A More General Thinking of Economy

The major difficulty anyone attempting to think about economics is the complexity involved in thinking about restricted economies. No matter the restriction applied, the more restricted the economy under consideration, the more external variables come into play, making a sensible understanding more difficult. This results in a strange oddity of economics, where what appears to be simpler is in fact more complex and more difficult to understand.

On the other side of this, the more general the economies under consideration, the more variables are cancelled out. The result is that in considering the most general economy possible, the number of variables is hugely reduced, and simultaneously the number of invariants increased. These invariants themselves, though, have a tendency to cancel one another out, leaving very few invariants that need to be assessed in order to understand the different ways the variables left affect one another.

The most general economy is of course the global economy, but since economy is also temporal in nature, the longer a period under consideration, the more general the consideration of the global economy.

To a certain point, barriers to global exchange complicate the picture by introducing artificial localizations of the general economy. A concomitant of this is that globalization as a trend reduces this complication. It’s fair to say that despite the overall increase in complexity of a restricted economy over the past couple of centuries, the overall complexity of the global economy as decreased. As well, the increase in rate of global exchange makes a given temporal period more generalized. Essentially the degree of generalization of the economy in a five year period today might be roughly equivalent to a 40 year period two hundred years ago. This may seem a smaller increase than might be expected given the exponential increase in speeds of exchange, particularly for virtual goods and services. That it isn’t larger is that those changes must be embodied to a degree in concrete local socioeconomic changes that are not as amenable to rapid change.   As an example, the potential for increase in transaction rates as a result of the Internet in the business-to-business sense, leaving consumer use out of the equation for the moment, occurred all at once, as technological changes usually do. However it has taken close to 15 years for that potential to be realized on a significant scale, due to local socioeconomic factors such as investment costs versus available money, availability of technologists with the appropriate expertise (and capability, which is often not the same thing) etc.

The main variable over an extended period is productivity. The reason for this is simple, productivity changes largely as a result of technological change, which is the single variable least affected, and therefore least controlled, by the other significant variables and the relevant invariants. Since the realization of the inherently unpredictable changes in technology is, though, largely restricted by more predictable socioeconomic factors, the unpredictability for the most general economy is greatly reduced.

A further point is that the consideration of economy, whether more restricted or more general, is itself greatly affected by the development of technology. The more capable the understanding, the more effect on the economy, at least in the restricted sense of economy. This effect does concern the economy in the most general sense, but similarly in a more consistent and therefore predictable manner.

A truism of economics that can be applied in a wider sense than it usually is: “Fraud can be easily discovered by ignoring details and concentrating on the general system.” Not only can fraud be more easily discovered, fraud is subject to trends like most other economic variables, and so the tendency to fraud, arising from a general trend, is more easily uncovered, but in this uncovering, the general trend is simultaneously revealed.

We are used to not ignoring details. Analysis is almost always restricted to “root cause” analysis, and due to the commonality of reductionism in the human sciences, and powerfully so in economics particularly, applying the idea of root cause analysis to economy at its most general is something most economists are loath to believe is possible. Granted, the analysis cannot be precisely the same type as is used in restricted economies, since “root” itself changes from the particular to the general.

We are used, as in many situations, to thinking of the most general economy, given that in a sense it is nothing but the sum of local economies, must behave similarly to local economies, with which despite greater complexity are much more familiar. This is a invalid assumption, however, precisely due to the elimination of external variables (to a large degree – natural disasters still happen for instance and must be considered external variables, but even those are largely cancelled out the longer the temporal sense of general is, the exception being any environmental impact that is generated by the economy itself, where external feedback becomes relevant). Virtually all of the assumptions of restricted economies are based on external feedback via these variables, but insofar as the variables still exist, their effect as internal variables is quite often not only different but opposite to their effect as external.

The most problematic effect of this is that what is beneficial and even necessary behavior in terms of local economies can be disastrous globally, at least to the economic system as it is at any given time (a disaster to a given economic system is not necessarily a disaster for human beings, it may also be a benefit). There is simultaneously no way from a manipulative perspective to change this somehow. The global economy is the sum of local economies in terms of behavior, but often opposite in terms of the effect of this behavior.

As a result many of the things that are effective in the most general economy, which means the global economy in the long view, are in fact relatively invariant. The largest impediment to understanding economy in the most general sense, for instance, is common sense, and simultaneously as a relative invariant common sense has a significant effect on the most general economy. Common sense is pragmatic since as individuals, corporations, even as nations the restricted economy in which it has its origin and validity is precisely where pragmatic action is taken. No action is taken on the basis of the general economy, partly because there is simply no means of doing so. Bernard Lonergan’s analysis in Insight as to the problematic results of common sense in the social economy, taken over the long view, becomes even more relevant, when economy at its most general, which contains the social economy, is under consideration.

