Reconciling Efficiency and Equity: Does the New Economy Provide New Opportunities?
The main conundrum of economic life has always been the tension between efficiency and equity. In the times in which we're living, the question rises again whether the dynamic changes in the present day world provides new opportunities to deal with this issue.
Since the beginning of this decade, we have witnessed the fall of the communist empire in Russia and the advent of the phenomenon of globalization. Moreover, in the most powerful economy of the world—that of the United States—a characterization of the course of events since then has become popular, called the New Economy. The term New Economy refers to a set of qualitative and quantitative changes that, in the last 15 years, have transformed the structure, functioning, and rules of the economy. The New Economy is a knowledge and idea-based economy where the keys to job creation and higher standards of living are innovative ideas and technology embedded in services and manufactured products.
The New Economy doctrine in the United States may be summarized as the view that globalization and information technology have led to a surge in the productivity of U.S. workers. This, in turn, has produced a sharp increase in the rate of growth that the U.S. economy can achieve without running up against capacity limits. This increase in the potential growth rate, in turn, is supposed to explain why the United States has managed to drive unemployment to a 25-year low without inflation. The rate of growth of output, by definition, is the sum of the rate of growth of employment (which is limited by the size of the potential labour force) and that of productivity.
The last point is exactly what the New Economy advocates emphasize. They maintain that productivity growth has accelerated, which means that the old speed limit of rising unemployment when growth rises above a certain number has been repealed. Moreover, if economic growth can accelerate without its old brake operating, then the classic issue of fairness in distribution once more recedes into the background because a quantitatively bigger slice for all somewhat softens the troubling matter of difference in the size of slices relative to each other.
Although many economists dispute the claims made for the benefits or the long term persistence of the New Economy, many people, especially in the business community, do take the doctrine very seriously indeed. Why? One answer is that the critiques of academic economics do not come naturally to businesspeople. The business of doing business is essentially microeconomic. Why should a CEO know or care about how an increase in the money supply affects GDP, or how that effect changes when an economy has a floating as opposed to a fixed exchange rate?
A second reason for the popularity of the new paradigm is, of course, that it tells businesspeople what they would like to hear. Who would not be attracted to a doctrine that promises that the economy can expand without limit for the indefinite future and that the appeals for redistribution can be laid to rest with a growing income for all?
This last reason brings us to the nub of the issue: Can we continue with our current understanding of what economic life is about? Should we reexamine our view of the end-purpose of economic activity? Are our rules for the pursuit of economic end-purposes sound? These questions look very heavy and philosophic. But the simple truth is that our everyday economic lives provide graphic and concrete answers to these questions, whether we realize it or not. For an answer to the question poised by our topic, we will therefore have to grapple with these questions.
What is economics about?
Our thinking about economics centres on dealing with the scarcity of means relative to our seemingly insatiable needs (or wants). This translates directly into two guidelines: first, to continually increase the efficiency of resource use, and second, to increase our supply of goods and services (called economic growth). Although there is good sense in these directives, it makes all the difference how we relate them to the other dimensions of our lives, how we see them applied over the short and the long run, and through which practical rules we make them take effect.
A very striking statement on all three of the last-mentioned considerations was provided in the 1930s by the great and hugely influential Cambridge economist John Maynard Keynes. Looking to the future in 1933 at the height of the Great Depression, Keynes saw the scarcity problem as steadily receding as modern economies continued to grow and increase productivity and production over the very long run. But, he cautioned, a long haul was necessary before that blissful state would be achieved. The end would only be reached, said Keynes, if for at least a century we followed certain rules of the game. These were to make all aspects of life subservient to the pursuit of economic growth and to do this by the inversion of right and wrong, "pretending that fair is foul and foul is fair because foul is useful and fair is not."
The most striking part of Keynes's admonition is his admission that this implies that we have to make greed and the exaction of unfair profit "our gods" because only they can lead us out of the "tunnel of economic necessity into daylight." He also pointed out that this way of pursuing the goal of economic plenty meant renouncing what he called the "surest principles" of all religion which condemned the rules he specified. Only when the blissful state had been achieved, he saw it possible to return to the true and the good and to stop pursuing economic growth at the expense of all else.
What an amazing description of the economic life of the past century! And how accurate. From the mouth of the singly most influential economist of the century comes the admission that the pursuit of economic growth must become a surrogate religion and be pursued with the utmost ruthlessness. During Cold War times, the dogged pursuit of growth in the West, particularly in the United States, was somewhat understandable. But the turn of economic events since the beginning of the last decade has shown that there is something deeply imbedded in our economic system that continues to drive us forward to attain ever higher living standards, despite what its effects are in respect of the other aspects of life in our societies and/or in our living environment.
