The economic engine at work.

The economy gets a pretty bad rap these days, and deservedly so. Income inequality is soaring, labour injustices continue to plague the third world, corporations have more power than ever and crimes against the environment occur on a regular basis. The combination of these realities has pushed many of my generational peers to become frustrated with the current system and call for economic reform. They have also, in extreme cases, caused an anti-capitalist fervor, especially on university campuses across the country. While institutional changes are essential to our well-being going forward, the anti-capitalist sentiment is a little misplaced since the current economy with all its corporate influence is probably more accurately described as crony capitalism anyway. The truth is, capitalism provides the best starting point for the 21st century economy, but a lot more needs to be done (specifically by the government) to make it work for all of us. I’ll get to my ideas in the second half of this post, but first I want to quickly address two groups of people who might disagree with that bolded statement. If you don’t belong to one of them, feel free to skip ahead.

What about socialism/Marxism/communism?

Well…they don’t work in the real world. I know that they’re all different, but we’ve tried implementing variations of all these ideologies many times before and literally all of them have failed.

This isn’t to say Marxist ideas are useless or invalid. To paraphrase this video, Marx is like a brilliant doctor in the early days of medicine: he knew acutely well how to diagnose the problems of the disease he called capitalism, but he had few practical methods on how to fix them. Nevertheless, his criticisms are still relevant to us today and we can use them in our quest for reformation.

Secondly, economic inequality is natural (side note: natural is not automatically good — I see this all the time and it’s a stupid argument). As a thought experiment, if all the wealth in the world was evenly distributed, everyone would have about $51,600. Some people will spend it on drugs, others on vacations, and a few will invest it to provide the drugs or vacations that others are purchasing. Eventually, this will lead to similar levels of inequality as we see today. This is simply because skill, talent, intelligence and resources are not equally distributed. Even if everyone starts on equal footing, inequality is inevitable unless artificially prevented. The important question is how much inequality should we accept and how should we maintain it?

What about free market/libertarian/laissez-faire capitalism?

Because if doing bad things is profitable enough, then people will do bad things. The profit motive works amazingly well to get people to do things that benefit others and scale it to maximum impact, but being double-edged and all, it also works frighteningly well in the other direction.

In other words, capitalism is only as good as the rules of the market. In a completely free market, there aren’t really any rules. More often than not, this works in our best interests. But humans are pretty shortsighted and are subject to behavioural fallacies like this one I’ve written about. Nasty covert racism/sexism can end up being pervasive. The rich can end up with ever-increasing wealth while the poor remain trapped in the cycle of poverty. To some degree, we see signs of all of these symptoms today and the cure definitely isn’t freer markets.

So why capitalism at all?

Along with democracy, I believe it to be one of the most powerful social ideas that humans have ever conceived. We know all about its evils, but here are some incredible things it deserves credit for:

It generates incredible wealth and has lifted hundreds of millions out of poverty

Put in the proper perspective, it’s kind of ridiculous how much growth the combination of industrialization+capitalism has led to in just about 200 years. Exponential only begins to describe it.

One interesting thing to note in this chart is the peak in the number of people living in extreme poverty around 1970. China transitioned to a market economy in the late 1970s and single-handedly lifted 500 million people out of poverty.

2. It spurs technological innovation

The two graphs above would not look like they do if not for technology. Competition and the profit-incentive drive companies to innovate. This excerpt from a post on my favourite blog puts it well:

An established industry full of existing winners running on greed is like the highest layer of trees in a crowded rainforest. They’ll push upward only as needed, elbowing each other for little gains and victories as they vie for sunlight, mostly just trying to keep their spot in the canopy. Greed just wants sunlight — it doesn’t care how high up it is when it gets it. But below, the hungry underdog burns for sunlight and will spend 100 hours a week trying to figure out how to get it. When the breakthrough comes, the underdog bursts up through the canopy into the open sky and spreads its leaves out wide. Suddenly, the trees that had been on top are blocked from the sun. Greed is then replaced by the much more powerful drive of survival, and innovation kicks into high gear as they scramble upwards for their life. The environment has changed — it’s been disrupted — and in this new world, created by the underdog disruptor, companies have to innovate in order to re-optimize. Some end up back on top, others die — and at the end of it all, technology has jolted forward. We all witnessed an example of this when Apple rocketed through the mobile phone canopy in 2007 and forced all of the other companies to make a smartphone or die. Samsung managed to get itself back into the sun. Nokia did not.

3. It offers freedom

Since the factors of production (like land and capital) are privately owned, the choice of what to do with them lies with the owner. The consumer is offered an almost overwhelming freedom of choice when it comes to satisfying any of their whims. On one hand this seems like unnecessary materialism, but on the other, every dollar you spend goes towards sustaining someone’s lifestyle somewhere on this planet.

Free markets ensure that if someone wants something, there will be suppliers for it. Markets also have the neat property of being self-correcting through changes in price without the need for enforcement; they are flexible enough to adapt to changing needs, wants and conditions.

On the supply side, you have the freedom to pursue whatever passion you choose and sustain a living from it, because chances are someone will want what you can offer.

Applied to countries, this means that they can specialize and trade their surpluses, benefiting from each other’s strengths. The rise in free trade is correlated with an increase in the global standard of living. Global trade also has the advantage of enforcing peace and good behaviour through economic interdependence. Sanctions are a much nicer way of dealing with political issues than combat is.

4. It decentralizes power

Capitalism can be considered the economic equivalent of democracy. As much as communism seems like the “power to the people” system, I think capitalism fits the phrase better. The power to decide what gets produced and who gets what is distributed in all of our collective hands. The problem only occurs when economic power becomes too highly concentrated by a state or corporations or the wealthy (like what’s currently happening).

Capitalism only provides an abstract and theoretical framework for human economic interaction, and as such, is amoral. The profit motive, much like the Force from Star Wars, is a tremendously powerful thing that can be used for both good and evil. So the question then becomes: how to harness the positives of capitalism while minimizing how evil it allows people to be? Or in other words:

What should the 21st century economy look like?

Glad you asked. I’m no economist, but I have a few ideas that make sense.

A good question to start with is: what do we want our rich and powerful to look like? And then structure the rules and incentives of the market accordingly to make that happen.

Personally, I’d like to see the people who cure diseases or scale solar energy production or invest in infrastructure in the developing world topping the Forbes lists.

Here’s a few ways we get there:

1. Government Regulation/Spending

A democratically-elected legislative body is our best hope for steering capitalism to work for us. It is the government’s role to act toward fixing the failures of the market. This could mean either taking direct action or setting the “rules of the game” and letting private industry handle it.

If the economy was the NBA, the government would simultaneously be star player Lebron James as well as rule-making commissioner Adam Silver. In fact, this is already the case with government spending accounting for between 25–50% of countries’ GDPs (easily the largest single entity in the economy), and passing regulation like Dodd-Frank.

The government has a lot of power and we need it now more than ever to work harder for the general public’s interests. Important spending decisions should be subject to a data-driven analysis of what works and what doesn’t. We get this to happen by exercising our right to vote, increasing public education in finance and economics and electing competent capable leaders in all levels of government.

2. Cap private spending in government and make elections democratic again

The breakup of corporations and government is like our modern-day separation of church and state. The biggest way they’re in bed together is lobbying, which isn’t a bad practice in theory, but as a tool, it’s used disproportionately by moneyed interests. The same goes with campaign fundraising. Curbing lobbying powers and publicly funding election campaigns would go a long way toward decreasing corruption. Perhaps a public website for advocacy and debate could bring transparency, equity and accountability and replace what is today essentially legal bribery.

Secondly, we need proportional voting in some form. It truly baffles me that most democracies in the world (including ours) still use First Past The Post, allowing as little as 37% of the population to have 100% control over legislation. We can further increase representation by either making voting mandatory (like Australia) or at least making Election Day a national holiday. Online voting is a pretty bad idea due to security concerns, but several things can be done to smooth the physical process like easier access to registration, polling station locations and wait times.

3. Internalize Negative Externalities (make doing bad things less profitable)

This seems obvious, but the easiest way to stop people from doing bad things is to kill the incentive for doing bad things.

Stop fossil fuel subsidies. Globally, more is spent on fossil fuel subsidies than on healthcare. That is just ridiculous.

Implement a carbon tax. It works.

End the agricultural subsidies and protectionist tariffs that encourage farmers to clear forests, use excessive amounts of fertilizer and precious underground water and give an artificial advantage to first-world farmers over third-world ones.

