The Money Cycle – Diagnosing the Inequality Problem, and Proposing a Solution

A year ago, I visited some friends near Rogers, Arkansas. Home to the headquarters of several major corporations, including Wal-Mart and Tyson, it was extremely beautiful. Green, vibrant, and full of people, and with gorgeous free parks and museums. I had a wonderful time there. But after I left, I couldn’t help but think, This is where my money goes when I shop at Wal-Mart in Milwaukee.

The Source of Inequality

We think of money as an equilibrium. Earnings come in, spending goes out. But looking at it from this narrow, individual perspective misses the big picture. The money we earn has to come from somewhere. When we zoom out, we see large-scale processes at work, leading to large-scale trends.

Over the past fifty years, the GDP per capita of the United States has been increasing relatively steadily, but the median income, adjusted for inflation, has remained about the same. The wealthy have benefited tremendously, while the rest of us have only benefited by proxy, with improvements in technology and lowering costs. This trend must have a cause, and that cause is the rates at which the various modes of cash flow between consumers and businesses, shown in a first-order approximation in the diagram below.

This diagram shows the major highways of money flow between the poles of the economy, the consumers and the big businesses. There are intermediate steps, such as small businesses, non-profit organizations, and business contractors, but they only change the rates of flow, not the big picture.

If you work at a for-profit company, your wage comes from your employer. But the employer has to get the money from somewhere. That money comes from those who buy the company’s products, consumers and other companies. A for-profit company’s goal is to make more money than it spends, so it is going to pay its workers less money than the workers make the company.

If you are self-employed, your money comes either from consumers or companies. But again, for-profit companies will only pay you if they believe your product or services will earn them more than they spend. I often hope I can make some money on Patreon with this blog, or with my new YouTube channel, but then I remember that any money I earn will come from its entertainment value to other consumers, who are for the most part, like me, struggling to get by. It feels like asking others to go hungry so that I may be fed.

There are currents, swirls, and eddies in the flow of money through the economy, but on the largest scale it is unbalanced, flowing from the consumers to the companies. What companies give back in wages and expenditures is necessarily less than they earn in profit, which is inevitably going to result in the long run in company owners getting richer, and consumers and workers getting poorer.

The Economic Engine

The motivations of consumers and companies are different. Consumers spend money to keep themselves fed, clothed, and entertained. Companies invest money with the intention of earning more money from it, as often from the consumers as from other companies. Just look at the number of ads we are bombarded with as consumers. On TV, websites, magazines,  the side of the road, junk mail and spam. There are ads everywhere, manipulating consumers into buying their products.

Because of this, a capitalist economy is like an engine. An engine runs as fuel is fed into the combustion chamber, releases its energy, and its waste leaves via the exhaust. So too, as consumers put money into the market and company owners take it out, the economy runs. The difference is that once money has been used, it can be used again, still as full of economic potential as it was before.

One of the main claims of the virtuousness of capitalism is that consumers have the power over which companies succeed by voting with their money. This only works if the consumers have money to vote with.

The fuel of a capitalist economy is money in the hands of consumers.

How can we replenish the consumer side of the economy? Wages aren’t enough, because the reason companies pay wages is as an investment in order to extract more money than they put in. Philanthropy isn’t enough, because the more a company gives away, the less advantage it has in the arena of the market. The way to replenish the gas tank of the economy, then, must lie in government redistribution.

The government cannot just print money and give it to the consumers. Or it could, but that would destroy the economy with inflation. To avoid inflation, the government must take out from the economy an amount comparable to what it puts in, through loans and taxes. Loans must be repaid, so it’s really just taxes.

Americans are notoriously allergic to taxes, and not entirely without reason. There are two major problems with taxes: when the money goes to unjust places, such as politicians’ pockets or agendas or broken programs, and when the taxes are uneven in such a way as to artificially and unfairly choose winners and losers in the market. In order for taxes to work, these problems must be accounted for.

One of the simplest solutions would be to implement a flat value-added tax (VAT), which is put directly into a universal basic income (UBI).

Sustainable Capitalism

A value-added tax is a tax taken from every transaction that contributes to the GDP. “Flat” means the percentage is the same, no matter who is doing the buying or what they are buying. This would have the advantage of not interfering with the market competition. No company would gain or lose economic status relative to other companies, which means this tax would not negatively affect the top of the economy at all. The government would not be taking wealth from the wealthy, just rescaling the value of money to keep it stable rather than inflating.

