Systemic Behaviour, And The Challenges Of The 2020s

Thursday, 23 April 2020, 4:48 pm
Article: Keith Rankin

The System – The Whole

Good systemic behaviour is acting for the good of all, not by making altruistic sacrifices but by following the golden rule ("behave towards others as you would have them behave towards you"). Or put another way, by acting to strengthen the whole, in the process we strengthen each part. So systemic behaviour is holistic behaviour. It can be summarised through the maxim: 'be kind'.

The question to ask of ourselves (and our businesses) is: 'if I do something and others in a similar situation also so that something, will the whole be harmed'? If the answer is yes, then we should choose to not do that something, and so would those others faced with similar circumstances. The problem is that if one (or a just a few) make the wrong choice it may give them a competitive advantage over those who make the right choice, thereby pressuring those who initially made the right choice to change their choice.

A simple example might be dumping effluent. If one business dumps its effluent in the nearest river, and its competitors pay to have their effluent sustainably processed, then the cheating business incurs lower costs and can then tender at a lower price. Governments and others, who tend to pay the lowest price possible, will purchase more from the bad business, and less from the good businesses. This places pressure on the good businesses to 'go bad'.

The Invisible Hand

In economic liberalism – also known as classical liberalism (or for purposes here, 'liberalism') – the maxim is that the best way to be kind is to act in a self-interested manner. This is summarised by the metaphor of 'the invisible hand'; the metaphor given to us through the political economy of Adam Smith, in the eighteenth century. The idea is that by acting in a manner of 'enlightened' self-interest, it is 'as if' there is a governing spirit that allocates resources and opportunities in ways that could not be bettered by governing institutions.

This idea that wellbeing (we'll take it here as human wellbeing, while acknowledging that the 'whole' is wider than the human whole) can be maximised through self-interested behaviour contains a number of caveats, and is by no means equivalent to anarchism.

One of those caveats is that there is a small, powerful and honest state; what Smith's English contemporary Jeremy Bentham called 'Police'. The state constituted a legal environment which, most importantly, recognised and enforced private property rights. The presence of an invisible hand did not mean the absence of a visible hand. (Good names for Bentham's 'Police' are THEY or THEM, as in "why don't THEY do something about …?")

The second caveat is the word 'enlightened'. In 'liberalism' this means 'not breaking the golden rule', rather than explicitly following the golden rule. Thus, behaviour that is clearly harmful to others could not be classed as enlightened. Libertarians tend to interpret this as 'harmful to identifiable others', rather than as harmful to society as a whole (they tend to downplay 'society') or 'harmful to the planet'. Further, behaviour that may be harmful but is not obviously harmful fosters ignorance – indeed wilful blindness – as a way to tolerate self-interested behaviour that may be harmful to others, or to the whole.

(If we consider my earlier example, voluntary unawareness of the harm a business does by polluting a river can give that business a competitive advantage without it having to admit to cheating.)

A third caveat is that Adam Smith's conception of the whole was the nation state; in his case, Great Britain. To be fair to Smith, he was not an economic nationalist, and he believed that if people in other nations behaved in the enlightened way that he believed British small businesses did (by and large) behave, then that would strengthen humanity as a whole.

A fourth caveat was Smith's use of the word 'frequently'. So, even within his framework, he was not casting an economic law; rather expressing a rule of thumb.

The legacy of Adam Smith's economic liberalism – and that of his liberal precursors such as philosophers John Locke and David Hume – is that governance came to be understood as creating the institutions and policies which would best facilitate the market and private property mechanisms that underpinned the 'invisible hand'.

The Unkind Reality of Primitive Capitalism

Much of what we say and do is not kind. Indeed, bureaucrats can be very unkind; in the ways they apply their rules, and in their preference for systems with rigid sets of rules.

One form of unkindness which I have written about recently is mercantilism, where life is conceived as a competitive struggle with winners and losers, and where the perceived winners are the parties who accumulate the biggest hoards of money. (An irony of mercantilism is that, from an historical perspective, the 'winners' may actually be the losers. This explanation requires a separate essay; for a clue, however, consider two large countries, one of which has a trade surplus every year for a century, and another which has a balance of trade deficit every year for a century.)

Adam Smith's most famous book – The Wealth of Nations (1776) – was an attack on mercantilism (the "mercantile or commercial system" as he called it). Smith was against mercantilism, but what was he for? Smith turned out to be for an individualist system that can be best described as 'primitive capitalism'; a capitalism without a public component that went beyond Bentham's 'Police'. While we might have a sophisticated (if fragile) capitalist world economy, we do not have a sophisticated understanding of capitalism. We cannot properly evaluate our systemic whole without a theory of public liberalism that complements the existing theory of market liberalism.

While mercantilism is often understood as a zero-sum game (where winners and winnings exactly offset losers and losses), it is under many conditions a negative-sum game, where the losses of the losers outstrip the winnings of the winners. In an unkind world, the winners do not care about the losers' losses.

