The conventional picture of how the economy works as shown in economics textbooks depicts a beautiful self-regulating system of supply and demand, which constantly seeks an equilibrium that ensures optimal distribution of resources.

But observation of the real world – especially now – makes it very hard to believe that this rosy picture is an accurate representation of our economy today.  Since COVID struck, the world economy has shrunk by $4 trillion or around 5%; at the same time, the combined wealth of the world’s billionaires has grown by $1.3 trillion or around 27%.

As the World Bank says, “Per capita incomes are expected to decline by 3.6%, which will tip millions of people into extreme poverty this year.”

Is it really plausible that this is an economy which is finding an optimal solution for the entire population?

Or course it is not plausible. We need a new picture of supply and demand, which illustrates what is happening in a way that relates to the reality of the world:

  • First, we should remember that economy is the system that society has put in place to create and distribute valuable goods and services for the population to enjoy;
  • We need a picture of the economy that illustrates whether and to what extent the economy is fulfilling that role; and
  • When we look at that picture, we see that COVID has accelerated adverse trends that were present before.

Fortunately, the actions we need to take to reverse this are clear.

The economy is the system we put in place to serve the population

There are around 200 countries in the world, and each one has chosen to run its economy slightly differently from the others. Some have a large public sector; some have a small one. Some have their own currency; some are part of a currency union (like the eurozone). Some trade heavily; some do not.

And they could have chosen even more radical options: it would be theoretically possible to revert to the gold standard. We could use AI to decide much of each type of goods and services to produce and who should receive them. We could even revert to barter.

The point is that we have a choice.

But we often talk as though there is just one possible economy, and it is the job of people to fit into that. We usually act as though we have no choice. We often say that if people have too low a market value, that says something about them as individuals, rather than about the type of market and the type of economic system we have chosen.

It is this mindset that leads to us having allowed the creation of a system which, in the middle of a global pandemic, takes money from the poorest in society and gives it to the wealthiest.

We need a picture of the economy that shows how well it is serving us

The conventional picture above does not help us to understand how well the economy is performing its core task of creating and distributing valuable goods and services for the population.

And nor do the most common measures of economic performance. The measures we see most often are:

  • Gross Domestic Product (GDP) and GDP per capita – both of which (inaccurately) measure the total value of products and services available for the population as a whole, but give no indication of who actually receives these valuable products and services; and
  • Government debt:GDP – which is a largely irrelevant measure favoured mainly by people looking for a reason to impose yet more austerity.

The book 99% suggests a different way of looking at these issues, particularly at supply and demand, which shows how well the needs of the population are being met (see Chapter 3).

Let us start by considering what the population needs. We can easily imagine a spectrum.  At the left-hand end of the spectrum, demand might be interpreted as “what people need to stay alive”.  At the right-hand end, demand might simply mean “things people clearly don’t need, but would like to have.”

At the far left of the spectrum, water, food, shelter – and, when necessary, healthcare – are absolute needs: without them, people will die, quite quickly.  Any practical definition of demand must include things that are so fundamental.

Moving further along the spectrum, demand becomes relative rather than absolute – short-term physical survival does not depend upon these things.  These are things without which it is impossible to have a normal life.  For example, it is extremely difficult to get a job without a permanent address, some level of education, a phone number and, nowadays, Internet access.  It is reasonable to consider this form of demand also as a fundamental need.

In the middle of the spectrum, there is demand for goods and services without which a normal life may be possible but with which life becomes far easier.  Being able to take a holiday each year, owning a car and a decent house all fit into this category.

Then there comes a level of demand which is in no sense necessary; owning several houses, luxury cars and private education for the children, for example.

Finally, at the extreme right-hand end of the spectrum there is demand for goods and services of the highest level of luxury: a top-end Swiss watch (which can cost over $500,000), a house in the Hamptons ($30–40 million) or a 70-metre yacht (a rule of thumb for super-luxury yachts is that they cost around US$1 million per metre).

We do not have the capacity to provide goods and services at the highest level of luxury to every person on the planet. Not everyone can have a 70-metre yacht or a private island. In this sense, scarcity is real. There is no way around it.

