What’s wrong with economics — 5 (Policy)

The illusion that one can be scientific about complex phenomena (such as the workings of economic life) that depend on facts, values and information that we could never ascertain, is a dangerous one. It leads to the elevation of people as ‘experts’ whose prescriptions are unquestioned. It leads to claims that, lacking the detailed information, are necessarily broad and easily sensationalised, creating pressure on politicians to do the wrong thing.

In the decades that followed Keynes’s macroeconomic analysis, for example, economists thought that they had truly understood the aggregates such as employment, output,  and inflation, and could prescribe policies to control them. And politicians accepted that economics was now a genuine science that could maintain the health of the economy as surely as medical science could preserve the health of us all. But the economists’ prescriptions soon showed their side-effects. Expansionary policies boosted aggregate employment, but larger and larger doses of inflation were required to sustain it. The Phillips Curve (still taught as established wisdom in the fashionable French business schools), either exploded or went vertical.

Centralised production and investment was supposed to be more rational, but such policies ignored the impossibility of the planners having the necessary information and the less than benevolent motives of the policymakers who would make the decisions about how much money should be directed where and to whom. Focusing only on what they could measure objectively, economists overlooked the depressive effects of bureaucratic control, of monopoly provision, and on the sheer size of government industries on incentives, morale and motivation. And the. Policymakers they advised overlooked the wider consequences of supposedly scientific policies: for example, how tariffs meant to support domestic industries led to retaliation and the prolongation of inefficient businesses that could never match international competition.

Economists might insist that cost-benefit analysis is essential for any rational policy, but how can they measure costs? How can they measure the distress of those whose homes are demolished for a new road and the pleasure given to those who can now drive a little faster? Likewise, they might call for more competition in certain industries, but who can known what an effective amount of competition is? This is something that has to be discovered by those in the industry: it is much more in some than in others.

The challenge for economic planners is exactly that of the market: to discover where price will equal marginal cost. The market does that by poly-centric analysis and action, using local knowledge and understanding. The planners fail because they assume facts that are not known and can never be known. People have divergent values: some are buying the same things that others choose to sell. And people make different decisions about the future — something we cannot know, and have to make a judgement on before you can decide what to do. Any economist, or politician, who claims that such judgements can be made scientifically is in fact simply exposing us all to their personal opinion.

Eamonn Butler