Summary Calling our economy dysfunctional is contentious. However, is one group right and the other wrong in this debate? Most definitely. In a democracy, there can be no question or doubt about it. The economy must serve the needs of the majority. Therefore, equally, there can be no question or doubt about it - our economy is dysfunctional, as it no longer serves the needs of the majority. It has been hijacked by a small minority to serve their needs, at the expense of the majority. When majority needs are not served, we have a problem on our hands. Isn’t it better to deal with the problem than ignore it, as it will soon become unmanageable. This article highlights the five key underlying causes of our dysfunctional economy.
Article Calling our economy dysfunctional is contentious, as the wealthy one per cent would disagree. Others, like me, call it dysfunctional, as it does not serve the needs of the majority. However, is it all about perception, or is one group right and the other wrong? Most definitely. In a democracy, there can be no question or doubt about it. The economy must serve the needs of the majority. Therefore, equally, there can be no question or doubt about it - our economy is dysfunctional, as it no longer serves the needs of the majority. It has been hijacked by a small minority to serve their needs, at the expense of the majority. This is a classic example of liberalism at work, where liberal ideas (representing minority interests) are slipped into the system through the back door by powerful lobbying, and or vociferous groups. These groups do not represent majority interests, but they soon come to dominate the political and economic landscape. This represents a democratic travesty as we no longer serve the majority.
Every one of the five major causes of our dysfunctional economy has narrow liberal ideas at their heart - ideas intended to serve the wealthy minority, at the expense of the majority.
Below, I provide a brief overview of the key underlying problems. Naturally, the subject can be explained in greater detail, but the idea is to provide the gist of the problem as succinctly as possible.
The five major underlying causes are:
Wrong economic model.
Poor investment culture.
Expanding rentier economy.
Wrong belief system.
1) Wrong economic model.
Most developed economies are based on the neoliberal model, introduced by Margaret Thatcher and Ronald Reagan in the early ’80s. It’s about free markets, globalisation, small government and low taxes. It serves the needs of the wealthy elite well - of that, there is no question. However, it weakens investment in common assets, and in “the common good.” Investment in common assets provides the foundation of every economy. Developed economies have spent vast amounts over millennia in building institutions, practices, procedures, investment in infrastructure and society to support a prosperous economy. Investment in “the common good” (such as social support, education, health, etc.) provides an important economic stabiliser. That’s because money spent on “common good” programmes, recirculates quickly back into the economy. Such investment stabilises the economy at a higher level of performance. Globalisation needs a special mention as it has decimated the manufacturing base of developed economies, and manufacturing is the cornerstone of any economy. It’s far more important than the service sector. Globalisation weakens national economies, which adversely affects the workforce. All the practices of neoliberalism benefit the rich, not the majority. Consequently, our priority must be to introduce a model which puts majority interests first. A social market model, similar to those used by Nordic governments, serves both society and business needs well and represents a good starting point.
2) Wrong measures.
“What you measure is what you get.” “What you don’t measure you don’t manage.” These two statements provide us with an understanding of why our economy is so imbalanced. At both the micro and macro level, we use inappropriate and inadequate measures. They focus exclusively on financial outcomes, ignoring the interests of other stakeholders. This suits the needs of the wealthy, but nobody else. We put profit before all else, ignoring the interests of stakeholders whose outcomes are not measured, and therefore, not managed. At a micro (business) level, we use the Accounting Model as a business measure, and at the macro (government) level, we use GDP. Both do not consider stakeholder interests, who, in reality, contribute more significantly to wealth creation and well-being than financial considerations. They have to change these inadequate and inappropriate measures for more inclusive and balanced measures.
3) Poor investment culture.
We don’t have a true investment culture but are rather short-term traders. Shares have become commodities which people trade in, based on short-term, insignificant markets “blips,” which create trading opportunities. Short-term market “blips,” such as quarterly earnings, rumours or other minor market information, do not distract true investors. They have a long-term vision and commitment, which they stick to through thick and thin, like true owners. This creates market stability and long-term growth. A short-term trading mentality creates instability and poor long-term results. However, this is precisely the outcomes the trader wants - instability and significant market fluctuations, as this allows them greater trading opportunities and therefore, profit. Long-term prospects don’t concern them as they can divest in the blink of an eye. While this favours the wealthy one per cent, it certainly does not serve the interests of the majority - it hurts them. Often workers, suppliers and the community have more “invested” in the business than “short-term share certificate holders,” who can divest themselves easily, facing little or no loss. Shareholders are, therefore, not owners as they have little or no commitment to the business. They appoint professional managers as their proxy owners to run the business. These managers ensure they serve their paymasters by optimising short-term profits and dividends. They achieve this by stripping value from stakeholders whose interests are not measured and therefore remain hidden from the market. Unfortunately, stripping value from stakeholders to bolster profits and dividends weakens the business over the long-term. This explains why business longevity is in decline.
4) Expanding rentier economy.
In a neoliberal economy with low taxes, the idea is that the wealthy will use their discretion and reinvest in our economy. This is part of their “trickle-down” theory. Unfortunately, it doesn’t work. The money is instead directed out of our main, or “active” economy into the rentier economy. Investment in the rentier economy represents non-productive investment, as well as hurting the active economy, which has lost this crucial investment. The majority relies on the active economy for their income, which needs this investment to grow and prosper. Therefore, the majority suffer. Investment in the rentier economy seldom returns to the active economy because risk an returns are more favourable in the rentier economy.
As soon as taxes are lowered, individuals exercise discretion over the money not taxed, using it to serve their needs and not those of the common good. Governments, by retaining taxes, invest in common assets and the common good, which ultimately benefits all. The more governments lower taxes on the rich who already have high discretionary spending, the more will be directed into the rentier economy. Tax relief on the middle to lower-income groups, on the other hand, stimulates the active economy, as they have little discretionary spending power and will spend what they have in the active economy. There is a more sinister aspect to neoliberal policies which drive economic inequality, and that is the wealthy one per cent use the increasing financial hardships on poorer people to implement practices which allow them the opportunity to “vacuum up” more profit through their rentier based businesses. Trickle-down does not work, but vacuum up does. The wealthy one per cent are using the economic hardship they create, as a tool to enrich themselves even further.
5) Wrong belief system.
As a society we value production - the things we produce while paying no regard to the resources which allow us to produce them. Until we reverse this and value our productive resources more than their outputs, we will continue to destroy what sustains us. To a degree, this has to do with our measurement standards. Reports like CSR (Corporate Social Reporting) are inadequate and inappropriate and need changing. The problem has more to do with a complete change in everybody’s perceptions. We all understand we have to live within our means, but to us, we interpret that as “what we can afford to buy.” We live with this ridiculous notion of “entitlement.” If we work hard, we are entitled to do whatever we want (within the law) because we have earned the right to buy and consume wantonly. Nobody ever earns that right. We have a social responsibility to live within our ecological means. We cannot exceed these as then we infringe on the rights of others and harm our supporting resources. This is incorporated in what I call IT (Inclusive Theory), which explains how we are all part of the same system and individually and collectively responsible for its smooth functioning. Entitlement is a concept heavily promoted by vested interests as it drives rampant consumerism which is financially profitable, but environmentally disastrous.