HUMANISM AND ECONOMICS
PART ONE
You do not have to be a doctor to know that good hygiene, nutrition, and exercise are important to help maintain good health. You do not have to be a psychologist to know that repeated and uncontrolled behaviour that is destructive to yourself or others is an addiction. You do not have to be a lawyer to know that robbery is a crime and that terms of a contract must be fulfilled. Similarly, we do not need to be economists to understand and apply some basic ideas that aid in improving our personal lives or society as a whole.
Many decisions made by individuals or families involve some element of economic thinking. That is also true to a significant degree of plans made by businesses, governments, and various institutions. Budgeting, that is, knowing how much money is coming in and how much we would like to spend, is fundamental to our well-being.
Humanism uses evidence, logic, and compassion to guide behaviour. How can knowledge of basic economics be incorporated with this approach? Let us begin by defining some terms and outlining some key ideas.
An economy is a system to produce, distribute, and use goods and services. Decisions are made as to what to produce, how to produce, and for whom to produce. In a “Command Economy” the ruler and most powerful people control economic activity. In a “Planned Economy” agents of the government direct production. In a “Free Market Economy” sellers and buyers jointly make choices based on profitability and consumer satisfaction. Economics is the study of these various economic systems and policies. Canada today has a “Mixed Market Economy” where individuals are generally free to operate businesses as they wish, but not without regulations. Also, many services are provided by government rather than private companies.
Economics starts with the idea that we cannot all have everything that we need or want. (Economists call this “scarcity”.) Decisions are made every day about how to use the resources available to meet those needs and wants.
What are “Needs and Wants”?
SURVIVAL NEEDS: air, water, food, clothing, shelter, protection, medical care, etc.
NEAR NEEDS: transportation to and from work, communication for work, etc.
WANTS: those things that we would like to have but are not necessary for survival
For example, a healthy diet to increase the chances of a long and vigorous life includes vegetables, fruit, and whole grains, but we might also want to eat things that simply taste good. Or, it might be necessary to have a public transit system in order to travel to a workplace, but someone might want a fancy car to make the trip.
Distinguishing between needs and wants and then prioritizing efforts to obtain what is more or less important is a good starting point for applying economic thinking.
Linked to this process is the idea of “Opportunity Cost”. This simply means that whatever resources are put into producing something, the same resources cannot be put into something else. The steel used to make a car cannot also be used to make a tank. The land used to grow wheat cannot be used at the same time for a factory. In terms of personal finance, it means that the funds used for a vacation cannot also be used to pay the rent or mortgage. The money spent
on beer cannot also be spent on diapers for the baby. This concept is essential for making informed decisions as an individual, business, or government, etc.
What are the resources available in attempting to meet needs and wants? Economists refer to “land, labour, capital, and entrepreneurship” as the “factors of production”.
LAND: (natural resources) air, water, soil, plants, animals, etc.
LABOUR: physical and mental work
CAPITAL: tools, machinery, factories, etc.
ENTREPRENEURSHIP: the ability to start a business.
Analyzing how the factors of production are used is a key to being an “ET” or “economic thinker”. For example, will a forest be used to produce paper or left as a park for people to enjoy? Will new technology such as robots be introduced that replaces workers on an automobile assembly line? Will taxation policies encourage new business development, and, if so, in what areas?
What evidence can be used in making economic policy for the country as a whole? Three basic guides are GDP, CPI, and UR.
Gross domestic product (GDP) is the standard measure of the production of goods and services in a country during a certain period. As such, GDP measures the total amount spent on final goods and services. Increased spending gives some indication of increased consumption, and, therefore, of how well people are doing.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a “market basket” of selected consumer goods and services. Statistics Canada uses this measure to indicate the rate of inflation. Inflation means that the same amount of money from the past can now buy fewer products and services, i.e., money is worth less than it was previously, its purchasing power has declined.
The Unemployment Rate (UR) represents the number of unemployed people as a percentage of the Labour Force. The Labour Force is the total number of people working or seeking employment. Thus, the UR is the sum of the employed and unemployed. Individuals who are too young to work, have retired, or have given up looking for a job are not counted. There will always be some unemployment as workers are fired or choose to look for a different job. Unemployment can also arise due to changing technology or business closures.
