Last week I identified five issues we don't need to worry so much about in modern economics. Symmetry demands that I balance this with five issues that we should be worrying about more.
That's much harder because there are a lot more than five things that are very important. So I need to thin down the list. First I have excluded things that people are already very preoccupied with, such as inequality and poverty. They may be important, but I want to show how thinking needs to change. Besides I suspect that the solutions to many such issues will be indirect rather than arising from pulling them apart directly. I thought hard about whether to include environmental sustainability, or greenhouse gas emissions in particular, as this would be a really good place to start modern economic policy. But that isn't new, and many economists are already wrestling with it. What I can say is that moving away from a focus on increasing production and consumption is part of making this problem easier to solve.
And I have also exclude issues too nebulous to approach systematically. This includes the topic of human wellbeing. We absolutely need to be thinking about wellbeing, and break out of the thinking that we can use measures of income or expenditure as a proxy. But trying to construct alternative measures and focusing on them instead is the wrong way to deal with this.
Anyway here's my five:
1. Private debt
This isn't exactly a new issue, though economists have often struggled to know what to do with debt. I remember in pre-crash days (and even afterwards) people suggesting that macro-economists could ignore debt levels since all debt cancelled out - one person's debt is another's asset. In fact debt was always at the heart of monetary policy, which has been at the heart of macroeconomic management since the 1980s.
This was when the idea of regulating aggregate demand (and the business cycle) through public fiscal policy and public debt, often referred to as "Keynesianism", went out of fashion. Instead, the theory went, you could do something similar by manipulating interest rates. A lower interest rate would encourage people to bring forward investment plans and raise demand when the economy was running slack. Likewise, if inflation looked like an issue raising the rate could rein in demand. Although this clearly meant using private debt to regulate aggregate demand, economists were very shy about saying so. They kept on talking about the money supply instead, clinging to a picture of people using banknotes to settle all their transactions, whose supply was regulated by printing presses.
It was not until the crash of 2008-2009 that serious doubts were raised about this in the economic mainstream. In fact interest rates are a very imperfect way of managing aggregate demand, and high levels of private debt create financial instability. The crash itself was more complex than that - a lot of the problem was financial institutions lending to each other to generate fees and bonuses. Low interest rates were only part of toxic mix. But most mainstream economists still seem to think that private debt is a good way to regulate demand, provided banks are sufficiently regulated.
An alternative view of debt, put forward by heterodox economists such as David Graeber (if I can call an anthropologist that), is that it is the root of all evil - an instrument whose sole purpose is to dehumanise and enslave. This idea is not without merit, but a modern economy has come to rely on debt to carry out three things in particular which are more constructive. The first is to allow businesses to invest in capital projects which in turn make the economy more productive. A second, sometimes overlooked, is to provide working capital as a lubricant that keeps the wheels of a complex economy in motion; most business to business transactions are on credit. And thirdly it allows private individuals to buy assets by spreading payment over their useful life. Debt also helps private individuals deal with temporary cash flow problems, though this can lead to serious social problems with loan sharks, and I don't think this role is an important part of a functioning economy.
But, in the developed world at least, debt is mostly used for other things than these three, and in particular it is used to support speculation, and to generate income for middle men (aka "financial engineering"). Lending to private individuals to support property purchases spills into this economically useless territory. Some suggest that easy money is creating more demand for residential property more than society really needs.
In short, private debt has a useful role to play in the economy, but at current levels it is a source of financial instability and tends to exacerbate inequality. Policymakers need to start distinguishing between useful and dangerous debt, and clamp down on the latter. Alas they show little interest in doing so.
2. Low pay
One of the features of modern economies is the spread of low paid or insecure jobs. Economists have traditionally been pretty relaxed about this. They assume that it is a temporary problem that will rectify itself quickly, and it must be the fault of a poorly functioning labour market. But it seems to be a big problem is in the less regulated labour markets (such as the USA and Britain); the more regulated markets tend to have high unemployment instead. It is one of the driving forces behind the suspicion of immigration, and the feeling by working class people of being let down by the elite. Technological change seems to be making this worse.
