The first and most basic lesson of economics is the difference between a need and a want.
A need is something we require to sustain ourselves. A want is something we desire but can only consider consuming if we have our immediate needs met first; we could live without it. Karl Marx remarked somewhere that a society which does not reproduce itself—a society which does not have its needs met—will not last a year. This should be common sense, but a sense, nonetheless, those in charge of our economy seemingly lacked until very recently. Suddenly, in the midst of a global pandemic, we have been quickly forced to rediscover just what is essential and what is not. This distinction has thrown millions of Americans into unemployment virtually overnight.
Modern economists and laymen alike tend to get caught up in the minutia of the role of money in political economy, rather than the underlying hard necessity to prudently allocate economic capacity. As in the case of household budgeting, beyond the veil of debt and money, the allocation of real resources first to needs and then to wants is inescapable.
In a society, there are needs that must be met in order for it to continue to exist in its current form. The process of meeting these needs is known as social reproduction. These needs include literal reproduction, the costs of maintaining family households to keep the population relatively stable. In a capitalist society, these costs are mostly paid through wages. For social reproduction, wages and other sources of income making up household budgets must be sufficient to raise children, participate in upkeep of the social fabric, and allow for time for household chores. Beyond the household, the institutions and infrastructure that make up society must also be reproduced: the state, civil society, schools, churches, police, businesses, etc. Roads must be paved, sewers unclogged, peace kept, and necessities manufactured and shipped. Workers must be paid sufficiently to be able to fulfill these duties sustainably. Only after these needs are met can we collectively consider saving for the future, investing in growth, and consuming luxuries.
Classical economists were deeply concerned with this issue of necessity and its logical counterpart: surplus. As the world was just barely emerging from feudalism, this dichotomy was obvious. Peasant farmers and wage laborers worked primarily for bare subsistence. Thomas Malthus’ hypothesis of population growth trapping society in an equilibrium wage of bare subsistence was based upon thousands of years of empirical data. In this salient context, it was clear to these economists that the cost of social reproduction for a pastoral society was precisely the cost of necessary tools, animals, and natural resources on the one hand, and the cost of subsistence for its population on the other. Production capacity in excess of these needs was surplus.
Early classical thinkers recognized that this model was too simple. Industrial workers require very different sets of tools from pastoral peasants. German workers require beer, while the French require wine. A modern worker must pay for such machines as a refrigerator, a car, and a cell phone in order to fully participate in society and the modern economy, whereas their great-great-grandfather 150 years ago did not. If they live in the city, some may substitute a bicycle or public transit for the car. Our ancestors ate the life cost of disease and injury. We consider modern medical care an essential good.
It’s not the bare biological needs of human life, nor the needs of a particular pastoral mode of life, nor even the sum of needs of every individual, that make up the needs of social reproduction. The cost of social reproduction is determined by the needs of the whole particular society to continue in its current form.
While you cannot exhaustively determine what exactly is a necessity for a particular society, it is only after having met that cost of subsistence that we can allow for all the grandeur of luxury and investment in growth. From surplus above subsistence, we get the whole mass of profits, savings, investment, and consumption of luxury commodities. In capitalism, ownership of this surplus, much of which is spent on luxury, has been used as an incentive to increase production and boost growth; it is what encourages investors to invest, savers to save, and landlords to rent. The disproportionate power of billionaires and the effort of those who aspire to such levels of wealth is this incentive in action.
But like all things in economics, this incentive is a tradeoff.
There are costs to this luxurious incentive mechanism: the production costs of the luxury goods themselves, the free time afforded to those who have secured the means of their substance without labor, the redundancies of production demanded by market competition and consumer choice, the power and talent directed into the zero-sum games in the financial industry which must manage this accumulated wealth, and the speculative bubbles which naturally result from such accumulation.
It seems strange to think about luxury in these terms after hearing the rhetoric of austerity government since the 2008 financial crisis. In the logic of sterile government budgeting, it was social services which were the unnecessary luxury to be cut back, despite helping provide basic necessities for millions. Meanwhile every pain was taken to consolidate further surplus into the hands of financial elites.
