We need new economic thinking based on wellbeing and sustainability

If the political right and left can agree on one thing, it is the centrality of conventional economics – the quest for economic growth and rising productivity. For a few moments after the great crash of 2008/09 people suggested that conventional economics had had its day. But it just bounces back. And it fails to address the real needs of 21st Century society.

The right, the centre-right and even the centre-left remain entranced by economic liberalism, which the left refers to sneeringly as neoliberalism. This focuses on markets as the most efficient way of processing information on human wants, and that carefully designed incentives are the key to public policy in areas where markets fail. The centre-right and the centre-left are divided over the scale of government, but even the centre-left are wary about putting up tax rates, as a disincentive to work. The financial crash has not shaken their confidence, beyond showing the need to get banking right, though they are quietly putting even that thought on the back burner. If anything undermines confidence it is growing inequality. And yet while overall economic growth keeps going, at least in Britain and the US, they see no reason to question the foundations of their thinking.

That the left is as attached to the old economics as the right may seem surprising – they often claim that capitalism has failed and must be replaced. And yet their various policies need plentiful taxes, and they need a growing money economy to deliver this. They have received a boost from such conventional economic luminaries as Paul Krugman and Joe Stiglitz, who emphasise Keynesian fiscal expansion, and are critics of what the left calls “austerity”. Indeed opposition to austerity is now the rallying cry of the left. That this implies subscription to a prosperous capitalist economy is a paradox that does not seem to trouble them.

There are two basic, and linked problems with all this. Firstly that, for a variety of reasons, the potential for economic growth is sharply reduced in the developed world. Policies aimed at stoking it up are doomed to failure – usually in the form financial bubbles. Second is that it is largely addressing the wrong questions.

What are the right questions? Simple. How to promote human wellbeing. How to secure the future of the planet.

Consider human wellbeing first. Conventional economic theory puts the idea of “utility” at its heart. Utility is shorthand for the point of it all. But it doesn’t waste much time asking what this is, it just assumes that there is a hidden force behind market demand whose implications can be modelled with some relatively simple mathematics. And yet human wellbeing must surely be the point of all, and it is well worth taking a detached look at what this might be. This is, in fact, a flourishing field of study in modern economics – though it has failed to touch what I have called conventional economics.

This study highlights how important are things that are not easy to integrate into the market economy, and not related to quantity of consumption of goods and services: family life, local communities, public goods, and so on. After certain basic needs are met – sustenance, shelter, health care – higher levels of consumption do not securely lead to better wellbeing. And so an ever higher level of overall consumption – the central tenet of conventional economics – ceases to be important. This is actually quite obvious if we look around us. Public policy types might bang on about the need for ever greater economic productivity to promote our wellbeing, but this seems far from  most ordinary people’s minds. The great modern invention is the smartphone – but its big impact is on how we run our personal lives, not how we participate in the conventional economy. People seek out goods produced in environments of low productivity (organic goods, hand crafted clothing, etc.) because they confer higher status, or carry some other aura. And so on.

But there is a trap lurking in the promotion of wellbeing economics. Some want to reduce human wellbeing to numerical measures that can be used as a sort of replacement GDP. And yet the key to human wellbeing is human agency. It is something we must all learn to acheive for ourselves in our own way. The use of numerical measures implies that it becomes the responsibility of public policy makers – and that will be ultimately self-defeating. Public policy is better directed towards limiting human misery and providing basic needs – and not taking direct responsibility for human happiness. It is vital that people learn to take responsibility for their own lives, and not just blame everybody else for their problems.

And then there is environmental sustainability. The threat to the planet that we inhabit from excessive human consumption should be obvious to all. The threat to the atmosphere from an imbalance in carbon emissions is only the most immediate and serious aspect of this. And yet a public philosophy based on ever higher consumption cuts across this. Of course the unit impact of that higher consumption can be moderated. Energy efficiency is hardly incompatible with economic growth. And reduced environmental impact and economic growth are not necessarily incompatible. It is just very unhelpful to keep focusing on consumption for its own sake.

What difference does all this make? Here are thoughts, each of which needs to be explored in greater depth – something I hope to do in future blogs.

1. The state can’t keep growing. Tax revenues are dependent on the money economy (indeed you can argue that the whole point of money is to pay tax). If that’s not going to grow, and we can’t assume it will, we must find better ways of solving our problems than expanding the state’s resources. I think that means a more joined-up and localised approach, drawing strength from local communities.
2. We need less debt. Debt as currently conceived is a dehumanising process that increasingly leads to financial bubbles. Finance should be based much more on risk sharing instruments such as equities. We should approach this by steadily reducing creditors’ rights, as well as bearing down on the tax privileges associated with debt.
3. We need to rethink housing tenure. Our homes are central to our feeling of wellbeing. But clearly things are wrong. Property ownership seems to be privileging a lucky few. In the rented sector too much power is put in the hands of landlords to trash the lives of their tenants. Somehow we need to improve tenants’ rights while ensuring that there is a sufficient supply of decent homes.
4. We also need fresh thinking on employment. The employer-employee relationship is too often exploitative. And yet flexibility of employer-employee relationships often leads to a more efficient use of resources (consider Uber and its ilk).
5. We should stop worshipping scale. Large organisations, from government agencies to big companies seem to be privileged. We lazily assume that scale leads to efficiency. It sometimes does. But too often it simply destroys local knowledge and human relationships.

I could go on. Tackling these problems will require reform of political institutions and public services, as well as the system of legal rights in which our society works. But a future where we are both happier, and reduce the strain on our environment is surely attainable. I think this is a fundamentally liberal idea – but it is possible to build broader political coalitions behind reform. But we badly need to move on from the staleness of the current political debate.