Economics for the Common Good
by John B. Cobb, Jr.
John B. Cobb, Jr., Ph.D. is Professor of Theology Emeritus at the Claremont School of Theology, Claremont, California, and Co-Director of the Center for Process Studies there. His many books currently in print include: Reclaiming the Church (1997); with Herman Daly, For the Common Good; Becoming a Thinking Christian (1993); Sustainability (1992); Can Christ Become Good News Again? (1991); ed. with Christopher Ives, The Emptying God: a Buddhist-Jewish-Christian Conversation (1990); with Charles Birch, The Liberation of Life; and with David Griffin, Process Theology: An Introductory Exposition (1977). He is a retired minister in the United Methodist Church. His email address is firstname.lastname@example.org.. The following paper was delivered at a conference in Hamburg, Germany in November 1998.
My paper will be in large part a critique of the assumptions underlying the now dominant economic theory and a proposal of different assumptions. To many people this seems a remote and indirect way of approaching the issues of the common good. I hope that, as I proceed, that sense of remoteness will lessen. But at the outset I want to explain why this seems so important to me.
It is obvious that there are many problems in the world today. In my opinion the condition of many of the peoples of the South has deteriorated in the past fifty years. Without question the global environment has deteriorated. There are multiple reasons for this, including the explosive growth of population. But I believe that the most important reason is to be found in the economic policies that have increasingly shaped global events.
Those who recognize the suffering that results from such policies as structural adjustment, often complain loudly. These complaints, if effective at all, lead to minor changes. But while these changes may bring modest improvements, new policies are being implemented by the International Monetary Fund, the World Bank, and the World Trade Organization that continue to worsen the situation. They are all guided by a common vision and understanding. As long as this vision and understanding remain unchallenged, improving the ways in which they are implemented has only minor effects.
This vision and understanding are shaped by the dominant economic theory. That theory in turn follows from a few fundamental assumptions. Until these assumptions are made explicit and critically evaluated, this vision and understanding will continue to dominate the course of events.
The first assumption to be considered lies outside economic theory. It is the assumption that the economic order is the most important one, that progress is to be viewed primarily as economic progress. It is this assumption that renders economic theory so important. If the economy were viewed as one among several important components of society, perhaps as subordinate to sociological and political considerations, then it would be these sociological and political considerations to which we should be giving primary attention. But today this is not the case. Sociological and political considerations are subordinated to economic ones. Governmental policies are determined largely by their contribution to economic progress, and economic progress is understood in terms of economic growth.
There is a further assumption, one that is being questioned more and more. This is that the standard measur of economic growth are good ones. At present by far the most common measure is the per capita Gross Domestic Product (GDP). Since the success of policies is so largely judged by their effects on this statistic, examining it is eminently appropriate.
Questioning the value of this measure is not new. In the 1960's, there was considerable criticism of its role in shaping public policy. Two leading American economists, William Nordhaus and James Tobin, undertook to take account of the criticisms and come up with a better measure of genuine economic progress. They called this the Measure of Economic Welfare (MEW). They made major additions to the GDP for leisure and for household work while subtracting most governmental expenses and other defensive ones. They also emphasized in their calculations the importance of investing sufficiently to provide for future production. They then calculated the MEW for the United States from 1929-1965.
The results showed that MEW grew more slowly than the GDP. Nevertheless, over the period studied it did grow, about two-thirds as rapidly. They concluded that this fact warranted the continued use of the GDP rather than of their more complex measure. Presumably they decided that, over time, growth of the GDP does contribute to human welfare, so that continued concentration of effort on securing that growth is appropriate policy.
Their interpretation of their own results is surprising when one examines them more carefully. If one breaks the 1929-1965 period into parts and considers the period after World War II, the connection between GDP growth and the MEW turns out to rather slight. The MEW grows only one-sixth as rapidly as the GDP between 1947 and 1965. It would seem more rational to draw the conclusion that in the circumstances of the time, increasing GDP was a rather ineffective way of improving economic welfare. One should experiment with more direct approaches.
That there was no hint of such a thought in Nordhaus and Tobin's report indicates that their real goal was more to defend continued use of the GDP than genuinely to consider the advantages of employing a different measure. If this had not been their purpose, one would expect at least that they would advocate continuing study to see whether MEW growth continued at all when policies were directed to increasing the market activities that are measured by GDP. But in fact they dropped the project and did not even suggest that others might continue it.
In the mid-eighties I became so frustrated by the hardly questioned hegemony of GDP accounts in evaluating policy that I gathered a group in Claremont to pursue the issue. Later my son, Cliff took over much of the work on the project. We first thought that we might simply bring the MEW up to date. But as we examined it, we gave up this idea. We found that some of the statistics they used were not available in subsequent years and that they had omitted enviornmental issues from consideration. On the other hand, we saw that their treatment of leisure was such as to overwhelm their index. Also, Nordhaus and Tobin did not consider the question of distribution of income, whereas we judged that this issue is important for any responsible measure of human well-being.
We developed an Index of Sustainable Economic Welfare (ISEW) for the United States that omitted leisure but included environmental costs. We dealt with the years 1950-86, and we published our results in an appendix to For the Common Good. We found that in the fifties GDP and ISEW rose together; that in the sixties and seventies, GDP rose rapidly while ISEW rose slowly; and that in the eighties, GDP continued to rise rapidly while ISEW declined. Subsequently, ISEWs have been prepared for several other countries, including Germany, with remarkably similar results. I should also note that when leisure is included, as in principle it should be, the gap between GDP and ISEW is considerably increased.
The ISEW is a very crude instrument for the measurement of economic welfare. Nevertheless, it is much better than the GDP. The sharp and increasing divergence between the two is strong evidence that continued orientation of policy to increasing the GDP is damaging to economic welfare. Subordinating policies directly aimed at improving the economic conditions of people to those aimed only at increasing market activity is not justified even by the strictest economic considerations. Yet this practice continues to prevail through most of the world.
Note, further, that the ISEW measures only economic wellbeing. No Christian, and indeed noone genuinely concerned for human beings, should equate economic wellbeing with wellbeing in general. There is very little correlation between economic wellbeing and personal happiness. Most of what is most important to real human beings, such as the quality of their relations to others, is missed as much by the ISEW as by the GDP. Accordingly, the ISEW is not put forward with the recommendation that henceforth political policies be guided by it, although that would be an improvement over present policies. It is put forward primarily to show the absurdity of guiding political policies by standard governmental measures of the economy.
Far more important to most people than what can be measure in an economic index is human community. To be an accepted and appreciated member of a healthy community is a primary requirement of human maturation and personal satisfaction. But on the whole, the changes that have been taking place in the past fifty years have been adverse to community. This may be less true in Europe and Japan than in the United States, but it is even more true in the Third World. And there, as in the United States, it is a direct result of economic policies.
In the United States, the past fifty years have seen the replacement of family farms by agribusiness. Small rural towns have been decimated, while the population of urban slums and sprawling suburbs has greatly increased. Of course, new communities come into being in slums and suburbs, but their quality is inferior to what existed in rural America in earlier periods.
One factor that works against the emergence of healthy community in suburbs is rapid mobility. In many suburbs the average length of residence is three or four years. The move away may either be to a more affluent suburb in the same urban area or to another city. Both moves are dictated by economics.
There can be little doubt that the rise in psychological depression, drug abuse, suicide, crime, educational achievement, and divorce are related to the decline in the quality of community. The decline in political participation, neighborhood churches, public schools, and civic organizations is part of the same picture. Interests narrow and concern for others declines.
The decay of community in Third World countries is more dramatic. At the end of World War II most people still lived in rural villages or within functioning tribal systems. They were very poor, but most of them had some ability to produce their own food and were accepted and appreciated participants in communities. Since then, as in the United States, agribusiness has replaced subsistence farming and there have been vast movements of population to cities often unable to provide people with the minimum facilities of urban life. Here, too, new communities form, but they are far less healthy than those that were destroyed.