Wealth is not in the number of dollars someone has. It is in their property and purchasing power. The scaling of money via a flat VAT does not affect one’s wealth, as long as that scaling is even across the whole economy. Generous company owners could breathe in good conscience, as they would finally be able to give money without losing their competitive standing.

A universal basic income is exactly what it sounds like. Every adult citizen receives a fixed rate of money from the government, no strings attached. That money is theirs to spend as they see fit, be it for necessity, investment, charity, entertainment, luxury, or vice. To many, this would be a tremendous relief, as they no longer have to live paycheck to paycheck in fear of going hungry or losing their homes, but suddenly become valued members of the economy.

In this renewable economy, money flows through the markets from the consumers to the companies. The government taxes the profits, and returns the money to the consumers, so that the cycle can continue. Because money continues to flow, the total wealth as measured in property and standards of living increases. The rich get richer, but so do the poor and everyone in between as rising GDP causes the guaranteed income to increase. And for the first time in fifty years, the GDP per capita will actually reflect the prosperity of the average citizen.

The VAT-UBI combination does not extract wealth from anyone, or pick winners and losers. All it does is rescale the value of the dollar so that the UBI does not cause inflation. It would also restore optimism and faith among the small folk that the economic and political institutions care about them, leading to wiser spending and an increase in employment as people start to believe in the fairness and prosperity of this new version of capitalism once again.

Adjustments and Other Solutions

Of course, real life isn’t simple. The economy is one of the most complex systems known. Therefore, a program as simple as a flat VAT and UBI is not likely to be anywhere near the best solution. So how are some ways we could improve it?

First, a flat tax takes an equal percentage from the bottom of the economy as it does from the top. Small amounts of money have more human value to those who are most in need of it, so we might want to consider a graduated VAT. The greater the wealth of the agents involved, the higher the VAT for that transaction. We could choose not to tax wages or philanthropy, as those are already transferring wealth from the top to the bottom. We would have to watch out for loopholes in these, of course.

On the redistribution side, it might seem unnecessary to have a universal basic income, since it would go to everyone equally, from the poorest to the richest. We could instead elect for a negative income tax (NIT)—which has a terrible name, because it’s a grant, not a tax. An NIT would give a supplementary income to those whose income is small.

We would want to be careful with an NIT not to make a welfare trap, where a person can lose money by getting a higher-paying job. To avoid this, the NIT could be a percent difference between one’s income and the cutoff. For instance, if the cutoff was $40,000 per year and the percent difference was 1/2, a person who earned nothing would receive $20,000, one who earned $20,000 would receive $10,000, one who earned $40,000 would receive nothing, and anyone making over $40,000 would pay income tax. This would ensure everyone had enough to get by, and be cheaper to implement than a UBI of $20,000 for everyone.

The downsides to an NIT are that it involves more bureaucracy than a UBI, and that people who make barely more than the cutoff might feel cheated, feeling like the government values those who are lazy more than it values them.

Objections and Responses

• “Won’t this cause the prices of necessities like food and housing to rise, defeating the purpose?”

Maybe a little. But think about what it would mean if they rose so high it defeated the purpose. It would mean that, under capitalism, it is necessary for a number of people to go hungry and homeless in order for prices to be low enough that some can afford them. If that were the case, capitalism would be broken beyond salvage, and we would have no choice but to tear it down and replace it. I don’t believe that’s true, but either way, a basic income program is worth trying.

• “Won’t this make people not want to work?”

On the contrary. People don’t want to work in the economy we have now, because of the problem of growing inequality. When GDP is going up, but workers are still living paycheck to paycheck, they start to think, “What’s going on? I’m doing all this work, and the economy is leaving me behind.” That is demotivating. On the other hand, if an increase in GDP leads to an increase in income for all, it restores faith in the economic institutions, and make people optimistic and eager to contribute. Instead of making people not want to work, it will motivate people to work better.

• “Won’t this dramatically increase the national debt?”

It would cost several times the current federal government budget, but could make up for that with the VAT. Depending on how successful it is, we might actually be able to use the VAT to decrease the yearly deficit.

• “Isn’t this socialism?”

