NEO-CLASSICAL MICRO AND MACRO E CONOMICS , SCIENCE OR S ILLINESS ?

A FEASIBLE AND DESIRABLE ALTERNATIVE FOR POLICY OF AUSTERITY IN ORDER T O SOLVE THE SOCIOECONOMIC C RISIS.

TOC

1 2 3 4

Introduction ...................................................................................................................................................................... 2 Six blind boys and an elephant ......................................................................................................................................... 3 On the diverging advice given by economists to politicians and the public in general ..................................................... 6 Some economic misconceptions ..................................................................................................................................... 12

4.1 4.2 4.3 4.4 4.5

Scientific practice .................................................................................................................. 12 Gross National Product per capita ......................................................................................... 13 Economic growth .................................................................................................................. 14 Positive balance of trade........................................................................................................ 15 Profit, the missing link in economics .................................................................................... 16 Profit according to the businessman .............................................................................. 16 What is profit? What is the origin of profit? ................................................................. 21 Profit according to a neo-Marxian economist ............................................................... 21 First paradox: higher wages for employees, higher profits for the employer ................ 22

4.5.1 4.5.2 4.5.3 4.5.4

4.5.5 Second paradox: is a positive cash flow for one company at the expense of the rest of the world? ...................................................................................................................................... 24 4.5.6 4.5.7 4.6 4.7
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Profit according to (neo-) classical economists ............................................................. 25 Evolution of the profit-ratio........................................................................................... 26

Active unproductivity ............................................................................................................ 27 The economic dogma ............................................................................................................ 29 Satisfaction of needs: Driving force of the economic process .............................................. 31 Profit as a consequence of growth ......................................................................................... 32 Profit for companies as part of profit for society ............................................................. 32 The social purpose of profit ................................................................................................... 34 An idealistic view on economy ............................................................................................. 36 Positive balance of trade........................................................................................................ 36 Conclusion ............................................................................................................................. 38 Distribution of profit as driving force of or brake on economic growth ......................... 38

Basic Theory on the Origin of Profit .............................................................................................................................. 31

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8

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Addendum ...................................................................................................................................................................... 43

Introduction

Dear Madam, Sir, I dont think I have to give you a description of the present socioeconomic situation worldwide. Just study the past, look at the newspapers and the news on TV, makes you wanna cry. Wish your heart was made of stone. If one read or hear the diverging advises given by distinguished economists, one can only conclude that they dont know the solution for the socioeconomic crisis. Some advocate austerity, ot her advocate more government spending, and most of them just refer to other economists. So what can the poor (in vision) politicians do in order to solve the crisis, as even the economists dont know the way out of the crisis? The economists of the Troika (World Bank, IMF and the European Commission) impose a severe austerity on countries like Greece, Spain, Portugal, Ireland, while other countries, like Germany and The Netherlands, impose a severe austerity on themselves (read: their own population, not themselves). There is no solidarity between the North European countries and the South European countries. And even within Germany the rich federal states no longer show solidarity with the ones who suffer from high unemployment. And within countries, the young generation is told by some perverse ideologists that the post WWII baby-boom generation is responsible for the economic crisis: divide et impera in order to divert the attention from the real causes of the problem. The economists carry a crushing responsibility on their shoulder: just think of the people in many countries who commit suicide as they are the victims of the policy of austerity: unemployment, reduced wages (the working poor), lower social benefits and pensions, homes confiscated by the bank Economists just do not know what the purpose of the economy is, something they are reluctant to admit. In particular the notion of profit is obscured in their theories. Economy is not about making profit, it is not about GDP per capita, it is not about accumulating wealth, it is not about creating jobs: these are all the result of producing products for and providing services to others, to fellow human beings. Jobs, profits and wealth are the result of this, but they have become the principal goal. This shift in emphasis is the cause of a lot of socioeconomic problems. People are considered as economically important only when they create added value or have money to spend; the rest are considered as dispensable eaters. The socioeconomic paradigm of economists and politicians is still based on Malthusianism and Social Darwinism, theories which were wrong from the onset, and have led to centuries of colonization, imperialism, genocides and wars. Speaking at a UN Business Conference, Sept. 14th 1994, David Rockefeller, member of the Council on Foreign Relations an independent think tank said: We are on the verge of global transformation. All we need is the right major crisis and the nations will accept the New World Order." Well, it took them quite some time, but they finally got their major crisis. But what New World Order do they envision? One which is advantageous for the 1% bermenschen at the expense of the 99% ntermenschen with a major social setback all over the world, in particular in Europe? Or one where there are only Nebenmenschen, with a major social leap forward for everybody? Nowadays, 99% of the people points to the 1% as the responsible architects of the crisis. We know who they are and we know where they live. But all the efforts of the 99% individual or in a myriad of organizations are not coordinated, chaotic and ineffective: rebels without a cause and without a vision. This is a tremendous waste of effort and time as they focus on the wrong causes. Their efforts 2

could even be contra productive, as most of the 99% focus on conflict, confrontation and struggle, which is just what the 1% wants: divide et impera! And then there are the UN organizations, the IMF, the World Bank, the OECD, the World Economic Forum and a myriad of academic persons, consultants, NGOs, climate conferences, labor unions, peace organizations, Artists for Peace and Justice, reports on topics such as peace, human rights, poverty, unemployment, ecological problems, income inequality. I wouldnt like to feed all the persons involved in this endeavor of academic, social and economic unproductivity: most of these reports and conferences are just drops in the ocean, there is a lot of overlapping, and most of them bring not even a single quantum of solace to the people in need, the homeless, the unemployed and the working poor. I apologize myself for this harsh judgment I am an Indignado pure sang and also for this rather long e-mail and the other attached document, but let me explain you why my judgment is so severe. Cooperation with a common goal among all of mankind is a much better way than this kaleidoscopic waste of effort, as everybody gains. Buckminster Fuller, author of the book Critical Path once wrote: "You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete". All right, but how would this new model look like, and how could this be accomplished? In the course of history, social progress was accomplished when people agreed and focused on a common objective, when they could be mobilized for a common cause and then followed the same strategy. As examples we can refer to the general right to vote for men, the womens right to vote, a working week of 40 hours divided over 5 working days and a weekend of 2 days, paid vacation, social security, health care These were usually accomplished after a major war or revolution. But should we wait for such events? Or should we act proactively and avoid war and revolution? We would like to present you and the rest of the world with a blueprint of a New World Order that is to the advantage of the (99+1)% of the world population, all of humankind! It is based on a profound insight of how the socioeconomic system really works and on the profound knowledge of some universal wisdom. We do not focus in a reductionistic way on individual problems, but in a holistic way on the solution, a solution which is in line with the historical social evolution of humankind on this Spaceship Earth.

Six blind boys and an elephant

Problems cannot be solved at the same level of consciousness that created them. Albert Einstein
An old Indian story goes as follows. A man is active in the forestry, and he uses an elephant in order to transport the trees. After a day of hard work, the six blind sons of the man have to wash the elephant. Each boy was given a certain portion of the elephants body to wash. All were delighted to have this chance to learn something about elephants. After an hour, when the elephant washing was over, the six blind boys simultaneously shouted: Now I know what an elephant is like! The first son said to the second son: Well, what is the elephant like? The second brother, who had been washing the sides of the elephant declared: Oh, the elephant is just like a huge wall of flesh. The first son, who had been washing the elephants trunk, scornfully said: You are talking nonsense. The elephant is just like a bamboo pole. 3

Listening to the quarrel between his two brothers, the third son, who had washed the elephants ears, laughed and interrupted: You fools, you dont know anything. The elephant is like two big banana leaves. Hearing what he thought to be absurd remarks from his brothers, the fourth son, who had been washing the four legs of the elephant, cried out: You are all wrong. It is ridiculous for you to fight about something you evidently know nothing about. The elephant is only a large roof of flesh supported by four fleshly pillars. The fifth son, who has been washing the tusks of the elephant, was beside himself with laughter, and spoke up: My blundering brothers, listen to me. I declare, as a result of personal experience, that the elephant is nothing but a couple of bones. This was too much for the sixth son, who had washed the tail of the elephant, and he said: All of you must be crazy, or under the spell of hallucination. The elephant is only a piece of rope hanging from heaven. He, being the youngest and quite short, could not reach to the top of the elephants tail, hence he thought that the elephant was a heavenly rope just suspended above the earth. The father heard in great merriment all this squabble about the animal, he came running to his children when their argument waxed into a free-for-all fight. You assorted young fools, stop this fighting! he commanded. All of you are right and yet all are wrong. The boys cried in unison: How can that be? To which the father replied: You have each one described a part of the elephant. But you are all wrong because the whole elephant is neither a couple of tusks, nor four legs, nor one trunk, nor a huge wall of flesh nor a tail, but he is an aggregate of all of these. The tail, or the trunk, separated from the elephant from the elephant, could not be termed an elephant. With many thanks to Paramahansa Yogananda! Let us now replace the elephant with the socioeconomic reality, and the six blind boys by: 1. 2. 3. 4. 5. 6. So called economic experts So called financial experts Bankers Politicians Businessmen Rating offices

With this as a result: the blind leading the blind: uninformed and incompetent people leading others who are similarly incapable (with many thanks to the website The Phrase Finder http://www.phrases.org.uk/meanings/67150.html!)

Notice that here also there are 6 blind persons. Coincidence? Or did Paramahansa Yogananda and Breughel both were in contact with what Teilhard de Chardin calls The Noosphere and what artists call The Muze, the source of their inspiration and creativity? Maybe the six professions mentioned earlier should also try to make contact with that Noosphere! According to Teilhard, it is the third stage in a succession of development of the Earth, after the geosphere (inanimate) and the biosphere (biological life). What follows in dark blue comes from the website The Phrase Finder: This appears in the Bible, Matthew 15:14 - from Miles Coverdale's Bible, 1535: Let they go, they are ye blynde leaders of ye blynde. Wha one blinde leadeth another, they fall both i ye diche.

In the authorized King James Version of Collins Publishers New York and Cleveland this is phrased as follows: Let them alone: they be blind leaders of the blind. And if the blind lead the blind, both shall fall into the ditch.

Biblical citations of commonly used English phrases usually tend to be earlier than those from other sources. In this case the thought was probably inherited from the Upanishads - the sacred Hindu treatises, which were written between 800 BC and 200 BC and first translated into English between 1816-19. From Katha Upanishad we have: Abiding in the midst of ignorance, thinking themselves wise and learned, fools go aimlessly hither and thither, like blind led by the blind.

Pieter Brueghels 1568 oil painting, often called The Parable of the Blind, is what appears to be a literal depiction of a line of blind people following each other and stumbling into a ditch, as forecast in Matthew 15-14 [and the Katha Upanishad]. Little is known of Brueghels religious views and his

intent in conveying any moral sense or figurative meaning, if indeed he had any such with this painting, is difficult to interpret.

