Economics is for the People

By Collin Li

When an economic debate descends into something along the lines of “the economy exists in order to benefit the people – not the other way around,” you should reply:

But what is an economy other than many millions of people interacting daily?

Let’s not understate the reach and application of economics – it infects every facet of society.

(By definition in economics, individuals in a marketplace trade according to their “utility” – a term used to capture the personal values of each individual, thus allowing the individuals to maximise their well-being in the marketplace.)

I certainly agree with the notion that the economy should serve to benefit its people. However, the initial retort above suggests the economy and society are separate. This is nonsense.

“Markets improve the ability of economies to serve society.”

In fact, we are actually let down when markets are overridden and distorted by government spending intended to “prop up the economy,” rather than to serve society. When the government spends a lot of money on our behalf, apparently it is good for the economy, with proponents citing improved GDP and the multiplier effect. However, one must also remember that government spending must be funded by some kind of taxation (whether directly or indirectly). So when the government spends our money on our behalf, they are more likely to be spent on things that we may not even want, and thus there is an opportunity cost.

Economies are much better stimulated by allowing people to spend their own money, because they use it the best, and that, in turn, helps the economy provide the most useful services to society. After all, the economy is supposed to serve society, not the other way around, isn’t it?

So when we let the market work, instead of the government, the benefits for society are maximised.

8 thoughts on “Economics is for the People”

  1. I think this idea has 4 fatal flaws:
    1. It assumes perfect and public information in markets – something that does not always exist, meaning that people need to be protected from malicious companies by consumer trading laws etc. Markets only work where complete contracting exists and the government should either intervene to correct problems caused by incomplete contracting or intervene in the mechanisms that govern contracts.
    2. It assumes that no market failures exist and that all participants have equal ‘market power’- because of externalities this does not exist and due to market inefficiencies the work of Stiglitz shows that minimum wages can be efficient and not lower employment. Very basic microeconomics also shows as a lead on from the externalities idea that public goods are underprovided in a private market, for example health and education etc.
    3. Humans are not always rational, indeed a lot of behavioural economics shows they aren’t, which a government can seek to intervene in to the benefit of society see Pigouvian taxes etc. People make very short-sighted decisions on their health, even when given the full information, because people are not machines and are present-biased.
    4. Humans are not always utility-maximising, they may act to lower their own fitness in the interests of the group (acting altruistically even if it is for ‘warm glow’ reasons), see the work of Bowles and Gintis.

    Sure, history and economic theory has shown that central planning is an inefficient and socially disastrous way to run and economy. But economic theory and the extension of game theory show that the government can productively intervene in an economy to curb the problems caused by unfettered markets, predatory companies and a lack of welfare.

    • Daniel, I agree that there are exceptions to the rule where government intervention is required. However, sometimes governments intervene not to benefit society, but to benefit the politicians – to win votes and elections. There does need to be a balance though, and like you say, when there are market failures or imperfect information etc., government intervention is essential.

  2. As someone who is clearly and emphatically liberal on economic issues (and I mean that in the sense of supporting policies that promote free-operating market structures, not in the corrupted American sense), I nevertheless regard this article to be utter tripe. It constructs a ridiculous straw man and rebuts it with an equally pathetic counter-argument. If this is the best that we can produce, then I really do despair. And by “we”, I mean both “economic liberals” and “students of economics”.

    I’m reminded of one of the discourse analysis studies which found that the opinions of university-educated people are to a large extent less sophisticated than those of high-school dropouts in deprived neighbourhoods. The difference is that university graduates blanket their trite and poorly-developed arguments in fancy language in order to cover for the fact that they’re not saying anything at all.

    • I think you are overestimating people if you are calling this a straw-man. It is raised by the very group of people you scorn – socialist-types who embellish their arguments in emotive/sophisticated language, which disguises the true consequences of their ideas.

      It is not the best we can produce – it is a reply to the “straw-man”, but I understand if you think there are better debates to be had – there are, but this is designed to destroy the mask of rhetoric, not add to it.

  3. I agree with Peter. What does a ‘market’ here mean? A market for child pornography might exist in an unregulated world, but the harms caused to children surely mean a sane government should ban it. ‘Economy’, ‘market’ and ‘society’ can’t just be bandied about and conflated. Markets are only best when they don’t cause harms that are not internalised in those markets. Further, this argument is an example of virtually religious dogma- markets must be axiomatically true in ALL circumstances, by definition. Even if markets were universally good when unregulated (to which there is a pile of contrary evidence), this needs to be proven scientifically: 1. propose the hypothesis that reducing regulation and freer markets always increase social utility (this model also needs to prove rational acting, utility-maximisation and full public information as other hypotheses), 2. collect evidence, 3. find insufficient evidence and accept the null hypothesis OR find sufficient evidence and continue looking. Axiomatising markets as ‘always good by definition’ means that economics becomes a pseudoscience comparable to Freudian psychoanalysis or alchemy. We should avoid this at all costs.

  4. And I agree with Dean, this is why fields like public choice economics exist or the behavioural studies of democracies and government agents (which is a growing field). I think that government intervention can be hugely disastrous and often indeed is (in both non-democratic and democratic states). I just think this article misses any nuances and declares an ex cathedra truth that markets should ALWAYS reign supreme. And I think this view is manifestly wrong.

    • I never explicitly stated markets always reign supreme.

      I did suggest, however, that markets do better than government. It is responding to the sensational/emotive appeal that “economies should serve the people, not people serving the economy” – an oft-used appeal from lefties for top-down control – and recognising that the bottom-up market system does a better job of arranging resources to meet society’s needs instead.

  5. Because markets are our primary source of innovation, right? Not necessarily. Markets do optimize trends, but a different sort of institution is often needed to initiate those trends. For example: the U.S. military invented the internet, rather than any market. THE INTERNET. Sure, markets deliver newer and better software tools every day, but they never produced the support network to make any of it possible in the first place. Much wealth-generation relies on high-risk/low-reward inventions that weren’t intended to generate profit, like nuclear energy and sticky putty. Many organizations, like the New York Times, are motivated by convictions far more interesting than a want for profit. To paraphrase one former executive at the NYT: the newsroom is tasked primarily with crafting and delivering poignant, impactful journalism. Financial viability is of secondary concern to that organization. In fact, now that the NYT is responding to market forces in order to avoid financial ruin, an excellent dialectic between market and non-market forces is playing out, and will hopefully produce something better than either force could alone.

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