No. Socialism is a radical restructuring of the ownership of the means of production and distribution, either to the workers or to the government. A basic income program only redistributes money; it does not affect the rules of ownership.

• “You sound like Marx.”

Okay McCarthy.

Conclusion

Faith in capitalism is eroding away. There are many reasons for this, and one of the biggest is the growing economic inequality, where wealth is skyrocketing at the top, while far too many people struggle to keep up with the basic necessities. This can be ameliorated by a guaranteed basic income, paid for by a value-added tax, which if implemented fairly does not affect the competitive standing of the players in the market.

This doesn’t solve all the problems of capitalism. It doesn’t solve pollution and waste. It doesn’t solve global warming. It doesn’t solve plutocratic government corruption. It doesn’t solve overseas exploitation. But it is one step to address one of the major problems. And all these people who find new financial room to breath can contribute to other solutions with the mental energy that used to be taken up by the stress of making it to the next month.

I don’t usually ask this, but if you think the perspective in this post is valuable, then please share it, especially if you know any politicians or kindhearted rich people who might be sympathetic. And if you happen to be one of those kindhearted rich people, a donation to Paypal or Patreon (links in the sidebar) would mean the world to me.

Economics: Inequality

Economics:
The Purpose of the Economy
A Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

We keep hearing these days that a very small percentage of people in the world own a large percentage of the wealth, and those numbers are getting more extreme. Usually, this is meant to shock us, assuming we will automatically see it as an indication that our economy is unfair. But does it really mean that?

The first time I heard about economic inequality, it was in a bar graph in a college textbook. It was relatively flat for most of the space, shooting upward at the rich end. The final bar, the one percent, went all the way to the top of the figure, wrapped around to the bottom, and stretched to the top again. And then again. Five times.

I was surprised, but I didn’t feel it was necessarily unjust. As long as things were getting better for everybody, I thought, what did it matter if the people at the top had a million, a billion, or a trillion dollars?

We might naively think we can see how the average person is doing by dividing the GDP over all of the people, the GDP per capita. But that would only be valid if the GDP were proportionally spread across all of the people in the country, and that is not the case. To get a better picture of what is happening with the average person, we need to look at the median income. Median income takes the person directly in the middle, with an equal number of people in the country who are richer and poorer.

US GDP, adjusted for inflation, since 1993.

Median income in the US since 2000.
The red line is raw dollars, and the blue line is adjusted for inflation.

In the United States, adjusting for inflation, the GDP has been on a fairly steady upward trend, but the median income has remained about even. The amount of wealth in the country is increasing, but it is not getting distributed to the average family. This means all that extra wealth is going to people who are already in the upper brackets. This is disheartening for many people, and makes them lose motivation and fear for their financial security.

Despite this, it is still possible that the average person’s condition is improving. This is because as technology and manufacturing improves, stuff gets cheaper. With the same amount of money, people can afford more, better stuff. On the other hand, some things are getting more expensive, like healthcare and college, so that argument is somewhat flaky. We would also hope that people accrue money over time, and the median is preserved by older people passing away and younger people coming into the workforce, but that doesn't always work out.

Inequality feeds on itself. The more money you have to start with, the better education, tools, facilities, resources, and services you can afford, which allow you to live healthier, longer lives, and make even more money. The richer you are, the more influence you can have on politics and the media, turning them in your favor. Add to this the fact that there is wealth inequality between races and genders, and we have a recipe that readily triggers a lot of people’s sense of injustice.

If we see inequality as a problem, how can we go about fixing it? First, we have to ask what we are aiming for. It’s very hard to find a reasonable goal where we can say we have solved the problem. So perhaps the answer isn’t to try to make a paradise, but just to strive to make things better than they are now.

Since the problem is inequality of wealth, an obvious solution is redistribution. One way to do this is through philanthropy. It may surprise you, but there are a lot of rich people who see inequality as a problem, and donate their money to help. Another way is through government taxation and distribution programs at the city, state, or federal level, depending on the specific problem in question.

The goal wouldn’t be just to give outside assistance, but to create strong, prosperous communities. This can be done by supporting local businesses, supplementing underpaid jobs, and empowering individuals through a basic income. And there are surely many other options I haven’t thought of.

