During the initial phase of industrialisation, Adam Smith argued that a nation’s supply of ‘wants and conveniences’ depended mostly on the ‘skill, dexterity and judgment’ of its workers and the extent to which they were employed. His example was the pin factory in which, through specialisation of work tasks, productivity could be multiplied many thousand fold, so that workers in an industrialised nation could enjoy a hugely enhanced standard of living. Smith argued that the wealthy should pay a greater portion of their income in taxes so the nation could provide education, for example, for the less well-off to compensate for the ‘mental mutilation’ caused by the boring, repetitive nature of their ‘specialised’ work.
So how did we get from that position, identified by the father confessor of industrial capitalism, to where we are today, with the Bob Diamonds, Fred Goodwins and Philip Greens of our world being paid zillions for not very much, the less well-off paying proportionately most in taxes and today’s pin factories run by ‘ruthlessly hard-driving, strictly top-down, command-and-control focused, shareholder-value obsessed, win-at-any-cost business leaders’? One explanation is provided in The Road to Co-operation.
The road from Smith’s pin factory to today’s dead-end, was largely defined by the economic theory developed from Smith’s inquiry into the Wealth of Nations. One of the most important steps along that road, a hundred years after Smith, was the economists adoption of mathematically defined models of reality, based on the simplistic idea of maximisation. Firms should seek to maximise profits, individuals to maximise their own self-interest. More recently Friedman argued that ‘corporate officials’ had no other social responsibility than to maximise the wealth of their shareholders. But maximisation of any one thing, necessarily requires the impoverishment of everything else. It has taken over a century to work through the whole economy, but today we have the result: to put it simply, maximised gain for the 1% wealthiest and relative impoverishment of the rest, and the lower down you go the greater the degree of impoverishment.
Maximising shareholder wealth implies the impoverishment of all other stakeholders. Employees must suffer the inequitable distribution of income and wealth. Paying real costs must be avoided wherever possible. Thus our finite world is exploited without mercy. Its limited resources are depleted at an obviously unsustainable rate, destruction is wreaked on the oceans, and the atmosphere polluted without recompense wherever possible. All this justified by the economic theory of maximisation.
Smith said we owed our dinner to the self-interest of the butcher, brewer and baker, but he was not advocating maximisation. He recognised the butcher and colleagues’ self-interest was in earning a living for themselves and their dependents. Their interest was lifelong rather than maximising their short term take at the expense of suppliers and customers. Almost 75 years ago, Chester Barnard pointed out that it wasn’t till he had ‘relegated economic theory to a secondary place’ that he ‘began to understand organisations or human behaviour in them’. Understanding the dead end we have now come to, requires that we don’t just relegate maximising theory to a secondary place, but bin it in its entirety for the rubbish it really is.
That would mean rethinking the whole of economic theory based on maximisation, such as the ‘free markets, open access’ dogma driving so much of the predatory capitalism featured on this site. For example, a posting last April about how Glencore was screwing the world (http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/) showed how close to criminality they were prepared to go in order to maximise. Their merger with Xstrata will create such a dominant force they will be able to fix and screw almost any market dealing in earth’s finite resources, absolutely at will. So far, there is nothing on this earth that will be able to stop them.