Is it really that difficult? I dont think so, it is crystal clear! And I could even add some more blind boys to the list! I hope that the metaphor of the six blind boys and the elephant could induce a metamorphose in economic thinking.

On the diverging advice given by economists to politicians and the public in general

On September 9th 2011 Mrs. Christine Lagarde, the new director of the IMF, held the opening speech at the Royal Institute for International Affairs in Chatham House: The Challenges for the Global Economy. About six weeks before, she spoke at a similar early morning event in New York, at the Council on Foreign Relations. These two sister organizations founded in the wake of the Great War have a common goal of fostering the ideas and dialogue needed to build a prosperous and secure world for all. I read her speech on the website of the IMF. Some items caught my attention: The key message I wish to convey today is that countries must act now and act boldly to steer their economies through this dangerous new phase of the recovery. There is a path to recovery [my emphasis, as I fully agree]. The ultimate goal should be strong, stable and sustainable global growth. The challenge is to find the pace of adjustment that is neither too fast, nor too slow. Unconventional measures may be necessary. The road ahead may be rocky, but a way forward exists if we act now.

In the Belgian financial newspaper De Tijd of August 27th 2011 I read 2 remarkable articles. One was about the meeting of the chairmen of the major central banks and the IMF at Jackson Hole, in which Ben Bernanke stated that the FED and other central banks have done their utmost best (printing of wagonloads of money or QE2, low interest rates) in their fight against the financial and economic crisis, and that it is now up to the politicians to take the necessary measures. The ECB and other EURO-zone central banks, however, follow a completely different strategy: no massive injection of money into the economic system and an interest rate that is higher than in the US in order to keep inflation low. The ECB has even decided to buy government bonds of countries in problems on the second market, which has led Jrgen Stark to his decision to quit the board of directors of the ECB. Confusion seems to be everywhere. In the Belgian context, just think of the diverging opinions of Professor Paul De Grauwe (macroeconomist) and Geert Noels of Econopolis (micro economist, more focused on enterprises than on countries). Politicians usually take advice from distinguished economists. In the same newspaper there was also an article about the Meeting of Nobel Laureates Economy held in Lindau in Germany. There is no agreement among them on how to solve the financial economic crisis, as they told diverging or even conflicting stories. Professor Stiglitz said the following during a press conference: The US needs a growth figure of 3% in order to reduce the unemployment. With a lower growth figure the unemployment will most probably increase.

The QE2 measures of the central bank have not led to more investments and more employment. In his book The Three Trillion Dollar War, he estimates that the cost of the second war in Iraq is about 3,000 billion dollar, while the US spends only 100 billion dollar per year to development aid to developing countries.

During his speech to young promising economists he formulated an honest mea culpa, when he stated that his generation of economists has not always focused on the right questions. He urged the new generation to focus on the right questions and to find the answers for these in order to come to a world with more social justice, more care for the environment and more attention for the wellbeing of everyone all over the world. If we can find the answers to the right questions this is indeed possible. On the diverging or even conflicting stories economists are telling us about the crisis and the confusion with politicians, I can refer to the following rather funny historical anecdote. Edwin Nourse was economic advisor of Harry S. Truman, the 33rd president of the USA from 1945 till 1953. Nourse had been fond of saying on the one hand [statement 1], but on the other hand [the negation of statement 1] After some of these zero-sum-statements, President Trumans reaction was: Cant somebody bring me a one-handed economist? On the origin of all this confusion among so-called experts I gladly refer to the book The Use of Lateral Thinking written by Edward de Bono; It is one thing to suggest that new ideas are useful, profitable and exciting, but quite another thing to suggest that something deliberate can be done about having new ideas. No one would disagree with the first suggestion, but most would doubt the second. There are two opposite ways of improving a process. The first way is to try to improve it directly. The second is to recognize, and then remove those influences that inhibit a process. If a car does not seem to be moving fast enough, the driver may either press harder on the accelerator or he may make sure the brake has been fully released. To design a car that goes faster the designer could either put in a more powerful engine, or reduce the weight and air resistance that slow the car down. It may be more useful to study stupidity in order to understand intelligence. It may be easier to see what the stupid person lacks than to see what the clever person has extra. Instead of trying to understand why one person invents, it may make more sense to see why other people do not. If it is possible to obtain some insight into what prevents the emergence of new ideas, either in general or in a particular person, then it may be possible to improve the ability to have new ideas. Lateral thinking is made necessary by the limitations of vertical thinking. The terms lateral and vertical were suggested by the following considerations. It is not possible to dig a hole in a different place by digging the same hole deeper. Logic is the tool that is used to dig holes deeper and bigger, to make them altogether better holes. But if the hole is in the wrong place, then no amount of improvement is going to put the hole in the right place. No matter how obvious this may seem to every digger, it is still easier to go on digging in the same hole than to start all over again in a new place. Vertical thinking is digging the same hole deeper; lateral thinking is trying again elsewhere. The disinclination to abandon a half-dug hole is partly a reluctance to abandon the investment of effort that has gone into the hole without

seeing some return. It is also easier to go on doing the same thing rather than wonder what else to do: there is a strong practical commitment to it. It is not possible to look in a different direction by looking harder in the same direction. No sooner are two thoughts strung together than there is a direction, and it becomes easier to string further thoughts along the same direction than to ignore it. Ignoring something can be hard work, especially if there is not yet an alternative. These two sorts of commitment to the half-dug hole may be regarded as commitment on invested effort and commitment of direction. By far the greatest amount of scientific effort is directed towards the logical enlargement of some accepted hole. Many are the minds scratching feebly away or gouging out great chunks according to their capacity. Yet great ideas and great scientific advances have often come about through people ignoring the hole that is in progress and starting a new one1. The reason for starting a new one could be dissatisfaction with the old one, a temporal need to be different, or pure whim. This hole-hopping is rare, because the process of education is designed to make people appreciate the holes that have been dug for them by their betters. Education could only lead to chaos if it were to do otherwise. Adequacy and competence could hardly be built on the encouragement of general dissatisfaction with the existing array of holes. Nor is education really concerned with progress: its purpose is to make widely available knowledge that seems to be useful. It is communicative, not creative. To accept old holes and then ignore them and start again is not as easy as being unaware of them and hence free to start anywhere. Many great discoverers like Faraday had no formal education at all, and others, like Darwin or Clerk Maxwell, had insufficient to curb their originality. It is tempting to suppose that a capable mind that is unaware of the old approach has a good chance of evolving a new one2. A half-dug hole offers a direction in which to expend effort. Effort needs a direction and there are few more frustrating things than eager effort looking for a direction. Effort must also be rewarded by some tangible result; the more immediate the results, the more encouraged is the effort. Enlarging the hole that is being dug offers real progress and an assurance of future achievement. Finally, there is comfortable, earned familiarity with a well-worked hole... Oilmen do not perhaps find it so difficult to appreciate the paradox that sitting about deciding where to dig another hole may be more useful than digging the same hole deeper. Perhaps the difference is that, for an oilman, digging costs money, but for scientists and industrialists, not digging is more expensive. Without a hole, how can a mind exert its well-trained effort? The shovels of logic lie idle. There is no progress, no achievement. Today, achievement has come to be ever more important to the scientists. It is by achievement alone that effort is judged, and to pursue his career a scientist must survive many such judgments. No one is paid to sit around being capable of achievement. As there is no way of assessing such capability it is necessary to pay and promote according to visible achievements. Far better to dig the wrong hole (even one that is recognized as being wrong) to an impressive depth than to sit around wondering where to start digging. It may well be that the person who is sitting around and thinking is far closer to digging a much more valuable hole, but how can such a thing be judged until the hole is actually started and the result becomes visible?
I hope this book has convinced you that there is a new economic hole worth to be elaborated. Jan Tinbergen, the Dutch Nobel Prize Laureate economy had no formal training in economy whatsoever. He just had a PhD in physics. Tinbergen became known for his 'Tinbergen Norm', which is the principle that, if the difference between the least and greatest income in a company exceeds a rate of 1 to 5, that will not help the company and may be counterproductive. Could this be valid for the society as a whole?
2 1

In the long run it may be far more useful to have some people about to achieve the right thing than have everyone actually achieving things of lesser worth, but there are few who are willing to invest in mere possibility. In the present system who can afford to think? Who can afford the non-progress of abortive thought? An expert is an expert because he understands the present hole better than anyone else except a fellow expert, with whom it is necessary to disagree in order that there can be as many experts as there are disagreements for among the experts a hierarchy can then emerge. An expert may even have contributed towards the shape of the hole. For such reasons experts are not usually the first to leap out of the hole that accords them their expert status, to start digging elsewhere . It would be even more unthinkable for an expert to climb out of the hole only to sit around and consider where to start another hole. Nor are experts eager to express their expertise as dissatisfaction with the hole, as dissatisfaction is too eagerly expressed, and often more forcibly, by many others who have not earned the right to be dissatisfied. So experts are usually to be found happily at the bottom of the deepest hole, often so deep that it hardly seems worth getting out of them to look around. Because the mind is happier enlarging by logic an existing hole, because education has encouraged this, and because society has elected experts to see that it is done, there are a lot of well-developed holes continually enlarging under the impact of logic effort. Many of the holes are extremely valuable in terms of the ore of practical knowledge that is removed from them. Others are a waste of effort. There is nothing wrong with a hole that is a waste of effort. At least there is nothing wrong with its location, though the size may be extravagant. There ought to be many more such holes in original places. Many of them might well be a waste of effort, but some of them could turn out to be extremely useful. But to start such holes more people would have to escape the powerful commitment there is to the dominant hole. The effect of the dominance of old and apparently adequate ideas is often underestimated. It is assumed that an old idea should be regarded as a useful steppingstone to something better until that something better turns up. This policy may be practical but it can inhibit the emergence of new ideas. If a good cartoonist has captured with a few dominant lines the impression of a face, it is extremely difficult to put that impression aside, look at the face again and come up with a new way of expressing it. Sects, which assemble on mountaintops on predicted days of doom to await the end of the world, do not come down on the morrow shaken in their ideas, but with a renewed faith in the mercifulness of the Almighty. New information that could lead to the destruction of an old idea is readily incorporated unto it instead, for the more information that can be accommodated, the sounder the idea becomes. It is like putting some drops of quicksilver on a surface. If you make one drop larger and larger, it approaches neighboring drops, and as soon as it touches them, they lose their identity and become shifted bodily into the larger drop. As with dominant ideas, the big drop always swallows up the smaller one; it is not a matter of compromise... Dominant ideas need not always be so obvious for them to exert just as powerful an organizing influence on the way a person thinks and approaches a problem. Old and adequate ideas, like old and adequate cities, come to polarize everything around them. All organization is based on them, all things are referred to them. Minor alterations can be made on the outskirts, but it is impossible to change the whole structure radically and very difficult to shift the center of organization to a different place. Edward de Bone, The Use of Lateral Thinking, pp. 21-26.

