By Lazarus Nyagumbo.
This article follows several and various requests from different parts of the world where our sphere of influence is present. Many of our readers have been asking why can’t we focus more on economy and less on politics as a nation or world. They are relatively correct and right to raise those concerns, however, this is due to a lack of knowledge and understanding of what is economics, and what is politics. I will do my professional level best to debug and demystify this misunderstanding.
Back To Basics
To begin with, Economics is an English word derived from Greek word Oikonomia which basically means the management of a family or household. Home economics rings a bell to some of our people but we are not about that. The study of household management to Greek philosophers like Aristotle (384-322 BC) was the “study of wealth” to the mercantilists in Europe between the 16thth and 18th centuries. This later on inspired the Scottish Adam Smith (1723 -90) to publish ‘An Inquiry into the Nature and Causes of the Wealth of Nations or, more popularly known as ‘Wealth of Nations’ in 1776.
Adam Smith (1776) posited that “the great object of the political economy of every country is to increase the riches and power of that country”. Wealth can be defined as those goods and services which command value-in- exchange. Economics is concerned with the generation of the wealth of nations. Adam Smith advocated for the “Invisible Hand, Price Mechanism, Free Market or Private Sector” in which the government has no role in the economy, in other words, everything is privatised and goods or services will be produced and allocated according to forces of supply and demand rather than welfarism.
Furthermore, John Stuart Mill (1806-73) argued that economics is a science of production and distribution of wealth, echoing Adam Smith’s (1776) philosophy as well.
However, Alfred Marshall (1890) in his book “Principles of Economics” argued that economics is concerned with human activities or human welfare rather than wealth. Marshall defines economics as “a study of men as they live and move and think in the ordinary business of life, it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being”. In other words, wealth is not an end in itself as was thought by classical economist like Aristotle, Smith and Mills; it is a means to an end—the end of human welfare.
Neo-classical economist A. C. Pigou (1877- 1959) implored that economics is “that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money.” However, Lionel Robbins (1898- 1984) argued that economics should encompass ‘non- material welfare’ also. According to Robbins (An Essay on the Nature and Significance of Economic Science, 1932) “economics is the science which studies human behaviour as a relationship between wants/needs/desires (ends) and scarce resources, factors of production or means (land, labour, capital and enterprise) which have alternative uses (opportunity costs, meaning the cost or loss of the forgone or given up alternative use of scarce resources when a choice is made).”
From the foregoing discussion of economics definition, it is clear that economics deals with our daily issues, human wants/needs, why do people go to school, go to work, start up a business? The main reason is that households, individuals or consumers attempt to satisfy their wants and wants and gain utility or happiness, whilst firms, producers or businesses pursue profit maximisation when their marginal revenue is equal to marginal costs. Governments want to achieve sustainable, steady economic growth e.g. 2% in UK, 10% in Africa, low stable inflation e.g. 2% consumer price index in UK per year, low unemployment (natural rate of unemployment) e.g. <5% in UK, balanced or sound balance of payments (export-imports), reduce income and wealth inequalities, sustainable environment among others. For a political party to form a government, it must win an election by majority vote as per worldwide celebrated democratic process. For a political party to win an election, it must come up with a unique selling point manifesto resonating with the aspirations of the masses. So how can economics be separated from politics or vice-versa. These are fraternal twins, some call them two-sides of the same coin.
The Cambridge Dictionary (n.d) defines politics as the activities of the government, members of law-making organizations, or people who try to influence the way a country is governed . Aristotle added that the most important roles of a politician, though, is to make laws, or constitutions, after the laws are put into place the politician’s job is to make sure that that they are abided by. Political science focuses on the theory and practice of government and politics at the local, state, national, and international levels Therefore, political science is the knowledge and understanding of the ways in which political power is acquired and used in a country. Similarly, political science is concerned mainly with the foundations of political community and institutions. It focuses on human nature and the moral purposes of political association. How does a politician acquire power, and when he acquires the power what does he/she do with the power, facilitate the provisions of voters wants/needs, governing, leading, protecting etc the masses that gave her/him the power? How can you separate economics from politics, be real?
Pettinger (2017) thus summarised economics as concerned with studying and influencing the economy whilst politics is the theory and practice of influencing people through the exercise of power, e.g. governments, elections and political parties. In theory, economics could be non-political. An ideal economist should ignore any political bias or prejudice to give neutral, unbiased information and recommendations on how to improve the economic performance of a country. Elected politicians could then weigh up this economic information and decide to implement policies and actual programs that uplift the people’s welfare, increasing their utility and happiness ensuring an election victory in the future.
