ONE:
THE PERSISTENCE OF POVERTY
The Causes of Poverty
Experts have put forth several different theories on the causes of poverty and advocated different measures to cure the problem.
⦿ The simplest theory is that the poor have brought the condition on themselves. Many who are poor did not care to learn anything in school, dropped out early, took on work requiring no skill, spent some of their income on drink, drugs, and gambling, got married too early, and had more children than they could support. Their children carried on the same indifference to education and skill building. Often the marriage broke up. Some who lost their job preferred to live on transfer payments like Medicaid, housing subsidies, food stamps, or disability payments rather than take on low-paid work.
⦿ Another theory is that poverty is the result of the poor having too many children. Each new child makes a poor family poorer.
⦿ A third theory is that poverty persists because the poor don’t own any fungible property or capital on which they could borrow money. They lack tradable assets.
⦿ Still another theory blames poverty on the greed of the ruling elite.
Apart from these grand singular-cause theories, the majority of experts recognize poverty as resulting from many interrelated causes, all of which must be addressed in an integrated fashion. Consider Paul Collier’s views in his book The Bottom Billion.4 According to Collier, the billion people at the bottom live in “trapped countries.” He identifies four elements that cause countries to become trapped:
1. Civil War. A great number of the bottom billion have been or are currently experiencing civil war. Wars result from these countries having large numbers of young men who are unemployed and uneducated as well as the existence of ethnic imbalances.
2. “Natural Resource Curse.” Almost a third of these countries rely on exporting some raw materials. They typically lack the skills to add value to these natural resources. These governments tend to be corrupt and don’t hold democratic elections.
3. Landlocked Countries. Almost a third of these countries are landlocked and economically disadvantaged, and they are surrounded by “bad neighbors.”
4. Bad Governance. About three-fourths of these countries are governed by autocratic or corrupt leaders.”
Solutions to Poverty
Given all these different approaches to helping the poor, I recommend the following:
⦿ The best solutions will involve more than government solutions and NGO solutions. They will involve the private sector as well, working closely with government agencies and civic organizations.
⦿ Much of the work of helping the poor lies in using tools to understand, influence, and assist the poor to participate in developing their own solutions.
⦿ We need to link the big national picture of the poverty problem with the specific conditions found in each local situation.
⦿ We should use the tools of social marketing planning, implementation, monitoring, and control. Social marketing aims to change or support behaviors that lead to results good for the people and for the society. I believe that social marketing as a tool has been missing in all the previous work on helping the poor.
⦿ We must carefully consider whether it would make more sense for national governments to guarantee everyone a certain minimum income and do away with the many War on Poverty programs that only act as bandages to slow down the bleeding.
TWO:
INCOME INEQUALITY ON THE RISE
How Is Income Distributed?
Let’s look more closely at the vastly different levels of incomes and wealth in different countries. Measured in terms of median income (which is a better measure than average income), Australia leads with $220,000, followed by Luxembourg, Belgium, France, Italy, the U.K., and Japan. The United States falls way down the list on this measure, with a median wealth of just $45,000. The remaining countries trail all the way down to the poorest of the poor.
Oxfam is an international charity focused on fighting poverty and empowering impoverished individuals around the world. It released a 2014 report containing the startling fact that the richest eighty-five people in the world are worth more than the poorest 3.5 billion*. “Our estimates suggest that the lower half of the global population possesses barely one percent of global wealth, while the richest 10 percent of adults own 86 percent of all wealth, and the top one percent account for 46 percent of the total,” the report states. This means that we are living today in a time of wealth distribution similar to that of the pharaohs of ancient Egypt or the royal court of Louis XIV before the French Revolution
*Ezra Klein, “10 Startling Facts About Global Wealth Inequality,” Washington Post, January 22, 2014.
⦿ About one percent of the U.S. population has extremely high incomes and wealth. Let’s call these people the super-rich. This group consists largely of executives and managers; many come from the world of finance.
⦿ Below the super-rich are the affluent, who are about 5 percent of the population. They enjoy discretionary income well beyond that needed for basic food, clothing, and shelter. They can take expensive vacations, eat at expensive restaurants, send their children to expensive colleges, and invest in capital growth for personal wealth and trusts.
⦿ Below them is the middle class. Capitalism created the middle class! Earlier times consisted of only the rich and the working poor. The middle class enjoys stable jobs and pleasant homes and can eat out and buy the latest appliances. At the same time, they have to be careful in their expenditures. Usually their income requires two working parents who are finding it harder to send their children to expensive colleges and who want to save enough to support their aging parents and themselves in case they incur heavy medical expenses. They hope that their pensions and homes hold up in value.
⦿ Below the middle class is the working class, whose jobs enable them to earn just enough to meet their bills and have enough for basic food, clothing, and shelter. If married, both partners are already working. Many are single-parent or single-person households, and some earn only a minimum wage.
⦿ Below the working class are the poor, who would not get enough food and shelter if it weren’t for food stamps, the earned income tax credit (EITC), subsidized housing, and Medicaid.
The problem of inequality and social justice occurs when there is a great distance between the earnings of the poor and the working class and the affluent and the super-rich. Consider that the poor make up the largest population group in the world. Jeffrey Sachs estimates that 5 billion of the 7 billion people living on the earth today are poor.* Something is wrong in human society or in human nature when 5 billion people don’t have adequate food, clothing, and shelter while 2 billion people enjoy an appropriate or even a plentiful life.
*Jeffrey D. Sachs, The End of Poverty: Economic Possibilities for Our Time (New York: Penguin Press, 2005).
Dangers of the Inequality
From an economics point of view, we can assert that the high concentration of income and wealth leads to a reduced level of consumer demand, thereby continuing the economic malaise. The working and middle class meet their needs by using credit cards to pile up more debt than they can repay, thus laying the conditions for an eventual boom and bust. With consumers lacking enough earnings, businesses are cautious and keep their production and employment at a low level.
The social fabric is further hurt because both parents have to work and give less time to their children. Money stress leads to divorce and the growing number of single-parent households. Working-class parents before 2008 were tempted to buy a home saddled with a substantial mortgage in the expectation that home value would increase. All this ended in a terrible bubble of falling home prices and foreclosures when some people simply walked away from their homes. This meant that their college-age children couldn’t go to college unless they took substantial student loans. Student loan debt has grown to over $1 trillion. We are finding that education and health care costs are growing at rates exceeding income and wealth growth for the working and middle class.
Policies for Reducing the Great Differences in Incomes
There are a number of measures that can be taken to reduce the great differences in incomes:
1. Raise the minumun wage
One solution is to raise workers’ pay through establishing a higher minimum wage. In my opinion, the U.S. minimum wage is a disgrace. Yet those opposed to raising it cite two possible undesirable consequences.
First, some small businesses, which hardly make a profit paying workers $7.25 an hour, are likely to close shop at a higher minimum wage.
Second, employers will search for other ways to replace labor with capital.
Both of these consequences may have the effect of reducing the number of jobs, but paying more to those who are still employed.
2. Make the Tax System More Progressive
3. Close Offshore Tax Havens
Progfits earned by U.S. companies are subject to 35 percent tax rate. Clearly, U.S. companies want to reduct their taxes if possible. There are three approaches the y use to accomplish this:
⦿ The first is to set up a U.S. company subsidiary in Bermuda, the Cayman Islands, or Ireland. A U.S. company making a printing machine for $10,000 in Chicago might sell it to a Miami printing company for $12,000. It would have to pay a 35 percent tax on the $2,000 of profit—namely, $700. Instead, it could sell the printing machine to its own subsidiary in Bermuda for $10,000 at no profit. Then its Bermuda subsidiary can sell it to the Miami printing company for $12,000, making a $2,000 profit in Bermuda. But Bermuda doesn’t tax profits (or taxes substantially less than the U.S.).