When we talk about economic inequality, we mean more than just the difference in wealth between the rich and the middle class and its rate of  change. It also matters whether the average people are getting better or worse off, and how likely that trend is to continue in the future. As are all things with economics, it’s a complicated subject, and we shouldn’t settle for answers as simple as “it’s a disgraceful injustice,” or, “it’s nothing to worry about.” It’s a real issue, not just philosophical, and that means we have to look at the real consequences, both intended and collateral, of our solutions.

Economics: Motivations and Incentives – Take 2

Economics:
The Purpose of the Economy
A Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

While reading over the past entries in the Economics series, I found the previous discussion of motivations and incentives was too narrow. So I decided to rewrite it, making it more general, and adding in a few more thought I’d had since then. I’m actually happy about backtracking like this, because the whole point of this series is to journal my economic views as I construct them, and things like this happen. So here we go, a new and improved version of Economics part 4.

In order for an economy to run, work must be done. Producing and distributing goods and services takes labor and organization. So naturally, the question arises, what motivates people to do these things?

The most common motivation for individuals throughout history, past and present, is the threat of poverty and starvation. You work, you get paid, you pay your bills. But given the opportunity, people will also work for other reasons. Some like the promise of wealth and moving up in the hierarchies of society. Others work because it provides joy and purpose to their lives. Still others have a strong sense of duty, and cannot rest unless they have given their fair share of effort toward supporting society. Others see problems in society, and their compassion moves them to help.

People also generally like to do what is right, especially if it is easy. For instance, if recycling means taking a load of trash in your car to a facility twenty miles away, not very many people will recycle. However, if there are conveniently-placed blue bins all over the place that somebody else takes care of, almost everybody will recycle.

Individual workers are not the primary drivers of the economy, though. The real economic power is in organizations: businesses, corporations, cooperatives, governments, fiefdoms, and plenty of others I haven’t thought of. Although these organizations are run by people, they can be treated as if they have their own motivations. It is an emergent phenomenon.

Like individuals, organizations have a diverse range of motivations. These could be to provide high-quality services, to solve problems for humanity, or to gain economic power (profit, in modern society). Here we find a feedback loop. If an organization makes it its goal to gain more economic power, it will become more powerful than organizations that value other things. Therefore, the organizations that have the most influence over the economy are naturally going to be the ones that prioritize accruing economic power.

This can lead to all kinds of practices that are not in alignment with the greater purpose of the economy, to provide people with what they need in order to pursue fulfilling lives. These organizations might form cartels, agreements between producers of a certain commodity to raise prices ridiculously high. They might buy out competing companies, becoming monopolies with total control over a market. They might leverage governmental influence in their favor, either through lobbying or direct political power. And they do whatever they can to raise prices and lower wages.

Organizations aiming to increase economic power can also cause collateral damage. Pollution, for instance. If it is more cost-effective to dump chemicals in the river than to properly dispose of them, such an organization is going to dump them in the river. Damage caused in this way might be temporary, or it might build up over long periods of time and cause serious damage later on. Even when it is best for all organizations in the economy collectively if they don’t cause collateral damage, it is often more advantageous for each individually to do so, no matter what the others do. In game theoretical terms, this is called a Prisoner’s Dilemma.

No matter what kind of economy we live in, we want to mitigate these negative effects of power-seeking organizations that inevitably rise to the top. Luckily, there are ways to do this. If a large number of people come together in a social movement and refuse to use a certain provider’s product or service, the organization will lose out unless they change their behavior. Workers can band together in unions to demand more reasonable wages and benefits. And the government can add incentives, like minimum wages, taxes, subsidies, regulations, and plenty of others.

It is important to note, however, that things are not black and white. It is not simply the good people versus the bad forces of the economy. Strong economies do a lot of good for humanity, and we want the Elon Musks of the world to be able to do their thing. The key is smart legislation. It is not enough to simply be “for people.” When coming up with policies, it is important to make decisions based on data and science, so we can be sure they will actually do the good we want them to do.

Economics: Motivations and Incentives

[Retrospective note: this post is more of a case study of the modern American economy, and not as general as I would like. To see an updated version of this discussion, click here.]

In order for an economy to run, work must be done. Producing and distributing goods and services takes labor and organization. So naturally, the question arises, what motivates people to do these things?

The most common motivation for individuals throughout history, past and present, is the threat of poverty and starvation. You work, you get paid, you pay your bills. But given the opportunity, people will also work for other reasons. Some like the promise of wealth and moving up in the hierarchies of company and society. Others work because it provides joy and purpose to their lives. Still others have a strong sense of duty, and cannot rest unless they have given their fair share of effort toward supporting society. Others see problems in society, and their compassion moves them to help.

