Many troubles of the world from climate change, Global Financial Crisis, War in Ukraine has been said to stem from economics. Economics is said to have failed to appropriate and channel the necessary funds or resources for the betterment of the eco system (humans, animals, plants and planet).
Alfred Mash defined economics as "a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side the study of wealth and the other and more important side, a part of the study of man."
As such economics helps household, companies and governments to make decisions that increases the value of the household, companies and governments. For an example, a household, student may decide to go to university if the government provides bursary and if unemployment is at its highest. Companies on the other hand make decisions on what projects to undertake i.e. produce mobile devices like tablet or phone based on what consumers want to buy.
As household, companies and governments have unlimited wants but there are limited resources (raw material, labour, money) to meet all these wants. Household, business and governments are constantly analysing their choices to get the most of their limited resources. They are constantly thinking about the benefit and cost of their choices and making decisions that supports the highest value that they can gain (the value of the next best alternative= opportunity cost).
As economics is social science, those in power (government) needs to weigh benefit and cost while finding out what would be the best strategy forward. For an example, UK spends approximately 44.6 billion dollars in 2020/21 in military spending, the opportunity cost could be schools, roads and hospitals.
As GDP is a tool. It is the science (the role of the Government) how they use the tool appropriately, efficiently, effectively to get the best outcome. Which brings us to question what is the best outcome? More funds channeled towards war or channeling the funds for better public transportation, schools, hospitals etc.
American president Dwight D Eisenhower in his 1953 speech on Cold War mentioned "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientist, the hopes of its children".
Economics brings together the workings of both private companies (conservative) and governments(liberal). Governments helps the country to operate by providing the basic needs such as roads, traffic lights, fire fighters, police, hospitals etc that supports the general society and businesses. While businesses focus on the free market economy. So both private and governments work together to enable the country to flourish.
As such economics merely provides the tools for good decision making. The decision maker (household, firm, government) need to use these tools efficiently and effectively to make decisions that alleviates the quality of living. If the decision maker is influenced by political or self-cherishing agendas than the economic tools will be used to push forward this agenda and money; power; status; position will take the center stage in the decision making process resulting in a bias outcome. For example, Clinton administration pushed for Green GDP but A West Virginia congressman put a halt to the effort fearing it would hurt his state's coal mining industry.
Similarly, if focus is on accelerating economic growth (GDP) instead of balancing out with the eco system dignity and value (human, animals, plants etc) than the outcome will be labour displacement, climate change, inequality, oil spills case of BP; cutting down amazon forest etc.
As such although Economics helps one to understand the world and solve problems efficiently, the choice of making the world a better place to live in rest in the hands of the decision maker. There are many good economic contributions that comes from micro finance- Muhammad Yunus- Grameen Bank and Human Development index- Amartya Sen.
Yet, few economies of the world have adapted these approaches. The current state of the economy lacks dignity and sense of purpose that explicitly prioritize human health and wellbeing. Governments that focus on human needs, prioritizing their health and wellbeing might lead much of economics to quite different conclusions. As Banerjee and Duflo argue, 'restoring human dignity to its central place... sets off a profound rethinking of economic priorities and the ways in which societies care for their members, particularly when they are in need'.
As the Government relies heavily on economic theory to guide public policy. It is important for the decision maker (in this case the government) supported by the data to figure out the right incentives.
For an example, universities receive state money for each student they enroll. So universities had financial incentives to recruit as many students as possible but were not obliged to help them succeed once they were in class. This pushed the government to award state money only for the number of students who complete their courses or earn degrees. Thus, more resources were channeled from marketing to programs that helps students learn better. Thus, the right Incentives can help solve problems without adding more resources.
Another example is to improve healthcare instead of spending more money, insurers, doctors, hospitals and patients could be given incentives to produce the most effective care possible at the lowest possible cost.
When Vietnam was under French colonial rule, the regime issued bounty on rats to exterminate them, giving money to people for handing in rat tails. The plan backfired, to make as much money as possible the rat-catchers cut the tails of the rat and released them allowing them to make baby rats. The policy increased the population of rats.
As such when many argue that economics does not reflect human reality, i.e there is a huge gap between the rich and the poor amongst others. Economics merely provides the tools but it is down to the decision maker to make the right decisions by placing the right incentives in the right place. For example which is better at fighting climate change, a gas tax or increase in fuel efficiency.
Commissioned for the Christian Thinking in Economics to clarify the good and bad sides of economics.
Copyright Charmele Ayadurai, 2022.
Created 20 May 2022. Last Updated: