“Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?”
Dan Ariely (Author of 'Predictably Irrational: The Hidden Forces That Shape Our Decisions')
In a world where the two dominant economic systems have been shaped by their impact on individuals, I am always surprised that the study and disciplines of economics are always driven by aggregates. When I raised a question about the relative impacts on different segments of society at a recent economics seminar, I was advised that it was not the economist’s role to look at the standard of living or quality of life across society.
Another perceived impostor in the world of economics is psychology, as if the study of economics is a subject of purely scientific analysis; and yet we all know that economics is an art, not a science, and that figures only tell half the story.
So in this commentary we look at some areas where economics leaves us short, and why impact on human psychology needs to be taken into account.
Those two dominant economic systems are, of course, capitalism and communism. The former has grown into heavyweight intermediation over decades of wealth concentration and generational favouritism, which has morphed into powerful financial organisations which drive the whole system. The latter was designed for heavyweight intermediation in the first place, intended to be controlled by a ‘benevolent’ dictatorship which ensures that everyone toes the party line.
Societies swing between the two systems like a pendulum, reacting against the excesses which reflect the shortcomings of their controlling powers.
Yet the human condition is not one which should be ruled by others: as we wrote on 4th May, disintermediation should be one of the yardsticks by which the effectiveness and fairness of economic systems are measured. Disintermediation requires that the impact on the individual is taken into account, and that the need for people to take individual responsibility and control is recognised.
GDP has some real limitations when it comes to measuring economic wellbeing. In defining life in terms of monetary growth, albeit adjusted for inflation, it takes no account of the other features making up the standard of living. It is very rarely applied across segments within society, and had shown its deficiencies particularly strongly when confronted by technology.
We all experience how technology demonetise is demand and introduces huge scalability to supply, thus introducing a persistent downward pressure on inflation - we have addressed this at length in these commentaries. We have all experienced the extraordinary swings in GDP during the pandemic while under normal conditions we’re asked to take every half percentage point movement seriously - but has it made a corresponding impact on the quality of life?
Economics also tends to major on financial flows, and to ignore issues of ownership and the impact on control and responsibility that individual ownership can bring. Perhaps this is because ownership is just as much a feature of psychology as it is of financial possession.
A truly effective sense of ownership is built over time, and is best accompanied by a combination of learning and earning - in the widest sense. It is the contrast between ‘give a fish to feed for a week, or teach to fish to last a lifetime’. Micro-finance has shown our effective this can be, not only for the individual but also for their local community.
Contrast this with an inheritance passed down to fortunate descendants who have played no part in its construction, or to the winner of a lottery prize who may be delighted by their good fortune but has no idea how to handle it.
It's for these reasons that The Share Foundation links its work to help young people find their Child Trust Fund with programmes of financial awareness, because inter-generational rebalancing relies on interweaving both finance and life skills.
As mentioned earlier, economics also struggles to cope with the deflationary and ‘monetary suction’ elements of technology. A current Amazon advertisement on CNN says ‘At Amazon we don't just think big - we do big’. In a week when Jeff Bezos has converted the revenues from millions of his customers into his single space trip on 20th July, we have a graphic example of the economic impact of monetary hoovering.
The art of economics has much to learn in order to keep pace with our changing world but, most of all, it needs to accommodate the impact on individuals.
The gift of potential when human life begins makes no distinction for nature; in terms of socio-economic conditions, gender, race, creed, nationality or other; yet, as Antoine de Ste. Exupéry pointed out in the epilogue of his book ‘Wind, Sand and Stars’, it is often smothered by nurture: leading to a subservient underclass pushed about by the intermediation of others.
True respect for others will enable every individual to have a stake in the society in which they live, and provide real opportunity for young people to achieve their potential. And respect for others is most effective when it is disintermediated.
Gavin Oldham OBE
Share Radio