ourEconomy

Take care of the people, and the economy will take care of itself

Economic theory has legitimised the idea that we can't afford to provide basic human needs. But needs are a key foundation upon which a strong economy is built.

Cahal Moran
12 March 2020
A homeless person sleeping rough in a doorway in Farringdon, London.
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Yui Mok/PA Archive/PA Images

John Maynard Keynes famously claimed “look after unemployment, and the budget will look after itself”.

He was refuting the austerians of his time, who believed the best way to balance the budget was to attack it head on with tax rises and spending cuts. In Keynes’ view, employing people and otherwise stimulating the economy would kick start a process which would increase economic activity, getting people off unemployment benefit into work and paying taxes – thus balancing the budget. Conversely, he believed austerity would put this process into reverse and ultimately be counterproductive to its stated aims.

There is a similar but broader dichotomy at the heart of contemporary economic analysis: the idea that we cannot afford to provide basic human needs such as housing, education, health, and subsistence. During the UK general election campaign, Conservative MP and now First Secretary of State Dominic Raab responded to a woman who criticised cuts to disabled benefits by saying “I can think of lots of things that I would like to avoid making difficult decisions on and lots of areas like the health service or schools that I want to put even more money in. But unless you’ve got a strong economy creating the revenue, it’s just a childish wish list.” In response to this, those on the left made claims such as “we are the 5th richest economy in the world” and that we “can afford” these things. These arguments still imply needs are a luxury we must be able to afford.

I see no logic in saying we cannot afford to make human needs the centrepiece of economic policy. Humans are the source of all economic activity: each working age individual is a potentially productive economic unit. In fact, their productivity is a function of how much is invested in them, and if their basic needs are fulfilled and secure over their lifetimes they will be all the more productive. Recently it has become clear that in each and every area the empirical evidence suggests that recognising peoples’ humanity, investing resources into them, and ensuring that everyone has a stake in society is a sure fire way to increase productivity and well-being while decreasing crime and other social problems, and as such is not at odds with the focus on the economy.

Although the Conservative Party and contemporary economists disagree on many things, often including austerity itself, they share the idea that human and economic aims are generally opposed. For this reason I believe that views like Raab’s ultimately find their intellectual roots – assuming there are any – in the discipline of economics.

The scarcity mindset

Scarcity is at the heart of modern economic theory, economics as used in policy, and public perceptions. It is baked into the standard definition of economics espoused by Lionel Robbins in 1932 “economics is a science that studies human behaviour as a relationship between limited resources and unlimited wants which have alternative uses”. The idea of opportunity cost – what you could have gained from the next-best alternative – is a favourite of popular economics books such as 'Freakonomics' and of economic theory, underpinning key ideas such trade-offs between purchasing two goods; between work and leisure; or between efficiency and equity. Almost every economic seminar I attend features the word ‘trade-off’ at some point. It’s a crucial part of economists’ lexicon. And although new research and other perspectives have poked countless holes in the idea, it persists in textbooks, assumptions, and in the core mindset of the discipline.

Take the best-selling textbook ‘Principles of Economics’ by Greg Mankiw, the outgoing tutor of the Harvard introductory economics class. He famously opens the book with 10 principles of economics and the first is that “people face trade-offs”. He immediately extends this to society as a whole, stating that “efficiency and equality…often conflict”. Later he states that “trade-offs are involved in most policy decisions” and at one point describes the instance of environmental regulations in more detail “trying to eliminate all pollution would reverse many of the technological advances that allow us to enjoy a high standard of living. Few people would be willing to accept poor nutrition, inadequate medical care, or shoddy housing to make the environment as clean as possible”. By my count, the term ‘trade-off’ appears 146 times throughout the book. Nobel Laureate Thomas Sargent was even more unequivocal in his list of 12 economic principles he tells to students, which include “there are trade-offs between equality and efficiency” and “many things that are desirable are not feasible”.

It would be absurd to deny that trade-offs exist. But the idea that they are a universal feature of the world – that as a rule, we are forced to choose between two economic goals; or between an economic and a social, political, or environmental goal – is often just assumed in economics with little evidence. Take the purported trade-off between equality and economic growth when an IMF study found that, if anything, the relationship goes in the opposite direction. Or, as per Mankiw’s environmental example, consider the many studies showing that reducing pollution can increase productivity and reduce health costs. Economist Anna Stansbury has listed a number of other counterexamples, such as criminal justice reforms, where efficiency and equity are complementary. Yet standard economics embodies the idea that the economy and the government cannot bear the burden of catering to human needs through its focus on scarcity.

