We must change our economic objectives

In response to this essay I have received some feedback in the direction of 'Economists are supposed to care about the economy - not normative aspects of our society'. In light of this I want to frame the context from which I am approaching. This essay is explicitly directed towards politicians and those that lead our society. They necessarily need to make ethical decisions every day, and how they make those decisions is in large part influenced by what they consider their objectives. If GDP is the only objective, they will make only decisions which are in support of growing it and disregard everything else. Thus, I am advocating for these leaders to broaden their scope of consideration and adapt to the world around them.

Objectives

As with many things, context is incredibly important in understanding the origins of economic goals and consequently goals that the state adopts. During the early 17th to late 18th century, economic thinkers such as William Petty, Richard Cantillon, Adam Smith and David Ricardo began writing about how we as a society must produce a surplus and how this surplus will be distributed. This period of expansion in economic thinking is undoubtedly linked to the sweeping movement of Enlightenment racing across Europe at the time, in essence, the birthplace of modern rational thought. As USYD Professor Tony Aspromourgos comments, Enlightenment was in a broad sense synonymous with the inauguration of modernity,

"The project of advancing the human mastery of nature, including the human mastery of human nature –with the means to that objective, unaided human reason (and sensory perception), being deployed specifically to the goal of human emancipation from natural constraints and chance, and to the conscious, rational (re)construction of polity, society and economy (and indeed, nature itself)." (Aspromourgos 2001)

Fundamentally, economics was a central pillar of this, since material progress and abundance is a necessary precondition for human emancipation from scarcity. A surplus was the most essential goal for society as a whole during that time. Before we could achieve a surplus, we were metaphorically chained to the land and the work required to survive. It is also not surprising that economics originated in France and England, the wealthiest and most forward-thinking nations of the time. Leaders in these countries were seeking a basis for nation-building, a theory to inform their policy choices so their government could achieve a surplus in the long term.

It is strange to think then that these economic objectives have hardly changed since the 17th century. Of course, they have become much more sophisticated and we measure many more things; though we still largely all aspire in a 'more is better' direction. This of course is a general statement, but it is hard to refute that the more market oriented governments and politicians around the world pursue economic growth and job creation as the salient objectives to their work. Central banks target 2-3% inflation ranges with the underlying assumption that the economy will be growing at 2-4%.

You then have to ask the question, is this still an appropriate perspective to hold? Does every dollar of GDP growth still contribute to the same increase in utility/satisfaction/life improvement for members of the state as it did 200 years ago? The hard part is, there are no objective means of even answering this question! We have built our society on the assumption that "more is better", but it is impossible to verify its validity. Now, of course, some objective improvements occur with the "more is better approach". Human health has objectively improved. The number of people who live in poverty has objectively decreased. There are objectively fewer wars today than there ever have been. That being said, is the "more is better" approach the only overarching objective which would have allowed humanity to achieve these goals? Or is it a remnant of a different context, in which we were trying to escape the shackles of the land and the work to survive?

Now, I realise there are some obvious caveats to this line of thinking. People in the USA are generally more satisfied with their lives than people in Afghanistan. Fundamentally, however, the USA and Afghanistan cannot have the same economic goals on this basis, because this relationship does not hold forever. One of the first things you learn as an economics student is that in life, there are usually diminishing marginal returns.

Many studies have proven this to be empirically valid, that low-income countries experience low life satisfaction, and life satisfaction experiences a positive relationship up to a certain point after which the curve flattens out. There is also the debated Easterlin paradox, which has shown that satisfaction appears to be strictly monotonically increasing with income when one studies this relation at a point in time across nations, however in the long term, increases in income does not have a positive relationship with life satisfaction.

The image above is an interesting visualisation of this point. There is a strong positive relationship between GDP per capita and life satisfaction untill you get to about US $30,000 PA. Here this relationship begins to break down.

It becomes harder and harder to justify the approach that "more is better" when you consider the underlying data. Limited material resources also begin to play into the fold. Regardless of the (limited) relationship between GDP and human quality of life, we cannot continue on our current path if we are eventually going to run out of the materials we need to maintain the current system. Another question that needs to be asked revolves around technology. If technology increasingly allows us to do the "work" required for societies basic needs to be met, this implies there will be less work in 'real' jobs. Technological development is primarily driven by the cost savings induced by replacing human labour, and this will keep happening at a compounding rate. This was the case even before automation or robotics became a possibility, there are many technology based services which employ neither yet do work that was done by humans previously. Think about a service like Xero. Xero employs around 3000 people which is wonderful since these are generally high paying jobs. However Xero has over 2 million customers. How many bookkeepers and accountants would have been employed if it were not for Xero?

And then you consider automation and robotics, a world where cars & trucks, retail, office administration, housekeeping, manufacturing, phone services and many other jobs will be no longer available for humans. Is there not fundamentally a limit to how many goods and services one person needs? If more of those needs are met by technology then it becomes difficult to see how humans will still have a solid labour market. This is not a condemnation of technology, but rather of an economic system which measures success by hours worked and raw output rather than efficiency and human satisfaction. Technology replaces humans in the production process, and specific proportions of the production process will always remain the same, so to assume 'new jobs' will indefinitely be created is optimistic at best.

For these reasons, I would argue that a change in government and private sector economic policy objectives are necessary for developed countries. The economic context of 2020 in developed countries is vastly different to the economic objectives of the 17th and 18th centuries. A concept mathematicians often like to use is to test the underlying implications of an idea is to extend the inputs to infinity or zero. Emphasising inputs to extremes is a useful concept in economic theory, since there are two variables which naturally lend themselves to an extension. Material resources tend towards 0 in the very long term, and time tends towards infinity. If you consider the economic equation where we have resources, human actions and economic structures as inputs over an infinite time horizon it becomes relatively obvious the "more is better" approach is not going to work out. As discussed earlier, it does not even serve as a suitable target outcome. I suggest the target outcome for this equation should be human happiness, satisfaction and quality of life as well as human survival. If we are not maximising for either or both of these objectives, then our goals are illogical and not in our best interests. The obvious constraint on this equation should then be minimising resource use.

In practical terms, this is not even a massive change. We want to minimise resource use, whilst maximising human satisfaction, quality of life and survival. Governments thus need to realign economic objectives to balance these two objectives.

1. Maximise humanity:

   1. Human physical wellbeing: A healthier society is in everyone's interests: longer life expectancy, fewer diseases, fewer premature deaths, fewer hospitalisations, less obesity.
   2. Human mental wellbeing: If we as a society are not trying to increase how happy citizens are every day then what are we doing? The modern age has seen a rapid increase in depression, anxiety, stress and general unhappiness in developed nations. Increasing unhappiness is not a trend we want to see; this is a trend we want to reverse

2. Minimise resource use:

   1. Existing resources and environments: The existing resources of earth need to be used as little as possible, and we should create a circular flow of material resources. Clearing land, digging up resources, emptying lakes, cutting down forests and killing wild animal species all tend to 0 over the long run, so we must effectively stop using 'new' allocations of these resources
   2. Dumping processes: Many processes create waste. This can be seen as a disutility generating by-product of economic resources. The amount of carbon emissions, landfill and other forms of waste must be reduced to 0 as quickly as possible.

It is essential to recognise these objectives are in no way contradictory to the underlying principles of capitalism. Capitalism is by no means a perfect system, but it has been an incredible tool for humanity to proceed to where we have. Like anything though, capitalism needs to be course-corrected, adjusted for the current context. Governments need to step in here and help capitalism focus on the correct objectives, assuming that "the market" will magically deliver solutions to problems that were not considered very intensely when "the market" was developed is not sound thinking. The issue is that capitalism is more like an engine than a steering column. It provides the power in the direction it is pointed; it does not choose the where we are going. Where society is moving towards is a much more sophisticated culmination of factors well outside the reach of capitalism. Governments need to ensure they are at the helm and direct capitalism towards the objectives that are in our best interests.

Further context

In most ways, I support the free market as an efficient exchange mechanism. As I point out however, capitalism is an engine, it will only choose the direction which maximises profits. The customer is always right so to speak. The entity that lets most countries down today is government. Government is where the measurement of economic objectives should change. Economists may still produce GDP figures, unemployment figures and inflation figures, however, governments must change the way they interpret these. If GDP rose by 2.2% this quarter, the president or prime minister should not simply rejoice; they must be incredibly cautious and curious as to where that growth came from, whether it was sustainable and who benefitted from it. Politicians reside over these ethical questions, not the economists.

So in short, politicians needs to become much more adept at both understanding the detailed characteristics and composition of growth - and also communicating this to the public. So whilst the liberal and labour parties may have different ethical orientations, we as voters should at least be convinced of the logic that substantiates their positions.

Along these same lines, an astute political observer may note that their underlying differences in measurement represents their ethical position because they measure what matters to them. To this position I argue that the general public is not made up of economists. When Scott Morrison focuses on GDP growth and the Greens theoretically focus on carbon intensity, the general public cannot possibly be expected to understand the nuanced difference in priorities that these measurements represents.

For this reason I suggest the independent measurement authority (i.e. ABS) needs to establish a procedure whereby the public is informed in a nuanced manner of how growth is proceeding. This may be in the form of a once monthly speech (such as the RBA does with monetary policy), accompanied by a website and monthly reports highlighting key figures that we as a society identify as important. What to define as important is in itself a difficult question, but I believe maximising human wellbeing whilst minimising resource use is a good way to begin.