This destruction of community has not been accidental. In the years after World War II, as development workers moved into the Third World, they complained about the impediments to growth deeply entrenched in traditional societies. Traditional values worked against those needed to build a "modern" society. Certainly the prizing of human relations in community was an important part of the obstacle. Simply pointing out to people that they could earn more money by leaving their places of birth did not suffice to move them. They were concerned for economic survival, of course, but beyond that participation in family structures seemed more important to them than "improving" their condition.
Colonial powers had long struggled against these traditional values. They had difficulty inducing "natives" to work for pay as long as they could survive without doing so. Hence they had to create artificial needs for cash -- by taxes, for example -- or they undercut their means of subsistence by taking their land away from them or destroying their irrigation systems. In recent decades similar policies have been followed as peasants have been forced off their land for the sake of modernization and "progress".
We might regard all this simply as tyranny. But it should be understood instead -- or at least also -- as a consistent expression of the dominant economic theory which, as noted above, is the theory governing the dominant sector of society. That theory has no place for the values of community. It is interesting that Lester Thurow, a leading American economist, closely related to the more progressive wing of the Democratic party, has written that the agricultural sector is the one great area of progress in American society since World War II. That is because this is where there has been the greatest increase in productivity, that is, product divided by hours of labor. This has been achieved, of course, by shifting from family farms to agribusiness. Thurow is blind to any human costs involved because he is socialized to think in economic terms.
The point, then, is that a basic assumption of economic theory is that human beings are, at least for economic purposes, rightly to be understood individualistically. Sometimes the units to be understood individualistically are households rather than as individual human beings, but this makes little difference. In the dominant economic model, the wellbeing of the individual is not affected by the wellbeing of others. Hence the destruction of rural communities does not count against the gain in per capita income achieved by reducing the number of persons living on the land while producing the same quantity of agricultural products.
The model of the individual is sharpened by an exclusive focus on production and consumption. The individual is understood to aim at consuming as much as possible while working as little as possible. In other words, workers sell their labor as dearly as possible and purchase goods a cheaply as possible. It was the failure of members of traditional societies to conform to these norms that led to the call for modernization.
Again, I call attention to the absence of any role for human relationships other than those of exchange in the market place. The sympathy that Adam Smith saw as the foundation of morality is excluded from economic considerations. Economists acknowledge that some people choose to give their money to others, but this must be understood simply as one desire alongside others that money allows one to fulfil. There is no accounting for human tastes, and economic theory counts against any judgment among them. The goal is that as many desires as possible be fulfilled, whatever those desires are.
Given this understanding of human beings, the policies that have destroyed so many communities both in the United States and in the Third World, are entirely rational and moral. They lead to increased productivity and thereby, assuming full employment, to increased per capita consumption. The fact that this assumption is rarely realistic is given too little thematic attention. Opposition to these policies is seen as sentimental and ignorant.
If in fact people are not the separate individuals depicted in economic theory, then the theory developed on this basis is distorted. It is not surprising that the policies based on this theory lead to so much human suffering. It is important to articulate an alternative.
I propose a common alternative, that we view people as persons in community. We do not want to minimize their importance as individuals, but true individuality emerges only in community. The wellbeing of individuals is more affected by the health of the communities in which they participate than by the quantity of goods and services they consume. Hence the economy should be so ordered as to strengthen communities and make them more healthy rather than to destroy them.
Policies designed to strengthen communities in general lead to some increase in per capita production and consumption. The issue is not whether this should increase. The issue is whether policies should be geared primarily to this increase, with the result of destroying community, or primarily to benefitting people in communities in part by increasing their ability to meet their need for goods and services. Ghandi strongly favored the latter approach, symbolized the sewing machine, whereas Nehru, a more modern thinker, built steel factories. Many NGOs and church groups have worked at community development projects, but governments and global agencies have engaged in top-down development, such as huge dams, destructive of community. The difference is practical and sharp.
The difference manifests itself also in the proper relation of socio-political and economic power. If people are understood as individuals benefited only by increased consumption of goods and services, then socio-political structures should adopt those policies that increase the availability of these goods and services. This is their most important function. Since the larger the market the more efficiently goods are produced, the socio-political structures should remove all barriers to the movement of capital and goods across socio-political boundaries. They should reduce their regulation of business to a minimum, and provide the most favorable and attractive context for investment. In short, they should adopt the role of servants of the global market.
