Why Economics Should Be Rethought

The Assumptions About Human Nature Hidden Behind the Respectable Veil of Economic Analysis

Author: Anonymous

Economic decisions in government are evaluated using cost-benefit analysis. Thus the Department for Transport established that a high-speed north-south rail link (HS2) was good value for money by determining that every £1 of cost to the taxpayer would lead to at least £1.8 of benefits. And what could be more sensible than carefully weighing up the pros and cons of a decision to society in order to determine the preferred option? Behind the illusion of rigour and dispassionate logic, however, are a number of assumptions about what humans are which many of us would surely not subscribe to. And yet, the actions of almost all public bodies supposedly acting in our interests, from the Bank of England to the International Monetary Fund, work on exactly this basis.

Perhaps the most brazen assumption is that humans’ wellbeing is purely determined by their lifetime consumption. Undeterred by 2500 years of philosophical debate on the source of human happiness, Economics proceeds with its own simple prescription. An esteemed economist has argued that the profession has got away with this for so long because sources of happiness other than consumption are at least a function of it. For example, a plausible alternative view of human happiness is that it is status-driven, determined by a citizen’s level of consumption relative to others. In this case, a policy that increases a citizen’s individual consumption would also increase their relative consumption, so increased wellbeing would still be achieved. This argument falls flat, however the moment a policy is applied to a nation rather than an individual. If a government policy increases all its citizens’ consumption by the same amount, then their relative consumption will not have changed so they will be no happier than they were at the start. So even this small tweak to the standard Economics view of human happiness would call into question much of government economic policy. And in any case, presuming that our happiness is predicated purely on the amount of phones and clothes we buy surely paints an unduly shallow picture of humanity.

Economics also assumes that humans care less about the future than the present, and in a banal sense there is some truth to this. Putting the tub of ice cream in the fridge for later, for instance, tends to be harder than eating it straight away. However when it comes to assessing something more consequential like how much we care about the damage that climate change will inflict, can it still be justified to assume that we value the future less? This could lead to the absurd conclusion that a policy which ended humanity would be economically acceptable if the apocalypse happened sufficiently far in the future that the lost happiness of the dead future generations was deemed to be negligible by today’s myopic citizens. Arguably the inadequacy of public pressure to force any significant political action on climate change demonstrates that people today don’t in fact care about the future effects of climate change or are at least sceptical about its impact. That is not to say that they would not feel regret once the consequences become more apparent, however. But this capacity to change one’s mind and feel remorse is again excluded from the economic decision-making process.

Evidently the view of human nature assumed in economic policy-making is a narrow one, and yet it issued not just to make decisions in the Western world but to impose polices on countries across the globe via the World Bank and the International Monetary Fund. Thus this view of humanity, borne from the traditions of Western economists is taken as the basis for policies in cultures with countless different philosophical traditions and a wealth of perspectives on human nature. Would Economics not be more powerful if a different variant existed for each view on what humans are? Perhaps in this way Economics could be rethought.

Rethinking Economics: a New Conference this Weekend

For those of you who aren’t already there, our Rethinking Economics conference began in London this afternoon. The conference will be running all weekend and we would love to have you join us.

If you’d like to find out more about this event, Yuan Yang has written a guest blog post for one of our partners, the New Economics Foundation (NEF): http://www.neweconomics.org/blog/entry/rethinking-economics-a-new-conference-this-weekend. Check the schedule at http://www.rethinkecon.co.uk/#!schedule/cihc and come join the conversation.

We would love to hear from you, whether you are attending the conference or not. Please fill out our survey, which can be found at http://www.rethinkecon.co.uk/#!yourthoughts/c187x.

Rethinking for Action

Author: Diana García López

Teaching economics is a political act. What you discuss (or not) in your seminar, what you include (or not) in the syllabus, shapes the minds of generations of economists. Academics create and perpetuate economic theories that inform and ultimately justify policies that affect society as a whole.

The last decades have seen the economics syllabus become narrower and narrower. A student who studied economics in the 60s would have received a much broader education than many UK undergraduates today. Recently, a lecturer in economics at a leading UK university even compared the fading of non-neoclassical schools of thought to the abandonment of treatments like leeches, tobacco smoke enemas and homeopathy by the medical profession. His students are not systematically exposed to the history of economic thought; some of them have never heard of Keynes in their lectures (let alone of Marx), and are frustrated because what they are taught has little relationship to the current real-world economic problems that attracted them to the study of economics in the first place. Critical thinking is not encouraged; prospective young lecturers are valued in terms of how much they have published in ‘the correct’ few mainstream journals.

