The Imaginary Economy
The imaginary economy is that large fraction of the economic system which produces services with the only real utility of furnishing an income to those who provide them.
It is the spontaneous remedy to the fast productivity increase in the manufacturing sector, to which, due to the social inertias described in this book, the rise in the consumption of society is not equally rapid.
The divergence between technically feasible production and actual consumption has visibly reduced the number of blue-collar workers and peasants in the population and inflated, for compensatory purposes, a gigantic service sector which must be unproductive of material goods, brimming with employees, managers, consultants, supervisors and various employees with duties difficult to understand and explain.
Namely: the advance of automation in factories increases the number of forms and signatures needed to open an account in banks.
The fact is that this ‘solution’ is generating problems in turn, and brings out numerous absurdities and oddities in the economic system.
They have inspired several critical and satirical considerations but, so far, no clear explanation of what is taking place.
It is exposed here, leveraging on mechanisms neglected by economists but well-known to sociologists, which provide the logical explanation of many absurdities which today have become frequent in everyday reality.
This book does not recommend ‘remedies’ nor divulges moral proclamations, but what it brings to light concerns anyone interested in the economy, because it renders obsolete much of the conceptions and exhortations that today pass for sacrosanct among economists.
THE AUTHOR
Mario Fabbri, a scholar of human sciences, was born in Novara in 1949.
After graduating in electronic engineering from Polytechnic of Turin and getting an MBA at INSEAD in Fontainebleau, in 1975 he entered in the confectionery group FERRERO where he held various positions, latterly organizing an in-house division providing IT services to Group companies worldwide. In 1995, with two partners in Turin, he founded Directa SIMpA (www.directa.com), world pioneer of online trading in the financial markets and still sector leader in Italy.
Mario Fabbri is Directa’s CEO.
Other publications in Italian: in 2103 La fabbrica delle illusioni [Factory of delusions], about the severe faults of current economic theories, and in 2015 La rovina delle nazioni [The downfall of nations], about the collapse of some ancient civilisations and the less serious but somewhat similar 17th century economic downturn of Southern Europe.
cover
M.C. Escher’s “Waterfall”
© 2017 The M.C. Escher Company - The Netherlands.
All rights reserved. www.mcescher.com
The image on the cover, like many others of M.C. Escher, is available from the site http://www.mcescher.com
Translation
Alan Nixon, Mario Fabbri
Proofreading
Joanna Pyke
digital edition
eBookFarm
edition
© 2018 La fabbrica delle illusioni srls (Torino)
mailto:fabbricadelleillusioni@gmail.com
ISBN 978-88-9432-792-2
First digital edition: April 2018 v. 1.52b
All rights reserved.
Table of Contents
Argument of the book
FIRST SECTION – The factors in play
1. A different view of economic development
2. Economic cycles and post-war periods
3. Economic development and social constraints
4. An alternative hypothesis
5. Keynes: half under-consumptionist, half orthodox economist
6. Answering two objections
7. The disadvantages of specialisation
8. The central role of the upper classes in the introduction of new forms of consumption
9. Henry Ford’s intuitions
10. The Sismondi effect
11. Further reflections on the Sismondi effect
12. Why do people want to work?
13. Complaisance
14. The ubiquity and sociobiological origins of complaisance
SECOND SECTION – The imaginary economy
15. The imaginary economy
16. The amazing capacity of the service sector to expand
17. The imaginary economy distributes the products of the real economy in society
18. The unstoppable growth of excipient costs
19. Some brief looks at the imaginary economy
20. The dynamic of complexity
21. The micro-macro fallacy
22. The inexhaustible sources of unproductive labour
23. The low visibility and normal ineliminability of inefficiencies
24. The neuroses of big companies
25. Why the price of bread moves away from the price of wheat
26. The useful concept of ‘causation by disappearance’
27. A general overview
28. The imaginary economy can stimulate economic development
29. The imaginary economy can be irrelevant to economic development
30. The imaginary economy can harm economic development
THIRD SECTION – Why does imaginary economy escape common awareness?
31. Premise: the advance of irrational thinking
32. Reality as a social construction
33. The policeman of reality
34. Summary
35. A final consideration
APPENDIX
A way out of the crisis
Considerations on crises and economists’ prescriptions
On the futile use of mathematics in economic theories
Story of Ylati land
BIBLIOGRAPHY
INDEX OF MAIN CONCEPTS
QUOTED AUTHORS
Argument of the book
There are plenty of economists,
it is economic science that is not there.
Sergio Ricossa1
The aim of this text is to present a conception of the economic system that is new and more appropriate than those current today, the weaknesses of which I examined some years ago in La fabbrica delle illusioni. [Factory of Delusions].
Suffice it to think of their inability to make robust predictions or of the irremediable contrasts between opposing theoretical schools. It is a kind of diatribe that would be given short shrift in any serious science.
The conclusion was that economic theories are not born out of dispassionate study of economic facts, as economists are usually mere factious propagandists of a political line: free-market or centralist.
They imitate physicists in their lavish use of mathematics, which does not, however, serve to make their predictions more precise but only to give a scientific look to fantastic constructions that are detached from reality.
It is an instrumental use that leads them to make egregious mathematical mistakes that would immediately come to light if mathematics were to be used for concrete purposes. In this regard, see On the futile use of mathematics in economic theories, here in the Appendix.
And my criticisms were certainly not isolated, as today there is almost a specific branch of essays specifically aimed at bringing economics to task. Just look at the title of the essay Open letter to the economic gurus who take us for morons, by the economist Bernard Maris, tragically killed in the Islamist attack of January 2015 in Paris at Charlie Hebdo.2
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But a simple argument lays bare the futility of current doctrines:
To build theories of human economic behaviour, what sense can there be to rely on highly sophisticated mathematical constructions, as economists do, while carefully avoiding any consideration, as if it were irrelevant, of what sociologists, psychologists and historians have observed on the ways men behave?
Here in fact, to present our new ideas we will not use mathematical formulae, but consider those socio-psychological mechanisms that are so important to human behaviour but are ignored by economists.
And we will not confine ourselves to generically recommending a new and better road for future research, but will make strides along it by developing the crucial concept of the imaginary economy in which we aim to incorporate the huge mass of activities that today are considered ‘economic’ but do not in fact produce goods or real services – like those in the medical field – and essentially only carry out the function of distributing income to many members of society.
From this new perspective, it becomes surprisingly easy to understand a large number of behaviours and developments that are crucial for the economy but which are normally ignored by economists.
The logic that we will examine impacts all human societies to some extent, but here we will focus on its most spectacular outcomes that can be seen in the rich and technically advanced societies of our time.
A note to end with: some readers might be disturbed by the forthright tone of some of my remarks. My intention is to present some ideas for the reader’s critical consideration that seem to me deserving of attention and reflection, while keeping them as simple and clear as possible and without watering them down with too many mitigations or precautions.
Such an attitude would only have the effect of dragging out the discussion without ever producing a perfect result immune to criticism. Not the right choice for a text it has been my intention to keep concise and readable.
The text is divided into three parts:
a presentation of the basic factors that produce the imaginary economy;
a quick review of its more relevant logics and characteristics;
an inquiry into why its presence escapes common awareness.
▶ For a quick overall view of the terrain which we will cover, you can read the short Story of Ylati land, here in the Appendix. I wrote it several years ago, to present simply and clearly for the benefit of acquaintances some of the logics that are developed here in much greater detail. Some readers have found this a clever detour.
1 RICOSSA, Come si manda in rovina un paese, p. 78.
2 The French title was Lettre ouverte aux gourous de l’économie qui nous prennent pour des imbéciles but the book has not been translated into English.
FIRST SECTION
The factors in play
1. A different view of economic development
The object of our investigation is the imaginary economy: the growing part of the economic system that claims to be ‘productive’ and is not.
To assess it fittingly, we need a new repertoire of concepts that we will now present. The reader is warned that what he will find here is in irreparable contrast to the conceptions now current among experts.
The most straightforward way to present the new logic is to start with the trend in average real income in the United States from the country’s birth to the present day:1
The vertical axis is not linear but logarithmic, so that a constant growth rate is shown as a straight line: the steeper the slope, the faster the growth.
Now, from the 1840s to the present day, average income, which has grown by a factor of 25, has clearly followed a straight line, albeit with small oscillations at the beginning, the famous 19th century economic cycles, and the dramatic zig-zag of the Great Depression of the 1930s.