But the traditional economists are right up to a point. Solving the problem is not about throwing away market economics, such as creating lots of high paid but useless jobs in the public sector, or arbitrarily high minimum wages. These would create more problems that they solve. Neither am I convinced by the fashionable idea of topping up low-paid workers income with a universal basic income. The point is to find ways of giving ordinary workers more power. Such power comes from one thing: a shortage of workers compared to the opportunities available.
The public sector surely has a role in this. An expanded public sector with meaningful and skilled jobs (teachers, nurses,social workers) may well be part of it, but the public sector does need a bit of rethinking before we can turn it into an instrument of economic engineering. I am intrigued by ideas of job guarantees to take surplus workers out of the market - though I can see many ways this could go wrong. Should lifelong liberals accept that managing immigration flows is a part of it? Maybe, but allowing workers opportunities to work in other countries may be part of the solution too. The truth is I'm pretty short of answers, but the point is that we need to be looking at ways of tilting the job market in favour of the disadvantaged, without creating either mass unemployment or pointless jobs.
3. Economic clustering
Economists have long noticed that successful businesses tend to cluster together geographically, creating a pattern of a small number of prosperous islands amid a general sea of poverty and disappointment. In Britain this is a very serious problem, and we are not alone. Various attempts have been made to address this, including regional subsidies, pushing public service institutions out to struggling regions, creating deregulated freeports, and so on. They almost always disappoint. The extra money pumped into the poor regions flows straight back to the rich ones. Meanwhile the poorer areas become hotbeds of disillusion and discontent.
Economists don't seem to be very interested in solving this problem, to judge by the articles I read in The Economist. These largely take the line that clustering improves productivity and should be encouraged. We should concrete over the green spaces in prosperous areas areas, and build more homes there - while bulldozing the empty homes elsewhere.
But what I can't help noticing is that the problem is worse in some places than in others. France and Britain, for example, but not nearly so much in Germany, extending into Austria and Switzerland, or in Scandinavia. The big difference between these healthier regions and neighbouring Britain and France is political structures, both now and historically. Greater Germany, if I may call it that, and Scandinavia, have much more decentralised political structures, going back through history. Centres of political power attract economic clusters. We need to understand that better. By reorganising our politics we may alleviate the problem. And maybe technology will one day start to undermine the current successful clusters.
4. Intellectual property
In the new economy intellectual property, such as copyrights, patents and so forth are becoming much more important. Unfortunately, the idea that such property rights over ideas is a something innate and sacred is being accepted lazily by politicians, quietly egged on by business vested interests who like to pretend they are fighting for impoverished artists and inventors. This needs some serious pushback, because intellectual property rights are being used by the rich and powerful to oppress the rest of us. It is also used by multinational businesses to manipulate profits into low tax jurisdictions.
Intellectual property rights do have a socially useful purpose - to help reward and stimulate creativity. But they should only be as strong as necessary. I'm intrigued by the idea that intellectual property costs should not be tax-deductible (I think similarly for loan interest...). Doubtless this is too extreme to work, but there may be intermediate ideas better prospects. And what about making intellectual property non-transferable? That would stop patent trolls, an activity that no social merit at all.
4. Effective public services
This sounds obvious, but I am really struck by how few economists understand how different public services are from private ones, and how they must often be managed in a completely different way. It is no wonder that they are so badly managed. On the one hand public services have been managed without any incentives to be efficient, and becoming useless, conservative bureaucracies who have lost touch with their purpose. This is why so many of us with memories of the 1970s and 1980s are so suspicious of calls on the left to re-nationalise railways and energy services. On the other hand, if you run public services like private businesses they lose touch with their purpose in a different way. They try to avoid or pass on the difficult cases, or try to turn them into lucrative repeat business instead of solving problems; they hollow out key performance indicators so they become a meaningless game; they soon learn to manage their political masters rather than their customers.
But highly effective public service can be done (London's primary schools for example, though the current government is trying its best to undermine and destroy their achievements). Ultimately we need to understand that public services are about solving complex problems using skilled professionals that engage with their users as human beings. Creating institutions that can do that, and identifying the more from the less effective ones, is something that should be engaging economists and policymakers much more.
I have gone on enough. But I hope I have shown why I think that fresh thinking is needed as our society moves through its next phase of economic development.