Basic Income in a transformed economic order

Those of us who have long been preaching the unavoidable necessity of establishing a universal (unconditional) basic income (UBI) as the primary mechanism of income distribution in the emerging modern economy – often in the teeth of either mass indifference or ridicule – have recently been gratified to notice that the idea has started to gain significant traction in the political mainstream. This is reflected in official moves in a number of European countries to initiate research or pilot projects (notably Finland, the Netherlands and Switzerland) as well as Canada to determine the viability and/or public acceptability of introducing a UBI.

It seems fairly clear that this apparent shift in mainstream opinion, at least in the industrial (OECD) countries, is due to a combination of two specific factors:

a) the progressive collapse of established social welfare systems in face of an increasingly fragmented labour market, and
b) growing recognition of the irreversible disappearance of stable employment opportunities driven mainly by accelerating technological change.

Such cracks in the edifice of the current global order may easily be seen as symptoms of a broader disintegration manifest in uncontrollable flows of mass migration across borders and the demonstrable failure of conventional tools of macroeconomic management.

Thus whether supporters of UBI see it primarily as a mechanism for achieving greater social justice or simply as a rational route to greater economic efficiency they will probably all view these ideological developments as a welcome, if belated, recognition of trends that have been gathering momentum for many years – indeed decades. In order for the idea to take hold, however, it is clear that its supporters will need to formulate realistic proposals for implementing it on a much wider scale (ultimately covering virtually all countries in the world) than has been envisaged so far. In doing so, moreover, they will need to take account of a broad range of factors that are leading to a profound – and accelerating – transformation of the global economy and society which is rendering existing economic and political institutions ever more unsustainable.

This broader socio-economic context to be considered will need to encompass developments such as:

1) The ending of scarcity

Just as technological change (mainly stemming from the development of steam power) transformed the economics of manufacturing – notably textiles – and transport 200 years ago, leading to the first Industrial Revolution and the emergence of capitalism as the dominant form of economic organisation, so in the present period we are witnessing even more profound transformation resulting from contemporary technological advances which will likely lead to the virtual extinction of capitalism in its turn. This would be the result of what seems to be our emerging capacity to supply almost infinite quantities of goods and services (beyond the capacity or desire of the population to consume) at very low cost.

A striking example of such disruptive change is provided by the supply and use of energy. Throughout the 19th and 20th centuries this has been based primarily upon fossil fuels (coal and hydrocarbons), a dependency which has acted as a significant economic constraint to those states with little or no domestic sources of supply, while equally conferring a corresponding advantage on those with abundant supplies of their own. However, there is ample evidence that this pattern is changing dramatically, not least due to pressure to switch to renewable energy sources in the interests of limiting global warming. This has led not only to the development of progressively more cost-effective alternative sources of electricity such as solar and wind power (hitherto found to be too expensive) rather than traditional large thermal power stations, but to advances in power storage (battery technology) and more efficient small-scale distribution (facilitating local networks in place of traditional dependence on large-scale and often inefficient grid systems). At the same time demand is being quite rapidly reduced thanks to improvements in the energy efficiency of buildings and machinery – including automobiles, where the industry is being forced by regulation not only to improve their fuel efficiency but progressively to adapt them to run on electricity rather than petroleum.

Leaving aside the dire implications of such change for the vast fossil fuel empires (dominated by OPEC and the major oil companies) that have held the world economy in thrall for so long, the far more positive conclusion to draw is that these developments could hugely empower local communities to manage and control their economies independently of large corporations which have hitherto been able to monopolise power supply via the huge infrastructure networks that they control. As a result such communities will be able not only to secure much greater ownership and control of the economic assets on which they depend but also greatly to improve their living standards by accessing much lower cost energy.