Meanwhile, the UK (and Europe) has got stuck in a socio-economical and political impasse in which new answers are needed urgently. Suddenly the economics jargon has invaded the news and concerned citizens have become amateur economists, trying to understand what is going on, with the perception that economics can no longer be left exclusively to the supposed experts who “didn’t see it coming”. We have thus seen the development of a broad range of civil-society groups who share a focus on practical solutions and action, while differing in methods, scope and specific objectives (e.g. New Economics Foundation, Positive Money, Jubilee Debt Campaign, World Development Movement, Strike Debt, Robin Hood Tax, City Reform Group, UK Uncut, to name a few).

Successful efforts to increase coordination and exchange have taken place in the last few weeks, for example at the Transforming Finance conference [10 May 2013] that brought together academics, finance professionals and campaigners “to discuss how to make finance work in the long-term interests of the people and planet”. Last Saturday [22 June 2013], after weeks of preparation including an endorsement by 63 economists, Central Hall in Westminster saw 4000 campaigners from different backgrounds historically join forces in a People’s Assembly against austerity.

We are witnessing how the government’s budget cuts target the poor and the weakest in society – e.g. two thirds of people hit by the bedroom tax are disabled (as if it was the poor who had the money to reduce the debt!). The program to dismantle the welfare state is being implemented not only in the UK but all across Europe; entwined with the vicious circle of bad debt it leads to social collapse as the unfolding Greek tragedy shows. The respective ‘opposition’ parties across Europe have also accepted the “they/we deserved it; there is no alternative” belief. Only a few brave black sheep are left, armed with facts that nobody wants to hear.

The UK alone boasts 3 new food banks every week, with 13.5m people under the poverty line, 2.5m unemployed, 1.8m households on council house waiting-lists, and 25000 elderly people freezing to death at home every year because they can’t afford to pay their heating bills, just to mention a few figures. To me and to many this is not what a civilized society looks like.

Answers are needed to overcome this worsening situation, and in my opinion students and academics have a moral responsibility to participate in the production of such practical answers. As with everything we do, there is a whole spectrum of positions, each of which implies some degree of contradiction. The question is what degree of contradiction one is prepared to assume.

The clock of history is ticking; an answer is expected from the economics academics. I reckon it’s time to take a look outside the academic bubble, to descend from the high tower and reconnect the economics discipline with its roots – with the society it was always meant to serve.

Economics needs feminism

Author: Yuan Yang

Economics is a feminist issue. The structure of the economy reproduces gender roles; what’s more, the concepts we use to talk and think about the economy reflect our patriarchal understandings. Yet there aren’t many feminist economists.

What does feminism have to bring to economics that is so difficult for the profession to swallow? The first form of feminist economics refocuses the topics of economic research. One can see gender differences as barriers to economic growth: the Food and Agriculture Organisation estimated that 100 million malnourished people could be sufficiently fed through overcoming the misallocation of resources in agriculture: within the same household, men tend to hoard and over-use fertiliser, whereas women don’t receive an efficient share to use on their plots. Educating women is a cost-effective way of improving health and education outcomes for children, who then become more productive.

So far, this is economics as usual, only with its gaze scrutinising a part of society that is often ignored: women’s lives. Grown presented the so-called “business case” for gender equality. Investing in women boosts growth, therefore we should invest in women. This flags the question: why are women not part of the “business” that we are trying to improve? Economics as a profession is shamefacedly noncommittal about its ultimate political values, and the “business case” for gender equality tries to fit into this shifty-eyed academic scene. But achieving equal access to capital, equal bargaining power in the labour market, and dismantling mechanisms of oppression are all good aims in themselves, and not only as tools to inch up our GDP measures.

This brings us to the second form of feminism in economics: it broadens our conception of what an economy is. When we think of economic production, we usually think of the production of material goods in the formal, remunerated market. Feminist economists also consider “social reproduction”, the process of (re)producing the households and workers that compose the economy. For example, care work is the production of labour by means of predominantly female labour in the unpaid household sector. And as much as we need to invest in fixed capital like machinery for economic production to continue, we also need to invest in social reproduction.

Humans need care. Professor Stephanie Seguino talks about the effect of austerity programs on eroding “social infrastructure”. This is the infrastructure created by care work that is either paid for by the government (child benefits, social care, education), or the result of the unpaid labour of parents – predominantly mothers who face a gender wage gap that makes it individually rational for them not to participate in the formal economy, plus a host of social expectations about housework and care.

Now we are really getting somewhere. The third and most exciting form of feminist economics is at the level of methodology and the structure of economic thinking. Neoclassical economics deals with closed transactions, comparisons and equivalents. Its fundamental axioms of rationality require commensurability of different goods into one utility measure; its methods of analysis presuppose that all decisions are choices between commensurable alternatives. Does, for example, the fact that childrearing labour is largely unpaid and a long-term commitment to one non-exchangeable institution of love instil a fundamental inequality in the social economy? Is our relationship with our children and partners not analysable in neoclassical economic terms? Latour writes of anthropologists who look at “primitive” economies, “[they] recoil in horror at the imbroglios which are described among these others. ‘Oh dear,’ they sigh, ‘these poor people will never get out of this mess, they are always tied up, attached, indebted, hooked, mixed up, entangled.’” The state of those who participate in social reproduction can be characterised by this entanglement.

The interdependence and interrelatedness of humans engaging in social reproduction contrasts with the individualism of economic methodology, which takes one agent (or more problematically, one unified household) as the unit of agency and analysis. Welfare economics can barely handle ‘other’-referring preferences – preferences which mean you care about other people’s consumption. What would a feminist economic methodology look like? I don’t know, but I think we need to begin the journey.

Feminism does not only reorient the economic enterprise to map a broader human landscape; it lets us see more deeply, and asks us if we are really looking in the right way at all.

Supercasinos - based on bad economics

Author: Sam Wheldon-Bayes

The supercasino controversy in the UK is a classic example of bad economics being applied to a policy under consideration. As a result, the government utterly failed to properly grasp the wide-ranging social and economic consequences of the proposed policy – to allow massive Las Vegas style “destination casinos” in the UK.

Gambling addiction is, without a doubt, awful. This hardly seemed to be taken into account when the enormous new gambling venues were proposed, however. Policymakers were not considering the terrible problems that the casinos might cause, they were instead fixated on comparing a few comforting, easily-measurable variables. The entire project seemed to be based on whether on not the construction costs outweighed the direct income from the casinos and the number of jobs created.

Having concluded that these three variables indicated that the casino was a good idea, enthusiastic New Labour politicians would not be moved in their support for the casinos. It took a change of Prime Minister from Tony Blair to Gordon Brown to halt the badly thought-out project. Why did they become so enamoured with these hulking gambling stations? What caused so many politicians to disregard the obvious negative side-effects of constructing these casinos? After all, every job created is created with money taken in from a gambler. That gambler stands at risk of becoming addicted to gambling, potentially ruining not only their own lives, but the lives of those around them too.

There was some rumour of corruption surrounding then-deputy PM John Prescott, who had spent several weeks holiday on the ranch of a man who wished to construct the first supercasino in what was then the disused Millennium Dome and is now the wildly successful O2 Arena. Given that the first casino ended up being planned, before the policy was scrapped, for construction in Manchester, this does not seem likely to be the sole explanation of the government’s folly.

Instead, I believe it relies on economics’ unhealthy obsession with measuring things, and the even more unhealthy tendency to simply ignore that which is too difficult to be measured. Taking the example of supercasinos, the point is illustrated rather well. It is fairly easy to consult with the potential casino operators on their expected staff numbers, and hence get a figure for the number of jobs you expect to create. It is much harder to go about defining, measuring and predicting the number of lives that will be negatively impacted by gambling addictions of varying degrees.

This leaves us with a situation where one was the central justification of the policy (and creating jobs is a valid government objective) yet the other – the primary downside of the policy – was basically ignored by those responsible for it. Trying to measure the human and social cost of the policy would be tremendously hard and imprecise – but that does not mean it is worth doing.

Gambling problems are not only prohibitively expensive for the person suffering from them, they have many other side effects. They can potentially ruin personal relationships with significant others, children, family and friends. The knock on effects, for example, that a gambling addiction will have on the education of the children of those affected, will not have been taken into account during the policy creation.

Illegal activity to obtain money to gamble with is also, unsurprisingly, common among problem gamblers, which will have many unanalysed negative consequences. Other mental health issues become more likely in problem gamblers, which are desirable to avoid for their own sake and also for the strain treating them puts on the national health budget and dealing with them puts on society at large.

In short, the UK government was guilty of massively underestimating the downsides of a particular policy due to the fact that the upsides of that policy were far more easily measurable than the downsides. Thankfully the proposed policy was abandoned eventually, but it came far closer to reality than it ever should have done. We should rethink economics to place more emphasis on the human and social cost of decisions that we all too often characterise as purely economic.