The New Economy

©Fernando Caracena 2014

Why I am Writing This

I have an optimistic message on the eve of the New Year.

I grew up in a time of great optimism. I entertained a variety of optimistic expectations for the future. Shoot for the Moon. Someday we will roam the galaxy. Things will be better for the human race, even better than what the TV series Star Trek portrayed. Then I watched in disbelief as things rapidly turned sour for our country. For several decades I have seen the serious erosion of U S infrastructure and creeping impoverishment of its citizens. I have often asked myself: "Why is this happening?"; "What are its causes?": "Can it be fixed?" Now I begin to see the outline of change that may restore the optimism. The vast distortions of the recent past have precipitated an avalanche of change that will balance out the negative changes and establish firmer fundamentals on which to build a more optimistic and stable future. This bit of hardship that we have endured may result in a happier future for humanity and individual.

Toward a Zero Marginal Cost Society

We are in a period of transition to a new economy when many modern industries will be hoist with their own pétards of greed. Jeremy Rifkin's new book, "The Zero Marginal Cost Society" suggests that this is happening to capitalism right now: capitalism has reached the point of diminishing returns where is must be replaced in part, or totally, by a new form of commerce. A new economy may be emerging. See the following video for a presentation of the problem: video.

Before proceeding with this discussion, let us define a few key terms.

Capitalism

Capitalism is an economic system in which trade, industry, and the means of production are largely or entirely privately owned and operated for profit.—Wikipedia.

Those working under capitalism have struggled over the past centuries to establish capitalism as the dominant economic system of today. The reason that capitalism has won out is that so far it is the most efficient system for the production, exchange and distribution of goods and services. On the competitive field of efficiency it has beat all other economic systems hands down. It does not need to be defended as an ideology, because its operating efficiency insures its own survival. If it is so robust, what other more apt system threatens its survival?

Free Market System

The test bed of economic systems is the marketplace where people express their preferences for goods and services through their purchases. Throughout the centuries, people in aggregate have tended to go with free markets.

A free market is a market system in which the prices for goods and services are set freely by consent between sellers and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority. —Wikipedia

The free market system is the easiest system to operate. Governments have tried to suppress free markets and replace them with some kind of state-controlled alternative. And always, state-controlled market systems eventually fail the test of time. A free market system operates efficiently apart from government control. It has sprung up spontaneously in a variety of settings around the world. It is practically hard-wired into human behavior. A free market system functions best under anarchy. N B that here we use use the term anarchy, not in its older pejorative sense of lawlessness and disorder, but under its more modern definition:

In 1840... Pierre-Joseph Proudhon adopted the term [anarchy] in his treatise What Is Property? to refer to a new political philosophy, anarchism, which advocates stateless societies based on voluntary associations.—Wikipedia

There are human behaviors that tend to self-organize into orderly structures, which echo a theme based on the behavior of complex, thermodynamic systems, treated in a previous blog entry, "Spontaneous Order and Dissipative Structures". Governments would do better and operate more efficiently if they take into account the self-ordering behavior of human beings in aggregate [anarchy], which operates in harmony with the freedom of the individual and appears spontaneously in groups of humans. Such governments would become unobtrusive and enjoy great success.

Marginal Cost

In economics and finance, marginal cost is [defined as] the change in the total cost that arises when the quantity produced has an increment by unit.—Wikipedia

The importance of the concept of marginal costs in economics is that it defines the point, at which profits turn into deficits. The idea is that industries will continue to increase production for a free market as long as they can still make some money on each additional item produced, and will stop increasing production when they stop making such a profit.

As market have expanded globally, profits are modified by other factors. Economists use other concepts in dealing with large-scale price setting that depend on the size of producer-consumer economies, such as the idea of perfect competition.

The Zero Marginal Cost Economy

Today satisfies the ancient Chinese curse, "May you live in interesting times". We are seeing vast dislocations in the economy. Many old, well-known industries that survived the great depression have now fallen victim to the huge paradigm shift in business economics. Many of the successful techniques of well-organized business practices have been rendered moot by the change in times. Some people feel that civilisation itself is self destructing. The change that is happening is greater than that produced by the introduction of gunpowder in the destruction of feudalism and perhaps, compares with the complete restructuring of Gaia by the advent of the Cyanobacteria.In these comparisons there is the same pattern: something very small (microscopic)  restructures the system on the largest scales (macroscopic). Jeremy Rifkin has found the microscopic cost that will have a macroscopic effect on our economic system: near zero marginal costs. The effects of near zero marginal costs helps explain a lot about the causes of the great restructuring of the world economy in recent time.

Personal computers and the Internet enabled an approach to zero marginal costs.

The new electronic media reduced the costs of communications to near zero and thereby facilitated the sudden growth in various business strategies, which also contributed to the acceleration of the approach to zero marginal costs.

Vertical integration pursued by many businesses as a means of lowering costs, produced much growth in revenue for them, but in some ways it has accelerated the dive toward zero marginal costs. We recognized the effects of vertical integration in the fall of many people out of the middle class. Although, the idea of vertical integration in business is old, it did not become a large-scale business practice in full-swing until a few decades ago.

Outsourcing and offshoring, which  originated in the early 1980s, aimed at reducing labor-related costs by delegating parts of the business to subcontractors who could avoid a significant part of those costs. This practice also exacerbated rampant unemployment, the fall out of people from the middle class, and the extension of unemployment upscale into the educated class. The most dramatic effects of this move was the appearance of highly educated people in more menial positions, such as airport shuttle drivers, etc. The term "underemployed" gained common use.

Rising College Costs Reflect Lag in Reducing  Marginal costs toward Zero

Meanwhile, there are vast dislocations that happen when some sectors of the economy fail to move with the times, such as the rising costs of a college education. The net effect of rising college costs is that people earning university degrees at enormous costs, financed by large debt, come out into the job market to find that the well paying jobs that they have prepared for have disappeared. This group  forms the educated poor, who are loaded with a lifetime of debt that they have to pay from menial, low-paying jobs.

Is the Commodification of Jobs the Last Straw?

The Commodification of Jobs was a false notion circulated a few decades back. The idea was that work was a commodity that could be bought at the cheapest price in any part of the globe. In combination with outsourcing and offshoring, international companies located factories and assembly work in other parts of the world at very low wages, where the cost of living was low, or where people had low expectations related to jobs. But, work itself has a non-reducible marginal cost that depends on where a worker may live. A modern economy, such as that of the US, cannot be sustained  on minimum wages. Forcing people to operate in their role in the national economy at below their marginal costs is actually a form of slavery, or robbery, because if they were  a business, they would choose not to sell another unit of their production for less than its marginal costs.

In the case of the earlier generation of optimistic students who hoped that lack of opportunity was a temporary condition, instead of the systemic dislocation it was, they ate the loss imposed on them as lifetime loans--an ultimate form of slavery, debt peonage. The generation of students watching their older sibling falling into this trap, have begun to rethink the problem. What is a job really about? Does a job, or money really buy security? Happiness? Meaning? The answer for many of them is that life is too short. They pursue happiness by different means.

The Pool of Discontent Fuels to Dive Toward Zero Marginal Costs

When highly talented people look around and see what I have described above, they change their focus from the idea of seeking employment under someone guided by mere money ambitions, to one of becoming self-directed in seeking to make a difference in modern society. They recognize that their expertise and talent can be used to benefit real people in real need. Entrepreneurship becomes one of opening up opportunities for people struggling under the effects of colonialism in third world countries. Often the new form taken by these efforts is in establishing a collaborative commons, in which people participate in an ad hoc manner to hack out unique solutions to sustainable survival and enriching each other's lives. Often these experiences are fed back to their own deteriorating environments where new modes of industry are created. And it is these new modes that are threatening to bring down, or seriously hobble the old forms of capitalism.

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One Response to The New Economy

  1. trrish says:

    Very interesting, Fernando. I can't say I know economics well enough, but I am seeing what you are talking about with the commodification of jobs, college costs, etc. I like the optimistic spin.

    Trish

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