Reference:

ROD DOBELL, University of Victoria

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# DRAFT

THE "DANCE OF THE DEFICIT" AND THE REAL WORLD OF WEALTH: RE-THINKING ECONOMIC MANAGEMENT FOR SOCIAL PURPOSE

ROD DOBELL Francis G. Winspear Professor of Public Policy University of Victoria October 1994

Francis G. Winspear, whose gift to the University of Victoria made possible creation of the Francis G. Winspear Chair for Research in Public Policy, began his independent professional career on the basis of innovative ideas about accounting procedures for better identification of cost and value in production activities. He extended these ideas throughout a business life directed toward creation of increased value through reorganization of producing enterprises, particularly in the resource-based economy of Western Canada. The fruits of this work he then re-directed towards strengthening the educational and cultural institutions of the society in which he lives.

This present paper, dedicated to Francis Winspear, is written in the hope of encouraging similar innovative thinking about the foundations of value and wealth in an increasingly knowledge-based global service economy. It is drawn from a longer working paper in preparation with Kim Balfour, whose work on the project was supported by the National Forum on Family Security. Helpful criticisms and encouraging comments by Bruce Kennedy, Carol Matthews, Michael Prince, Brian Scarfe and Tom Shoyama on a much earlier draft are gratefully acknowledged. Responsibility for views expressed and any remaining errors rests solely with the author.

Revision of May 20, 1995



TABLE OF CONTENTS

1. Introduction

2. New World, New Circumstances

I. Economic change and labour market restructuring II. Sustainability and the "full world" economy III. The re-emergence of civil society: home realm of the new social capital

3. Rethinking Social Policy: The New Social Contract

4. Re-thinking Guaranteed Income: A Candidate Scheme

5. Reality Check: Taxable Capacity and "The Race to the Bottom"

6. Re-thinking Fiscal Federalism: Roles of Governments

7. Conclusion

References



THE "DANCE OF THE DEFICIT" AND THE REAL WORLD OF WEALTH: RE-THINKING ECONOMIC MANAGEMENT FOR SOCIAL PURPOSE

INTRODUCTION:

". . . the State would acknowledge the duty to maintain individuals and their children at all times, and to ensure for them the necessities of a healthy life. Individuals, in their turn, would acknowledge it to be their duty to devote their best efforts to the production of the wealth whereby alone the welfare of the community can be maintained." (Rhys Williams, 1943, cited in Atkinson, (1993). Amended from original to gender-neutral language.)

In this paper, we survey briefly the argument that a welfare system founded substantially on a central government commitment to full employment is no longer plausible, and conclude, with others, that the evidence is persuasive. Something better is needed as a framework for social policy. Fifty years after the last major reformulation of the welfare system, and two hundred years after the main principles of our present market economy were articulated and the sources of national wealth (as seen at that time) documented, it is time to rethink what an appropriate social or institutional response might be to the challenges of the economic world as we now understand it.

The key point is that the forms of wealth or capital central to the knowledge-based, innovation-driven service economy and global information society in which we now live go far beyond raw labour and financial or physical capital: they include skills, knowledge, information and intellectual property; institutional, social and cultural capital (1); and ecological or natural capital. The creation of wealth in fact rests fundamentally on the increase of social and natural capital. It is the claim of this paper that these are the crucial investments our society must make in the current and coming decades. Yet our commercial institutions and our accounting systems lead us astray: we count as "unproductive"--as contributing to deficits--almost all the investments we make for these purposes.

The evidence is now conclusive that we must view the economy more broadly than does conventional economic analysis. Economic mechanisms must be seen as set within the structure of social institutions (including family, household, voluntary sector and civil society generally) within which much of the work of society is conducted. But this work is not in the formal economy--it is not paid for in any fashion that brings it into market transactions or economic accounts. Recognition of this broader concept of work extends economic decisions into a public or social sphere, and underlines the importance for economic performance of relationships and investment decisions in this realm. The "economically inactive" should not continue to be "policy-irrelevant".

