Issues in Postmodern Economics

 

Arthur Warmoth, Ph.D.

Copyright © 2005

 

I.  A Theory of Knowledge Value Evolution Over Time

 

            The question of knowledge value theory needs to be placed in the context of the history of the evolution of economies.  Economics is about the quantification of value.  Economics and astronomy were the first domains of the application of mathematics to practical affairs.  They preceded the application of mathematics to physics, chemistry, and the other natural sciences that enabled the Industrial Revolution.

 

            However, the physics envy characteristic of many of the social sciences has led modern economists to complicate the mathematics that are necessary to analyze economic systems per se.  Economic systems are essentially accounting systems, and the unit of account is what we conventionally call “money.”  Economics involves mapping the absolute quantification of value in accounting systems onto maps of social and natural ecologies.  It is in mapping the structure and dynamics of these ecologies that higher mathematics becomes useful.

 

            A theory of value, which is needed in order to define the specific domain of knowledge value, requires a theory of human needs and desires.  The most widely accepted such theory in use today is Abraham Maslow’s hierarchy of needs:

 

 

An ecological assessment of these levels of human needs reveals that the lower levels require the exploitation of natural resources, while the satisfaction of the higher needs is entirely a function of human relationships.  (Maslow distinguished between deficiency needs and being needs.)  Thus the economics of lower need satisfaction is based on the formula:

 

            Standard of living = knowledge (technology) + natural resources

 

The formula for the satisfaction of higher needs is

 

Quality of life = Values (ethics) + knowledge (systems sciences) + choice (political will)

 

The first formula in amenable to the manipulations of conventional market or neoliberal economics, while the latter is not.  Since many of the satisfiers of the higher needs are public goods (mostly public services), we find ourselves today in the same quandary that John Kenneth Galbraith defined in The Affluent Society (Boston: Houghton Mifflin, 1958). in the 1950s:  We live in a society awash in private goods and starved for public goods.

 

“Value” is essentially in the eye of the beholder.  The key to understanding the historical shift from the Industrial Era to the Information/Communications Era is the shift from an emphasis on the economics of Standard of Living to an emphasis on the economics of Quality of Life.   Quality of life is mainly dependent on human services and human relationships.  This signifies a major shift in the perspective from which we must address the question of value.  Since our standard of living is mainly a function of our ability to utilize natural resources in order to create useful things (commodities or products) the criteria for progress and productivity are essentially objective.  In other words, most informed observers can agree on measurement criteria.

 

When it comes to human services and relationships, however, agreeing on criteria becomes much more problematic.  The criteria become intersubjective.  This means they require agreement or consensus among persons (subjects) who may be coming from widely divergent points of view about values.  These differences may be relatively modest, based on differences of temperament and personal history.  Or they may be yawning chasms grounded in ideology or cultural identity and worldview.  In either case, ‘values’ is not a trivial variable in the Quality of Life equation.  Values cannot be taken for granted.  On the contrary, in the absence of a viable living tradition, they can only be established through negotiation.  This means politics.  Ideally, political negotiation can best be accomplished in the context of intersubjective empathy and compassion (both of which are herewith proffered as desirable values).  But it cannot be denied as an empirical fact that negotiations are often resolved by force.

 

Human services and relationships essentially live in virtual space, not in geographical space, although in many cases geographic proximity is necessary to establish functional intersubjectivity.  The information/communication technology (ICT) revolution has enormously expanded the human capacity for creating knowledge in virtual space.  The challenge is to adequately map our accounting systems onto this new greatly expanded virtual geography.  An optimistic view of the potential of this horizon is offered by the normally more pessimistic, or at least more skeptical, philosopher José Ortega y Gasset.  According to Ortega, humans turn inward into the self in order to reflect on possibilities for intellectual and technological progress.  However, this inwardness is always prelude to action.

 

Far from losing his own self in this return to the world, he carries it thither, projects it energetically and masterfully upon things, in other words he forces the other–the world–little by little to become himself.  Man humanizes the world, injects it, impregnates it with his own ideal substance, and it is possible to imagine that one day or another, in the far depths of time, this terrible outer world will become so saturated with man that our descendants will be able to travel through it today as we mentally travel through our own inner selves; it is possible to imagine that the world, without ceasing to be the world, will one day be changed into something like a materialized soul, and, as in Shakespeare’s Tempest, the winds will blow at the bidding of Ariel, the elf of Ideas. Man and People (New York: Norton, 1957, pp. 20-21, Original italics;  he hastens to add in a footnote:  “I do not say this is certain. . .but I do say that it is possible”).

 

A sea change in the transition from the Industrial Era to the Information/Communications Era has been the shift from the centrality of the idea of “progress” to the idea of “sustainability” in public discourse.  In the nineteenth and most of the twentieth centuries, it was assumed that change driven by science and technology, by capitalism, and by democratic politics represented improvement.  Ortega argues that the soporific effect of this idea lay behind much of the pain and destruction of the twentieth century:

 

No small part of the anguish that is today [the mid 20th century] tormenting the souls of the West derives from the fact that during the past century–and perhaps for the first time in history–man reached the point of believing himself secure. …The progressivist idea consists in affirming that humanity–an abstract, irresponsible, nonexistent entity invented at the time–progresses, which is certain, but also that it progresses of necessity.  (Op. Cit., p. 26)

 

However, toward the end of the century, the concept of “sustainability” began to gather currency.  Today it is an international buzzword in politics and planning.  The practical and economic significance of this concept is that we must now make conscious choices–political decisions–about those aspects of social and natural ecologies we want to maintain, as well as about those we want to change.  This underscores the importance of conversations about values and ethics in civic life.  Nostalgic fundamentalism–religious (Christian or Islamic), economic (free market fundamentalism), or political (dogmatic democracy)– is no longer a sufficient foundation for ethical decision making in a globalizing world.  On the contrary, it is incumbent on leaders in all areas of society, ranging from education and health care to politics and business, to encourage both greater understanding of the character of complex social and natural systems and of the ethical issues involved in the planning and management of those complex systems.

 

 

 

II.  Investing in Third World Economies

 

I was recently challenged by a colleague to explore this question:  How can an investor (that is, a holder of assets, of accumulated savings) realize a reasonable return on the kinds of investments that are needed for Third World development?

 

The answer to this question requires that we establish some basic theoretical principles:

 

 

The under these principles, the key policy necessity is to have sustainable accounting rules that:

 

1.     Replace interest with service charge

2.     Minimize paper entrepreneurialism

 

The basic systems unit of economics should be the sector.  Sectors can be nested with regional metasystems (e.g. metropolitan bioregion, national economy, etc.)  Important sectors include:  agriculture, health care, education and culture, manufacturing, natural resource management, recreation and entertainment, transportation, public safety.  Each of these sectors is an ecology that operates according to distinctive system dynamics that deserve intelligently designed accounting systems.  The role of the banking system should be both to recognize these distinctive ecologies and to design metasystems that coordinate exchange, savings and investment among these ecologies.  The following tables off two templates for assessing the economic issues in sectors:

 

“Market”

Accounting System

Production for Individual Consumption

Conventional Market Economics

Production for Collective Consumption

Separate consumption and investment accounts for the public sector (including NGOs), income=taxes & philanthropy

 

Core Issues

Solution

Public Sector Add-On

Underutilized Productivity

Complementary Currencies

Political Will

Low Productivity

Investment

Political Will

 

As a general rule of thumb, philanthropy is better suited to fund public investment and government to fund public consumption, although some investment projects are so large that government investment is required, e.g. the railroads in the 19th century, space exploration, and basic research in general.

 

The role of government (the legislative function) should be to establish ground rules for the economy as a system (of accounting systems).  Government and civil society (the NGO sector) should have joint responsibility for determining and prioritizing collective needs for consumption and investment.

 

Organizations that provide public services and implement public investments (public sector entrepreneurs) can be chartered as government, NGO, or private corporations.  Privatization policies should distinguish between organizations that are essentially providing public services that require public subsidy and/or oversight and those that are public assets (that is, that generate resources for public purposes, e.g. public ownership of natural resources).  In the former case, regardless of the type of charter, the key requirements are transparency and accountability.  The latter case must be accounted a public give-away, although there is room to contract for the management of public assets.

 

As a general rule of information economics, research that primarily generates information or ideas should be publicly funded and the results should be in the public domain.  This is analogous to the role of government in creating the post-Civil War land grant universities; as with higher education there is also room for private philanthropy.   However, organizations that use information in the public domain to produce real-time goods and services are assets that can be owned by any combination of individual, corporate, or public investors.  Ownership of productive assets using public domain information is a viable alternative to extending patent protection.  Productive enterprises include enterprises whose main function is accounting services.

 

The democratization of the capitalist economy is necessary for broadening the base of stakeholdership and reducing incentives for collective antisocial activity, such as rebellion or terrorism.  The democratization of capitalism requires the democratization of ownership through institutional arrangements such as those proposed by Louis Kelso, Jeff Gates, and Shann Turnbull.

 

The most important sectors for investment in Third World development systems are health care, education, and sustainable agriculture.  Investing in these systems requires collaboration among entrepreneurs, producers, and consumers.  The key to both of these sectors is mobilizing local human resources, not importing technology or other goods.  Self-financing by entrepreneurs, producers and consumers using Kelso investment mechanisms and micro-banking (i.e. the design of an appropriate accounting system) can reduce the need for outside ‘foreign’ capital, which should be needed primarily to purchase materials–especially technology– and expertise that are not available locally.  Foreign liquid capital can be provided by both government and private investors. (‘Foreign’ in this essay refers to transactions with agents outside of the regional economy in which the investment is taking place, not necessarily outside of national boundaries.)

 

Under real wealth-based accounting systems, average return on investment should be roughly equal to the average growth rate of the economy.  Distribution should be governed by some mix of traditional capitalist and Kelso investment mechanisms.  However, the potential growth rate of services is much higher than that of industrial era growth as the former is not subject to the same level of natural resource (including energy) constraints as the latter.

 

The problem with generating a return on foreign investment is that it must be paid by exportable real wealth.  In economies with limited capacity for material exports, the obvious alternative is tourism, including eco- and educational tourism.  Foreign investors might also consider the value of intangible returns, such as reductions in global warming and international terrorism.

 

A model investment accounting system

 

 

 

 

 

 

 

 

III.  A Modest Proposal for a Regional Network

of Complementary Economic Institutions

 

I would like to offer the possibility of developing a network of regional complementary economic institutions.  This is based on the notion that economics is essentially simple in principle:  it consists of mapping accounting systems onto social and natural ecologies.  Thus the math is simple:  arithmetic and simple algebra, and when you get into projecting the future, elementary statistics and calculus.  Complexity arises out of the richness and complexity of the data to be processed.  That is why computers are revolutionizing economics, and why whole-system pilot projects are a good idea.

 

The logical region for a pilot project in Sonoma County is the metropolitan bioregion of Sebastopol, which consists mainly of the city and the west county supervisorial district, exclusive of the parts in the Santa Rosa Metropolitan area.  This aret already has much of the social and political infrastructure needed, and it is small enough to be modeled in a reasonable time frame .

 

The approach would be based on the two recognized basic functions of money:  Medium of exchange and store of value (savings and investment).  This can be mapped against the two primary sectors of the economy, public and private (although these are more accurately described as “the market” and “the commons”;  the commons includes both government and philanthropic/NGO activities).  This leads to a matrix that proposes four innovative financial institutions:

 

 

 

 

The Market

 

The Commons

 

Medium of

Exchange

 

C$D System

 

Time Credit Bank

 

Store of

Value

 

Solari-Type Investment

Group

 

Regional Community Foundation

 

At this point he advantages of a complementary currency system are pretty well understood among many culture creatives; it consists of creating a banking system that substitutes a reasonable service charge for interest. The Solari model provides for a group that is knowledgeable about both the ecology of the community and the mechanics of economic information system management to create an investment institution focused on ecologically sustainable real wealth growth in the local economy.  (The mutal credit model is the desirable alternative to fiat and debt-based monetary issuing systems.  For information on the Solari model go to: http://courtskinner.com/solari/Rise.htm.)   A Regional Community Foundation can provide the benefits of a Solari for investing in and sustaining the Commons.  This would go beyond the model of the existing Community Foundation Sonoma County in that it would focus on investing in the regional economy, not just investing in support of the regional commons.  However, the existing Foundation might be willing and able to provide infrastructure.

 

The relevance of Time Banking in the commons requires a bit more explaining.  In No More Throw-Away People Edgar Cahn documents the utility of Time Banking for what he calls the “Core economy[:…] family neighborhood, community and civil society” (2nd ed.; Washington, DC: Essential Books, 2004, p. 203).   Lietaer and Demeulenaere’s study of Bali documents the positive results of what is essentially a time credit tax.  One of the benefits of a time credit tax is that it is automatically progressive, requiring equal contributions to something everyone in the short term has the same amount of:  time.  The disadvantage, of course, is that implementing a tax would require a radical rethinking of tax policy.  In the meantime, much can be done with Time Banking philanthropy.  This type of activity has the advantage of taking place outside of the complexities of IRS policy

 

Many of the activities of government and the non-profit sector involve both market and commons components, for example public transportation and higher education.  In these areas, user charges in C$Ds combined with tax and philanthropic support make sense.  Time Credit taxation(along with the authority of local jurisdictions to implement progressive dollar taxation) can come later.

 

 

 

8/22/05