases, oppose it as an intervention in the free operation of markets.
In conclusion, what is needed is an economic science that takes account of and works for all of humanity, now and in the future. Rather than only considering the demand for goods and services of those able to pay for it, it should focus on satisfying the needs of all of humanity. And instead of considering money as a given entity – which makes its scarcity the key obstacle to sustainable development - it should come to consider it as an instrument to facilitate sustainable development. On the other hand, if the world’s economic and political elite, supported by the mainstream media, continue today’s policies, based on the outdated or false assumptions of traditional economics, mass unemployment, poverty and the widening of the gap between rich and poor will persist. That means that in spite of continuing advances in technology, knowledge and skills we are likely to see more human misery, a major economic and financial crisis, and a seriously disrupted global ecosystem.
What is needed, therefore, is a major push, by citizens and opinion leaders, towards a new approach to economics. The central question of that new economics, as argued above, should be how to use society's resources to optimally satisfy humanity’s needs in the short, medium and long run, using the quantity of money as an instrument rather than a given.
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