The Chain Economy

The Chain Economy

The image that springs to mind when we think of the ‘economy’ is perhaps the most powerful idea in the modern age.

If you are an economically trained policy maker, the image will be a graph of demand and supply.  It is a graph with two lines intersecting, reflecting a natural tendency towards equilibrium.  It tells the story of a self correcting mechanism that self directs towards the best of all possible worlds.

It is interesting that this is the dominant imaginary of the economy, because it doesn’t provide us with a way of thinking about either of the most important economic questions – how do we achieve growth and what is the impact on equality.

The model of demand and supply tells us nothing about growth. It is what is described as ‘allocative statics’, that is assuming technology, labor and  capital are all constant how do we allocate what we have right now in the best way possible. It doesn’t tell us anything about how economic development and growth occur.

It also doesn’t tell us anything about equality. The demand and supply curve aggregate individual choices in a way that assumes we are all the same, and which makes it impossible to separate different social groups.

To address either of these major economic questions, we have to move away from our dominant imaginary of the economy and develop entirely separate models and tools that have nothing to do with our central image.

Recently I was asked to give a first year lecture on the global economy and introduce students to ideas of economic growth, inequality, the political struggles over economic models and the impacts of globalisation. It was an immense brief and not one that you could give using the usual models.

I looked for a unifying image of the economy that I could set up and hang all of these issues on.  The image that I settled upon was the production chain.

I explained Adam Smith’s original ideas about economic growth springing from the gains of specialisation.  I explained how being a jack of all trades that made our own houses, sewed our own clothes and grew our own food made for a pretty poor standard of living.

However, by specializing we were able to develop skills and tools that made us much more efficient at a much narrower task. We could then use our surplus produce to trade with others who were also specialized, increasing our combined total wealth.

I explained how the process of economic development was a process of specialization and  lengthening production chains. It began with cottage industries, grew into the early factories, and today is made up of global value chains that employ thousands and reach around the globe.

Using this image we were able to talk about equality as the distribution of wealth along the chains. Wealth was created by this process of specialisation, but it has been hotly contested where that wealth should manifest along the chain. We could talk about Marxism, unions, and the long political struggles about how the wealth should be distributed.

We could talk about the growth of the welfare state and the century long political struggles that saw the chains regulated to create minimum wages, OH&S and environmental sustainability.

We were also able to talk about globalization, and how as the chains began to cross international borders, democratic governments lost the ability to dictate the rules on the chains. How the victories achieved began to be eroded as governments competed to keep as much production in their own countries as possible.

 

Thinking about the economy in terms of chains not only offers a way of connecting up how we think about the major policy challenges facing us, it also invites us to think about a whole range of new questions.

More on that next time.

 

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