Frank Rotering: An Economics for Humanity

PART 3 - THE HUMAN FRAMEWORK

PRELIMINARIES

I have received many useful comments from the discussion group on parts 1 and 2 of my Feasta website paper. My sincere thanks to all who have contributed.

The most important thing I have learned from the group is that my concept of "social perspective," as defined in part 1, is not well-founded and is therefore an inappropriate basis for an economic theory. I now believe that human economics should be based on a clear objective.

The objective of human economics is:

To formulate economic concepts and analytical tools that permit the maximization of human well-being, subject to ecological constraints.

This is a broad statement of social orientation. The precise meanings of "well-being" and "constraints" are developed within human economics itself.

As we proceed, it is important to remember the structure of human economics. There are three conceptual frameworks: the human, ecological, and functional. This structure was not chosen arbitrarily or for convenience. Rather, I believe it reflects the key intellectual tasks before us. These are:

a. To specify the characteristics of a humane economy. This is the aim of the human framework.

b. To specify the characteristics of a sustainable economy. This is the aim of the ecological framework.

c. To analyze existing economies. This is the aim of the functional framework.

Note especially that the human framework, which is the subject of the present document, does not address an economy's operational details. It provides tools to define the economy we want, and to criticize the economy we have, but it leaves prices, markets, and similar topics to the functional framework.

This document is a summary of the human framework. My goal is to prepare the way for the ecological framework, which lies at the heart of Feasta's concerns. In order to focus our efforts I have omitted detailed discussion of topics that are not directly relevant to this goal. I briefly describe these additional topics at the end.

Finally, I should justify why a new economics is required. Several group members have questioned this, and I would like to provide a more complete answer than I have so far.

My most fundamental reason is that we - the world's non-capitalists, who prize human well-being and environmental integrity over profits - must break free from capitalism's enveloping ideological influence. We require an independent perspective, not just in our emotions and commitments, but in our intellectual processes. I believe the most critical of these processes are in the economic realm.

More specifically, we need a new economics to:

1. GUIDE ACTIVISM: Social activists are focused, and rightly so, on the glaring abuses of the current system. They fight insane energy consumption, suicidal greenhouse gas emissions, rampant habitat destruction, persistent poverty, etc. But most activists employ the available intellectual tools, which were not systematically developed. As a result, some causes may be misidentified and some solutions may be poorly conceived. Human economics can help correct these inaccuracies and provide broad conceptual guidance to social action movements.
2. INFLUENCE PUBLIC POLICY: Governments and public opinion will be swayed more readily if we can provide cogent arguments based on sound theory. Those who oppose us have an impressive economic theory to defend their views. We need an equally impressive theory to defend ours.
3. MANAGE SOCIAL STRUCTURES: If we succeed in creating the communities many of us want, or in increasing our control in current societies, we will need a sound economic theory to guide our actions. Lacking such a theory, we will be subject to haphazard decisions and unstable policy-making, and we will be prey to the persistent influence of capitalist concepts, ideologies, and institutions.

So much for the preliminaries - let's get to the economics itself. Herewith the human framework (abbreviated version), using the analytical tools outlined in part 2.

1. THE STANDARD OF VALUE AND COST

Recall from part 2 that value is what human beings need or desire in an output, while cost is the sacrifice we must make to obtain this value. Among the most fundamental questions for any economic theory are:

1. How do we judge needs and desires? That is, what is the standard of value?
2. How do we judge sacrifices? That is, what is the standard of cost?

We might, for example, decide that population is the appropriate standard of value. Consumption that results in a higher population would then be preferred to consumption that results in a lower population. We might also decide that energy use is the appropriate standard of cost. Production that uses less energy would then be preferred to production that uses more.

Two other possibilities are:

• Self-reported happiness for value; hours of work for cost.
• Quantity of consumption for value; quantity of raw materials for cost.

These examples use separate standards for value and cost, but this is not necessary. We might decide to use self-reported happiness for both. Our aim would then be to consume so as to gain the most happiness, and to produce so as to lose the least happiness.

Standard economics uses a single standard - subjective wants expressed in money - for value and cost, and I believe a single standard is required in the human framework as well. If we try to apply separate standards we encounter insurmountable analytical hurdles.

Look what happens, for instance, if we try to use happiness as the standard of value, and hours of work as the standard of cost. The general principle is that the quantity of an output should increase until the marginal cost of its production exceeds the marginal value from its consumption. If we apply this principle to our two standards, the question becomes: when do the marginal hours required for the production of the output exceed the marginal happiness from its consumption?

This question is inherently unanswerable because happiness and hours of work are different kinds of things, which cannot be quantitatively compared. They are, to use the economic term, incommensurable, which is the death knell for rigorous analysis. A single standard for value and cost is therefore essential.