⦿ The second tax avoidance scheme is called “inversion.” If an American company can show that some percentage of its shares are owned by another company abroad, it doesn’t have to pay U.S. taxes on this amount. For example, the Walgreens company might buy an Irish drugstore chain and pay for it by issuing more shares of its stock. Walgreens of Ireland would have to pay taxes to Ireland, but Ireland’s taxes are considerably lower than U.S. taxes.
⦿ The U.S. government needs to worry about a third possibility where a U.S. corporation starts thinking about moving its headquarters out of the country. The consulting firm Accenture began as a U.S. company, then moved to the Cayman Islands, went public in 2002, and then moved to Ireland because of its lower taxes. Eaton Corporation moved its headquarters from Cleveland to Dublin, saving $160 million a year in taxes. So far, some sixty U.S. companies were “never here” or have been using inversion to avoid U.S. taxes.
4. Cap the Ratio of Top Executive Pay to Worker Pay
5. Plug the Tax Loopholes
Here are three major tax loopholes:
1. Capital Gains Tax Rate: People who invest in securities for more than one year and then sell the securities were formerly taxed at 15 percent rather than at their normal income tax rate. The capital gains tax rate was raised to 20 percent plus another 3.8 percent temporary (or 23.8 percent). The purpose of this tax law is to encourage investors to stay in securities they believe in rather than switch their stock holdings frequently. The problem is that most wealthy people basically put their money into securities that they hold for over a year; therefore their effective tax rate on capital gains is 20 percent to 23.8 percent. This contrasts to wage earners who are taxed on their income anywhere up to 35 percent.
2. Home Mortgage Interest Deduction. Anyone buying a home with a mortgage is allowed to deduct the mortgage interest payment from his tax bill. The purpose of this deduction is to encourage more home ownership on the notion that people owning homes (instead of renting) will be more rooted in their communities and care more for their communities.
3. Tax on Foreign Earnings by U.S. Companies: Companies that operate globally are able to avoid a tax on foreign income as long as they do not bring the income into the United States. By not bringing it into the U.S., their stockholders are receiving no benefit from this money in dividends, nor is the company able to use this income to buy back its stock. The problem may be getting even worse. Some U.S. companies are thinking of reincorporating in another country where the corporate tax rate is lower.
6. Improve Transfer Payment Programs
Transfer payments represent money given by the government to its citizens. Examples include certain kinds of tax credits, Social Security, unemployment compensation, welfare, and disability payments. Here are two areas in which transfer payments could be made more equitable:
1. Strengthen the earned income tax credit. The U.S. runs a large cash-transfer program to help the poor, which cost $61 billion in 2010. It provides up to $3,305 a year to low-income working families with one child and up to $6,143 for those with three or more children. The program has not been extended to help childless people who have very low incomes. Broadening the tax credit might make it possible to do away with food stamps and a miscellaneous set of other props aimed at providing a decent living for all.
2. Apply a stronger “means test” before making transfer payments. I remember a wealthy person complaining about receiving a Social Security check for $3,500 each month. Federal transfer payments should not go to people who have a good income or substantial wealth. Social Security payments should be subject to a means test.
Policies for Reducing the Great Differences in Wealth
What can be done to reduce the great concentration of wealth? We have to put heavier taxes on the passage of estates to their heirs. Today, the estate of a super-rich person is exempt from a tax on the first $5 million given to each heir. The tax rate on the rest of the estate is 55 percent. This rate can be raised even higher to reduce the concentration of wealth. Huge bonuses paid to top executives also skew the unequal concentration of wealth. These bonuses are often wildly out of balance with the actual contribution of the top executives to the company’s profits. This again raises the question of whether higher estate taxes will lead to more avoidance and also cause talented people to work less hard or threaten to leave the country. I would argue that there are a great many talented civic-minded people waiting to move up the wealth ladder and take their place. The major issue, of course, is who would receive the redistributed wealth? Will it ultimately be used by government to increase wages and jobs? Or will it go into more defense spending and more bureaucracies?
Is there any realistic way to cap wealth accumulation?
Piketty recognizes problems with his intriguing proposal. (1) The wealthy would scream that it would reduce incentives and innovation. (2) This proposal would never be proposed, nor passed, because politicians are too dependent on the wealthy for their reelection. (3) The wealthy would transfer their wealth to other countries where this wealth tax did not exist.
The real challenge is to convince the super-rich that paying higher taxes would benefit them as well as the general public. Arguments can be used that roads and infrastructure will be improved, workers will have more money to spend on the businesses owned by the rich, and the public will think that the tax system is fairer and be willing to comply more readily. If the government can demonstrate that its operations are efficient and that their tax money is going to the right causes, people will be more willing to pay their fair share of taxes. In the end, is it better to move toward a budget calling for preserving tax loopholes, cutting taxes, and reducing investments in education, health, and infrastructure or to develop a system that raises more money through a fair and efficient tax system and uses the money to improve the lives of people?
THREE:
WORKERS UNDER SIEGE
Has capitalism been good for the working class? This question was central in the battle between capitalism and communism. Communism held that the workers were exploited under capitalism. Those supporting capitalism say that workers around the world have better lives because of capitalism.
Worker exploitation is still alive today in the United States in commodity areas where migrant workers are employed. For many decades, migrant workers picking tomatoes in Florida would be harassed and bullied and given no rest breaks, although the temperature was 95 degrees in the sun. Crew leaders would often grope the women, demanding sex in exchange for steady jobs.
Worker exploitation is found in many parts of the world. In 2012 the International Labor Organization (ILO) estimated that nearly 21 million individuals across the globe were living and working under conditions of quasi-slavery, including debt bondage, forced labor, child labor, human trafficking, and sex trafficking. The workers come to earn money but their cost of transport, rent, and food leaves them with very little as their debt increases and they lack the means to return home.
Organizing Unions
When workers became highly aggrieved about their low wages and poor working conditions, they tried to organize trade or craft unions. Companies typically fought unions and the idea of collective bargaining on the grounds that workers were free to quit whenever they wanted and that unions violated the private property rights of owners. Although companies preferred no unions, some agreed to “open shop” unions where workers were not forced to join and pay membership fees. Unions tried to insist on “closed shop” unions that require all workers to pay dues, because this gives the union more money and manpower to fight management and go on strike if necessary. The closed shop also prevents “free riders,” workers who benefit from a union without paying dues.
The Question of Minimun Wages
Disagreements about Raising the Minimum Wage
Some companies argue that workers would ultimately lose if the government established “too high” a minimum wage. Companies would not only hire fewer workers but also would try to replace labor with machinery. This is exactly what happened in factories where an increasing amount of production is now done by automation and robot machines. The intended plan for the future supermarket is to collect cash without needing cashiers.
Businesses say that they will hire fewer workers if the minimum wage is raised. Existing workers would make more money, but those not hired would be worse off. Businesses complain that they will have to raise the wages of the more skilled workers as well, called the “ripple effect.” Businesses warn that they will also have to raise their prices in order to recover the cost, in which case higher minimum wages will hurt families who have to pay more for their goods.
Unions argue that the minimum wage is particularly needed (1) when employers collude to keep the wages down; (2) where there is low job mobility, such as in company towns or where workers are loath to leave their homes and friends; and (3) where there is imperfect market information about where higher-paying jobs might be found.
