The Imaginary Economy: a new conception

by Mario Fabbri

  5. The fact that a high number of jobs are unproductive but procure income for those who perform them is perfectly compatible with the constraints of market competitiveness. In fact for companies, being competitive does not mean avoiding unproductive work, but only not remunerating more of it than competitors do.

  6. In line with the innate characteristics of the social animal homo sapiens, in contemporary societies a collective reality is formed, in which all this takes on the aspect of obvious necessity. Even if, due to the speed of change, oddities and inconsistencies might remain here and there, poorly integrated into the overall picture.

  I hope that the kind reader who has followed us so far will agree that, by turning attention from lack of resources and limits to production toward the inertia of consumption, i.e. taking into account the presence of the imaginary economy, we can understand what is normally happening much better than through current conceptions of economics.

  These may appear credible only to those who remain respectfully deferent to the authority of today’s economists.

  But if the doctrines of these fellows plainly ignore most of the quite relevant arguments we have discussed here, how could they accurately explain the working of economic mechanisms?

  And if they only provide a partial and inadequate image of what they are talking about, would it not be logical to abandon them without regret?

  The new conception presented here, on the other hand, effectively explains numerous economic and social developments.

  As a consequence it proposes itself as, in the words of Thomas Kuhn, a promising ‘paradigm shift’ for this field of study.

  There remains, inevitably, a lot more to say, a lot more to discover.

  35. A final consideration

  This book has dealt with important themes, but it does not presume to propose that humanity (!) take a different or ‘better’ path than the one it is currently heading along.

  Even if today aspirations of this kind are not uncommon, they are ludicrous, and in any case not in line with our own aspiration, which is simply to identify and describe a crucial socio-economic process which has so far escaped common attention, while staying well away from making moral judgments or exhortations to act.

  Nevertheless, offering some brief reflections, however generic, on future hypothetical changes allows us to better identify the context in which the concepts we have presented move.

  Some, reflecting on the enormous productive potential of today’s technologies which – we have seen – are exploited only to a very limited extent, might be led to toy with dreams of a radical, utopian reset of society.

  But human societies are not designed by moralists, however well-intentioned, because the inherent characteristics of the species set up constraints on human behaviour that moralists are unable to evaluate in a balanced manner.

  And it is also certain that the current situation could not be ‘improved’ by actions designed for the micro level such as – say – ingenious reorganisations of institutions that generate unproductive work.

  We have seen that the effects of such micro interventions would be inexorably wiped out by the logic active at macro level.

  But real change could happen if the social energies no longer needed in the production process came out of the economic system instead of remaining inside and making it complex and muddled.

  In this case, hypothetical ‘social engineers’ should bear in mind the human being’s innate vocation to solve problems, to have something challenging to apply himself to.

  Non-producers should move on to non-economic activities that were, however, still able to satisfy their competitive inclinations.

  For many, for example, some scientific or technological research activity would be quite adequate.

  There is, finally, one very challenging development that fascinates some and at one time seemed to be about to become an imminent part of the agenda, while today it is moving off the radar: the relocation of the human species to outer space.

  Apart from absorbing indefinite amounts of energy and resources, this road would provide all the outlets needed to feed that disposition to surmount difficulties that natural selection has carved out in man.

  APPENDIX

  We have seen that the growth of the imaginary economy may vary from being favourable to being unfavourable to the material well-being of society.

  And this is clearly visible in Italy, which passed from a situation, in the first decades after World War II, when the imaginary economy was a stimulus to economic development, to the current one where it is visibly detrimental.

  The current state of affairs justifies the anti-crisis recipe I outlined some time ago,1 and which I can now more clearly synthesise as:

  we need to worry about the real economy,

  and not waste precious energy on the imaginary.

  But to examine the nature of and prospects for the current Italian crisis, a much broader analysis would be required.

  A way out of the crisis

  Among the many remedies proposed to combat the current crisis, the most widely recommended today is the ‘rigoristic’ therapy: Italy is in trouble because government taxes/spending and wages have increased more rapidly than in virtuous Germany. In order to make Italy competitive again they must be reduced: the government must carry out a spending review and the private sector must be liberalised, eliminating the many corporative constraints that keep wages high and employment low. But this must be done while balancing the public accounts, and rigorously respecting all commitments with Europe.

  According to ‘Keynesians’, on the other hand, the role of the State must not be reduced but increased: the State must promote investments in productive activities, without covering the respective expense with new taxation, which would further depress consumption. In the beginning national debt will increase further, but soon an economy that is flourishing again will boost tax revenues and set things straight, avoiding the long hardship prescribed by the rigorists.

  Those focused on the ‘tax wedge’ say labour costs are too high because of taxation and parafiscal charges. Businesses must be relieved by shifting taxation to the non-productive sectors of society, or by increasing debt Keynesian-style: employment and output will grow and things will go back to normal.