Sorry for this rather long quote. The cartoon from Astrix chez les Helvtes below is a good summary, as a picture is worth a thousand words. The sick economy

And on the result of all this confusion among so-called experts, I have included the following cartoon.

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I myself have done some lateral thinking and have made a study on the real causes for the recurrence of financial and economic crises and the correlation with the occurrence of wars ( Eight days a week The Fourth Wave). 11

Link: http://www.scribd.com/doc/42446357/Eight-Days-a-Week-The-Fourth-Wave. In this study I have tried to formulate the right questions and to find answers to these questions. I managed to find the missing link between macro -economy, micro-economy and business administration: the real social origin and purpose of profit. Based on this new insight, I was able to formulate a feasible low-cost solution for the economic crisis, a solution that could lead to zero unemployment, more social justice, a more peaceful world and sustainable growth on global level. At first glance my proposal may look rather crazy, as it is the result of some lateral thinking outside the box, but it is basically the logical next step in the evolution of how we organize our time. It could very well induce a quantum leap in the evolution of humankind on Earth as it could lead to a win-winwin-situation for business, governments and private persons alike. It solves a lot of problems at once, not only in the industrialized world with its aging population, but also in the Arabic countries with its young and educated population without any prospects for a decent job, and even in the BRIC countries, where more economic growth has led to more inequality. In the words of Mrs. Lagarde: it is indeed time to act boldly and unconventional measures are necessary, but there is a path to recovery, a way forward exists, and I can assure you that the road can be smooth and not at all that rocky, under the condition that we start to focus on the right questions and to find the answers for these in order to come to a world with more social justice, more care for the environment and more attention for the wellbeing of everyone all over the world. Or in the words of Jeremy Rifkin, an expensive advisor to the European Commission: We should aim for The Empathic Civilization.

Some economic misconceptions To measure is to know, but first you have to know what is worth to be measured!

4.1

Scientific practice

In all sciences, two principles prevail: Qualification: describe the subjects of study with a clear and unambiguous definition. The simpler, the better. Quantification: to measure is to know. This measurement is expressed with a number followed by a unit of measurement3. o Distances are expressed as a number followed by a unit appropriate to the scale of things: meter, kilometer, yard, mile, nautical mile, Angstrom, light-year with fixed exchange rates among all these units. o Weight is expressed in kilogram, ton, milligram, pound, stone o Time is expressed in seconds, hours, days, years, centuries, millennia o Electrical current is expressed in Ampere, electrical charge in Coulomb

What are, according to your own judgment, the units of measurement for profit or cash flow of a company, economic growth and the balance of trade of a country?

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4.2

Gross National Product per capita

Scientists and academic oriented people like to quantify the phenomena they observe and study, to express them in numbers. In most economic studies and reports on the economy of a country, the Gross National Product per capita is considered to be an important yardstick in order to compare economies of countries and to evaluate their individual progress. The Gross National Product is calculated as the sum on the annual flow of final goods and services (prices of oranges * number of oranges) + (prices of apples * number of apples) + (prices of prams * number of prams) A quantity qi of a certain good or service is traded at a price pi. Then we can calculate the GNP as the sum of all the mathematical products qi * pi.

GNP = qi * pi

In order to evaluate and compare the GNPs of different countries, one divides the total GNP by the number of people living in the country in order to get the GNP per capita. The higher the GNP per capita, the better off the population in a country is considered. Is this true? Let us use a method that was promoted by the so called Austrian School adepts like Friedrich Hayek and Ludwig von Mises: the simpler the line of reasoning, the greater the chance for a clear insight. Let us consider two countries with the same currency, the same GNP and the same level of population. Country A has a GNP composed of high quantities qi at low prices pi and a substantial middle class, while country B has a GNP composed of low quantities qi at high prices pi and with the wealth concentrated with a small upper class and no middle class. According to the economic statistics, both countries are at the same economic level. But in what country would you like to live? In the country where goods and services are abundant at low prices, or in the country where goods and services are scarce and expensive? I dont think the choice is that difficult to make! So what is then the value of using only the economic yardstick GNP per capita in order to compare the economy of the two countries? None! It is also dangerous to evaluate the economic progress over time of a single country with this one dimensional yardstick. Due to a civil war, a military coup, a natural disaster or some other calamity, a single country may have evolved from a situation of a GNP with high quantities qi at low prices pi, to a higher GNP, but composed of lower quantities qi (lets say halved) at higher much prices pi (lets say tripled, due to an inelastic price elasticity). So clearly in this case, the growth of GNP per capita does not reflect the real economic evolution, as people are now worse off. Also the division of the GNP by the number of people living in the country can obscure the real economic situation, as it does not take into account the participation level of the population into the economic process or the composition of the population, the population pyramid. Some countries have a very young population, with relatively few elderly people to support; other countries have an aging population with relatively few people who are economically active and with relatively many elderly people to support.

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I think that the Gini coefficient, a measure of statistical dispersion, commonly used to define degrees of inequality within a given population, is a more appropriate measure than the GNP per capita in order to assess the health of the economy of a country and the happiness of the people. It is a measure of statistical dispersion developed by the Italian statistician Corrado Gini and published in his 1912 paper "Variability and Mutability". In Appendix C: Economy and Control System Theory we will elaborate a multidimensional view on economy as an alternative approach to this one-dimensional GNP per capita approach in order to measure the state of the economy of a country.

4.3

Economic growth

In most textbooks on economy, economic growth is considered as a necessary condition in order for the economic process to run smoothly. Growth is supposed to give more people a better income and standard of living, due to the trickledown effect. But the funny and at the same time sad thing is that the greater the economic growth is, the wider the gap between rich and poor people becomes. After centuries of growth, there are still poor people, their number is growing, their misery also. A report was published in October 2009 by the United Nations food program which stated that 1.02 billion people in the world have not enough food and suffer from malnutrition, the highest number in 40 years! Even in the industrialized countries the number of poor people is growing and the purchasing power of the middle class is declining, as the concentration of wealth with a minority of the population increases. The economic growth was substantial during the Golden Sixties of the 20th century, which are considered as a period of an economic boom. As already mentioned, the output of the economic process is now higher than during the golden 1960s. One could think that relative growth is more important than the absolute level of production in determining the state of economic health of society. But why is economic growth so vital? This question is seldom stated or answered in those textbooks on economy. Economic growth is considered as something self-evident, not to be put to question. The nature of that growth quality of life versus quantity of consumption has only recently emerged as a topic worth to be discussed. Indeed, one has become aware of the fact that a lot of dangers and inconveniences for humankind have been created by the interventions in nature by men themselves. As a result of the increased technical capabilities of men, actions and reactions which used to spread over hundred or more years are now concentrated in decades. This implies that the effects of human activity on the environment have become more intense: more pollution, CO2 emission, global warming, more intense storms and hurricanes, more inundations... Concepts like the gross national product, used to measure a nations wealth, can also be put to question, as only economic activities which can be expressed in terms of money are included in it: when you hit a tree with your car and you have your car repaired, then this adds up to the GNP. Other activities, like growing your own vegetables, are ignored. Taking care of older or sick persons at home is not an economic activity, while putting them into a hospital or a rest-home increases the GNP. But if growth is really so vital to the economic process, what options for further growth do we have? Is uninhibited growth possible, or are there limitations to what can be achieved? What is the nature of

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these limitations? Which groups have the greatest benefits when there is substantial growth? Is zerogrowth a possible option? And what are the economic and social consequences of zero-growth? Moreover, what is the unit of the entity economic growth? We can express distance in meters, miles, yards, inches, etc.; time can be expressed in seconds, hours, days, years, etc.; speed in kilometers per hour or meters per second; weight in kilograms, pounds, etc.; electrical current in ampere... In newspapers and economic studies, economic growth is usually expressed as a percentage. But a percentage is not a unit in itself: it merely indicates a relative change realized over a period of time (a year, a quarter of a year) with respect to the absolute value of the GNP realized in the previous time period (expressed in currency unit: US $, EURO).

So clearly the unit of economic growth is currency unit per time unit4. (US $ per year, EURO per year...).

Later on you will understand why I state this so explicitly.

4.4

Positive balance of trade

In those same textbooks on economy, a positive balance of trade is considered as favorable for the economy of a country. Why? If a positive balance of trade is so favorable, it is reasonable to assume that every single country will try to obtain this. But is it possible for every country to succeed in this endeavor? If not so, does it make sense to put this as an objective? By the way, what is the meaning of national borders? In the course of history, one can recognize a trend towards ever-larger economic entities from the Greek polis towards the European Community , while economic and political borders are pulled down. What is the explanation for this evolution? And where will it lead us to, as the Earth is a finite globe? On the other hand, in times of recessions, economic nationalism predominates over international solidarity; governments take protective measures tariffs and quota, devaluation of the currency in order to boost the export in order to protect their own economy. The economic obstacles from older days are erected again. Is this to protect the employment in their own country, or are there other motives for this reaction? In a longer period of recession, one can also see that nationalistic feelings emerge, making political integration virtual impossible. In extreme cases the evolution towards larger economic and political entities is even reversed: empires disintegrate, like the USSR in the 1990s. Moreover, what is the unit of the entity balance of trade? Generally, a balance of trade is expressed in a currency unit, with the tacit assumption that it is over the period of one year.

So clearly the unit of balance of trade is currency unit per time unit, the same unit we use to measure economic growth.

In mathematical terms: Growth = d(GNP)/dt (the differential).

15

Later on you will understand why I state this so explicitly.

4.5

Profit, the missing link in economics

Profit has a very important role in our economic system. In this section we will discuss the origin of profit. We will also discuss two extreme opinions: that of a businessman and that of a neo-Marxian economist. And we will find out that even classical economists themselves have some difficulties with the notion of profit. 4.5.1 Profit according to the businessman

From a businessmans point of view, we can describe profit as follows: A company realizes a turnover by marketing a certain product or service. In order to do this, it has fixed and variable costs. Turnover minus the variable costs gives us the contribution. Contribution minus the fixed costs gives us profit before taxes. Profit before taxes minus the taxes results in profit after taxes.