People also generally like to do what is right, especially if it is easy. For instance, if recycling means taking a load of trash in your car to a facility twenty miles away, not very many people will recycle. However, if there are conveniently-placed blue bins all over the place that somebody else takes care of, almost everybody will recycle.

The economy does not primarily run on individual people, though. The real power behind an economy is in its businesses. Yes, businesses are run by people, but the businesses themselves can be looked at as if they have their own motivations. It is an emergent phenomenon. If we want to understand the driving force of an economy, it is businesses’ motivations we have to look at.

Like people, businesses have a variety of motivating forces. Some businesses want to provide high-quality services. Some aim to solve problems for humanity. But by far, the most significant driver for businesses is profit. Money allows businesses to grow and become more powerful, so the biggest, most powerful, most economically significant companies are the ones who orient their capacities toward making more money.

Naturally, profit-oriented companies want to increase their prices and lower their wages as much as they can, while still having people buy from and work for them. This is not aligned with the purpose of the economy, which is to meet people’s needs and provide an environment in which they can pursue meaningful lives. The most commonly championed counter-force to these self-centered practices is competition. In a competitive market, more workers apply for the companies with the highest-paying wages, and more customers buy from the companies with the lowest prices.

However, because competition makes wages higher and prices lower, companies don’t like it. So they try to get around the competition, by either putting the other companies out of business, or buying them out. Thus, competitive markets are unstable, because if one company pulls ahead a little bit, they have an advantage that grows at an accelerating rate. This leads to monopolies, companies that control a product’s entire market.

Companies are also prone to causing collateral damage. Pollution, for instance, as well as other kinds. If it is more cost-effective to dump your chemicals in the river than to properly dispose of them, you’re going to dump them in the river. Of course, it is best for all companies together if they don’t pollute, but for each company individually, it is more advantageous to pollute no matter what other companies do. This an example of the Prisoner’s Dilemma.

It is also a senescent behavior. Senescence is a term from biology, which refers to the deteriorative processes of aging. In economics, senescent behaviors are actions that give short term gains, but have negative effects that build up in the long run. The quintessential example of a senescent behavior in the economy today is carbon dioxide emissions, which build up slowly in the atmosphere over time, only causing problems after many years.

Luckily, there are ways to mitigate or guide the profit incentive so that it serves human interests. If a large number of people come together in a social movement and refuse to buy a certain company’s product, the company will lose out on profit unless they change their behavior. Workers can band together in unions to demand more reasonable wages and benefits. And the government can add incentives, like minimum wages, taxes, subsidies, regulations, and plenty of others.

Of course, companies will fight against anything that would reduce their profits. Not all companies, of course, but a significant fraction. They will try to use the government to reduce taxes, limit unions, repeal important regulations, and otherwise turn the tables in their favor.

It is important to note, however, that things are not black and white. It is not simply the good people versus the bad companies. Many companies do a lot of good for humanity, and we want the Elon Musks of the world to be free to do their thing. The key is smart legislation. It is not enough to simply be “for people.” When coming up with policies, it is important to make decisions based on the numbers and the science, so that we know it will help, and not accidentally make things worse.

Finally, we must remember that companies love to replace workers with machines, because a machine costs a whole lot less than a human. As robotics and artificial intelligence continue to get better, the space of economically relevant human tasks continues to shrink. This is both good and bad. Good, because companies can offer their goods and services for even cheaper. Bad, because people are having a harder and harder time finding work. We will talk more about this in discussions to come.

Economics: Production and Distribution

Building an Economics View:
The Purpose of the Economy
Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

At the beginning of this series, we stated the purpose behind economics: to provide as many people as possible with their basic needs so that they are free to pursue lives that are meaningful to them. In Economics, there are two major processes, production and distribution. It is very common in economics arguments for people to fixate on just one of these, and ignore the other. However, both are essential for a successful economy.

Without production, there is no economy at all. Everyone starves, and everyone sleeps in the rain. Production is often measured by a country’s gross domestic product, or GDP, which is roughly the amount of money spent within a country during the span of a year, adjusted for inflation, as well as some other factors. More useful is the GDP per capita, which divides the GDP by the number of people living in the country. Of course, production and money are not the same thing, but in general, people spend more when production is high, causing the GDP to go up.

