Addendum 2: Introductory Notes on New Economic Theory

The following are some simple notes on what I think are some very basic fundamental issues to consider for the rebuilding of a new thinking on economics. They have been dealt with mainly in Cadmus and other publications since 1978. However all the major issues might appear dispersed and priorities are not always clearly perceived as such. In addition, they are all strongly interrelated. So let me reassume here the priorities:

Over the last two centuries the Industrial Revolution has become the key priority issue for economic, social, as well as historical and cultural development. On this basis Adam Smith wrote “The Wealth of Nations” and unintentionally founded economics. Economics as a discipline is still today a consequence of the Industrial Revolution as such. It is very important that this starting point is understood.
At the time of Adam Smith the majority of those involved with economic issues insisted that the key for producing wealth was agriculture (the same type of “economists” today think that industrialisation is the basic first reference and priority). Quesnay (“the basic economica activity is agriculture”) and others did not perceive the dynamic potential of industrialisation which became the prime factor for development from the eighteenth century.
Today, the implicit foundation of economics based on the almost exclusive priority of the industrial process is misleading. Services are now by far the dominant factors determining economic and social development (whereas Smith considered them secondary in his time), in all economic sectors (including agriculture and manufacturing). Most services consist of delivery systems such as education and health care which function very differently from unit production of products by industry. The main investment is in the system, rather than the individual product. We should never forget that there are no services without products and vice versa. In most cases technological developments decrease the cost of “products and increase the costs of services (performance and management) attached to them.
The key issue is then the notion of value. In the classical Industrial Revolution, more useful products meant more value. Their use (and destination) was the key point.
Economic value is also of course necessarily a relative human concept. On what is it based? It should be based on values to human welfare (see again Adam Smith) rather than simply on costs alone. Many things that cost in many cases have negative value to humanity.
The notion of use value has been substituted in practice in the service economy by the notion of “utilisation value”. The difference is based on the acknowledgement of a time period.
Value (use value) is normally related to an equilibrium market situation (which is alright in a traditional Industrial Revolution situation), finally sanctioned by a price (or an analogy of a price), at a given moment. The philosophical reference is static (in some cases it is a comparative static – see Samuelson). Such equilibrium would be increasingly more complete thanks to growing knowledge and information – in the case of utilisation value. In order to produce wealth we have to acknowledge a process starting with research (largely a probabilis­tic system), followed by “production” (integrating planning, finance, security, logistics etc.) where service functions can easily represent 80% of the costs. We then have distribution and further on the utilisation phase (based on a hypothetical duration). Finally there is the waste management phase. All this is a probablistic process, including future performances (which exclude perfect equilibrium). Value then depends on its positive period of utilisation. This can be variable and is normally extended into the future. The quest for wealth then is based on the management of a series of uncertainties.
Use value and utilisation value are then two fundamentally different concepts, based on very different perceptions, philosophies and realities.
One could dare say that economics today represent the kind of difference which has already grown in physics for about a century between a Cartesian-Newtonian vision (often aiming to provide a deeper vision of objective “reality” as such – even Einstein said that God does not play with dice) and quantum physics, where the issues of uncertainty and probabilities are central ones.
All this implies that economics has to rethink basic issues such as: what is value? How do you “produce” it? How to manage and monitor uncertainty? How to integrate monetarised and non-monetarised assets? How to monitor the transition from one to the other (and vice versa) and which ones represent a positive or a negative development? What do productivity and capital mean? etc.
Most likely the present discussions on the economic crisis increasingly become more dependent on the limits of economic thinking and analyses derive from the period when industrialisation was conceived as the essential and priority tool for development. Today the tool is still important but increasingly less adequate and it does not really explain “crises”.
The ecological movement will probably become increasingly more efficient if it really contributes to the rebuilding of the new economics. The opposition between “ecology and economics” is deadly for both. But they first have to start to redefine “value”.

The notes which form Addendum 2 are the author’s, as discussed at the Trieste Forum on 5 March, 2013 on Science and Technology: Impact on Society and the Economy organised by the World Academy of Art and Science at the ICTP (International Centre for Theoretical Physics, Grignano, Trieste)