Of course there are a lot of tricks in order to lower the profit before taxes and thus the taxes by using different methods of depreciation, making certain costs tax-deductible, etc..., all in a legal way. Sometimes the laws are even adapted for this purpose in order to stimulate the economy. In this sense, financial cash flow is a better measure for profit than profit itself. So, when you read profit in this book, think of it as cash flow: it is less compressible than profit, and it has the same unit, unit of currency per unit of time. And think of cash flow as a flux of money flowing into a company, just as a positive (negative) balance of trade can be considered as a flux of money flowing into (out of) the country. Part of the turnover can be realized in the home market, another part could be realized abroad. So part of the profit can be considered as a result from turnover in the home-market, the other part as the result of export activity. Wages and salaries are part of the fixed and variable costs. The profit of a company is a function of the wages and salaries it pays. If these are increased, the profit will apparently decrease, and vice versa. But is this always true? During the 1970s and early 1980s, after the Golden 1960s, the economy of most West-European countries was no longer what is used to be: the level of profit was too low, the return on investment was not rewarding anymore. The return on investment is the ratio between the profit made and the risk bearing capital invested. In particular, the profit-ratio in those days was lower than the high interestrate one could get from low-risk investments as government-bonds or saving accounts due to the twodigit inflation of those days. So the incentive for private persons to invest in business was rather low, companies had difficulties in finding new funds on the money market. They had to go to the bank to

16

negotiate a loan at a high interest rate, which had a negative impact on the working accounts of the companies. Countries like Belgium are dependent on export, as the home market is relatively small and a lot of energy and raw materials have to be imported in order to feed the economic process. As the wages and salaries at that time (1980s) were too high compared to those of other countries, it was difficult for companies to be competitive in these export markets. People were laid off as a result of the decline in turnover and production. With the help of government regulations and legislation, a policy of moderation and even reduction of wages was pursued. Wages were no longer automatically increased when the cost of living had gone up. All these measures were aimed to consolidate or strengthen the position of the own economy in the international trade scene, so that, in the long run, the profit figure of companies would increase, especially that part of the profit resulting from export activities. This extra profit was then supposed to be an incentive toward new investments, which in turn would create new jobs. For the same reasons, some countries like the USA under the Reagan and Bush Sr. administration changed their tax legislation, reducing the maximum level of taxation, particularly for the rich, in order to favor private business and reward successful entrepreneurs. The dilutees of society were supposed to wait until the wealth would have trickled down to their level, of course in diluted form. But on the other hand we can say that as a result of the national policies of wage control and tax reform, the real purchasing power of the majority of the population decreased while the inequality of the distribution of wealth increased, resulting in a lower level of consumption. A lot of enterprises realized lower turnovers in their home market, so the part of the profit resulting from that turnover decreased. Facts confirm this statement: in Belgium the turnover in retail-business for a particular month in the year went down for several years after the government started their policy of wage control in the early 1980s, the real purchasing power of the population went down with approximately 2% each year. You have to read the table below from left to right in order to account for seasonal influences.

Turnover retail-business in Belgium (index 100 = 1970) 1982 January February March April May June July 128 127 148 150 140 145 126 1983 123 119 136 131 129 135 117 1984 119 116 129 124 128 130 114

In order for the economic policy to be effective, the loss in turnover (and profit) resulting from the lower purchasing power in the home market had to be compensated by an extra increase of the export. 17

Indeed, in an article in a newspaper of those days one can read that the economic activity, measured by the industrial production and the consumption of electricity, was increasing. But the private consumption was still declining. The economic activity was supported solely by export and by the increase of stocks of semi-manufactured articles. At that time there was no indication of the expected increase in investments and employment. But what if the extra export of goods and services is not enough to compensate for the loss in turnover in the own country? And what if the other countries are faced with the same problems and have decided to apply the same economic policy of moderation? Could it not be that all employees and enterprises in all those countries suffer from reduced wages and shrinking turnover? What is it good for to try to stimulate extra investments if there is no purchasing power, neither in the home market nor in foreign markets, to buy the products that could be produced with the extra production capacity? And what if there is an excess of production capacity, so companies no longer need to invest? One was well aware of this problem in most branches of industry. Already in 1978 Bob Stouthuyzen, former chairman of the Belgian employers organization VEV, warned the politicians that it is absolutely necessary for private consumption to increase in order to get out of the economic crisis. An entrepreneur does not only want to produce, he also wants to sell his products, if not abroad then on the home market. One could indeed imagine that the economic policy of moderation and reduction of salaries and wages could lead to the crumbling off of the economic process and our material prosperity. All these phenomena are interrelated and could lead us into a downward spiral: lower wages, lower purchasing power, lower turnover, fewer investments because of the excess in production capacity, more unemployment, still lower wages... Where does this process stop? Could it not be possible that, in the long run, this economic policy will lead us to a social Armageddon because of its short-sightedness?

18

The contracting spiral of the world trade month by month during the 1930s, leading to the Second World War. From the book This Time is Different: Eight Centuries of Financial Folly, written by the Professors Reinhart and Rogoff. Just replace 1929 with 2008. Rather revealing and scaring, isnt it?

19

Cover from the Belgian magazine Knack: How Europe is economizing itself till death.

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4.5.2

What is profit? What is the origin of profit?

There seems to be a problem with profit, the money-maker that makes our capitalistic world go round and round. But what is profit, and how is it created? For a lot of people, not the least for businessmen, profit exists, has always existed, and will exist forever. To put profit to question is the same as putting life to question. It is a fact that we live and that profits are made. So let us make the best of our lives and of profit. To think about it only leads to a headache. In this study, however, we will not be content with this point of view: we will try to find the social origin of profit. This will lead us to a deeper insight in the economic process so that we can grasp the true nature of the economic crisis and thus find a way out of it.

4.5.3

Profit according to a neo-Marxian economist

We have discussed already how a businessman sees the origin of profit as turnover minus costs and taxes. Even the Belgian neo-Marxian economist J.P. Van Rossem, who could discuss the problem emotionally and intellectually more detached, ascribes a major role to profit in the economic process, although he gives it another origin. If one likes it or not, but also in a so called mixed economy, where there is intervention in the economy by the government, profit is still the driving force of the economic process. As long as entrepreneurs can make profit, they will create jobs for blue- and white-collar workers. By direct taxation of the profits made by the companies and the salaries earned by the employees, and by indirect taxes on consumption goods, the government acquires financial means to run its own affairs... In a mixed economy it is perfectly feasible for companies to maximize profit and for government to maximize welfare, but, all things considered, the means the government needs in order to realize its goals are dependent on the profit made by the private companies. For this reason I say that profit is the driving force of the economy... How does profit occurs, where does it come from? Nobody will deny that profit is the difference between turnover, realized by selling products or services, and the costs made to produce these. But this does not explain the social origin of profit. Next to the government, there are two parties with conflicting interests in our economic system. On the one side we find the entrepreneurs, who are the owners of the means of production and who hire labor-force. On the other side there are the employees and laborers, who do not own any means of production, but who sell their own laborforce. As long as the businessmen think it will yield profit, they will hire labor-force to produce goods... There are many ways to calculate the value of the produced goods. One method is to express this value in terms of the energy mechanical or human needed to produce these goods efficiently. So the value of a product could be expressed in kilo-watthour. Usually, however, the value is expressed in the local currency (EURO, US $,...). The transformation from values expressed in energy to currency is a rather complicated process5, described in the theory of energy-value... The labor-force the blue- and white-collar workers sell to entrepreneurs and the government is a special kind of commodity: under certain conditions it can yield
5

If you cannot convince, then confuse.

21

profit for the one who buys it. Here also, it is possible to express the value of this commodity in terms of the energy, efficiently used for the reproduction of labor-force (the value of the goods the laborers and employees buy is a measure for the value of their labor-force). It is possible that there exists a positive difference between the value of the goods the employees produce and the value of the labor-force they sell. This difference is what the economists call the surplus value, which, if it is realized, will be the profit for the entrepreneur. This implies that we can divide a working day in two parts: on the one side, the laborer spends part of his energy in the reproduction of his own labor-force he sells; on the other hand, he spends part of his energy for the production of surplus value, to the advantage of the employer. If then the employer succeeds in selling the products, then he will realize the surplus value of these products as profit. J.P. Van Rossem, Knack, January 31 1979

In reading this analysis, we can ask ourselves several questions: Is it really a fact that employees and employers have conflicting interests at all times? How is it possible that there exists a positive difference between the value of goods workers produce and the value of the labor they sell to the employer? What are the conditions in order for the employer to realize the surplus value, i.e. to succeed in selling his products? Does this analysis gives us a better explanation for the origin of profit than the businessmans point of view, or does it just shift the problem?

As the following paradoxes illustrate, it is not so unrealistic to ask these questions.

4.5.4

First paradox: higher wages for employees, higher profits for the employer

In order to contract a thing, one should surely expand it first. In order to weaken, one will surely strengthen first. In order to overthrow, one will surely exalt first. In order to receive, one will surely give first. This is called subtle wisdom. Lao Tzu Contraria sunt complementaria. Inscription on the coat-of-arms of Niels Bohr (Order of the Elephant of Denmark!).

22

Red? Ganesh?

In the discussion on profit, seen with the eyes of a businessman, it seemed that an increase in wages and salaries for the employees would lead to lower profits for the company. According to a neoMarxian economist, employers and employees have conflicting interests. Are these statements correct? Statements on economy are often hypothetical and academic6. The following story, however, is a historical fact. In 1953 my friend the late Walter Reuther, then president of the United Auto Workers, was about to meet with the board of directors of General Motors to form a new and timely post-World-War-II labor pact. At that time the first new-scientist-prototyped computers were being assembled, put in running order, and fine-tuned by Walter Reuthers skilled machinists. Walter had all his fine-tuning machinists put the following problem into their computers: In view of the fact that most of General Motors workers are also its customers, if I demand of General Motors that they grant an unheard-of wage advance plus unprecedented vacation, health, and all conceivable
6

Which is not always the same as scientific! More on this later on in Appendix A.

23

lifetime benefits for all of its workers, amounting sum-totally to so many dollars, which way will General Motors make the most money: by granting or refusing? All the computers said, General Motors will make the most profit by granting. Thus fortified, Walter Reuther made his unprecedented demands on General Motors directors, who were elected to their position of authority only by the stockholders and who were naturally concerned only with the welfare of those stockholders. Reuther said to the assembled General Motors board of directors: You are going to grant these demands, not because you now favor labor (which, in fact, you consider to be your enemy), but because by so granting, General Motors will make vastly greater profits. If you will put the problem into your new computers, you will learn that I am right. The directors said, Hah-hah! You obviously have used the wrong computers, or have misstated the problem to the computers. Soon, however, all their own computers told the directors that Walter was right. They granted his demands. Within three years General Motors was the first corporation in history to net a billion-dollar profit after paying all government taxes with their profits increasing steadily thereafter for twenty years. R. Buckminster Fuller, Critical Path, p xxviii.

This may all seem rather unrealistic, but it is a true historical story. What is the underlying reason for this, at first glance, surprising turn of events? What model was used to program the computer? What can a computer do more than an assembled board of directors? Could it be that something is hidden here that could help us to solve the economic crisis in the industrialized world? In any case, this story clearly shows us that the interests of employers and employees should not necessarily clash, and that an increase of wages for the employees does not always lead to lower profits for the company. But it is also dangerous to conclude that a huge increase in salaries for employees in industrialized countries will rescue the economy. When the socialists gained the elections in France in the early 1980s, their economic policy during the first years of legislation was based on increasing the purchasing power of the lower-end income classes by granting them higher wages and social benefits. But the result was that those people started to buy, among other things, video-recorders imported from Japan: the extra purchasing power was spent on products imported from abroad, making the trade balance negative and putting pressure on the French Franc. As an intermediate conclusion, we can only state that under certain conditions an increase in wages and salaries can have a positive effect on profit for companies. These conditions will be discussed in great detail later on in the book.

4.5.5

Second paradox: is a positive cash flow for one company at the expense of the rest of the world?

The businessman thinks of profit as the difference between the turnover his company realizes and the cost involved in producing and selling products or services. Even neo-Marxian economists have their own more complex explanation for the origin of profit. As quoted before, they see profit as the result of the realization of the surplus value, the difference between the value of the products the workers produce and the value of their labor.

24

But let us imagine the earth we live on or the whole universe for that matter as one big system, composed of several interacting smaller subsystems. Suppose a certain company is such a subsystem. Then we can see the rest of the overall system the earth or the whole universe minus that one company as the complementary subsystem. If then that one company makes a profit (or a positive cash flow), does this imply that the complementary subsystem is making a loss (a negative cash flow)? We can ask ourselves the question if profit is made at the expense of others? Or is it possible that in an isolated economic system as the Earth, every single subsystem can make a profit? If so, how is this feasible? Or must we admit that our ideas about the real origin and nature of profit are wrong? Perhaps the description of profit from a businessmans point of view or even a (neo-) Marxian economists point of view have led us to the wrong perception of what profit really is and how it originates in an economic system larger than just one company or one country. There are indeed also some flaws hidden in the (neo-) Marxian description of profit as a result of surplus value. Van Rossem tells us ...a positive difference is possible..., but how is it that a positive difference is possible after all? Let us, at least in mind, unite all enterprises-subsystems of the world in one big subsystem: World-Industries Inc7. On the one hand we can say that every family man is an employee of this big company: he makes his contribution to the production of goods and services, and in return he receives a salary. On the other hand, he and his family are consumers of products and services marketed by World-Industries Inc., and they have to pay a price for these. The amount of money the household can spend, however, cannot be higher than the salary the employee receives by selling his labor-force. OK, they could buy things on credit, but one day they have to pay back the loan with interest, so in the long run the amount of money they can spend cannot be greater than the salary they receive. Stated in another way: World-Industries Inc. would realize less turnover than the sum of money they paid as salary to their employees. And salary is just one of the cost items in a working account. How could this World-Industries Inc. make a profit? Is profit possible after all? Or does one subsystem-company makes profit at the expenses of another subsystem?

4.5.6

Profit according to (neo-) classical economists

According to the concept of evenly rotating economy formulated by the economist Murray Rothbard, when everything is perfectly known by everybody, technology is stabilized, and management is perfect, then the economy evolves to a stationary state and profit tends to decline to zero. Paul Samuelson has expressed the same as follows: Suppose we lived in a dream world of perfect competition, where we could read the future perfectly from the palm of our hands and where no innovations were permitted to disturb the settled routine of things. Then the economist says there would be no profit at all!8 I do not agree with these statements. Economists try to let us believe that profit is not possible in the first place. I have never found a positive proof of this statement in all the books and articles that I have read on economy. So in a way it is an academic dogma, an invalid axiom. But then everybody wants to make a profit. It is like Eros and Thanatos: everybody does it but nobody wants to talk about it. But there is nothing unnatural with sex or dying, neither with profit: they are all natural, part of life.

7 8

The nec plus ultra of globalisation: no more competition! P. Samuelson, Economics, p 621.

25

The question if profit is possible after all will be answered in the next chapter, where we describe our basic theory on the origin of profit. There we will demonstrate that profit is indeed possible without losses for other subsystems, even in a situation of perfect competition and perfect knowledge and without need for innovations, if certain conditions are met. We will describe the real nature and origin of profit in a manner totally different from the businessmans or the neo-Marxian or neo-classical economists point of view. In order to do this, we will introduce an important agent in our description: time. In doing this, our picture of the economy will become dynamic instead of static. Let us return once more to the story of the employee of World-Industries Inc. for an additional paradox. As a good family man, who works very hard, he is able to put some money aside on a saving account. The bank pays him interest on the amount of money he has saved. Where does that extra money come from? Well, the bank does not just treasure it up, it grants a loan to a person, a company or even a country at a higher rate it has to pay to the family father. All right, but that person, company or country has to pay back the loan, with interest. Where do they get the extra money? By making money, you say. OK, but how is that money made? Stated in another way: how is it possible that the amount of money can increase? And how is this decided and by whom? Is it just a matter of printing money? Who is entitled to print money? And what about inflation? These questions, again, will be answered later on. Moreover, what is the unit of the entity profit? Profit is generally expressed in a currency unit, with the tacit assumption that it is over the period of one year or a quarter of a year.

So clearly the unit of profit is currency unit per time unit, coincidentally the same unit we use to measure economic growth and balance of trade.

Later on you will understand why I state this so explicitly.

4.5.7

Evolution of the profit-ratio

On the subject of the evolution of the profit-ratio of private companies, we refer to the work of the Belgian (neo-) Marxian economist J.P. Van Rossem. One cannot deny the fact that in the whole western economy the profit-ratio (the ratio between the realized profit and the capital invested in order to realize that profit) has decreased steadily since World War II. This does not imply that companies make less profit. It only says they have to invest more in machinery, buildings and energy to realize the same level of profit... Calculations show that the average profit-ratio in Belgian economy has declined from 15.86% in 1953 to a level of 7.62% in 1977... Nobody has ever maintained that the profit-ratio should decline, just as a stone drops when he is released. One can think of measures to increase that profit-ratio. However, when we analyze for example the evolution of the average profit-ratio in Germany from 1880 till 1976 (West-Germany after 1954), we can conclude that the profit-ratio has increased only in two periods of time: the first time between 1915 and 1919, the second time between 1941 and 1944. In other periods of time the profit-ratio has 26

shown a declining trend... In the past, the profit-ratio has increased substantially only during World War I and World War II. J.P. Van Rossem, Knack, January 1979, p 119.

Profitratio

Peace

Peace

Peace

War

War Time

Evolution of the profit -ratio

We can represent the evolution in time of the profit margin with a saw-tooth shaped curve: longer periods of decrease are alternating with short periods of fast increase. The period of fast increase happens to coincide with the occurrence of a war. Is this pure coincidence or is there a logical explanation to it? Also rather revealing and scaring, isnt it?

4.6

Active unproductivity

To stay competitive and increase the productivity per employee or decrease the labor cost per produced unit a lot of companies have invested in automation in production and in administration. On itself, this evolution can only be approved off: clerks and secretaries are relieved from the burden of dull administrative routine; laborers do not have to work in dangerous or unhealthy conditions anymore as robots can do their job. One could indeed ask the question: which percentage of people working in industry and government is really productive? Imagine how many people are employed in government departments, institutions and even private companies who make no or very little contribution to the production of goods and services, but who are just physically present at their work, killing time by playing social games. Paul Lafargue described this situation already in 1880 very accurately as active unproductivity 9. Indeed, is this not a form of hidden unemployment? What is the difference between, on the one hand someone being really unemployed and receiving unemployment benefits, and on the other hand the unproductive employee receiving a salary? Would it not be better for society as a whole to let those
9

Paul Lafargue, The Right to be Idle.

27

people stay at home, and let them enjoy the goods and services without them making a contribution to the economic process10? This could result in savings in energy-consumption, transport-costs, mobility problems, cost of medication and health care... This would also lead to extra employment in the recreation business. It would benefit the trading balance of the country as a result of less energy consumption. One could indeed wonder if man is destined to work11! A lot of useful and pleasant things could be done with the time that would become available if all companies would be re-engineered with the principles of Dr. Hammer and if robots and computers would be introduced on a large scale and if hidden unemployment would be dissolved. Are we evolving as Homo Sapiens from Homo Ardens toward the Homo Ludens after all? Is there a society at hand in which a minimum of human effort will be needed in order to produce the necessary goods and services and where everybody will be entitled to enjoy the abundance? On the other hand, a lot of unskilled persons lose their job due to the introduction of automation, while there is a great demand for people with technical skills in order to design, produce, maintain, program and operate those robots and computer systems. The productivity per capita of the persons with a job increases, but the productivity of the people who have lost their job drops to zero. So what is the effect for the society as a whole, what is the productivity per person, irrespective of the fact that he is employed or not12? And what can we do about all those people who are unemployed? Is there a society at hand in which a minimum of human effort will be needed in order to produce the necessary goods and services and where only a minority will be able to enjoy the abundance the owners of the means of production and, in second degree, the technical skilled persons , while the other ones will live in a situation of permanent poverty because they are no longer needed in the production process: a high labor-force reserve i.e. unemployment keeps the wages of those who are working low. A society where the outcast will receive only the basic necessary goods in order not to die from starvation or to start a revolution, and where the established power of the lite will be maintained by a strong internal military force and by selling or even free distribution of intoxicating drugs13, so that the poor can build up their own world of fantasy (panem et circencem)? Havent there been already civilizations of this kind in the course of time? Doesnt that make you think of George Orwells 1984 and Aldous Huxleys Brave New World?

You may think this absurd. It is! But later we will work out a feasible alternative when we will elaborate our Eight Days a Week solution. I am convinced the world is ready for a Fourth Wave. 11 The right for labor was a Marxist slogan! 12 I wonder if economists have made some research on this. 13 At the end of the 19th century, laborers in the textile industry in Flanders where paid part of their wage in gin, so they could endure the 12 to 14 working hours 7 days a week.

10

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4.7

The economic dogma

Economy has been defined as the social science dealing with the problem of choice in a world with limited resources, a world where the factors land, capital, workforce, raw materials, energy are scarce: Butter or guns. Thomas Malthus, who as central information-gathering agent kept statistics for the East India Company, found that, as population grew with a geometrical progression while resources only grew with an arithmetic progression, scarcity would increase. There always would be a fundamental inadequacy of life support on planet Earth, so only the fittest would survive economically resulting in an Us or Them attitude. To my very surprise this EIC started to play a very important role when I was compiling my study. I am even pretty sure it still exists as a company in one form or another, as the ideas of Thomas Malthus still dominate current geopolitical affairs. Within this scarcity, the economic agents individuals, companies, banks... are supposed to aim for the maximum benefit for themselves, to act out of pure self-interest. Classical economic theory, neoclassical theory, Marxist theory or neo-Marxist theory, they all start from these same basic assumptions. In the classical general equilibrium theory, the law of supply and demand and the market take care that the price level for each product and service evolves to its optimum value. There is no moral judgment to make on this pure rational and morally impartial Invisible Hand. On the contrary, moral considerations could lead to regulations interfering with the market mechanism and thus to a less than optimal economy. One of the benefits in the capitalistic world is profit for the private companies. From a businessmans point of view, we can describe profit as follows: A company realizes a turnover by marketing certain products or services. In order to do this, it has fixed and variable costs. Turnover minus the variable costs gives us the contribution. Contribution minus the fixed costs gives us profit before taxes. Profit before taxes minus the taxes results in profit after taxes.

