Ever since Adam Smith, and probably before, economists and philosophers have attempted to reduce the essence of economics to simple principles, coming up with various explanations for various aspects of economics, ranging from “the invisible hand” to “surplus value of labor” all the way to the Laffer Curve, which postulates that there is an optimum rate of taxation, above which actual tax revenues will drop.  This, of course, was the rationale for the Reagan tax cuts.  But for all these theories and studies, economics has been spectacularly flawed in its application to law and public policy, and we now face an economically critical period in history.

Today, throughout the industrialized world, and particularly in the United States, political and economic leaders are faced with a series of economic problems.  First, there is a continuing, and often growing, disparity between the incomes of average individuals and the highest-earning individuals.  Second, growing productivity and profitability is resulting in greater returns to high earners and is not resulting in significantly increased employment, and not enough to keep up with population growth. Third, an increasing number of governments lack the resources to maintain fiscal and financial stability. Fourth, governments and businesses are increasingly reluctant to spend on societal infrastructure, even as more and more of business and society are dependent on such infrastructure.  The combination of the first three situations is leading, in many cases (and those instances will likely increase), to political and social unrest, and the fourth situation, unless remedied, is likely to undermine attempts to resolve the first three problems.

The problem with almost all past economic theory and most political solutions proposed to date lies in more than a few questionable assumptions underlying various theories. The two that seem most prevalent and erroneous to me are:  (1) Individuals and organizations behave rationally. (2) Value is determined objectively.

Recent economic studies have shown that true objective rationality, particularly on the part of individual consumers and business owners, is seldom the case.  Part of that lack of rationality lies in part in the fact that all of us have core sets of beliefs at variance to some degree with the world as it is, and part lies in the fact that we never know enough to consider all the factors. This lack of rationality compounds the problem of determining economic “value.”  From the beginning of economic studies, economists and philosophers have groped to find an answer to the basic economic question of what is “value” is and how it is determined in a working society.

The so-called Classical Theory of economics effectively states that the price/value of goods is determined predominantly by the cost of the labor producing it, and in this regard, Marxism is only a variation on classical theory, since, in Das Kapital, Karl Marx asserts that the difference between skilled and unskilled labor does not factor effectively into the creation of worth.  It’s also clear that salaries and wages are determined by what the employer is able and willing to pay, and that is determined in part (and only in part) by what consumers of goods and/or services are willing to pay.

But consider the following questions.  Why are the employees of Target, Costco, and WalMart paid on very different wage scales?  All three companies provide similar goods to large numbers of consumers, and many of those goods are identical. Why do universities pay professors of similar rank and experience widely differing salaries, sometimes dependent on discipline, and sometimes not?  Why do investment banks and hedge funds continue to pay their CEOs and top executives and traders tens of millions of dollars for services that are essentially irrelevant to roughly ninety percent of the population?  And why has no government ever seriously attempted to recoup any significant proportion of the immense financial losses inflicted on national economies… or taxed them more heavily to help pay for the unemployment benefits for those whose jobs they destroyed?

The theoretical answer to all these questions is some variation on paying the “market rate” or “that’s the way business works.”

At the core of this “market” are the so-called laws of supply and demand.  The idea is that when goods and services are plentiful, prices go down, and when they are scarce, prices go up.  This works well, if mercilessly, in terms of commodities, or commoditized services.  After all, one bushel of durum wheat is pretty much like another bushel, but when it comes to people, the idea has more than a few flaws, and the more complex the society, the more the impact of those flaws is magnified.

And “scarcity” doesn’t always translate into higher wages or greater demand. Despite a demand for math and science teachers, there are never enough qualified applicants, although that’s likely because school systems won’t increase wages enough to spur demand… which points out that, for all the talk about following a business model, organizations and institutions often only do so when it suits their fancy.

Take the commoditized job of a checker at WalMart, Costco, or Target.  Theoretically, checkers provide the same service for the same pay.  Having stood in many check-out lines, I can assure you that the ability of all checkers is anything but the same.  And this is a comparatively simple job.  But because it is a “simple” job, there are many people who can handle the basics of the task, and because a really good checker who wants better pay can be replaced by someone who can just manage the basics, wages stay low…  except Costco pays better.  Why? Because they’ve learned they get better people?  But that means that service jobs are not the same…something that tends to get overlooked in economic discussions.

The same problem exists, if on a higher level, in elementary and secondary education, with an added complication.  While there are a great many would-be teachers with the proper credentials and the theoretical skills, even after years of study, the best analysts can only approximate the factors that make a truly skilled teacher. There are effective and skilled teachers with totally different approaches to exactly the same subject, who both can inspire and produce better students who learn more, and while pretty much every prescriptive and descriptive analysis of teaching can describe the basics of what constitutes an effective teacher, once you go beyond that, it’s all speculation, because truly good teaching is an art.  But… pay and value are determined by average competence, and because excellent teaching is an art, so-called “merit pay” systems have largely failed where they’ve been tried — and likely will in the future.  Yet legal codes and the threat of litigation make it effectively impossible either to identify or reward outstanding teachers. All this points out not only the problem with Marx’s assumption that, essentially all labor in a certain position or field has the same value, but the wide-scale application in industrialized societies of the same principle to all jobs with the same description. 

To make matters more complex, “commoditization” of jobs often is applied perversely, or not at all. As I’ve noted before, in my wife’s university, the professors in the performing arts fields work longer hours, provide more services to the university, and are paid far less, even when they have more degrees and experience than do professors in the field of business. That’s because the field of “business” is considered more profitable… but the job of professors is education, not business.  Likewise… why do college coaches make more than university presidents?  Because athletics are more “valuable” than administering an institution educating thousands, if not tens of thousands of students?  Then, too, on a society-wide basis, women are paid less than men with equivalent time and experience, or even less, in the same professional field.

Finally, consider the high earners in society… who are they?  I looked at the top fifty names on the Forbes list of billionaires, and 30% came out of the financial sector and 30% from the entertainment and communications sector, followed by 20% in food and retail enterprises, and 10% in natural resources.  What does that say about “value” and “rationality”?  Or about the results of blindly following a so-called market economy?

Perhaps, just perhaps, that we really don’t want to pay for either value or rationality, just what we want when we want it, and then to complain about what doesn’t get done that we don’t want to pay for.