Recycling for a living in South Africa. (Credit: Jan Truter/Flickr)
Recycling for a living in South Africa. (Credit: Jan Truter/Flickr)

The opportunity to redesign the foundations of social systems rarely arises. The zeitgeist does not encourage systemic changes that threaten the status quo. Furthermore, people tend to prefer to live with ‘the devil they know’, rather than risk changes with uncertain outcomes. In many countries today, however, substantive change is essential, for at least two reasons.

First, stress levels imposed by dysfunctional economic conditions have become intolerable for a critical mass of people. Second, repetitive errors which stem from decisions by governments have persuaded people there is something fundamentally defective in the methodologies employed by policymakers.

One outcome is paralysis in the formation of public policy. This is most visibly demonstrated in the United States. The Trump administration is failing to implement the changes promised by the president, despite Republican control of Congress. Policy paralysis is also evident in Europe.

This state of affairs may stem from the lack of agreement on the causes of systemic failure and the analytical tools required to formulate new strategies. This paper examines some of the reasons behind these failures and suggests guidelines on how agreement might be reached in order to support policies which may achieve better outcomes.

The starting point for an examination of the viability of social systems is agreement that neither capitalism nor socialism has overcome the legacy problems of the past. These problems include persistent unemployment (or under-employment), gross levels of poverty (and the associated issue of inequality), and the systematic abuse of natural habitats. The list is a long one. It is composed of issues that have featured in societies throughout the past 300 years of modernity.

Is it possible to identify a social paradigm that is free of the defects associated with past and present social formations? Attempts at visualising such alternative models (including those articulated by Plato and Thomas More) proved to be utopian. Might we, with the benefit of hindsight, now be able to formulate the foundational elements of a viable social structure that empowers people to diminish (for example) inequality both within, and between, countries; and which can be negotiated, designed, and introduced within the timeframe determined by current and looming global crises? If a practical alternative social paradigm does not exist, the choice is then between piecemeal remedies: palliatives that mitigate the damage to people’s lives from within extant social systems.

The answers to these fundamental questions will emerge from sustained dialogue. The immediate need, therefore, is to define the method for nurturing such informed discourses.

Conversation is the essential prelude to the popular mandates that are required, if the qualitative reforms, which are essential to peace and prosperity, are to be authorised by people at large.

1. Identify what does not work

Intellectual space needs to be created so that people can engage in innovative thinking. The starting point is agreement about the ideologies and false facts which serve as barriers to honest discourse. What has not worked in the past to resolve persistent problems? One step towards such a consensus is agreement on what it would take to achieve the end-goals of reform.

1.1. If the goal is inclusive development, why have existing forms of social organisation persistently failed to deliver this outcome? Are poverty, social injustice, and economic underdevelopment features of both the capitalist and socialist models? Facts relating to the unequal treatment of people, and the cyclical dislocation of economic activity, ought not to be contested. Objective conclusions can be reached by reference to historical records.

Does the persistence of these issues tell us that the causes are embedded features of societies? Which of the social formations are more prone to problematic stresses? Or are the failings (poverty, for example) the consequence of individual choices, for which the institutions and laws of society should be exonerated?

We do not generate adequate answers by simply ranking the performance of countries. The best performing countries (for example, in relation to corruption) are not free of the problems which afflict others to a greater degree. Nonetheless, questions need to be asked about why some countries are happier, or more prosperous, or less unequal than others.

What is special, for example, about Denmark and New Zealand? They are the least corrupt countries in the world (Transparency International, 2016). Denmark was in second place in the UN-backed World Happiness Report 2017, and the quality of its housing stock is deemed the best in Europe. Should there be a forensic examination of Denmark’s social, economic, and political history, to discover the lessons which might be excavated? But is our analytical apparatus fit for such a purpose?

1.2. Globally, over the course of the second half of the twentieth century, the number of people whose lives were prejudiced by ‘inequality’ was reduced. Was this attributable to the invention of new strategies for producing and/or sharing income? Or was it the result of relief from constraints previously imposed? If the decline in inequality was due to the dismantling of the socialist-style command economy, it is not likely that emerging economies or rich countries will learn anything new from the transition to purer forms of market economics, whose record is blemished by inequality on a significant scale.

An attempt to negotiate a way forward between capitalism and socialism was made by Tony Blair during his ten years as prime minister of the UK. His Third Way experiment collapsed when Britain became one of the victims of the 2008 banking crisis. This failure came on top of Western Europe’s experiment with the welfare state: over the course of 70 years, no country managed to secure sustained economic growth or eliminate the stresses corroding social solidarity. Despite three generations of legislation and income redistribution, levels of income inequality and the premature deaths of low-income people are rising. At the very least, this tells us the instruments employed by the welfare state were insufficient. In other words, they accommodated the root causes of social problems. What are those root causes?

1.3. The world has now embarked on a digital revolution. Many people believe this is the cause of new levels of economic and social inequality. But we know from history that new waves of innovation have always been associated with the loss of traditional occupations. What can we learn from that history, to confirm or refute the popular belief that artificial intelligence and the internet are the causes of social grief? Might there be a common denominator, embedded in the structure of the system, which continues to wreak havoc in people’s lives? Is inequality a symptom of a structural flaw, rather than a technical innovation like the combustion engine or robotic power?

Like previous innovations which flowed from the accumulation of new knowledge, the digital revolution is reducing the costs of production. Why is this not good news for everyone? Why blame artificial intelligence per se for the loss of welfare? Is there a structural reason why cost-saving innovations are necessarily linked to a reduction in the quality of people’s lives?

We need to isolate causes, instead of describing symptoms as if they were causes. Poverty, for example, is attributed to low incomes. But what constrains the incomes of a part of the population? Robert Reich (2017), a professor at the University of California, Berkeley, claims that the decline in the real value of wages over the past 40 years has its “root” in the detachment of incomes from trends in productivity.

Reich does not, in fact, identify the root cause. He offers tautology. We need to understand what stops the gains from increased productivity from being shared by those who live on wages. Much of what passes for economic analysis is no more than superficial description. One reason for this is that analytical tools are seriously deficient.

2. Analytical tools

The repetitive failures of government policies imply that there is something fundamentally flawed in the realm of economics as the discipline on which governments rely most heavily for the formulation of policies. This was recognised long ago. In his presidential address to the American Economic Association in 1970, for example, Wassily Leontief offered a profound critique of his discipline. The problem lay in the infatuation with mathematics, he declared, which had detached economists from reality.

In no other field of empirical inquiry has so massive and sophisticated a statistical machinery been used with such indifferent results…

This harsh verdict on 200 years of theorising came as a shock to the economics profession. Leontief urged his colleagues in academia to improve their performance:

To keep the automatic, or rather the semi-automatic, engine of our economy in good working order we must not only understand the general principles on which it operates, but also be acquainted with the details of its actual design (Leontief, 1970).

The appeal to reality made little difference. Economics remained locked in unreality, as noted by Herbert Simon who, like Leontief, was a Nobel Prize winner. He analysed the false basis of one of the key organising concepts of post-classical theory (rational expectations) in the following terms.

Although the assumptions underlying rational expectations are empirical assumptions, almost no empirical evidence supports them, nor is it obvious in what sense they are ‘rational’ (i.e., utility maximising). Business firms, investors, or consumers do not possess even a fraction of the knowledge or the computational ability required for carrying out the rational expectations strategy (Simon, 1996, p.39; emphasis added).

If the flawed nature of the analytical tools was understood, at least by some practitioners, what could the explanation for this state of affairs be, other than that governments were willful in persisting in their use of defective information that leads them to employ defective policies? Whatever the explanation, a thorough re-evaluation of the concepts applied in policy-making is needed. Two examples illustrate deficient research outcomes and policy formation.

2.1. The concept of wealth is routinely employed to discuss problems such as inequality gaps, and funding issues related to infrastructure in the public sector. Governments claim that it is necessary to tax wealth. Used in this way, the concept may lead to serious misunderstanding about the nature of problems. Does the concept also mislead policy-makers about the appropriate remedial strategies?

The concept fails to differentiate between two distinct classes of assets:

  1. Assets that are active: owners engage in value-adding enterprises that create jobs and add value to a nation’s total income;
  2. Assets that are passive: owners engage in rent seeking who are most concerned with appropriating other people’s earned incomes.

By focusing on wealth as a taxable asset, fiscal policies that impose ‘deadweight losses’ on working people are adopted. Governments have the choice of raising revenue without imposing such losses (the losses flow from what is technically called the ‘excess burden’ imposed by certain taxes). By choosing taxes that damage people’s incentives to work, save, and invest, governments become part of the social problem. They contribute to the creation of inequality, unemployment, and the constraints on social development.

2.2. The concept of capital is employed uncritically by economists. When this usage colours public policies, economists become part of the problem rather than contributors to solutions. Consider, for example, the global acclaim directed at Thomas Piketty.

In Capital in the 21st Century, the author argues that the central problem is summarised by the formula r>g: that is, the growth in the private rate of return on capital (r) exceeds the rate of growth of income and output (g). This leads to the conclusion that, for remedial purposes, a heavy tax should be levied on the richest one percent of the population. This use of capital makes no allowance for the possibility that the return on land (an asset in fixed supply, which is treated as a species of capital) may increase, over the long term, while the rate of return on man-made capital, which is infinitely reproducible, may decrease over the long term. By distinguishing between these two forms of assets, a more nuanced fiscal strategy might commend itself, compared to penal tax rates on ‘capital’ (as with capital gains taxation).

The defect in Piketty’s analytical framework is confirmed in a discussion which he heads, called “The Mystery of Land Values” (Picketty, 2014, p.196). The mystery of land values (if it ever existed) was dispelled by David Ricardo early in the nineteenth century. But Piketty insists on treating land and its value as a mystery. Might this explain why his policy recommendations are not capable of resolving problems linked to the mal-distribution of income?

If economists continue to employ concepts that confuse themselves, it is not surprising that lawmakers should be directed to policies that fail to resolve the problems that afflict their societies.

3. Palliatives versus structural reforms

The notion of ‘reform’ is routinely employed without acknowledging the difference between short-term measures that offer transient relief, and changes to the structure of society. One consequence is the application of policies that are not fit for purpose; policies, in fact, which may even aggravate the problems which they are supposed to resolve.

Pure palliatives are needed, such as supporting people who are rendered unemployed. They need financial support while searching for new employment, or while retraining in skills that are in demand.

3.1. Palliatives may mitigate the damage caused by dysfunctional social arrangements, but as a consequence, they also accommodate the causes, permitting these to mutate deeper into the body politic.

Palliatives include regulations that are intended to constrain (say) monopoly power, but which do not remove the basis of that power. These measures need to be distinguished from palliatives that have the added benefit of shifting the system in the desired direction, such as first-step measures which, although palliative in themselves, equip governments to push further in the direction of eradicating a structural problem. An example is the partial implementation of a fiscal policy which, to an extent, deters dysfunctional behaviour; and which, when extended to its logical conclusion, completely eradicates such behaviour.

3.2. Structural reforms are those measures that are intended, from the outset, to erase the causes of undesirable behaviour. An example is that of the outlawing of slavery in the British colonies. Such reforms exercise an immediate effect in altering the quality of people’s lives.

4. Transparency and accountability

Advice on how to combat inequality is offered as if the analysts have at their command all the relevant information. Could it be that the quest for solutions is compromised by defects in the available information? Are the institutions that are charged with collating information failing because of the lack of transparency and accountability? An example is the advice from the OECD that Asian countries should increase their tax-takes, to fund programmes that would reduce inequality and elevate rates of economic growth. But the OECD routinely fails to offer a full impact assessment of the negative consequences of the tax policies that they commend to governments. Could those taxes be part of the cause of inequality?

Consider, for example, the recommendation in the 5th edition of the OECD’s biennial comparison of public sector performance in major economies. The biggest share of public investment (a third) goes into economic areas like transportation and energy. The next biggest share (15 percent) is on defence. The OECD concludes that public investment in areas like infrastructure, technology, green energy, and education should have a positive impact on employment and healthcare. It, therefore, recommends increased spending out of additional taxation. But the OECD fails to calculate the degree to which growth may be retarded by the ‘excess burden’ of the taxes that it advocates. Does this mean that the OECD contributes to what is called the ‘democratic deficit’?

5. Conclusion

Given the historical record, we have to assume that, under current social and economic conditions, problems such as inequality within countries will continue to grow in both developed and developing states. This means that destructive political and social emotions will continue to be nurtured, of the kind that spawned the rise of the populism that rejected mainstream political leaders in recent years.

Is there a critical level of inequality, at which point the social edifice collapses? If humanity is to address the existential threats that are now emerging, a fresh approach to research and the analysis of contemporary problems is needed. New questions need to be framed for old problems, a few of which are identified in this conclusion.

5.1. Learning the good lessons. To harmonise relationships between nations in the multipolar world, comparative research is needed to isolate the features common to countries whose records are acknowledged as exemplary. For example, are there elements common to:

  • Denmark: The country is consistently ranked as the happiest on earth (second to Norway in the 2017 rankings). What created that social wellbeing? (Rankin, 2017; Geggel, 2016).
  • Australia: From scratch in the mid-nineteenth century, a modern economy was created which yielded a per capita GDP greater than any other nation by the end of the century. What was at the heart of its development model?
  • Hong Kong: A resource-poor jurisdiction’s per capita GDP ($43,681 USD, 2016) exceeded that of the resource-rich UK ($39,899 USD). The UK established the former colony’s development model. Policy-wise, what was applied in Hong Kong that was absent from practice in the UK?
  • Singapore: Similar comparisons and questions arise to that in relation to Hong Kong.
  • Taiwan: A development formula was applied in the 1950s which transformed a desolate island economy into the first Asian Tiger. What was ‘the secret’?
  • Japan: Confronted by American gunboats in the 1850s (Commodore Perry wanted the country to open up to the export of US-made products), Japan reacted with rapid industrialisation without disrupting a unique cultural heritage. How was this accomplished?

