Economics with a human face

Print edition : July 21, 2017
The narrative combines history, theory, anecdotes and diagrams to put forward suggestions for reworking economics for the future.

ECONOMICS is among the subjects highly sought after by students when they turn to collegiate education. With economic aspects very much in the news emphasising the role of the market and of corporations, job prospects may be the main reason, and rightly so, for the preference for the subject. For over a century, economics has had the reputation of being a “science”, unlike most other disciplines in the humanities such as history, politics and sociology.

In fact, in the second half of the 19th century, some economists, chief among them a French engineer-turned-economist by the name Leon Walras had made a deliberate attempt to convert economics into a “physico-mathematical science” with a unifying principle similar to Newtonian physics. Later in the century, Alfred Marshall, Professor of Economics at Cambridge University, brought out a textbook titled Principles of Economics with very little mathematics explicitly, but using diagrams (among them the most familiar being the intersecting of the “supply and demand curves” determining equilibrium prices). In the first half of the 20th century, Marshall’s Principles entered colleges and universities throughout the English-speaking world. Then came Paul Samuelson’s 1948 publication, Economics: An Introductory Analysis (from its 1964 sixth edition titled just Economics), which replaced Marshall’s work not only in the English-speaking world but in Japan and, to a large extent, even in many countries in Europe.

A rigorous mathematical model of what was by then known as the “competitive economy” was presented by two American economists, Kenneth Arrow and Gerald Debreu, in 1954 showing how the allocation of resources by the market with competitive conditions was superior to what a socialist regime could achieve through administrative decisions. (Both these economists later won the Nobel Prize, Arrow specifically for his work on the competitive economy.) From then on, this version of economics, widely known as “neoclassical economics” (different from “classical economics” of Adam Smith and David Ricardo, and Marxian economics and “institutional economics” propagated by some early American economists), has reigned supreme.

There has been growing discontent mainly because of the disconnect between the rigour of the theory and its relevance to real-life conditions. In the real world, markets did not seem to work according to the tenets of the neoclassical theory. Many questioned the basic assumptions of that theory: that all who enter into exchange transactions are “maximisers”, producers maximising profit and consumers maximising “satisfaction”, and that this follows from all decision-makers being “rational”; that information is freely and equally available to all participants; that production, whether large-scale or small-scale, will have the same cost per unit of output; and many more. To begin with, questions arose from students who were more interested in the relevance of the theory than in its rigour, and felt that economics as a discipline was narrow and inward-looking. In Sydney, Paris, Cambridge and other centres, students started demanding that teaching of economics be radically transformed. Fairly soon, senior economists from different parts of the globe came forward to champion the cause.

What really shook the complaisant attitude to economics came from real life, the 2007-08 meltdown, which hardly any economist had anticipated, but which soon became “global”. There were other global experiences, too: growing inequality of incomes and wealth; “jobless growth”; the recognition that the earth’s natural resources were being rapidly depleted and that global warming and air pollution were affecting not only economic activity but also the health of people in practically all parts of the world.

It is against this background that Kate Raworth, who teaches at Oxford University’s Environmental Change Institute and is focussed on exploring the economic thinking needed to address the 21st century’s social and ecological challenges, puts forward her suggestions for reworking economics for the future. Judiciously combining history, theory, anecdotes and diagrams, she provides a narrative that is easy to follow. I shall not try to summarise all her recommendations but shall concentrate on a few.

The thrust of her arguments is that if one is to see the mismatch between the problems to be solved and theory’s failure to deal with them, one has to recognise that economics not only deals with some narrowly defined issues but is also part of the attempt to understand and resolve complex problems of society at large. The inner boundary of her “doughnut”, therefore, is appropriately titled “social foundations” and the outer boundary is an ecological ceiling of planetary pressure that should not be exceeded. To paraphrase, economics as a discipline must have two foci: how to ensure tolerable living conditions for all human beings and how not to exceed the upper limit of the ecological ceiling. Stated thus, it appears not only noble but even reasonable. However, it goes against the scientific discipline of economics, especially its neoclassical version which is averse to any policy objectives and assumes that the only prescriptive statement it makes is to leave all economic decisions to respond to signals that the market provides.

At a different level, the only policy objective that is compatible with a “neutral” scientific approach in economics is to pursue growth of income. At the national level, it implies maximising the value of total output represented by the gross domestic product (GDP) on the assumption that when output increases everyone will be better off, possibly unequally so. That being the case, the author’s first suggestion is that there must be a change in goals. She suggests “meeting the human rights of every person within the means of our life-giving planet” as the new goal. It may be noted that whether economists agree with this proposition or not, at the global level and via the United Nations’ efforts, there is a general acceptance of this goal. To achieve this goal, it is necessary to think of the economy as embedded within society and nature. It also calls for a different understanding of human nature. The decision-makers of neoclassical economics are “maximising” individuals who enter into market transactions as self-interested and calculating beings. A different and more realistic understanding of human beings as social, interdependent, willing to share and learning through experience is necessary for a new economics. To cater to the needs of a growing population and to raise the standards of living, increase in output is necessary; but it is not necessary to make a cult of growth.

Resource power

To be agnostic about growth does not mean being indifferent about it or refusing to measure it. It means promoting human welfare whether GDP is “going up, down or holding steady”. That is more easily said than done.

The author recognises that the underlying problem is not merely economics as a discipline, but that it is set within the mould of the capitalist system with neoclassical economics being its brand ambassador. While claims are made, including by some well-known economists, that under capitalism the consumer is king, the reality is that the market is substantially controlled by those whose profits depend on persuading everyone to buy more and more. What the market needs are customers; it is immaterial whether they consume or not, but they must purchase.

Theory is silent on the fact that purchasing power arises from resource power, which, in turn, depends largely on the pattern of ownership of resources. The market is driven not by tastes and preferences but essentially by those who have the power to purchase.

In the present phase of capitalism dominated by finance, the market has become even more powerful because transactions, instead of production, have become the main source of income and even of wealth, especially for those who are already wealthy. The ethos is different from what it was in the early stages of capitalism where the owners of capital were accumulating wealth but were using it for increasing production and thus ensuring growth of goods. By contrast, we are now at a stage where the pursuit of growth is largely the pursuit of financial assets, of claims rather than goods, neglecting the basic needs of those who are deprived of possessions. At the same time to the extent that production also is increasing without adequate protection for natural resources and the environment, prospects for the future do not appear to be promising.

What the author aims at is to warn about the great crisis that awaits humanity if the present economic policies based on misinterpretations of economic processes are not altered radically. However, she is not a prophet of doom. She provides something of a new road map for the future, specifically of economic thinking and action. A worthwhile and challenging beginning, indeed.

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