In the two centuries of history since the Industrial Revolution (eg since 1820), the era of global economic growth, it can easily be argued (though certainly not universally argued) that the predominant human experience has been winning. That experience has been called economic growth; and global economic growth has been a byproduct of our hybrid (oxymoronic?) liberal-mercantilist order. (Economic liberalism itself is not about growth; rather it is about efficiency, the maximisation of per capita happiness through the mechanism of the marketplace.) The energy that has given us 200 years of economic growth has been that of mercantilism, the human drive 'to make and accumulate money'.

This mercantilist drive has yielded many societal benefits, though as byproducts. It is also capable of yielding substantial systemic harm. Further, the productivity benefits that have happened might have been greater (and better distributed) had that mercantilist drive conferred more value to the public commons that primitive capitalism exploited, and paid more heed generally to the sustainable and equitable proprietorship of public resources.

Racing to the Bottom

We have all heard the terms 'race to the bottom' and 'arms race'. In the 1960s' the global arms race led to both technology-fuelled economic growth, and the terror that human (and other biological) existence might be destroyed in a nuclear holocaust. (The new cold war between the United States and China has a hint of a technological arms race not unlike that of the 1950s and 1960s between the United States and the Soviet Union. China holds most of the cards' in particular, it is the main supplier of the 'rare earth' materials that make our connecting devices possible.)

A race to the bottom occurs when we (as individuals or organisations) act – either cynically, in response to competitive pressures, or through wilful blindness – in ways that create gains (or perceived gains) to us while creating bigger losses to others. We understand this as cheating or 'corruption'. But it's more nuanced than that.

We see this when manufacturers pollute, and when land speculators drive up the price of land by making it unaffordable to all except other land speculators. We see it when we trade wild animals for profit, while being unwilling to pay enough to prevent one group of animals from infecting another. We see it in the lethal drugs trades, whether those lethal drugs be illegal (eg methamphetamine), prescribed (eg fentanyl) or legal (sugar fizzy drinks). The impulse for some to 'make money' outweighs (to them) the harm that they do to others. We see it when rich people and rich organisations seek to avoid paying taxes; they argue that they do this to gain a 'competitive advantage' (which is a mercantilist concept). We see it more generally as a process of miserliness, where people take money from the circulatory system without giving back to it. And we see it in the labour exploitation practices that exist to some extent in every part of the world.

While systemic actions may counter these races to the bottom, real-world competitive pressures make it difficult for individuals and capitalist organisations to make systemically beneficial choices. Hence we need institutions of governance – especially but not only governments – which we expect to act in ways which offset the private behaviours that are subject to 'market failure'.

Economic liberals play down the extent of market failure, and also argue that governments are rarely competent enough to make good offsetting decisions. That's a cop out. Democratic governments exist to make systemic decisions; to do so they have powers (albeit constrained) to levy taxes and create money. (Indeed, many non-democratic governments make many good systemic decisions, though they are not mandated to do so.) Only anarchists believe that governments are not needed to offset 'race to the bottom' behaviour. (Anarchists believe that individuals are inherently good, and universally choose to refrain from unkind behaviour.)

Money and Affordability

It is in matters of money that we find it hardest to behave in systemically beneficial ways. This is for two reasons; the first is our general ignorance of money (and by that I do not mean 'financial illiteracy'). We (including many finance professionals) think of money as if it was inherently scarce; for the very good reason that for individuals and organisations it is scarce, and rightly so. Money would lose its utility to households and businesses if its value could be undermined by, for example, counterfeit.

Monetary theory is one area where economic liberalism falls flat. To economic liberals, the money supply is very much the tightly guarded responsibility of the inner 'Police', but not of the sovereign governments which they have never trusted. Throughout history, classical liberals have worried about the possibility that there could be too much money compelled to circulate, and that this might lead to an inflation that would depreciate the purchasing power of misers' caches of unspent money.

Thus, economic liberals have always mystified money, playing down the reality that, to THEM (the Benthamite 'Police') money is infinitely cheap and can be created at will. (Felix Martin, in his 2013 Money, the Unauthorised Biography – suggests that John Locke, the founding father of economic liberalism, simply did not understand money. Nevertheless, due to his reputation as a philosopher, Locke's naïve views on money prevailed in the public mind, despite there being other people in banking and commerce who did understand money.)

Much political theatre has been made by journalists asking politicians standing for office "where will the money come from?" to pay for their policies. These journalists faithfully reflect liberal-mercantilist assumptions that money is, in effect, a commodity like gold.

There are only three answers that aspiring politicians can give to this journalistic question. The first answer is that money could be reallocated from some other public use. Almost all people standing for office give a variant of this answer. The second answer is that new taxes will be raised, meaning that the future government will have more and the government's private subjects will have less; this answer is generally seen as political suicide. The third (and honest) answer – the one that leads to ridicule (ask Russel Norman who contemplated 'quantitative easing') rather than political suicide – is that, in the event of a systemic money shortage, the Government can borrow what it needs from the Reserve Bank (in essence, the people can borrow from the people, the stock-in-trade of Japan's Abenomics). (This option is pejoratively known as 'printing money', and is dismissed at 'inflationary' by classical liberals.)

