On this blog I have been very critical of mainstream economics, to the point that I feel most of it should be thrown out. I believe the orthodox theory of demand, supply, labour theory, wages, recessions, competition and information are fundamentally flawed. The obvious question is, if we are to ditch these unrealistic and useless theories, what do we replace them with? I cannot only criticise and knock down, I also have to create. I believe we should replace the current theory based on graphs of supply and demand with one based on power. The economy is not governed by unseen and unchangeable impersonal forces but by the competition of different sources for power. I believe neo-classical economics has outlived its usefulness and instead should be replaced with “The Theory of Power”.
This is a challenge that will take years or decades to complete and will need more people than just myself. However I intend to take the first step with this post. Keep in mind that this is the beginning and I am still only a 21 year old college student, so there is still time to solve the world yet. This is only a crude rough sketch of ideas I have running around in my head.
There are no inflexible laws of economics that control our actions. Instead the positions held in the economy are based on power. Wages are not set by an interaction of an immeasurable and abstract demand and supply curve, but rather by the relative power of each party. For example, low wage workers get paid so little because they are in a position of weakness. They have little education, few opportunities, are marginally attached to the workforce, are often ethnic minorities and lack confidence to assert their position. Whereas the employer is in a position of strength. They have control over whether or not their employee will make a living or not. It is only in a rare situation that their security and livelihood is threatened. They use this power over their employees to push down wages. Corporate executives get paid obscene wages not because their special demand or supply curve but because they have the power to set their own wages (or influence the board to do so). The only way to offset this is if the workers form a union which grants them a degree of power to balance the employers. Or the government could intervene in the form of a minimum wage.
Prices are not set by demand and supply but by degrees of market power. Ironically, neo-classical economists would agree with me on this as according to them no profits are made in the free market, profits only come from distortions in the market like market power. Monopoly is only the most obvious and visible example of this. Oligopoly is another, as is the use of advertising and branding. I can still remember the awe and esteem in which a group of Southsider teenagers I knew held their Abercrombie clothes. What is conspicuous consumption and fashion but power? Have you ever tried to argue with a bank or an airline? They will listen to you to an extent but only to be polite, after that its tough luck. They know you there is little you can do about it, that they have power over you and that you’re stuck.
Prices are set by the degree of power the firm has. Hotels do not charge extra because they have a unique supply or demand curve, but rather because they know they can get away with it. Inertia will push people towards the easiest option even if it isn’t the cheapest. How can demand, that abstract and immeasurable concept known only to economists, be the setter of prices when few managers have ever heard of it? How can it be claimed that prices are set by demand and supply when economists have never actually measured or found signs of either? The world is far too complex to fit on a graph. Prices are formed from the clash of businesses pushing upwards and consumers pushing downwards. The winner is dependent on the amount of power each has, which is why prices are always different (if it was a question of supply and demand then there would be only one price). So rather than viewing businesses as powerless objects with their hands tied by the market and the consumer as sovereign, they should be seen as countervailing powers constantly pushing against each other.
This theory takes account of the government, not in the abstract let’s-pretend-it’s-not-really-there way like conventional theory, but as a central core of capitalism. Capitalism needs the state. Not just to protect property, but to educate, protect, medically cure the workforce as well as invest in infrastructure and research. Big business has huge power over government through the funding of elections and their wealth. For example here in Ireland, corporations have effectively blackmailed the government into keeping corporation taxes some of the lowest in the world with the threat of “if you don’t we’ll close shop and jobs will be lost”. Across the Eurozone government actions are judged based on how the market reacts, as though it was the supreme judge and ruler of the economy. While some criticise the government bailouts, economic historians are aware of the fact that bailouts are a common feature of capitalism. Whenever major businesses get into serious trouble the government usually comes to the aid. The few times it has not, the result has been a disastrous collapse.
