• The Invisible Hand

Politics: The Enemy of Economics?

For an economist, politics will always seem irritating and incomprehensible. Politics is the mechanism through which economic theory is mostly applied in our economy, yet it is also the mechanism through which sensible economic theory is so often stifled.

"Devolved Parliament" by Banksy

Economists make the assumption that individuals make rational decisions and it is tempting to make the same assumption about government- all politicians are looking to maximise the satisfaction of a country’s population in the long-term. However, the key difference between decisions of the government and the individual is that the effects of the government’s decisions do not directly affect the decision-makers, so the incentive system is different. The government might abandon a forward-thinking well-researched economic policy which would benefit society in the long-term, for a short-term election bribe. This decision maximises the utility of the governing class but not of the electorate. Clearly, the standard economic theories and assumptions do not apply to decision making of the government. However, this does not mean economists ought to adopt a nihilistic attitude and attempt to eliminate all politics from the process of economic decision making. In fact, this means it is even more important that economics includes a political element so that the work of economists can be applicable in the real world.

Most of economics is focused around government policy. This is the area that economists get the most media attention from and it is the area that think-tanks have spent years researching. Government policy is inherently political; therefore, economists must accept that a political element exists in economics. Some economic schools try to distant economics from subjective statements and make economics entirely empirical and statistical such as the Neoclassical School. However, the Public Choice School and particularly James Buchanan integrated political factors into economic analysis. He looked at how the incentives of politicians and bureaucrats affect decision making something Keynes never considered. He, unlike all other economists, assumed economists' ideas might not be able be easily accepted and implemented even if they benefitted the economy. Economists can come up with all the theories they want but ultimately, they must be legislated by the government and therefore there is a political context to consider. This was something classical economists such as Adam Smith were acutely aware of and in fact, at this time economics was called ‘political economy’ rather than its modern equivalent.

It is also an overly simplistic view to see political and economic thought as entirely independent. All economic theories require political value judgements on some level. For example, judgements must be made about the freedoms of the individuals, the welfare of society and the class structure in an economy.

Wilfredo Pareto was an avid supporter of fascism who believed that there should be a very limited role for the state so that market forces could work fully. He believed in individualism and embraced the idea of an elite ruling over the weak. These are clearly political value judgements and it is inevitable that these had an impact on his economics work. His eponymous theory of Pareto efficiency states that an intervention by the government can only be justified if it makes somebody better off, without making somebody worse off. This is fundamentally an argument for a limited role in government and it embraces the idea that the rights of any individual are sacred and should not be violated even for the benefit of the common good. There is a clear link here between Pareto’s political theory and economic theory which is all too common among economists.

Often it is economic theories which are created to justify political beliefs rather than the other way around. Socialist economics was developed to provide an economic justification for the political desire to reduce equality. If everybody thought the other way around economic thought would be very different. People would objectively rate the merits and demerits of any economic policy and develop political theory around these policies. Yet economic theory is much more often guided by selfish political interests (eg for lower taxes) or emotional inclinations.

A clear example of how economists are not totally objective is the significant role that corporate finance plays, particularly in the US, in funding economic think-tanks and research. The 2008 financial crisis revealed the large number of economists who had been doing lucrative, but misleading consultancy for the financial sector.

Economists may assume consumers act rationally and objectively, yet perhaps they are themselves influenced by these political judgements. Economic thought is not independent from politics and this should be accepted rather than ignored in our economic analysis.

Economics is far more complex than simple laboratory experiments, instead, economists need to consider the political implication of their policies. Will it get support in Parliament? Will it be popular with the voters? Will special interests get in the way? With the neglect of these important questions, economic theories can struggle to be credible in the real world. Therefore, economists must consider politics in their process of economic policy-making.

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