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Tuesday, April 11, 2017

INQUISITION 17: Separation of Economic Theory and Political Consequences


Economic theories, when placed into concrete political actions, have real world consequences.

While this is akin to stating that sunshine causes shadows, it is worth addressing because some politicians and economists have forgotten the obvious.

Seemingly the study of economic theories in modern times has been devoid of any consideration of real world consequences whenever real policies are created using one or another economic theory.

In past times when the study was called Political Economy, there was an explicit acknowledgment of those consequences.

Some Marxist philosophers have suggested that both the intent and the results of that division were motivated by a desire to enhance the political domination of the working class by the monied interests. Notably, this was put forward by Ellen Meiksins Wood in her essay "The Separation of the Economic and the Political in Capitalism", originally published in NLR 1/127 (1981) [http://www.versobooks.com/blogs/2302-ellen-meiksins-wood-the-separation-of-the-economic-and-the-political-in-capitalism].

My suggestion is this: it is time to reconnect economic theory with political reality regardless of when or why the division was implemented. We can do that without any outdated political or economic philosophy like Marxism simply by stating our desired real world outcomes ahead of the policy introduction

Governmental policies based on economic theory have immediate consequences for the lives of most citizens. It is irresponsible to ignore the consequences and focus on only the 'pure' math or theory of any economic idea.

Sometimes political rhetoric suggests that Economic Theory dictates a particular regulation or lack thereof in order to conform to pure economic theory. The corollary suggestion is that any political effects will be balanced out by a movement toward a more pure and efficient economy that will benefit all in the long run.

This idea is nonsense. Keynes said it best: '..in the long run, we are all dead..'

It is irresponsible for economists to argue that the introduction of 'free markets' is consistent with economic theory and is therefore good for all when the demonstrable effect of those polices is to exacerbate income and wealth inequalities and human misery resulting from those inequalities.

That statement is the same as this statement: 'Since our goal is to increase inequality, we will introduce Free Market reforms since we know that those reformers will increase inequality.'

An approach which is both more consistent and more real is to identify the outcome goal of a policy and then to introduce the policy with its outcome goals stated clearly. It is even possible to forecast or predict what the effects will be in the real world in support of that policy. Then, the policy can be adjusted if the outcome goals are not being met.

Here are two specific examples of how that can, and does, work.

EXAMPLE 1

Suppose a country's government wants to improve the lives of all its citizens. It then identifies what it wants its citizens to have. Then, it costs out those changes to get a forecast cost of all the changes. Last, the government raises taxes on its agreed group of income tax payers by enough to implement the changes. If the tax change raises more money than the new benefits cost, then it reduces taxes.

This is called the Nordic model and functions with some variances in Sweden, Norway and Denmark.

EXAMPLE 2

Suppose a government decides that its transportation infrastructure needs repair in order to prevent a reduction in GDP from transportation failures.

The government then costs out the repairs necessary and raises taxes by enough to cover the repairs, or at least enough to cover the debt service on the bonds it sells to finance those repairs.