If economics is a science, why isn't it being more helpful?
Updated: Nov 11, 2019
Economists know the price of everything and the value of nothing. Values are up to us
The government’s top two economic advisers are in stark disagreement about something straightforward: whether the Australian economy would benefit from a bigger budget deficit or not.
The governor of the Reserve Bank says he is running out of room to cut interest rates any more, and that some government spending would help stimulate the economy. The secretary of treasury says no such stimulus is necessary. Who to believe?
If economics is a science then you would think that two advisers to the same government, giving advice about the same economy at the same point in time, might be able to agree on the answer. If physicists can agree on how to make an object move and physiologists can agree on how to resuscitate a heart that’s stopped beating, why can’t economists agree on how to boost Australia’s flagging wage and GDP growth
Economics defines itself as “the science of the efficient allocation of scarce resources”. I’ll come back to the science part shortly, but let’s take a close look at all the other words first.
Everyone knows that economists are into efficiency, but not everyone knows what economists mean by “efficient”. That’s because not only do economists disagree about the need for a budget deficit, but economists disagree about what efficient means too. Take building a new house, for example.
Is it efficient to knock down an old house, cart the rubble away and quickly build a new, prefabricated house? Is it more efficient to use the bricks from the old house in the construction of the new one? Or is it efficient to work with the structure that’s already there and modify it as little as possible? The answer depends on how we value waste disposal, time, transport costs and aesthetics. Would you trust an economist to have the final word on what constitutes an “efficient” house?
What about when something breaks? Is it more “efficient” to repair it, or replace it? The answer depends on whether you are talking about the efficient use of your time, natural resources, or money. And if you think economics is all about money, then how come governments say it is “inefficient” to spend more money on preventive health, crime prevention and even preventing climate change? How can spending a little bit today to save a lot in the future be “inefficient”?
And now to “allocation”. To allocate means to distribute, share or divide up. Which means economics, by its own definition, is all about sharing and distribution. Who knew! Economists and politicians often suggest that economics is about “growing the pie” and that questions of distribution are best left for others, or left until later, or ... just left out altogether. But if economics is about “efficient allocation” and we can’t be sure what “efficient” means, then it becomes impossible to separate conversations about economics from conversations about equity.
I’m not alone among economists in believing that distributional issues are at the heart of economics. These days, even the World Bank publicly argues that reducing the gap between rich and poor is not just fair but good for the economy. And these days, even the IMF argues that taxing polluters and reducing greenhouse gas emissions would be good for the economy. Trying to separate distribution from economics is like trying to separate sound from music or votes from democracy.
How about “scarce”? Surely, I hear you sigh, economists can agree on what scarce means. Nope. Some economists think that old-growth forests in Tasmania and the Amazonian rain forests are scarce because their complex ecosystems are literally irreplaceable. Other economists think that trees are trees, and there’s nothing wrong with chopping them down in one place and planting them in another.
Like everything else in economics, the definition of scarce is contestable, and it revolves around what thing you think can substitute for another. Some people think that Pepsi is a substitute for Coke. And some people – but not many koalas – think that that tree plantations are substitutes for old-growth forests. And some people refuse to believe that renewable electricity is a substitute for coal-fired electricity. Like everything else in economics, there is no right answer. Intriguingly, economists usually call things like fish and forests “renewable resources” and things like iron and copper “finite resources” even though the solar system is full of asteroids and planets made of metal and we are yet to find evidence of fish or forests anywhere else in the universe.
And finally, there is the definition of “resources”. By now you have probably guessed that economists can’t agree on what constitutes a resource either. Are retired racehorses a resource for the pet-food industry or proud animals deserving of dignity? Is asbestos a resource for making cheap brake pads or a dangerous pollutant best left in the ground? How about the air we breathe? A former chief economist at the World Bank once referred to Africa as having too much fresh air and suffering from “UNDER-pollution”. For him, the atmosphere was nothing more than a low-cost (“efficient”?) dumping ground for industrial pollutants.
Which brings me back to the question of whether economics is a science. There is no doubt that economists can sometimes use scientific methods to develop some conclusions to some questions, based on replicable and repeatable methods. But there is also no doubt that most of the big questions that we collectively face are simply not able to be answered with reference to rigorous experimental evidence.
The reason that the government’s two most senior economic advisers disagree about macroeconomic policy is that neither of them have ever seen an economy with wage growth as low as ours, low productivity, low GDP growth and record low interest rates. Their instincts and advice should be taken seriously, but neither of them has any experience managing an economy like the one the Coalition has created, and neither of them know what will happen next, even if their advice were to be followed.
Similarly, when it comes to decisions about increasing unemployment benefits or reducing greenhouse gas emissions, it is absurd and unhelpful to suggest that an economist – or any economic model – can determine what we “should” do.
The meaning of the words: efficient, allocation, scarce and resource are all contestable. One person’s trash is another’s treasure and one woman’s call to close the gender pay gap is another man’s loss of privilege.
I like economics and I think it has something to offer any democracy that must make hard choices. Economics can help identify trade-offs and develop policy solutions. But no economist can tell us what kind of society we want to live in, how much of our natural environment we want to protect or even what kind of house we should live in. Economists know the price of everything and the value of nothing. Values are entirely up to us.
‘The RBA governor Philip Lowe says the economy could use some stimulus. The Treasury head disagrees. Who to believe?’ Photograph: Mick Tsikas/AAP
• Author: Richard Denniss, chief economist at the Australia Institute Source: The Guardian