Everyday Economics

A User's Guide to the Modern Economy

Steve Coulter

• Publisher: Agenda Publishing
• Year: 2017
• Print ISBN: 9781911116363
• eBook ISBN: 9781788210591
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Much of economics is a top-down analysis that simplifies and reduces the huge varieties between individuals to a predictable range of characteristics that lend themselves to systematic analysis. This book eschews this conventional perspective, which sees national economies as simply agglomerations of the activities of millions of people, and instead explores the role played by the individual in the economy, in particular, how the individual experiences the economy. In so doing, the book is able to illuminate the economic landscape for the non-technical reader in a much more engaging and accessible way.

Steve Coulter examines those areas of our lives that most direcly connect with the economy – jobs, education, healthcare, housing, personal finance, welfare, consumption – and explores how the individual choices we make are determined. He shows how the things we experience, need and consume fit into a fast-changing and interdependent global economic setting and highlights the role of government and markets in shaping our lives.

1

Economics: what is it good for?

1.1 Introduction

It must have been a fairly toe-curling moment. Opening a new academic building at the London School of Economics and Political Science (LSE) in 2008, as the financial crisis was raging unchecked, Queen Elizabeth II asked her academic host a cutting question: “Why did none of you see this coming?” Her Majesty’s comment, and the awkward embarrassment with which it was greeted, was reported around the world as an emblem of the inability of the economics profession to prepare the world for disaster.

Were these accusations fair? Yes and no. No, because economists are not omniscient and, the mini-industry of economic forecasting notwithstanding, cannot predict the future. The claim of economists that they are (social) scientists is often mocked by “real” scientists studying applied natural phenomena, as opposed to the behaviour of unruly human beings. Yet some of these are equally poor at making predictions about disruptive occurrences in their own realms: seismologists cannot predict earthquakes; meteorologists can make reliable weather forecasts only for the next few days; and so on.

But, on the other hand, yes; because the financial crisis was an extraordinary event that shook the discipline of economics to its core, exposed some of its central tenets as wishful thinking and revealed a stunning level of complacency on the part of leading members of the profession, including highly paid analysts in government and financial institutions. Among the most searing criticisms was that modern economics was addicted to abstract theorizing and thereby irrelevant to the everyday concerns of ordinary mortals. This was not merely sniping from the sidelines. Leading economists and financial insiders felt the same way. Just before he quit his job, the president of the European Central Bank (ECB), Jean-Claude Trichet, complained in exasperation that, “as a policymaker during the crisis, I found the available [economic and financial] models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”¹

The crisis and its aftermath have prompted much soul-searching among economists,² as well as ridicule from many commentators (although applications to university economics courses shot up). Methods have been questioned, theories and models rethought and the data re-interrogated. Public policy, grounded in economic theory, has been retooled to ensure the crisis will not happen again, although few really believe we have seen the last of such shocks. Economics, albeit chastened, continues. And this is surely a good thing, because trying to make sense of how modern economies work is profoundly important. Moreover, it is a task well suited to economists, as they possess many of the intellectual tools needed to do this.

For economics is a practical discipline that brings much-needed rigour to the analysis of questions that are fundamental to everyday life – in particular, how to produce a fair and prosperous society, given finite resources. Most people are dimly aware of the “big” questions of economic management: how to control inflation, create jobs and foster growth. But many do not appreciate how much more there is to the field than that. Economics, especially the field of microeconomics, also deals with many of the particular challenges and opportunities of existence at a very human and immediate level, such as getting and keeping a job, making the most of an education, buying the right house, staying healthy, getting goods from producers to the shops, financing a retirement – and many other things besides.

In a lot of ways economics is at its most interesting and engaging when it considers these subjects, which are also probably the things that matter most to people on a daily basis. Economics provides a way of thinking about life and how to make the most of it that is both distinctive and a good guide to public policy. It helps to make sense of a world that is both familiar and strange, but in a way that offers a unique, yet rigorous, perspective. This book looks at a lot of these issues by throwing light on some of the fascinating study and research that economists have undertaken over the years. It does this by taking areas of everyday life experienced by individuals – work, education, health, welfare, housing, shopping and finance – and explaining how these work in economics terms. By making economics understandable – hopefully – through an explanation of the things most people encounter personally on a day-to-day basis, the book is intended to show how relevant economics is to important aspects of everyday concern.

More humility from economists is required, however, and it is perhaps also a good thing if their knowledge and understanding are shared out a little bit more. The trouble is that, in the hands of professional economists over the years, economics has come to be associated with grand, abstract theorizing and an arrogant ambition to make human beings conform to conceptions of behaviour that strike many people as remote and unrealistic. Economics is possibly at its worst when it comes to rigid worldviews and overconfident forecasting, when it is prone to over-promise and under-deliver. It is at its best when it is about problem solving and shedding new light on familiar conundrums.

The crisis and its aftermath have given rise to two big questions about economics that are also the central themes of this book: what use is economics if it cannot predict the next destructive shock, or even explain previous ones; and what can be done to make it seem more relevant to the experiences of individuals? Answering the first question is pretty straightforward. The rest of this introductory chapter tries to show that economics offers an extremely powerful set of tools for comprehending the modern world. If understood as a particular way of thinking about human affairs, rather than a set of iron laws, it can help us to restrain our more destructive, short-sighted impulses to help build prosperous, cooperative societies. This will be easier to achieve, however, if economists open up and make more effort to explain themselves.

The second question is therefore more challenging, and is the focus of the rest of the book. To outsiders, economics often seems lost in its own impenetrable world of dogmas and abstractions. To those not steeped in the advanced maths required to read academic papers in economics journals, the subject can often seem like a private game played between aloof figures uninterested in everyday problems of wider concern. To the men or women in the street, the methods and concerns of economists can seem baffling and irrelevant. Can, they may well ask, all these models and equations help me get an affordable mortgage, or tell me why my daughter’s school is underperforming? Why do the latest gadgets get so much cheaper if you wait a few months after they are introduced in the shops before buying them? What are my taxes being spent on, and how do I know if they are spent well?

To be fair, plenty of economists, particularly those working in microeconomics, the branch of the subject concerned with the behaviour of individuals and firms, are actively considering these problems. And they regularly come up with policy suggestions based on their research that improve our lives. The trouble is, this study is conducted in a way that is largely inaccessible to those directly affected by the problems being put under the microscope by economists. Possibly the most off-putting thing about modern economics that contributes hugely to this gulf in understanding is its seeming inability to theorize human beings in a way that seems realistic to real people. Two conceptual strategies are generally adopted, neither of which particularly recommend economists’ methods to the layperson. One is to simply abstract the behaviour of large numbers of individuals up to the macro level, so they are treated as members of groups rather than individual subjects, and examined according to collective dynamics. The other is to consider people as individuals but to assign to them a number of assumptions about their motivation and behaviour in order to render them predictable: that they are rational, self-interested “utility maximizers”, for example.

But this can look bizarre. Economics appears then to view people either as faceless cogs in a machine or, at the other extreme, atomized and self-absorbed individuals relentlessly pursuing their own ends and indifferent to the needs of the group. In a key sense, people should ideally be conceptualized as both at the same time. It is only if you assume the former that can you easily aggregate individual behaviour to the group, and only if you suppose the latter that this aggregate behaves predictably.

The financial crisis demonstrated well how individuals affect, and are affected by, the wider economy of which they are an intrinsic part. The crisis had numerous causes, among them institutional and policy failings by governments and regulators. Some observers note that major financial crises erupt roughly every 70 years and are probably an inevitable part of modern capitalist economies. Governments elected by us, the voters, stripped away much of the regulation stopping reckless behaviour by banks. So perhaps we simply need to learn to live with the consequences of our actions?

But behaviour by individuals played its part too. Private debt, particularly in the form of mortgages for housing, spiked in the years leading up to the meltdown, and once the banking crisis was under way people responded by pulling out their savings, producing a run on the banks. What was individually rational and understandably self-interested behaviour produced, collectively, a financial and economic crisis that affected everyone through its destructive impact on jobs, incomes and life prospects.

This is not, of course, to say that if only a few more people had economics degrees or read The Economist magazine then the foolish behaviour leading up to the crisis would not have happened. But it is entirely possible that a greater awareness of the consequences of certain actions might lead to better decisions in future, with beneficial outcomes.

So, we have a couple of challenges. One is to try to provide an entry point to economic thought. The other is to build on this to guide readers through aspects of the economy they are likely to encounter and to render these more explicable by using economics to explain them. What is needed, therefore, is an account of economic life that combines explanatory power and simplicity with a focus on activity from the ground up. A book about “everyday economics”, in other words.

The seven thematic chapters that follow this one each deal with an aspect of everyday life and try to explain them by using economics: why education is important; how to get and keep a job; buying and owning a home; the economics of health; why we need a welfare state; shopping and consumption; and how finance works. Each chapter begins with an examination of foundational explanations from microeconomics, usually the mainstream “neoclassical” view. They are then critiqued and expanded upon as alternative explanations are introduced, before moving on to the macro level with a look at how governments and the international economy have an effect. Finally, we conclude with a look to future developments, and how economics can contribute to explaining these.

But, before we get to that stage, it is worth delving more into the earlier discussion of what economics is about and how it treats us as individuals. The next section will try to dispel any lingering doubts about the value of economics by clarifying what it can and cannot (an...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Preface and acknowledgements
• 1 Economics: what is it good for?
• 2 Knowledge is power: education and training
• 3 Let’s get busy: work and occupations
• 4 Get well soon: health and healthcare
• 5 Making the world go around: money, banking and personal finance
• 6 Home sweet home: the housing market
• 7 Shop till you drop: shopping and consumption
• 8 From cradle to grave: benefits and welfare
• Index