Alternative Proposals to Help Workers Get a Living Wage
⦿ One provocative proposal is to establish a basic income that provides each citizen with a sum of money that is sufficient to live on. Sometimes this is called a “negative income tax.” It is a transfer payment from the government that comes from the broad tax base and doesn’t impose any loss of efficiency on different business groups. The argument is that unemployed people are more expensive to maintain than keeping them employed. If they are unemployed, they will receive unemployment insurance, food stamps, and welfare services that would cost more than the government paying them to work on useful projects.
⦿ A guaranteed minimum income is a variant that is conditioned on a means test and the person’s willingness to participate in the private-sector labor market or perform community services. Several arguments have been advanced in favor of the government providing every citizen with a minimum income. (1) No one would go hungry. (2) People could leave a hated job and start their own business. (3) The government could eliminate the inefficient patchwork of current programs (e.g., welfare, food stamps, housing vouchers, and others) in favor of a simpler system that in a single stroke does the job of delivering a minimum income to everyone.
⦿ Another approach is called a refundable tax credit, available only to households that have earned some income, where the government can reduce the tax owed to zero and add net payment to the taxpayer.
⦿ A quite different approach (used in Germany, Italy, Sweden, and Denmark) is called co-determination, which lets the minimum wage be set by collective bargaining in the company or industry. There is no minimum wage set by government.
⦿ A stronger proposal than co-determination is to favor establishing more Workers’ Self-Directed Enterprises (WSDEs). Here, workers own shares in the company, called an ESOP (Employee Stock Ownership Plan). They participate in running the company and in deciding what is produced, how it is produced, where it is produced, and how profits are to be used and distributed. Normally these business decisions are made by an owner or investors with less consideration of their impact on the workers.
⦿ Then there are calls for establishing a universal savings plan for retirement in addition to Social Security. Workers and their employers have been contributing to Social Security so that the workers receive payments upon retiring. The money would be invested in an appropriate mix of stocks and bonds. In this sense, the workers would become capitalists to some degree!
The Issue of Worker Satisfaction on the Job
Even if workers received a living wage, many would still be dissatisfied with their jobs. Such would be the case with jobs that are hard, such as construction work; jobs that are dangerous, such as mining; and jobs that are boring, such as cashiering or “shelving” in a supermarket or putting a walnut on each piece of chocolate coming down the production line. Even in the professions, such as law and teaching, there is much boring work. The challenge facing companies is whether they can do anything to make work more interesting and “happify” their employees.
Companies would be more profitable if they would pay their employees more and treat them better. Employees who have more job satisfaction would engage with the customers to find out what they really want. They might even be empowered to show off merchandise and improve displays and would end up selling more goods and services, which would feed back into more employee job satisfaction.
Paul Zak, a neuroscience researcher, has proposed that employees who have trust in their organization and see a higher purpose to their work will experience more joy (Trust × Purpose = Joy). His research team has found evidence that confirms happy employees are more productive, are more innovative, and contribute more to the bottom line of companies.
Some progressive companies go even further and want to invest in enhancing their employees’ healthful living. Company wellness programs have two parts: lifestyle management and disease management. The lifestyle management program tries to help employees eat healthier foods, give up smoking, and exercise regularly to avoid obesity, diabetes, cancer, hypertension, and other health problems. The disease management program helps employees with a chronic disease take better care of themselves by reminding them to take their prescribed medications and not miss lab tests or doctor’s appointments. Many of these programs have yielded a better life to employees and a financially sound return to the companies.
One additional factor in job satisfaction is paid vacations and holidays. Workers deserve and need vacation time to renew their energy and outlook.
FOUR:
JOB CREATION IN THE FACE OF GROWING AUTOMATION
The Impact of Technology
Technology is clearly destroying many jobs, probably faster than it is creating new jobs. Technology has been a job killer and disrupter of several industries, including publishing, music, retail, and manufacturing.
Fewer Jobs for More People
At the same time that automation is reducing the number of jobs, the labor supply is actually increasing. Many people who’ve lost their jobs are still out there looking for work—not all of them have given up the search. Legions of young people just out of college are struggling to find meaningful employment. As a result, there are more people looking for fewer jobs.
The real question is whether the rapid acceleration of automation and information technology will put a new face on the problem of job creation. Jeremy Rifkin addressed this problem in his 1995 book The End of Work. Rifkin pointed to the rapid increase in the use of automation and information technology as potentially eliminating millions of jobs in the manufacturing, agriculture, retail, and service industries. He contended that the incomes of knowledge workers who produce the automation and information would increase, but not enough new jobs would be created to equal the number of old jobs destroyed. Even if they did, low-skilled workers would have lost their jobs and gone on welfare. Rifkin saw the possibility of worldwide unemployment leading to the need for more government welfare in the form of a “social wage” and the growth of the third sector of not-for-profit organizations to supplement the government’s provision of needed social services.
Who Will be Affected Most?
There is a debate about which groups will be most affected by technological advances in automation. One would think low-skilled workers would be hurt the most because machines can be built to do unskilled routine work. But it can be countered that these machines may cost more than simply paying low wages to low-skilled workers.
One critical question is whether there are brainier jobs that cannot be done by machines, and enough of these jobs. The other question is whether new types of work can be invented at a faster pace to replace the jobs that are being lost. New businesses tend to employ far fewer workers than in the past. Instagram, the photo-sharing site, was bought by Facebook for $1 billion in 2012 and had 30 million customers managed by thirteen people, whereas Kodak, a victim of the digital revolution, had to file for bankruptcy after once employing 145,000 people in its heyday
Unemployment might rise even higher if the gap keeps increasing between the incomes of the rich and the poor.
Slower Economic Growth?
The economicst Robert J.Gordon of Northwestern University believes the big gains in productivity that supported an expanding middle class and the modern welfare state won’t be repeated in the future. He sees technology continuing to grow, but not likely to bring about brand-new breakthroughs on the scale of the steam engine, the internal combustion engine, indoor plumbing, electricity, the railroad, automobiles, airplanes, computers, and the Internet. Gordon admits that the Internet and the digital revolution still has plenty of growth potential left.
Furthermore, Gordon sees six other forces in the economy that are likely to dampen U.S. growth: “our aging population, our faltering education system, growing income inequality, rising foreign competition, the inevitable impact of global warming, and the need to eventually pay down our debt.”
Acquiring New Skills
Clearly the demand for STEM skills is terribly out of balance with the present and future workforce skills, not only in the United States, but also in China and India and emerging countries. What are the possible solutions?
1. Set up better job-retraining programs for the current workforce, focusing on the types of jobs that will be in chronic short supply.
2. Do a better job of training U.S. students in math and science at the elementary and high school levels. The need is to develop better educational leaders and better classroom teachers. This will require improving the salaries and status of teachers in our society to the level found in the most educationally competitive countries.
3. Educate high school students to better understand the job market so that they can make wiser career choices.
4. Bring together educators, businesses, and government groups, at the local level, to develop a shared vision of how to improve their job pipeline.
5. Encourage businesses to invest more in human capital development and be able to depreciate the cost of their investment, the same as they do with physical equipment.
6. Make it easier to attract more foreign talent to come and work in the country. Reduce the present impediments that limit entry visas.
Encouraging Entrepreneurship
Are there potential developments that could get the country back to a 2 percent GDP annual growth rate and create the necessary jobs? One approach is to encourage and facilitate a strong interest in and support of entrepreneurship.
Supporting the Unemployed
Sadly, the cost of supporting the unemployed exceeds the cost of creating a job for them. This suggests that the great needs of the society for better education, health, and infrastructure ought to be met by the government supplying these jobs in the absence of the private sector creating them.
Among the better proposals for supporting the unemployed are the following:
1. Share the work. Reduce the average workweek to thirty-five hours, as France did in February 2000. Assuming that the same amount of work remains to be done, the assumption is that companies will need to hire more workers.