On the other hand, if we view people as persons-in-community, the socio-political structures will aim to constitute themselves as the kind of society that strengthens and enriches community. They will favor local businesses and protect them from unreasonable competition from without. They will establish wages at a level that provides for all who are unemployed and make sure that working conditions are safe and healthful. They will make sure that the use of local resources is sustainable and nonpolluting. They will gear education to the enjoyment and well being of their people rather than to competing economically against other economic units. In short, they will develop a relatively self-reliant economy and protect it from erosion by global economic forces.
The inidividualistic assumption I have discussed above works with others to increase the gap between the rich and the poor and, I believe, to worsen the lot of the poor absolutely. This is closely related to the weakening of community. In a true community the well-being of all is of concern to all. Hence provision is made to care for those who cannot care for themselves. The basic needs of all are met as long as the community as a whole has the resources to do so.
When there are only individuals competing in the market, this does not happen. Some individuals may feel disposed to care for other individuals who need help. But there is no broader sense of being members one of another, such that the needs of all lay a claim on all. The majority will care for the minority through corporate institutions only if they are persuaded that this is to their individual benefit. This is often difficult to argue when people are encouraged to measure their benefit in terms of economic gain.
Furthermore, when the market replaces community as primary, competition replaces cooperation and mutual support. The competition may lead to greater total production and consumption, but by its nature it leads to winners and losers. In the long run there are likely to be fewer and fewer winners and more and more losers. The gap between winners and losers grows wider. In short, the market, when other forces do not intervene, concentrates wealth in fewer and fewer hands. When wealth is the primary determinant of power, the dominance of the market concentrates power in the same way. Globally, and in the United States, we have gone far down this path.
The extension of the free market across sociopolitical boundaries compounds the problem. Especially if wages and working conditions differ in the countries included, pressure is downward in the more prosperous country. But it is rarely upward in the less prosperous one.
This is because countries must compete with one another for capital investment, and poor countries compete primarily by offering low wages and few restrictions. For example, wages in Mexico have gone down since NAFTA. With the increasing globalization of the economy, workers in Mexico are forced to compete with those in Central America, Haiti, and south China. The market will raise wages only if labor becomes globally scarce -- a highly unlikely scenario.
The ending of community by globalization thus renews the almost total dominance of capital over labor. It reduces the capacity of countries to care for their unemployed. In short, it enriches those with capital and impoverishes those who have only labor to offer in the market place.
On the international level the International Monetary Fund is responsible for preventing nations from reneging on their debts. This is for the sake of maintining global investing and trade. This means that banks can lend governments money with little fear that they will not be repaid. When governments are unable to repay, the IMF lends them money by which the repayments can be made. In exchange for the loan it imposes conditions that insure that the money to repay the IMF will come from the poor.
This effect of the global economy, based on individualistic thinking, is accepted because of other assumptions. One is Pareto optimality. This is the doctrine that we cannot compare the benefits to one person with those to another. Our goal must be to benefit some without hurting others. How much some benefit while others do not does not matter as long as there are no losses. Of course benefits and losses are measured in terms of the ability to consume.
Pareto optimality counts against an interest in how the increasing global wealth is distributed. As long as the total wealth increases and noone is impoverished, it is satisfactory that the only beneficiaries are the rich. One cannot say that a thousand dollars added to annual income benefits a poor person more than a rich one. For those who accept this principle, preference for less inequality is a matter of personal taste.
Another assumption important in US policy is that full employment is inflationary and that inflation works against the proper functioning of the economy. The Philips curve is said to show that unemployment of less than five or six per cent is to be avoided for this reason. The reasoning is that if labor becomes scarce, there will be "wage inflation", that is, wages (especially at the lower end) will rise. This will raise the costs of goods. If there is sufficient competition for low-wage jobs, this can be avoided. During the period that this has been the official policy of the government of the United States, real wages have fallen despite a great increase of GDP.