But, with the exception of these temporary irregularities, average US income has grown at an incredibly stable rate of 1.9% per year for 170 years.2
Over this long time-span everything has fluctuated in the American economy: import-export policies – protectionism/free market – interest rates, foreign exchange rates, the political climate, the amount and destination of investments…
What are we to think then of the adamant statements of economists and politicians that the adoption of this or that policy, dear or odious to their hearts, had or would have really changed the situation of the country?
What are we to think if the American economy, apart from some limited fluctuations, from which it always recovered perfectly (!), continued to grow undeterred at the same rate for longer than a century and a half?!
I was certainly not the first to see this, but so far it has remained one of those curiosities that economists pay little attention to, in keeping with their tradition of ignoring what they are unable to explain.
And finding an explanation was impossible for them, because the trend of average US income is at irreparable variance with the ideas developed by economic theory along the road it took two and a half centuries ago.
In fact, its extraordinary linearity clashes with the idea proposed by Adam Smith in 1776 and basically upheld by most until today, that a country’s economic growth is the simple outcome of the expansion of its production sector.
But – let’s ask ourselves – how could the combination of the somewhat random sequence of inventions and technological innovations and the ever-changing investment decisions of industrialists produce such a steady growth rate over such a long period of time?
Such linearity, however, also suggests what a different road theory might have taken, because the remarkable stability of this 1.9% leads us to suspect that there is some ‘physiological limit’, different and more stringent than mere production capacity, that has put a cap on the growth rate of per capita income.
The most logical explanation is that the speed at which American society assimilates new forms of consumption has precise and very stable limits.
In other words, the thought crosses one’s mind that having achieved independence and following an initial period of adjustment,3 US society set about raising its standards of living as fast as its ‘nature’ allowed, and that, this nature, has remained remarkably unchanged to the present day.
We will see how easy it is to find elements supporting the existence of a speed cap for assimilating new forms of consumption, and we will explore its impact on economic development.
Now we have two premises… the first is that we will use the term ‘consumption’ with a broader meaning than is common, equating it simply to the usage of income for any purchase, regardless of the purpose.4
In fact purchases, whatever the reason for them, always feed the activities of the production system to some extent. And Keynes refers to their overall amount as aggregate demand.
Within this he ascribes a central role to the portion, distinct from consumption, called investment because – in this remaining faithful to Smith – he believes the expansion of the production system to be the direct cause of general prosperity. Our ideas are different and we can simplify the terminology.
The second premise is that we will reflect more on the consumption of tangible goods than of services, because tangible goods are the ones that are truly essential. And simplifications, if they lead us to focus on their logic, may actually be beneficial.
Furthermore, a distinction has to be made between health services and services such as tax consultancy, but it is difficult to make this clear, at least until we explain what should be understood by “the imaginary economy”.
So let’s begin by pointing out that in a society every form of consumption corresponds to a habit, a part of everyone’s normal way of life, or to a novelty that is finding a place among pre-existing habits.
And this finding a place is usually the result of a typical process: from its first introduction in innovative social environments
to its subsequent wider adoption that changes the habits of a large part of the population.
And here we must consider that changing one’s ways of life, even for the better, always entails a certain amount of stress and therefore, even if the flow of attractive available novelties were extremely rapid, some limit in the speed of their possible adoption must surely exist.
Let’s imagine, for example, the effects of a systematic rise in consumption of – say – 7% per year:
there would be a doubling of living standards in ten years, a four-fold increase in twenty, an eight-fold multiplication in thirty…
three quarters of a sixty year old man’s consumption patterns would have come into use after his fortieth birthday, and he would have to expect similar changes in the next twenty years, so that by the age of eighty, he would be living his last years in a world where forms of consumption had multiplied 256 times compared to those of his early childhood.
This is surely not compatible with the rate of adaptation of any possible human society.
Novelties and changes can be useful and fascinating but they also engender a psychological cost; and if the cost is too high we just stick to our old habits. This must put a cap on the growth speed of living standards and so of economic development.
Could this resistance to change be the factor which for nearly two centuries has kept the growth in American society anchored so precisely to 1.9% whereas – we have to think – technical and productive factors might have allowed a faster growth?
Here is a first clue pointing in this direction: in early 19th century Britain, the Industrial Revolution and with it the adoption of machinery triggered an unusually rapid supply of goods. It was precisely at this point that a number of ‘under-consumptionist’ authors began to note a resistance in society to raising consumption habits at the same speed, thus pinpointing the real limit to economic growth.
Thomas Malthus in 1820: