Chapter IV: The Purpose of an Economy

What Must an Economy Do?

The indispensible requirement for any economic system is that it must provide the material basis for life for a sufficient number of its citizens so that society can continue for another season. In addition, it must provide a sufficient surplus so that society can be re-populated and continue for another generation. If either of these conditions is not met, then society simply disappears and further discussion is unnecessary.

But in addition to the few things that an economy must do, there is a longer list of things it ought to do. For example, an economy ought to provide the material basis of life for as many members of society as possible, and ideally for all members. It ought to provide for a certain level of material comfort and security; it ought to reward work, ingenuity, thrift, and inventiveness; it ought to supply sufficient excess to fund common goods such as the national defense, religious works, education, etc.; it ought to provide the ground for liberty; it ought to provide the ground for social harmony, that is, each citizen ought to be able to believe that his efforts are fairly rewarded, and that no one lives off of the efforts of another.

Having a list of things an economy should do implies another list of things it should not do. For example, it should not depend on slavery; it should not deprive work (including the “stored-up” work known as “capital”) of its just rewards; it should not reward sloth, that is, create wealth without work, wealth not based on some productive endeavor; it must not weaken social bounds or encourage class warfare, and so forth. Taken together, these lists of what an economy must do, what it ought to do, and what it ought not to do, provide us with a set of criteria upon which we may make firm judgments about the success or failure of any particular economy, most particularly our own. Granted that these judgments can never be precise. We can always point to some wealth without work, some work not fairly compensated, some shortfall in the material provisioning of society. But what we must really judge is whether these things are endemic to the society, or merely limited failures, failures which, in an imperfect world, we must expect in any system.

The Economic Problem

What is Economics? “Economics is about social provisioning, or how societies provide for their material reproduction.”[1] This definition deals with a more basic problem than do the more common definitions of economics, which generally involve “the allocation of scarce resources among alternate uses.” Resources must be allocated, but such definitions leave out the purpose of these allocations. Further, the neoclassical definition biases the conversation in favor of scarcity rather than abundance; but the whole purpose of resource allocations—the whole reason for economizing—is to allow for a relative abundance. It is the means (resources) which may be scarce, but not necessarily the ends. Therefore, the more fundamental economic question involves social provisioning. In answering this question, we must deal with three further questions: What to produce? How to produce it? To whom should the benefits be distributed?[2]

What to produce? What a society produces is a direct reflection of its dominant values, or at least of the values of those who dominate society. It would seem that some things need to be produced and are therefore natural and beyond cultural considerations. But while things like food, clothing, and shelter are necessary, the form they actually take is always cultural. For example, we must eat to live regardless of what language we speak, but what we actually eat—spaghetti or egg foo young or hamburgers—is always a cultural product.

How to produce it? This is a question both of human technology and abilities. There must be a means of assigning tasks, something which normally has a large social content. For example, tasks will be assigned at least partially on the basis of education, but who gets educated and who doesn’t is largely a social decision.

To whom should we distribute the product? This question has both discretionary and necessary aspects. Certainly the product must be divided so that enough members of society can subsist and reproduce the next group of workers. Beyond that, distribution has strong discretionary elements. Normally, the actual distributions will depend on the values of the society at large, or perhaps will reflect the values only of the ruling class. The solution is largely a matter of power relationships rather than of some “pure” economics.[3]

Solutions: Tradition, Command, and Market

The answers to the questions of social provisioning can come from three sources: tradition, command, or the market.[4]

Tradition: The past guides the present: What to produce this year is guided by what was produced last year; sons follow their fathers’ professions. There is little change and less freedom. All three questions are answered, but answered, as it were, “in advance” and with little option for growth and change.

Command: Command economies rely on some central authority to provide all the answers. While this ensures that all the questions are answered, the quality of such answers may be open to some doubt, especially if the values of the planners are at odds with the values of society at large. The planners can be seeking either the interests of the common good or their own interests. Nevertheless, economies heavily dependent on command have functioned successfully and left behind great monuments such as the pyramids or the medieval cathedrals.