At the other end of the spectrum, however, we could provide water, food, shelter and essential healthcare to everyone on the planet – though it would require some reallocation of resources to do so. According to the United Nations, the equivalent of 28% of the world’s agricultural area is devoted to production of food that is lost or wasted, while roughly 11% of the world’s population is malnourished. In other words, even without increasing production, if we could simply reduce food waste, we could feed the world. As the Nobel Prize-winning economist Amartya Sen said: ‘Starvation is the characteristic of some people not having enough to eat. It is not the characteristic of there not being enough to eat.’

This means that at the left-hand side of the spectrum, scarcity is not inevitable – where it exists (as it does), it is a result of the choices made by society. This is, of course, especially true in rich countries. Using this spectrum of needs allows us to look at supply and demand in a qualitative as well as quantitative way.

We can use the visual metaphor of a target viewed through a telescopic sight. In this picture, the bull’s-eye represents the absolute needs, and each ring of the target represents increasingly inessential, aspirational levels of needs and wants. The field of view of the telescopic sight represents what is actually supplied to meet these needs. Here is a representation of the US economy.

In 1980, most people in the US had their absolute needs met (most, but not all, of the bull’s-eye is visible through the sight) and the majority (though not a very large majority) were also able to meet their needs for a normal life; it is a minority who have an easy life, or can meet the bulk of their wants and desires; and a still smaller proportion of the population enjoys super luxury.

Inequality, in this view, is the degree to which supply is off target. In 1980, the sight was aiming just outside the bull’s-eye.

In conventional economics, that part of the target which is not visible within the sight does not count as demand – and indeed, to a business, a need that is not backed by money is only hypothetical. In this sense, and in this sense only, poor people have no needs. On the other hand, rich people have a great many.

Complete equality, which would be represented by aiming the sight into the centre of the bull’s-eye, would result in all absolute needs, needs for a normal life and needs for an easy life being met, and everyone would meet some of their wants and desires – but there would be no super luxury.

And, of course, intermediate positions are possible in which there is some inequality, but everyone has their fundamental needs met. But that is not the world we live in.

Now let’s skip forward 35 years to 2015.

As the diagram illustrates, the problem in 2015 was not that per capita supply – the value that the US can produce per person – had failed to grow over the thirty-five years since 1980. Real per capita GDP was almost 80% higher than it had been in 1980, and so the view through the telescopic sight is much wider. The problem is that supply had drifted further off target: far more of the resources of society were devoted to production of super-luxury and luxury products and services – the super luxury market has grown by 226% since 1995 – while the fundamental needs of many citizens continued to go unmet.

This is because the sight was, by 2015, aiming well outside the bull’s-eye.


COVID has accelerated previous failings

Despite COVID, the US economy is larger today than it was in 2015, so the area visible through the telescopic sight is bigger. We do not have accurate poverty data yet for 2020, but the World Bank comments, referring to the global situation,

“COVID-19 could push 71 million people into extreme poverty in 2020 under the baseline scenario and 100 million under the downside scenario. As a result, the global extreme poverty rate would increase from 8.23% in 2019 to 8.82% under the baseline scenario or 9.18% under the downside scenario, representing the first increase in global extreme poverty since 1998.”

It is likely that the US picture today looks something like this:

The picture shows a small increase (since 2015) in the total area visible through the sight, but a further drift off-target. The result is a significant increase in the resources of society devoted to meeting the desire of the ultra-rich for super-luxury, and a further increase in the number of people not having their fundamental needs met. The sight is now aiming nowhere near the bull’s-eye.

This is not a picture of a self-regulating system which produces the optimal outcome for the population as a whole.

But it is a picture of the world we live in.

The Actions We Need to Take Are Clear

Given the scale and importance of the challenge set out above, it might seem that a solution would be complex and radical. Fortunately, the path to redressing the balance is easier than might be supposed.

This is because it is a choice: the reason the sight keeps drifting further and further off-target is because we keep making policy decisions that push it in that direction. If we choose different policies, we can push the sight back on target.

And it will take only five, relatively straightforward actions to do that.

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