Ever since Adam Smith, and probably before, economists and philosophers have attempted to reduce the essence of economics to simple principles, coming up with various explanations for various aspects of economics, ranging from “the invisible hand” to “surplus value of labor” all the way to the Laffer Curve, which postulates that there is an optimum rate of taxation, above which actual tax revenues will drop.  This, of course, was the rationale for the Reagan tax cuts.  But for all these theories and studies, economics has been spectacularly flawed in its application to law and public policy, and we now face an economically critical period in history.

Today, throughout the industrialized world, and particularly in the United States, political and economic leaders are faced with a series of economic problems.  First, there is a continuing, and often growing, disparity between the incomes of average individuals and the highest-earning individuals.  Second, growing productivity and profitability is resulting in greater returns to high earners and is not resulting in significantly increased employment, and not enough to keep up with population growth. Third, an increasing number of governments lack the resources to maintain fiscal and financial stability. Fourth, governments and businesses are increasingly reluctant to spend on societal infrastructure, even as more and more of business and society are dependent on such infrastructure.  The combination of the first three situations is leading, in many cases (and those instances will likely increase), to political and social unrest, and the fourth situation, unless remedied, is likely to undermine attempts to resolve the first three problems.

The problem with almost all past economic theory and most political solutions proposed to date lies in more than a few questionable assumptions underlying various theories. The two that seem most prevalent and erroneous to me are:  (1) Individuals and organizations behave rationally. (2) Value is determined objectively.

Recent economic studies have shown that true objective rationality, particularly on the part of individual consumers and business owners, is seldom the case.  Part of that lack of rationality lies in part in the fact that all of us have core sets of beliefs at variance to some degree with the world as it is, and part lies in the fact that we never know enough to consider all the factors. This lack of rationality compounds the problem of determining economic “value.”  From the beginning of economic studies, economists and philosophers have groped to find an answer to the basic economic question of what is “value” is and how it is determined in a working society.

The so-called Classical Theory of economics effectively states that the price/value of goods is determined predominantly by the cost of the labor producing it, and in this regard, Marxism is only a variation on classical theory, since, in Das Kapital, Karl Marx asserts that the difference between skilled and unskilled labor does not factor effectively into the creation of worth.  It’s also clear that salaries and wages are determined by what the employer is able and willing to pay, and that is determined in part (and only in part) by what consumers of goods and/or services are willing to pay.

But consider the following questions.  Why are the employees of Target, Costco, and WalMart paid on very different wage scales?  All three companies provide similar goods to large numbers of consumers, and many of those goods are identical. Why do universities pay professors of similar rank and experience widely differing salaries, sometimes dependent on discipline, and sometimes not?  Why do investment banks and hedge funds continue to pay their CEOs and top executives and traders tens of millions of dollars for services that are essentially irrelevant to roughly ninety percent of the population?  And why has no government ever seriously attempted to recoup any significant proportion of the immense financial losses inflicted on national economies… or taxed them more heavily to help pay for the unemployment benefits for those whose jobs they destroyed?

The theoretical answer to all these questions is some variation on paying the “market rate” or “that’s the way business works.”

At the core of this “market” are the so-called laws of supply and demand.  The idea is that when goods and services are plentiful, prices go down, and when they are scarce, prices go up.  This works well, if mercilessly, in terms of commodities, or commoditized services.  After all, one bushel of durum wheat is pretty much like another bushel, but when it comes to people, the idea has more than a few flaws, and the more complex the society, the more the impact of those flaws is magnified.

And “scarcity” doesn’t always translate into higher wages or greater demand. Despite a demand for math and science teachers, there are never enough qualified applicants, although that’s likely because school systems won’t increase wages enough to spur demand… which points out that, for all the talk about following a business model, organizations and institutions often only do so when it suits their fancy.

Take the commoditized job of a checker at WalMart, Costco, or Target.  Theoretically, checkers provide the same service for the same pay.  Having stood in many check-out lines, I can assure you that the ability of all checkers is anything but the same.  And this is a comparatively simple job.  But because it is a “simple” job, there are many people who can handle the basics of the task, and because a really good checker who wants better pay can be replaced by someone who can just manage the basics, wages stay low…  except Costco pays better.  Why? Because they’ve learned they get better people?  But that means that service jobs are not the same…something that tends to get overlooked in economic discussions.