  Others finally point out that there have been similar crises in the past, when the difficulties of national producers, who had become less competitive than their foreign competitors, tipped the balance of trade into the red, depressing the Lira, which became increasingly less welcomed as payment for imports.

  In the end the Lira was officially devalued and the results were excellent. The last time, in 1992, instead of the burst of inflation predicted by the rigorists of the time, the manufacturing sector rapidly regained competitiveness, immediately generating a trade surplus, reviving the economy and also repaying the non-producers who were initially penalised by the higher cost, in devalued liras, of the imported goods.

  But today the remedy has become more difficult because we are members of the Eurozone: to use the same system we should leave the Euro, recreate a national currency and then devalue it, which could give rise to difficult problems because many of our commitments are in euros and there is no agreed way of managing the transition.

  Rigorists declare that these difficulties are irresolvable and they have a point. For example, through the ECB we are in debt with the other countries in the Euro, first and foremost Germany, for over €200 billion, primarily for goods imported in the past: can we really reduce this debt with a currency gimmick? It does not seem acceptable between countries that, in the common interest, have to maintain good relations with one another.

  But even the rigoristic script is at fault. For example, although it is surely appropriate to improve the functionality of the State machine, simply cutting its costs ‘to save money’ as if it were a normal private
company would not be beneficial but detrimental, because the costs of the State are – who would have thought it? – the incomes of millions of people and reducing them would further weaken economic activities.

  Things would be different if the resources removed from the public sector were immediately reemployed in the private one, as the free-market gospel implies. But in real life things move very slowly and instead of improving the situation, these cuts would worsen it, as those fortunate enough to have eyes can see.

  On this Keynesians agree, but even their remedy does not hold water. The idea that investment infallibly revives the economy is seductive, but experience tells us that the result is not a foregone conclusion: in a country like Italy the most predictable outcome is that billions will be earmarked for projects that are great on paper but unsubstantial in reality, with poor returns.

  And even adjustments to the tax wedge pose problems: it is wise to lighten the burden on labour, but understanding ‘labour’ in its broadest sense, as the many looking for tax reductions demand, would lower State revenues too much, causing the deficit to explode.

  Because the idea, perfect in these witch hunt days, of seeking redress from less fiscally virtuous sectors, whose immense capacity to pay is pleasant to dream about – take the fabled 150 billion of evaded taxes ready to be recovered – only shows that demagogy blunts reason.

  In fact the typical Equitalia2 -style attack on ‘survival tax evaders’ eliminates economic operators that produce more real goods than the many office workers who do not produce anything but appear to be exemplary taxpayers just because on their payslip under “gross income” a figure is printed higher than the one they actually receive.

  And the morally praiseworthy ‘luxury taxes’ have raised very little: less than they have destroyed in terms of closed businesses and unemployed workers looking for social welfare benefits.

  These methods do not increase but decrease the production of goods, thus lowering Italians’ standard of living. Equity and fiscal justice are nice words for dreaming of a luminous future, but instead of delivering bread they destroy it.

  However, a viable road remains because the tax wedge therapy can be reset in a form that makes it really workable: in fact the labour that it is essential to relieve from the tax burden is not all labour but only that producing material goods. Burdened as it is today by levies in favour of ‘worthy’ social sectors, by tortuous regulations and the disaffection of those who prefer less plebeian activities, it is Italy’s real weak point.

  In other words the elephantine service sector can be disregarded and only agriculture, handicrafts and industry relieved: namely the producers of tangible goods, the sole components of the “productive” sector in the sense in which Adam Smith used the term, before it was rendered vacuous and confused by his successors.

  So instead of being dispersed indiscriminately, the benefit will be concentrated where it will certainly be useful, and producers, having become more competitive, with revitalised income statements, will commit themselves serenely to boosting production, reviving exports and contrasting imports, in view of the necessary inversion of the balance of payments, increasing employment and eventually consumption in Italy.

  At the beginning non-producers might be worse off, because in order to boost producers’ tax reliefs, a tax increase could be opportune elsewhere, but they too will afterwards be involved in the general recovery.

  If we think about it, this would bring back the very mechanisms, validated by experience, that make the devaluation of the currency effective: the logic would be very similar but the currency would not be touched, as it is not opportune to do so now.

  Having ascertained the feasibility of a similar ‘devaluation by fiscal means’, it must be remembered that the Italian productive system is hindered by other handicaps in addition to taxation, particularly of a regulatory and bureaucratic nature.

  But tackling such hindrances requires more time than is available at present, and the measures should be evaluated in a different context from the one proposed here.