This trend towards diminishing scarcity – which is affecting most other productive sectors as well as energy – has been accompanied over the last 30-40 years by one of reduced need for physical inputs relative to the value of output or commodities consumed – or “de-materialisation”. While this is partly a result of the higher growth in global demand for services relative to physical goods – a function of rising affluence among the wealthier minority of the world’s consumers – it is also to a large extent the consequence of advances in the efficiency of production techniques. The latter have also permitted the manufacture of products on a small scale without any loss of cost-effectiveness, using such techniques as 3D printing. This has not only enhanced competition by lowering barriers to market entry by small and medium enterprises; it has also improved overall efficiency by reducing the need to hold large stocks of both inputs and finished goods, thereby lowering costs of working capital.

2) The increasing redundancy of capital

As a consequence of such technological change the futility of continuing to base our economic system on the perpetual expansion of investment and output mediated by a financial sector driven by the principle of profit maximisation is becoming ever more glaring . For where investment capital is still needed as part of the productive process it will increasingly be in such small quantities that it should be readily available to enterprises either from their retained earnings or from local financial institutions (including community, cooperative or other mutual organisations) or even “crowd funding”. At the same time, because in a relatively static economy (see below) capital investment is unlikely to be needed to finance significant expansion beyond predictable existing markets, the attractiveness to private investors of participating in such markets – where competition is bound to ensure that return on capital remains low relative to risk – is likely to be very limited. By the same token large corporations following business plans based on the prospect of perpetual expansion will become a thing of the past; rather such organisations will be forced progressively to downsize and shed more and more of their permanent workforces and other overheads. The implications of such trends for both the structure of economies and asset values – as corporations’ physical assets shrink and urban landscapes and infrastructure are transformed – are evidently huge, if hard to quantify.

3) Dwindling impetus for economic growth

As the demand for capital for fixed investment grows progressively weaker, the dynamics of capitalism itself can be expected to lead to a weakening of political pressure for maximising growth – particularly once the present global debt bubble that has been crippling economic activity since 2008 has finally imploded. In fact it is sobering to recall that the adoption of the maximisation of growth as the primary objective of macro-economic policy in the industrialised West only really started around the end of World War II, following the development of generally accepted measures of national income (Gross Domestic Product or GDP) in the 1930s. The significance of this indicator is that it quantifies total market value added and thus acts as a proxy for the aggregate output of the commercial sectors of the economy – i.e. those supplying tradable goods and services. It thus has come to serve as an indicator of market prospects for enterprises seeking to determine the appropriate strategy for their businesses. For policy makers it also represents a key indicator of the tax base available to a given economic entity.

However, once the meaning of the exponential rise in the productivity of both labour and capital occasioned by the digital revolution is more widely understood, it is bound also to be recognised that attempting to grow GDP at a rate sufficient to absorb ever mounting surpluses of capital and manpower in profitable new investment is futile. Hence it must follow that the imperative of growth will inevitably cease, over time, to be a public policy priority.

4) Changing pattern of global trade and competition

As described above, the declining need for physical capital relative to the level of output and the progressive dematerialisation of production is increasingly making it possible to produce manufactured goods (as well as energy) on a relatively small scale with no loss of cost-effectiveness – thus reversing the pattern that was ushered in by the first Industrial Revolution. In parallel with this trend there are signs that technological change is tending to transform the pattern of trade beyond all recognition. For not only is technology now enabling the superabundant production of goods and services at very low cost; it is also heralding the day when production may be undertaken almost anywhere, subject only to the ability to gain access to the relevant know-how. The increasing importance of such know-how in determining the capacity of enterprises and communities to survive and prosper doubtless helps to explain the rise in importance of “intellectual property” (IP) as a factor in trade negotiations and disputes. It may be doubted, however, whether it will be possible for corporations such as Apple or Monsanto to enforce their claimed IP rights over specific technological breakthroughs so as to extract sustained profit flows (royalties) – let alone control how they they may be adapted or developed by others in future.

The net result will be that the competitive advantage of the purported “owners” of given technological innovations will be increasingly short-lived, as both fixed and marginal costs of production dwindle to insignificance. Hence productive activities will cease to be a magnet for profit-seeking, large-scale investment, so that decisions on the allocation of resources will be left to enterprises or communities based on priorities other than maximum profit. All in all, the assumptions of classical trade theory, based on Ricardo’s law of comparative advantage, will be terminally undermined.