In my opinion this ‘scarcity mindset’ has two major flaws. Firstly it is a static, narrow view which takes constraints as a given when a broader, dynamic view reveals they are malleable. As Yanis Varoufakis eloquently explained on BBC Question Time, for governments income and expenditure cannot be separated so easily – and as we will see, this is especially true of certain classes of spending. Secondly, there are many cases where goals are complementary rather than opposed. The cases I will focus on are those where the achievement of an equity goal satisfies basic human needs, resulting in a positive feedback loop as the human becomes more able and willing to contribute to the economy. Unlike wants, needs are finite and the evidence favours the operating assumption that fulfilling them is both achievable and beneficial to the economy.

Putting humans at the centre of economics

The economist Amartya Sen famously advocated the ‘capabilities’ approach to development, arguing that “there is a deep complementarity between individual agency and social arrangements”. My point here – and it was made by Sen in passing – is that both of these can be complementary to economic outcomes, too. As an example of how the human has been taken out of economics, standard theories generally do not consider the effect that material and social conditions have on people. Homo economicus is never stressed, overwhelmed, vulnerable, desperate, hopeless, depressed, anxious, frustrated or fatigued. Equally, they are never inspired, appreciative, motivated (except by money), solidaristic, purposeful, proud, fulfilled, optimistic, or creative. These undeniable features of human nature are not extraneous details to economics; they form a crucial part of how humans behave and interact with the economy. And making them central to economics changes our conclusions about policy.

For example, one of Sargent’s principles is that “social safety nets don’t always end up working as intended”. Interpreted narrowly this is almost certainly true, but given the context it’s clear what Sargent is referring to. Standard economic models see work as a sacrifice of leisure, done to pursue higher consumption with the income gained from working. Working is a form of disutility, decreasing happiness, and is worth it only insofar as it gets the goods. This has the implication that taxing people for working and giving them money for not working (such as unemployment benefits) will reduce the amount they work, making redistribution a double whammy for efficiency losses. Yet neither proposition has much evidence to support it. A 2018 review of 16 basic income programs found that the unconditional cash transfers have next to no impact on employment and labour supply. A 2012 review of taxes concluded that there is little evidence that people work much less when taxes rise (the exception is at the very top, but this is mostly driven by tax avoidance/evasion, which raises different questions). And there are good behavioural explanations for these findings.

An alternative view of work was masterfully described by Daniel Pink, who showed that people work for more than just money. Monetary incentives only work in a narrow range of circumstances; in general money is necessary up to the point that people don’t have to worry about it. After this point they are driven by innate curiosity; willingness to learn; an urge to master and to produce something. Work is a source of happiness and self-esteem; a way of contributing to society and gaining peer approval; and fulfils the fundamental human need to have a purpose. Under certain conditions, financial incentives can even have negative effects. This model explains why unconditional benefits may actually have less of a disincentive effect than those accompanied by sanctions – the preferred choice of many countries today - since treating recipients badly elicits negative responses.

To flip the question on its head, a lack of money could have a negative impact on work. It has been shown time and time again that poverty and deprivation negatively affect peoples’ performance in the workplace. Humans only have a limited level of information processing capacity and being poor is cognitively demanding. You are forced to manage your finances more closely; think about where the next meal is coming from; and are more likely to be time constrained because you can’t, say, eat out or hire a cleaner. Those in situations of poverty may make less ‘rational’ decisions as a survival mechanism. The famous Marshmallow Test asks children to sit in a room with a marshmallow while being promised a further one if they wait for a few minutes. Those who wait have consistently been shown to be wealthier, healthier and happier later in life and guess what? Children born into poorer families tend to ‘fail’ the test.

A 2016 study showed this wasn’t because they were less rational – biological indicators suggested that among the poorer children, it was the calmer ones who took the first marshmallow. When you’re poor, it makes more sense to think about the present day than the future; when the present day is secure, you can make long term plans which are good for yourself, society, and the economy. Jennifer Sheehy-Skeffington and Jessica Rea have done a comprehensive synthesis of over 200 studies showing how poverty impedes one’s decision making in a variety of realms including health, education, and employment – and in some cases this also applies to one’s parents’ poverty. The recent example of the boss who raised his employee’s salaries to $70,000 and saw an increase in performance may not be as rigorous a piece of evidence, but it is illustrative of this point.