2. Establish a three-day workweek of eleven hours a day. Workers would have more time for family and they will constitute a larger market for entertainment and self-development products and services.
3. Offer longer unpaid vacations. Honeywell did this.
4. Increase the programs in job training and retraining.
5. Undertake a vigorous program to rebuild our deteriorating infrastructure—bridges, ports, airports, water and sewage systems—and build solar and wind farms and better electric grids.
6. Establish “social wages” for those who have tried to get jobs but have not been successful. They will have more money to spend on goods and services, which will increase the number of jobs.
7. Help American companies increase their exports from their U.S.-based businesses.
8. Attract more foreign companies to locate their factories and offices in the United States to increase the number of jobs.
FIVE:
COMPANIES NOT COVERING
THEIR “SOCIAL COST”
Economists have worked on the theory of what makes an economy perfectly efficient. The economy is said to reach a “Pareto optimum” if no voluntary exchange of labor or capital or allocation of goods and services will make some people better off and other people worse off. Market failures exist when some market participants can be made better off without making others worse off.
Here are three types of market failure that can occur under capitalism. They are:
1. Businesses and consumers ignoring costs they cause for which they are not charged, which is called the problem of negative externalities
2. Public goods that are abused if not regulated or rationed, which is called the tragedy of the commons
3. Monopolistic or oligopolistic control of industries and markets, which is called the monopoly problem
Companies Avoiding Social Cost
Total cost consists of private cost and social cost. The social cost is a “negative externality” in the production of steel. If the steel company was required to pay for this cost, it would have to raise its prices or be left with less money and produce less steel. By avoiding their social costs, companies price lower than they should and end up producing more output. Someone else has to pay for the pollution.
Two systems have been proposed. One is to put a tax on carbon emissions because carbon releases greenhouse gases into the atmosphere. The higher a company’s carbon emissions, the higher its tax bill. This will cause companies to reduce their carbon emissions.
Others have proposed a system that sets a limit on emissions, which is lowered over time if emissions decline. Each company estimates its carbon emission and needs to buy carbon credits.
Such a system is called a cap-and-trade system. The government puts a cap on how much pollution can be tolerated, and companies can buy and sell carbon credits to cover the cost of the pollution they emit. Their carbon credit costs will lead them to search for ways to reduce their emissions. Through emission trading, companies will be acting more responsibly about air pollution.
The question is how fast should the cap level be reduced? Many have favored lowering the cap at a rate to limit the earth’s temperature from rising more than two degrees Centigrade. But this rate is not universally accepted, and some countries may not join in this cap-and-trade system. One suggestion is to put “carbon tariffs” on imported goods coming from nonparticipating countries, an idea disliked by the World Trade Organization. The question is, do we prefer to save the planet or continue to practice “free trade”?
As for controlling water pollution, the government would state what can and cannot be dropped into water and set penalties for such pollution. If the penalties are sufficiently high, the polluter would need to find some other way to dispose of bad chemicals.
Protecting Public Goods
To prevent the tragedy of the commons, two solutions are available.
⦿ One is to issue a set of rules for citizens who want to make use of the public good. A public park might issue rules: It is open only from 9 a.m. to 6 p.m.; dogs are not allowed to relieve themselves unless the owner carries a poop bag; littering is prohibited and punishable by a fine; no campfires are permitted.
⦿ The other solution is issuing permits to prevent the overuse of a public good. The government decides on how much use can be made of a public good and issues hunting and fishing permits. Some national parks that are overcrowded limit the number of visitors per day.
Monopolies and Barriers to Entry
The purpose of a capitalist economy is to rely on open and free competition to set prices and output. If one company or industry is earning high profits, other companies need to be free to compete by offering lower prices or better products. Healthy competition keeps market prices and profits from becoming excessive. This assumes that there are no barries to entry.
Among the most prominent barriers to entry are:
1. Legal Barriers. Zoning laws or transport agreements can prevent entry; other examples are protective tariffs on imports; switching barriers, such as long-term contracts making it expensive to change to a new competitor; the lack of essential resources needed for production; and the ownership of patents that prevent the entering firm from gaining access to necessary technology.
2. Cost Barriers. They include the high cost of required advertising to establish the new brand; the high cost of required capital; the high cost of attracting distributors and suppliers when there are exclusive agreements; the low possibility of achieving scale to bring down cost to the level enjoyed by the present industry leaders; the high cost of obtaining the necessary licenses and permits; the high cost of dealing with predatory pricing by the dominant firm to stop entry; and the high cost of research and development (R&D).
All of these factors perpetuate the dominant firms’ leadership in the market. The leading firms work hard to prevent the entry of new firms or the rise of existing minor firms. The leaders develop a strong brand and loyal customers who are willing to pay more.
The extreme anticompetitive case is where a monopoly exists—namely, one seller of an important good or service where near substitutes don’t exist. Sometime this may be a natural monopoly, where a firm’s per-unit cost decreases as it increases output and where one firm is most efficient from a cost perspective. Here the government may decide that it would be inefficient to have more than one firm supply the nation’s electricity or telecommunications or oil. That monopoly might be operated by the state or by a private enterprise whose pricing and investment activities are regulated in a way to prevent excessive profits.
There can also be an oligopoly of a few dominant firms that agree to price in a certain way and control output, following cartel-like principles. Cartels are found in such industries as oil, electricity, and telecommunications. They result in higher prices and reduced outputs. Edmund S. Phelps, a professor of economics at Columbia University and a Nobel laureate, reports a troubling trend in many countries that he calls “corporatism,” in which economic activity is controlled by large interest groups. When corporatism becomes dominant in a society, the public doesn’t adequately appreciate the contributions of individuals who work hard to innovate. A corporatist economy can grow for a while, but it will not produce the needed growth that an entrepreneurial culture can deliver. The overconcentration of power in a small number of huge companies can lead to another type of market failure.
The existence of market failure is the reason for government intervention in a particular market. The aim is to find a possible means of correction. However, some regulations and types of interventions involving taxes, subsidies, bailouts, and wage and price controls may possibly lead to an inefficient allocation of resources, sometimes called government failure. This occurs when the cost of intervention exceeds the cost of correction. Usually political parties split on the issue of whether an intervention has improved on an inefficient market outcome or made it worse.
SIX:
ENVIRONMENT EXPLOITATION
Is there a contradiction between business objectives and environmental objectives?
There is a range of views on this question. Paul Hawken, an eminent ecologist, believes that businesses can adopt ecological practices without hurting their bottom line and, in fact, maybe improve their bottom line. He emphasizes three things that companies must do: (1) end waste, (2) shift to renewable power (e.g., solar and hydro), and (3) create accountability and feedback.
At the other end of the spectrum, John Bellamy Foster, another well-known ecologist, views capitalism as intrinsically incapable of protecting the environment. He says if we want to save planet earth, we would have to change our system to socialism.
Climate Change and Energy Needs
Clearly the solution is to reduce the pollution from coal and other fossil fuels and get energy from more neutral sources such as solar panels, wind turbines, and water power. The shift to renewables hurts the coal companies economically, and they will inevitably battle attempts in our courts to curtail use of coal. It also hurts consumers because these neutral energy sources cost more. This is one example of the many tradeoffs involved in trying to meet the needs of commerce while protecting the environment.
Will the World be Able to Product Enough Food?
The earth’s population is estimated to grow from 7 billion to 9 billion people by 2050.12 The earth will have to support the production of enough food, animal feed, and biofuels to meet the population’s growing needs. Here are the major problems in this area:
⦿ The earth is losing arable land through top soil erosion, resulting from one-crop specialization and deforestation and city growth that removes arable land.
⦿ Agriculture requires a great deal of water, which is diminishing as the planet heats up, water evaporation speeds up, and much water is wastefully used.