Governments can use two basic approaches to improve the economy generally or to help certain groups.
The first is Fiscal Policy. This is the government’s power to tax and spend. Individuals and businesses are required to pay money to the government in order to finance government programs that cover a great range of activities including essential services such as police, fire, and other emergencies. Governments spend a great deal of money on many other things too.
The second is Monetary Policy. This is the responsibility of the central bank. The Bank of Canada is not a regular bank where citizens can make deposits and take out loans. Instead, among other things, the BoC establishes an official rate for lending money to private banks. As that rate rises or falls, the interest rates charged by lending institutions will go up or down accordingly. Higher interest rates generally reduce borrowing, decrease spending and investing, and, thus, slow down economic activity. In turn, the CPI will decline and inflation decrease, but the UR may increase.
Only with these terms clearly in mind, can we begin to discuss economic policies. Those policies will also involve ethics and politics.
HUMANISM AND ECONOMICS
PART TWO
Humanism uses the rational analysis of reliable evidence to come to conclusions and to make decisions. Humanism also promotes individual fulfillment and broad compassion. Thus, economic policies will be based not only on sound economic principles but also on ethics and politics.
Ethics is the study of morality. It examines values; not values as expressed in the price of goods and services, but in the sense of what is right or wrong, good or bad, important or unimportant. Thus, when we want to design the best family, business, or government policies, we need to consider them ethically as well as in purely economic terms.
That then leads to politics, i.e., making decisions in groups. If certain individuals or organizations decide that a policy would be good from an ethical standpoint and it also makes sense from the evidence of economics, the next step is to implement that policy. In order to do so, it may be necessary to change something in government fiscal policy or even change a law that influences some aspect of economic activity.
Fortunately, in Canada we live in a society where free and open debate about economic policies can take place on the street corner, in the board room, or among elected officials.
What can be discussed? There are many issues and many different recommended solutions.
For example, to what extent should we try to increase the production of goods and services as measured by Gross Domestic Product? While GDP is the single most important indicator to capture economic activity, it falls short of providing a suitable measure of people’s material well-being for which alternative indicators may be more appropriate. For example, during an epidemic there may be a great deal of spending on funeral services. That would show as an increase in GDP but it would not indicate any additional happiness for the bereaved. Also, there is the environmental element. While GDP needs to grow as population increases in order to meet the needs and wants of the additional individuals, the processes of producing the required items and services may add to resource depletion, pollution, or global warming. Furthermore, business transactions that are not reported (“black market”, “under the table”) are not counted in the GDP even though they could represent considerable spending. And GDP needs to be adjusted to account for inflation (using the CPI). If spending has increased simply because prices are going up generally, then there is no indication of improved prosperity. Finally, GDP looks at totals and does not consider individual situations. It may be that only the rich are consuming more while the poor fall further behind.
Will fiscal policies (taxing and spending) increase GDP? If so, how well will the growth be spread across society? In what areas of the economy should government be heavily involved and what areas should government only set and enforce a few basic rules? Any government involvement may put certain limits on economic freedom.
How serious a problem is inflation? What steps, if any, should the government or the central bank take to increase or decrease the cost of borrowing (the rate of interest)? Such steps will affect the purchasing power of the money in your pocket or the funds required to operate a business.
What is an acceptable Unemployment Rate? While there will always be some unemployment, including structural job losses as technology and consumer tastes change, to what extent should the government intervene to protect jobs, offer retraining, or provide unemployment insurance? Government funds for these programs will have to be paid for out of tax revenues. And any money spent in this way cannot also be used for alternative activities.
The questions raised above generally consider the big picture such as the national economy. But many of them also apply to the provincial or municipal level. The policies that come from them will always affect individuals, households, and businesses.