It is also becoming both clear and widely accepted that the ultimate foundation for economic performance is established by the natural systems of the biosphere, and that to understand economic performance and assure a competitive economy we must extend economic reasoning to take into account the ecological systems and underlying resources on which all material well-being is finally based. Thus we have to see the economy within its social framework, and this as set in turn within the ecological systems which surround us. Some--for example, Quinn (1992) or Wilson (1992)--would argue for going much further, to see our interests as a species as set within the co-evolutionary processes governing life as a whole.

In particular, the argument of this paper is that our concept of social support should be based on a social contract, not social insurance. The creation of a social contract, it is argued, is not an act of charity born of compassion, but a necessary investment in a market economy which can support internationally competitive enterprises. It is thus an investment born of enlightened self-interest for the community as a whole. The social contract we envisage assures a basic income paid as an economic return to all citizens for two reasons: first, as participants in productive social networks and active contributors to social wealth creation; and, second, as owners of the social capital, represented by social networks and community knowledge, and of the scarce natural capital, represented by the ecological commons, which together form the foundation for market activity. The affordability of the social contract emerges partly from essential repricing of the services of those resources; partly as a result of the revised conceptual framework which will result from better bookkeeping; and partly as a recognition that we who are comfortable are going to have to pay something for an essential social commitment that goes beyond simply an insistence on individual responsibility for individual well-being.

The balance of this paper outlines three groundswells in the social and economic world which dramatically alter the context in which welfare provisions must operate: labour market restructuring; our approach to ecological carrying capacity; and the emergence of a networked, increasingly global, civil society. In light of these transformations, a reorientation of social policy towards sharing the costs of economic adaptation and pooling the risks of adjustment in an innovation-driven society, one which is buffeted by storms of change in a large, growing and increasingly integrated global economy pressing against ecological limits, seems essential. Specifically, this paper argues again for a guaranteed annual income, or basic income. This idea--not new then--was widely discussed in the 1960's, when growing problems of poverty amidst plenty began to be widely debated. It was almost embraced in Canada in the mid-1970's, when labour market problems began to appear as enduring rather than simply cyclical concerns; and it saw a resurgence in the mid-1980's, when the structural difficulties of a polarized labour market and inequalities in income distribution associated with the transition toward a knowledge-based service economy began to be evident. (See Wolfson, 1986; Atkinson, 1993.)

A brief review of the evidence suggests that some integrated tax-transfer scheme offering a reasonable assured minimum income to all citizens is feasible, and that it is possible to finance the necessary outlays--in part by shifting some of the present tax burden from income to consumption through the repricing of ecological resources. For this writer, at least, the implied balance of responsibilities amongst governments and other organizations, relying largely on markets but increasingly on voluntary organizations and quasi-market mechanisms, seems plausible; the relationship is consistent with what we need to do in any case in pursuit of ecological and social sustainability. Perhaps the problems are now sufficiently severe, and the urgency sufficiently widely recognized, as to generate the political will to overcome the predictable resistance of the organizations--academic, professional, bureaucratic and union--which will strive mightily to protect privileged positions against any such obligation to share in the adjustment costs of an innovative, adaptive, and open economy.

None of this is new, but it seems we still have a very long way to go in facing up to the consequences of these technological developments and maturing social movements for the way we approach economic decisions.



NEW WORLD, NEW CIRCUMSTANCES

I. Economic change and labour market restructuring

"We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another." (Keynes, 1930, cited in Cordell, 1985.)

The story of our changing economy, centered on processes of endogenous technological change and the diffusions of ideas, knowledge and innovation, and the impacts of such changes on skill requirements, has been rehearsed in many places. Lipsey (1993) offers a wide-ranging account of the forces underlying contemporary economic transformations. Osberg, Wolfe and Baumol (1989) explore some implications for labour markets. Evidence that the move toward a knowledge-based economy is increasing labour market polarization is itself increasing (Morissette et al, 1993). In addition, the degree of inequality in the distribution of primary incomes or overall earnings is increasing, and is only partially offset by transfers. (Wolfson, 1993; Beach and Slotsve, 1994.) The problems of long-term unemployment associated with older workers and unskilled younger workers seems likely to grow and to aggravate these trends.

Galbraith (1994) recently suggested that "there should be no doubt that our expectations, or perhaps more accurately, our habits of mind, exceed reality. We have to face the fact that substantial unemployment is normal." In 1930, Keynes anticipated unemployment as the result of the immense productivity increases caused by technological developments. Yet as the British White Paper (1945), United States Employment Act (1946) and Canada's White Paper (1946) made clear, western governments felt that it was their responsibility to assure full employment in the post-war world. In 1994, after nearly 50 years of bruising social and economic change, the Organization for Economic Co-operation and Development (OECD) takes a somewhat less presumptuous view and advises that there is no single recipe for full employment, but rather "a menu of measures that can help move OECD economies towards higher employment with good jobs." (OECD, 1994) It is the OECD's contention that high unemployment is the direct result of the inability of economies and societies to adjust and adapt to rapid change.

One of the difficulties for most modern economies is that their insurance-based models of social security, which assume that something close to full employment will normally prevail, actually hinder the adaptation to change which is so desperately needed for economic and social survival in a post-industrial world. The current concept of social insurance assumes steady economic growth and assured prospects for full employment in the formal labour force. It functions best in a society where there are numerous and relatively prosperous employed earners; where income inadequacies arise primarily from short-term interruption to earnings; and where entitlement is related to previous contributions and contingency rather than income. The percentage of unemployed people receiving social insurance in most OECD countries has decreased sharply since the 1960's, a result directly attributable to new contingencies not recognized by the traditional social insurance model. These include long term unemployment, sustained youth unemployment, the growth of non-standard employment, and the tightening of contribution requirements--attributable in large measure to the social learning on the part of both employees and employers that enables the individual production costs associated with fluctuating demand for labour to be shifted to the collective pool. Furthermore, with the growth of employer-provided benefits and pensions, as well as private income among the elderly, the original contingencies of old age, illness, death of the breadwinner or unemployment are no longer automatic determinants of need.

It is estimated (OECD, 1994) that there are 35 million people unemployed in OECD countries and that another 15 million have either given up looking for work or have unwillingly accepted part-time work. The link between work and wages as the basic mode of income distribution is clearly inadequate for most modern economies. People continue to define their social role primarily in terms of participation in production, and to derive substantial self-esteem and meaning from work. But the range of productive work far exceeds the range of employment, and a new social contract must recognize a broader concept of contribution; it must include income from both formal and informal work and benefits that are not contingent solely upon participation in the formal labour market. Lerner (1994) surveys these issues and possible policy responses in some detail.

In a prescient analysis, Rotstein (1984) makes a case for government policies that support the informal economy. He argues that the three primary forms of economic activity--reciprocity, redistribution and market exchange--all take place in the informal economy. To the extent that redistribution in the formal economy has been taken over by the state, and that the current welfare state is only viable within the context of stable, decently paid jobs, Rotstein questions our dependence on market networks to the exclusion of other forms of exchange. "It is precisely the ability of informal networks to identify and address new social and economic needs outside a formal, price and cash-oriented context that makes possible the creation of new circuits of production and consumption. These networks coexist with and feed into the formal market. The informal economy can thus serve as the source of a series of potential new economic activities upon which policymakers can draw to supplement and expand the number of registered and wage-remunerated employment opportunities." It is also worth noting that it is in the activities of this "third sector" that the comparative advantage of humans over machines in dealing with variety and situational complexity, as Nakamura and Lawrence (1993) describe, is likely to have its greatest impact in increased employment.

II. Sustainability and the Full World Economy

"The evolution of the human economy has passed from an era in which man-made capital represented the limiting factor in economic develop- ment (an "empty" world) to an era in which increasingly scarce natural capital has taken its place (a "full" world)....But few until now have recognized that we have not only reached an economic turning point, we have passed it." (Daly, 1993, p 79-80)

The publication of the World Conservation Strategy (1980) introduced an emphasis on sustainability as a key feature in public policy-making. Work in environmental economics has since argued for much broader acceptance of methods to integrate environmental considerations in economic decisions, by pricing resources and ecological services more appropriately. But that, although it represents important progress, still has the basic relationships backwards. Ecological economics, by contrast, integrates economic decisions within broader recognition of social institutions, and sets all those within the framework of the biosphere, the network of natural dynamics which forms the life-support system for humanity.

The failures of price systems, financial accounting systems and systems of national accounts to capture essential features of transactions involving natural capital or environmental amenities are widely recognized (Pearce et al, 1989; Wolfson, 1994b, 1995). So is the necessity of correcting flawed markets with fiscal instruments like "green taxes", or creating new markets for trading in new property rights, or implementing "polluter pay principles" of the sort advocated by the OECD since the early 1970's. Such measures are now seen as essential to correct otherwise misleading market signals and misinformed economic decisions (Hawken, 1993). Kennedy (1989) anticipates much of the central argument of this paper in emphasizing the importance of public assets in attempts to achieve real reform in income security. Beyond the simple correction of market calculations and social performance indicators, some more profound restructuring of social decision-making is also occurring with the attempt to find consultative procedures and processes of shared decision-making designed to assure adequate preservation and renewal of scarce natural capital (CORE, 1994).

What these developments mean for public policy is that, along with investment in social infrastructure to assure opportunities for individual participation in useful social roles, public investment activity designed to protect or restore the foundation of natural capital on which the economy rests is also a critical infrastructure investment--a key investment in a productive resource base. The consequence, which has perhaps not yet been fully recognized, is that there must be dramatic adaptation of markets and production structures to more informed recognition of these costs through the widespread introduction of user charges and "green taxes". While these attempts at repricing are designed primarily to improve market information, they do offer new revenue sources as well. These revenues can be earmarked to employ large numbers of people in the work of conservation, preservation and adaptation of the economy to the massive structural changes which must follow when the repricing and revaluation necessary in the pursuit of sustainable development is more properly reflected throughout the price system and in market mechanisms generally.

The transition to a "full" world, one that is feeling the pressure on limits to carrying capacity, reflects the scale problems arising from both global population growth, primarily in the "South", and intensive consumption and production activity, primarily in the "North". As natural capital becomes scarce, it must be priced and rationed in production; its value must be accounted for in wealth estimates and national accounts, and the incomes generated by its use must flow to its owners. The owners of these resources are the citizens of the nation, who share in the returns to the resource as a matter of right, based on market relationships--as rentals or dividends to wealth holders, not as a matter of redistribution. This profound transformation in pricing mechanisms and production structures, necessary when the role of natural capital is recognized, is one factor leading to a radical revision of the conceptual bases underlying arguments for an assured minimum income.

Concepts of wealth creation and the sort of work which represents wealth creation thus have to be substantially broadened. A conservation corps, for example, or habitat improvement activities, which might never pass a standard test of commercial viability to the satisfaction of local bankers, nevertheless have to be recognized as wealth-creating. High rates of return on forest ventures that rest on practices which destroy salmon habitat and erode forest lands, or profitable fishing ventures harnessing technologies that strip the seabed but utilize only minuscule proportions of a massive by-catch, must, on the other hand, be seen as wealth-destroying. With this broader notion of wealth creation, we are in a position to see participation in the economy, and contribution to society, in a wide range of activities contributing to the sustainability and increase of ecological, human and social capital.

III. Re-emergence of Civil Society: Home Realm of the New Social Capital

"Institution-building, collective action, co-operation, and social learning towards a new environmental ethic are some of the ways in which social self-organization may help us adapt rapidly enough to meet the constraints of sustainability. We can use the great creative activity of the current energy-rich world and the pervasive information network to find 'a prosperous way down' to sustainable steady-state societies." (Berkes and Folke, 1994, pp.145-6.)

Liberal democracy has always required the existence of a third realm, independent of the market and state, to act on behalf of community and societal interests. Historically, it has not been treated as a system because of its lack of a strong, unique form of organization equivalent to the hierarchical institutions of government or the competitive markets of the economy. However, information technologies and related innovations in management and administration are enabling the network form of organization to gain strength.

In a provocative recent paper Ronfeldt and Thorup (1994) argue that the advent of information technologies has led to the erosion of hierarchy, diffusion of power, blurring of boundaries and opening up of closed systems, all of which combine to challenge the supremacy and efficiency of both government institutions and atomized markets, while at the same time increasing the power and effectiveness of informal social and economic networks. The information revolution is making it possible for many previously small, weak and isolated actors to communicate, consult and co-ordinate with one another as never before.


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