Is there any statistic less meaningful during this pandemic than
the quarterly GDP figure? In ordinary times the regular GDP number is a
barometer for the overall outlook of the economy. But who needs a barometer in
the middle of a tempest?
When workers are told to stay home, when factories, offices,
and building sites are closed it is obvious that output will fall and not by a
little but by a lot. Equally, future projections of GDP are so clouded by the
unknowns that they are not worth the electricity consumed in their calculation.
This crisis should be a signal that the way we talk about
economics and economic policy is inadequate to the moment. While there may be
rich and diverse theories of economy, in the regular discourse we are limited
to a few key variables and a few stylised facts. In our public discussion of
economic policy, we are constrained by language which is too limited.
The pandemic will have deep impacts on our economic
wellbeing, but the usual notions of growth, “confidence”, inflation and
financial markets are not where the action is. This is firstly a crisis of
production rather than markets. Social distancing and the lockdown mean that
production of many goods and services have fallen or stopped altogether.
One of the weaknesses of mainstream economic theory is its
focus on exchange with little to say on production. Neo-classical economics concerns
itself with markets where commodities are bought and sold. It views the economy
as a system of linked markets each moving towards an equilibrium between supply
and demand. It is not surprising, then, that public discourse is couched in the
same terms.
In this crisis supply has fallen, but so has demand. Car
production has ceased but then no one is buying new cars anyway. Why does it
matter when supply and demand are still in equilibrium? If we expand our vocabulary,
we can say that it is production which provides “all the necessaries and conveniences
of life”, whether that is personal transport or healthcare or social care or software.
Of course, it does matter that no cars are produced or sold
and no pints are being pulled. Production requires labour and most people’s
income are wages and salaries. The government was right to introduce schemes to
support incomes by keeping employees in place. Not only does that preserve the capacity
for production but recognises the role of labour in the firm.
Neo-classical economics has little to say on distribution. In
political discourse it is seen as a question for government to correct by
redistributive policies. The idea that such problems could be dealt with at source
is unthinkable within the frame of our current economic vocabulary.
A market oriented language also obscures how economies
change and develop. Yet change is an important driver of prosperity. New
products and new means of creating them allow better production from the same resources.
Firms innovate, not markets. But firms do not innovate on their own. Publicly
funded research, support to start ups lie behind much of the technology on sale
today.
With a wider vocabulary it becomes possible to ask different
questions, like what is it that we as a society value and want to have
produced? Is it right that the wage rates of those who care for our elders are
determined by a “labour market”? Is it right that the availability of homes for
young families depends on a “housing market”?
The government’s difficulties with in securing adequate personal
protection equipment and testing kits can be seen in this light. Government has
seen the task as one of procurement from a notional market, and lacks the
ability to engage with producers. Manufacturing companies can be remarkably flexible.
If face masks are wanted they can be produced but government needs to do more
than issue a tender. Government should have been actively organising the
production of crisis fighting equipment calling on the expertise of producers.
There are economists who spend their time dealing with these
questions, who work with theories on industrial organisation and production, on
wages and employment and on innovation. These aspects of economic thinking
rarely touch on the national dialogue on the economy. In order to understand
the current problem and address the post crisis economy we will need to enlarge
the scope of how we discuss economic affairs drawing on a wider set of ideas.
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