Somehow simplify the insane complexity of the financial sector and emphasize its ethics and raison d’être. As economist Robert Shiller says, “Finance is not about making money per se. It exists to support other goals — those of society.”

Back out of any treaty that masquerades as free-trade but only serves to give corporations more power. Corporations simply cannot be allowed to sue countries for “lost profits” or erode our digital rights in the name of intellectual property. On the same topic, all trade agreements should include clauses that ensure humane conditions and fair compensation for foreign labour, monitored by an independent third party.

Get tougher on companies with a lot of monopoly power. Important industries like telecom, GMOs, mass media, drugs, music and film are dominated by a few powerful firms which have the power to strangle consumers, competition and innovation.

The awesome part about some of these suggestions is that along with increasing social good, they also increase government revenue so more money can be spent doing point #4.

4. Incentivize Positive Externalities (make doing good things more profitable)

Ramp up low-interest loans, subsidies and investment into renewable energy research and companies (even better if this is done with fossil fuel subsidies). This includes everything from energy production (fusion, solar, wind) to more efficient consumption (electric vehicles) to sustainable urban development.

Do the same thing for GMOs, innovative farming techniques, novel food production (lab-grown meat) and water generation (rainwater harvesting, desalination)

Increase public investment in basic research and provide worthwhile tax credits to encourage private research.

Restructure the way we fund drug research. This guy has an awesome idea.

Incentivize developers to build affordable housing alongside luxury developments to combat gentrification.

Fix patents so that they work for innovators and not for the patent trolls who’ve extracted $1 trillion in wealth since 1990.

Invest in entrepreneurs. They’re really good for the economy.

5. Use a better metric for progress/success

The GDP is the current go-to metric for a measure of a country’s well-being, primarily because it’s relatively easy to measure. But as a statistic it’s pretty flawed. It weights all economic activity the same (beneficial and harmful) and leaves out costly externalities like environmental damage. GDP is still useful as a high-level measure of economic output, but we really shouldn’t be basing policy decisions off it. Perpetual GDP growth is simply a ridiculous and unsustainable measure of progress. We’re already using way more than the Earth can afford.

So what can we use instead? There are a few promising alternatives like the OECD Better Life index, the UN’s Human Development Index and the Genuine Progress Indicator. Someone smarter than myself is gonna have to evaluate the relative strengths and weaknesses of each of these statistics. The ideal measure of progress would capture the standard of living as well as the economic production and resource usage. It’s a tough ask, I know.

6. Basic Income (BI)

This last point probably isn’t going to happen for a while, but it’s definitely worth talking about because it will change everything when it does. The basic idea is that everyone receives an unconditionally guaranteed income without any qualifiers or requirements. BI is about establishing a minimum standard of living for every individual. BI has a lot of benefits and there’s real-world evidence that it works; if you’re interested, read more about it here.

Why will we need BI? First, watch this. I’ll wait…… Now that you’re all caught up, you’ll agree that automation is coming for most of our jobs, and the economy isn’t going to function when 47% of the population is unemployed. Those who own/create the automation will become ridiculously wealthy but if no one can afford the cheap ubiquitous goods the explosion of productivity creates, then everyone loses. So we tax the owners of capital and redistribute wealth in the form of BI. It’s supported by smart people from all over the political spectrum because it just makes a lot of sense.

This has major implications for the future of work. No one will need to work to sustain themselves anymore. Human labour will rapidly depreciate next to supremely intelligent and dexterous robots. This will probably lead to an explosion in industries based on culture, art, entertainment and pleasure. BI takes us a little step closer to the utopian Star Trek economy.

Conclusion

Our economy is a gigantic and complex beast. After about 200 years of changes and development, it works well…for the most part. There’s a lot it does right and equally as much it does wrong. Our job going forward is to critically evaluate it and make it work for all of us even in the face of scary problems like inequality and automation. A lot of what I’ve spent the last ~2700 words describing is pretty oversimplified, but as much as I wanted to get into the data and the nitty-gritty theory, I also wanted you to read this far. Hopefully, you’ve found this piece interesting and a worthwhile use of your past 10 minutes. The ideas I’ve shared here definitely aren’t comprehensive and aren’t even guaranteed to work. But if you like what you’ve read or just straight up disagree with me, please leave a comment below or get in touch. Oh, and a share would be nice too.