The Changing Face of Economics - When Corporations Rule the World - Literature review Example

Introduction The world has generally been stack on an economic model that has not been able to prevent some of the negative consequences that undermine sustainability. The dominant economic model has, however, dominated as the fundamental thinking upon which the world economy is run. A recent remark by Thomas Friedman (1999) could not have come at a better time. This renowned economist asks us to “step out of the normal boundaries of analysis of our economic crises and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it is telling us that the whole growth model that we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall-when Mother Nature and the market both said: ‘no more.” (Friedman, 2009). This call could serve as a reminder to the world to evaluate this economic model that it has depended so much upon. Indeed, this prevailing crisis is a valuable basis for evaluation. There are many lessons that can be learnt out of the crisis about the dominant economic model, and in particular, its effectiveness in regard to sustainability. The economic crisis Several analysts have described the economic crisis that began in 2008 as the worst since the “Great Depression” (Reuters). As is usually the case, the crisis has been characterized by slowed economic activities with the contraction of the business cycle. Analysts have been quick to point out the direction of various macroeconomic indicators. The level of employment, capacity utilization, investment spending, production - which is measured by the Gross Domestic Product (GDP), business profits, and household incomes have all gone down. This crisis started and is fuelled mainly by four factors: the “burst of the United States (US) housing bubble”, the US credit crunch, the growth of economies in the east, and the rising oil prices. What initially was meant to help US citizens own houses resulted in a crisis. The burst of the housing bubble allowed more people to take mortgages, which resulted to lenders engaging is “subprime lending” such that lending occurred to even borrowers who would usually not qualify to get a mortgage for purchasing a home. Several sectors of the economy such as the construction industry, the banking industry, material companies, and realtors (***) were benefitting from this housing bubble. However, since these mortgages were characterized by initial low interest rates but that drastically shot up after few years, several people who took these mortgages were unable to refinance. Note that US banks and other lending institutions had transferred these debts to investors including other banks and investors around the globe. In effect, a “credit crunch” occurred because banks became reluctant to lend money; liquidity became too little in the system. Eventually, several financial institutions including banks were affected and made losses, some even experiencing bankruptcy. The increased prices of oil fuelled by the rising energy demand by mainly India and China’s rising economies also contributed to this economic crisis. Some of the resultant effects of high oil prices are increased prices of fuel as well as increased cost of food. It is worth to note that the high oil prices, which can be described as having recorded the highest level ever, were driven by demand – one of the concepts that characterize the dominant economic paradigm, and which is widely applicable in analyzing economic situations. The dominant economic model The dominant economic model is based on the determination of outputs, prices, and distribution of income in a market using the demand and supply concept. The school of thought is that a competitive market allows price to function so as to balance consumer demands and producer supplies towards equilibrium of quantity and price. This approach to economics is mediated by a theorized maximization of cost-constrained earnings of firms and of income-constrained utilities by persons using factors of production as well as information available, and in line with the rational choice theory (Campus, 1987). The schools of thought in regard to this model propose a system where governments are not supposed to interfere with markets. Thus, the private sectors ought to dictate the direction of the market through factors such competition. Nonetheless, the ideas of Keynesian economics, which features in the dominant economic model to a certain extent, advocates for government intervention in free markets through policy mechanisms such as monetary and fiscal policy. Therefore, in the event of an economic crisis like the 2008-crisis, governments would respond by implementing expansionary economic policies that include raising government spending, reducing taxation, and raising money supply. This model gives the notion that growth is increased means of production (or stocks of capital goods) where factors such as labor, investment, output, and capital goods are factored. In addition, technology is viewed as a vital element for economic growth. The dominant model further makes the assumptions that nations utilize resources efficiently, and there exists shrinking returns to labor increases and capital. Therefore, increase of capital in relation to labor would result to an economic growth. One notable point of this model is that with technology allows production to occur with lesser resources. All in all, use of this economic model has had its share of negative consequences in the world population at large. Robertson (1992) notes that the “current economic strategy to promote growth while changing its character” is entirely infective. In fact, many businesses and several governments have agreed that the present economic direction is not environmentally sustainable. Nonetheless, adopting sustainable economics is not straightforward because of the fear for the unknown results. Nonetheless, these bold steps are necessary because the dominant economic model has continued to destroy the earth, disabled people, and established reliance on wage-labor (Robertson, 1992). Veblen (1898) has described the individual characterized by this economic model as "a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact." In