A comparative analysis of such achievements may reveal common themes of relevance to low-income nations today. Those insights may affront the standard economic model, but that tells us that there is a need for new centres of learning. Might such research centres be sponsored by countries that are vulnerable to the hegemony of conventional wisdom?

5.2. The ‘international order’: Many problems within sovereign nations arise from relationships with other nations (stemming, for example, through trade). The treatment of these problems assumes that the loser nations are in some way weak vis-à-vis the rich nations. But is that weakness a congenital consequence of their inherent social and/or natural endowments, or the result of defects in their forms of governance (of the kind that can be remedied)? Are low-income countries really dependent on modifications to global governance (over which they exercise little influence)?

Rather than focusing on the terms under which trade is conducted, might they be better advised to expand the discourse on internal changes to their forms of governance? This issue may be posed another way: are weaker nations free to detach themselves from dependence on cash-rich developed nations? What would a model of autonomous development look like? China, for example, was not hamstrung by international norms when it decided to abandon the command economy. By deploying its comparative advantage (as it then existed: cheap labour), it was able to accelerate economic growth.

But is the Chinese model replicable? Even if it were, is it desirable? i.e., is it free of the problems intrinsic to capitalism? Has China unwittingly seeded the malevolent mechanisms that undermine balanced growth and social stability in western countries? If so, the Chinese model is not one that commends itself, if the goal is stable long-term economic growth and equity in all realms of society.

5.3. The Westphalian model: Has the standard political model of the nation-state now exhausted itself? The question arises because a new doctrine has emerged within the European Union that asserts that citizens have human rights that are not contingent on legal norms prevailing in the sovereign jurisdictions where they live. Those rights, apparently, are transportable across borders.

This poses problems, which have yet to be addressed. Many questions warrant further research, for in the past the nation-state model was associated with fearsome breakdowns in the social order. Some questions include:

  • Does investment in the military sector steer nations closer to global harmony? How might those resources be better used?
  • Might humanity’s problems be located in the nature of ‘soft power’ – the cultural traits that have the capacity to steer towards either peace or territorial conflict?

What would an alternative form of geopolitical settlement look like? This raises anew the issue of the status of international treaties, which cannot be explored without greater care in the use of basic concepts.

5.4. Linguistic analysis: Greater attention needs to be directed at concepts that are in routine use because policy analysis is bedevilled by concepts that serve as barriers to progressive reforms. Politicians who wish to avoid close scrutiny of their proposals, for example, often deploy the word ‘sustainable’. People assume that they understand the meaning of the word, so they fail to subject proposals to close examination. Some of those concepts have become ideological mind-benders: they confuse rather than clarify issues.

The process of clarification needs to begin in the scholarly literature. More comprehensive treatments are needed, to distinguish between policies that are capable (in principle) of uniting a population (by reducing social frictions and enhancing cohesion) and those that would disunite people. This entails, for example, agreement on the terms of an auditing process for discovering the prospective outcomes arising from policy initiatives.

This issue may be illustrated by reference to the concept of ‘human rights’. The problem with the UN Declaration of Human Rights, for example, is that of enforcement. Human rights are routinely abused by all members of the UN: no country is free of poverty, unemployment, and unaffordable shelter – problems that would not exist if people’s human rights were honoured. The discourse on human rights needs to be enriched.

How, for example, would people’s life chances be enhanced if human rights were matched by an equally robust agenda on human responsibilities? Rights are asserted without acknowledging the corresponding responsibilities. Claims could be directed against governments that entail increases in public expenditure. The claimants do not explain how the resources are to be raised. Nor do they account for the collateral consequences arising from the taxes that are usually employed to raise those resources.

The foregoing issues indicate that there is an urgent need for a new discussion on the methodology for designing social systems.

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Fred Harrison
Fred Harrison (born 1944) is a British author, economic commentator and corporate policy advisor, he is Research Director of the London-based Land Research Trust. He is notable for his stances on land reform and belief that an over reliance on land, property and mortgage weakens economic structures and makes companies vulnerable to economic collapse. His first book, The Power in the Land (1983), predicted the economic crisis of 1992. He followed this with a 10-year forecast (published in The Chaos Makers [1997]) that a global financial crisis would be triggered when house prices peaked in 2007. He studied economics at Oxford, first at Ruskin College and then at University College, where he read Philosophy, Politics and Economics. His MSc is from the University of London. Fred’s first career was in newspaper journalism, most notably at The People newspaper, where he became chief reporter. After a move to Economics, initially as Director of the Centre for Incentive Taxation, he spent 10 years in Russia advising their Federal Parliament (Duma) and local authorities on property tax reform and establishment of land markets. Since his return to the UK he has worked as a corporate business advisor, research director, writer and lecturer. Harrison is inspired by the writings of American political economist, Henry George. He has written for a number of newspapers and magazines and his books are widely distributed.