The luxuries of supposedly austere government have come back to bite us. Our national stockpiles of essential goods, such as masks and ventilators, are insufficient. Our healthcare system sees the closure of hospital after hospital. With little safety net, many face financial ruin. Health agencies faced bipartisan funding cuts for decades. Expensive health insurance and health care discouraged the sick from seeking help, and likely lead to excess deaths. Decrepit public and subsidized housing programs have enabled a homeless population which could be a hotbed of viral spread when crowded into shelters.
Hence the tradeoff. The reason we do not have these resources and safeguards, and the necessities of a robust economy and state capacity in general, is because we chose to treat the luxuries that compete with them as sacrosanct. Our popular orthodoxies around economics have made us forget the distinction between needs and wants.
There is nothing wrong with luxury as such. We can and should have the good things in life, from the humble peace of mind in knowing that your people are not desperate for necessities, to the beautifully luxurious trim of our most important spaces and vehicles, to especially the higher luxuries of great collective achievement. The problem is that as a society we have fixated our attention on the wrong luxuries at the expense of the necessities of social reproduction. We have neglected the basics while treating the uninspiring luxuries of our current economic system as fixed.
All luxury, and all property, is premised on the existence of society reproducing itself. If we choose to value things which are in fact luxuries over those things which are in fact necessities, we may find ourselves having neither. Those moments where social reproduction totally breaks down are the object of fear for civilization itself: plagues, wars, famines, and general economic and political collapse.
The Soviet Failures to Meet Necessities and Luxuries
One of the last great lapses in social reproduction was the destruction of the Soviet Union. The depression that followed this collapse was significantly more severe than the Great Depression in the U.S.
The collapse of the USSR offers some valuable lessons for economic necessity, surplus and planning in catastrophes.
During World War II, political scientist Harold Lasswell hypothesized that the level of economic mobilization from the war footing in the U.S. and USSR would continue on in what he called the “Garrison State.” The threat of total war was considered so all-encompassing that mass conscript armies supported by rationing and state-coordinated full employment would be upheld indefinitely.
The USSR bought into this hypothesis and prepared for a conventionally fought World War III, a war where nuclear bombs would merely be extra-large mortars. Machine designs were often kept suboptimal in order to preserve their ability to switch to wartime production—even Soviet cigarettes were slightly larger than their western counterparts so that the machines that created them could also produce bullets in a pinch. Despite having a relatively small economy compared to other great powers, the USSR put all its weight behind military production and innovation so as to compete with the U.S. in conventional battlefield equipment. In contrast, the U.S. relied on its nuclear deterrent to scale down state-led economic mobilization after WWII. Rationing ended and the private sector–led growth.
It’s often been declared that the USSR fell because it failed to innovate, or that the planning system couldn’t adequately allocate capital and resources without price signals. But this explanation is more drawn from the theoretical logic of markets than on studying the actual history of the country. In reality, the USSR had one of the best-educated populations in the world, and scientists who produced many cutting-edge advancements. But there is an important distinction between scientific innovation and innovation in the production process. That distinction makes it clear why a tradeoff exists, and just why incentive systems matter.
While Soviet scientists did innovate in technology, there was no incentive to implement innovations in the production process. Enterprises would reject using the latest, most efficient machines because doing so would mean fewer resources allocated to the enterprise, which would mean less power and wealth for the managers and bureaucrats in charge of it—not to mention, for those they could bribe. More efficiency meant that an enterprise could make do with less, and therefore the planners would ratchet back those resources. This led to systemic hoarding.
Soviet planners, while always in a battle with enterprises for accurate statistics, were generally good at allocating capital and labor to high productivity sectors of the economy. This was how the USSR was able to achieve such high growth up until its stagnation in the 70s. But after the easy gains of industrialization were won, the tendency against changes to the plan won out. The more changes that were proposed, the more computational adjustments would be required, and the more mistakes became possible. This is where focusing on necessity alone can go awry.
The economic plan could secure the necessities of social reproduction, but the incentives to use surplus production for growth existed on paper only. The flaw in the Soviet system was that the mere existence of surplus does not necessarily imply growth. A society can maintain the same level of surplus by simply consuming or squandering all surplus beyond what is required to replace existing capital stocks. This is what happened in the USSR but in a very unusual way. The planners were well aware of the need to implement new innovations to grow, and allocated some 25-35% of GDP towards investment (the all-time U.S. high in the postwar period is roughly 20%). But because much of this investment was not utilized, it was merely consuming surplus. Hence, the stagnation of the late USSR.
But take careful note: social reproduction as such did not break down until there was an attempt to transition towards more liberal, market-based institutions. The severe depression was not directly caused by the failures of Soviet economic planning, but by the breakdown of social institutions and the systemic theft of formerly state-owned enterprises by Russia’s rising oligarchs. It was only when the planning system was replaced by an incentive system that demanded a much higher level of immediate luxury for the oligarchs that society could no longer hold together. An economic system that lacks growth may be maladapted for great power competition and economic development, but one which ignores the requirements for social reproduction will fail spectacularly in both the short and long term.
The New Demands on Surplus
The Garrison State theory was overfitted to a particular problem in a particular time: the immediate threat of total war. But the idea that we may need to mobilize the economy and sacrifice luxury to prepare for crisis is now more pertinent than ever.
We live in a world characterized by big numbers and non-linear systems. Don’t let civilization and all its technological and moral trappings fool you; the threats presented by our own growth are just as existential as those faced by our ancestors. We have never been above nature; we will never escape our war with her.
With a higher population and urbanization comes the ever-increasing possibility of the evolution of new highly transmittable, highly deadly diseases. A one in a ten billion mutation, which would have been near impossible 1,000 years ago, is now near inevitable. Likewise, the exponential growth of industry—molding natural resources into our every desire—has come at the cost of disrupting vital ecological and human social systems. Climate change, widespread extinctions, threatened ecosystem collapses, and pollution more generally can quickly spiral out of control. Technological development and more powerful tools and weapons increase the risk that these new inventions may be turned back on society at large with devastating consequences. Runaway AI, terrorist attacks like 9/11, and nuclear proliferation are all threats of this nature, as are catastrophically misused mass social control technologies.
With ever lower interests, stagnating or falling rates of profit, higher cost of scientific innovation, fossil fuel extraction becoming non-economical, and fewer new markets to colonize, global capital promises even more intense financial speculation and instability going forward. While perhaps not as intrinsically existential as the other threats, the periodic crises of global capitalism may degenerate into larger political crises.
States and societies must find ways to prepare for and deal with all these risks and the crises they generate. There is no single strategy for all of them, but inevitably they all demand the allocation of surplus, and the reliable procurement of necessities.
Luxuries and redundancies do have an important role to play in confronting these risks. Market competition, while necessarily wasteful from an unattainable ideal of perfect distribution, allows for the distributed creation of novel solutions. A quirk of production in a single firm, or a piecing-together of shop-floor insights, can quickly turn into an innovative solution in a way that no government strategist can predict. The profit mechanism automatically allocates surplus to scale up those firms most able to find them. Financial bubbles from out-sized private wealth can help fund risky and expensive innovation, as the dot com bubble in the 90s showed with Amazon and eBay, and the recent tech boom has been showing today. Incentives for growth can lead to great productive powers to be swiftly marshaled in times of need and can increase the amount of surplus overall.
How ironic that meritocratic and naturalistic arguments about market societies hide these benefits. With the death of the rational market hypothesis, the justification of profits of many speculative investors are left on shaky ground; just as the replacement of hard budgets with soft budgets through government bailouts makes a mockery of the idea that those who take the risk reap the reward. Those businesses which wisely save for hard times, not splurging on withdrawals for stockholders, must now compete with those who do not but are still propped up by cheap loans and government bailouts indefinitely. It is better to be lucky than skilled in American capitalism. Large zombie firms, overhyped startups, and financial bureaucracy are taking resources away from those industries and workers which the day-to-day realities of quarantine are proving “essential.”
The first step to confronting the economic necessity of our situation has already occurred, whether we are conscious of it or not. We have been forced to confront the line between our needs and wants. Now we must prepare and act accordingly.