⦿ Agriculture is a major cause of water and air pollution through airborne germs and agricultural drain-offs. Agriculture causes 30 percent of our greenhouse gas emission.
⦿ Much arable land is used to grow grass or soybeans for animal feed. Diets are getting richer in protein, which requires more resources than a vegetarian diet.
⦿ Much grown food is wasted through spoilage during storage or shipment.
⦿ People in developed countries consume much more food than is necessary, causing obesity and other problems.
Here are the top ten environmental issues that business needs to consider:
1. Climate Change
2. Energy
3. Water
4. Biodiversity and Land Use
5. Chemicals, Toxics, and Heavy Metals
6. Air Pollution
7. Waste Management
8. Ozone Layer Depletion
9. Oceans and Fisheries
10. Deforestation
SEVEN:
BUSINESS CYCLES AND
ECONOMICS INSTABILITY
There are two great injectors of risk and uncertainty into business decision making. (1) persisting presence of business cycles in capitalist economies. (2) rising level of market turbulence in this new era of globalization and rapid technological development.
The Problem of the Business Cycle
The aim of economic policy is to keep the economy moving at a healthy growth rate. It should be able to create jobs for everyone who wants a job, and do so without causing inflation. This leads us to examine the following questions:
What are the phases of a business cycle?
A business cycle passes through four phases:
1. Contraction: When the economy starts slowing down, it is usually accompanied by a bear market. GDP growth slows to the one to two percent level before actually turning negative.
2. Trough. While the economy continues to decline in a recession, GDP’s negative performance each period eventually gets smaller and the economy gets ready to turn the corner.
3. Expansion. When the economy starts growing again, it’s usually signaled by a bull market. If the economy is managed well, it can stay in the expansion phase for years.
4. Peak. When the economy gets into a state of “irrational exuberance,” with overly high expectations, inflation starts to appear. The peak phase is when the economy’s expansion slows. There is usually one last healthy growth quarter before the recession starts. If the GDP growth rate is 4 percent or higher for two or more quarters in a row, the peak is just around the corner.”
What factors generally precipitate a business contraction?
Much of the business cycle is explained by changes in the level of business, investor, and consumer confidence. Periods of economic growth occur when investors, businesses, and consumers have a positive outlook on the economy. Consumers buy when they can depend on their income level and home value. Even a little inflation can encourage consumers to buy sooner before higher prices set it. High consumer demand leads businesses to hire new workers and make further investments.
Specific downturns can be precipitated by different combinations of factors. A contraction can start as a result of poor earnings, job cuts, major strikes, ballooning inventories, inflation fears, and other factors. Business, investor, and consumer confidence is shaken and the contraction phase begins. Investors start selling stocks, buying bonds and gold, and hoarding cash. The contraction is marked by businesses laying off workers and others hoarding cash rather than spending it. Stock prices fall drastically and inventories pile up.
Economists have long worked on the idea of putting together indicators of economic activities that would help predict changes in the economy:
1. Leading indicators are those that change before a change occurs in economic activity.
2. Lagging indicators are those that change after the economy has changed.
3. Coincident indicators are those that change at approximately the same time as the whole economy.
Among the indices used by these three indicators are earnings reports, the unemployment rate, the quits rate, housing starts, the consumer price index (a measure for inflation), industrial production, gross domestic product, bankruptcies, broadband Internet penetration, retail sales, stock market prices, and money supply changes.”
What factors normally contribute to a more rapid recovery?
The big debate is about the best course of government policy. Here, two diametrically opposed positions battle. One—known as the austerity solution—states that the recession will eventually end on its own. Companies need to reduce their costs through cutting jobs and postponing investments. Workers need to accept lower wages if they want to hold on to their jobs. At some point, more companies will once again see opportunities to improve their profit and then the recession will be over.
The other position is called stimulus spending. The government essentially prints money to spend on needed construction, infrastructure improvement, and a variety of social needs. This puts money into the pockets of many people. Most of it gets spent and generates more money in other pockets.
The Problem of Heightened Market Turbulance
The fact is that the world is more interconnected and interdependent than ever before. Globalization and technology have created a new level of interlocking fragility in the world economy. Globalization means that producers are increasingly importing resources from other countries and increasingly exporting their output to other countries.
And turbulence has two major effects. One is vulnerability, against which companies need defensive armor. The other is opportunity, which needs to be exploited
The Sources of Turbulence
We can identify and describe seven critical factors that raise the stakes for business risks:
1. Technological Advances and the Information Revolution
Information technology (IT) is one of the key driving factors in the process of globalization.
The Internet has transformed and globalized commerce, creating entirely new ways for buyers and sellers to conduct transactions, for businesses to manage the flow of production inputs and to market their products, and for job recruiters and job seekers to connect with each other. New media—websites, email, instant messaging, chat rooms, electronic bulletin boards, blogs, podcasts, webinars, cloud computing—create a global system that makes it much easier for people and businesses with common interests to find one another, to exchange information, and to collaborate.
But the information revolution contributes to the level of turbulence because there are so many more people sending and receiving messages about events in every country that can help or hurt different companies in different parts of the world. Enterprises need a key officer who can sample the stream of messages for trends, corrections, and problems that might affect the enterprise.
2. Disruptive Technologies and Innovations
Some disruptive technologies include mini steel mills replacing vertically integrated steel mills; digital photography replacing chemical photography; digital phones replacing traditional phones; and semiconductors replacing vacuum tubes. Disruptive technology has the potential to be the ultimate “game changer” that can create chaos in an entire industry.
Professor Clayton M. Christensen postulates that “low-end disruption” occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the product’s performance overshoots the needs of certain customer segments. Then, a disruptive technology may enter the market and provide a product that does not perform as well as the incumbent product, but exceeds the requirements of certain segments, thereby gaining a foodhold in the market.
3.The “Rise of the Rest”
Another source of turbulence is the rise of other countries establishing political and economic power in a global situation where until recently the United States was the undisputed power. There are a rising number of competitors coming from emerging markets. Emerging-market companies such as Brazil’s Petrobras and InBev, Russia’s Gazprom and Severstal, India’s Reliance and Tata, and China’s Lenovo, Haier, Alibaba, and Huawei will increase turbulence and disruptions. These companies are growing at record paces.
Based on current trends, emerging-market companies will account for one-third of the Fortune list within ten years.15 These extremely ambitious and aggressive companies will do whatever it takes to beat competitors from developed economies and also in developing economies, since it’s in the developed economies where the most robust profits are found.
4. Hypercompetition
Hypercompetition occurs when technologies or offerings are so new that standards and rules are in flux, resulting in competitive advantages that cannot be sustained. It is characterized by intense and rapid competitive moves, in which competitors must move quickly to build new advantages and erode the advantages of their rivals.
In the hypercompetitive environment, profits will be lower for firms failing to create new competitive positions faster than their old positions crumble, especially as the weight of their depreciated and costly strategies will prevent many of them from adapting and adopting new behaviors fast enough.
5. Sovereign Wealth Funds
The increase in sovereign wealth funds (SWFs) means more capital can move swiftly to areas of opportunity and out of areas of saturation, causing another source of turbulence. A sovereign wealth fund is an assemblage of stocks, bonds, property, precious metals, and other financial instruments.
During the global financial crisis in 2008, several U.S. and European financial institutions avoided bankruptcy by accepting SWFs from the Chinese government and various Arab kingdoms. This says a lot about the “rise of the rest” as well as which among those rising will be the key groups making waves in the new age.
6. The Environment
Ecological groups pressuring businesses to pay more attention to the environment are also introducing turbulence. All companies are facing increased pressure to conserve scarce natural resources and reduce pollution to ward off global warming so that life on the planet is not irreparably damaged. The “green movement” is growing and gaining clout, and adds to the cost of doing business overall, irrespective of any investment returns.
Ultimately, the value of companies is likely to change as environmental factors begin to affect their performance. The short-term impact on cash flows may be limited, but it will eventually be significant in some industries. As nations and companies begin acting more aggressively to address environmental concerns, including potentially expensive systems to reduce carbon emissions, major shifts in the valuations of sectors and companies will start to become clearer and more predictable.
7. Customer Empowerment
The volume of word-of-mouth coming from businesses and people who have experienced a product or service will end up advertising the good guys and defeating the bad guys. And it will prod the good guys to get better and better. So customer and stakeholder empowerment acts as a catalyst leading to continuous improvement in the offerings of serious competitors.
By the same token, word-of-mouth has the potential to create turbulence and chaos for sellers. A person who experienced terrible service during a commercial flight can create a website devoted to the airline and welcome others with bad experiences to tell their tales. One irate customer or consumer can potentially undo an established company. Vigilant companies need to aim for high customer satisfaction and monitor the talk on the Internet to make sure that one angry individual doesn’t destroy the company.
EIGHT:
THE DANGERS OF
NARROW SELF-INTEREST
Capitalism is an economic system that’s largely rooted in the idea of individualism and individual rewards. People should be free to pursue their own dreams and build their own lives in a free marketplace. They shouldn’t depend on the government or its handouts or even be beholden to public opinion on what is right or wrong.
Former Federal Reserve Bank Chairman Alan Greenspan put the question this way: “Do we wish a society of dependence on government or a society based on the self-reliance of individual citizens?” I would challenge his question and ask why we can’t have a system of self-reliance as well as a system of community caring for families that need help. What is the best balance between the two?
The Case For Individualism and Self-Reliance
Individualism is the doctrine that values independence and self-reliance and believes that the interest of the individual takes precedence over the interests of the state or a social group. The concept of the individual arose in the Age of Enlightenment, which rejected authoritarianism, obedience to kings, oppressive government, hereditary status, established religion, and rigid dogma.
The Case for Community
Geert Hofstede is a well-known international scholar who classified different countries according to four cultural dimensions, one of which was “individualism vs. collectivism.” He said in a collectivist society, the self-worth of an individual is rooted more in the social order than in individual achievement. Community-oriented societies would include Confucian, Islamic, and Middle East societies to some extent. They all put a high value on social harmony, even to the extent of curtailing some individual rights.
Communism was one extreme. Countries that came under the communist philosophy held that action will be judged for its impact on the welfare of the masses, not on the freedom of individuals. The state was all important in making sure that greed and self-serving behavior didn’t become the norm. Communism sought to own all the state’s productive resources and all workers worked for the state.
Less extreme is the economic system known as socialism. Socialism emphasizes the “common good,” allows private property and privately conducted economic activity, and strongly protects democratic institutions and elections. Sweden, France, and even Britain would call themselves socialist societies to different degrees.
The reaction to hyper-individualism has created growing interest in communitarianism. Communitarians stress that individuals who are well integrated into communities are better able to reason and act in responsible ways than isolated individuals. Communitarians admit that there is a downside in that there may be high social pressure to conform and this can undermine the individual self.
It can’t be said that capitalism intrinsically favors individualism over communitarianism, primarily because there are so many types of capitalism. American capitalism favors individual rights and the free market. European capitalism leans more to a communitarian position, as do Japanese and Chinese capitalism.
My own belief is that individual rights must be preserved and have a better chance of being preserved if they are accompanied by social responsibilities. In a world laden with major social problems—poverty, pollution, climate change, rising energy costs—individuals and companies need to show their concern by organizing to reduce these problems, lest they end up destroying the planet or bringing about violent revolutions. This is called by some “the Third Way” rather than” favoring one philosophy over the other.
NINE:
THE DEBT BURDEN AND
FINANCIAL REGULATION
Growing Income Inequality
“These numbers are also a structural snapshot of the paradox of having income inequality and trying to increase national GDP. How can so many households with less real income than in the past spend enough to increase GDP more than in the past? The answer to the GDP riddle is consumer credit and personal debt for most households, notwithstanding the investment transactions of big money by the top one percent of households. Both of these sources of monetary circulation are the core activities of the growing financial service sector.
Solutions: Measures to Regulate The Financial System
What needs to be done to get the financial system to operate safely and profitably?
⦿ The first need is to make sure that no American banks become so big and important to the economy that we cannot allow them to fail. We can’t rely on printing money to save these banks at the cost of great taxpayer losses and unleashing a huge inflation. These banks need to be broken up and forced to operate with clearer limits on what different types of banks can do, distinguishing between a savings bank, a retail/commercial bank, and an investment bank, and preventing them from getting into other businesses, such as insurance, travel, and the stock brokerage industry. Another proposal would be to require banks to back up more of their lending operations with their own capital.
⦿ The second need is to do a better job of overseeing and regulating the new types of financial instruments that have come into the world’s financial system. Derivatives, credit-default swaps, and various complex financial instruments—including money-market funds that are not FDIC insured—have been called potential weapons for mass financial destruction. Many investors and institutions don’t fully understand these instruments, and any sudden drops in their value can create panic in the financial market. There is a need to determine which existing and new financial products are acceptable, so these products should be transparent regarding risk and return.
⦿ The third step is to drive banking back to its original purpose—meeting the needs and interests of small-, medium-, and large-scale businesses, both here and abroad. In spite of the huge amount of money in the hands of banks, many banks unduly limit their lending. Banks are cautious about lending to individuals or lending to businesses that need cash to cover costs or buy goods or invest in production.
⦿ Other suggestions include devising a better system for rating the creditworthiness of banks. The classic credit rating bureaus—Standard and Poor’s, Moody’s, and Fitch—completely missed seeing the financial risk that led to the Great Recession, partly because their income comes from the banks that they rate. We also need better qualified, higher paid regulators.
TEN:
HOW POLITICS SUBVERTS ECONOMICS
What is the relationship between the economic system called capitalism and the political system called democracy? Many believe that capitalism is the natural companion of democracy. But it depends on the type of capitalism. If capital is widely held by the citizens in the country, then citizens truly know their interests and can vote accordingly. But if capital is mostly in the hands of a few (say, in a country where one percent of the people own half of the capital), the democratic concept of “one person one vote” is a sham.
Lobbying
“Lobbying” describes the effort of people representing a particular interest group to influence decisions made by government officials such as legislators, regulators, or judges. Lobbying takes place at every level of government, including federal, state, county, municipal, and local governments.
View About Lobbying
We tend to view lobbying activity as bad because it leads elected officials away from voting in the interests of the people in their district and toward voting in favor of the lobbyists’ clients. We tend to see the influence of lobbyists as pernicious and favoring the interests of corporations and wealthy families over the common citizens.
Nevertheless, we must recognize instances of “good lobbying” by those trying to counter the misstatements and misinformation of other lobbyists and represent advocacy groups such as environmental, educational, and health care groups.
Campaign Financing
Campaign finance is the real source of corruption of our democratic ideal. Legislators face mounting costs to get elected or reelected—costs that are beyond their personal income and the income of friends and acquaintances. Each legislator needs campaign donations beyond what his or her political party can supply. Lobbyists are able to make campaign donations that come from their client corporations.
We must recognize lobbying as essentially a marketing activity. The client hires a lobbyist with an issue in mind and the lobbyist identifies the key legislators, their voting tendencies, and their susceptibilities, all in order to develop the right information, communication, and persuasion strategy. Successful lobbying requires deft persuasion skill and therefore has much in common with such activities as management consulting, marketing, and public relations. Lobbyists hope to develop a close and trusting relation with various legislators and supply them with helpful information.