By the same token the traditional competitive struggle among countries to secure a greater share of global markets for themselves – a preoccupation of national policy makers since long before the capitalist era – will become ever more futile. This in turn should ultimately end the “race to the bottom” – or competitive lowering of standards in areas such as labour, environment and tax – which has been such a ruinous consequence of “globalisation”. (It will nevertheless still be important to guard against attempts by different states or communities to use predatory practices such as dumping of products at below-cost prices in order to impose their will on others).

5) Failure of the global order based on “sovereign” nation states

The inequity and instability induced by “globalisation” – compounded by that of market capitalism – as well as growing threats to the biosphere in a finite planet, have exposed the non-sustainability of a world order based on a structure of supposedly sovereign independent states, none of which have more than limited control over the forces determining their own well-being, while at the same time none have any formal / legal responsibility for the welfare of those in other countries. Obviously the problem is further exacerbated by the fact that the supposed sovereignty of nations (communities) is undermined by corporate interests which often conflict with the public interest. The result is dysfunctional outcomes such as:

  • abuses of power by authoritarian national governments against their own people’s rights (as defined in the Universal Declaration of Human Rights) without any possibility of legal redress;

  • impotence of smaller and weaker states to deal with disasters, whether natural or man-made (e.g. Nepal after the recent earthquake, Haiti and other small island states);

  • abuse of the “global commons” (oceans, atmosphere etc);

  • refugee crises resulting from the above.

6) Redundancy of the financial industry

The dramatic collapse in demand for capital investment and the disappearance of the growth imperative indicated by the developments described above points to another major disruption to the present capitalist model which should both strengthen the case for introduction of UBI and render it much more feasible. This is the gradual implosion of the financial sector whose prosperity – and ultimately its very survival – depends on the continuation of expanding demand. For if the demand for capital flows into new investment is disappearing, so will the possibility of maintaining pension or other funds channelling the contributions of workers and employers into assets whose ability to yield an adequate income stream to meet the cost of pensions is being fatally impaired.

This tendency is reflected in the fact that many funded pension schemes in both public and private sectors are already threatened with insolvency, thus acting as a drag on the profitability of sponsoring corporations (such as General Motors and British Telecommunications) and pushing state and municipal authorities (such as Detroit and Chicago) to – or over – the brink of bankruptcy. Taken together with the flows channelled to other funds – including so-called Sovereign Wealth Funds supposedly intended to enhance the long-term economic security of those countries that have established them, but actually benefiting few besides the overpaid fund managers hired to administer them – these funds are still diverting 10 per cent or more of developed countries’ GDP annually into assets that are not only increasingly failing to deliver for the supposed beneficiaries but are having a net negative impact on their wealth. Likewise it is obvious that the huge resources committed to these ever more wasteful outlets could be better spent on providing a basic income (including pensions) or other socially useful purposes

7) End of the policy imperative to create employment

Introducing a truly universal, unconditional basic income at an adequate level (at or above subsistence) will serve to break the link between work and entitlement to a minimum survivable income. Thus it will cease to be necessary to have a public policy objective of maintaining paid employment at a given level or to support relevant training programmes beyond what is needed to meet the anticipated demand for manpower. Hence it will not be possible to use the number of jobs that would be created by a particular project or policy as a justification for supporting it – or, conversely, for the retention of one that is no longer needed on strictly economic grounds. Consequently public investment projects will need to be justified on a broader rationale of their economic or social utility, so that support for “white elephant” schemes such as infrastructure or housing projects for which there is no real demand will no longer be tenable just because they may generate jobs.

8) Inescapable need for greater equality in income and wealth distribution

Because of limited growth and employment opportunities large differences in income will be less tolerable than they have been hitherto. Arguably this tendency is already apparent in stronger reaction in the West against exorbitant pay awards to top management (which have often resulted in ratios of 100:1 or more between highest and lowest paid company employees), suggesting that “trickle-down” arguments in favour of high pay for top executives no longer convince.

