Towards a Global Comprehensive Context-Driven and Decision-Focused Theory and Method for a New Political Economy

3. Other Dimensions of the Problem of Economic Theory and Practice
For a long time, conventional economics has entrenched itself in both academic and intellectual circles and in policy arenas. It has experienced sharp and trenchant attacks on its organizing theories, methods of analysis and more importantly, its unapologetic lack of concern for the undesirable outcomes for human society that it consistently generates. In our time, senior members of the World Academy of Art and Science had made the issue of the need for a new paradigm in political economy a prime concern. The new paradigm will require a serious revision of its fundamental premises, its failed methods and its lack of concern for the social consequences of its theoretical inadequacy. A number of specific issues have been used to target the weakness of conventional theory. For example, the concern that the focus of economics should be on the value of the GDP is considered to be myopic and ultimately unrealistic.4 Others have stressed the limitations of mechanistic measures to realistically understand values. The methods of measurement are thought to be rooted in the fundamentals of a Newtonian universe in which matter and cause are exclusively used in cognition. Still other concerns stress the lack of understanding of productive forces and productive relations in the real world, which has gravitated to a post-industrial political economy. This development has tended to overlook the salience and the contribution to value of the dynamic service economy. This new context effectually requires a call for a new emerging paradigm of global economics in the global social process.

Conventional economics has tended to ignore insights and criticisms that are particularly trenchant and touch on the question of fairness and collective wellbeing. At the turn of the last century in 1899 for example, Thorstein Veblen, the American economist, published a book. The book is titled The Theory of the Leisure Class. This book may well qualify as Veblen’s insightful dig at the one percent at the top which constitutes the leisure class. Indeed, since Veblen’s time this class may well constitute itself as a global plutocracy. Veblen’s central thesis is that the activities of the successful leisure class amounted to “the winning of wealth by force.”5 But this form of winning wealth was sold as honorable and dignified. On the other hand, labor was denigrated and tainted with indignity. In Veblen’s view, the leisure class in the modern economy was not far removed from barbarian ancestors. Veblen’s detailed description of economic life at that time underscored the point that conventional economics served to justify and serve the taking class, and the leisure class.

Later, Veblen wrote another book, which has a curiously important message for our time. This book is called The Theory of Business Enterprise (1904). In Veblen’s view, the businessman is not the wealth creator but rather the saboteur of the system.6 One of the important insights in this book is Veblen’s description of the divorce of finance from manufacturing.7He uses an example from US Steel. Businessmen came together to construct the manufacturing plant. Actually, their real interest was not manufacturing but how the plant could be leveraged in the financial markets. That was where the real profits lay. The company’s assets were $682 million. Against this was sold $303 million in bonds, $510 million in preferred stock, and $508 million in common stock. The financial company in other words was twice as wealthy as the manufacturing plant. In short, the investors made a vast amount of upfront money from the financial sector. The manufacturing sector was really only an incident of their interests.

Carrying Veblen’s meditations into the contemporary context we find that these insights have a curiously contemporary relevance that are best illustrated in the context of the financial crisis of 2008. Alan Greenspan, a leader in the force of conventional economics and a powerful spokesman for its legitimacy, admitted publicly, “Virtually no one foresaw the U.S. finan­cial crisis.”8 He suggested that certain irrational “animal spirits” were the root cause of the crisis. In short, the real blame for the financial mess was not to be found in the conventional approach, which had not anticipated the crisis. Rather, the root cause of the crisis was some unaccounted external force of economic animal spirits. To this extent, the conventional theory itself is flawless and bears no blame for the financial crisis.

