It is quite often a struggle to explain this concept, not just to the layman of economic theory but also to very intelligent people by modern standards. Constantly being surrounded by entrepreneurship, it’s the norm for my colleagues an I to cheer on any entrepreneurial endeavors, and to a majority extent rightly so, but to do so blindly is also dangerous from a broader context. Our current economic system, apart from being fairly short term in focus, is aspires the severely vast majority of the time towards serving almost purely individual needs and how an individual (i.e. customer) defines “value”. There are many exceptions to that rule, a concept that Amartya Sen has rightly been a great champion of, but the reason much of economic theory and research is so useful is because homo economicus does hold true for upwards of 90% of the time perhaps. Don’t hold me to that number, I state it simply to express the gravity of the accuracy of homo economicus’ assumptions on our current economic system. For example, “Do I want almonds or cashews, a Ford or a Honda?” Etc.
The blanket assumption within that concept however, is that the definition of “value” from a societal standpoint is on the flip side, too often left out of the picture completely.
To illustrate this using a quite clearly defined example, let’s start with two extreme cases most people will probably agree on. The first is one of a nonprofit that clearly adds value to our society, The Water Project. http://thewaterproject.org/poverty
I don’t mean to hitch my metaphorical ride to their wagon of course. Any organization whose genuine mission is simply to improve the standard of living in poverty-stricken areas of the World will still serve as a valid example. Regardless, The Water Project’s vision is, and I quote directly from their website, to provide “… sustainable water projects to communities in sub-Saharan Africa who suffer needlessly from a lack of access to clean water and proper sanitation.” There is no legitimate questioning to the fact that clean water is an essential part of life and is a clear, no pun intended, added value to both the individuals and their society. However, this is an organization like many other non-profits with similar goals, almost completely driven by donations. By homo economicus terms, there may be indirect benefits but certainly no direct exchange to create “economic value” by those definitions. All revenue of the organization is not derived from the exchange of products or services. In other words, we have a system by which organizations such as this, despite their best efforts to have an enormously positive impact on society, can often struggle to sustain themselves economically nevertheless.
On the flip side, human traffickers, and narcotics & arms dealers can be some of the wealthiest individuals on the planet. By homoeconomicus standards, there’s clearly market “value” to be had otherwise there would be no financial transactions taking place. From a societal standpoint however, there’s obviously a negative and adverse impact from these industries. They cause horrendous detriment to families, individuals, our health care system, our labor markets, social services, and the list goes on. All the while, the simple that fact the market exists to such an extent is clear proof that it meets the standards of pure homo economicus.
I do of course concede however that these examples both represent the extreme ends of the spectrum. They are the low hanging fruit if you will, but the fact our current systems of free market and government are clearly failing, and have failed for centuries, to have a meaningful systemic impact to solve these issues, should be all the proof we need to recognize that more must be done. As Henry David Thoreau once said in “Resistance to Civil Government” 1849:
“Is a democracy, such as we know it, the last improvement possible in government? Is it not possible to take a step further towards recognizing and organizing the rights of man?”
Can we not and should we not also think similarly of Capitalism and the Free Market? To acknowledge their imperfections is not in anyway to encourage socialism or communism as many critics will likely say, it’s simply the recognition that “Our democracy is the people’s democracy, and it can be as great as a people can be but it’s also as fallible as people are.” – George Takei (attributed to his father: Takekuma “Norman” Takei) Our economy is one created by people, born with the same human error in us all. While the input from many can help to limit the system’s imperfections, we cannot and should not assume that it is a perfect system with no possible revisions to be made. We should view our economic system as well as our system of government to have an asymptotic relationship with an “ideal” i.e. “perfect” system, continuously improving over time but never quite reaching perfect, as we know that is impossible. As such, it is in the best interests of all human beings, rich, poor, black, white, gay, straight, male, female, etc. that we question the assumptions of our current economic system and work to continuously revise it toward our ultimate goal which is to define “value” to include both the value to the individual as well as taking into account the value to society.
Think about the incredible ramifications to be had from such a perspective. Right now, our only check to instances where personal value may conflict with societal value is through government regulatory bodies such as: OSHA, the EPA, DOH, etc. Clearly these serve a purpose to society, thus the reason for their existence. Having healthy work environments and standards for food quality add enormous societal value on a larger, long-term scale, but the system in place for doing so through government regulation is not only inefficient, but ineffective in many cases.
Now imagine an economic system where the market forces vis-à-vis the definition of “value”, the very fundamentals of the system, take into account many of elements these regulatory bodies control. It suddenly becomes to the economic benefit of both consumers and providers to have a healthy work environment for employees, to take food quality into account, to consider impact on climate change. If you think that’s currently the case on a mass scale, please consider how many of our products are produced in East Asia with lower labor costs and labor regulations. More to the point, this concept enables a system whereby the entrepreneurs behind The Water Project become multimillionaires and the drug lords go broke. A system of significantly reduced government regulations and oversight, not simply to reduce “costs” but because much of their oversight become obsolete or redundant now that it is has been incorporated into the very fundamentals of market forces to the benefit of all consumers and producers.
Sure this all seems a bit abstract, and admittedly it is in 2014, but the vision is now there, the concept is appealing and importantly it is plausible. It’s the road from where we are now, to a system where these principles hold true that remains unclear, that still hangs in the balance within the unknowns of implementation. That however, I declare today, as my life’s goal. Perhaps I will not live to see the day where this vision becomes the reality of the norm, but if I make it possible so that the history books may cite my work in the contribution to that establishment, even through the work of others, I will have considered my life a successful one.