It's Time to Start Questioning the 5 'Economic Policy Commandments'

Published April 4th, 2018 - 01:58 GMT
The laws of Economics are mutable. Is it time to start questioning them? (Shutterstock)
The laws of Economics are mutable. Is it time to start questioning them? (Shutterstock)

By Olivia Baskerville

Given how the economy is often reported, we’d all be forgiven for thinking that running it requires an impenetrable set of mathematical theorems best left to academics and policymakers, and indeed there are highly technical statistical calculations which are integral to informing policy decisions.

But a
movement is growing to better educate and inform the public about how economic decisions are made, and provide citizens, consumers, and producers (lesson one: they’re the same thing!), with the means to understand what economic and financial decisions shape their lives. Thus, an introduction to five economic principles you’ve heard about in the news and probably thought were immutable laws, but are actually political decisions in dire need of debate. 

 

Economists and policymakers love talking about Gross Domestic Product, or the total value of goods and services produced within the borders of a given nation. If it increases, we call that growth, which we also love talking about, and encouraging. But GDP is a single metric, which tells us only about the productivity of domestic markets. It tells us nothing about national social wellbeing, so why does it appear so often in our headlines? 

Part of it has to do with our obsession with growth, on which more in a moment, but there’s more to it than that.

Theoretically, the price of something tells us how much we value it and how much good it does us, which is a pretty bold claim indeed and comes from an improbable history when, in the 1930s, economists really wanted a neat figure to show the free market was better at providing for people’s needs than the Soviet Union. The problem, of course, is that people value goods and services differently, and in fact there are plenty of things, like housework, social belonging, and political engagement, which we don’t value in monetary terms at all. We’re also particularly bad at valuing services, especially government services, which is a problem in increasingly service-based economies.

Instead of considering just increases in how much we produce, to get a comprehensive idea of how much good the economy is doing us we need to consider a variety of complex measures. We need to emphasise households as economic actors and broaden our understanding of how households’ activities affect others, whilst also looking more closely at how income is distributed between them.

We must consider how to measure and compare quality of life when it comes to education, physical and mental wellbeing, insecurity, and other social factors. And we must account for the negative and positive impact of our economic activity on the earth. These measures, which were recommended in a 2009 report by some of the worlds’ most prominent economists, have only just started to make headway in national policymaking – like Bhutan’s happiness index – but they haven’t yet entered the public debate. It’s high time we improved the economic narrative and provided a comprehensive snapshot.  

What is the purpose of the economy? As a group of frustrated economics students at the University of Manchester recently pointed out, it’s a political, value-laden question for society to decide. Nonetheless, you’d be forgiven for answering ‘to get bigger’.

One of the consequences of relying so heavily on GDP for understanding economic health has been that we expect it to go up. We’ve become obsessed with how fast it is – we talk, not about negative growth, but about slower-than-expected growth; in the last fifty years American presidents have increasingly run on tickets of high growth. And growth is, at its most basic, not a bad thing. It can be a sign of a healthy economy in which people are innovating.

Yet indefinite growth is not an inherent necessity for human wellbeing – rather it is a political choice, and in making it we must consider what, why, for whom, and how long we are growing. GDP is a poor sole measure of wellbeing; growing it unchecked in pursuit of that wellbeing has some pretty serious consequences.

First, according to the OECD, the benefits of current growth is, and has been for years, unevenly distributed. Income inequality is higher than it’s been in 50 years. In the 1980s, the richest 10% of the population owned seven times what the poorest 10% did. Today they own almost ten times as much.

Second, constant growth is unsustainable. Productive output can’t grow indefinitely, in part because the planet simply can’t provide infinite resources. Even if we switched to a digital and service-based economy, the needs of the population required to maintain anything like current growth rates would decimate the planet. Energy consumption, lithium mining, and meat farming are already depleting natural resources faster than the planet can regenerate them. Growing indefinitely within the confines of the earth’s resources cannot be done, so where does it end?

Since the stock market crash in 2008, conversations about the economy have invariably involved some sort of discussion regarding the accompanying debt crisis. The bailouts of banks which were ‘too big to fail’ are part of this conversation, but the nature of banking at the turn of the millennium was such that the sort of financial instruments which caused the crash were well beyond the basic knowledge or vocabulary of most people (think: ‘collateralized mortgage obligation derivatives’). The result is that, whilst there has been extensive public discussion regarding the debt crisis, very little has addressed debt itself, leading to some fundamental misconceptions surrounding credit and lending.

The most important of these regards who repays debts and who does not. There’s some pretty significant moral force behind the idea of paying back debt, with ideological roots that, according to some anthropologists, originate much farther back than the Protestant work ethic.

After all, when an individual, a firm, or even a whole country formally borrows money from a bank, they sign an agreement obligating them to pay it back, often with interest. These legally binding agreements are, crucially, backed up by the state’s monopoly on violence. If debtors don’t repay their debt to the bank, bailiffs will forcibly seize any possessions put up as collateral, and often anything else which amounts to the value of the unpaid credit, most notably homes, pensions, other personal assets. Most democracies no longer have debtors prison, so individuals can’t be incarcerated for not coughing up, but they can be imprisoned for obstruction if they resist the removal of their possessions. 

This threat of seizure is crucial, because there’s one group of debtors to whom it has been shown not to apply: banks themselves. Every deposit an individual or firm makes to a bank is effecitively a loan, yet in 2008 (and, indeed, 1929) when a large number of people decided to reclaim their principle and interest, banks were unable to provide repay that debt to their customers. Yet no penalties were exacted on the banks. Indeed, in 2009 the US and UK governments paid the debts on the banks’ behalf.

This is the essence of the ‘too big to fail’ argument, which is rarely pointed out – that ultimately, everyone else must pay their debts to the bank, but if the bank is unable to pay its own debts, there are no repercussions to be found. Ultimately it is bailed out by state funds, nothing is seized, and the bank continues to function as before. Fundamentally, the moral imperative that everybody pay their debts is a lie.

There’s been a lot of backlash against global trade in western politics recently. The election of Donald Trump in America and the Brexit in the UK are increasingly understood as rejections of consequences of trade agreements which have been negotiated in the last thirty years between the major global powers. The European single market, the Trans-Pacific Partnership (TPP), NAFTA between the three major states in North America, and the Trans-Atlantic Trade and Investment Partnership (TTIP) have allowed most goods and labour to pass between their signatories relatively unhindered. Economists are pretty united on the value of free trade between developed countries, so why hasn’t the reality turned out as expected? 

The answer is that a free trade agreement doesn’t guarantee free trade. As a recent paper by Harvard economist Dani Rodrik has pointed out, these massive, multi-year negotiations have addressed not only the basic barriers to trade like quotas and tariffs on imports, but expanded their remit to making sure the signatory countries are united in regulations on things like labour health and safety, investor rights, intellectual property rights, etc.

In theory, this standardised regulation smooths the way for business to be done across borders, and it is pretty effective. But in practice it also safeguards corporate international interests against any domestic policies which protect other interests – like those of local businesses, employees, households, and even the state. In fact, corporations have had a seat at the negotiating table in every major trade agreement of the last thirty years. 

A study by the Sunlight Foundation found that TPP negotiators were lobbied extensively by pharmaceutical corporations, car manufacturers, milk and dairy, information technology, and the entertainment industry, amongst others. What American, British, and other discontents of globalisation are feeling is the negative effects of allowing corporations to build trade agreements to which supercede domestic legislation and protections – not the effects of reducing quotas and tariffs to allow goods to move freely.

This is why Trump’s recent steel and aluminium import tariffs seem so preposterous, even to Trump voters. The proliferation of free trade as built up global supply chains which can’t and shouldn’t be torn down without damaging millions of jobs. Trump’s tariffs redress the basics of free trade which allow economies to thrive, but not the problem with free trade agreements, which are inherently political and influenced most heavily by precisely those Trump represents – corporate interests.  

All of the economic myths outlined above have at least one thing in common: they all rely pretty heavily on economic equilibrium theory, which is essentially the one which says when supply and demand in markets equalise, they do so at a perfect competitive price.

There are more than a few problems with this theory on which much policy has been based in the last fifty years, but perhaps the most prevalent - and easiest to disprove – is the presumption that people, especially in their capacity as consumers, are entirely rational whilst acting in their best interests and have access to full and complete information.

It’s a pretty ridiculous abstraction. Most of us are willing to admit times when we have been less than rational in our decision-making, both economically and otherwise. We spend money we don’t have on items we don’t want or need, money which should rationally go into investments or retirement plans. We’re influenced by error, bias, pattern-recognition, social interaction, and context, amongst many other things. 

Most of us would also agree that whilst we make decisions based on the information available to us, when it comes to economic transactions that information is distinctly lacking. In fact, most contemporary marketing is deliberately designed to keep information from consumers, or at very least to direct their attention away from information companies don’t want consumers to have.

In the 1980s, when financial markets were deregulated in the English-speaking west, this homo economicus played a pretty significant role. The idea was that rational, informed people trading stocks on the market would do so in their best interests with full information and therefore they should be left to get on with it to increase overall wealth and stimulate growth.

But stock markets are speculative, and stocks traders therefore heavily influenced by the behaviour of other stocks traders, meaning that if one obtains (or thinks she has obtained) information the others do not have and begins to trade accordingly, the others will follow suit regardless of whether they have that information, and regardless of its validity.

Editor's note: The views expressed in this article belong to the writer, and do not necessarily reflect those of Al Bawaba. 


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