However, for the economic system as it currently stands, we are not in need of considering a view so long that the overall effect of the continued application of common sense is an immediate issue. As well, since it is only relatively invariant, and this relativity is itself related to the global economic system, structural problems in that system that lead to necessary modifications of it would also modify common sense, and therefore lead to different particular effects, at least over the medium view, even though the general trend over the longest view might remain the same.

The most immediate issue with the economy in the general sense, itself taken over a medium rather than the longest view, is that over a medium view the various manipulations that allow capital accumulation itself cancel one another out. This leaves only one significant variable in terms of the potential for accumulation at all. This variable is known most commonly as surplus value, and is only relevant in terms of the production of wage goods. That production, however, only comprises about 5% of the total economy. Since although it is a very common notion in economics, it’s not well understood how it occurs, especially for those outside the field, I will explicate, as simply as possible, what surplus value is and how it comes to exist.

Surplus value is phenomenally important to our economic system. In fact, all of the value in all the financial markets, including all the accumulation worldwide of capital itself, originated as surplus value in the production of wage goods. How it comes to exist, though, is murky at best even in the work of some of the top economists in the world. Fundamentally surplus value, which initially takes the form of business profits in wage good production, originates in the difference between the value of those goods on the market, and the total wages paid to produce them. So far there is no problem, because we are dealing with surplus value in a restricted economy. The difficulty arises, though, in that in order to create this differential, a contradictory differential must exist between the extant currency and the extant cost value of the total goods that can allow the maintenance of the differential between cost and price. In a restricted economy this differential is produced by a combination of trade with external economies, discounting, and the basic inefficiencies of wage good production. In the global economy over a medium view, though, the first two are cancelled out, leaving only the basic inefficiencies involved in wage good production as the origin of this differential.

In any restricted economy it is in the interest of the economy to be as efficient as possible in terms of wage good production. This is so due to the basics of any competitive market, the market doesn’t need to approximate a true “free market” for this basic effect of any competition. The primary means of increasing efficiencies is via technology, such as automation, that reduce the wage bill and thus in a restricted economy increase the surplus value. Ideologically based reductions in the wage bill are in reality only changes in the measure, and while they have significant impact on a local economy, have negligible impact on the most general economy. This is largely true of any financial manipulation, because eventually it is a zero sum game that is dependent for the total available on the surplus value actually created. This is precisely where the inversion of effect in the general view has its most crucial impact.

As I noted above, surplus value is dependent on inefficiencies overall, even though in a restricted sense it is increased by greater efficiency. This apparent contradiction is due to the means by which efficiency, measured as productivity, affects surplus value. In the case of a restricted economy, the effect is fairly direct, as described above, however in the general economy, the effect is far less direct, since the direct effect noted above is dependent, not on an increase in absolute efficiency, but on efficiency relative to other producers. This relativity is cancelled out in the most general economy.

In the most basic general economy, that of an isolated community such as a tribal or isolated village economy, there is no surplus value. As a result the possibility of individual or family accumulation is directly related to the propensity of other members of the community to disaccumulate via debt. The overall wealth of the community over the medium to long view is independent of this relative accumulation, since it is a zero sum situation. The main variable is the average productivity of community members, which is primarily affected by the average effort applied and the average difficulty of procuring resources.

This situation, although in the local view becomes more complicated, remains largely intact as isolated villages or tribes form trading interconnections with other communities. The first real change in the overall situation occurs with the development of empire.

An empire, at its most fundamental, is a restricted economy that functions as a general economy, since external variables are tightly controlled. What differentiates it from other restricted economies that are connected to external economies is that the control over the effect of external connections is controlled in a precisely unbalanced manner. The empire always brings in more than it puts out in terms of value. The difference is the original form of surplus value. When this surplus value is no longer adequate to meet the needs (and greed) of accumulation, the empire is forced to expand its borders, thus creating a temporary increase in the rate of unbalance. Empire is fundamentally limited, though; its accumulation of surplus value is limited in the final analysis by the reality that expansion itself is a simultaneous contraction of the available external economies with which it can maintain an unbalanced exchange in the long term.

While empire remains relevant to this day as a source of surplus value, it is not in itself sufficient to provide the possibility of the extent of accumulation actually realized in the modern global economy. This exponentially greater extent of possible and actual accumulation is predicated on technology, and specifically on inefficiencies that are inherent in the immature application of technology.

The most basic technology necessary for accumulation is of course currency. Insofar as currency remains tied to something else, accumulation remains fairly limited in scope. Whatever arbitrary “thing” it is tied to is not itself infinitely reproducible, and so accumulation is tied fairly directly to the availability of what it is tied to. Over the longer view, though, currency is more fundamentally tied to overall wealth.  With the changes the technology of production brings, the direct relation between wealth production and effort/resource availability becomes much more indirect. Productivity, therefore, is no longer a simple measure of average effort versus average difficulty. Changes in productive technology, though, were relatively slow and only modestly cumulative until the modern period, when industrialization and eventually automation produced a much more rapid and cumulative dissonance between productivity and its basic prerequisites.