regard to this, Korten (1997) highlights some of the keys aspects of the dominant economic model is characterized: The model insinuates that human progress is driven by sustained economic growth that is determined by the gross national product (GNP). The free market economies where markets are not regulated by the government allow efficient allocation of resources. Globalization, a concept that is realized through removal of trade barriers such that money and goods flow freely in the globe, increases economic growth, encourages competition, creates employment, boosts economic efficiency, raises consumer choice, reduces consumer prices, and generally benefits nearly everybody. Privatization, which involves moving assets and functions from the government to private sectors, results to improved efficiency and effectiveness. The fundamental responsibility and concern of government should be enforcement of the rule of law regarding contracts and property rights as well as provision of infrastructure essential in advancement of commerce. The model, therefore, generally views human beings in a way that suggest that self-interest is the motivating factor for people, and in our society, it is mainly by making money. It insinuates that what is best for the society is that which earns a firm or an individual the most money, that society ought to be established around competition since it is more sensible to compete than to cooperate, and that a society’s well-being and human progress are developed through high levels of spending by the consumer. The Benefits of the model The dominant economic model is beneficial to some extent that can be described as short term. It can be argued that this model has allowed the creation of jobs, growth of economies, wealth and power creation, and enhancement of the living standard, and even advancement of human beings. Nonetheless, these benefits have been short-lived or are not sustainable. For instance, this economic model has been characterized by a boom-slump cycle such with the reality of the economic crisis people are losing jobs and almost every progress made is being reversed. The shortcomings of the dominant economic model It seems that even as economists argue out the best approaches to solve the problems facing the world using the current world economic system, more fresh problems are emerging. Today, the world is characterized by rampant poverty and unequal distribution of wealth with an ever-increasing wealth gap between the poor and the rich. A report by the United Nations indicated that the average earnings of “the top 20 percent of people in the world is 150 times that of the bottom 20 percent” (Kresse, 2007). Moreover, the average earnings of individuals that live in the most wealthy nations is about two times to that of those living in the poorest nations (Kresse, 2007). In essence, the ever widening gap between the poor and the rich is a basis of political and social tension, which leads us to argue about the moral questions of this economic model. The reality with this crisis that began in 2008 is that many people are loosing their jobs and the wealth gap is widening. Since the dominant economic model emphasis on maximization of profits, corporations are laying off their employees to make more profits without the thought of the wellbeing of these people. Moreover, government strategies to resolve this crisis revolve around the thinking that business enterprises need to stay in operation so as support the factors that allow the growth of the economy. These enterprises are less concerned about the welfare of each and every person in the society and only a few people would benefit from government incentives. The model is also responsible for low wages and poor working conditions. Since this economic paradigm - under the concept of globalization - enables free movement of organizations in almost every part of the globe, firms play off countries, cities, and even people against each other so as to get favorable treatment. As a result, these firms pay low wages to workers, they engage child labor, lack to provide pensions or health cover, and operate under low environmental standards. In other words, the organizations transfer substantial amount of their operating costs to the society. Note that these costs are not accounted for even by this economic model. A closer look at the 2008-economic crisis reveals that the dominant economic model is not effective in maintaining a sustainable balance between consumption and production. The increased demand for oil by the eastern countries has necessitated oil producers to produce more oil. The utilization of this commodity, however, is not justified because it doe not match the benefits to the society (Friedman, 2009). The lowly paid workers in organizations that cause the demand of oil to rise brings to our attention the lack of moral standing of the current economic set up. Moreover, the cost of oil does not reflect the actual cost when the damage to the ecosystem is factored. Thus, the use of oil as well as it production results in pollution of the ecosystem that has its own implications. The other consequence of this model is “a focus on short-term” returns (Kresse, 2007). The stock markets are designed such that they act on annual and quarterly earnings. Furthermore, the standard measure for returns on investment commonly known as the discounted cash flow analysis does not factor the benefits achieved beyond about 15 years as valuable. Therefore, corporations normally opt to get higher immediate profits in compromise of rather smaller profits albeit these smaller returns might be obtained in perpetuity. Note that the likelihood that the higher returns are obtained through depletion of the ecosystem or resources is higher, although in calculations the value of this cost is greatly underestimated. The 2008 financial and economic crisis provides an opportunity for people to reorganize the current economic system so a to ensure sustainability. The way forward Since the fundamental thinking that is associated with the existing economic system permeate our outlook of the globe, it is essential to first change the way we view people and their