Day one - the seven day economic plan
HAVE you noticed that politicians once they get elected seem to turn magically into qualified economists? They might have been a research chemist, a five-star general or even a movie star in their previous life. But sit them down in the national driving seat and they will drone on endlessly about interest rates, budget deficits and even the public sector borrowing requirement.
Doesn’t that make you suspicious? Maybe - just maybe - the skills and training required by both politicians and economists are precisely the same. It’s a bit of a coincidence but entirely possible. The other possibility is that they only appear to be the same; in either case all that is required is a degree of common sense.
On this basis the average New Internationalist reader is as capable as anyone. And even the average New Internationalist journalist should be able to understand the basics of economics and pass them on. That is my excuse for most of what follows. I don’t claim any special expertise. I have read a little, talked with other people, even thought occasionally when I got really desperate, and then written it all down. This is nothing you couldn’t have done yourself; all I hope to do is save you a little time.
But there is one liberty that I wish to take. In order to make this something of a conversation piece I would really prefer it if you were to join in, argue a bit, ask the occasional question. There is a practical problem here, since you could be anywhere from Vancouver Island to Alice Springs, but I propose to get round this by assuming that I know more or less what you would say if you could. How does that sound to you?
Well... I’m, not so sure…
Good enough for me, so let’s press on. This magazine calls itself ‘Economics in seven days’ and it has been divided up like this so that you can take it in one section at a time - starting today. This will be a help if you are diffident about entering strange new territory. But then again it will also help to slow you down if modesty prevents you becoming too expert in too short a time.
Frankly I don’t know that I want to spend any length of time on this.
Absolutely right. I should make it clear that there are some people who need to know no economics at all. If you live in a remote village on the upper Amazon your reluctance is quite understandable.
You will be a farmer or a hunter, growing or catching for yourself most of what you need. You have what is called a ‘subsistence economy’ and having learned this you need read no further. Consider yourself fortunate to have somehow acquired a copy of the New Internationalist; if you choose the other aspects of civilisation you accept with similar discretion you should not go far wrong.
For the rest of us things have become a lot more involved. We produce an enormous quantity of weird and wonderful things - digital rulers, spaghetti measuring gauges, talking cars - but we have little idea of who is using them. From the relative calm of self-sufficiency we have jumped to the frantic dislocation of bosses and workers - producers and consumers.
This changeover has taken quite some time: four hundred years from the economic torpor of medieval Europe to the integrated world economy. And the initial impulse for this ‘Industrial Revolution’ was first felt - remarkably enough - on those wet and windy offshore islands that today make up the United Kingdom. The British people did not suddenly start to work longer hours - there is no evidence that they ever did this voluntarily - what did change was the way that their work was organised.
You mean they were pushed into factories?
Yes, partly. But herding people together in this way was by no means a new idea. Booksellers in Roman times, for example, would dictate the contents of the latest best-seller to row upon row of patient copiests who would take it all down in their best hand. By the eighteenth century, however, this system had become increasingly refined as a ‘division of labour’ was introduced. Jobs were being broken down into easily learned steps so that one worker only needed one or two skills. This speeded up production and was now being used to turn out everything from millinery to coloured maps.
But the really important production boost came from mechanisation. If you want to produce more with human muscle you have to employ - or enslave more people. Harnessing water or steam power to a mechanical loom, say, can dramatically increase output, but it might even employ fewer people.
In those days if you had the money to build factories and buy the equipment you were in a very fortunate position. This was your big chance to become a ‘capitalist’ and use your money to extract more and more output from human labour.
I knew the capitalists would get pushed into the firing line early on. But you haven’t explained where their money came from.
Inherited, a lot of it - Europe’s landed gentry had spent centuries piling up the loot to support their aristocratic habits. But it was to be the nouveau riche of the age, the merchants and the traders who were to supply a lot of the cash needed.
They may have made their fortunes on an international scale - from the new colonies of the British Empire. Indeed what we now call the Third World made a big contribution to Europe’s industrial take-off. Trading in slaves or cotton or sugar or spices was very profitable and the proceeds were used to build grandiose houses and lead extravagent lives, but there was enough to spare too for investment in the noisy new textile factories and the heat and grind of the iron foundries.
Wait a minute, who was buying all this new stuff?
Whoever had the money - and to some extent this included the workers themselves. But the colonies were also to be important markets. And if countries like India already wove their own cloth, then too bad. Such competition would have to be dealt with. Indian textiles in the eighteenth century were much more sophisticated - and cheaper
than the British produce and were in great demand. So to protect their infant industry the British government imposed a 75 percent duty on imports from India and reduced the flow of textiles to a trickle. Then as the British factories grew more sophisticated they overtook the Indians and eventually destroyed their industry.
