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Rules of the game

Economic paradigms shape much of how we organise our economy, they are often taken for granted


Beth Harmon, the heroine of The Queen's Gambit on Netflix, is a chess prodigy who struts around the globe beating chess masters across the United States, Europe and Russia. Her skills are unparalleled in the world of 64 squares, and 32 black and white pieces. The rules of chess are strictly governed. Knights can only move in an L shape. Pawns move forward, not backward. A piece, once taken, doesn't come back from the dead - no matter how much you may want your Queen back. Beth knows how to work within these rules and kick her opponent's ass.


The rules of chess got me thinking of the rules of the game economically speaking. The stuff that often goes unsaid, but is actually super obvious, that has powerful implications for how we organise our economy and lives. The rules of the economy aren't as strict as chess, but they govern how we operate.


A rule in this instance could be a widely shared belief or a product of how people and resources interact. This article doesn't focus on rules that can be made up by institutions, but norms or ideas that are followed because they are built into the structure of the economy. One of the clearest ways of 'seeing' an unspoken rule is to consider alternatives and think about what the economy would look like in the absence of the rule.


Prior warning, there is nothing to be learned in this article beyond a way of thinking. The focus will be on the environmental implications of unspoken economic rules, but there are implications to other domains.



Nature supports the economy - not so much the other way around


There are many stocks in nature. Oil. Wood. Minerals. By far the overriding use of those stocks is to support our lifestyles and economy. Those stocks are priced and owned so people can derive value from it. Sure people go for nature walks and enjoy non-economic activities in nature, but that is relatively small compared to the much larger activity which is converting nature into a product or service.


Natural stocks can be drawn down, depleted, and transformed into other things so they are not available for the future. Or at least not available in the form that it started in. Stocks can replenish, but it's often slower than the rate at which they are used. Oil is a classic example, as are fisheries. You can't grow a fish as fast as you can catch and fillet one.


There are not always incentives to ensure the retention of stocks. If anything it's the opposite with entities incentivised to overuse the stock for short-term profit. Though this isn't always the case, it is common enough. Relying on self-regulation is risky in tragedy-of-the-commons scenarios.


The implication is that using more of nature is viewed as a good thing economically speaking as it helps the economy grow. Of course, that way of thinking fails to recognise the economic limits of nature, which is part of the great sustainability challenge humanity faces.


It doesn't have to be this way. If nature were viewed as an enabler of human survival rather than as a means to support the economy we would be less likely to overuse stocks as we approached the limits of what nature can handle - though that is idealistic.


Even in the more environmentally conscious world we live in today, the focus is still very much on how to maximise nature for humanity's long-term benefit. Our efforts on climate change are essentially focused on how we can best maintain current standards of living. Typically people won’t advocate for lower living standards for some or all of society in return for greater sustainability.


Feedback loops don’t always give us enough information to make great decisions


A feedback loop acts as a signal telling people the impact of an activity. Global warming is an example of a feedback loop. As we pump more greenhouse gases (GHGs) into the atmosphere, the Earth gets hotter. The trouble with feedback loops is that they are sometimes indirect or take a long time to be felt, as is the case with global warming. You can imagine that if the Earth immediately got hotter in response to GHGs being emitted, we wouldn't have emitted GHGs for long before we thought 'well that's a bad idea.'


Sometimes we avoid feedback loops when we have a chance to create them. For example, sewage is pumped downstream, past where people might want to use a river. Consequently, we don't see the actual impact of sewage on the environment. That makes sense from a hygiene perspective, though if sewage were pumped directly to a point where people go swimming, we would go to greater lengths to stop polluting or clean up sewage more.


Market ideology suggests feedback is factored into the economy through price - ie that the price of polluting is already 'built-in' through demand and supply dynamics, at least to some extent. That could be true if suppliers directly bore the cost of polluting. It definitely isn't when we talk about feedback loops where the cost isn't worn by the supplier, or feedback loops take a long time to occur. No one could seriously argue that the costs of climate change were factored into prices for the past few decades. It's difficult to do that sensibly when talking about an issue far in the future where the costs are unknown.


Frankly, the future costs of climate change are the biggest intergenerational equity issue facing the world today. Past generations have not paid their fair share to mitigate the cost.


Price is a result of many factors influencing suppliers and consumers. Costs, margins, notions of value, affordability and risk are top of mind. Prices are primarily a result of the interaction between the supplier and consumer with regard to their own interest, rather than the interests of society as a whole.


The economy will be bigger in the future than it is today


This is probably the most important unspoken rule in this article. If you ask economists what the point of an economy is, many will tell you 'to distribute resources' or something like that. That's correct, but a point often missed is that an economy is primarily designed to be bigger in the future than it is today.


This is a fairly modern rule. Throughout much of history, the economy has barely grown. Check out this chart of GDP per capita in England. GDP didn’t really take off till the 1800s. In the 1400s the next generation was no better off than their parents.


Nowadays pursuit of growth is in the fabric of how people and organisations operate day to day. Develop productivity by producing more, ideally for less. Look to grow profits and expand. Earn more so you can buy build a bigger house. Measure GDP and make sure it keeps going up each year - heaven forbid we enter a recession. Asset prices would collapse if this rule was untrue.


The economy can get bigger without needing more resources, e.g. through technological growth and using fewer resources for more output. However, that doesn't change the fact that using resources has been a key driver of growth.


Environmentally, requiring an ever-growing economy is disastrous as we progressively use more resources to fuel a larger economy. Our spaceship economy is overheating as we reach the limits of what is available on our ship. It may be that we have to accept that using less and designing a smaller economy is the way of the future.


Designing and implementing new and improved economic machinery is the holy grail of economics


A lot of the focus in economics is on the here and now. Where should we spend that million dollars? How do we improve efficiency? How do we handle recessions? When recessions hit the economy basically shits itself. People lose jobs. Lives are ruined. Look at what's been happening during COVID-19 for an example. The economy doesn't handle getting smaller very well - at least in the short term. Long-term people adjust.


Peek behind the curtain and look at how an economy operates. Changing the machinery is incredibly powerful - though much harder than usual policy. Changing the machinery can lead to disaster - think the Soviet Union for example. A good example of where it can be successful was the introduction of monetary policy with central banks that control the money supply and have the ability to set interest rates that influence the cost of borrowing. The introduction of centrally controlled interest rates has helped achieve price stability.


Changing the economic machinery can allow policymakers to improve how the economy actually works, and change how economic agents act, to get better social and economic outcomes. In this sense, the 'rules' of the economy are all connected. If pawns can start moving backward, it will change what the best moves are for other chess pieces.



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A New Zealand based politics and economics blog

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