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Economics lies by omission

December 15, 2017

When I studied economics at the University of New England back in the late 80’s, we all had to trot off to the mathematics department to be taught differential calculus and strategies for solving simultaneous equations. The application to economics of these mathematical techniques enabled us to find things like the points of equilibrium on supply and demand curves or where the marginal propensity to save or spend might kick in.  On the first day in the lecture theatre a reasonably bemused mathematics lecturer made the pithy observation that there was no way economists could prove anything about a multidimensional society with billions of participants by using a two dimensional diagram drawn on a bit of paper. Isaac Newton, the inventor of calculus, would be turning in his grave.

This observation resonated with me so much that it is still a prism through which I view the machinations of the three terrors of economic thinking – politics, academia and business.

I call them the terrors because by and large those three have been responsible to for almost supplanting the notion of a society with the notion of an economy.  Remember Bill Clinton’s famous line’ “It’s the economy, stupid”

There is a subset of flawed ideas that go along with this – “What is good for business is good for society”, “Government is by nature inefficient, whereas business delivers value for money” and of course, “Lower rates of taxation make everyone better off”

The sales pitch for this line of thinking has probably been going on since Adam Smith came up with idea of the invisible hand of the market back in the 18th century, an example of magical thinking much informed by hope and religious ideology in keeping with the ignorance of the times.

Interestingly, there is no set of guiding economic principles which say businesses should pay back the full cost of the services supplied by other sectors of society that enable their enterprises to run. Society supplies the education for the workforce, the roads and transport infrastructure for allow goods to go to market, childminding services to allow workers to work unencumbered by the responsibility of parenting, society picks up the cost of pollution mitigation, provides healthcare to keep the workforce on its feet, funds research that allows companies to take good ideas to market, our diplomatic and defence capabilities keep sea lanes open and provide pathways to trade in other countries etc.. The list of things society provides the commercial sector for free is extensive.

In economic theory, these things are called externalities. This is a euphemism for the “too hard basket” and this was the subtext of the mathematics lecturer’s statement about the impossibility of reducing complexity to a graph. I used to think economists’ answer to this issue was to simply ignore the complexities and move on with the magical thinking, researching the myriad ways in which economic theory differs from economic reality. But I was wrong.

What economists have actually done, is persuade the rest of us that, despite obvious flaws in the conceptual process and the subsequent modelling, the rules governing economic theory, and by extension the business sector, should be the pre-eminent rules in society.

In the process, as more and more of them have infiltrated the upper echelons of politics and commerce, they have actually bent society to the theory by separating the inconvenience of actual externalities from actual business. Society picks up the cost of externalities, business picks up the profits.

This is the backdrop to discussions about climate change, energy policy, working hours, parental leave, wages policy and any myriad of business issues where companies stand to lose the free kick given to them by poor economic thinking that only recognises simple ideas about wealth creation whilst ignoring the costs the rest of us bear.

Of course, some companies will point to their tax payments from which the government can provide services to the rest of us, and they could also quite rightly, point out we would be a poorer nation if that taxation revenue was not available. The corollary of that argument is it ignores how much richer we would be if business reimbursed society for the services it provides to enable them to trade.

It’s difficult to quantify how much of a worker’s education goes into any given product, which is why economists chose to ignore it, but this is not an excuse for failing to recognise the contribution was made.

This is the nub of the argument about business taxation. The current line being peddled about the benefits of reducing corporate tax is really an extension of the externalities solution, ignoring the financial contribution a society makes to the success of the corporation in favour of a simple supply and demand curve, an example of bending society to the will of the theory.

The only two outcomes of a successful campaign to reduce corporate tax are an increase in taxation for everyone else to fund the things business relies upon for success, or a decrease in living standards. Now, I know I can also be accused of reductionism here by suggesting there are only two possible outcomes here but hey, I have an economic message to sell. The simpler the better.

 

 

 

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