I think Keynes put his finger right on it when he mentioned our economic actions as that of serving gods. For any decent expectation of blessing, this demands total commitment and obedience. Is that what we see happening? The impression cannot be escaped that we have come to regard higher economic growth as the most important goal of all societies on the planet—one which must be served by everything else. For its attainment, we are putting our trust in mobilizing ever more resources and using them with steadily increasing productivity—often costing what it may. And the organizing method we use is to extend the market and its requirements to all reaches of the world and into all corners of our society. The title of a recent book be Robert Kuttner, Everything for Sale, sums up this approach.
You may ask: But what is wrong with a pursuit of economic growth if we find new ways to continue doing so? The problem lies not with growth as such but with how we pursue it. In the circle of CLAC and its supporters, the idea has long been entertained that our economic calling can be summarized with the concept of stewardship. A steward takes care of and maintains that for which he or she has been given responsibility. But do we, in our pursuit of growth, still adhere to our economic life as a servant of the other aspects of what constitutes a society as well as of each other?
It seems to me as if many Christians, together with a multitude of others, have steadily but surely adapted their views in a peculiar way to what the Scottish philosopher Adam Smith remarked in the eighteenth century. He became famous for "discovering" that we could give up on the idea of benevolent and mutually responsible economic behaviour and plunge ourselves headlong into a single-minded pursuit of our own individual interests with no regard for others. Through the ensuing competition, mediated by free markets, he saw the result as that of order instead of chaos and growing plenty instead of increasing misery—the famous Invisible Hand.
How have we applied Smith's ideas in the nineteenth and twentieth centuries? The answer lies in our interpretation of what economics is all about, viz. wisely relating material means to ends. Following on the work of Smith (and disregarding much of his qualifications to the working of markets) our economic life has reversed the relationship between economic means and noneconomic ends. Instead of viewing the pursuit of individual interest through markets as a means to ends which mostly lie outside economics, we have made the pursuit of profits (in the form of economic growth) well-nigh an end in itself. This does not want to suggest that we have become complete slaves to our material appetites, but that most of us have put our hopes for the fullness of a "good" life first of all in the pursuit of economic growth. It seems as if the rule has become: Seek ye first the kingdom of material growth and all else will be added unto ye.
The striking resemblance to what Keynes already noted in the 1930s cannot be missed. We have indeed embarked on a course of pretending that means can be made into ends in the belief that this will take us through a tunnel of inequality, poverty for many, cut-throat behaviour, and predatory possessiveness into the daylight of abundance where we can return to ways in which we care for each other and for nature. It seems hard to escape the conclusion that our societies have succumbed to economic idolatry.
Let us acknowledge that the result of this relentless pursuit of material growth has indeed been spectacular in many respects and has surely brought relief from deprivation and hopelessness to millions. But at what cost? What have we destroyed or gravely damaged? In answer to this, a whole litany of results can be listed: lingering and degrading poverty for millions in the poorer countries of the world; growing inequality and even poverty amidst plenty in the rich countries, which reduce the opportunity for a meaningful life for many; environmental degradation and destruction; destruction of cultural heritages of all kinds in the name of economic progress; the hollowing out of noneconomic aspects of societies through ever-extending marketization. Without being purely negative or alarmist, it cannot be denied that there is a steady rise of concern about the sustainability and sanity of our current economic trends amidst the euphoria of seemingly unlimited room for economic expansion.
What perspective does a Christian view of life offer on the meaning of economics? In short it can be put as the provision and maintenance of livelihood for all. Not an easy promise of riches or privilege resulting from ruthless action or good fortune, but the opportunity to acquire the wherewithal to fulfil our various callings in return for an honest effort. Since the time of the Greeks the word from which "economics" derives has meant sound housekeeping and not the pursuit of riches or material power. Furthermore, the economic side of life has a serving function for the other dimensions of our individual and communal lives. It thus has to be brought in the correct (serving and supporting) relation to the pursuit of social cohesion, cultural integrity (including honouring the internal character and purpose of the broad range of societal institutions), justice, environmental care, sound family life, and so on. From this it is clear that the absolutization of economics into a dominating position is in fundamental opposition to the view that our economic task is stewarding the material world to provide the sustainable and justly accessible means for a diversified and God-honouring life. We will briefly return to this in the last section.