The total cost of federal campaigns has skyrocketed in recent years, and elected officials today spend countless hours on the phone raising money for their campaigns.
Lobbyists are paid a salary and given a budget to cover expenses and also contributions to legislator campaigns.
Proposed Solutions to the Lobbying Problem
1.A cooling-off period that makes elected and nonelected government officials, members of their staff, and others wishing to enter the lobbying field wait a year or more before they can become lobbyists
2. Requiring lobbyists to register their contacts and expenditures and report which businesses and organizations lobby, how, to whom, and for how much
3. Establishing a ban on personal gifts
4. Putting a limit on campaign contribution amounts
5. Requiring political candidates to voluntarily agree to take only small ($100 maximum) contributions
6. Allowing federal tax payers to check off a certain amount to go to specific congressional candidates.
Bribery and Corruption
Bribery and corruption impose great costs to society.
Corruption slows down economic development and burdens democratic institutions. Honest businesses and citizens have to pay others who create no real value for the right to conduct business or handle their normal affairs. The result is a misallocation of resources because the most valuable and efficient transactions do not take place.
There are different levels of bribery, from small-time bribery to grand bribery. Most companies do not want to get into the bribery business to win contracts or facilitate performance. The problem is when a company knows that its competitor is engaging in bribery as a practice—should it offer a larger bribe, report what is going on, or desist from bidding?
Proposed Solutions to Bribery and Corruption
Most corrupt nations have been ineffective in reducing corruption.
⦿ One step they could take is to explicitly outlaw corruption and set high penalties on bribers.
⦿ A second approach is to appoint a high-level government agency to investigate bribery occurrences and bring perpetrators to justice. This agency needs to run a public relations campaign against corruption and invite the public to report bribery incidents. The agency could even offer to pay whistleblowers who identify major bribing activity.
⦿ A third approach is to make it difficult for those who extract bribes to hide their ill-gotten money.
Government Regulation and Tax Policies
A third way that politics can distort the outcomes of capitalism occurs when government interferes too much in the operation of the free market. Understandably, the government has to set up some regulatory agencies to ensure safe food, safe drugs, limited pollution, safe waste disposal, and safe public and private transportation. Economist John Kenneth Galbraith believed that economic regulation was necessary to keep the capitalist system fair and safe and to prevent large businesses from dominating the market. He saw government and unions as a needed “countervailing” force to prevent business excesses.
The other issue is that government must decide on sales and income tax policies. How much tax should be borne by the working class and how much by the wealthy class? The sales tax falls harder on low-income groups than if the same amount of tax dollars were raised through income tax. Poor people and lower income groups do not pay much in an income tax. There is the question of how steep taxes should be for the rich and super-rich. There is also the question of how much corporations and businesses should pay in taxes.
Conservatives argue that income taxes are too high and that leads to profligate government expenditures. They see too much spent on welfare and “entitlements.” Liberals see entitlements spent on education and health and relief for the poor as necessary and desirable, and a way to make up for the excessive income disparity. Liberals point out the many tax loopholes and exemptions favoring companies and the rich at the expense of the poor.
The Influence of the Super-Rich
Proposed Solutions to the Influence of the Super-Rich
The most direct method of taming the wealth and influence of the one percent class is through more stringent tax systems. Here are possible measures:
1. Put higher taxes on luxury goods.
2. Pass a more progressive tax system, where the tax rate increases for higher incomes.
3. Set some agreed-on number. The excess will either go to the government or can be directed to some specific social problem.
4. When it comes to estate taxes, allow the surviving member of a family to retain $5 million without paying any taxes. The remainder can be distributed up to $2 million each to offspring. Anything beyond this amount goes to the government.
5. Regarding gift taxes, allow the family to give an annual gift to family members of no more than $20,000 a year to each person.
ELEVEN:
CAPITALISM’S SHORT-TERM ORIENTATION
Businesses operating in a capitalist market economy need to do dual planning. (1) They must keep their eye on the short-term picture, making sure to achieve their growth and profit objectives. And (2) they must implement their long-run investment plan for profitability, growth, and sustainability.
On the Issue of Long-term Investment
How much money can publicly traded companies plan to spend to meet their long-run investment needs?
Clearly a company puts the first priority on achieving its short-term target revenue and profits. Hopefully, it will gain enough surplus income to invest in new product development and needed infrastructure. If cash is low for long-term investment, the company has the option of borrowing more money by issuing additional stocks and bonds. But long-term investment is clearly at the mercy of the company’s short-term profit performance.
Maintaining and Improving Infrastructure
High-level infrastructure lowers the costs of supply and gives greater competitive accessibility to more productive enterprises. Spending on infrastructure can increase employment, facilitate enterprise migration, integrate national regions, and support urban economic productivity and livability.
How is infrastructure to be maintained and improved in a short-term focused enterprise economy? Much of the infrastructure initiatives come from government at the local, state, and national level. Roads, schools, and bridges are usually the responsibility of cities and states.
TWELVE:
QUESTIONABLE MARKETING OUTPUTS
The Role of Advertising in Shaping Our Wants
Many influences shape our wants. Our family, nationality, social class, and genes are among the influencing factors. But the role of advertising should also be mentioned in turning our needs (say, for food) into wants (say, a steak).
The good news today is that the Internet and our cell phones have made it possible now to get two sides of the story. Our friends can share their preferences, experiences, and reservations about advertising claims. We can look up different reviews about products and brands on the Internet. We can even set up a personal blog and message our friends and others about vendors, products, and service quality. Books and information are readily available on sustainable living and sane consumption.
There is another problem that intense advertising creates—namely, it gets people to want more things than their income can buy. And the finance industry stands ready to make easy loans and sells the idea, “Buy now, pay later.
What are the alternatives to getting healthier and safer products produced and consumed under capitalism? We have seen that bans don’t generally work.
⦿ The first alternative is putting higher taxes on items that are harmful to health or safety. Such taxes would most likely be passed on to consumers. But they would accomplish the goal of reducing consumption of these items.
⦿ The second alternative is to apply a “nudging” strategy, which involves loading the choices in a way likely to lead customers to buy the healthier alternatives.
⦿ A third alternative is to use “social marketing tools” to persuade people to make healthier choices.
⦿ A fourth alternative is to educate children from the time of their early schooling about making healthy food choices and stressing the problems caused by diets heavy in salt, sugar, and fats. Hopefully, their food choices would evolve more to the healthier offerings.
THIRTEEN:
SETTING THE RIGHT GDP
GROWTH RATE
Slow Growth Group
I mentioned in Chapter 4 the forecast of Northwestern University economist Robert J. Gordon that U.S. GDP growth will probably be slow and not achieve the high levels of the past. He would consider the United States to be lucky if its growth is even one percent in the coming years. He points to several “headwinds” that will slow down our growth:
(1) the aging of the American population,
(2) the stagnation in educational achievement,
(3) the fiscal tightening to fix our public and private debt,
(4) the costs of health care and energy,
(5) the pressures of globalization, and
(6) growing income inequality and the debt burden.
Steady-State Economy Group
A steady-state economy would solve the problem of not running out of needed resources and not polluting the earth. Its advocates are deeply concerned about the limits to the earth’s carrying capacity. A steady-state economy seeks to deliver well-being to its citizens without pushing higher consumption. It not only emphasizes sane production and consumption, but also encourages more birth control and a fairer distribution of income. The poor would have enough to live on and the rich wouldn’t waste resources by acquiring private planes, swimming pools, and large mansions.
How to Change the Culture of Consumerism
To get people less interested in an endless pursuit of consumption, other lifestyles need to be promoted: The value of relationships, the joy of nature, and the pleasure of a good community need to be stressed. But how do you achieve this type of culture change? After a century of instilling a consumer culture, it may take another century to undo it. Many steps would need to be considered and debated and may end up requiring a planned authoritarian economy. Here are some proposed measures:
1. Establish limits on resource extraction.
2. Set limits on total pollution.
3. Put limits on advertising.
4. Favor medium- and small-scale companies and nonprofit organizations.
5. Increase local commons and support participative approaches in community decision making.
6. Reduce working hours and facilitate volunteer work.
7. Reuse empty housing and co-housing.
8. Introduce a basic income guarantee and an income ceiling.
9. Limit the exploitation of natural resources and preserve biodiversity and culture by regulations, taxes, and compensations.
10. Transition from an automobile-based culture to one that encourages local biking and walking.
Two Major Unresolved Issues
To get out of the growth-economy mindset, there are two major issues to address. The first has to do with jobs. The second has to do with corporate social responsibility for practicing sustainability.
The Question of Jobs
If we limit consumption, we reduce the number of jobs. It is bad enough that unskilled and skilled jobs are being destroyed by advancing technology.
If consumer and business spending falls, it can only increase unemployment. Normally, we should be creating enough jobs to keep up with population growth and to compensate for productivity improvements.
In highly industrialized economies, competition stimulates technology improvements that increase labor productivity to reduce costs. As labor productivity increases, fewer people are required to produce the same goods. If growth stops, unemployment increases, household income drops, demand drops, and the system moves toward recession or depression.
Hence we face an impossible growth dilemma. Growth in its present form is unsustainable. But degrowth under present conditions will reduce consumer demand, increase unemployment, and lead to recession.
Corporate Support for Sustainability
Today’s companies are expected to pay more attention to how their activities affect the environment. Some critics of GDP say that GDP is grossly overstated. We need to subtract the waste and pollution and other “bads” that companies have created, but not paid for. The net GDP might end up half the officially stated size.
At the very least, a company should do no damage by way of air or water pollution. This alone might require companies to make large expenditures on pollution control devices. Beyond that, the company should choose suppliers and distributors who also conduct their business in an eco-friendly way.
FOURTEEN:
CREATING HAPPINESS
AS WEEL AS GOOD
Suppose an economy manages to produce a high and steady rate of GDP growth. This sounds like an ideal economy. It would mean that per capita productivity is rising and there are potentially more goods and services for the citizens. But would citizens necessarily be happier? Would citizens attain a higher level of well-being?
We have to distinguish the impact of economic growth on happiness and, separately, its impact on well-being. Happiness is the harder condition to measure. Happiness can fluctuate from day to day. Happiness is adversely affected by major events such as losing one’s job, getting divorced, or having a major health problem. Happiness is positively improved when someone has good friends, is involved in a meaningful activity, and is making a difference in the lives of others.
Happiness at a national level does not continue to increase with added wealth once people have enough money to satisfy their basic needs.
⦿ First, happiness is partly conditioned by a person’s genes, with some people born with a positive outlook on life and others with a negative or depressed view of life.
⦿ Second, happiness is partly conditioned by the religious and cultural character of the country. Having a positive outlook on life may have something to do with whether the person is Catholic, Protestant, Jewish, Hindu, Muslim, or some other religion. A person’s outlook may also depend on whether finding a job and earning a living in a particular society is generally hard or easy.
We would expect that persons who have a high level of well-being would also show a high level of happiness. But there can be qualifications:
Persons with a high level of well-being may be unhappy because they become jealous when comparing themselves with other people. Thorsten Veblen, the famous economist, talked about the pain of envying the social standing or conspicuous consumption of others.
Persons with a high level of well-being may be unhappy because they have not found a higher purpose in life or they haven’t developed certain skills they craved or certain relationships they sought.
The reason for making this distinction between well-being and happiness is that citizens have to decide what they think is the primary goal of economic development. Is it to create more and more goods and services? Is it to create a happy citizenry? Or is it to create a high level of well-being in the society?
Gross National Happiness
In 1972, King Jigme Singye Wangchuck of the little nation of Bhutan proposed the need for a new measure called the Gross National Happiness (GNH) to be viewed alongside with the GDP measure. The GNH received a lot of publicity and today countries such as England, France, Denmark, Brazil, and others are engaged in developing a GNH measure.
He postulated four pillars of GNH: sustainable development, preservation and promotion of cultural values, conservation of the natural environment, and establishment of good governance. Several other investigators have offered further elaborations on Bhutan’s theory. In 2006, Med Jones, the president of the International Institute of Management, proposed tracking seven wellness areas:
1. Economic Wellness: Indicated via direct survey and statistical measurement of economic metrics such as consumer debt, average income to consumer price index ratio, and income distribution
2. Environmental Wellness: Indicated via direct survey and statistical measurement of environmental metrics such as pollution, noise, and traffic
3. Physical Wellness: Indicated via statistical measurements of physical health metrics such as severe illnesses, being overweight, etc.
4. Mental Wellness: Indicated via direct survey and statistical measurement of mental health metrics such as usage of antidepressants and rise or decline of the number of psychotherapy patients
5. Workplace Wellness: Indicated via direct survey and statistical measurement of labor metrics such as jobless claims, job change, workplace complaints, and lawsuits
6. Social Wellness: Indicated via direct survey and statistical measurement of social metrics such as discrimination, safety, divorce rates, complaints of domestic conflicts, family lawsuits, public lawsuits, and crime rates
7. Political Wellness: Indicated via direct survey and statistical measurement of political metrics such as the quality of local democracy, individual freedom, and foreign conflicts
The Role of Materialism in Relation to Happiness
Materialism is an orientation that is heavily promoted by economists and businesses. Materialism plays a major role in driving more consumer spending.
We describe people as “materialistic” when they have a strong leaning toward acquiring and possessing material objects. We would not call a person “materialistic” who simply acquires basic food, clothing, and shelter. These are essential to living. However, if people spend a lot of time buying an unusual number of material objects, such as many dresses and pairs of shoes, we would label them as being materialistic. If they spend a lot of time searching and shopping for further goods even though their closets are full of everything they might need, we would say they have a materialistic addiction. If they are very conscious of their neighbors’ possessions and want to acquire the same or even better possessions, they are materialistic.
Achieving Happiness Without Materialism
There are other styles of life than the materialistic that can give persons lifelong satisfaction. Among them are:
Connecting deeply with art, culture, or religion
There are some people who have a deep feeling for art, culture, or religion. A few of them will be artists such as Michelangelo or Leonardo de Vinci who want to create beautiful or arresting pieces of art. There are architects who want to create impressive physical structures for living, governing, or worshiping. There are composers such as Beethoven, Mozart, or Verdi who stir our feelings with their beautiful musical compositions. There are religious leaders who inspire us to feel more spiritual about life and the world and its meaning. All of these dedicated people help build what we call a civilization and a culture.
Helping others and improving the world
We admire persons who show prosocial behavior—that is, voluntary behavior intended to benefit others by donating, sharing, helping, cooperating, and volunteering. They are the people who respond to natural disasters by pitching in to save or help others. And in smaller ways, their high level of empathy leads to generous giving wherever a real need exists.
Prosocial behavior is central to the well-being of social groups. Encouraging prosocial behavior in children and young adolescents benefits society. Discouraging antisocial behavior also benefits society.
Some small measure of egotism or self-interest might operate in prosocial behavior. The giver receives a feeling of self-worth from doing a good deed. The giving or caring person may expect some reciprocity under certain circumstances. None of this diminishes the positive value added to the lives of the others who have received the caring and help.
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