How We Prepare in the American Regime
The next step is to recognize this is a problem whose solution cannot continue to be lamely handed over to private industry acting alone. The consequences of state impotence are clear in the ever “essential” defense industry. While private contracting has always been a cornerstone of American war-making, it used to be that our government could design and produce weapons to meet its strategic needs at institutions like the Springfield Armory—one of the country’s oldest military institutions, founded during the Revolutionary War by General Washington. The resulting hardware could compete in military trials alongside private designs. The Armory was chiefly responsible for the design and production of the M1 Garand during World War II, what General Patton described as “the best battle implement ever designed.” During the height of the war, the Armory produced 164 M1 rifles per hour.
Despite its monumental history and success, the Armory was decommissioned by Secretary of Defense McNamara in 1968, in the midst of the Vietnam War, on the belief that its function could easily be replaced by private industry. One possibly related result has been a stagnation in weapons design, with modern M4 rifles being essentially a refined and modernized M16, first introduced in 1969, based on the 1959 AR-15. Attempts have been made to replace the design using external contractors, but none have yet succeeded.
The closure of Springfield Armory represented a shift in our approach to how we prepare for crisis, a foreshadowing of the coming neoliberal turn. Whereas President Dwight D. Eisenhower had warned us about the dangers of the military-industrial complex, the defense contracting world would swiftly become overtaken by the logic of profit-seeking private enterprise, with higher levels of surplus allocated to luxury.
Private equity entered into the defense sector and slimmed down many large conglomerates, breaking off their consumer businesses from their defense businesses. It used to be that the consumer sides of the business could be used to spark innovations for national defense, especially when it came to cutting edge technologies. But by making defense companies more profitable, this has also shepherded these innovations into the hands of foreign-owned companies, where the expertise and capacity they develop now work against the United State’s exclusive technological edge. It is either that, or expecting the CIA to pay incredible sums to take control of these technologies before they’re lost.
At the same time, government contractors and congressional dysfunction pushing for the state to pay top dollar for the latest gadgets has produced the most expensive weapon system in the world, the F-35 fighter jet. This weapon system continues to underperform in testing and would likely be overwhelmed in a great power hot-war, due to its complexity and inability to be mass-produced.
On the subject of our latest crisis of necessity, the pre-history of the coronavirus failure shows just why we shouldn’t rely on government contractors to pull us out of calamity. Thirteen years ago, the government attempted to procure millions of dollars worth of newly designed, cheap ventilators from a small, California-based company. The endeavor had even produced several working prototypes. Despite everything, the project fell apart when the contractor was bought out by a much larger company that deemed it insufficiently profitable. The replacement contractor, who was paid millions of dollars more, refused to deliver the ventilators to the government stockpiles despite selling them for higher prices to foreign buyers. As for the few ventilators the government did stockpile, thousands were unusable due to a lapse in the contract after a protest from a third party. In total, the federal government has spent nearly $20 million on 30,000 new ventilators that never arrived, all while spending another $38 million to allow thousands of our 10,000 ventilator stockpile to go into disrepair.
Private industry isn’t friendly to the logic of economic necessity. Effective stockpiling is expensive for the government in normal times due to the need to rotate supplies. Large corporations could effectively stockpile, using consumer demand to rotate out the stock, but then they would be forced to give up control of supply when demand is at its height in crisis.
Some commentators have suggested that stockpiling and preparedness for risks such as those mentioned here are unnecessary or even wasteful. In their analysis, the lack of emphasis on the national stockpiles and planning in countries such as South Korea, Singapore, and Taiwan shows that the competency of key leadership is the most important factor in crisis outcomes.
It is, of course, correct that competent leadership is a requirement for a good crisis response. It is also true that the American political and bureaucratic systems lack such competent leadership, while East Asian governments have been shown to be much more flexible and forceful in their response. But it is not the case that planning and stockpiling have been superfluous in these countries.
It is easy to mistake the absence of evidence in Western reporting for the evidence of absence. While the failures of American stockpiles and planning are well known, and thus the existence of such plans and stockpiles, the utilization of stockpiles and long term plans by South Korea, Singapore, and Taiwan has been less well understood.
In fact, the approvingly cited responses of these governments were as much the result of decades of preparing and building upon existing systems as they were of competent leadership. Each of the three countries maintains significant stockpiles of Personal Protective Equipment, as well as antiviral treatments. Their stockpiles allowed them to meet the high demand and rationing requirements even as China began to pressure exports early on and while attempts to use surge capacity were still just beginning. The highly praised digital transparency and surveillance measures were built upon similar measures pioneered in the SARS outbreak in 2003 as well as H1N1 outbreak in 2010. Emergency preparedness is one of the fundamental responsibilities of competent leadership.
However, it is quite right to critique U.S. leadership for lacking competency. The most basic demand for containing the epidemic has been to vigorously test and track down infected persons early on. In this, we have totally failed and failed for reasons that have a great deal to do with competency. In the key month of February, there were multiple points of failure at the FDA and CDC, including the refusal to use tests already developed by the World Health Organization and labs overseas, not moving quicker in allowing those labs which received the CDC test to throw out the unusable portion, and not removing bureaucratic hurdles for third party labs to produce diagnostic testing.
Had any one of those points of failures been avoided, the American testing capacity would have been greatly improved and perhaps allowed us to detect community spread as it occurred. The FDA had all the legal authority required to waive the regulatory red tape around any of these problems, but those in charge of the coronavirus response were complacent and lacked the imagination to take drastic action. Reports have now emerged that HHS Secretary Azar severely underestimated the threat, and charged a 37-year-old former dog breeder with no medical or bureaucratic background to lead the day to day management of the crisis.
The federal bureaucracy, too, shares some of the blame, but not in the way most of its adversaries claim. We cannot blame the bureaucracy for following bureaucratic rules and regulations; it is their fundamental imperative to obey such orders. We know we’re in truly hot water once the bureaucracy starts acting autonomously, as an agent with its own independent interests.
Rather, the true failure of the bureaucracy was that no intelligent civil servant identified the severity of the problem and alerted leadership before the media—for example, by understanding that the lack of applications for Emergency Use Authorizations was the result of red tape and not lack of interest. The failure of leadership is a fundamental political problem, but it is entirely plausible to imagine a more competent federal bureaucracy through stricter hiring standards, no longer allowing veterans to cut in line in the hiring process, and reducing the number of political appointees. On the agency level, congressional pressure has generally tended to create more paperwork, mainly so that the bureaucracy has a paper trail to cover for itself when under review. Agencies not subject to appropriations are generally much more flexible. The public corporation model pioneered by the FDIC is much more functional in many cases, and has even been proposed elsewhere.
But, more fundamental to the critique that America lacks competence rather than preparedness is the wariness of “Maginot Line” planning. The concept comes from the famous WWII-era French plan to stall invasion by Germany with a series of walls and fortifications, which came apart as the German army simply circumvented them by going through Belgium. While it may seem like a ridiculous oversight in retrospect, it was quite easy to understand why the French planners could not have foreseen the problem in advance. Belgium was, after all, an ally, and they couldn’t simply put up military encampments on their border. The French had also expected cooperation with the Belgians in defending an extension of the Maginot Line, cooperation which collapsed in 1936.
All planning is, at its most basic, a model predicting future events. The problem with Maginot Line-style planning, which has many examples in history, is that either the model is overfitted to specific past experiences, or that the model, by attempting to be comprehensive, becomes unstable. Its very complexity and scale can make it liable to disproportionate changes in outcomes when encountering the unexpected.
In military history, the failure to procure sufficient logistical support has killed far more campaigns than over-planning. At the same time, the most effective plans are not the plans where everything follows its expectations. The most effective plans are where the estimations are so conservative and the goals so ambitious that enormous resources are marshaled to overcome even multiple points of failure.
The U.S. invasion of France in WWII illustrates this well. Here, too, the plans were too comprehensive, too complicated, and failed in multiple places. But, after the initial landing on Normandy, all the failures were on the side of conservatism: supplies were being offloaded into France far faster than the plan accounted for. If the generals had stuck to the plan the invasion would have proceeded at a snail’s pace. It took competent leadership to assess the situation and charge ahead as far as the logistic supply chains would allow, which is precisely what General Patton did.
Good planning is simple and aims towards providing general capabilities, not specific ones. The political situation in 1936 caused the U.S. to begin to plan for war in this way, ramping up production of the M1 Garand at the Springfield armory so as not to be caught flat-footed. In the USSR, Stalin framed the rapid industrialization drive as necessary preparation for war as early as 1931, at a time when the contours of WWII could scarcely be comprehended. But industry was an instrumental goal, since it could be used in many flexible ways necessary for defense.
A New Kind of Austerity
Today, the United States does have industry, atrophied as it is by decades of offshoring production. But it would still be more than sufficient if our leaders had the competency and will to use it. Imagine if, instead of allowing private industry to extort for the privilege of utilizing precious medical supplies, we took control as South Korea or Taiwan did early on. The framework is totally within the executive’s legal authority at this juncture. At minimum, we could have avoided the worst shortages of masks and ventilators. Even better, we could have a civilian version of the Springfield Armory, a state manufacturing R&D center that could design, create, and coordinate production for essential goods in a crisis. Such a proposal is not new at all, but a renewal of a great American tradition.
But now we are too cowardly to dare impede the luxuries afforded to private industry. Private actors and organizations who control crucial supply chains become indignant at the thought that they are not the most essential link, or that anything more needs to be done. The logic of social reproduction is above their heads, just as it is and has been recently for the White House. If we should get through this crisis intact, it will be in spite of these actors, not because of them.
The contingencies of this crisis remain unpredictable; the risk of things getting out of control is very real whether in biological, political, or economic terms.
Current medical estimates state that the world will face more and more of these crises. And novel viruses are only one of the supreme contingencies which can realize the threat of a breakdown of social reproduction on a previously almost unthinkable scale.
To meet these challenges, we must first upend the primacy of the luxury incentive in our society, and begin to think about how to use the surplus at our disposal in the most strategic way. We must use the unique properties of our increasingly developed world to our advantage in coming crises.
We must conceptualize a new kind of austerity, one premised on the allocation of total surplus away from luxury and towards maximizing our ability to respond to immediate and future crises. And if we have run out of crises to prepare for, our surplus could be allocated to great public striving for new heights of development. Above all what must be avoided is the fatal complacency that sacrificed essential preparedness and public well-being and achievement to an overextended commitment to liberal incentive mechanisms.
We might begin by restructuring or even slashing the rents associated with intellectual property and academia, and so start to fully utilize the scientific capacities of our country. State imprimatur would go a long way toward normalizing important but currently underground institutions like libgen and scihub as the legitimate media for reproducing knowledge.
Measures of such a program might include the rationing of pollutants like carbon, expansion of public or regulated monopolies, greater strategic stockpiles, backstop public labor programs to provide a productive wage floor, public investment in market housing to decrease passive rents, breaking of regulatory capture in stagnant or overgrown industries like health care, artificially scarce luxury goods as public fundraisers, industrial policy to track and increase productive capacity, and creatively strengthened tax policies to reward productivity and discourage passive speculation. Much can be imagined, given the will to see surplus as something to be allocated strategically, and see beyond luxury as the sole motivation for production.
This new kind of austerity regime would make certain goods more expensive in the short-term as well as put downward pressure on profits. That is the price we would have to pay. Economics is about trade-offs, after all.
But it also comes with its own luxuries for normal people, those who are essential for the reproduction of our society. Job security, healthcare, and education, which have increasingly become essentials for reproduction of our society, could cease to be treated as privileges.
But such a program would require the development of a state consciousness among the powerful quasi-governing segments of American society that currently conceive of themselves as private actors without public duty. Without a change in consciousness, to see that their interests are intimately tied to the public interest, they may find themselves more comfortable with the continued decline of American civilization.
To those concerned with its preservation, among the elite and in the general population, there can be nothing more misguided than the clutching at private wants against public needs with such pathological drive. Americans tend to have a certain contempt for those who spend away their earnings on frivolous things; this has been the driving political force behind neoliberal austerity. Let us hold up a mirror to our economy in this crisis and recognize that same failure on a national scale.
For too long, across the political spectrum, we have been overcome by fantasies that amount to extravagant luxury. It is time to start thinking of economic necessity once again.