From a Market Economy to a Finance Economy

The Most Dangerous American Journey

A. Samli

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137322982
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

In this gripping book, Dr. Samli makes the case that the US economy is shifting for the worse, tilting towards a finance-driven economy, and argues that investing in innovation will bring us out of the recession and back to a successful, market-driven economy.

Chapter 1

American Market Economy: Quo Vadis

General Electric, the company that made light bulbs since their innovation, in 2007 decided to begin outsourcing its next generation of bulbs to China, which caused many job losses in the United States.

The recovery from the 2008–2009 recession has been sketchy at best. But the business sector has been in the black. The stock market recovered, corporate profits went up, but the job market and domestic investment activity did not recover. They remained drastically low.

The American Medical Association (AMA) prevents extra competition by using its political influence to prevent nurses, physician’s assistants, and qualified others from providing services such as midwifery or massage therapy to keep prices high by reducing the choice.

Our finance system has become essentially a secret casino, which belongs to the mafia. The world’s wealthiest companies and individuals in that casino bet with trillions of dollars of other people’s money. If they lose they expect to be bailed out by the government, but if they are making much money they are totally antigovernment.

Millions of homes were sold at exorbitant prices to people who cannot afford them. The end result is that millions of homes are locked into contracts to pay hugely inflated housing prices. But the market value of these houses are much lower.

These are only a few examples of how the American economy is becoming anticonsumer, antiworker, and antihuman values. It has become mean and calloused (Ratigan 2012).

If our economy can be coined as a market economy, then we have to understand what it really means and how that meaning can be implemented to the reality of our country’s daily life. The market economy is based on human values, makes people work, and working people get fair reward for their efforts.

The market economy is the epitome of functionality of an economy. In the final analysis any economy must be functioning at the point that a market system requires. Here, perhaps most of the people in this country have the following question in their minds: Just what is a market economy and how does it function?

The Market Economy

Unlike the prehistoric alternative of being gatherers and the more recent one of being agrarian economies the market economy strictly deals with people. It makes people satisfy their needs by having access to products and services. The market economy makes these goods and services readily available at prices the consumers can afford. In the market economy satisfying consumer needs through effective marketing creates a reward that is called profit. Naturally, the market economy must emphatically emphasize that marketing efforts be fair and reasonably profitable rather than exploitative. In other words, the market economy must be beneficial to all people of the society rather than to only totally profit-oriented people or financiers.

A Fully Functioning Market System

If the market economy is as functional as it may be presented in economics books it will accomplish numerous basic tasks.

The market economy is basically an arrangement that allows buyers and sellers to exchange products and services for money (O’Sullivan and Sheffrin 2001). If this basic condition prevails then a number of additional conditions emerge. Wilfredo Pareto summarized these conditions under the title of “Paretian optimality.” These are: making available the greatest volume of goods for most people in the society, which means, in Pareto’s terminology, no one could be made better off without making someone else worse off. This further means allocations of economic resources in such a way that some people cannot be better off without making others worse off (Pieters 2005–2012). Thus, a perfectly competitive market system is an ideal system where no player could be better off without another becoming worse off. If this is the ideal goal for a market economy how do we explain the aforementioned practices? The market economy should function to reach or at least come closer to that goal and improve the quality of life for all.

Perhaps Pareto’s optimality cannot be achieved totally, but the market economy, at least, could function in that direction, even though ultimate equilibrium as Pareto envisioned cannot be readily achieved.

As opposed to such theoretical equilibrium goals, the market economy followed a series of certain functions through organized behavior systems, which are firms or enterprises (Alderson 1965). What these firms were involved in has been called marketing, but despite the complexity of the market economy, a marketing theory did not attract much attention. It was the earlier work of Alderson (1957) that established the ground work for a theory of marketing that presented a theoretical orientation for the firm’s functionality. From that perspective the firms in the market economy started producing for certain specific groups of consumers; they made the products and services available by storing, transporting, and delivering of goods. But as these activities continued the market economy started showing favoritism and making some firms big, successful, and rich as many others failed. This pattern disrupted the possibility of achieving Pareto’s optimality and diverted the market economy in time to become a finance economy with many key problems for the majority of people in a society, which are discussed in the following paragraphs.

As the market economy became more complicated about less than one hundred years ago marketing emerged as a discipline. Marketing discipline continued from where microeconomics left off. This primarily meant the market system moved in the direction of being efficient, which meant being able to produce greater output with reduced input. Efficiency from a micromarketing perspective, unfortunately, lost the possibility of approaching Pareto optimality, in favor of making more money for individual firms. Many industrial giants functioned in the market system in the way that marketing discipline coined it as being involved in practicing extreme marketing for profit only, rather than for the enhancement of quality of life.

The marketing discipline, although exploring possibilities to constantly perform well in the market economy, did not make a critical difference between the short run and the long run. Thus, the practice of business did not follow the direction of Pareto’s optimality. Profiteering and discrimination against consumers brought the market economy to a point where strong deviations from the earlier market economy advocated by Adam Smith (1779) took place. These deviations were termed “pathological” (Samli and Sirgy 1982). Five pathological conditions were identified:

1. Inadequate levels of raw materials, energy, and other resources.

2. Inappropriate forms of these items.

3. Inadequate levels of marketing information.

4. Wrong direction of prevailing marketing philosophy.

5. Abnormal international marketing practices.

These pathological conditions individually as well as together created a movement at odds with an optimally functioning system.

