The starting point for a new economic heuristic is to distinguish two different circuits of production:
- A basic circuit which produces goods and services such as food, housing (or housing services), refrigerators, cars etc. which are sold into a community’s standard of living (in green in the image above)
- A surplus circuit which produces the means of production, the machinery, equipment, tools etc. that remain in the productive process and are repeatedly used to produce other goods and services (in gold in the image above)
Thus, the above diagram distinguishes five functions which are:
- a basic demand function is the income available for expenditure on goods and services that enter into the community’s standard of living
- a basic supply function is the outlay for the production of these goods and services – some proportion as income or wages and, some proportion as outlays on the means of production
- a surplus demand function is expenditure on the means of production that after being sold, remain in the productive process and are utilized within that process
- a surplus supply function is the outlay for the production of the means of production – again, some on wages (which go back to the basic demand function) and some as outlays on their means of production
- a redistribution function which (i) facilitates the exchange of property, shares, secondhand goods, taxes etc. (such exchanges add nothing to a community’s standard of living or wealth – they are simply exchanges of already created goods and services) and (ii) holds savings from the two circuits and (iii) provides credit to support the productive functions.
Contrast with current economics
This new economics presents some major challenges for current economists.
In the first place, it demands a shift in thinking, from a common sense understanding of the economy – a ‘flat-earth’ way of thinking – to a theoretical understanding of the economy (and what such a shift might mean, despite talk of theory in economics).
Second, its initial focus is on the processes/activities that constitute an economy and so, on the basic variables that constitute an economy – rather than the traditional focus on entities such as household, firms and government and their motivations.
Third, the new economics demands a rigorous distinction between different dimensions of social activities, between technological, economic, political and cultural dimensions. Currently, economics operating within a common sense mode of understanding crosses between these different domains.
Fourth, the new economics systematically exploits the distinction between two different circuits of production (basic and surplus) to develop a two-flow analysis of the economy which explains the regular cycles of booms and busts in economies.
Fifth, the new economics discerns an ethic within economic processes – what we need to do to maintain/constitute a functioning economy. What we do matters. Thus, economic activities can be evaluated internally rather than using arbitrary external criteria.
Sixth, the new economics distinguishes between an ethic of economics and the motivations of participants and thus, that “ignorance, not greed, is the prime cause of poverty” – ignorance about what activities we need to do to maintain an economy.