Solving the Central Problem of Economics

Ian Choo

This essay is Ian’s entry to the 2010 Peter Drucker Challenge where his essay was ranked within the top 10 entries. Congratulations, Ian!

“The disappearance of Labour as a factor of production is the unfinished business of capitalist society” – Peter F. Drucker

The challenges facing the 21st century will in some ways are a continuation of the problems that have plagued the human condition since the beginning of time; in other ways, they will be vastly different from the ones faced by the times preceding it.

The central problem of economics is essentially the problem of scarcity – a world vexed by the contradiction of unlimited wants in a state of limited resources to fulfil these wants. Organisations controlling factors of production, united by the monetary system and guided by the long arm of the nation state have led many of us in the developed world to live in a world of material plenty.

Products were created by the market to satisfy even the most obscure of wants; human life expectancy in the last 50 years has soared through advances in medical technology; record numbers of humanity have claimed the right to education. It would seem that if there was a utopian end state of history, humanity was relentlessly advancing closer toward it.

However, whilst we had our eyes firmly set on the future through refining the efficiency of production – it is issues of distribution which will pose some of the greatest threat to social stability in the next century. Capitalism, in its own internal logic[1], has a relentless pursuit to do more with less, which in the course of the 18th to 20th centuries, has manifested itself as quantum increasing in productivity. No where is this effect more apparent than in agricultural productivity – which has proven Malthusian predictions of a looming global famine wrong (at least up till now).

Much more with less, but for who?

Ironically, it is this exact same logic that is seeing capitalism break down in its other function – as a system of allocation of output. Relentless advances in technology, mechanisation of processes and a new global division of labour are creating new winners and losers.

It would seem that if the current global economic system is taken to its logical conclusion, humanity is faced with an inherent contradiction – a world having the highest productive potential it has ever had historically – but lacking the ability to distribute this output to in a world plagued by persistent structural unemployment.

In an economic sense, this has in recent times shown up as a demand-side deficiency in much of the developed world, and poverty outside it. These are all manifestations that have arisen gradually from Labours’ disappearance as a factor of production in a global knowledge-based economy – and consequently, wages as a system for allocating production to the satisfaction of human wants.

Why doesn’t traditional redistribution work?

The traditional agent of redistribution – the nation state – has found itself largely crippled in trying to tackle this problem of redistribution. Progressive taxes and the welfare state, as the key instruments of distributive justice administered by the nation state, have struggled to cope in a global world where as Drucker puts it, “Capital knows no fatherland, and neither does Knowledge”. The Labour Union, the traditional countervailing force to the exploitative tendencies of capital, continues to suffer an existential problem in the same world where the alternative to a poorly paid job is no job at all, as companies have the option to pack up and move somewhere else in search of a better return.

With a few notable exceptions in the post Cold War era, the general trend in governance around the world as been movement toward an more minimal state – with increasing focus being put on improving economic competitiveness and access to global markets rather than reducing inequality and providing economic security within the confines of their territories. Many detractors started to call the demise of the welfare state entirely (however prematurely). It would seem given recent evidence that the new emerging social classes[2] of ‘knowledge workers’ and ‘service workers’, within and across countries are increasingly starting to define the winners and losers of global society.

It is becoming increasingly apparent that almost all traditional redistributive mechanisms assume the power of the nation state, and the “stickiness” of “modes of production” within confines of the nation state as a pre-requisite for them to function effectively. Simply, it assumes that the company as system of production, is under the full control of a local government and its laws. Evidently, as an underlying assumption of a system, this is increasingly untrue.

Moreover, the economic thinking of both demand and supply side economics is largely based static (or at least gradual and slowly changing) ‘modes of production’, which can be correctly simulated and controlled through economic modelling – through the instruments of fiscal and monetary policy.

The technological frontier is assumed as a given and largely exogenously defined. As the recent financial crisis has shown, fiscal and monetary policy, even in the worlds’ largest markets in the US, EU, Japan and China, are largely blunt instruments in trying to cope with a world where structural change in ‘modes of production’ occur quite rapidly.

To cope with recent developments, central bankers in many of the worlds’ leading markets have had to put their traditional narrow mandate of ensuring price stability in markets on hold and engage in direct interventions (e.g. Nationalisation of AIG in the US, ECB engaging in direct bond-buying to decrease credit spreads in Greece) to prevent wild contagion effects in the global financial system.

We seem to be moving closer toward the reality envisioned by Joseph Schumpeter[3], where ‘Creative Destruction’ is the order of the day and Entrepreneurship is instrumental in creating new value. This makes the task of redistribution by the nation state much more difficult, particularly given the current preoccupation with the monumental task of stabilizing many parts of the monetary and real economies.