relationships with the global ecosystem. An upturn from this deep financial and economic crisis would be an opportunity to explore ahead of the predicament of this economic model, which disregards the limits of the earth's growth rate. It can be argued - out of the recurrent problems associated with the dominant economic model - that factors such as self-interest, competition, financial profits, and increasing consumption do not represent the appropriate fundamental values that would be compatible with our dynamic process of living. Instead, our existence require that we have “an understanding of, cooperation with, and love for, this reality that brought us forth, and on having our economic systems accord with these values (Kresse, 2007). Korten (1997) has evaluated some of the aspects that defines a sustainable economic model that would serve the world positively and in an appropriate manner: A sustainable economic model should ensure environmental sustainability. The world economy must meet three requirements in order to allow human life to progress meaningfully in the long run. One, the pace at which renewable resources are utilized must not surpass the pace at which the world ecosystem regenerates these resources. Two, the rate of consuming or disposing the non-renewable resources should not go beyond the rates of developing and phasing into use the renewable substitutes. Three, the rates at which pollution is released into the environment should not go beyond the capacity of the world ecosystem to absorb them. An economic model should be just to both the future and the present generations. It should have the ability to provide for all these generation the things that vital in maintaining a fulfilling, productive, secure, and healthy life. The key point is that, even with additional benefits to the great contributors, the basic needs for each and every person must be met without impairing the options of upcoming generations, nor should the economic power distribution destabilize the society. The economic system must also care for the biological and cultural diversity as exhibited on earth while . The economy nurtures the biological and cultural diversity of the planet, appreciating that diversity is vital for our daily living as well as the potential to evolve. A sustainable model should promote the sovereignty of the People. That is, the main purpose under which a human economy is built should emphasize on meeting the people’s needs as opposed to those of government, corporation, or money. People should maintain the right to decide the kind of utilization of the earth that best work enhance their health while ensuring environmental sustainability, economic justice to present and future generation, and diversity in both biological and cultural aspects. Human beings are able to excellently exercise this kind of right if the following factors are considered: 1. That those who possess productive assets maintain patience and that these assets be controlled locally. The essence of this is to his make sure that crucial decisions are rooted in the long-term wellbeing of the people who will bear the ultimate costs. 2. That governance is based on small and local units that allow maximization of opportunity for democracy that is direct and participatory. 3. That the role played by levels of remote system should be to strengthen and serve the local levels in attaining the goals they have set themselves. The sustainable economic model should also be characterized by intrinsic responsibility. In this regard, the participants involved in making resource distribution decisions should incur all the costs associated with these decisions. Therefore, one entity does not have the right to transfer such costs to another entity. The aim of this set-up is to construct economic interaction in order to promote each and every locality stay within its means of ensuring a sustainable environment. The proposed sustainable model also considers the common heritage. A sustainable model, therefore, should allow every person – either in present or future generation – to experience the benefits of these heritage. These include the planet’s environmental resources as well as knowledge of these species that has been accumulated over years. The owners of the environmental resources ought to observe their roles as trustees of the future generations while the people with special knowledge should share it out. Conclusion The remark by Friedman (2009) to “step out of the normal boundaries of analysis of our economic crises” could not have come at a better time. The world has generally relied on an economic model that seems to have fallen short of ensuring sustainability. The crisis that began in 2008 is a wake up call that this economic model has grave shortcomings. The outcome of the crisis has featured increased unemployment, a destabilized social system, global inflation, high food and oil prices, dollar value decline, mortgage crisis, among other negative outcomes. These factors are not in line with the objectives that this economic model is meant to meet. In addition, this crisis stems out from the interplay of the aspects that this model promotes such as the demand and supply concept ,and their relation to production. So it substantial to generalize that the dominant economic model has overlooked the costs that occur over an extended period while emphasizing on the short-term achievements. It is wise, in that regard, to adopt an economic model that has a sustainability dimension. It should be based on values such as environmental sustainability, economic justice, biological and cultural diversity, among others. The bottom-line is adopting a model that is centered on fulfilling the basic needs of human being as opposed to corporations and money while allowing the natural systems to regenerate. References Campus, A. (1987). Marginal economics, The new palgrave: a dictionary of economics, vol. 3, p. 323, New York. Colander, D. C, Rosser, J. B., Holt, R. F. (2004). The changing face of economics, University of Michigan Press, Michigan. Friedman, T. L. (2009). The inflection is near? , New York Times, New York. Korten, D. (1997). 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