The same problem exists, if on a higher level, in elementary and secondary education, with an added complication.  While there are a great many would-be teachers with the proper credentials and the theoretical skills, even after years of study, the best analysts can only approximate the factors that make a truly skilled teacher. There are effective and skilled teachers with totally different approaches to exactly the same subject, who both can inspire and produce better students who learn more, and while pretty much every prescriptive and descriptive analysis of teaching can describe the basics of what constitutes an effective teacher, once you go beyond that, it’s all speculation, because truly good teaching is an art.  But… pay and value are determined by average competence, and because excellent teaching is an art, so-called “merit pay” systems have largely failed where they’ve been tried — and likely will in the future.  Yet legal codes and the threat of litigation make it effectively impossible either to identify or reward outstanding teachers. All this points out not only the problem with Marx’s assumption that, essentially all labor in a certain position or field has the same value, but the wide-scale application in industrialized societies of the same principle to all jobs with the same description. 

To make matters more complex, “commoditization” of jobs often is applied perversely, or not at all. As I’ve noted before, in my wife’s university, the professors in the performing arts fields work longer hours, provide more services to the university, and are paid far less, even when they have more degrees and experience than do professors in the field of business. That’s because the field of “business” is considered more profitable… but the job of professors is education, not business.  Likewise… why do college coaches make more than university presidents?  Because athletics are more “valuable” than administering an institution educating thousands, if not tens of thousands of students?  Then, too, on a society-wide basis, women are paid less than men with equivalent time and experience, or even less, in the same professional field.

Finally, consider the high earners in society… who are they?  I looked at the top fifty names on the Forbes list of billionaires, and 30% came out of the financial sector and 30% from the entertainment and communications sector, followed by 20% in food and retail enterprises, and 10% in natural resources.  What does that say about “value” and “rationality”?  Or about the results of blindly following a so-called market economy?

Perhaps, just perhaps, that we really don’t want to pay for either value or rationality, just what we want when we want it, and then to complain about what doesn’t get done that we don’t want to pay for.

After my encounter with an excessive plethora of unexpected internet viruses, and the comments from readers, my wife the professor made the observation, “The law hasn’t kept up with the internet.”  We both laughed, because it is so obvious as to be totally laughable.  It’s also laughable in a sadder way because it’s become apparent that the law will never be able to keep up with the internet… and quite possibly with other aspects of advanced technology.

For years now, a number of high-tech companies have been trying to protect themselves with not only patents, but with secret and secretive production processes, sometimes, I’ve been told, forgoing patent protection because they believe that a patent is a roadmap for a competitor.  At the same time, we have so-called genetics companies trying to patent genes obtained or derived from people and other organisms, which suggests some fairly frightening future scenarios.

Then there’s the growing reliance on high-speed information technology and information transfer.  As I’ve mentioned earlier, nanoseconds matter in the world of securities trading, and the fact that they do requires almost total reliance on high-speed computers and sophisticated algorithms.  The federal government is pushing for standardized electronic medical records, and pretty much every state government, every major corporation, and every federal department and agency is becoming increasingly reliant on such technologies.

And yet, this increasingly complex and interdependent web of information makes both our economy, as well as its underlying infrastructure, and thus not only our economy, but every industry and service, ever more vulnerable to technological disruptions, the causes of which could range from massive solar flares to inspired hackers, dedicated and sophisticated cyber terrorists, foreign computer operatives, and unexpected algorithm failures or applications.

We don’t have a legal structure that is designed to deal adequately with either massive electronic misfeasance or malfeasance, and even if we did, we don’t have the means to track down even a fraction of the perpetrators, let alone a way to legally and physically punish them.  And it’s highly unlikely that we ever will. This is not a problem unknown in human history.  In fact, in a sense, we deal with it every day, because no government anywhere can monitor all its people all the time and deal with all the possible violence they could commit. Historically, social codes have been far more important than laws… but social codes only work well with populations that share common values, which raises the overwhelming question, so to speak – what happens when neither laws nor social codes are able to restrict wide-scale information hacking, cyber-sabotage, intellectual property piracy, and out-and-out information systems terrorism? 

It’s clear that some organizations can muster the technology and skills to thwart or counter such; it’s also clear that most of us can’t, not on a continuing ongoing basis. Nor, at present, do most nations have adequate back-ups and alternative infrastructure and communications systems ready to take over in the event of information system failures on a national scale.  Yet the push for greater information technology integration continues, again fueled by promises of lower costs and greater efficiencies… or at least greater efficiencies until everything collapses.

Why isn’t anyone looking at this problem seriously?  Because, of course, it’s too expensive to resolve… and I fear that when people suddenly realize that something needs to be done, it will be far too late.