The important thing to note here is that a country's monetary system is controlled by THEM, in the form of a partnership between two public (and publicly accountable and publicly owned) institutions – the Government and the Reserve Bank. At times of monetary shortage, we need the Reserve Bank to mark up its balance sheet by advancing credit to the Government, and we need the Government – notionally in debt to the Reserve Bank – to ensure that the new money circulates. It means that there is never any need to have poverty amidst plenty. Any decision to have too little money in circulation is an unkind – indeed cruel – political decision. There is no need to have a general economic depression of trade during or after a public health emergency such as the present one. There is no technical reason that constrains the supply of money. Those who are empowered to act systemically for the good of the people they are accountable to, should indeed do so.

(We note that, for federally constituted nations, the money-creation mechanism is only available at the Federal level; the politicians subject to journalists' questions will in many cases be operating at the provincial level. In this sense we note that Greece – and indeed France – are mere provinces of the Eurozone of the European Union.)

It would very much help if each nation had a mechanism already in place through which they could channel new money directly to the people. A system of universal productivity dividends (eg a basic universal income) is such a mechanism. When economic citizens are already receiving regular tax-funded weekly dividends – and no matter how small those regular dividends might be – then a time that would otherwise be an economic depression can be a time to raise those dividends to facilitate the circulation of new money.

To individuals, something is affordable if they have sufficient money or credit to buy it. At the systemic level, however, affordability means something quite different; it's about whether resources such as labour or machinery can be deployed or redeployed. Sometimes items are not affordable to governments even when they have the money – eg houses can only be built if there are available builders. Other times items are affordable when governments do not have money; indeed much infrastructure was easily affordable in Auckland in the early 1990s, but was not purchased by government in the belief that it was unaffordable; a belief that prevailed despite there being many unemployed builders and hundreds of thousands of unemployed workers.

International Systems

One oft-cited constraint on domestic policies is the requirement to be internationally competitive. This is code for, if other countries are breaking the rules then our country must too. Thus, the workings of the international economy constitute a race to the bottom that cannot be offset by a global 'Police'. (There is no global 'Police', the international economy is, literally, an anarchy.) There are ways to offset the unenlightened behaviour of other nations; for example, by restricting imports from foreign suppliers who do not pay all their costs; in the jargon, those suppliers who do not 'internalise' all their costs.)

It is also often claimed that countries which create too much money (or which are not fully trusted by the international community), will have their money depreciated. This has been a problem traditionally faced by Latin American nations. Additionally, centre-left governments in countries like New Zealand have been seen by international bankers as less trustworthy than centre-right governments; making centre-left governments especially cautious about running technical debts to their Reserve Banks.

In a liberal economic order, as conceived by Adam Smith for example, commerce would be conducted by a myriad of small to medium sized businesses supplying goods and services to households and other businesses. In the mercantilist order that Smith critiqued, governments conferred special 'monopoly' favours on small numbers of large businesses; businesses that played the international competitive advantage game with the military backing of their states, and which acted as agents of foreign policy as well as of commerce. Examples of these privileged companies include the various East India Companies, and the Hudsons Bay Company.

The reality then, as now, was a mix of big and small businesses. Likewise, the global reality is a mix of big and small countries. In the absence of a formally constituted global 'Police', it falls on the big companies and the big countries to act in systemically helpful ways; in ways that small tradable businesses and small nations cannot be expected to act. One form of systemically helpful behaviour is to support effective global institutions, such as the United Nations. Another way would be to enable the International Monetary Fund to operate as a global Reserve Bank (as per John Maynard Keynes' original vision presented at Bretton Woods in 1944).

In the absence of effective global governing institutions, we look to nations such as the federal United States, China and European Union to take a global perspective in their decision making. Of the three, China has probably taken on this role more clearly than the others, since 2008. Indeed it was Chinese leadership that saved the world capitalist system from the financial blight of 2008 (the Global Financial Crisis). (While many have reservations about China's domestic strictures, and indeed some of its global motives, nevertheless it did act to revive the global economy and sought to invest its surpluses in capital-poor regions such as Africa.) The United States has conspicuously absented itself from any obligation to act in a globally supportive manner, since 2017. And the European Union has, since 2008, waged its own North-South economic civil war. It now acts principally to maximise its annual trade surpluses with the rest of the world. The European Union and the United States, at present are mercantilist organisations, looking to their perceived competitive advantages within the world rather than to the wellbeing of the world as a whole.

The good news is that some smaller nations have assumed leadership roles beyond what would normally be expected of them. I count New Zealand among these.

In Summary

The human world of 2019 faced huge systemic challenges; challenges that could be understood by observing which behaviours were supportive of the whole, and which behaviours diminished the whole.

In 2020 we have the more immediate global challenges posed by the Covid19 emergency. The necessary immediate responses relate to the need for our governmental organisations to ensure the required monetary support; support to ensure that our scaled back economies operate productively, efficiently, and justly. The correct political responses to the Covid19 emergency will also be the responses that help us to address the pre-Covid19 challenges.

© Scoop Media

Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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