“Economics shapes our everyday lives,” he says, “but the notion of value in the economic domain doesn’t come close to defining what is really valuable in life: things like love, family, career.” What does the economic system value? Profit. Russon acknowledges that the economic set-up we have is essential in our society. “We need banks, we need money, we need to participate in the marketplace,” Russon says. “However, although economics is important, it must be subordinate. It can’t be in charge. When the marketplace sets the terms for our lives, we’re in trouble.” John Russon
I just can’t help myself. When I read this piece on the University of Guelph’s homepage (my university), I just had to respond somehow. It is clear to me that Russon’s thinking about what economics says or doesn’t say is muddled.
1) Economics is fundamentally about people. It is the study of how people behave given a world of scarcity. One of the assumptions we find useful is that businesses try to maximize profits. It turns out to be a pretty good assumption about how they really behave which helps us make predictions. But businesses (or firms as we like to call them) are only half the story. The other half of the market are the households who are made up of families who love each other and face the world with their value system. They supply inputs such as labour (which makes for a career) and savings (which banks turn into loans) into the market place. Households also buy the goods and services that firms produce. People do not think about profits per se but about their happiness (or utility–which is a concept developed by a philosopher by the way). Ultimately, everything goes back to households who care about being happy. It turns out that when their stock portfolio or savings (at the bank) makes positive returns due to profits made by firms who borrowed the money, it makes them happy. When companies make profits and pay their workers, it makes them happy. When people use money instead of barter to pay bills or buy things, it saves so much time that it makes them happy. Institutional market-less poverty is truly miserable as the Great Leap Forward showed us.
2) All economists acknowledge that markets can fail. In the case of the environment, it is precisely because it lies outside the market system that it is failing. The environment has what we call externalities associated with it. Thus the market does not capture all of the costs associated with firm activities. We acknowledge that this is a problem which requires a solution. But not all solutions are created equal. We would argue that the best ones work inside the market to get the right results. For example carbon taxes are one solution to the problem and one that many economists think works better than environmental regulations. However, either solution imposes a cost on the firm when they pollute. They can no longer treat the environment as if were free. After all free is really a price. At the other extreme when a price becomes infinite (which is what I assume priceless means in this case) then there should be no activity at all. No heat in our homes, no food on our tables, and no clothes on our backs because consumption of each of these degrade the environment to some degree. Not a happy place for households.
3) Ipso facto we need prices somewhere between zero and infinite to help households make good choices. In econ-speak we say that people maximize utility (which contain their preferences) subject to constraints, constraints that create prices. For example when my children were young I worked and with my income I bought things like toys because it made me happy because of the pleasure it gave my children. I didn’t buy every toy available because I was on a budget. I chose things like books and Lego rather than items with batteries because I thought these toys were educational and I hate noise. Clearly, I entered the market-place a person with love, family and a career and found what I was looking for. The important stuff.
Books I love. by Natalie MacNeil
What can I say but a heartfelt thanks to Natalie for recommending my book to her audience of women? I am glad she loved it! It seems to me that economics is usually thought of as a male dominated subject (especially finance) but my book has a definite feminine side…one that women can relate to. (Just so you know many men have enjoyed it as well.)
Let me quote from my final chapter…
Well, there you have it. A few big ideas and a lot of small talk about markets. I hope you feel more confident during cocktail party conversations. Even if these kinds of conversations aren’t your thing and you would rather discuss the latest movie or novel, there are still some benefits to knowing this material. If you happen to be a women, remember that an educated understanding of a subject viewed as a typically male one is like fantastic underwear. No one has to see it, but you can feel the difference and it changes how you carry yourself. If you are a man, lightly chit-chatting on these matters with savoir faire is very attractive, especially if you know when to stop. Cocktail Party Economics pg 168
Fighting devastating ignorance with fact-based worldviews everyone can understand.
Gapminder Foundation was founded in Stockholm by Ola Rosling, Anna Rosling Rönnlund and Hans Rosling on February 25, 2005. Gapminder
Facts can tell stories and this is a terrific example of that statement. You could spend hours exploring the Gapminder site because it is rich in animated graphs and videos about issues related to the health and wealth of nations. Moreover, you can go back at least one a year to find out how the world has changed. I do this every winter when I teach introductory macroeconomics–I get the updated map of the world to show my class. My basic message is this: It is good to have a high level of income because it is so linked to living long and prosperous. The role of economic growth cannot be over estimated when we explore the idea of standard of living. Moreover it is not a zero sum game. The poorest of the poor can be made better off and we in the richest nations wouldn’t notice a drop in how we live. After all, every country started out in the poor and sick camp. Fortunately–for those of us who live in the developed world–we escaped much of our historical misery. I believe we should do everything we can to help prosperity go global.