The next question is: should this single standard be subjective or objective? I find a subjective standard to be unacceptable for the following reasons:

1. Subjective needs and wants can only be measured by something external, such as money. If money is used, then demand means "effective demand" - it must be backed by cash. A penniless person dying of thirst has, in this sense, no demand for water. If water is not free, and if a good Samaritan does not appear, this person will perish. Money - or whatever expresses subjective desires - masks our real needs and wants.
2. A subjective standard makes interpersonal comparisons difficult, and perhaps impossible. The internal state of one person cannot easily be compared with that of another. This leads to gross economic injustices. For example, it places a poor person's desperate need for a necessity on the same plane as a rich person's frivolous desire for a luxury. It fails to differentiate between widely divergent ethical situations.
3. Subjective demand can be powerfully shaped by social influences, such as advertising, media images, peer pressure, and the like. So-called subjective demand is frequently nothing but the implanted whims of corporate marketing departments. I do not claim that producers create or manipulate all our wants, but the opposite extreme - the standard assumption of "consumer sovereignty" - is certainly false.

   The human framework thus requires a single, objective standard of value and cost. Following are the key considerations to determine what this standard should be:
   

   • Human economics seeks to maximize human well-being. The standard should therefore be intimately tied to the survival and flourishing of human beings.
   • To be useful as a set of analytical tools, the human framework should be as rigorous as its subject matter permits. The standard should therefore be quantifiable and allow for at least a rough unit of measurement.
   • Human beings interact with an economy in three main ways: directly through labour and consumption, and indirectly through the economy's impact on the environment. The standard must be capable of measuring all three interactions.

   A standard that meets all these criteria is the physical health of human beings. It is objective, is intimately associated with human well-being, permits quantification, and is capable of measuring all three economic interactions.

   Physical health indirectly includes mental and emotional factors. Stress, worry, and loneliness all have physical symptoms. Joy and laughter are also expressed at the physical level. Physical health is probably the most accurate single indicator of overall human well-being available to us.

   A compelling reason to use physical health as the value/cost standard is that it directs our attention to the needs of poorest. It is easy for affluent analysts, most of whom are healthy, to forget or downplay these needs. All economic issues should, in my view, be analyzed in relation to the least fortunate on the globe, and the physical health standard builds this concern into our economic theory.

   Health has the added advantage of being strongly correlated with happiness. Richard Douthwaite cites a study that asked 2,000 people in eight European countries how satisfied they were with life in general: " ... the best predictor of whether people would say they were content was whether or not they were happy with their health." (Growth Illusion, p. 13)

   Finally, physical health serves to integrate the human and ecological frameworks. The standard is used in the ecological framework to establish the ethical basis for the levels of resource consumption and waste output by the present generation.

   A standard that meets all the stated criteria, that accurately reflects human happiness, and that provides an indispensable ethical standard cannot, in my estimation, be far off the mark.

   2. "LET 100 FLOWERS BLOOM ..."

   Other value/cost standards besides physical health are possible. Health, which implies life itself, is at the very foundation of human well-being, but it does not directly capture fun, variety, exhilaration, or indulgence, to name a few. These can all be valid reasons for human beings to value outputs, and some can plausibly be used to measure cost.

   Similarly, a group or community might decide that rigour in an economic theory is not required. Rather than being concerned with commensurability and quantification, they might decide that a consensus estimate of well-being or spiritual fulfillment is sufficient for their needs.

   Such differences in interpreting the economic universe extend to the other frameworks.

   In the ecological framework I choose an abstraction of nature - a simplification that allows the application of economic logic to nature's complexity. Other analysts may feel that my abstraction does not represent nature adequately, and may choose a different one.

   In the functional framework I address capitalism because this is currently the world's dominant economic system. Other economic organizations still exist, however, and new ones can be developed. Multiple functional frameworks are therefore possible.

   The result of these various interpretations is that several versions of human economics could eventually arise. Richard Douthwaite has suggested that this may be desirable, and I agree. So long as each theory has a clear objective, is internally consistent, and adopts a humane, ecological perspective, this diversity can only benefit humankind.

   Let me now proceed with my version of human economics, which I feel has general usefulness and holds substantial analytical promise.

   3. THE HEALTH UNIT

   One of my requirements for the value/cost standard was that it should be quantifiable and permit the definition of a rough unit of measurement. While it is pointless to attempt a precise definition at this early stage of theoretical development, let me briefly explore how such a unit could be established.

   The zero point in the measurement of human health is the state where a representative person is minimally alive. From this point, any reduction in health will result in death. At the other extreme is the currently attainable peak of physical health. This means complete freedom from disease and injury, and the greatest possible vigour, strength, flexibility, sensory acuity, stamina, and so forth.

   This continuum of health states, from minimal life to its currently achievable peak, can be divided into equal increments. The details of such a division must be left to health experts, but there is no obstacle to it in principle.

   A rudimentary example of such a scale already exists for newborns - the APGAR score. When a baby is born, a doctor can assign 0-2 points for each of muscle tone, pulse, reflex, skin colour, and respiration. The total score (out of 10) tells the medical team if the baby is healthy, warrants some attention, or requires immediate resuscitation. Extending this scheme appears relatively straightforward.

   The other essential aspect of health is time. An increment in health that lasts for 20 days is 10 times greater than the same increment lasting for two days. For example, an apple might increase health by ten increments for three days. A house might increase health by eight increments for 50 years. Although the apple has the greater short-term health effect, the house has a much greater long-term impact.