Market: The forces of supply and demand dictate the answers, with each individual responding to price signals in order to maximize utility. In this way, it is believed, the market is self-organizing and capable of creating order out of chaos. But as Charles Clark has noted:

This is the myth of the market. Markets are not natural phenomenon, but are socially created. In the real world the market mechanism is best at dealing with small changes to an already existing economic order, providing the signaling function of adjusting relative prices so that a small number of market participants can adjust their behaviour. Markets, however, cannot generate this order. All markets are social institutions, embedded in particular societies and in history. They have rules of behaviour, laws and customs. These come from tradition. Also they have property rights and methods for enforcing these rules and customs. These come from command. Without the proper context, markets are inefficient and chaotic, as Russia is currently demonstrating to the world.[5]

Clearly, the markets do not generate order, but are based on a pre-existing social order which they then help direct. But they can also help to destroy that order. Indeed, the assumption that all things can be based on self-interest destroys the very basis of virtue which is presumed by the market. A pure market system has never been attempted, because it cannot be attempted. Markets require fully socialized and ethical participants in order to function, but an attempt to establish a pure market system displaces these traditional sources of economic order, that is, families and shared political values. It is no accident that as the force of custom and virtue diminishes, the role of law—and lawyers—increases. So too does the role of politics and bureaucracies; Force, legal or political, must replace the virtues that a “pure” market system helps to undermine.

Economics and the Family

If economics requires fully socialized participants, and if economics is about social provisioning, then the question of the family cannot be divorced from economic questions. For the economic actors, producers and consumers, are “produced” and socialized within the confines of the family, and without the family there will be no next generation and hence no future for the economists to worry about. Therefore, it is the family that is the basic economic unit as well as the basic social unit. Modern economics tends to ignore the role of the family completely to focus on the individual. However, the individual, by himself, is sterile and not a self-sustaining entity. Neoclassical economics thus has no way to explain how new workers come into the economy, and hence it has no way to explain growth. John Mueller has characterized these shortcomings in economics as “The Economic Stork Theory.” In the Stork Theory, workers arrive in the economy fully grown, fully trained, and fully socialized. These stork-borne workers are a “given”; that is, there is no way to explain the growth in workers or their level of training and socialization, and hence little reason to support them with political or fiscal policies. Mueller describes the theory as follows:

I call this the Stork Assumption, since it literally means that adult workers spring from nowhere, as if brought by a large Economic Stork. Under the Stork Assumption, the accumulation of workers’ tools—buildings and machines—is the only possible source of economic growth that can be affected by policymakers. Moreover, under these assumptions the total tax burden not only should, but inevitably must, fall entirely upon the incomes of workers (who by assumption cannot avoid such taxes by having fewer or less-educated children, though property owners are assumed able to avoid taxes on property income by investing less in property). The Stork Assumption, not economic theory, underlies the perennial proposals to abolish taxes on property income, which are advocated by a cottage industry of (mostly my fellow Republican) economists centered in Washington, D.C.[6]

It is an oddity of modern economics that it depends on treating the worker as just another commodity (labor) for purposes of pricing that labor, but treats the production cost of that “commodity” as something beyond the price system. If we take any other commodity, say a bar of pig-iron, it is assumed that the price must cover the cost of production, maintenance, and depreciation, or the product will be withdrawn from the market. But in regards to labor, this assumption is never examined. For labor has its own “production cost” (the family) and its own “maintenance” costs (subsistence and health-care) and its own “depreciation” costs (sickness and old age). Labor cannot simply be withdrawn from the market when these requirements are not met. Therefore, labor—and the family—does not even gain the dignity of a bar of pig-iron in modern economic theory.

Scarcity, or “Can there ever be enough to go around?”

Scarcity is the most obvious and self-evident economic principle because we live in a finite world. Indeed, scarcity is what makes economizing necessary.[7] However, when ends and means are confused, scarcity itself becomes not something self-evident, but something evidently false. Let me illustrate with an anecdote. When I was a boy in New York City, we lived in an old brownstone apartment on Manhattan’s west side. We did not have a car; nobody on our street did. However, for 15 cents we could buy a subway token, and for that fee the cultural and recreational wealth of New York City was ours, even as small children. My brother and I loved to go to the American Museum of Natural History to see the great skeleton of Tyrannosaurus Rex that dominated the lobby, or the great blue whale that hung in the basement. Or we would go to the Metropolitan Museum of Art and see the armor exhibit, with knights in shining armor mounted on steeds covered in steel plate, lances lowered so that, when you entered the room, they looked like they were charging directly at you. Or for the same fee, we could go to the beaches at Coney Island or Far Rockaway. We were indeed men of the world at the age of seven. But mostly, we were independent; we were free. It was a poor neighborhood, but we were rich in cultural and recreational resources. By contrast, my children grew up in an affluent suburb in Texas. Everybody on the street had at least two cars, but my children had very little transportation. The means of transport were not available to them independently, and hence parents and children were bound together in a relationship similar to that of a lord and his chauffeur; both children and parents lost some of their freedom. It was perhaps good that there were so few places to go, and that the major cultural resources were the mall and the movie theater.

In one case, there was a scarcity of means and an abundance of ends (transportation), and in the other an abundance of means and a scarcity of ends. In one case, cars were scarce and transportation abundant, and in the other cars were abundant and transportation scarce. Properly considered, scarcity should apply to means, not ends. If we reverse the terms, we end up manufacturing our way into scarcity, and an expensive scarcity at that. In place of robust systems designed according to some notion of the common good, we have narrow systems designed from the premises of individualism which always make the ends, transportation in this case, more problematic. And they are even more problematic the more you invest in them: we spend huge sums of public money on systems that limit access rather than expand it. This same pattern of spending ourselves into scarcity can be seen education, health care, the military, etc. Expenditures for higher education increase while access to college declines, for example. What is lacking is a purpose, a telos, that is to say, a vision of the common good, and a proper distribution function informed by that vision.

Summary

Let us now summarize our conclusions about the purpose of an economy:

· The subject of Political Economy is the material provisioning of society.

· An economic system must answer three questions: What to produce? How to produce it? And To whom do we distribute the output?

· The answers to these questions will come from a combination of tradition, command, and market forces.

· In order to accomplish the material provisioning of society, the economy must provide for the material provision of the family, because the family is the basis of both the social and economic orders; it is the reason for having an economy and the indispensable condition of an economy.

· The economy must provide for a relative abundance of ends using relatively scarce means.

· It must accomplish all of these tasks in ways that advance freedom

Taken together, these give us a teleology for the economy; they define the ends and purposes of any actual economy and give us a set of criteria to make reasonable judgments about that economy, to say whether or not the economy is fulfilling its proper functions. However, they say nothing about the means by which an economy reaches its natural ends. Now, the primary means by which an economy fulfills its goals is by achieving a balance between supply and demand, a state called equilibrium. There are various paths to achieving this balance, some of them manifestly better than others. These will be the subject of the next chapter.

---

[1] Charles M.A. Clark, "Catholic Social Thought and the Economic Problem," Oikonomia, no. 1 (2005), http://www.pust.edu/oikonomia/pages/febb2000/Clark.htm.

[2] Ibid., no.

[3] Ibid., no.

[4] Robert L. Heilbroner, and William Milberg, The Making of Economic Society, Eleventh ed. (New Jersey: Prentice Hall, 2002), 6.

[5] Clark, "Catholic Social Thought and the Economic Problem," no.

[6] John D. Mueller, God and Money (Washington D. C.: ISI Books, Forthcoming, 2006), 75.

[7] Paul Heyne, Peter Boettke, Dave Prychitko, The Economic Way of Thinking, 10th ed. (Delhi, India: Pearson Education (Singapore) Pte. Ltd, 2003), 5.