Viewpoint

Public Policy and the Money Fetish

People need good health, good education, a decent social service structure and a clean and productive natural environment. Many of the costs are easily measured in dollars, but benefits are hard to measure and may not appear for decades. How, then, do we as a nation make the best possible policy decisions?

Many "answers" to this fundamental social question have been supplied in recent years by economic policy analysts. Most of the answers, and the policies stemming from them, revolve around the "need" for institutional changes to separate producers from consumers. Markets can then be introduced to provide better services at lower cost. I see it, however, as both undemocratic and bad social science to transform people into consumers and/or producers for the convenience of government. To treat us as nothing more is a serious misrepresentation of our humanity.

Is this process of social change built on a firm scientific base in economics? I think not. To me, mainstream economics -- the Neoclassical theoretical tradition -- is one of the biggest problems we face in developing good policies. The deep lack of scientific understanding that most politicians have also means a strong degree of scepticism is seldom applied to the economic policy advice they receive.

Consider the basic macroeconomic model of society. Goods and services from the production sector (mainly industry and commerce) are exchanged for money from the consumption sector (mainly households). Householders obtain money from selling labour and investing savings. Everything of economic importance in society comes about as a result of the interplay between producers and consumers.

Prices paid for goods and services, labour and capital, should ideally be determined in markets. In mainstream economics, if markets are not "free", they are not "efficient". This is why Government policies of recent years have removed restrictions on labour and money, to ensure they follow the dictates of the marketplace. In this process, society is being changed in line with the requirements of economic theory. I see this as both ethically and scientifically reprehensible.

Over the last hundred years, economics has developed towards higher and higher levels of abstraction. Economic theorists have attempted to place economics on similar foundations to physics -- a process described as "Physics Envy". Physics is based soundly on a small number of rock-solid, timeless laws of nature, but human social behaviour is culturally determined, and specific to a time and place. Thus, the foundations of economic theory can never be solid.

A serious outcome of following the neoclassical model has been the sin known to science as the Fallacy of Misplaced Concreteness. In it, conclusions are drawn about the way the real world works by making logical deductions from the behaviour of abstract models. There is little if any awareness by economists of the dangers of the process.

The fallacy is shown clearly when money flows are seen to represent reality. It is only a short step further to forget about the people involved in the labour and the capital and the physical reality of the goods and services. The whole economy is then "understood" through its dollar stocks and flows. This means money has become a fetish, where a symbol (the dollar) is imbued with characteristics that transcend those of more worldly things.

To a money fetishist, it is simple logic that since money balances can in theory grow forever (via compound interest), so can GDP and wealth. So too can pigs and cars and haircuts and populations and employment . This economic model is thus a continually-growing perpetual motion machine, which scientists know to be physically impossible.

The fact that all economic activities, without exception, draw from the energy and material resources of the environment and reject wastes back to that environment, is absent from mainstream theory. If this fact alone had been properly incorporated into economics, debates such as that of Limits to Growth need never have happened; societies would have begun the transition to sustainability. Absurd self-contradictory incantations such as "sustainable growth" are reflections of money fetishism, with no foundation in reality.

Further problems arise when the characteristics, say, of people or society are to be transformed into a money measure similar to goods or services. Economics asserts that the market is the appropriate place for valuation. This approach has several fatal flaws. One is that the "prices" of child abuse, for example, or of hepatitis C are not available; there are no markets where they may be valued. Economists overcome this problem by inventing a "shadow price" to incorporate them. But shadow prices are based upon dollar transactions associated with the events, such as sickness benefits and hospital or psychiatric counselling costs of treatment of an abused child or of interferon treatment for a hepatitis sufferer. They are in no sense a measure of the pain and misery experienced by the victims. To call such situations "market failure" is absurd, since nonexistent markets cannot fail. Market fetishism is not an adequate response when the real issue is a lack of understanding of basic social science.

Yet another example of economic fetishism is when "efficiency" is used as a justification for economic reforms. In an economic (Pareto) optimal allocation, resources cannot be reallocated to make at least one person better off without making someone else worse off. A dissident economist put the reality bluntly: "A Pareto-optimum is ... when nothing more can be given to the hungry, the cold, the ragged and the homeless without incommoding the glutton, the miser, the usurer and the play-boy".

And let us not forget that at best we can still only measure the costs of treating most problems, in health, education, social services, environment or anywhere else. The benefits of prevention, cure or conservation can seldom be measured, and in any case they often accrue to different "accounts". Which accounts are personal, which are community-based or belong to future generations, and which may be noneconomic is a distinction usually ignored as economically irrelevant. But where real people are concerned, these issues are of considerable importance.

To a few economists, highly critical of what is being done by their colleagues, all this is Economic Imperialism, where the boundaries of the economy are to be extended to the farthest frontiers possible, social and environmental. Once this is done, monetary agents will be in control of as many as possible of the activities of people in society. No democratic or scientific mandate exists for such a process.

To continue along the road of economic imperialism is to ensure the economy becomes both socially and environmentally unsustainable. Societies must stop the economic imperialists, and prune the formal economy back to a manageable size. I see the process requiring illumination of community ethics, resourced by the best of "systems-based" physical, ecological and social science. Economics should not be involved until after that process is finished.

In other words, I acknowledge the considerable value of many economic tools, especially markets, while denying them any universal validity. As a professional engineer, I emphasise the point that money and markets are tools. Tools should never be confused with blueprints.

It does not in any way follow from these arguments that I believe economics has nothing interesting, useful or important to say about socio-economic policy. But what it has to say is of a general nature and not easily translatable into the specifics of policy. This is why economists commonly disagree. Interpreting information about what is happening in the economy is an art, not a science.

Writing also as a scientist, I see many of the theories of economics as very poorly founded. Few can be rigorously tested according to the requirements of science. They are also incapable of giving more than a rough indication of what might happen in the future, and even then only if other things remain equal. Given the known unpredictability of economies, that proviso cannot be valid in practice. It is not possible to set an economic model a specific question and expect an answer that is capable of proper validation.

There is one important exception, however. That is where people are required or induced to modify their behaviour in order to satisfy the requirements of the model. Many social policies of the last few years have been enacted in association with legal and fiscal powers to achieve just that.

Current mainstream economics is built upon an outdated 19th century notion of humans as self-interested economic robots. I have a recurrent nightmare of a society where people are no more than economic neuters, themselves items of production, consumption and exchange. This is a logical outcome of giving free rein to an ideology that goes far beyond any scientific understanding we have of the cultural and social characteristics of humans. What the social sciences recognise as the "person-in-community" does not exist in mainstream economics.

Interpreted narrowly, as the dominant viewpoint requires, economics treats us as economic neuters in an ever-expanding marketplace. Interpreted creatively and humanistically, in its equally valid meaning of "loving care", it could incorporate a system-wide perspective that encompasses the "stewardship" role of humans in their relationship with all things, all people and all generations in the global household. That, however, would require economists to participate in working with the people of New Zealand and the world to clarify their collective hopes and aspirations for the future. As yet, I see little sign of the humility needed for that process to start.

John Peet is a senior lecturer in chemical and process engineering at the University of Canterbury, and author of "Energy and the Ecological Economics of Sustainability".