The economic disparities between rich and poor countries arose, therefore, as much from political and military coercion as from economic superiority. The British did, for example, try the same thing on their American colonies: it was illegal to export machinery to America or to set up blast furnaces. But the Americans were strong enough to fight for their independence and shake off their colonial masters.
Still, Britain continued to do quite well. There was much more being produced and British workers’ houses were filling up with pots and pans and curtains and carpets as possessions spread throughout their households. Mind you, the rate of growth even at the height of the Victorian epoch from 1870 to 1913 was only around 1.6 percent a year, a figure most countries would be very depressed about nowadays.
The Victorians were not, of course, too pre-occupied with economic indicators. Capitalism itself had been born without the intervention of economists and it continued to grow mostly of its own accord. And for the mine owners and the factory bosses this had great advantages. They could, for one thing, be very flexible in their use of labour. Children were coaxed inside the clattering machinery and down the wet and dangerous mines and encouraged to use their small size to great advantage - or at least to the advantage of the owners. The English Factories Act of 1883 did try to put some controls on such exploitation but there was a very strong incentive (money) for getting the most from your workforce, so legislation was interpreted as liberally as possible.
The industrialists were generally unsympathetic to government intervention. Back in the seventeenth century the French Finance Minister Colbert had asked a group of merchants what the government might best do to help them. They are said to have replied: ‘Laissez-nous faire’ - ‘let us get on with it’ - and that’s what capitalists have been trying to do ever since.
And persuading the workers to go along with them?
Generally speaking, yes. But the position for the workers was now changing rapidly. Previously, under the feudal system, the lord of the manor might have been a greedy, bellicose old lecher who treated his serfs more or less as slaves. But he was honour-bound to see to their survival. Capitalism had broken this paternalistic system. People were now free to move from one employer to another and the bosses did not need to accept any responsibility for the workers’ livelihoods - factory hands could be thrown out into the street at will.
So what protection could they expect now? Indeed how would the country as a whole hold together now that money and investment had displaced religion and duty as the focus of national life?
I thought I was supposed to be asking the questions.
Well you’ve got to allow for a bit of rhetoric every so often. Anyway, one person who could have answered my question was Adam Smith, a philosopher turned economist at the University of Glasgow. He would have said that there was an ‘invisible hand’ at work - self-interest and free competition would keep things under control. In The Wealth of Nations which he published in 1776 he showed how such competition in the marketplace would be made to work for the good of all.
Giving free rein to greedy, self-interested individuals might seem like a recipe for social chaos: the strong could crush the weak; manufacturers could exploit consumers. Not so, said Smith. Factory owners who continually exploited or underpaid their workforce would soon lose labour to competitors who offered better conditions. And if they tried to overcharge consumers they would be similarly at risk from their rivals who would undercut their prices. If the market could be kept free, and monopolies broken up, the system would be self-regulating.
Nor need there be any unemployment. In the pursuit of maximum profit, manufacturers would always produce just as much as could be sold. If a worker found himself out of a job all he need do was offer himself elsewhere at a lower wage so that some manufacturer would eventually discover that he could make a profit by employing him: with a lower wage the manufacturer could reduce his price and thus sell more.
Smith also predicted that, with perfect liberty, such a market would constantly expand - that we would get ‘economic growth’. Manufacturers would always be on the lookout for ways to cut their costs and so increase their profits and a good way to cut labour costs would be to invest more and more in labour-saving machinery. The amount produced by each person would increase as more machines were purchased and the whole of industry would grow steadily as a result.
Sounds like Smith had economics all worked out. Full employment, steady growth - what more could you want? Is that it? Can I take the rest of the week off?
Not so fast. He did have a very powerful theory. But it depended on there being a free market. Even in his time it was clear that this was not necessarily the case. As he said himself:
‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’
The imperfections in the market place make for a few more complications and mean that we will have to talk about a few more economists like John Maynard Keynes and Milton Friedman. We’ll do that after a couple of slight diversions. First over the page you’ll find a few statistics that might be useful for later reference. Next we’ll spend a little time talking about money.
It is, it is.
Primitive communities produce and consume very little. And, relying mostly on human muscle, they cannot make more goods without using more people.
But the ‘division of labour’ backed by powerful machinery can dramatically increase output.
The money for this comes from the capitalist owner of the factory. He invests in machinery now in order to make greater profits later.
Capitalists and workers will, according to Adam Smith, be regulated by the marketplace. The ‘invisible hand’ of competition will ensure that one group cannot exploit another.
And growth is guaranteed by the capitalist’s wish to earn more profit. He will continually invest in more efficient machinery in order to make his workers more productive.