This dissonance introduces a potential discrepancy between the total price of goods produced and the total cost, and that discrepancy can be exploited, at least within a restricted economy, in order to facilitate much greater accumulations and much greater concentrations of accumulation. In this arises the notion of capital itself as an entity. Accumulation, though, in the general economy retains its unreality over the medium to long view, and this contradiction produces a related inversion in the means by which surplus value is created in the general versus restricted economies. The basis of the contradiction is that the discrepancy in the restricted economy has to work as a higher price of goods versus cost of goods. The biggest variables affecting each are supply/demand in terms of price, and wages in terms of costs, since most of the other factors are relatively invariant over the medium to long view.

In terms of price, supply is already largely a function of demand over the long view. Temporary shortages of supply are usually made up for, since demand also produces the conditions necessary for investment in increasing supply to earn an attractive return. Demand in a restricted economy is not determined solely by that economy, however in the general economy it is. The major things that affect demand in the general economy over a reasonable period are wages and concentration of accumulations.

The greater the concentration of accumulations, since with the transformation of accumulation into capital, accumulation itself is the major prerequisite for further accumulation, the lower the demand for goods, and hence greater concentrations have a dampening effect on price for wage goods. The production of surplus value in each restricted economy is dependent on wages that are lower than the price minus relatively invariant costs. However in the most general economy, the total wages are the primary driver for demand, and the relationship here is inverted – higher total wages = higher total demand. The combination of greater efficiencies in production and greater concentrations of accumulation have a negative effect on the possibility of surplus value itself in the largest view. In fact, there is a negative surplus value at work, since the price must reflect the percentage that goes to accumulation, but that percentage is by and large removed from the total available to produce demand.   As productivity increases, the lower wages paid in total, or conversely the larger total of goods produce for the same wages, exacerbates this reduction of surplus value.

The extent and complexity involved in the transformation of simple currency into the modern financial system can to some degree obscure this problem, but only in a restricted economy. It cannot do so in the general economy because it is itself a zero sum game that can only exist based on surplus value. Mortgaging future production, for instance, only works for a limited period of time. Increases in credit to spur demand inevitably results in a later contraction as debt is repaid, or a sudden loss if the credit was extended beyond the ability to repay. Large restricted economies, such as individual nations, can use such means to their own advantage, but only at the expense of another nation in terms of the economy as a whole.

As the contradiction results in a greater and greater gap the process of increase itself accelerates, since restricted economies try even harder to increase productivity and thus result in lower total demand, investment in increased productive capacity continues to lessen due to lower demand, and the concentrations of accumulations, unable to get a decent return on investment in production due to lack of demand, turn to investment in rentier property. This latter raises the non-optional percentage of wages and thus further reduces demand. Eventually the value of accumulation itself becomes largely unreal, since it can never be realized in terms of actual goods. Both the public debt and the private accumulations are larger than the total currency and total value of available goods and as a result neither can wealth be utilized nor can the debt be paid off. Propping up such a fictional system becomes the main challenge of government and the financial system. The technologization of the latter, as well, only serves to increase the rate at which further exchange exacerbates the problem.

It doesn’t take much thinking to realize that the financial crises, which are usually meaninglessly attributed to other financial crises, have their proper basis in the contradictory nature of accumulation itself and the continuing exacerbation of that contradiction by technological advance. The gaps between nominal worth and real worth, and between nominal debt and real debt, are only sustained by trust in a financial system that increasingly and more obviously fails that trust, since its existence as well is predicated on something that doesn’t actually exist. That is, surplus value itself, in the most general economy.

The problem in terms of what is to be done is simple: there is no available remedy. We have no means of directly acting on the general economy, and no means of changing the behavior of restricted economies except in a local sense, which would accomplish nothing other than destroying those local economies. Even had we the means to act, the problem is so counterintuitive that any potential solution would be equally so, and as a result would be unable to garner any support. In the meantime, though, we risk the entire edifice of the financial system, itself the transformation of currency as the medium of exchange, the means by which exchange itself is valued, completely falling apart.

The question that remains, then, is what happens in the event it does in fact fall apart? We have had a major financial crisis each decade since the 1970s, and each time the total value at risk has been magnitudes greater than the last. If “too big to fail” becomes “too big to bail” the collapse is already accomplished. As a society dependent on exchange, how do we continue exchange with no means of valuing exchange? Since the financial system itself is no more than a measure, any measure we create in its place will contain the same contradiction.


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