18th Century thinking

An interesting column in today's Washington Post by Robert Samuelson illustrates the problem we are having at coming to grips with the I-Cubed Economy -- because too many people are still in the grip of the 18th Century thinking that defined the Industrial Age. Here is he heart of Samuelson's argument:

Since the dawn of the Industrial Age, this has been simple: produce more with less. ("Productivity," in economic jargon.) Mass markets developed for clothes, cars, computers and much more because declining costs expanded production. Living standards rose. By contrast, the logic of the [Obama] "post-material economy" is just the opposite: Spend more and get less.

Consider global warming. The centerpiece of Obama's agenda is a "cap-and-trade" program. This would be, in effect, a tax on fossil fuels (oil, coal, natural gas). The idea is to raise their prices so that households and businesses use less or switch to costlier "alternative" energy sources such as solar. In general, we would spend more on energy and get less of it.

The story for health care is similar, though the cause is different. We spend more and more for it (now 21 percent of personal consumption, says Brookings economist Gary Burtless) and get, it seems, less and less gain in improved health. This is largely the result of costly new technologies and the unintended consequence of open-ended insurance reimbursement that encourages unneeded tests, procedures and visits to doctors. Expanding health insurance might aggravate the problem. Many of today's uninsured get health care for free or don't need much because they're young (40 percent are between 18 and 34).

Samuelson has never understood the logic of an innovation driven economy -- where less can be more and more can be less. Nor does he appear to understand the basics of the capitalist economic system: that prices set the signals for the allocation of resources.

Let's started with the first quoted paragraph: that it is all about mass production. In the Industrial Age that was true. But we haven't been in the Industrial Age for decades. Even in the late Industrial Age is wasn't about just declining costs - but expanding product choice (something that Alfred Sloan understood when he created GM and Henry Ford had trouble with). Getting more with less is still important. But the "more" is not "more" the way that it was measured in the Industrial Age (as in more stuff). The key word today is really "better."

In the second quoted paragraph, he complains about "costlier" alternative energy sources. Here he fails to understand the dynamics of price signals. The problem with current energy sources is that they underprice the true cost of production by not including externality costs (in the form of pollution, for example). Those cost must be including to get the pricing signals right. As the price for energy reaches its true price, the basic tenet of capitalism is that investment will follow to the area of higher prices, innovation will drive down prices and a new equilibrium will be established. Apparently, Samuelson thinks that this capitalist system can't work in the energy sector and that no innovation (to either increase alternative suppliers or increase efficiency) will occur due to the change in price signals.

One other point. Samuelson complains about "get less" energy. Somehow he forgets what he just said about the whole point of productivity - to use less. Energy is a input to the production process and using less is what will ultimately drive down costs in the entire economy. I wonder, is he concerned that we are getting less computers because they now fit on a microchip rather than take up an entire room?

The same lack of understanding of dynamics of the capitalist system can be said for his analysis of health care. No innovation -- technologically or organizationally -- will occur to change the current cost structure. In fact, it appears from his view that "costly new technologies" are the culprit.

Samuelson's economic view of a static economy -- apparently frozen in the 1950's. While mentioned some technologies in the context of mass production, he goes out of his way to downplay the possibility of innovation:

They've left the impression that somehow magical technological breakthroughs will produce clean energy that is also cheap. Perhaps that will happen; it hasn't yet. They've talked so often about the need to control wasteful health spending that they've implied they've actually found a way of doing so. Perhaps they will, but they haven't yet.

In other words, since it "hasn't happened yet" it never will.

So maybe I should change the title of this posting. It isn't 18th Century thinking; its 12th Century thinking. Things are they way they have always been and always will be.

I think we can do better than that.