The questions arising from this section are threefold: Whether economic growth, as pursued, is responsible for these concerns; whether more growth can diminish or solve these problems, and whether more growth obviates the need to relate efficiency and equity. Before we can answer this, we have to take a closer look at the claims made for the New Economy.
What is new in the New Economy?
The above background allows us to explore the major changes in our current economic life with an eye on whether they provide opportunities to make positive changes in our continual grappling with the issues at hand.
It was the Austrian economist Joseph Schumpeter who reminded us that the form of a market economy which we call capitalism is essentially a form of continuous change. It never comes to rest and gives rise to a restless organization of life which changes everything in its wake. Since the fall of the Berlin Wall in 1989, the world has come in the grip of the newest form of such change, one which is called globalization. This is in its essence the arrival of the idea that the world is one seamless marketplace, connected by the tremendous advances in information and communication technology. But it is more than the flow of money and commodities. It also means the growing interdependence of the world's people through seemingly "shrinking" space and time and the disappearance of borders. Globalization integrates not only the economy but culture, technology, and governance.
This does not mean, however, that the world is now a fully integrated whole in the sense of a wider spread of privilege. To the contrary, the divide between the rich and the poor, the strong and the weak, the insiders and the outsiders, those connected to the new networks and those isolated from it, is not decreasing but increasing, as we are reminded by the 1999 edition of the Human Development Report of the UN's Development Program. The fifth of the world's people living in the highest income countries now has 86 per cent of the world's gross domestic product (GDP), 82 per cent of the world's export markets, 68 per cent of the direct foreign investment, and 74 per cent of the world's telephone lines. The bottom fifth, in the poorest countries, has about 1 per cent in each sector. Furthermore, the income gap between the richest fifth of the world's people and the poorest fifth, measured by average national income per head, increased from 30 to 1 in 1960 to 74 to 1 in 1997.
Except for this general description of the new order in the world economy, the first important new element of the change is the immense shifts in power that are occurring. The financial concentration and power of investment banks and other large multinational corporations are now so immense that fifty of the hundred largest economies in the world today are companies and not countries. More than US$1.5 trillion a day is exchanged in the world's currency markets. This steadily diminishes the ability of national governments, even jointly, to influence the course of economic and other developments like they had done before, powerfully illustrated last year with the financial crashes in the Far East and Russia. Incidentally, this also marks the return of planned economies in a new guise: not as countries like the old Soviet Union but as giant business enterprises with no nationality or accountability to anyone other than their shareholders. The latter are preponderantly the already rich and powerful.
A second new element is change in the nature of economic competition. Previously competition was based on comparative advantage which depended on natural resource endowment and factory proportions. Every country had a natural place or niche in the world economy. Today this has changed very deeply. Success is now increasingly determined by brainpower industries—microelectronics, biotechnology, telecommunications, robotics, and computer hardware and software. These have no natural home and every country or region wants them. Which means that everybody can compete for them. Those who can mobilize enough remuneration or opportunities for profit can now create comparative advantage anywhere. Such advantage is now human-made. This implies that the dominant competitive weapon of the next century will be the education and skills of people. But more importantly, it changes the outcome of competition from the previously win-win format where trade benefited both sides to the new win-lose format. If everyone who wants to race ahead wants the same key industries, those who get them will leave the others with little if anything. It needs no great effort to imagine what this holds in store for the already poor and straggling countries of the world.
A third element is the increasing inability of decision makers in the world to deal with overarching or global problems. Two graphic recent examples are 1) the inability of the Rio Conference on the Environment in 1992 to come up with any resolutions with the promise to deal effectively with environmental deterioration, and 2) the already referred to inability to deal effectively with the international financial instability of 1998. Left aside is the long-standing problem of the persistent, even increasing, poverty of a large section of the world's population. This has prompted the well-known business guru Peter Senge to remark that the world seems to be out of control, driving down a dark road with little or no light and with technological progress that mostly amounts to speeding up the process. We are therefore entering an era of increased potential but also of increased threat to human security.
Before we embark on an evaluation of what's new, it is necessary that we briefly pay attention to what remains unchanged. At least three aspects of the economic system that we inherited from the eighteenth and nineteenth centuries remain as they are:
- The most important element of continuation is that the basic rule of pursuing economic growth above all else has not been abandoned, but rather intensified. The growth agenda is pursued with renewed vigour in a global marketplace with no borders and continuous and instantaneous communication.
- The aim of industrialism, which arose with the Industrial Revolution of the nineteenth century, remains intact, albeit focused on products created with the latest technology and producing mostly services in accordance with current tastes in affluent societies.