However, if we only focus on production and ignore distribution, we get large inequality, with most of the wealth that is created piling up in the hands of a powerful few. Of course, some level of inequality is inevitable, because some people are lucky, and some people make wiser choices. But when inequality gets so great that it prevents people’s needs from being met, or it prevents people from being able to pursue meaningful lives, the economy is not doing its job. So while it may be tempting to say that a high GDP per capita means more prosperity for all, that is not necessarily true.

On the other hand, it can also be tempting to look at the inequality in the world or the country, at the fact that there are both millionaires and poverty, and conclude that we have already produced enough, and distribution is all that matters now. But focusing only on distribution and neglecting production is unsustainable. The reason people get rich is very often because they contribute a lot to production. If we take money and goods from those who contribute a lot to production, people will feel less incentive to produce. If we don’t produce, we will run out, and have nothing left to distribute.

For an economy to work in accordance with our values, we need to take into consideration both production and distribution. So how do we do this? What are our options for the means of production and means of distribution? Here are four that I thought of off the top of my head:

1. The means of production are owned by individuals and corporations, and the means of distribution is the market.

2. A central authority, such as the government, coordinates production and/or distribution.

3. People produce and distribute voluntarily.

4. The means of production and distribution are automatic and run by artificial intelligence.

While reading this list, it’s possible that one of the options jumped out at you as the obvious right answer. It is also possible that I missed something. However, what looks true at first glance is not always the real truth. Remember what we talked about last time in the series; we are looking at this from a rational point of view, not an ideological one. Each of these options has things they do well, things they do poorly, and things they ruin. The real question is what balance of these four things, and any others I may not know about, an economy should have. Gaining knowledge to answer this question more wisely will be our focus in the future installments of this series.

Economics: Coming in with a Problem-Solving Mindset

Building an Economics View:
The Purpose of the Economy
Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

We live in a time when it is fashionable for everyone to have an opinion about everything, and Economics is no exception. We are strongly pressured to have the “right” view of Economics, which is of course the same one as our friends and family and the news we watch. But we don’t do things like that here on A Scientist’s Fiction. Instead, we do our best to put our biases aside and acknowledge our assumptions, observe the relevant facts, and follow where logic takes us.

The first step in thinking about Economics is to shake the ideological mindset. When approaching the subject, the most tempting thing for most of us to do is to jump into the debate between Capitalism and Socialism. But that is the wrong question altogether, and just makes people angry at one another. We might also be tempted to come at it from the perspective of justice, of who rightfully owns what. While this is important from a values perspective, we must remember that it must be informed by our core economic values, which we talked about last time: to supply as many people as possible with their basic needs, so that they are empowered to pursue meaningful lives.

In order to accommodate our values, we need to understand how economies work. The economy is like a machine, built out of a bunch of different parts, all working together. We can look at the parts and see how they work and what they do. Only then can we build a realistic view of how a good economy can be built. It is impossible to build a rocket that will get to orbit without understanding physics. It is impossible to design a new medical drug that will heal people without understanding chemistry. Similarly, it is impossible to design an economy that will provide prosperity and freedom without understanding Economics. And like other sciences, we must be humble and remember that Economics is a complex field of study, and there is much about it that humanity does not yet understand.

Today’s discussion is very short, but it is important enough that it warrants its own post. Although it may seem like common sense that we have to look objectively at the mechanics of how something works if we want to make it work better, we humans so often forget this. Without a conscious effort to understand, our views are shaped by persuasive speakers, and we forget that good intentions are not enough to guarantee good outcomes. Unlike what many smart people throughout history have believed, we humans are not naturally rational. Rational thinking takes practice and effort, just like any other skill. Because Economics is an object of so much political rhetoric and propaganda, it is a high-level challenge for rational thinking. So it seemed appropriate to take a moment to remind ourselves of the mindset we want before we dig into the meat of the topic.

Building an Economics View: Basic Needs

Building an Economics View:
The Purpose of the Economy
Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

I’ve recently noticed that when people say things I disagree with about economics, I find myself tempted to reply with an angry rant. I have no idea why any reasonable person would say something so obviously incorrect, so I feel it must be because they are a bad person, and I treat them as such. But when the fire dies down and I look at what I have said, I realize this is counter to my own philosophy of assuming people are good and peacefully allowing them to disagree with me. This suggests that the problem lies with me, not them.

