Principles 1 – Decentralisation

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Okay, so for the first of the ‘Principles’ series, we will discuss one of the primary problems facing the macroeconomic picture and global economies of today.

One problem I will be facing myself in regards to this series and my blog as a whole, is that a lot of the topics, ‘principles’ and general ideas that I discuss will overlap. These problems are interconnected, are somewhat involved in an exacerbation of each other and I may find that I will be repeating myself. I will try my best to make sure that the lines of demarcation between these issues are defined to the utmost of my ability.

As I briefly underlined in my introductory post some of what I think to be the main issues in the sphere of the global economy and macroeconomics touch on several potential studies: finance, monetary structures, globalisation, etc. Although the principle we’re advocating today is ‘decentralisation’. Defined as being the ‘transfer of decision making power and assignment of accountability and responsibility for results. [Which] is accompanied by delegation of commensurate authority to individuals or units at all levels of an organization even those far removed from headquarters or other centres of power‘.

Usually the tradition of advocating decentralisation is as a reaction to a perceived bureaucratic block which occurs due to the overreach of government within institutions. What I am purporting is this same principle. However, I believe this bureaucratic block is no longer is occurring due to state overreach but due to the increased influence of powerful entities in the private sector. The classical economic mantra maintains that investment through public means creates an overcrowding which pushes out private, long-term and sustainable investment. What I am purporting is the contrary; the increased size and influence of private institutions and actors has overcrowded a means not only of democratic and public, but private, competitive sectors of economic activity and sustainable investment to boot. For an example of how this can occur, consider the European project of fiscal Austerity: the failed implementation of this idea, and utmost neglect of the idea that public and private sectors can coincide to create substantial and sustainable economies.

This principle of ‘decentralisation’ is advocating the redistribution and dispersing of functions and power away from the centralised authority of private entities. ‘Power tends to corrupt, and absolute power corrupts absolutely’, or more aptly spoken: coupled with the increased trend of economic inequality, the increased size, influence and reach of certain private entities has made sure that the playing field of most economic structures are uneven. This playing field has only been made to be more uneven through the pandering to these entities by central governments, through subsidies, tax breaks, etc.

Due to globalisation, coupled with these trends there has never before been such a divide between small to large, and supra international corporations and actors. Once a business has met a certain level of feasibility, it has the ability to determine every step of its model at a level of global competitiveness. This creates a great deal of externalities: labour is exploited in ‘developing’ nations, the ‘too-big-to-fail’ banking and finance industries have the capacity crash entire nations through globalised gambling schemes known as hedging and derivative trading, and not to forget these same institutions are complicit in the fact that extraordinary amounts of capital is hoarded in places where taxes are set at a level of global competitiveness. This is reflected at both the individual level as well as through the activities of business. At more of an individual level, a great example of the externalities involved would be the treatment of housing as monetary asset investments, and the social effects of gentrification. Overall, what we are discussing here is the creation of a divide between business of higher clout and those without. In plain terms, it is effectively economic apartheid.

What this divide has done has created a two-tier system of separate economies: the local and global economy – also known as the real and shadow economy respectively. The real (local) economy is labelled precisely because capital is kept in circulation. Businesses in the real economy make their modest profits which are taxed at an appropriate redistributive level which is re-invested to help the local economy. Businesses in the shadow economy in this modern era are accountable only to the nation which has the for it most financial perks; these perks which are established in a global auction of the highest bidder. The result being that they’re able to play to a completely different set of favourable rules that all other businesses have no option but to abide by.

How can this be solved by decentralisation, a concept which has almost always been previously used in relation to government bureaucracy? First, a realisation that the existence of a shadow economy is a regressive state of affairs. It contributes to a race to the bottom in terms of economic inequality and as a result worsening social conditions through the very externalities which we have already discussed. Decentralisation manifested in the form of large-scale devolution to local authorities can be used to solely foster a local and real economy. A large-scale neglect of those in the shadow economy and focus and support (as long as they play by the rules) for entrepreneurs, small, medium and large businesses can be used to create a vibrant, innovative and sustainable future for those businesses and individuals in their communities.

There we have it,

The basics of how Decentralisation fits into my blog as the first episode in the ‘Principles’ series.

Čau for now!

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10 Comments

    • Thanks for your comment!

      I have another post on the way which will elaborate further on this very point.

      However, a general answer to your question would be to use the technological advancements that we have already seen in ways to create vibrant real economies. Businesses/individuals operating within these new parameters will gain new dimensions of comparative advantage to firms operating in the shadow economy.

    • How do you propose that we ensure that these parallel economies remain as parallel economies, without the advantages of one economy negatively affecting the other at some stage? Or without it just being the case of one economy following another set of favourable rules?

  • I think that there are several factors contributing to the formation of a ‘shadow economy’ or ‘black market’.
    1. Is inequality caused by creation of synthetic assets like stocks, debt, and derivatives that are traded for real money and are pulling wealth out of the ‘real’ or ‘tangible’ goods market. Effectively reducing the residual wages of people and thus reducing the money multiplier. These factors create a labor market gap that reduces residual wages.

    2. We have governments trying to ‘fix’ the inequality problem by simply pouring more money into the markets by means of trying to create more debt without really ensuring that the money will be used for productive purposes that will lead to the above mentioned reduction in residual wages in the long term.

    In other words, we have too much money and artificial assets accumulated in the hands of very few, too much money in circulation and no production/ wages to create a market demand for the products. What is worse we don’t even have a mechanism to reverse the problem.
    The fundamental Keynesian assumption that more money in the economy creates more consumer demand is flawed in today’s socioeconomic environment, due to the causes described above and the level of technological advancement. One can produce a lot with very little labor and investment.

    In order to cover the employment ‘gap’ created by deb, technology and synthetic commodities, it would be possible to rearrange economies around complementary currencies used for specific purposes. I.e. one type of non inflationary currency is used in the production and payment of food and housing, while national currency is used for everything else. This way minimal subsistence levels can be ensured without loosing freedom of choice on all other consumption markets. Assigning a specific purpose to each type of currency would make it very unlikely that one economy would threaten or overshadow the other one.

    • I happen to agree strongly with you that the over-reliance on debt (financialisation) has left huge gaps in labour markets resulting in the current state of many economies with low wages, low employment and low productivity. Using different currencies for different sectors of the market however in an effort to redeem this is an interesting thought. Although, this is not something I have thought about very much yet, but I find it difficult to grasp exactly how this would work as a lot of industries actually rely on each other in their supply chains, and also how the currencies would be assigned.

      My definition of a shadow market comes from the difference in power between large-corporations, and small and medium-sized businesses and startups (SME’s). Markets are distorted due to this difference in power and influence. In this context, it is hard for me to see how a variety of currencies would redeem this difference.

      For me (as we stick to the topic of the post we’re commenting on) the answer has to lie in the decentralisation and neutralising of this power imbalance. Starting with financial institutions: they should be entirely localised, with their entire focus on building a productive and healthy SME culture amongst their local reach. If we begin with this focus I believe the Keynesian argument is still a vital component. There must be a healthy status of aggregate demand (or as you say ‘money in the economy’) to accompany the rise and sustainability of these enterprises.

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