As already mentioned, there is something very strange with this profit, as according to some prominent economists themselves profit is not possible at all. So in order to keep on making profit in the capitalistic world, where only the fittest survive, one has to set one of the following mechanisms into action, or a combination of them, resulting in a deviation from the optimal equilibrium. The actions are listed as bullets in an order that is economically irrelevant, and I am sure you are able to add a few more yourself. In this book you will find many practical examples of these mechanisms: Mechanisms in order to realize the same turnover with less variable costs: increase productivity, more automation in order to reduce the direct labor costs and to increase output per man-hour, layoffs; mechanisms to guarantee cheaper input of raw materials and energy.

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Mechanisms in order to distribute the fixed costs over a greater turnover by increasing the scale of production and by acquiring new markets. Mechanisms so that customers buy from you and not from your competitor: innovation, product advantage compared to the competition, advertising. Mechanism in order to create ever new products or variations on existing products and to be the first one to skim the market. Mechanisms in order to eliminate the competition: mergers and acquisitions, regulations. Mechanisms in order to make the customer to buy your product over and over again: too expensive printing cartridges, built in wear-and-tear, genetic manipulation of planting seeds. Mechanism in order to force the customer to buy the product from you and you alone (monopoly, autarky). Mechanisms to pay less tax, or even better none at all. Mechanisms in order to divert costs from your account to someone elses, or even better to many others (pollution). Mechanisms in order to divert money from the pockets from the others into your own pockets.

and when all of the above mechanisms are no longer effective, in order to save the system from total collapse: mechanisms to start the game all over again from the beginning (same players shoot again). It is obviously unnecessary to say that the mechanism that you can set into motion depends on your span of control. This us-or-them-but-not-both-together-attitude, based on the Malthusian assumptions of fundamental ever-increasing scarcity and zero-profit in perfect equilibrium, has resulted in the socioeconomic world-paradigm as we know it today. Just read the newspaper and watch the news on television, but dont you dare to make a moral judgment as toute est au meilleur dans le meilleur des mondes, to speak with Voltaires optimistic Candide. Well, both assumptions are wrong. And as the mechanisms described above are based on these wrong assumptions, they are becoming more and more irrational and immoral as you go down the list. If one takes a look at history, economic depressions are a result of an excess in production capacity, lack of turnover, lack of consumers, i.e. lack of people with economic needs and with money to spend. The people with money to spend have already more than they need, and they can easily reduce their level of consumption. The people with real needs do not have any money to spend. So, in a sense, there is scarcity, but only scarcity of consumers, not of products. Economists try to let us believe that, in the first place, profit is not possible at all without the use of one or more of the mechanisms described above. I have never found a single positive proof of this statement in all the books and articles that I have read on economy. So in a way it is an academic dogma, an invalid axiom, based on the economists inability to explain the real social origin of profit. The question if profit is possible after all will be answered in this book, where we will demonstrate that profit is indeed possible without losses for others and without using one or more of the mechanisms listed above, even in a situation of perfect competition and perfect knowledge and without need for innovations, if certain conditions are met. We will describe the real nature and origin 30

of profit in a totally different manner than the businessmans or the neo -classical or the neo-Marxian economists point of view. This new insight, which could and will result in a very clear understanding of the economic and political history of the world as well as the present economic, financial and political reality, could and will lead to a new world-paradigm. And above all it will lead us to the solution of economic and political crises, a solution that is rational and moral at the same time, and permanent. There is another mechanism that works.

Basic Theory on the Origin of Profit How wonderful that we have met with paradox. Now we have some hope of making progress. Niels Bohr.

In this section we will evolve a general and coherent model to describe the economic process. This model will be very simple, even suspiciously simple. However, it will allow us to explain the economic reality in great detail: all questions and paradoxes from the previous chapter can be answered with this model, the recurrence of economic entities and their correlation with war will also be explained. This argues for the validity of the model. According to Fernand Vandamme, former professor at the University of Gent, one should consider the following characteristics in order to make a general evaluation of a theory14: The systematization of the theory. The level of abstraction and the universality of the theory are closely related to this. The number of phenomena that can be explained by this theory compared to the complexity of the theory. Control: diversity of confirmation and falsification. Objectivity, i.e. the acceptation of the theory by experts in the field concerned [?].

5.1

Satisfaction of needs: Driving force of the economic process

To start with, let us consider a society that lives in isolation from other societies. You may think this is a severe constraint. But remember, think as a cosmopolitan: isnt the Earth an isolated system without any trade with the extraterrestrial universe? We can think of this society as a system, composed of several smaller subsystems interacting with each other: private persons, companies, political and social pressure groups, countries... The people living in this society have material needs. These needs can be of individual or collective nature. The economic process is supposed to fulfill these needs: raw

14

Fernand Vandamme, Economy and Philosophy of Science, p 81-82

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materials, energy and human effort and creativity are combined in order to produce and distribute goods and services. As barter proved to be inefficient15, an intermediate medium of exchange is introduced: money. This money can take several forms: pebbles, shells, cattle, metal, gold, jewels... even paper! Money does not need to have an intrinsic value to use or to consume it. Money, as money rather than a commodity, is wanted not for its own sake but for the things it will buy. A person accepts money because it is generally accepted in the society he lives in. He accepts it because he knows or hopes that other persons will accept it when, later in time, he wants to exchange it for real goods or services. It is just a matter of social convention and of confidence, more specific confidence in the future value of that money: that other persons still will accept it and that it still will have the same value. Later on in this book, we will see that one could make and has made abuse of that confidence.

5.2

Profit as a consequence of growth

A student in economy has to struggle through several courses at university. They can be classified in two fields: Economy, divided in macroeconomics and microeconomics. Productivity is one of the key words. Growth of productivity is the objective16. Business administration. Profit is one of the key words. Maximization of profit is the objective.

The relation between these fields and the premises on which these theories are built are rarely discussed or questioned at university: how do all these theories on economy fit together, what laws are valid on one level but not on another, can one extrapolate from one level to another...? Students in economy study these courses in the first place in order to be able to reproduce the material the way the professor knows it and to get a degree, not to put things to question. If they would do so, they would question the authority of the professor, which might jeopardize their degree and their academic career.

5.3

Profit for companies as part of profit for society

As already promised, we now introduce time in our description of the economic process. Let us assume that in the society we study, the output of the economic process at time t1 has a certain level of production: x bread, y shoes, z prams... Against this level of production, we have an amount of money in circulation. The ratio of the amount of money in circulation to the level of production determines the average price-level of the products and, on the other hand, also the purchasing power of a certain amount of money.

Paul Samuelson, Economics, p 274-276, Barter versus the use of money. I can recommend the article Neo-classical Micro and Macro Economics, Science or Silliness written by Michael Albert, to be found at http://www.punksinscience.org/kleanthes/courses/UK04S/WV/Neoclassical_Economics.html
16

15

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The purchasing power of a subsystem in our society in particular an individual person is determined by the percentage of the total amount of money in circulation it can accumulate, because this determines the percentage of the total production of goods and services it can acquire. Let us further assume that in the present stage of economic development there is not enough production to fulfill all material needs. People make an effort to increase production by combining more time, energy, raw materials and human effort and creativity in the production of goods and services. At time t2, a period of time dt after t1, the output of the economic process has increased with a certain amount: x+dx bread, y+dy shoes, z+dz prams... are produced. If the amount of money in circulation cannot be changed we almost wrote manipulated because a certain scarce good is used as money, then the average level of prices must go down. With the same distribution of the amount of money as before, at time t1, this implies that at time t2 the purchasing power of every subsystem and every individual has increased: with the same amount of money they can buy more things. In particular, we can say that the purchasing power of money that was put aside has increased: with the money saved at time t1 one can buy more goods and services at time t2 than at time t1. If the amount of money could be adjusted, then one could keep the same average price level by increasing the amount of money in circulation with the same rate as the level of production has been increased17: the growth of the economic production is then translated into a growth in the amount of money in circulation. We can consider this increase in the amount of money from time t1 to t2 as profit for the society, realized over the time-interval [t1,t2], and thus expressed in currency unit per time unit. The way this increase of the money-supply or profit for society is distributed among the several subsystems of the society determines the respective changes in purchasing power of those subsystems: profit for companies, part paid as dividends for shareholders and part as earnings retained in the business, higher wages and salaries for employees and laborers, increases in pensions, interests on savings accounts... with the restriction that the sum of all increases in purchasing power is equal to the increase of the amount of money in circulation or the profit for the society as a whole due to increased production. Here we can see the real origin of profit realized by companies:

Profit realized by companies is part of the profit for society, the result of economic growth, and thus is a consequence of the growth of the economic production. (Remember: profit and growth are both expressed in currency unit per time unit).

This is a very important conclusion. However it is very difficult to find any trace of it in economic textbooks. As already stated, most economists even say that profit is not possible at all: Suppose we lived in a dream world of perfect competition, where we could read the future perfectly from the palm of our hands and where no innovations were permitted to disturb the settled routine of things. Then the economist says, there would be no profit at all!
17

See also Ravi Batra, The Great Depression of 1990, p 83.

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Only after an intense research we have found a short comment on the relationship between profit and economic growth in a book written by the Dutch economist J. Pen: ...the social benefits are a burden for profits, which are corroded already by the decline in economic growth 18. However, this conclusion that profit is a consequence of economic growth will play an important role in this book, especially because it will lead us to the explanation for the paradoxes and questions of the previous chapter and the solution for the economic crisis. Next to freezing the amount of money in circulation or keeping the same average level of prices, there is also a third possibility: the amount of money in circulation could increase at a higher rate than the economic production. We will postpone the very interesting and revealing discussion on this possibility until a later chapter.

5.4

The social purpose of profit

In the previous section we have discussed how growth of the output of the economic process leads to profit for society as a whole. This profit for society, expressed in terms of goods and services or in terms of money, is divided among the different subsystems in society: dividends for shareholders, earnings retained in business, higher wages and pensions, interests on savings accounts. In periods of considerable economic growth it is very well possible that all private companies make a profit, that all employees and laborers receive higher salaries and wages and the retired people higher pensions, that all depositors receive interests on their savings, and that all banks receive higher interest on loans than they have to pay on deposits. We do not have to assume imperfect competition, imperfect management, non-transparent markets and innovations in order to justify the existence of profit, as some economists do. Profit of a company is part of profit of society and is thus to be considered as a consequence of economic growth. The social goal of profit is twofold: In the first place it is a fair reward to entrepreneurship and innovation: companies and entrepreneurs who combine time, raw materials, energy and human effort and creativity in an efficient way and who produce goods and services fulfilling real needs of society and its subsystems, are rewarded with a profit. In this sense, we can say that profit is a stimulus to avoid injudicious use of time, raw materials and energy: inefficient companies, with high costs of production, or who are making products not in demand, are punished with a low or even negative profit and eventually will go out of business. Efficient companies, on the other hand, with low production costs or making a product in great demand, will make more profit. They will stay in business and even be able to expand their activity. On the other hand we can see profit as the stimulus for entrepreneurs to design, produce and market products fulfilling real needs in society. To realize this, they hire people and they pay them a salary for their services. Employees can then fulfill in their needs and of those depending on them by spending money, buying goods produced by the entrepreneurs.

18

J. Pen, Look, Economy, comment with the picture on p 54.

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Here we see a mutual dependency between employers and employees. In his last book Critical Path, the late Buckminster Fuller has described this concept of mutual dependency as precession: i.e. the mutual interaction, voluntary or involuntary, among two subsystems belonging to a greater overall system of a higher level. B. Fuller has illustrated the concept with a simple metaphor: the theory of the rubber cylinder19.

Let us consider a cylinder with a rubber middle part, rigid disc ends and filled with water. When we pull the two opposite disc ends away from one another, the middle part of the cylinder contracts in a series of concentric circles of diminishing radius perpendicular to the line of our pulling. This is because the volume of the water cannot change: when the cylinder is made longer, then the middle part must contract. So the middle part and the ends of the cylinder are tied to each other by the medium water. A displacement of one of them (the discs) results in the displacement of the other (the middle part). So next to the result that was deliberately achieved (the pulling apart of the discs), a not-intended perpendicular side effect occurs (the contraction of the middle part). One could have obtained the same result by doing just the opposite: by contracting the middle part, the discs would move further apart. This means that pulling the discs or contracting the middle part have the same result. In pursuing the result, is it then important, after all, which one of both actions has been performed: pulling the discs, contracting the middle part, or a combination of both? We also notice that when we would have used a thinner medium air or some gas there would have been less coupling between the displacements of the discs on the one side and the contraction of the middle part on the other side: part of the interaction is lost in the elasticity of the medium, as air is much more compressible or expandable than water.

19

B. Fuller, Critical Path, p 141

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The reader may object: What do cylinders filled with water or some gas have to do with economy. Isnt this just a metaphor20? Well, let us return to economy. By trying to obtain more profit (pulling the discs apart), the employer invests and he allows more people to fulfill their material needs (contraction of the middle part) as he produces and sells more products and services and pays more salaries. Could it be possible that the opposite rule is also valid, as with the rubber cylinder? Will profit increase (discs moving further apart) when more people are given the means to fulfill their material needs (contracting the middle part)? I suppose you recall the paradox from the story of General Motors that realized a higher profit after granting higher salaries and all kind of benefits to its employees. From that story one could assume that the opposite rule is indeed valid. The underlying mechanism will be explained in the next chapter, based on the basic notion that profit is a consequence of growth, and how the distribution of the resulting profit for society among the several participants determines future growth and thus future profits. If we follow this line of reasoning, we could ask ourselves the question: what is the medium in the rubber cylinder that links employers and employees? And what happens if that medium becomes thinner? Does the mutual interaction still work then? For the first question I would suggest the following answer: needs for goods and services. The employers produce and market goods and services fulfilling needs of the society. The employees sell their labor to the employers in order to receive a salary and to be able to fulfill their needs for goods and services. The second question, on the medium becoming thinner, will be handled in great detail in the next chapter.

5.5

An idealistic view on economy

We could describe economy as a process in which time, raw materials, energy and human effort and creativity are combined for the production of goods and services in order to fulfill collective and individual needs. In this process, profit is at the same time a consequence of as well as a stimulus for growth of the economic production. In this view, fulfillment of needs for goods and services is the driving force of the economic process and not profit, as was even stated by a neo-Marxian economist. However, this ideal situation is turned upside down in real life: profit, a consequence, has become a goal on itself. As we shall see later on, this shift in emphasis has caused us a lot of trouble.

5.6

Positive balance of trade

Previously, we made already the assumption of a society living in isolation from other societies. You may say this is not very realistic as most countries today are involved in the international trade scheme. We also wondered why a positive balance of trade is considered to be good for the economy of a country. A country has a positive balance of trade when it exports more than it imports, when it produces more than it consumes so the revenues are higher than the expenditures in its international trade. One could consider a positive balance of trade as profit for that country realized by its trade with other countries over a period of time, and thus expressed in currency unit per time unit, the same unit as profit and economic growth.

20

Metaphors can trigger a metamorphosis.

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This profit for the country is also distributed among the countrys different participants in the international trade, just as profit for society, as a consequence of economic growth, is distributed among the different subsystems of society. On the other hand, we can consider a negative balance of trade as a loss for the country in its trade with other countries. This profit or loss for the country, resulting from its trade with other countries, accumulates with the profit for society resulting from its internal economic growth. When the internal economic growth stagnates, because of saturation of the market or because the needs of the internal subsystems with money-to-buy are saturated and the internal subsystems with real needs have no money-to-buy, then companies can still make a profit by exporting their products to other countries. We can conclude that profit for society and thus also profit for a company can be considered as the consequence of two factors: On the one side the internal economic growth and increasing consumption within the society. On the other side a positive balance of trade in the societys trade with other countries.

Here we see the reason why economists attribute such a great importance to a substantial growth rate and a positive balance of trade. When faced with saturation of the internal market, it is obvious that countries will concentrate on the second factor in order to avoid a situation of zero-growth: they will try to have a positive balance of trade with the other countries. In the assumption that the Earth is flat, and thus an infinite plane, it is perfectly feasible for every country to have a positive balance of trade: there is no argument to contradict this. However, since several centuries we know that the Earth we live on is a globe, and a globe has the annoying feature of being finite! The Earth as a whole is a society living in economic isolation from other societies! The finite number of countries on this finite globe can be divided in two classes: those with a positive balance of trade those with a negative balance of trade

The sum of the surpluses of the positive balances of trade must always be equal to the sum of the deficits of the negative ones. This assumes that the balances of trade of all countries are calculated in the same way. This equilibrium is a direct consequence of the fact that our globe is finite. We stress the fact that the equilibrium between balances of trade is not static, but rather dynamic: the balance of trade of a country can show a surplus at one time and a deficit at another time. But there has to be an equilibrium between the surpluses and the deficits of all countries at all times. It is also a fact that not all countries can have a positive balance of trade over the same period of time. Let us consider ourselves in this study as world citizens, free from any national preference or prejudices. So we can make abstraction of the borders between countries, this means that we consider the earth as one great economic entity isolated from other societies.

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In this view there is no trade with the outside world, so there can be no positive balance of trade, so profit for society and profit for companies can only be a result of the growth of the world-economy.

5.7

Conclusion

In this very important chapter we have unveiled the social origin of profit. We have discussed that profit for a company as well as profit for society as a whole (a country or the Earth) is to be considered as a consequence of the growth of the output of the economic process. We have learned that fulfillment of material needs is the driving force of that economic process. Profit is at the same time the stimulus for enterprises and entrepreneurs to start this process and to keep it running, as well as the result and the reward of it. This point of view is quite different from that of a businessman, who thinks of profit as the difference between turnover and costs, and also different from that of some economists, who see profit resulting from the realization of a surplus value, in one way or another. Our point of view, however, is not in contradiction with these two. Our point of view embraces the other two and explains that a positive difference can exist between turnover and costs even when all companies are united in World Industries Inc. , that a surplus value can be realized and that interest can be earned on a savings account. The necessary condition for all of this is economic growth. The question remains: how can we accomplish this?

5.8

Distribution of profit as driving force of or brake on economic growth

Let us again study a particular society. Suppose that the output of the economic process is growing: ever more material needs of ever more people in that society are fulfilled. Over a period of one year the growth has a certain level: the increase in the volume of goods and services produced. This increase corresponds with the profit for society or the total increase in purchasing power. This profit for society is divided among the different subsystems in our society: dividends for shareholders, retained earnings for companies, increased wages for employees, higher pensions and social payments, interests on savings accounts, etc. The several subsystems in society see their purchasing power increased according to the percentage of the total profit for society they are assigned or they can acquire. An increase in purchasing power of a subsystem whose material needs are already fulfilled to some degree compared to other subsystems will induce only a small or even no increase in consumption expenditure of that subsystem. On the contrary, that subsystem will save the major part of the extra purchasing power it has acquired. It will invest the saved money by placing it on a savings account or by acquiring government bonds i.e.: low risk investments or it will invest directly or indirectly in private companies i.e.: risk-bearing capital. Depending on the level of the expected profit-ratio, which reflects the return on risk-bearing capital, compared to the interest of the low-risk investments, one will decide to invest in shares or in government bonds. Investments in shares lead to growth in capital goods (office buildings, factories, machinery,...), while investments in government bonds lead 38

to growth in public goods and services (roads, bridges, defense industry,...). Both can give a contribution to future economic growth. However, if the private consumption does not increase, then the ever increasing stock of capital goods will be used far below its maximum capacity, so demand for new capital goods will also drop and economic growth will slow down. The profit ratio will decrease. To illustrate this, we refer to an interview with the economist Ernest Mandel, former professor at the University of Brussels 21: These reasons together indicate how difficult it is to solve the economic crisis. Everything one does to expand the market and to increase the purchasing power of the population undermines the profit of the companies. And everything one tries to improve the profit-ratio of the companies undermines the purchasing power and thus the sales potential. To solve both problems simultaneously seems to be very difficult and it will take a long time. We are surely not so pessimistic as professor Mandel when he says that it will be extremely difficult and will take a long time to solve both problems of over-production and low profit-ratio at the same time. Indeed, an increase of the purchasing power of a subsystem in society, whose basic material needs are far from fulfilled, leads to an immediate increase of consumption expenditure: that subsystem will spend the total increase of its purchasing power to buy goods and services. If this happens in a situation where the production capacity is not used at full capacity, then the output of the economic process can increase without need for new investments. So it is perfectly feasible that a substantial increase in purchasing power of a subsystem with great material needs will lead to an increase of turnover and thus to a higher profit for society and thus to higher profits for private companies in absolute terms. As the level of capital goods does not have to increase, this means that the profit-ratio will increase! On the one hand we have stimulated the direct consumption and the economic growth; on the other hand we did not have to do additional investments to increase the production capacity. Here we have found the explanation for the paradox that higher wages for employees and laborers not necessarily imply lower profits for employers and companies, but actually can lead to higher profits. The board of directors of General Motors had three alternatives: It could divide the total profit of that year among the shareholders as dividend. It could decide to pay no dividend but to invest the retained earnings in extra production capacity. It could grant the demands of the union.

