Sunday, 29 June 2014

What are the costs of economic atomisation?

'Public Policy and the Past' usually shies away from the theoretical. Who's going to read a column about the history of mathematics and accounting? About the way macroeconomic statistics are assembled? Visions of the firm and competitiveness? Concepts of other countries' economic success and failure? Quite a few, perhaps - as evidenced by the day job - but not as many as want to know who will win the next General Election based on past experience.

But here's some theory, front and centre: the chief public policy challenge before us to glue back together our frame of vision. To reassemble the ways in which we can see politics, society and economic behaviour as one set of relationships. Now, this may sound pretentious (it is, by the way). But stop. Don't hit that 'close' button! Let us explain.

The death of macroeconomics has proclaimed for longer than we care to remember. Chaos theory challenges how much we can discern about what causes anything, let alone the performance of an entire society. Postmodern ideas focus on discourse - what we know, and how we speak about it. Fast-moving economies seem to defy any concept of 'equilibrium' - the key building block of classical economics-as-a-discipline itself. Small state neoliberals don't want governments meddling in as much as they used to. Thinking about an entire nation-state as a mechanical machine, pouring out goods and services along the lines of what we put in and how we manipulate it all? It's dead - official.

Now there might be some advantages to this. As free market economists never hesitate to point out, policymakers (both 'Keynesian' and 'monetarist') have pretty poor records in managing all these macroeconomic levers. They always think that we're in a boom when the heat's all coming out of it; and they usually think that we're still in recession long after the economic motors have begun to purr again. They know little, necessarily - and make unsurprisingly bad decisions on the back of their ignorance.

But consider the deleterious consequences of going too far the other way. We've ended up in an age where every fault in your stars is in yourself - where every economic misfortune that might befall you is because you didn't buy a house quickly enough, because you invested in the wrong human capital skills, because you bought the wrong shares, because you joined the wrong company, because you didn't work hard enough. And so on. The policy consequences are obvious: education becomes the only way to raise productivity (by 'increasing the quality of inputs'); and nations' budgetary stances cease to matter in the determination of economic growth itself. Because if everything that happens to you is your fault (or reward), then the economy must logically become the sum of such choices and payoffs.

Now, forgive us, but this is economic and logical nonsense. Spanish, Italian and Greek under-25 can educate themselves all they want, but most of them are unlikely to secure well-paid, satisfying jobs any time soon (if ever). Key economists even at the dawn of the neo-liberal counter-revolution accepted eagerly that the very reason companies existed at all was to share information, to reduce transaction costs, and to protect economic activity against excessive risk. That's why even free market luminaries such as Ronald Coase didn't always oppose government regulation: they took it on a case-by-case basis.

Today? We're afflicted by the idea that everything has to earn its way. Every arm of the company must break even. Every research unit must justify its existence. Each research project must demonstrate 'impact'. Welfare recipients are a 'drain'. Poorer regions require 'reform' to secure 'convergence'. Too much more of this, and we're going to be asking ourselves the poisonous questions - why should we support our wives or husbands when they want to re-train or stay at home looking after our children? Come to that, why should we support our children when they are at school? We exaggerate, but you get the point. Logic-chopping like this makes every company, every team, every office and every research lab vulnerable to their bottom line - unless they are powerful enough to exert social influence on their fate, one type of 'economic' transaction that always seems to get left out of these judgements of excessive smallthink.

The costs of this sort of atomisation are clear. It drains away all of our ability to think strategically, to pool risk (opens as PDF), to reduce uncertainty, to accelerate local and global growth via intellectual and physical economies of scale. And it does something else, much more invidious and in the end much more damaging: it allows us to think as if profit, or at least the absence of losses, equals economic virtue. Which it doesn't. Ask anyone about all those bank balance sheets full of positive returns in the early 2000s. Do we think that they were a good idea?

No, we don't. Because they weren't - instances of an atomised, individualistic, microeconomic and above all cramped, small and over-segmented view of the economy that should long ago have been cast to the winds.

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