The income gap continues to widen in spite of President Obama’s efforts, the economy continues to slog along at a snail’s pace in spite of record Federal government deficits, unemployment and underemployment continue to worry workers, and our youngsters continue to face bleak prospects.  Time to face facts, we are definitely in the “New Economy” or the “New Normal.” 

Old remedies no longer produce the economic recovery we desperately want.  There are fundamental changes that work against this and it is time to revisit basic economics in an attempt to find new solutions for new conditions.

The first subject to address is our basic understandings of economics and the first item here is our definition of economics.  The textbook definition has been, “to allocate scarce resources,” presumably to maximize output.  Since college days I have argued for a new, more realistic definition, “to satisfy the perceived needs of the people.”  The key word here is “perceived” since I argue that we should supply whatever the market wants, not satisfy needs from a preconceived script of what one needs.  The Soviets tried to do that and failed.  Moreover, perceived allows for unlimited needs to be filled and is thus more dynamic than the old definition.

The other major adjustment to be made is to the basic tenet of our capitalist system, one takes from production according to his contribution, usually in the form of work.  To function this means one has to have a job in order to contribute thus no job no sharing in the production.  The reality of today is that not everyone has to work to provide all we want.  The latest example of this is that in the wake of the massive job loss in 2009, some 8-9 million jobs lost, companies have managed to maintain the same level of production with fewer employees. 

At the beginning of the 20th Century over 50% of our work force was in agriculture.  By the end of the century less than 4% of the work force was in agriculture.  Many of the jobs lost were replaced by jobs in industry and by the middle of the century some 26% of the work force was in manufacturing. However, that number fell to less than 14% by the end of the century.  Add to this was the massive entry of women into the work force when their participation became expected, and not exceptional.  

Fortunately the jobs lost by agriculture and then manufacturing and the massive number of new jobs needed for women entering the work force were created in the service sector and by the end of the century this sector accounted for 80% of the work force. 

What appears to be happening now, however, is that major technological changes are reducing the need for service sector employees.  What we now have is a cap on new job creation. And while that means fewer opportunities for workers, it also means that they have no way to participate in the distribution of the output, no contribution, no participation.  The Soviets also tried to work around this dilemma by distributing according to “one’s needs, not contribution,” but that experiment also failed.

We definitely have to look carefully at how we distribute our output and seek ways to wean ourselves away from linking distribution to contribution.  One way already in place is to value the quality of one’s contribution and not just the quantity.  The social security safety net is another.  But we must modify this concept to meet the facts that a smaller share of our general population has to work to provide for all.