Pure capitalists (Libertarians) argue that government involvement in the economy should be strictly limited. Their position is that businesses and consumers operating in a free competitive market can best decide what should be produced. They believe that the Law of Supply and Demand will determine prices. Businesses will produce what they can, given the resources available and the likelihood of profit. In a capitalist system, creative entrepreneurship and skilled management will make companies successful or not as they respond to what consumers are willing and able to buy. This process will meet the needs and wants of individuals, households, and other businesses better than any attempt to plan overall production. At the same time, this type of economy offers the most freedom.
The critics of the Libertarians point out that, in fact, the market is never truly free and competitive. There are power relationships that keep prices favourable to some groups and unfavourable to others. Concentrations of market control by certain companies with few competitors may allow those companies to keep their prices high and make undeserved profits. Another criticism is that a free market economy will leave too many families in a disadvantaged situation through no fault of their own.
Socialists take the position that a planned economy can best meet the needs and wants of the population. They argue that government control of resources and the means of production allows for humane distribution of goods and service so that no one is left out. Production is based on consumer needs rather than on the profit motive. It prevents greedy capitalists from controlling the system to their exclusive advantage. It is a more equitable and fair approach.
The first criticism of socialism is that is has never worked well in any of the communist countries that have tried to implement it (the Soviet Union under Stalin, China under Mao, Cuba under Castro, etc.). Those governments have repeatedly failed to provide adequate consumer goods of sufficient quality to their citizens. Government planners simply cannot consider at the same time all the variables at play in obtaining resources and transforming them into products and services.
In Canada we have chosen a middle path between these two extremes. We have considerable free enterprise along with public services such as education and much health care. The challenge is to constantly evaluate the results and adapt to changing circumstances.
HUMANISM AND ECONOMICS
PART THREE
As Humanists look at their lives and the rest of the world they need to bring some understanding of basic economics to most problems. Wherever you stand on issues such as the desirable degree of government involvement, the amount of freedom individuals should have to pursue their private goals, or what responsibilities each of us has for others, there are certain economic concepts to keep in mind.
Remember “scarcity”. There are simply not enough factors of production to meet all needs and wants. Economics is about allocating limited resources to alternative uses.
Always consider “opportunity cost”. Resources used for one thing cannot also be used for another. Time and money are also limited
One of the common failures in planning is to consider only the immediate results of a decision without contemplating its medium and long term effects. Not only the problem at hand but also all other aspects of the matter may be affected.
Risk must be weighed against reward. Business is about profits but also about losses. Making a profit is not necessarily about greed. The profit motive can provide incentives, encourage investment, create jobs, and produce what people need and want.
In addition to GDP, consider the Human Development Index (HDI). This is a tool developed by the United Nations Development Program (UNDP). It combines indicators of health, education, and income to provide a broader measure of human well-being. It considers factors such as life expectancy, education attainment, and gross domestic income per capita.
The “tragedy of the commons” refers to a situation in which individuals with access to a public resource (also called a common) act in their own interest and, in doing so, ultimately deplete the resource. This theory helps to explain individuals’ tendency to make decisions based on their personal needs, regardless of the negative impact it may have on others.
The “tragedy of the horizon” refers to a situation where focusing only on the short term undermines our responsibility to make decisions with long-term benefits. For example, steps to reduce climate change and protect the future generations may require difficult economic decisions now. Another example to consider is the idea that government deficits are not a problem until the national debt grows so large that interest payments on the borrowed money become a major portion of government spending. In other words, benefits now may have to be paid for by future taxpayers.
Economists cannot perform controlled experiments the way physicists, chemists, or biologists can. Gathering the most accurate economic available and analyzing it carefully is essential. Humanists can discuss economics constructively with all of the above information in mind.
Some books worth reading include the following selection.
The Worldly Philosophers (7th edition, 1999) by Robert Heilbroner presents a survey of the ideas of many key economists who have influenced this academic study in significant ways. It is a fine place to start for those interested in the social and political aspects of economic thought. The seventh edition (1999) is recommended. He emphasized that “democratic liberties have not yet appeared, except fleetingly, in any nation that has declared itself to be fundamentally anti-capitalist.” However, Heilbroner’s preferred capitalist model was the highly redistributionist welfare states of Scandinavia; he stated that his model society was “a slightly idealized Sweden.”
