“It’s the economy, stupid!” Let’s try systems economics instead.

Mainstream economic ideology guides government decisions which determine the direction in which we are headed as individuals, as a nation and as a species, as well as deciding the fate of planet earth itself. Right now, none of that is looking good.

The result is exploding inequalities of wealth and income, within and between economies, loss of social cohesion resulting from those inequalities, corruption and fraud by the financialised sector, waste of earth’s finite resources; pollution of oceans and atmosphere; a looming mass species extinction; and the avoidable inevitability of global warming.

That mainstream ideology, Friedman’s variation on traditional neoclassical economics, seems utterly discredited, but continues to be supported and promoted by its beneficiaries and accepted by most others.

In support of its pretence to being a science, neoclassical economics relies on abstruse and irrelevant mathematical models and hypotheses that have been repeatedly shown to be absolutely wrong. The study of economics will inevitably return to its original focus on how systems actually work in reality. It will be an economic paradigm shift and will take some time, but it seems bound to happen.

The systems approach is based on analysis and understanding how the real world works. It is what led Adam Smith to report remarkable productivity gains from the specialisation of work in the pin factory. That was hardly new: Plato had reported gains from specialisation in Ancient Greece. Specialisation is a fundamental concept of systems economics.

A system is a network of interdependent specialised components. They might be parts of the human anatomy, individuals performing specialised tasks as in Smith’s production of pins, or they might be nation states acting within ecological and globalised economic systems. In all systems, it is the interdependence of their component parts which is decisive. They are needed to combine their specialised tasks and functions, rather than compete against each other, in order to achieve the overall system aims.

The current math based mainstream rejects co-operation between system components and instead promotes the idea of market competition as the source of efficiency. But a system is not a market; a market is not a system. That mainstream error has led successive governments to trash the systems operation of their direct responsibilities, such as state provision of health, education, security, social services and many others.

The standard mainstream approach is to try to convert the system into a market and introduce competition. It has been tried many times and always failed to achieve the intended result. The experience with UK National Health Service hospitals is a classic example. A typical intervention is to establish certain statistics as performance indicators and set the target levels to be achieved. Outcomes are then measured against those targets and reported on a continuing basis with results fed into published league tables of performance. That process substantially increases the admin costs of running a hospital – Deming suggested a likely rise from around 5% of total cost to over 20% [Deming, W E, (2000), The New Economics, Cambridge Mass: MIT, p22].

The emphasis on selected NHS targets also has the side effect of reducing the focus on non-targeted areas of work and their contribution to overall system achievement. It also tempts system components to game performance indication. Moreover, the increase in costs without commensurate increases in budgets, leads to cuts in essential NHS staffing, which may then need to be temporarily compensated by emergency hiring of agency staff at higher cost but less familiarity and expertise in the particular specialised tasks involved. This saga of destruction has been presided over by successive governments, innocent of the systems effects of their well intentioned, ideologically driven attempts to introduce competition to the system.

Markets are different. There should be substantial customer benefits from having different market participants competing for their custom. But not all markets are competitive, even if they operate free of regulation and with open access.

For-profit businesses, like all other systems, progress naturally through a life cycle of birth, growth, maturity, decline and death. The birth stage of most systems, including business, is characterised by high infant mortality – 80% of business start-ups perish within 4 years. The growth phase, dominated by the small and medium sized enterprises (SMEs) tends to be highly competitive with participants focused on the development of its people and technologies to deliver best value to customers. At this stage, it is competition that regulates the market. This seems to be what outsiders, such as politicians, envisage when they refer to being ‘business friendly’.

However, all growth phases come to an end at some stage, and when they do, business management is under extreme pressure to maintain the progression of their business. Its public rating, as well as their own personal reputations, depend on profitable development being maintained. In many cases, the end of growth tends initially to be passed off as a ‘blip’ with normality expected to be resumed shortly. When this does not occur, the pressure on management increases for them to find a strategic answer to the new situation. That is most readily achieved by refocusing the business onto merger and acquisition (M&A) deal making for quick results. That represents a crucial reorientation for the erstwhile successful real business, which tends naturally to mutate into a quite different, predatory, financialised entity.

In terms of goal orientation, mature systems seek to control their environment so as to ensure, as far as possible, their own future survival and well-being. For a financialised business, the goal of environment control can clearly be achieved through M&A deals to establish an increasingly controlling share of their industry.

Mainstream ideology rejects the possibility that free unregulated markets could fail to be competitive, though that is the common experience. Free markets, which in their growth phase may have been highly competitive serving customer interests, mature naturally into monopolistic cartels with competition stifled and customers exploited. The prime beneficiary of such non-competitive markets, as dictated by the Friedman variation on neoclassical economics, is not the business, but its shareholders, They don’t share the same interest in satisfying the overall system aims – but that is another story.

The observed reality, created by ideology based on false theory, is that systems, such as an NHS hospital, are being destroyed because their interdependent components are being made to compete, rather than co-operate with each other to achieve overall system aims. At the same time, competitive markets are being similarly destroyed by the failure to regulate and protect competition. That failure is caused by the common lack of understanding and consequent reliance on ideology and false theory.

If systems economics was taught in schools, business schools and university departments it might become the mainstream orthodoxy. Then, perhaps, the direction in which we are headed as individuals, as a nation and as a species, as well as the fate of planet earth itself, might be corrected. Maybe. But time is running out.

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