…and I’m angry, not quite raging rip-down-walls-mad, but close. Despite two different reputable anti-virus systems, both current, some virus or perhaps more than one, has rendered it useless, so much so that I had to turn it over to computer professionals for rehab.  All the files I need, except one, are backed up, and I can reconstruct that one, if necessary, but the time, money, and inconvenience resulting from this sort of event are more than a little irritating.

And for what?  So that some cyber-psycho can get his or her kicks out of destruction, out of wasting people’s money and time?  Or so that some sociopath can make other people’s hardware and software unwitting tools for some grand nefarious project that will victimize even more people?

I’m fortunate; I have back-ups; and I can afford repairs, but there was a time when this sort of thing would have thrown a huge monkey-wrench into life and family finances… and that’s still true for all too many people.

I’m definitely not a Luddite.  I like technology.  But as I’ve posted before, computer technology opens whole avenues of mischief, crime, and destruction.  It also has destroyed borders in so far as criminal activities are concerned.  Among other misperspectives, the right-wing opponents of immigration reform have totally missed the boat on crime.  Thanks to computers, a lot of the criminals outside our borders don’t even have to enter the U.S. in order to victimize Americans.  Without immigration reform, all we’re doing is making criminals out of those who came here to find work and opportunity and keeping the brightest of the rest of the world from coming here.

Computer viruses, worms, scams, identity theft, and the like are all part and parcel of crimes at a distance, where the perpetrator doesn’t see or have to face the misery he or she has caused, usually is never apprehended, and even if caught is seldom punished in any degree of relation to the harm caused.  It’s just another aspect of the technological desensitization of society, which includes rampant violence in every form of entertainment, sensationalistic news, computer/video games glorifying crime and violence, and the possibility of drone attacks all over the world.

Me, I’d just settle for an active virus-defense system that would immediately wipe the computer of anyone sending me such a virus or worm.

One of the functions that government performs best, in the sense that it is a function that can seldom be performed on a societal-wide basis by any other entity, is the one that citizens often have the least understanding of and/or the least willingness to support, with one or two notable exceptions.  That function?  To keep bad things from happening… or from getting worse once they happen.

Examples of such are police protection, trash collection, clean water, and effective sewer systems.  All of these are well-accepted government services with a large element of prevention embodied in their function. Other preventive government functions are not so well understood or accepted.

At one time, environment standards were fought tooth and nail by industry.  Now various industries fight new or tighter emission standards, but those standards are designed for one function – to prevent the emission of pollutants that harm people, and without those standards we had rivers where nothing could live, and some that even caught fire, air that caused hundreds of thousands of deaths, water supplies containing virulent carcinogenic chemicals… and so forth.

More than a few people have complained about the massive federal government spending on counter-terrorism, now estimated at $150 billion annually, just in the United States.  In 2011, the most-recent year of the Global Terrorism Index, there were 4,564 terrorist incidents that led to 7,473 deaths.  In the United States, there were actually more terrorist attacks in the 1970s than in any decade since – although the 9/11 attack was the deadliest in U.S. history – but since 9/11 the overall numbers of successful terrorist attacks have continued to decline, almost certainly due to increased security measures and, some would say, a certain restriction on personal freedoms.  But consider this.  Since 9/11, only 37 people have died from terrorist attacks and assaults in the United States.  While this apparatus hasn’t prevented those deaths, how many others has it prevented?  How can anyone tell? 

Vaccination is another area of prevention, although some parents still don’t understand vaccination or the need for it, but that’s an area where some quantification does exist. For example, even today, according to the World Health Organization over 100,000 people die every year from measles, yet there have only been few hundred cases annually in the United States over the past several decades, all of which occurred in unvaccinated individuals.  Before the development of the vaccine, there were often close to a million cases a year in the U.S., and as many as 7,000 deaths.  More recently, nearly a million people died world-wide annually from measles in years before 1999, when more wide-spread use of vaccines became available.  Yet in recent years, there have been parents who insist that the vaccine is more deadly than the disease, despite long-standing figures that shown mortality from measles ranges from one death in a thousand cases in healthy and well-nourished individuals to as high as 300 in a thousand (30%) for weakened or malnourished individuals.  By comparison, severe side effects from the vaccine are less than one in a million, and fatal side effects so low that they cannot be quantified.  For all that, some parents still insist that their child is safer without being vaccinated.

