Economics 101 and the wrath of Oxfam

“If only you knew the power of the dark side! In my day it was discussed in section 4.2 of the textbook.”

In the morning, before I get up and have breakfast or exercise, I like to stay in bed a little longer and read over the morning’s news and latest blog posts. This puts me at great risk, because it increases the chance that I’ll come across something that will really annoy me and thus spoil my pleasant morning. This is indeed a first world problem, but nevertheless one which has led to this blog post.

Over at From Poverty to Power, Duncan has linked to this blog post by Oxfamer Kate Raworth, who claims that economics textbooks lack the sophistication and tools necessary to deal with the issues that come about from human interaction with the environmental space. She asserts that this diagram represents the current way of economic thinking:

She then points out that this simplistic diagram (which I have yet to come across in a textbook – readers could you help me out? turns out it is from the Wikipedia page for circular flow of income, thanks @brettkeller) ignores three main things:

  1. Environmental degradation (use of natural resources, pollution, climate change).
  2. Unmeasured/non-monetary sectors of the economy (mainly work at home)
  3. Inequality

Let’s deal with her first point, shall we? Raworth claims:

First, the economy does not float freely against a white background. It is embedded within the planet’s environment, drawing on its natural resources and dumping pollutants back out into it. Mention that and an economist will say – ah yes, environmental externalities, we’ll come to those later. But calling nature’s resources ‘externalities’ and leaving them till later has led us to this crisis of climate change. How can it make sense to treat the fundamental resource on which all life depends as a factor external to the system?

First: “externality” doesn’t mean “external to the system,” it indicates a positive or negative impact which a given agent (person, firm, etc) doesn’t normally factor into their decision making. Economists label externalities as such because we think they are important, not because we are trying to shunt them under the rug.

Secondly, climate change hasn’t happened because people picked up Econ 101, didn’t see “the environment” mentioned as anything but an externality (or – admittedly – at all) and decided that it wasn’t important. Climate changed has happened because agents (citizens and firms and governments) don’t internalize the environmental impact of their actions. Not enough people think carefully about their energy usage. Not enough firms are given incentives to consider the environmental impact of their output. Economics has quite a lot to say about fixing externalities for a very, very long time (for example, the idea of Pigovian taxes has been around for more than 90 years), and to claim that climate chance is somehow the result of our way of thinking is a little silly.

Raworth also laments the lack of concern for the “unpaid care economy,” worrying that it will lead us to misunderstand the working lives of many of the world’s women. It is true that this is often left out of the discussion of the economy, but mainly because it’s pretty difficult to measure, not because no one cares about it. It’s also true that Econ 101 doesn’t have a lot to say about household chores or child care, but economics as a whole certainly does – Ms. Raworth would do well to have a look around the JEL classifications codes, especially in D and J. Her assault completely ignores decades of research on the household, the family and interactions between husbands and wives.

Similar things could be said about inequality – yes, Econ 101 is mum about it, often retreating to pareto efficiency without making any normative statements about initial allocations. In fact, much of Raworth’s objection seems to be that economics as a discipline isn’t normative enough, but I see this as a strength. It is up to us as a society, not economists, to determine how much we care about inequality. Yet, public policy requires a complex calculus of weighing different things that we care about; what economics and other social sciences try to do is make that calculus easier, by coming up with many different ways to measure income inequality and poverty, the impact of both on myriad indicators of well-being, including economic growth, health, (increasingly) the environment, and so on.

There is a missed opportunity here: I completely understand Raworth’s concerns and agree with her that we should be urgently focused on internalising the environment and inequality, and do more to measure what is currently unmeasured. Yet these concerns don’t validate her argument that economics is fundamentally lacking. Quite the contrary – we have been talking about externalities for a long time. We’ve been talking about inequality for a long time. We’ve been talking about the household economy for a long time. We have quite a large toolbox – some of the tools are better than others, and some of them are quite flawed, but perhaps a discussion as to which of them are more useful and which need refinement would be more fruitful than a casual dismissal of the way economics is taught.

Should more of these thing be making it into Econ 101? Some of them – like externalities – certainly do. It was one of the first things I learned in my undergrad economics courses. Then most of my lecturers -wrongly – dismissed externalities as something that would be dealt with by the Coase theorem. This is because many of them were libertarians who hated the idea of government intervention, not because economics told them to believe it to be true. Similarly, Ms. Raworth and I share very similar educational backgrounds: we both took the MSc in Economics for Development at Oxford and we both ended up as ODI Fellows in Africa. That our views diverge has less to do with the type of economics we were taught and more to do with who we are. This shouldn’t stop useful discourse – Ranil was taught quite a different style of economics during his masters, yet we managed to write a blog together.

I don’t believe I have the “wrong model of the world” stuck in the back of my head. Perhaps my tool set is weird, imperfect, and overly-mathematical, but that doesn’t stop me from caring about inequality and climate change.

Addition: this post could also be titled “In which Matt defends microeconomics, but has little energy for macro”