The shareholders already drove a car, and probably would not spend the extra money they received as dividend to buy another car, and surely not a GM car but rather a Bentley or a Rolls Royce. An increase of the production capacity did not make sense, as there was already capacity in excess. By granting the demands of the union and because they had set an example to other companies in the region of Detroit and all over the USA, GM had created a large market in their own country by increasing the purchasing power of the employees and the laborers. They had induced possibilities for future increase in turnover and profit for the next twenty years. As Lester Thurow says in the foreword to The Great Depression of 1990, written by Ravi Batra: Essentially the economic process is like that of the wolf and the caribou. If the wolves eat all the
21

Interview with E. Mandel in Knack, March 14th 1984.

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caribous, the wolves also vanish. Conversely, if the wolves vanish, the caribous for a time multiply but eventually their numbers become too great and they die for lack of food. Producers need consumers and if producers deprive workers of their fair share of production income they essentially deprive themselves of the affluent consumers they need to make their facilities profitable. The reader who is familiar with control systems theory will recognize in this discussion the concept of feedback. By returning the output of a process in one way or another back to the input of that very same process, one creates a mechanism to control the system. By feedback of the profit for society a result or output of the economic process as changes in purchasing power to the several subsystems in society, a change in the consumption and spending pattern of society and its subsystems is induced input of the same economic process. This affects the very structure of the economic process itself and the future growth and profit for society. This feedback mechanism has a quantitative effect (the size of the growth) as well as a qualitative effect (the nature of the growth: what kind of products and services will be in greater demand). Growth is considered by economists to be closely related to the transformation of the structure of the economy: in their view growth only occurs under the impulse of ever new changes in the structure of the economy, i.e. under the impulse of changes in the consumption pattern of the population, changes in the organization of the branches in industry and changes in technology. On the other hand we can say that this transformation of structure is not an autonomous process and that it is not only determined by technological progress. When economic growth leads to an increase of the income per capita, then we can see significant shifts in the demand for several kinds of products. When the income increases, the demand for some products increases more than the demand for other products. We know from control systems theory that an injudicious feedback policy could make a process unstable. This instability is manifested by increasing and, in the long run, excessive oscillations, which ultimately will lead to the breakdown of the system. If one knows the dynamics of the system by means of its state-variables and systems-equations, then it is theoretically possible for a certain subset of systems to find the best feedback policy in order to bring and keep the system to a certain state one has set as a goal. If however the dynamics of the system are not completely known, then one can still use heuristic rules. These are rules of thumb, not based on a complete and correct understanding of the system, but on partial knowledge, experience, common sense, intuition... Under certain circumstances, which are often not explicitly known, they can lead to a result that is acceptable. Based on our discussion on the effect of the distribution of profit on future growth, we could formulate the following two heuristic rules to control the economic process: Rule 1: If the stock of capital goods is used at full capacity or close to that, then we can induce investments by granting most of the profit for society to companies and shareholders (E.g. reduced taxes on profit or, even better, financial support for investments). The new investments will lead to an increase in production capacity and jobs and, in time, to an increase of the consumption for the whole society. To invest is to abstain from immediate consumption in order to be able to consume more later in time. Rule 2: If the stock of capital goods is used at a level substantially below its maximum capacity, then we stimulate consumption by granting most of the profit for society to those whose material needs are far from fulfilled. E.g. reduced taxes on lower wages, higher taxes on profit or a higher capital gains tax. The increase in consumption will lead to economic growth and more profit without having to invest in additional capital goods. The existing stock of capital goods will be used more efficiently and the profit-ratio will increase. 40

According to the conditions of the time being, we apply Rule 1 or Rule 2. The reader familiar with economy will recognize great similarities between these rules and the principle of Keynes, although they are not identical. Keynes observed that businesses perform a two-pronged function: as producers they supply goods, but they also pay incomes to households in the form a wages, rents, interests, and profits. The households in turn spend money to buy goods from businessmen. There is thus a circular flow, with incomes flowing from producers to consumers and then from consumers back to producers. As long as businessmen can sell all their goods at a reasonable profit, this circular process continues uninterrupted. But several hitches may arise. A part of an individuals income is saved and deposite d with financial institutions, a part is taken away by government in the form of taxes, and a part spent on foreign goods in the form of imports. These are what we may call leakages from the total expenditure, and they tend to keep aggregate demand for goods short of the aggregate supply. Counterbalancing these leakages are the three injections to total expenditures business borrowing for investment, government spending, and exports. If the leakages are matched by injections, total spending matches the total value of goods produced, and the economy may be said to be in equilibrium, that is, it has no tendency to move up or down. If the leakages exceed injections, aggregate demand falls short of aggregate supply and some goods remain unsold, so that businessmen are forced to trim production and hence their employment of labor; in the opposite case of the injections exceeding leakages, production and hence employment tend to rise. This, in simple terms, is the well-known Keynesian process of national income determination. In this system aggregate demand plays an active role and aggregate supply a passive role in the sense that the latter converges to the former. High national income and hence high employment call for high aggregate demand. The corollary is unmistakably clear: during years of low demand, the economy suffers from high unemployment and hence recessions or depressions. The policy prescription is also unmistakably clear: in order to cure unemployment, the government should step in and raise aggregate spending in the economy by means of fiscal and monetary policies. Fiscal policies involve the weighing of government expenditure versus tax receipts. During a depression, fiscal policy calls for a budget deficit, i.e. for government expenditure to exceed tax revenue; but with inflation, the cure lays in a budget surplus. Monetary policy, by contrast, affects the economy indirectly through its effects on business investment. Keynes argued that monetary expansion encourages investments, while a contraction discourages it. Hence during a depression, the monetary policy has to be expansionary, but during inflation, contractional. Keynesian economics is thus the antithesis of the neoclassical ideology, for the government is now cast in the role of a constant watchdog indispensable to continued prosperity. The appeal of Keynesian theory lay in the fact that not only did it properly diagnose the economic ills, but it also advocated policies within the reach of governments. Ravi Batra, The Great Depression of 1990, p 80-82

Here we also recognize the principle of feedback: the government uses its income (taxes, a result of the economic process) as input to that same economic process. The rules we have suggested however 41

are of a more general nature: it is not only the consumption pattern of the government that can influence future economic growth, but of all subsystems in the economic process. The heuristic rules of Keynes have been applied with great success after World War II in countries with a mixed economy. Indeed, the substantial economic growth after the war can not only be considered as a post-war recovery. Most western countries adapted a system of mixed economy in which government had an active role and thus created a dynamic growth pattern based on the principles of Keynes. The prime objective of the governments was to create full employment and to stimulate material prosperity for all. They installed all kinds of systems to redistribute and equalize incomes, they took fiscal and monetary measures to stimulate or slow down the economy in order to level out the normal business cycles of booms and recessions. Private business accepted the social policy of redistribution and the labor unions accepted the policy to invest in new technologies to improve productivity. The actions of both groups together with government spending converged into the accelerated dynamic growth during the 1950s and especially the 1960s22. But the government spending had a side effect. If taxes were not sufficient to finance the public investments, the social programs and the defense programs, a lot of governments started deficitspending: they loaned money on the money market. The banking industry was eager to take these loans at a higher rate than they had to pay their depositors. Politicians were not thinking further then their next re-election and they liked to play Santa Claus to their voters. Banks were making money with these loans, and industry and labor unions were happy with the government spending. So since the 1970s most industrialized countries are faced with very high accumulated budget deficits. Since the mid 1970s, the application of the principles of Keynes did not yield the expected results anymore23 and the theory of Keynes has been criticized by many distinguished economists. How does it come that these rules, once very effective, no longer seem to work? When using heuristic rules, or when the dynamics of a system are not completely known, one should keep in mind that these rules can only be applied successfully within certain boundaries, not necessarily known to us. In the first place, disturbances affect the normal functioning of a system. The consequences of these disturbances are not always predictable. Small disturbances can usually be neglected, as their impact on the system is much smaller than the control policy applied to the system. Large disturbances, however, could have a severe corruptive impact on the dynamics of the system. In the second place, some state variables could undergo such a great change that they go into saturation, i.e. they reach their limit value. As a consequence of this, the system does no longer obey to the same rules anymore, its dynamics have changed, non-linearities might occur. In both cases we can say that the application of the known heuristics will not result in the expected objective, but on the contrary might even lead to an end-result opposite to the desired result or even worse to the breakdown of the system. So we only have to find out which corruptive disturbances affect the economic system and where saturation did occur.

22 23

H. Van Der Wee, The Broken Circle of Affluence, p 30-32 R. Batra, The Great Depression of 1990, p 72

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Addendum

In 2008, before the financial crisis, President Sarkozy of France took the initiative to form The Commission on the Measurement of Economic Performance and Social Progress (CMEPSP, also known as The Commission Stiglitz). Five Nobel Prize laureates economy and many other professors in economy participated in the commission. The commissions aim was to identify the limits of the GDP or GNP [per capita] as an indicator of economic performance and social progress. In 2009, the CMEPSP has presented its final report of about 290 pages. One of the conclusions of the commission was that the crisis is teaching us a very important lesson: those attempting to guide the economy and our societies are like pilots trying to steering a course without a reliable compass. The present financial and economic situation shows a lot of similarities with the crash on Wall Street of 1929 and the Great Depression of the 1930s, which resulted in the Second World War. Let us hope history does not repeat itself.

With this book I would like to introduce you to an alternative solution for the financial and economic crisis, an alternative that breaks with business as usual and that could very well lead to a win -winwin-situation for business, governments and private persons alike. My proposal, that at first glance may look rather crazy, but is basically the next logical quantum leap in the evolution of humankind, could very well solve a lot of problems at once, not only in the industrialized world with its aging population, but also in the Arabic countries with its young and educated population without any prospects for a decent job. And most of all, it would induce the transition towards a more peaceful world and the abolition of violations of human rights. It would furthermore allow meeting the promise to spend 0.7% of the GNP 43

for aid to the Third World countries, the Millennium Development objectives formulated by the UN, as well as the Kyoto protocol. The secret power of this proposal lays in the fact that it focuses on man as man with his needs and aspirations, and not as a mere production factor or consumer. My suggestion could be the solution not only for the economic crisis in the Western industrialized world, with its aging post WWII baby boom generation, but also for the Arabic countries like Tunisia and Egypt, where the population is much younger, where a lot of the young people have a university degree, but no prospect of a decent job. It could also be advantageous for the people of Latin America, Asia and Africa.

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