Another area of successful prevention is that of automobile safety. The all-time high in automobile deaths was almost 55,000 in 1972, when the population was a third lower than it is now, but by 2011, that had dropped to 32,367, the lowest total in 60 years. Since 1960, the number of vehicles on the road has tripled and population has increased by 50%, yet automobile fatalities per 100,000 people have been halved.  The cost?  Adjusted for inflation, the cost of an average new car is roughly 140% higher than that of a 1973 new car, when the first significant mandated federal safety standards were imposed.   Assuming that no such standards were implemented, a conservative estimate suggests that we would have seen roughly a half-million more deaths than actually occurred, and most likely at least as many additional injuries. The problem with trying to quantify the costs is that it’s impossible to determine how much of the reduction in fatalities comes from improved design and how much from safety features and other factors, such as seatbelt laws.  That preventive measures have had a huge impact isn’t even in doubt, but we still have thousands of deaths a year because drivers don’t wear seatbelts, either because they don’t think it can happen to them or because they’re exercising a perverse form of civil disobedience.

Similar questions arise in healthcare.  Some critics have pointed out that the largest cause of death in the United States is heart disease, followed by cancer, strokes, and hospital infections.  Yet the most effective form of prevention is a healthy life-style, particularly avoiding obesity, tobacco use, and excessive consumption of alcohol while engaging in regular exercise. For all that knowledge, over forty million people still smoke, and over 30% of the population is obese, while excessive consumption of alcohol is a problem faced by at least 15% of the population. The cost of a single day’s treatment in a hospital for someone with a suspected heart attack can easily exceed $5,000 and the course of treatment for an actual heart attack can run many times that, and we – or our insurance carriers, or both – as a nation spend an estimated $500 billion in healthcare expenditures that could be greatly reduced if more people made, or were able to make, a greater effort toward a healthier lifestyle.

Some kinds of prevention, such as requiring vaccinations, drastically reduce death rates and costs for a tiny fraction of just what burial costs would be.  Others, such as automobile safety features, are still obviously cost-effective, but both are effective because the prevention is not only required, but it can be largely implemented.  Basic environmental standards are clearly cost-effective, but regulators and attorneys continue to argue about the need for tighter or additional environmental regulations and whether they improve health and the environment compared to the cost to those who must comply.  Nonetheless, some kinds of prevention can only be accomplished by government.  No individual, for practical purposes, can prevent air and water pollution or require automotive safety standards, or clean drinking water and safe sewage disposal.

In healthcare, the matter is even stickier.  Healthcare providers – or the government – cannot not only not require people to adopt a healthy lifestyle, but are greatly limited in requiring people who maintain unhealthy lifestyles to pay their full share of the additional healthcare costs required by such individuals. In fact, the current direction of U.S. healthcare is away from requiring individual responsibility, even as a host of government regulations require it in other areas.

Prevention — who pays for it?  Who should?  How much? And to what degree should people be made personally responsible for their own failures to prevent the preventable?

A recent Associated Press news story highlighted a fact that we all know – CEO pay has been going up again ever since a brief two year decline following the initial 2007 economic meltdown, and is now at its highest level ever.  In 2012, according to data from Equilar, an executive pay research firm, the “average” CEO made $9.7 million, up 6.5% in 2012 from 2011.  By comparison, the pay for all U.S. workers rose an average of 1.3% per year over the last three years.

Even more interesting is the fact that the two highest paid CEOs were from the entertainment and media industry, with the highest compensated CEO raking in just over $60 million [not including deferred stock compensation].  In fact, five out of the top ten were in entertainment and media.  Another interesting fact is that the area with the highest average CEO pay is health care, while the lowest is that of public utility CEOs, not that they’re exactly impoverished with an average pay packet of $7.5 million.

There are a number of conclusions one might draw from this, but the one that stands out, at least to me, is that the highest paid executives come from the field that provides the least tangible value to its consumers.  We need food, water, shelter, power, heat, and medical care.  We don’t physically need packaged entertainment.  While everyone complains about the costs of health care – and in most cases those costs are far too high – especially when one considers the pricing model of the pharmaceutical industry, where U.S. consumers foot the bill, and the rest of the world gets lower-cost prescription drugs – health care does provide a tangible benefit and has improved our lives.  I’m not sure we can say that about the U.S. entertainment industry.

But entertainment – and today’s media is in fact entertainment, including almost all so-called news – obviously fills a psychological need – and one for which people are willing to pay – and one that is extraordinarily profitable – just like the illegal drug industry.  Come to think of it, there’s a certain similarity.  Both have products that make their consumers feel good, and both have negative long-term effects… and the content of both is essentially unregulated… and both are highly profitable for those at the top.

And like it or not, how we as a culture spend our money and reward those who provide goods and services says more about us than we’d like to admit.