Our Economics Are Broken.

And Nobody seems to be willing to fix them

Economics is defined as the science of allocation of scarce resources. The core tenet is that there are unlimited wants and limited resources. Hence, something must allocate resources “efficiently”.

There are problems with economics.

The Who

Who should the resources be allocated to? Any introductory economics class begins with the assumption that humans are rational and humans maximise their utility. The reality is far from it. Without getting into the weeds, humans almost always behave less-than-rationally. That’s unsurprising to anyone who has met at least one person in their life and is older than 5.

Not only does the very fundamental assumption fall apart fast and hard, it renders large portions of microeconomics(and economics by extension) an exercise in futility. It also ignores the critical roles of communities that may maximise overall “utility” for the community over that of any individual.

This assumption also has a troubling side. This assumes that consumption is a fundamental reality. Economics unequivocally states that consuming more is the only possibility. Economic growth absolutely requires more consumption. But we know — and have known for a while — that we cannot keep consuming more. “Developed” nations already consume too much. For example, if everyone consumed as much as the Dutch do, we will need 3.6 Earths worth of resources. Clearly, economics and economic growth sets us on the path to certain overconsumption.

Essentially, the problem with economics is it’s complete and utter disregard for people beyond units of production. People are not just unpredictable but they also have aspirations beyond rational needs and emotions and behaviours that economics fails to consider. Economics also assumes it’s existence in a vacuum. The ceteris paribus assumption underpins most quantitative economics. But all other things are never equal. When physicists or chemists of mathematicians make assumptions, the results are marginally off and have few practical consequences. Economic assumptions filter through to reality and cause real impacts.

The What

Let’s take the example of global trade. Simple economics hastily combined with elementary mathematics results in the assumption that trade is good for society as a whole. But is it? Let’s look at the US. Global trade allowed producers to offload manufacturing to China and Southeast Asia. This destroyed the American manufacturing industry. In the name of economic efficiency, this is a win. Manufacturing is cheaper, more efficient and (surprise surprise) more polluting in China. In this manner, the US offshored not only it’s jobs but also it’s pollution. But the social cost would come due in ways economics absolutely fails to measure or imagine. The jobs lost due to this “efficiency” were lost by people who never needed a college education to support their lifestyle. Economic efficiency pulled the rug out from under their feet, destroyed livelihoods, engendered resentment, and led to a wave of support for Donald Trump who rode it all the way to the White House. The economic and social costs of that are still being paid by Americans and will be for years to come. Economists had no tool to measure these impacts of costs.

Who were the winners? It’s quite evident that tertiary sectors; Finance, IT, Banking etc. were the winners. The trend is clear. Jobs and wealth moved away from the “working” middle classes into the pockets of company shareholders and the so-called “elites”. Once again, economists dispassionately report the Gini coefficient but not what it really means to society. The pent up anger leads to demagoguery, to January 6 style insurrection attempts, and ultimately to deep rifts in society. Where is the social surplus now?

The Now

The pandemic shattered a million illusions and delusions. “Resilience” and “risk-management” were exposed as hollow buzzwords as supply chains crumbled. The highly efficient economy is as fragile as glass, shattering completely as the virus ripped through the world. The global economy cratered. In stepped the infamous central banks. Having famously overseen the worst and arguably most preventable financial crisis in history, central banks such as the Fed, that had flooded the market with cheap money unleashed a deluge. Trillions were pumped to keep economies running. Over in the UK, the Tories could hardly let the opportunity pass and lined the pockets of their friends and even peers for worthless, malfunctioning PPE. As lockdowns eased, central banks and governments twiddled their thumbs, lovingly looking on as consumers began spending again — the ultimate barometer of growth in our consumption and greed driven economy.

All of these “experts” failed to forsee the costs of unprecedented cash being unleashed on the market. And then Putin invaded Ukraine.

Europe’s story is rather similar to the US. Except, Europe became hooked on to a new drug. Cheap Russia gas. Economic sense overrode common sense. In Putin, a sinister pseudo-dictator was coddled by European “elites” for years in exchange for cheap gas, fertilisers and oil. Never mind that this guy was trained by the KGB, surrounded himself with sycophantic oligarchs and crushed any opposition at home, as long as the gas kept flowing. Economic sense trumped human decency. Then Putin invaded Crimea and Eastern Ukraine. While sanctions were levied, the flow of gas continue unabated. In 2022, electricity markets — founded on the very basis of competitive economic markets — failed spectacularly as supply shocks led to margin calls all along the market along with increased speculation. Never mind that electricity and gas are fundamentally critical resources to the very survival and well-being, especially of the most vulnerable, the markets were allowed to fluctuate unabated, banks, producers and oil and gas companies allowed to profit by pushing millions into energy poverty.

Why do we accept this? These markets work but only in very specific situations. Why isn’t uncertainty built into the system? Economists brazenly co-opt mathematics yet make no significant use of it. Complex mathematics govern financial markets but the goal is always profit, never resilience.

Why do commercial, economic interests trump all else? Is it really so imperative for everyone to have the latest clothing that workers in Bangladesh deserve no fair wage? Is it crucial for every household to have two cars when each new one inches humanity closer to extinction? Why do economists fail and fail again? Economies are complicated. People are complicated so why do we pretend that simplified assumptions work?

The Tomorrow

The alarm bells are already sounding as central banks batten down their hatches for yet another recession. As we hurtle towards it, central banks are raising interest rates and stoking unemployment. Age old techniques that reinforce the widening inequality, deal a blow to social order and threaten social services. Is this the only way?

In a simple analogy, should a bank be at risk of failure, the government is likely to step in (and several have done so in the past) and bailout the institution using public funds. The reverse is now true. Banks making windfall gains must be taxed to reduce liquidity, maintain and bolster public spending and help the most vulnerable cope with yet another crisis manufactured by the confluence of poor resilience, greed and Putin.

We need more economists to question economics. To develop it into areas that are critical but ignore. Behavioural psychology, social interactions, community interactions and policy need to become a part of the field of economics. Economics play a critical role in the future. But the economics of today will ensure that we have no future.