We may hope that in such a political climate belief will grow in the need to create a society and economy giving importance to stability and cooperation rather than growth and competition. Despite the reduced impetus for growth there will still be a continued desire of certain individuals or groups to secure a higher share of value added for themselves at the expense of others. While to some extent this may be inevitable, it will be important to find ways to discourage this tendency, not least by maintaining highly progressive taxes on income and profits.

Conclusion

Taken together, the developments described above must surely be viewed as amounting to irresistible pressure for radical change in the global economic and social order. Only such a context, it could be argued, could create both the necessity and the possibility of introducing such a transformational measure as UBI. Its full implications, in terms of the changes to our institutions and way of life that will flow from it, are hard to foresee in detail. It would, however, be realistic to expect that they could encompass:

a) A reversal of the pressures for greater centralisation that have long been evident under industrial capitalism. This will result from

  • The greater possibility of meeting demand for goods and services based on local, small-scale production units
  • The reduced need for workers to move long distances (whether within or beyond national borders) from their homes in order to secure a livelihood – thereby avoiding the socially damaging consequences of family separation that typically results from such disruption.

b) An end to competitive overproduction;
c) Marginalistion of private profit as the main determinant of resource allocation, price determination and income distribution;
d) The ultimate redesign of the whole institutional basis for determining the allocation and distribution of resources and value added – whether on a local, national or international basis.

Clearly neither national governments nor the leadership of supposedly key international agencies such as the United Nations, IMF and OECD have even begun to recognise the significance of such trends, let alone consider how to address them. It may be claimed by their apologists that, as with their failure to anticipate the Global Financial Crisis in 2007-8, their inability to do so stems from incompetence or cognitive incapacity. However, it is striking that the implications of such dramatic changes in the dynamics of the world economic and social order are potentially highly disruptive and inimical to the existing pattern of wealth and power relationships. Hence we should hardly expect the existing powers that be to do anything to facilitate such dramatic change even though the benefits to humanity as a whole may obviously be huge. But since such revolutionary tendencies are not only potentially benign for most of humanity but manifestly inevitable we may hope that more enlightened forces will ultimately prevail.

3 thoughts on “Basic Income in a transformed economic order

  1. Harry, I am wondering if you have done any number crunching on Basic Income, and if so where we can find that?
    This is clearly a live issue now and it would be good to see workings of how we can sustain public services and pay a BI.
    Thanks.

  2. I’ve made no attempt at detailed quantification of the net costs / benefits of implementing BI, mainly because – as made clear in this piece – I consider it would only be possible to implement it sustainably under a quite different economic model, where the principal rationale had ceased to be that of promoting growth and profit maximisation. As indicated, under such conditions it would be possible to utilise the 10 per cent or more of value added (GDP) that are presently being wastefully diverted to pension and other funds to paying for Basic Income and other socially and economically useful purposes.

    Please note, however, that even under the present system the UK and other developed countries have sustained much higher rates of taxation than at present (since 1981 the top rate of income tax in the UK has fallen from 83 to 45% while that of corporation tax has come down from 52 to 20 %).

    The best refutation of the unaffordability argument regarding BI that I know has come Dr Richard Pereira of Birmingham University (Universal Basic Income and the Cost Objection: What are We Waiting For?).

  3. ”This would be the result of what seems to be our emerging capacity to supply almost infinite quantities of goods and services (beyond the capacity or desire of the population to consume) at very low cost.” This seems to beg a number of questions. Didn’t Keynes say something like this in the 1930s, viz., ”Economic Possibilities for our Grandchildren” in which he postulated that we stood on the threshhold of post-scarcity and, in his words, ‘economic bliss’ This might be possible, however there exist massive political and ideological barriers to its realization. Solving the economic problems is as much, if not more so, a political rather than a technical problem.

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