Child poverty is an especially important case and one where the economic literature has paid increasing attention, even if textbooks and policymaking have yet to catch up. Hendren and Sprung-Keyser (hereafter HSK) recently did a review of social programs in the USA, estimating the returns to investment on numerous public provisions. They found that many programs have returns – in terms of efficiency and the budget – that have not been properly appreciated before. In fact, investment in programs which benefit children can literally pay for themselves. This underscores the research of Nobel laureate James Heckman, who has long stressed that investing in children through care, health, nutrition, and education will have a positive effect on children’s development which will make them into more happy, responsible and productive citizens. Without this provision, the effects will be reversed: another report found that the consequences of poverty cost the UK £78bn per year.

Underpinning these findings is the fact that people don’t disappear when you cut their provision; the costs can appear elsewhere in the budget. Healthcare is an especially instructive example, since not taking care of patients now can easily result in higher costs down the line. The present coronavirus panic is a case study in how healthcare has repercussions for everybody. More generally, research in the UK has found high knock on effects of spending on health, with £200m cuts to the NHS costing in £1bn down the line. Mental health expenditure specifically has been estimated by the World Health Organisation to return spending fourfold. A telling case comes from the Marmot review of healthcare austerity in the UK, which shows how crisis spending has risen concomitantly with cuts in preventative spending

Similar logic applies to other needs: it has been estimated in the USA that homelessness is extremely costly to the government via increased crime and health costs, and that funding students’ education is far less costly than funding the sad alternative of prisons. Finland’s recent experiment with giving homes directly to the homeless has had huge benefits by saving the public sector money elsewhere. Further evidence from Finland and Kenya shows that giving people money has positive benefits for their health, wellbeing, and even entrepreneurial behaviour; one town in Canada found hospital appointments declined by almost 10% when it introduced a minimum income. ‘Putting the human back into economics’ is not all about spending, either: reductions in work hours and improvements in worker well-being have been shown to have no negative economic effects and possibly even positive ones.

To get a little more speculative, there could be a cumulative effect of ensuring all needs are catered for on an ongoing basis. As Ha-Joon Chang has argued, social safety nets can be likened to limited liability laws because they offer insurance should one fail, inviting people to take more chances. At a population level this results in more entrepreneurial behaviour and economic dynamism – indeed, such is the logic of Denmark’s famous ‘flexicurity’ employment system. It also yields a version of what blogger Daniel Davies called the “Park Problem” after Nick Park, the creator of Wallace and Gromit: every so often, someone will come along who will transform the economy and society for the better immeasurably. Children and adults who are deprived of their needs are unlikely to do so. The converse of this is that depriving people of their needs produces backlash and instability: recent research has proposed links between austerity and Brexit, and even austerity and the rise of the Nazis.

One point made in the aforementioned IMF study was that inequality, not just poverty, may be bad for certain socioeconomic outcomes. Researchers Richard Wilkinson and Kate Pickett’s research relates higher inequality to several social ills. In their first book 'The Spirit Level' they were largely focused on aggregate correlations, linking inequality to various social outcomes including crime, mental health, obesity, and more. In their second book 'The Inner Level' they took a closer look at causality, relating income inequality to status anxiety and showing it seems to drive many of these observations. These relationships have been shown to hold to varying degrees across different countries, across US states, and within countries over time.

The most convincing evidence in this area shows there is a strong social gradient to stress-related illnesses: within a society the richest are less likely to suffer from these diseases, but this is not just because of poverty. If you move from the first to second income quintiles life expectancy goes down and the risk of these diseases goes up even though the second quintile can’t feasibly be said to be in poverty. So too do the results remain in regression analysis where you control for income and other factors. Just as importantly, health issues which are not related to stress do not show this behaviour, an example of the true meaning of the exception which proves the rule. There are also theories of behaviour which support the importance of relative comparisons, including one known as decision-by-sampling, where well-being depends on their ranking relative to citizens around them. Although the link with inequality is more convincing in some areas than others and more research needs to be done in this area, the idea of an efficiency-inequity trade-off is an amusing reversal of the standard story.