Is a new global class conflict inevitable?

“(Knowledge workers) own both the ‘means of production’ and the ‘tools of production – the former through pension funds…the latter because knowledge workers own their knowledge and can take it wherever they go. The economic challenge of the post-capitalist society will therefore be the productivity of knowledge works…The social challenge of the post-capitalist society will, however, be the dignity …of the service worker.”

So in a world of blunt economic instruments, ‘footloose’ capital and globally mobile talent, is a new global class conflict inevitable? Unlike Karl Marx[4] before him in his theory of class struggle that shapes history, Peter Drucker does not necessarily believe that the new emergent social classes of “knowledge workers” and “service workers” are naturally in conflict, within and across nation states.

In particular, it is worth noting that “service workers” would be “knowledge workers” themselves, given the right life circumstances and choices that would give them access to equipping themselves with the essential factor of production for them to earn their own place in society.

How global society in the collective navigates this transition to a knowledge society will determine the scale of the threats and opportunities that lie in the future. We are already starting to see widespread de-leveraging in the corporate community as grown projections slow and sources of cheap credit dry up, and with many governments in the developed world already in record amounts of sovereign debt – it is becoming evident that chasing growth by ‘kicking the can down the road’ with borrowing will be increasingly unsustainable. There will probably be a much closer alignment between the financial and real economies in the near future, which puts the key factor of production in value creation in the spotlight – Knowledge.

Knowledge is the be all and end all

Drucker foresaw that the Information Revolution – which is essentially a Knowledge Revolution – will cause a reconfiguration of the politics, economics and social fabric of global society as sweeping as the impact of Luther’s printing press, or the steam engine to the Industrial Revolution. The characteristics of this new system are constantly emergent – and the general view thus far is that is probably much more appropriate to think of its dynamics as an open dynamic system, rather than as a closed stable one.

The way things are made are constantly changing because of applications of knowledge – technology, processes, design – and this is making the role of the knowledge worker simultaneously much more valued, but much more uncertain. Few people can say for sure what the New Society will look like, but in the most general sense, it is almost for certain that the nation state will not whither away – and the most prosperous of them will be defined by how well they generate, disseminate and apply knowledge within their borders. This is the case even if the knowledge workers themselves are not indigenous to their particular city or country of residence.

Richard Florida[5] has already coined the term “The Creative Classes”, a mobile class of professionals whose life choices and output will increasingly define whether cities thrive or fade into oblivion. Deep at the heart of trying to attract and retain the “Creative classes” lay deeper issues of history and culture – simply put, people choose to live and create in places which suit their world view and aspirations.

And creative people like to be amongst other creative people that constantly advance their personal development. And since the saying goes “different strokes for different folks”, there will be room for a much more varied spectrum of personalities in cities across the globe. Cities will have to acquire a distinct personality and “brand” (as a promise) that will appeal to the (personal, even philosophical) dispositions of certain types of creative people around the world. And in the process, have to resist the seduction of what they don’t want to be, however appealing the economic allure and rewards. Because simply put, no city can have it all in the post capitalist world – but some are going to have a lot more than others.

In conclusion, it is worthwhile to note that despite the multitude of discourse that can be done at the systemic level about the new dynamics of the world, the Knowledge Revolution, its opportunities and its challenges ultimately has to be understood as a juncture which puts the importance of the individual back in the center of society. The individual, with his(her) capacity for creation, the complexity of his(her) impulses, his(her) holistic personal development throughout the journey of life and his(her) interactions with others. In is in this recognition of the importance of the humanistic journey that I find hope in living in these times. This could be the both the dark ages for economics, Renaissance for culture, or perhaps both. This generation has to choose.

References

• Drucker, Peter F. (1993), “ The Post Capitalist Society”, Harper Paperbacks
• Florida, R (2005), “Rise of the Creative Class”, Basic Books
• Marx, Karl (1897), “The Critique of Capitalism”, Penguin Classics
• Rifkin, J. (1997), “The End of Work”, Tarcher Books
• Schumpeter, J (1948), “Capitalism, Socialism and Democracy”, Harper Perennial Modern Classics

Footnotes

1. Rifkin, J. (1997), “The End of Work”, Tarcher
2. Drucker, Peter F. (1993), “ The Post Capitalist Society”, Harper Paperbacks
3. Schumpeter, J (1948), “Capitalism, Socialism and Democracy”, Harper Perennial Modern Classics
4. Marx, Karl (1897), “The Critique of Capitalism”, Penguin Classics
5. Florida, R (2005), “Rise of the Creative Class”, Basic Books