So what is going on? When I think about it, I realize I’ve been through this before. This anger is a result of cognitive dissonance between my intellectual pride and evidence that one of my views is not well thought out. When I examine my views of economics with a clear head, I find an incoherent jumble of ideas mashed together from all kinds of different sources. One moment I will say something capitalist, the next something socialist, and the next something anarchist, without any notion of how they might fit together or contradict. Clearly this is no good.

With this realization, I have decided to do with economics what I have done in the past with religion and morality, and that is to break apart my crumbling views, sweep aside my cultural influences, and start over from a clean slate. This time, though, I am going to write up the process here on A Scientist’s Fiction, so that you, dear readers, may see my thought process as I go.

The first step, when constructing a view, is to define what we’re talking about. What is economics? The first thing that comes to mind is money, but that is an emergent feature of economics in practice. At a more basic level, economics is the study of the production and distribution of resources. It would be good to have a term that means a specific rule, tradition, or regulation that affects how things are produced and distributed, so let’s call those economic mechanisms. An economic system is a collection of economic mechanisms that work together as a whole.

There are two parts to economics. The first is to study economic mechanisms and systems to find out how they work and what they do. But before we do that, we need to ask ourselves what separates a good economic system from a bad one, or in other words, for what purposes we are producing resources.

About a year ago, we did a series on morality, in which I argued for a version of Utilitarianism that can be summed up as “more good is better.”  Good is defined in another post as the perceptions we get through our moral sense, which is the same kind of sense as our most well-known five senses. The moral sense can be stimulated by circumstances, actions, states of being, etc. These things are not themselves good or bad, but take on a level of goodness when they are paired with someone's moral sense. In line with Deontology, everyone's individual good is equally valid. This gives us a context in which to construct our economics views. We are looking for systems and mechanisms that do as much good for as many people as possible.

Here we run into a problem. Economic mechanisms do very specific things. If “good” is different for everyone, how is it possible to know what kind of economic system will maximize it? What we need is an environment where people can pursue good in whatever form it takes for them. This is the motivation for the idea of basic human rights. The United States Declaration of Independence says “life, liberty, and the pursuit of happiness,” but I am going to be pedantic and say it should have been the pursuit of a good life, because there are other forms of good besides happiness. The measure of an economic system, then, is how easy it makes exercising these rights to as many people as possible.

Some people believe that human rights are a government responsibility, and economics has nothing to do with it. But that view is misguided. If someone does not have enough food, they do not have liberty, because they must spend all of their energy to get food, rather than pursuing a good life. Sure, some people may find good lives by the same actions that get them food, but even for them there is no liberty if there is no choice.

In order for someone to be free to fully exercise their fundamental rights, they require a basic set of needs to be met. What are these basic needs? Well, in order to pursue a good life, people need food and water, shelter, healthcare, transportation, and information. With these five needs covered (I count food and water as one), people have all that they require in order to pursue their own good, whether that be to earn money and live in more luxury, to volunteer for service projects, to plant and tend a personal garden, to contemplate the nature of existence, or any of a billion other ways for people to find meaning in life.

But what determines how much of the five basic needs is enough? After all, a person can live, albeit uncomfortably, on one meal a day. This question is not easy to answer, but at the very least, people should not have to spend energy worrying about how they are going to remain healthy and whether they will have sufficient options available for pursuing purpose. Perhaps we will examine this question more deeply in the future.

We now have a foundation for our views: an economic system or policy is good in proportion to the percentage of people to whom it provides sufficient food, shelter, healthcare, transportation, and information. Of course, a system that adequately provides all of these things to everyone will have its own problems, and maybe we'll have a discussion about them in the future, but for now it makes sense to focus on the problems we face right now.

You may notice that we have not actually talked about any particular economic system or mechanism yet. That is because if we hadn't set up the moral foundation, we would have no way to evaluate it. I am not sure where this series will take us from here, but that is the beauty of constructing a new view. Maybe we will talk about work and purpose. Maybe we will talk about taxation and redistribution. Maybe we will talk about the strengths and weaknesses of the market. Whatever it is, it will be explored in the spirit of curiosity and of making the world better for everyone.