It should be noted that many economists liberated from the old paradigm had in fact anticipated the problems of the housing bubble. These economists suggested that the crisis was not rooted in meta-physical animal spirits, but in a financial sector devoid of meaningful regulatory standards. Therefore, we could explain that these so-called animal spirits were freed in the crazy financial world of unregulated derivatives. These derivatives are highly complicated financial instruments whose value is derived from an underlying asset somewhat analogous to the U.S. steel example cited above. It was in the housing market that the imaginative derivative innovations of paper value ran amuck. Financiers bundled millions of toxic loans using mortgage income as an ostensible stabilizer. They then creatively generated a second layer of derivatives based on the value they assigned to the first set of derivatives and continued the layering process. The outcomes of these layered packages of derivatives produced a distinguishing if incomprehensible nomenclature such as “synthetic collateralized debt obligations” and “naked credit default swaps.” The paper of face value of these manipulations was in excess of $35 trillion. In effect, fourteen times the value of the mortgages supporting them.

Warren Buffet, the billionaire, described these exotic financial instruments as financial weapons of mass destruction. Other economists saw these novel instruments of value as being created by perverse incentives. The thesis of the conventional paradigm is that blame rests with meta-physical irrational spirits. It is incapable of recognizing the flaw of radical deregulation. A process that contributed to the destruction of the financial markets. It avoids the importance of human choice in the financial mess. A new paradigm at the very minimum must be able to assign responsibility to finite decision makers and to clearly recognize that the management of political economy is a matter of human choice and decision and not a matter of meta-physical speculation. In short, a new paradigm must generate a method and procedure that lead to economic accountability and improved choices for the common good.

The central elements that implicate a new paradigm of economic thinking rest in the acknowledgement of the centrality of human capital as the prime concern of responsible economics. Second, there must be recognition of the facts and conditions of great economic transformations and an understanding of the balance between the freedom of contract and responsible social regulation to guide the freedom of contract in constructive ways. By constructive ways we are talking about the fundamental values of liberty, equality, security, and social justice. Deep concerns are expressed at the great gulf that divides finance from productive economic processes. WAAS theorists maintain that “money is not the root of all evil that it has been blamed for. But the cancerous growth of unregulated speculative financial activity may be a good candidate.” They also insist that there is an important role for law in managing political economy, especially when law is based on human rights, human wellbeing and social justice.

The common challenges, which provide the challenges for a new paradigm, are generally speaking the following:9

  1. They all transcend narrow disciplinary boundaries.
  2. They are interrelated, interdependent and defy solution by partial, sectoral approaches.
  3. They are all global in nature and cannot be fully addressed without coordinated actions by the international community.
  4. Approaches to resolving these challenges are subject to conflicting claims, priorities and interests.

The central problems that are a current global priority and which cry out for new paradigm thinking include inter alia the following:10

1. Economy & Employment: How can global food security, full employment, and abolition of poverty be achieved within a decade?

2. Energy & Ecology: How can global living standards be raised to middle class levels without depleting or destroying the environment or depriving future generations of the capacity to sustain these achievements?

3. Human Capital – Education, Health and Welfare: How can global levels of education and public health be raised to OECD level?

4. Money & Finance: How can the necessary financial resources be generated and mobilized to achieve the goals described in the first three questions?

5. Security: How can we permanently eliminate war and WMD that threaten to destroy all other development achievements?

6. Global Governance: How can we design and implement systems of global governance capable of implementing necessary measures to achieve the other five goals for the welfare and wellbeing of all?

4. Zachary Karabell, “(Mis) leading Indicators: Why Our Economic Numbers Distort Reality,” Foreign Affairs 93, no. 2 (2014): 90; Hazel Henderson, “Grossly Distorted Picture: GDP Still Misleading,” Cadmus 1, no. 2 (2011): 90-92.
5. Thorstein Veblen, The Theory of the Leisure Class (London: Macmillan, 1899).
6. Thorstein Veblen, The Theory of Business Enterprise (Piscataway: Transaction Publishers, 1904).
7. Id.
8. For an overview of these ideas, see, Richard Katz, “Blind Oracle: A Response to “Never Saw it Coming”,” Foreign Affairs (January/February 2014): 179-181. For an insightful essay on money and human capital, see, Garry Jacobs, “Multiplying Money,” Cadmus 1, no. 6 (2013): 123-141.
9. “Opportunities & Challenges for the 21st Century – Need for a New Paradigm,” The United Nations Office at Geneva and the World Academy of Art and Science June 3, 2013.
10. Id.

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