The situations reached a point where President John F. Kennedy (1963) had to establish the conditions necessary to eliminate discrimination and enhance consumer protection. These were:

1. The right to be informed.

2. The right to choose.

3. The right to be protected.

4. The right to be heard.

None of these conditions have been eliminated (Samli 1992); thus, the market system slowly but surely has been getting away from benefitting the consumer. Even though the marketing discipline had been roughly followed, certain parts of the market economy, inspired perhaps by Pareto’s optimality, appeared to be disappearing.

Quite ignored is the fact that the market system worked on the emphasis of efficiency. But the concept of efficiency has been misconstrued. It was interpreted as trying to make more and more money without considering the society’s well-being. The conditions or activities that worked for the enhancement of the society and for improving economic conditions for all have been ignored. As microeconomics gave way to micromarketing, macroeconomics and macromarketing conditions to achieve Pareto’s optimality appeared to be forgotten or totally deemphasized.

This situation has led to deemphasizing the qualities of a market economy of promoting economic advancement and enhancement of quality of life in the long run. Instead, the total activity was focused on making as much money as possible and not considering consumer well-being or the advancement of the society. While productivity in the industries increased continually, this was translated into more and more profit for some enterprises rather than increased employment that would benefit the whole society (Bloomberg Business Week 2012a).

This short-run emphasis and the economic regression of our society can be attributed to the dramatic change of our economy from a market to a finance economy. This change is primarily based on two key factors: First, the micromarketing discipline during the immediate past half century has developed a number of techniques that have enhanced the financial sector’s ability to make a lot of money; second, an unprecedented greed factor appeared to control the market system.

From a Market Economy to a Finance Economy

During the past three decades or so the American economy has been increasingly guided by the financial sector. This is partially due to the fact that the marketing discipline has developed a high level of sophistication that has been very supportive of the financial sector to make more money in the short run without considering the consumer quality of life and economic progress. Sophisticated techniques of determining market segments, catering to their particular needs, and advanced communication techniques have been generating outstanding profits, which are not benefiting the average consumer or the society in general. Excessive profitability appeared in the national economy in terms of inequalities in income distribution. This inequality in income distribution has become more and more imbalanced over the years. The gross domestic product (GDP) of the American society is primarily concentrated in the hands of about 1 percent of the population. Currently, it has been stated that about 350 people or families in the United States have more money and wealth than 150 million Americans; similarly, the top 1 percent owns more wealth and receives more income than the remaining 99 percent of the society. This basically means that the market economy is in the hands of a group of finance people and is neither reaching the average consumer nor benefiting the whole population. It may be reiterated that the market economy is becoming a finance economy; it is getting further and further away from Pareto’s optimality, which in fact is the picture of the ideal market economy’s performance. As the finance economy conditions described earlier prevailed, it became even worse in terms of creating more difficult conditions for the average consumer. Consumers found it more difficult to find better jobs. Their job security almost totally disappeared. Their average incomes stagnated. These conditions indicated that the American society was facing an intolerable economic predicament. The American economy should be brought back to a balanced situation so that it levels the playing field and all people have equal opportunity to economic well-being. In short a well-functioning market economy, which caters to consumer well-being and to the economic progress of the society rather than making only a select few extremely wealthy, is needed.

The Dangers of Proceeding as a Finance Economy

At least three very critical areas must be considered as the finance economy endangers our economic well-being and therefore our future. First, money accumulates in the hands of a very small group. Second, unchecked financial economy encourages and supports what this author has termed the “greed factor,” which simply indicates making money almost endlessly and harming the rest of the society is perfectly alright without any checks, regulations, and financial conditions. Third, and perhaps the most critical, in the long run the financial economy allows key corporations to grow without almost any social responsibility to the point where they become too big to fail. The author maintains that this finance economy concept must be reversed and the too-big-to-fail concept must be described also as too big to succeed.

Money Accumulating in the Hands of a Few

Those who understand recessions know that generating effective demand is the key weapon against recession. In fact, it has been stated that unemployment is a failure of demand (Reich 2010). This means consumers must have money and some degree of job security. Only under these conditions can new jobs be created. Generating effective demand when the money is accumulating in the hands of very few millionaires and billionaires, almost by definition, indicates that there is no opportunity for creating new jobs. Consumers simply do not have enough money to buy things and demand more and better products and services. Thus, it is extremely difficult to create more new jobs, which is the most important or even perhaps the only way to keep recessions at bay. An important secondary impact of money accumulating in the hands of a group of extremely rich people is that they do not have a high propensity to consume (Dillard 1948; Keynes 1936). This means the rich do not have to spend money immediately and when they do spend, it may go to stock markets, or other nonessentials, and therefore, not at all be utilized in a most effective way. The poorer consumers will spend money wisely on major essentials and simulate basic demand, which is needed to create jobs. This whole process will take place in the shortest run.

But, it must be reiterated that the finance economy is not oriented to generate more employment, economic progress, and enhancement of consumer quality of life. This is due to the fact that, at least partially, marketing is not marketed properly and the economy is going in a rather questionable direction. The financial giants are chasing money as much as possible rather than improving the quality of life for all. There is a key issue that needs to be resolved. As has been established earlier, should the market economy become more and more a finance economy or should there be certain conditions initiated so ...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Exhibits
• Preface
• Acknowledgments
• About This Book
• Introduction
• 1  American Market Economy: Quo Vadis
• 2  The Disappearing Magic of the Market Economy
• 3  Greed, the Unfortunate Financial Disease
• 4  Too Big to Fail or Too Big to Succeed
• 5  Early Indicators If Any
• 6  The Innovation Culture: Where Are You?
• 7  Recessions Are Totally Man Made
• 8  Live but Also Learn to Let Live
• 9  Alice in the Finance Land
• 10  Government: A Partner or Foe?
• 11  Going Forward to a Market Economy
• Postscript
• References
• About the Author
• Index