A change in perspective

We need a shift in perspective to the baseline assumption that needs are not at odds with economic aims but are instead a key foundation upon which an economy (and society) is built. By way of an analogy, think about needs the way we currently think about physical infrastructure: while we may disagree about which roads should be built and how they are funded; and while there are undoubtedly some awful projects (like High Speed 2), we all accept that infrastructure is necessary and few people ask if we can ‘afford’ it in a general sense. The same assumption about social provisions arises naturally from putting a more realistic account of human behaviour into our economics.

To be clear, I am not saying that every needs-based program would increase GDP growth and/or pay for itself. Hendren and Sprung-Keyser’s research illustrates that there are some programs which would reduce efficiency and cost more than they spend, especially when evaluated on an individual level. But taken as a whole, there is good reason to believe a society which provides for its citizens’ basic needs – potentially via higher taxation – will not suffer from overwhelming problems of efficiency and stagnation, because these programs can have positive effects on the economy and revenue which offset or falsify the negative effects claimed by economists and politicians. It is a cliché to reference Scandinavia as a positive example of everything, but it is undeniable that they have higher tax and welfare levels than most countries without a perceptible loss of economic performance.

How exactly to administer these needs is a practical and empirical question, and the correct mixture of institutions will vary over time and place; in its use of private versus public sector; between being benefits-in-kind or just cash transfers; means-tested or universal, and so forth. In my opinion, the economic conversation should begin with the question of how governments provide for their citizens, an approach with a long tradition in economics. This is as opposed to asking how we can maximise efficiency, or GDP, or balance the budget – none of which are endangered by pursuing basic needs. Indeed, one of the admirable features of capitalism is its ability to thrive in a variety of different social and policy contexts.

To reiterate: this essay should not be interpreted as saying there are never trade-offs or hard decisions. Local governments and specific organisations like the National Institute for Health and Care Excellence (NICE) – who buy pharmaceuticals for the NHS – face concrete budget constraints because they cannot benefit from the same kind of broad positive feedback loops as national governments. The ageing population in the Global North (and now China) looks set to create some difficult trade-offs in the near future. Brexit also looks poised to create economic constraints and losses.

There is perhaps also a deeper question at play here. What we consider ‘the economy’, along with the scarcity mindset, is partly based on statistical fiction. Adjustments are already made to GDP and government accounts based on what society chooses to value. The Conservatives cordoned off capital investment from austerity, attempting to balance the current account only. With this in mind, should we re-envision how we measure and value both public and private services?

This would follow in the tradition of feminist economics, which has long argued that social provision should also count as investment and that expanding it may even increase GDP while reducing debt over the long-term. Even classing childhood investment and education – which literally pay for themselves – as capital expenditure would completely change our view of social spending. Additionally, we might consider some types of health and transfer payments; or adjustments to GDP itself. This approach seems to be gaining traction; it appears the UK statistical authorities and (presumably non-Raabist) elements of the Government are considering it.

Ultimately, however we measure it there is no prima facie reason to believe that providing for people is unaffordable or will do harm to the economy. To believe otherwise is to deny a substantial volume of empirical evidence to the contrary.

What can a world in crisis learn from grassroots movements?

For many communities, this is not the first crisis they’ve faced. The lockdown feels familiar to those who have years of experience living and organising in the face of scarce resources and state violence.

So it’s not surprising that grassroots and community activists mobilised quickly in response to COVID-19, from expanding mutual aid groups and launching creative campaigns to getting information out to women at risk of domestic violence.

What can the world learn from these movements to get us through this crisis – and help us rebuild a better world?

Join us on Thursday 2 July at 5pm UK time/12pm EDT for a live discussion on these urgent questions.

Hear from:

Mona Eltahawy Feminist author, commentator and disruptor of patriarchy. Her latest book ‘The Seven Necessary Sins For Women and Girls’ took her disruption worldwide.

Crystal Lameman Member of the Beaver Lake Cree Nation and campaigns against the exploitation of her people and of their land, holding the government of Canada accountable for violations of their treaty rights.

Elif Sarican Activist in the Kurdish Women's Movement, host and producer of Pomegranate Podcast.

Chair: Mary Fitzgerald Editor-in-chief, openDemocracy.

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