In an 1849 essay, Thomas Carlyle described economics as the ‘dismal science’. Attempts to elevate the discipline involves the use of mathematics and statistics, which John Maynard Keynes thought was limited by its assumptions and simplifications usually hidden in unhelpful symbols and equations. Fellow economist Kenneth Boulding concluded that quantitative tools brought both ‘rigor’ and ‘mortis’ to economics.
While much of economics only provides employment for economists and is a veneer of learning to decision making, some tenets are indeed insightful.
First, supply and demand of goods and services is the basis of life and economic activity. Around 60 percent of global national income is driven by consumption. While policymakers focus on maintaining the right level of demand, the supply of essentials like water, food, energy and minerals is increasingly constrained. Inability to produce sufficient raw materials is hampering the transition to lower-emission power generation.
The price of a product is where supply and demand equate in a market-clearing equilibrium. So a growing imbalance between demand and supply is likely to underpin increasing price pressures for many products.
Price sends off signals, with high prices decreasing demand and bringing new supply online to match it. It leads to boom-bust cycles as markets try to reach a sustainable balance. Businesses consolidate and try to lower competition, creating barriers for new entrants, by means fair or foul, to optimise profits. Oligopolies or monopolies in industries like technology, retailing, telecom and airlines manage supply to maintain prices. Items where demand increases as the price increases—called Veblen goods—explain the perverse characteristics of luxury products where affluent consumers purchase high-priced items as a status symbol.
Second, externalities. These are positive or negative side effects of economic actions that affect a third party not directly related. Investment in healthcare, education, infrastructure and research and development improves general workforce quality, productivity, civic participation and quality of life for society at large.
Negative externalities include detrimental effects of human activities, like pollution. Mining has frequent environment consequences, responsibility for which is transferred by private enterprises to the general population. Carbon emissions are the negative impact of insatiable human demand for energy. Private consumption decisions such as use of a private vehicles rather than public transport exacerbates climatic changes. Good government requires measures to enhance the positive and minimise the negative externalities.
Third, the ‘tragedy of the commons’. The controversial concept argues that unfettered access to a finite, valuable resource will lead to overuse, and its destruction will continue as users who exercise restraint will be supplanted by other users who are unwilling to curb their activities. Examples include pollution of the air, land, waterways and even space, as well as over-exploitation like in land clearing and logging.
Overfishing of international waters has left almost 90 percent of all fish species with unsustainable populations. Aquaculture, a response to falling fish stock, perversely creates its own side-effects damaging habitats from nutrient and antibiotic runoffs.
Climate change is another example where Earth is used without regard for the impact on neighbours and future populations. Overpopulation of the planet, because every individual has the right to choose the number of its offspring, is the ultimate tragedy.
Fourth, the ‘free rider’ problem—overburdening of a shared resource by overuse by people who do not pay a fair share. It is related to, but is different from, the tragedy of the commons. Individuals in the commons deplete a resource in accordance with their personal interest, while in the free-rider problem individuals benefit without contributing as there is no cost associated with doing so.
Citizens generally want to enjoy services like roads, bridges, public parks and amenities without contributing to its construction or upkeep. Individuals may refuse to get vaccinated, as occurred during the Covid pandemic, on the assumption that everybody else will reduce their personal exposure to infection. Individuals seek out free online services and software, which is in fact subsidised by advertisers or other users.
The free rider problem is also evident in international affairs. Many European and Asian countries use the expensive American defence umbrella to reduce expenditure on their own security. Advanced economies seeking to lower their carbon footprint have cynically relocated polluting heavy industries, like manufacturing of steel and some chemicals, to emerging countries that must bear the cost of the environmental damage. Many countries and industries today are hoping that other actors will reduce their carbon emissions, while profiting from the benefits to the environment with no direct cost.
The problem is that no party would voluntarily produce goods or services under these conditions; the shared item is not provided or must be made available with public money.
Finally, the idea of the ‘corner solution’ highlights difficulties in decision making when the chooser is either unwilling or unable to make a trade-off between choices. We want endless government services, but want taxes to be low. We demand low prices, but want to be paid well and decry exploitation of workers. We are unwilling to sacrifice our living standards to mitigate carbon emissions.
These principles identify key tensions in our social and economic fabric. It is about the best allocation of resources—to whom, how, at what price, and all while reducing the adverse effect of our decisions. Economics assumes rational decisions and efficient markets. But our world is illogical and people are imperfect. Our theorems are frequently little more than elaborate justifications for egocentric, adaptive and pathological selfishness, which we criticise in others but justify in ourselves.
Humanity’s major challenges require cooperative, not individual, solutions. On the other hand, Jane Austen feared that there was no cure for selfishness. In Cloud Atlas, novelist David Mitchell concluded that it would eventually spell the extinction of the human species.
(Views are personal)
Satyajit Das | Former banker and author of The Age of Stagnation