Economics in One Lesson (revised edition, 1978) by Henry Hazlitt is a brief and clear exposition of the Libertarian point of view.
Basic Economics: A Common Sense Guide to the Economy (5th edition, 2017) by Thomas Sowell provides a more extensive and up to date Libertarian interpretation. The Thomas Sowell Reader (2011) addresses many social issues from the point of view of a thoughtful and broadly knowledgeable economist of the very conservative type.
The Road to Serfdom (1944, 2007) by F.A. Hayek warns against extensive government planning. He witnessed the authoritarian rule of Benito Mussolini in Italy, Adolph Hitler in Germany, and Joseph Stalin in the Union of Soviet Socialist Republics. In each case promises of economic renewal and general prosperity descended into dictatorship and the cult of personality where almost all freedom, not just that of economic activity, was suppressed.
In The New Industrial State (1967) J.K. Galbraith, in opposition to the Libertarians, argued that the dominant American corporations had created a technostructure that closely controlled both consumer demand and market growth through advertising and marketing. He further stated that “countervailing power”, which included government regulation and collective bargaining, was necessary to balanced and efficient markets.
Economics from the Heart (2007) by Paul Samuelson presents a liberal economist’s views. Samuelson believes that markets have an essential role to play but emphasizes that capitalism is not always balanced and fair. The system can be manipulated by the rich and powerful. While free enterprise is to be desired, strong government regulation is required. Furthermore, the government must provide certain help to the disadvantaged in order to create greater equality of opportunity. Samuelson’s textbook, through many editions, influenced generations of economics students at universities.
Speaking of textbooks, Economics for Dummies (3rd edition, 2018) by Sean Masaki Flynn presents an introductory course that helps to understand many of the more advanced concepts used by economists than those described here. It includes diagrams that will help some learners grasp those concepts. It is very good for self-study for those who might never take a formal course in economics. It is far more technical than Hazlitt, Thomas, or Samuelson. It gets into the nitty-gritty of a challenging subject. It includes a list of Nobel Prize winning economists, including some women who have made major contributions more recently.
Economics: A Very Short Introduction (2007) by Partha Dasgupta has a somewhat deceptive title. While brief, it is rather technical. Its greatest strength, however, is that it addresses international economic issues, especially the uneven development of national economies around the world. He does this in an effective way by comparing the experiences of his hypothetical grand-daughters, one in the USA and the other in Ethiopia.
The Deficit Myth (2020) by Stephanie Skelton presents the view that government deficits are not the cause of economic problems. She argues that the real issue is the amount of money in circulation. Too little causes a recession and too much causes inflation.
Economics for Everyone – 2nd edition: A Short Guide to the Economics of Capitalism, (2015)byJimStanford presents the social democratic viewpoint typical of the New Democratic Party of Canada.
How the World Really Works: The Science Behind How We Got Here and Where We’re Going by Vaclav Smil (2022). Smil criticizes economists for not taking sufficiently in to consideration the rapid and profound changes in the modern world due to the impact of science, technology, and engineering.
Value(s): Building a Better World for All (2021) by Mark Carney, former governor of the Bank of Canada and later of the Bank of England, is an in-depth study of the most pressing economic issues that we are facing today. Carney offers action plans that are well worth considering. Among other persuasive ideas, he argues that “stakeholder capitalism” offers more hope for the future than “shareholder capitalism”. In other words, business rather than government should provide most products and many services, but those businesses must operate within a legal framework that compels them to consider not just making a profit for the owners but also respecting everyone affected by their operations. Carney’s approach is very familiar to humanists in that he provides convincing evidence and logical analysis combined with compassion and a call for honesty and integrity.
Some websites to consider:
https://read.gov/aesop/052.html
https://www.investopedia.com/ask/answers/08/broken-window-fallacy.asp
https://en.wikipedia.org/wiki/Economics
https://www.canada.ca/en/revenue-agency.html
https://www.worldbank.org/en/home
But you did really well publishing an article, Lloyd!
There are no OLD or NEW sites:
NEW.nep-humanism.ca is for playing/demonstrating new features only and it is not meant for publishing anything for our members.