The theory incorporates the media. It is the media that defines our societal values and has a major influence on how we view the world. Our discussions resolve around the dominate media narratives. If something is an issue, then it will be discussed constantly by people, whereas if it is ignored, then people don’t talk about it. Think of how inequality was unspoken of until last year, or how Gaza receives so little attention unless bombs are dropping or how Ireland can go decades with absurd and inhumane abortion laws until someone dies before it becomes an issue. The American Tea Party is essentially based upon delusions and untruths that had become dominant narratives on Fox News. The media is not a monolith speaking with one voice, and it is wrong to ignore the diversity of opinion. The media can also be a force for progressive change and the advancement of liberal ideas, particularly on social issues. But it would be naive to claim there is no set of underlying assumptions or commonly held beliefs that shape reporting. We are all biased in our own ways and it is natural that predominately middle class, white, urban reporters have their own biases separate from other parts of society.
The Theory of Power will link into other concepts such as theories of the elite. The Military-Industrial Complex never went away, other groups simply joined it. It will engage with the power of networks where who you know is as important as what you know. Ireland’s response to the financial crisis and recession has not been based on economic theory, but on power. The governing elite of politicians, bankers, developers (it used to include the Church) and partial support of the media have decided the course of action. It was due to the power that they wielded that the banks got a bailout. It was due to their power that the rich have been protected in successive budgets. The limited strength of trade unions has offered meagre protection for public sector workers, while the unorganised and powerless poor have borne the brunt. It has been the unemployed, the single mothers, the disabled who have taken the hit in repeated social welfare cuts. Until you understand the importance of power in political economy, you cannot understand current Ireland.
In the 19th century Marx spoke of the control of the means of production. In the 21st century it is control of the means of power that matter. Whatever you want to call them, the rich, wealthy, 1%, oligarchs, plutocrats etc have control of power in America. They dominate the government to a frightening extent. Campaign funding has reached the level of buying politicians. America has fallen from government by the people to government by interest group and lobbyists. Politicians run on platforms of who will help businesses the most, as though they were the only sector of the economy. The media is dependent on advertising giving it a strong incentive not to rock the boat.
The most powerful realm of all is the power of an idea. You can convince few people to do things that do not directly affect themselves without referencing an idea. People will live and die for an idea. They will put up with all sorts of misery and suffering for an idea they believe in. It is ideas that raise armies, build cities and create nations. It used to be the idea of religion and God that drove societies. In the 19th century it was the idea of nationalism that shaped destiny. In the 20th century it was political ideologies of Fascism, Communism and Capitalism. These ideas shape our societies and govern how we think and view the world.
The current dominant idea governing economics has shaped our economy hugely. The idea of the free market has as a great an effect as the idea of Jesus. The idea that the free market is the best outcome and solution to all problems permeates every discussion around the world. The idea of competition is good and government is bad not only dominates the world of economics but also the world of government and the media. You cannot explain the crash without explaining how the free market idea dominated economics, government and the media in a self-reinforcing loop. This triad drove the actions of the rest of the economy. The idea that the market is always right lies behind the economic crash and the ills of society. It is the excuse that justifies festering poverty and inequality. Our actions are determined by our ideas and the current apathy and inertia is based on the idea that problems naturally sort themselves out.
The Theory of Power puts the role of the government in a new light. Instead of viewing the government as ineffective interveners who make the problem worse, they can be seen as necessary counter balance. Power must rest in some hands and it is best to leave it in those who will abuse it least. Governments are prone to capture by ideologies and interests, it is important to ensure it is the right one. The government imposes rules and regulations upon the market in effect to control the beast. There is a saying that the market is like fire. If controlled it is good and can be used to cook food and keep you warm. But if it is not controlled then it can burn your house down. The government is necessary to prevent business from running wild. Unions too play a crucial role in this, which is why the decline of unions has been so disastrous. Community organisations and pressure groups also have a role as does the media. The economy should not be seen as rigid lines on a graph, but rather as competing powers pushing against each other.
To understand the world, you must understand who has power and how they use it. History does not march in a straight line across the globe. Rather the pendulum swings back and forth from different forces and kings are often dethroned. The economy takes its form from the struggle between sources of power in business, labour, government and the media. Unlike supply and demand, there is no one rule or result, but rather wide varieties dependent on history, culture, religion and social norms, which determine each factors strength. To conclude, we are not helpless against market forces, we are not trying to push back the sea. Instead the current wealth and power of the economy originates in the struggle for power. If it can be built then it can be destroyed. The Oligarchs of today may have come from dust, so it is possible that to there they will return. It is all to play for.