  1 MARIO FABBRI, Per uscire dalla crisi, 15 January 2014, www.affaritaliani.it/economia/crisi-mercati-borsa15012014.html

  2 The former tax collecting agency.

  This analysis of economic crises and how to deal with them is taken, with small changes, from La fabbrica delle illusioni.1 Here it can be added that the possible adverse effects of the imaginary economy come under the first ‘critical factor’, and the positive effects under therapy C of ‘income distribution in exchange for nothing’.

  Considerations on crises and economists’ prescriptions

  The anti-crisis remedies of free-marketeers and centralists are very different: the former recommend reducing the size and economic weight of the central government over the people and endeavour to limit or eliminate its direct or regulatory interference over markets.

  The latter instead constantly declare that the role of central government must be increased and, leaning on the prestige of Keynes’ name, they stress that the government should, first and foremost, stimulate investment.

  Is it not curious that both sides continue to propose just one recipe for every crisis, as if there were only one type of crisis, and as if an identical remedy were always appropriate, and always the one that happens to be closest to their hearts?

  In order to carry out a less partisan analysis, we therefore start by noting that we can divide the critical factors setting a limit on production–consumption into three large classes:

  1. The dimensions of the manufacturing system – cf. the ‘productive capital’ of orthodox doctrine.

  2. The public’s great/scant readiness to increase its consumption – cf. the problems posed by ‘under-consumption’ in the final phase of the economic cycle.

  3. The ease/difficulties facing economic operators wanting to interact effectively with each other – cf. shortcomings in money circulation and credit availability.

  A clash with the limits created by one or more of these three factors will always trigger an economic crisis, but the resulting situation will be different.

  To be more precise, we can consider six different types of ‘clash’.:

  1a. The production sector is subject to surplus withdrawals or moral–regulatory burdens that are so onerous they squeeze production, and therefore the ‘real income’ / overall consumption of society – cf. the ‘stagflation’ of the 1970s.

  1b. The manufacturing sector of a given country declines and shrinks because it is exposed to the competition of the more efficient manufacturing sectors of other countries – cf. The great crisis of Italian manufacturers in the 17th century.

  2a. Sales are insufficient because production has grown faster than the public’s ability to consume, which is constrained by ‘institutional’ rigidity – cf. the Sismondi effect.

  2b. Sales are insufficient, as above, but because of the ‘global’ physiological rigidity of society’s consumption – cf. the ‘ceiling’ on the consumption growth rate.

  3a. The economy malfunctions because circulating money and credit decrease faster than the time the market takes to adapt to their decrease – e.g. deflation: circulating money or circulation speed decrease but prices are rigid, generating difficulties and bankruptcy for operators committed to payments at old prices.2

  3b. A too violent type 2a or 2b crisis, rather than the normal end to a cycle followed by a ‘bounce back’, produces a different and more serious situation, in which the economic fabric is seriously lacerated, with the result that inertia and discouragement tend to persist for many years – cf. the Great Depression of the 1930s.

  We consider now four possible therapies:

  A. Reagan-Thatcher: reduction of the tax levy and moral-regulatory pressure on the production sector.

  B. Autarchic-devaluationist: defence of domestic manufacturers by taxing imports, or by compe
titive devaluation of the national with respect to foreign currencies.

  C. Keynesian-inflationist: distribution of income to consumers ‘in exchange for nothing’.

  D. Keynesian-centralist: growth of centrally stimulated investments.

  Notice that remedies declared to be D can instead be C, because consensus seeking politicians like to depict their distributions to friends as ‘productive investments’. See the industrialisation of southern Italy.

  Without considering the pitfalls of classifications, each of these therapies can be suitable for certain crises but not for others.

  Therapy A, reducing pressure on the manufacturing sector, is logical and appropriate for type 1a crises, when the manufacturing sector is squeezed too much by the rest of society.

  Therapy B can give results – at least in the short term – for type 1b crises.

  Therapy C, inflationist with the distribution of income in exchange for nothing, is appropriate in case 3a, when circulating money/payment means are lacking; and also in case 2a, the Sismondi effect, if the higher incomes distributed fuel the spending of institutionally disadvantaged sectors of society.

  In the latter case, even a type-D policy of government investment could achieve results, but only until the increase in income-output comes up against the Malthusian 2b rigidity of consumption, for which it is difficult to find countermeasures.

  Therapy D is appropriate for a case 3b destructive crisis, as shown by the remarkable revival of the US economy achieved by the massive World War II military investments, which wiped out at a stroke the after–effects of the Great Depression of the 1930s by redirecting the economy and overcoming the climate of “inertia and discouragement”.

  This analysis leaves out the case of several simultaneous crisis factors, as well as the complex case of weak economies in the widespread crisis in the Euro, hit simultaneously by cases 1a, 1b and 3a, with national systems so rigid that they make remedy A painfully slow, and European institutional constraints that exclude remedies B, C and D, at least in their traditional form.