Economics and Politics
Could these two disciplines be treated separately? Or the fact is, that they are doomed to an eternal dance?
Ideally, an economist could ignore any prejudice and political bias he has, and provide a natural, unbiased recommendation on the particular matter being questioned.
Unfortunately, in reality, things are not that simple. When a political regime’s success is measured by the success of the economy, one cannot stand alone from the other.
Many economic questions are inherently political. For instance, raising taxes on the rich. On one side, there are the Libertarians who seek to maximize autonomy and believe that government intervention should be minimized as much as possible. They claim that the government is inefficient, and argue that if you eliminate it, the free market will force businesses to protect consumers. The main economic ideas that they support are de-regulation, privatization, and tax reduction.
On the other hand, there are the Socialists, who believe that government intervention is perfectly fine, given the right motives. They could justify raising taxes on the rich, with the goal of reducing inequality. They believe that a free market, is “dangerous” for the consumers, mainly because the corporation is not looking for their interest. The core of their ideology is, in general, equality. The main distinguishing factor between these two ideologies is the support of government regulation and control.
“Law is born from despair of human nature” -José Ortega y Gasset
This modest article won’t try to solve the fateful dilemma in which ideology is preferable, but I think we solved the first one — economics and politics are almost un-separable.
With regard to the second dilemma, my view is that the truth, like always, is somewhere in the middle. I think that the free market is working mostly well, the supply needs to be flexible according to the demand and if there is competition, everybody wins. But that if, is a big one, and when monopolies are formed, this is one of the few circumstances that require intervention.
The idea that leads me to my opinion is that we see a lack of supply and high prices usually in heavily regulated and planned sectors. When a particular market is free of regulation(the supplier can determine the quantity of production without intervention from the government, importers can import freely, et cetera), the supply tends to find the break-even point with the demand.
Side note: There are a few occasions when monopolies are formed under the protection of the government and even by their order. Their rationalization could be “nutrition security”, or the protection of important sectors. In my opinion, this kind of intervention is absurd and contradicts all the basic rules of economics. When a company knows its own “Captive Costumers”, they have no incentive to improve the quality or the price.
Who should run the economy? Politicians or Economists?
The government’s tool for controlling the economy is the fiscal policy, which includes taxes and expenditures (government spending). On the other hand, there is the monetary policy, managed mostly by the Central Banks, which includes controlling the money supply and interest rate.
The government outlines the policy, for example, running a “tight” fiscal policy, which means increasing the tax rate and/or cutting expenditures. This leads to deflation, a reduction in the general level of prices in an economy. It will force the Central Banks to pursue an expansionary monetary policy, with the goal of offsetting the deficiencies caused by the fiscal policy. The task would be performed by expanding the money supply faster than usual and/or lowering the interest rate (not every fiscal act drags monetary reaction).
As we see, the government is the one in charge, but there is considerable power to Economists.
The government's decision-making process involves consulting with economics experts inside and outside the Treasury Department. The experts perceive as impartial and objective from politics, hence more trustworthy. The hope is that the politicians would take their advice with the level of seriousness that is expected (very high). In reality, sometimes they follow their advice, and sometimes they are going against it.
I see this situation as problematic for several reasons:
- Politicians are usually short-sighted, looking mostly within the boundaries of their term. On the other hand, the nature of the economics experts' work is more stable, hence their point of view is for the longer-term (usually). It takes a long time for the economic reforms to show results, so it is very important that those who orchestrate the reforms, would have a long-range vision.
- Politicians are in conflict of interest, they are elected officials who need public support. More likely, that they would endorse populist ideas if it suits them politically. We see an example of this, every time around an upcoming election when suddenly politicians endorse reckless money distributions and “economic boosting” moves, that for the economic experts seem foolish, however politically, they’re good for the politicians.
- I am sure that politicians' resume is very impressive, yet, in the field of economics, the experts' knowledge probably surpasses theirs.
- Admitting wrong is seen as political suicide. This creates politicians who tend to stick to their first ideas, wasting energy in trying to justify their past mistakes, rather than responding to events and evidence.
Side note: Personally, I would admire a politician who admits his mistake, tries to correct it and grows from it. That would show me his true intentions, which is doing good for the people.
Side note II: In 1985, Coca-Cola was overtaken by Pepsi in thousands of blind taste contests. The company wanted to come back on top, by inventing a new formula. The public reaction was poor and they wanted the old formula back. It took 80 days for the company to realize it was wrong and fix it by going back to the old one. How long do you think it would have taken for the government to admit a mistake and solve the problem, if at all?
“The fixity of a habit is generally in direct proportion to its absurdity” -Marcel Proust
People would always be driven by motives. When understanding the motives of the politicians, facing those of professional economists, I am not sure that politicians are the right group to manage our economy.