It is obvious that these economic theories that support the impoverishment of the poor are not beyond challenge. Against Pareto optimality, one may argue that the benefits of gains to those lacking basic necessities add much more human well-being than the addition of numbers to wealth used only to create more wealth. Against the view that "wage inflation" is to be avoided one can argue that precisely the increase of wages is urgently needed for a just society. Workers should participate at least equally in the increasing national wealth. One may further challenge the claim that in fact low unemployment is necessarily inflationary. There is historical evidence that it is not. But the moral argument must be that whether or not it is, a living wage should be a higher priority that avoidance of mild inflation.
In addition to concentrating wealth and power in fewer and fewer hands, the present system is impoverishing the Earth. I trust it is not necessary to recite the horrors that humanity is inflicting on other species and on the Earth-system generally. I will assume that we are agreed about the already occurring catastrophes and the threat of more terrible ones in the next century.
When we ask why it is so difficulty to address this issue effectively, once again we come back to economic theory. According to economic theory generally, environmental issues are not important. The exhaustion of resources is not a threat since technology will always enable us to replace one resource with another. Pollution is a cost of growth that can be internalized and paid for without reducing the importance of growth. Global warming falls in this category.
Fortunately, many economists as human beings know that environmental issues must be taken seriously. On the edges of the main discipline there has been resource economics, land economics, and environmental economics. But it is very difficult to recast basic economic thinking so as take their concerns into account.
The reason has to do again with basic assumptions. The only way in which the natural world has played a role in the mainstream of modern economic thinking is as "land". The French physiocrats, viewing the economy primarily in terms of agriculture, regarded land as the primary factor of production. Adam Smith included it alongside capital and labor. However, economic theory in the late eighteenth and nineteenth centuries was informed more by the industrial revolution than by agriculture. In industry capital and labor were the essential categories. Land was dropped as a factor of production and became instead a commodity to be bought and sold.
In the latter part of the eighteenth century, Henry George developed an economic theory that gave a special place to land. For a few decades it constituted a major challenge to both Marxist and capitalist theories. But the mainstream of economic thought successfully marginalized it and continued to exclude land as a distinct category from any significant role.
Since both capitalist and Marxist theory developed without consideration of the contribution of the natural world to the economy, any consideration of nature as something other than a commodity falls outside the discipline of economics. It is physicists and biologists who express concern about the natural world and its capacity to sustain our abuse. Economic theory suggests that their concerns are misplaced, and it is economic theory that guides most policies.
Clearly there is no inherent necessity that economic thinking forever exclude consideration of the natural world. It was not excluded by the physiocrats or by Henry George. It is now not excluded by environmental economics. Even some mainstream economists acknowledge that it has some distinctive characteristics. It is time, indeed long past time, to insist that economic theory be developed with a fundamentally different view of nature.
What should that view be? If economics were based on the model of individual people as persons-in-community, so that it aimed at the strengthening of communities, it could extend the understanding of community to include the natural environment. At least in a loose sense, people can be in community with other creatures. In any case the health and of the human community is inexorably bound up with the health of its natural environment. We may say either that economics should aim at the health of community understood to include both human and nonhuman creatures or that it should aim at the health of human community in its natural environment. That issue is terminological. That the economy, and any measure of its success, should serve the Earth, understanding the Earth to include its inhabitants, and especially its human inhabitants, is clear. It is also clear that this implies a very different understanding of economics from the now prevalent one.
One may still think that we can and should change the way the system works without challenging the theoretical assumptions of the academic discipline of economics. This is, indeed, possible. We could focus on overcoming the first of the assumptions noted, an assumption that is not part of economic theory but rather of contemporary politics, namely, the primacy of the economy in shaping human welfare.
We could then make clear that what is now called economics is better defined as marketology, the study of market activity. We could call for a new academic discipline much more like what Aristotle called oikonomia, the study of the how the oikos should be managed. And finally we could insist that the oikos be understood as it is in contemporary ecology. Under these circumstances the present academic discipline could be left largely intact, but it would play a much more modest role both in the university and in society as a whole.
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