Economics: The Foundation



From the previous post about systems we understand that the economy is a system of interrelated elements nested within the social system made up of people and artefacts, which in turn is nested within the Earth’s natural system of the biosphere.  Four major inputs come into the economic system: energy mainly from fossil fuels but also as electricity generated by various sources; materials like metals and agricultural products; bounties from nature such as air, soil and water; and human values, creativity and intelligence that enable the other three inputs to be converted into manufactured products and services.  By keeping the price of energy artificially low humanity has been able to use tremendous amounts of energy to extract materials at a relatively low cost to produce an incredibly large and continuously growing volume of products.  This conversion process is known as “throughput” and one of the main features of a modern economic system is its huge throughput in which people are employed in a myriad of occupations.

 That, essentially, is how the economic system works.  It is a vast enterprise and therefore needs to be managed and regulated.  The issue we will be addressing in this and following posts is how that management process is influenced and, indeed, determined by the underlying worldview we bring to it, and how that worldview was set in place several centuries ago.

 Where to Begin?

 To understand the workings of a modern economy requires not a little effort as well as a good slice of perspective.  Let’s begin with perspective and the effort will follow.

 Whether we appreciate it or not, we are today the inheritors of a long tradition of human thought.  When I say “we” I am referring specifically to those of us who live in Western style industrialized economies.  I am well aware that the majority of people alive on the planet today don’t live in such economies.  However, the influence of the industrialized West is so pervasive that I think it’s fair to say that humanity as a whole is under the sway of a long tradition of Western thought.  We need to remind ourselves of what it is.

 Phillip Smith and Manfred Max-Neef in Economics Unmasked (2011) contribute one useful part of the necessary perspective.  They remind us that “life is an unending sequence of bifurcations.”  By that they mean that our past is a set of paths taken and many others not taken.  The cumulative impact of the paths taken is the dominant paradigm or set of paradigms through which we now look at the world.  “We in the West are what we are,” say Smith and Max-Neef, “but we could also have been something we are not.  Let us then recall some of our decisive bifurcations.”

The authors contrast the thinking of several powerful icons from the past, going back as far as the 13th century to St. Francis of Assisi, who described a world filled with universal love.  In contrast Nicolo Machiavelli writing some time later advised those who would govern others that “it is much safer to be feared than to be loved.”  The authors state that “the world we have today is not that of Francis, it is the world of Machiavelli.”  Perhaps it would be more accurate to say that today’s world is more guided by Machiavellian thinking than by Franciscan, for clearly we have both, though Machiavelli dominates.

Similarly, our world has followed the precepts of Francis Bacon, who in the early 17th century advised that to find absolute truth mankind should “torture Nature so that through the delivery of her secrets we can extract truth.”  We have applied this teaching with efficiency and enthusiasm with spectacular results in increased knowledge, but along the way we lost the reverence for Nature that others such as Giordano Bruno (who was burned at the stake in 1600 for preaching pantheism) might have encouraged us to seek.

In the same tradition as Bacon, French philosopher Rene Descartes greatly influenced the thinking of his time in the first half of the 17th century and set the foundation on which centuries of Western thought has been built.  Descartes is perhaps best known for his famous dictum: “Cogito ergo sum.”  (“I think, therefore I am.”)  More importantly, however, he set in place a way of looking at the world which said that the only way one could know what truly exists was through the exercise of reason grounded in measurement.  If something, like human consciousness, could not be explored by measuring it, then science could have nothing to say about it.

 Living at the same time as Descartes, Galileo Galilei in Italy brought this way of thinking into the science of astronomy and set the foundation for Isaac Newton following shortly afterwards in England to develop his perspective of the universe as a machine governed by certain unchanging laws, which could be deduced through observation and the application of mathematics.  

 The contribution of Bacon, Descartes, Galileo and Newton to human understanding and knowledge about reality was enormous.  However, it came at the cost of taking reverence for Nature as a being fully alive in its own way out of Western thought, such that humanity and its world of growing commerce and social structures was seen as being separate from Nature—a distinction between the observed (Nature) and the observer (humanity).

 In Germany, reacting to this worldview, Johan Wolfgang von Goethe was upset with what he believed to be the limitations of Newtonian physics and he articulated a science of contemplative looking for “God in nature and nature in God.”  But Western thought followed Galileo and Newton more than Goethe with the consequence, according to Smith and Max-Neef, that “feeling, intuition, consciousness and spirituality are still banished from the realm of science.”  Moreover, they add that we now live in a world of disenchantment and confusion where “we desperately seek refuge in a technology that offers us an escape into virtual realities.”

 The Foundation of Economics

 Coming back to the point about how the arc of Western thought influenced the development of economics when it emerged as a field of study, we should not be surprised to see that it eventually fell under the influence of science.  However, it did not begin that way, for the man who has come to be regarded as the Father of Economics, Adam Smith, writing in Scotland in the late 18th century, was first a professor of logic and then of moral philosophy, and his principles of economics were derived from his work in these disciplines.

 Smith’s great contribution to economics was the publication in 1776 of his monumental work entitled, in evident philosophical tone,  An Inquiry into the Nature and Causes of the Wealth of Nations.  Smith was concerned about human well-being.  He said that “no society can be flourishing and happy, of which the far greater part of the members are poor and miserable.”  However, he was also a man of his time, in which he saw that stratification of society from “the inferior ranks of people” to “the respectable orders in the society” as being perfectly natural.  Within this natural order, though, he was concerned about fairness and justice.  This aspect of Smith’s work is described by Graeme Maxton in The End of Progress (2011): “His book is not about how countries can get rich.  It is about how they can improve the well-being of their ordinary citizens.  He believed economics was about how society could achieve prosperity and progress.”

 With this focus on the role of productive labour in contributing to overall well-being, Smith made many useful contributions to understanding how successful economies work.  He saw the importance of specialization and skilled work.  He argues that a person would labour in his own “rational self-interest,” which did not mean acting selfishly but rather acting responsibly with a sense of duty to others.  In his own words Smith famously argued that as the individual behaves in this way, “he intends only his own gain” but “is led by an invisible hand to promote an end which was not part of his intention. . . By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.”

 Commenting on Smith’s original contribution to economic thought, John Ikerd points out in Sustainable Capitalism (2005) that, within the framework described above, Smith argued in favour of two pillars of economic theory: competitive markets and free trade.  This foundation of economic thinking became known as classical economics.  His principles are endorsed by today’s so-called neo-classical economists in defence of the role of markets and free trade in today’s economies.  However, things are very different today from when Smith wrote in 1776.  Smith was a man of his time and not our time.  As Ikerd says, “Smith couldn’t conceive of a society in which people would sacrifice their moral and social integrity for the sake of individual sensory pleasures.  He couldn’t conceive of a time when trade would be carried out by transnational corporations with no citizenship, no nationality, and no sense of connection with any particular country or place.  Smith could not envision a society that would abandon the things necessary for a desirable quality of life in the pursuit of ever greater financial wealth.”

 By implication Ikerd is saying that this is the kind of society we have today, and it is not appropriate to defend it by saying that it is operating on the economic principles laid down by Smith.  How things changed from 18th century early industrialism and capitalism to what we have today is where we must turn next.  Central to that discussion will be an appreciation of what has been said above about the dominance of a mechanistic, reductionist science and its underlying worldview fixated on a belief in mathematical measurement as the indicator of progress.

 Adam Smith’s monumental work, which ranged over much more territory than I can discuss here, laid the foundation for how to think about the working of an industrial economy.  It also described how wealth was extracted by “civilized nations” by colonizing other parts of the world, and therefore puts some context to the complex global situation we face today.  It was a valuable piece of work full of enlightened underlying ideas as well as a limited human perspective.  We cannot and should not go back there, but we can use the best of it for guidance on the way ahead.

 The Way Ahead

 Smith lived at a time when the nations he was writing about were endowed with natural abundance either from within their own territories or from colonies they controlled.  This is known as primary wealth.  Smith’s genius lay in his ability to understand how that primary wealth could be converted into secondary wealth by human labour that was skilled in the means of production and organized in such a way through specialization that large numbers of people could be employed in “useful” or productive labour.

 As Chris Martenson points out in The Crash Course (2011), “this was a fair view of wealth in the late eighteenth century.  Given the limitless natural abundance of the time, those who could transform primary into secondary wealth faster and more productively created wealth the quickest.”  Today’s world is very different from Smith’s, “but the question of how we create wealth remains as relevant today as it was in his day.”  Today we have a vast amount of what is called tertiary wealth washing around in national economies.  Martenson calls this “paper-based abstractions” in the form of stocks, bonds, investments of every kind, and huge amounts of artificial “virtual” money created through debt.  As we shall see as we proceed with the economic analysis, this kind of tertiary wealth has value only in “a world of constant economic growth.”  But economic growth can only be sustained through constant, and therefore forever expanding, inputs of primary resources, especially energy, “and some day these will undoubtedly fail to expand further.”

 So we are talking now of managing in a far different economic future from that of the past.  Adam Smith laid the foundation for understanding and developing a form of wealth creation which came to be known as classical capitalism.  Pursuit of this model across the industrialized world enabled vast amounts of wealth creation throughout the 18th, 19th, and 20th centuries into the 21st.  Now, as we look to the future, we must be concerned about inventing a new form of sustainable capitalism that will take the principles of classical capitalism that can be considered to hold true, and meld them with fresh understanding of human dependence on natural wealth.  This will hopefully lead us to conclusions about what we must do to protect and preserve this natural wealth while we design a way for people to live and work together in what we must essentially see as a new understanding of prosperity.

 To explore and tease out the strands of this new understanding, which will be the foundation of our grandchildren’s future, is the objective of future posts.  I look forward to your company on this journey.

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2 Responses to Economics: The Foundation

  1. Hi Des- Thanks for the brief history lesson of thought on economics. In today’s world young people see the study of economics as so often the first choice of study. There is much written at this time with new perspectives on prosperity, however I think the old paradigm persists. I look forward to your thought and the thinking of others. Wendy Turner

    • Hi Wendy:

      I am not sure what universities and schools teach young people about economics these days. Hopefully it incorporates the new thinking in environmental economics as well as alternative measures of well-being to the GDP. I will be covering a lot of this in upcoming posts.

      Best regards


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