   In brief, the health unit can be defined in terms of a specified increment along the physical health continuum, for a specified period of time. Below I presume that such a unit has been adequately defined, and place either marginal or total health units on the vertical axis of each graph.

   If the health unit appears to lack substance, remember that the demand for measurement must precede the development of the unit and scale to perform the measurement. Until someone insisted that the health of newborn babies be quantified, the APGAR score did not and could not exist. Until someone decided that heat and cold were more than subjective feelings and should be measured, the concept of temperature could not arise, much less the Celsius, Fahrenheit, and Kelvin scales.

   4. EVALUATING FINAL OUTPUTS: INTRINSIC VALUE

   My use of the term "intrinsic value" derives from John Ruskin, a 19th century social theorist and critic of art and architecture. Ruskin wrote several books on economics, of which Unto This Last (1860) is the best known. The terms intrinsic value and its companion, effectual value, were introduced in a later work, Munera Pulveris (1862).

   Although Ruskin shared the ethnocentrism of his Victorian contemporaries and had a strong paternalistic streak, his views on economics were profoundly moral. Despite their limitations, his books remain well worth reading.

   Ruskin defined intrinsic value as "... the absolute power of anything to support life." He insisted that this power is objective and thus independent of human desire and judgment. Among the items he specified as embodying intrinsic value were land, buildings, furniture, instruments, food, medicine, books, and works of art.

   The idea of intrinsic value is not new with Ruskin. John Locke employed the term in 1690, using almost the same definition as Ruskin's. French economist Jean-Baptiste Say, a seminal figure in economic history, referred in 1803 to "positive wants", by which he meant wants that are satisfied by intrinsic value. Many other economists have made similar statements over the years. My adoption of intrinsic value, although well outside the current mainstream, is the continuation of a long tradition in economic thought.

   Based on the standard of value and cost developed above, I define intrinsic value as the capacity of a final economic output to increase or decrease the physical health of human beings.

   The key word here is "capacity". Earlier I stated that an apple might increase health by ten health increments for three days. If we define the health unit as one health increment for one day, then an apple contains 30 health units of intrinsic value.

   An apple, however, can be thrown away or allowed to spoil. The 30 health units constitute only a potential, which may or may not be realized. The apple has to be eaten, while fresh, by someone who can fully assimilate its nutrients. Only then will the 30 units of potential health be transformed into 30 units of actual health.

   Final outputs are objects and services that are directly consumed, such as food, furniture, and haircuts. These outputs should be distinguished from intermediate outputs such as raw materials, buildings, tools, and machinery. While intermediate outputs are essential to production, they are not directly consumed and do not, themselves, contribute to the physical health of humankind. They therefore fall outside the definition of intrinsic value.

   The intrinsic value of an output is a constant quantity (see the graph below). No matter how many apples are produced in an economy, it is presumably always possible for someone to consume the last one so as to extract its full health potential.

   Intrinsic value refers to the potential health flowing from an output during its entire lifespan. If a house is expected to last 50 years, and if it will deliver an average of 1,000 health units per year, then the intrinsic value of the house is 50,000 health units. The same principle holds for effectual value and input cost, which are discussed below.

   In brief, intrinsic value can be positive or negative, and is measured in health units. It is used in the human framework to judge the quality of an economy's outputs.

   5. EVALUATING CONSUMPTION: EFFECTUAL VALUE

   Whereas intrinsic value is the capacity of an output to increase or decrease human health, effectual value is the realization of this capacity through consumption. It expresses the degree to which the conversion of potential to actual health has been successful.

   If the apple mentioned above is consumed in such a manner that all its intrinsic value is realized, the outcome is 30 health units of effectual value. If half the apple is eaten and the rest discarded, the outcome is 15 units. If the apple is left to rot, the result is zero units.

   Like intrinsic value, effectual value can be positive or negative, and is measured in health units. Unlike intrinsic value, it tends to decrease at the margin as more of an output is consumed. The graph below depicts the general behaviour of these quantities.

   

   The graph's vertical axis is measured in marginal health units, as discussed. The horizontal axis represents the quantity of an output's production in a specific period of time. The unit of measurement here depends on the output under consideration.

   Because the vertical axis uses marginal units, movement along the horizontal axis indicates an incremental addition to value. Total intrinsic value therefore increases linearly as we move to the right - it is the area under the straight line at any quantity. Total effectual value also increases as quantity increases, but more and more slowly, until it becomes negative at the margin and total quantity decreases. (If this is confusing, see part 2 for a refresher on marginal and total quantities.)

   There are several reasons why effectual value tends to decrease with quantity consumed. An output is generally first applied to highly valued uses, and then progressively to less valued uses. Clean water, for instance, is first used to slake thirst, then to cook food, and finally to water lawns and to wash people and cars. As the available quantity of clean water increases, the health benefits of the last increment will tend to decline.

   Another reason is satiation: one apple a day produces excellent health benefits, but the body can absorb only a finite quantity of an apple's nutrients. As more apples are eaten, the health gains of the last one will steadily diminish. Eating too many apples will eventually decrease health, which is why marginal effectual value becomes negative in the graph above.

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