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.