Paradox of Value & Uncertainty
The question of value is central to the formulation of new economic theory. In his presentation at the GA, Orio Giarini called for a radical reassessment of economic value based on the real purpose of economy, which is maximizing human welfare, not maximizing economic growth or monetary wealth.
These apparently synonymous terms are often in direct conflict for a number of reasons:
1. The confusion between flow and stock blinds us to the fact that increasing economic activity can be and often is achieved by consuming non-renewable resources that reduce real wealth even as they increase economic activity.
2. Measures of economic growth neglect the concept of negative value. Growth may result in greater destruction of real wealth than it creates. Are higher levels of military spending and environmental remediation really indications of rising human welfare?
3. Real economic value has to take into account the utilization value of goods and services over time. In a modern service economy, true cost and value can no longer be fully defined at the point of sale. R&D expenditure, warranty and liability costs may occur years before or after the sale transaction. Many services such as health care are delivery systems that we invest in to provide for on-going service and security over time, and cannot be properly valued at the time of sale.
4. Important aspects of human welfare do not fall within the monetarized economy, such as home care for children and the elderly. We now spend $60 billion a year on bottled water which formerly was a virtually free commodity. The monetarization of drinking water is at least partially a result of declining quality of life, not progress.
More profoundly, the evolution from the industrial to the modern service economy has led to a paradox of uncertainty. Uncertainty is the source of doubt and insecurity which human activity strives to minimize. At the same time it is a rich creative cauldron of untapped potentials from which new wealth is constantly emerging in the form of new aspirations, products, services, technologies, organizations, etc. The key to future prosperity is to learn how to tap the creative value of uncertainty.
For a detailed discussion of these issues, see “The Evolution of Wealth & Human Security” in Cadmus Issue 3.
Need for a New Paradigm in Economics
The world needs a paradigm shift in economics similar to the one physics experienced a century ago, when quantum mechanics and relativity theory were formulated to address phenomena not explainable by Newtonian mechanics. This was the central thesis of Roberto Peccei in his presentation on November 11.
The emergence of a paradigm change in Physics came from understanding the limitations of the existing theories, and then inventing new concepts appropriate for these new regimes. A similar reassessment is needed in economics today.
The central issue facing the world today is that unbridled population and economic growth are untenable in a finite world. This calls for development of legal and social instruments which will provide solutions to our present predicament outside of present economic theory. New economic theory is needed based on sustainability rather than growth.
Economics is still based on many of the concepts formulated in the time of Adam Smith which were applicable to the transition from an agrarian to an industrial economy. We need new theory that incorporates concepts of biocapacity and sustainability. Okun’s law describing the relationship between growth and employment is really a tautology, rather than a valid theory.
New theory must also address the true role and purpose of financial markets to support human well-being, rather than speculative activities driven by greed, and promote investment in the real economy, creation of new jobs and equitable distribution of wealth.
To see Roberto Peccei’s Delhi presentation click here.
See his article on “Rethinking Growth: The Need for a New Economics” in Cadmus Issue 3.
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