- The requirement that everything be adapted to the demands of the growth game is pushed forward with renewed vigour in the guise of the privatization and marketization of ever more facets and institutions of our world.
Given the description of the underlying characteristics of the New Economy, we are now in a position to evaluate the potential it holds for reconciling the old conundrum of efficiency versus equity.
Reconciling efficiency and equity in the New Economy
It is obvious that we are dealing with such a complex and huge phenomenon in globalization (as the foundation of the New Economy) that it is an unhelpful simplification to reduce it to the current idea in North America that we are dealing just with a new impetus for increased noninflationary growth. Nonetheless, it is clear why businesspeople find the potential for higher growth provided by the New Economy an obvious way of avoiding the conundrum of efficiency versus equity and do not involve themselves with the larger issues and effects of globalization.
The classic way of dealing with the conundrum in its static form has always been to argue that justice and fairness in outcome is not a helpful yardstick for business. It is argued that as long as there is sufficient fairness in competition, brought about by well-functioning and relatively free markets, the distributional outcome can be ascribed to differences in the productivity of those participating in the economy. Those who demand a larger share would therefore have to work more and/or smarter. In the event of persistent and clearly unfair outcomes that demand to be addressed, the issue has been formulated as that of a trade-off between efficiency and equity: more of the one could only be attained by less of the other. The specific choice is a matter of the balance of power at the moment of decision and the most pressing objective to be achieved. The dynamic answer to the conundrum has been, as repeatedly stated, to increase the total amount of production, or increased economic growth.
This is not the place to go into the cogency of the above arguments. Suffice it to say that the line of reasoning omits addressing the issue of how the distribution of power of those participating in the economy come about in the first instance. But in this discussion we are focusing on the claim that higher growth makes the whole trade-off unnecessary. Thus, if the New Economy makes for higher growth without any negative side-effects, it is argued that we should embrace it without further qualms.
Seen against the broader background given above, it should be clear that a simple embrace of the New Economy and reinvigorated economic growth may give temporary respite in the search for a more meaningful and less adversary relation between efficiency (growth) and equity (one among a wider set of considerations). But it does not solve the issue or make it disappear. Still more important, we will not be addressing the idolatrous and destructive character of absolutized economic growth.
So, finally, are globalization and the new information and communication technologies trends that we as Christians have to view negatively? Not so. We should recognize the immense possibilities for human advance and greater justice in globalization, but only if we do it right. New technological and other breakthroughs offer great potential, but not with today's standard agendas. Three considerations need to be brought into play:
- We need to start returning to the meaning of economic activity as serving livelihood for all. In this regard, it is very informative and heartening that a prominent business consultant from Britain, John Elkington, argues in his new book (Cannibals with Forks) that as we enter the Third Millennium, business firms that wish to be successful will have to enhance the criteria for success which they employ. Instead of looking only at the financial bottom-line, he argues that they will also have to extend their criteria to include environmental sustainability and the achieving of social justice. And not in some rank order but simultaneously and interdependently. Quite a mouthful from a business consultant! In other words, Elkington supports the need for allowing back into the heart of modern market capitalism the need for care—the heart of stewardship.
- It is not necessary or even very helpful to invoke once more the coercive power of governments to turn the negative potential of globalization into a positive one, although they will have to play an important part. It is more important to realize that business, more than governments or nongovernmental organizations, will be in the pound seats in the immediate future. It is in the internal decision-making rules and practices of business that the bulk of the correction will have to be made. Not an easy challenge after more than 200 years of persisting in an old and seemingly advantageous way of thinking and doing. But it has happened before and it can happen again. And CLAC is right where the action is.
- We should not succumb to the idea of the inevitability of pernicious trends. CLAC's existence and growth (in conjunction with many other initiatives and organizations) testifies to the faithfulness of many and to the power and love of the God we want to serve in all walks of life. Seeking to find and obey God's original intention for the various dimensions of our lives has never been in vain. Normative responsibility works! Furthermore, it has always been the case that the dividing line between good and evil runs through everything and through us all. It is never located in one form of activity, institution, or trend. We should confidently but humbly proclaim that all of us are accountable in all our endeavours and institutions to God's intentions for us. If we approach the possibilities offered by globalization and new technology with care, distinction, and the commitment to seek God's will, we can turn it into a force for the good. But then we will have to become keenly aware of the manifestations, power, and hold of false gods in our economic efforts and expose and oppose them.
May God be with us and bless us in our work.