"Those who cannot remember the past are condemned to repeat it"
- George Santayana
It’s a statement of the obvious but our economic ideas, systems and institutions today come from previous thinkers who came up with an idea others bought into. The dismal science has a rich philosophical history that shapes the world we live in today. If you feel like me, that it's a borderline miracle that we are able to wake up each day and buy our daily bread, you have a long list of people to thank.
A walk back through economic history
There is John Maynard Keynes for his contributions to demand-side economics, which argues that growth, production and employment are largely a function of demand. An alternative to this has been supply-side theory developed by economists such as Arthur Laffer which argues that growth is primarily driven by limited government involvement and low taxes. Throughout much of the 20th and early 21st century we have seen both these doctrines duke it out in policy forums. Keynes ideas enjoyed a renewal of interest after the Great Recession of 2008.
Going back further in time to the 19th century we have Karl Marx who discussed class struggle and wrote a critique of capitalism. The Russian Revolution, which played a huge role in shaping the geo-political landscape of the 20th century, had its roots in Marxist thought. In the 18th century Adam Smith the esteemed Father of Economics wrote on the Invisible Hand and the unintended benefits from people acting in their own self-interest. You would not be the first person to feel like the invisible hand is giving you the invisible finger.
In the 17th century John Locke discussed property rights and the social contract suggesting that the government should act to protect people's property. In the Middle Ages, Thomas Aquinas wrote on economics where there was a moral question to consider. He discussed what constitutes fair pricing (a topic dear to my heart) suggesting that the price of a product or service should reflect its worth to people.
Economics need to respond to uniquely modern ideas and issues
I have mentioned these well-known thinkers briefly to give you a flavour of some of the ideas that shape our world today. There is a clear evolution and improvement of ideas as they are reviewed and expanded upon over time. Many of the ideas from previous philosophers that we adopt today have merit.
That being said, it is important to be considered and apply a fresh lens in the face of new evidence. Previous thinkers have not had to contend with the opportunities and challenges of today such as the internet, tax offshoring or climate change. If I chop a tree down, what should I pay to reflect the environmental cost? There are also substantial changes in social norms. The economic system is inherently patriarchal reflecting centuries of thought by predominantly men. How should this change recognise the emancipation of women? Applying a fresh lens is particularly critical when we see politicians bastardising economics for their own ends in the face of poor empirical evidence. It is important to contextualise and understand what has been learnt. However, this doesn’t always happen.
Economists should experiment and learn from their experiments
One such idea that haunts us and draws considerable criticism is trickle-down theory, which has its roots in supply-side economics. Championed in the 1980s by Reagan and Thatcher, trickle-down suggests that taxes on the wealthy and businesses should be reduced to stimulate growth and the flow of wealth economy wide. Trickle-down doesn’t fully consider:
That the wealthy may not spend a tax cut and stimulate demand as the additional money is added to existing savings.
Money makes money and accumulates.
The additional earnings may not be invested due to risk considerations.
Asides from the fact that the money may not trickle down at all, in a globalised world it can trickle elsewhere.
There is limited evidence to suggest trickle-down works but the idea is enduring and frankly tax cuts are an easy sell. We have seen trickle-down in action recently with the Trump Administrations’ Tax Cuts and Jobs Act of 2017 which will likely increase inequality and increase national debt.
Even bad ideas have merit to the extent that they are an opportunity to learn something - but we needn’t be haunted by them. Economics needs license to experiment just like any other discipline, but to a greater extent than other disciplines we must learn from our experiments to prevent hardship.
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