It must be categorically noted that in real world practice there is a direct-strong- positive – bi- causality relationship between economics and politics because the performance of the economy is one of the key political battlegrounds. Many economic issues are inherently political because they lend themselves to different opinions, why? Simply because when the economics sneezes, the politics catches a cold and the reverse is so true. World history is pregnant with food or bread riot cases in various countries. These riots sometimes culminate in the fall of a government. Psychologist Abraham Maslow (Hierarchy of Needs, 1943) stated that individuals must satisfy lower level deficit needs before progressing on to meet higher level growth needs. However, he later clarified that satisfaction of a needs is not an “all-or-none” phenomenon, admitting that his earlier statements may have given “the false impression that a need must be satisfied 100 percent before the next need emerges” (1987, p. 69). In order for any government to satisfy the masses’ needs, economics must be called upon and sound economic judgement implemented, if not, the political consequences or ramifications maybe not so rosy rather very ugly.
How does a political party’s ideology affect micro-and-macroeconomic policies, fundamentals, and the people’s welfare?
In many society’s most economic issues are seen through the lenses of political beliefs, values and vision. For instance, pro-free market classical and neo-classical economists view government intervention in markets or economy is retrogressive and must be avoided. They advocate for economic policies which seek to minimise the role of government intervention in the markets, they argue that markets will always self-correct and find an equilibrium where supply and demand for goods/services will be equal due to the workings of the Invisible Hand, The Price Mechanism. They argue that price functions such as signalling will give signals/incentives to producers to increase supply/production when the price is going up or reduce production when price is going down. Consumers will use the increase in prices signal to reduce/ration demand or source substitutes/alternative goods or services. Classical and neo-classical economists also promote supply side policies which focus on deregulation of markets to increase competition, privatisation and tax cuts on the rich people and trigger a “trickle down effect”. The argument is that when the rich get an income tax cut from 50% to say 40%, they will see a rise in their disposable incomes and increase their spending and investment in the domestic economy, this will create more jobs for the less privileged in society and they also earn income reducing absolute and relative poverty. Critics say they rich may decide to spend their income abroad or externalise it in so called safe havens, hence no actual benefit to the domestic economy.
However, some pro-Keynesians economists may have a preference for promoting greater equality and equity in society and be more willing to encourage government intervention to pursue to pursue radical economic transformation economic policies such as National Minimum Wage £7.83/hour in UK (2018/19), Real Living Wage £9/hour (2018), Affordable Housing Schemes, Land Reform, Free Education upto A-Level, Free Healthcare at the point of need among others. These policies and programs that affect real people in real terms are usually deliberated upon at Political Parties Annual Conferences e.g. Zanu PF 17th National People’s Conference (Esigodini, December 2018), ANC National Conference (Johannesburg, 2018), Conservative Party Conference (Manchester Central, September 2018). It is therefore not surprising why Aristotle concluded that “every human being is a political animal”. Everyone has got some economic needs/wants and these can be directly or indirectly affected by political parties’ ideologies, policies, programs and core founding principles values and visions.
An astute politician can work with economists and their economic research which backs their political view. Pettinger (2017) argued that Mrs Thatcher and Ronald Reagan were great champions of supply side economists like Milton Friedman, Keith Joseph, and Friedrich Hayek. When Reagan was attempting to ‘roll back the frontiers of the state’ – there was no shortage of economists who were able to provide a theoretical justification for the political experiment. There were just as many economists suggesting this was not a good idea, but economists can be promoted by their political sponsors. In the US, the Paul Ryan budget proposals were welcomed by many Republicans because they promised tax cuts for better off, cutting welfare benefits and balancing the budget.
Economics can be independent of politics though.
Econometrics, statistics, mathematical economics or quantitative methods are based on real economic data and avoiding cherry picking favourable statistics may result in sound economic conclusions and recommendations that don’t necessarily fit it with pre-conceived populist political issues.
Many international economists may be generally supportive of the EU Remain Vote and European co-operation, but the empirical evidence from the Eurozone shows that it has caused macroeconomic problems of low growth, deflation and trade imbalances in some weaker members. To a larger extent, Germany is the biggest beneficiary of Eurozone project because it has a strong comparative advantage in high-tech productive efficient manufacturing industry. Anywhere you go in EU or in the world, you will find Mercedes Benz, BMW, VW, Audi etc of all colours, shapes and sizes, what it means in simple economic terms is that Germany’s business is booming whilst other economies are mere consumers buying made in Germany products and all other related services. Germany enjoys higher exports, higher employment levels, higher direct and indirect tax revenues, their economy grows whilst consumer economies suffer reverse economic outlook and prospects. This has led to political temperature rising in some EU countries culminating in Brexit vote, the vote that is now proving to be a wrong choice after all and may require a second referendum. The close relationship between economics and politics is being manifested here.
Economics will always need political will and support.
Environmental economists may clamour for both tougher market-based and behavioural change policies to reduce demerit negative externalities, external costs or spill-over effects on 3rd parties not directly involved in the production or consumption transaction of a good or service. In most cases a Pigouvian tax ( this is a tax which makes producers or consumers pay the full social or total cost of the good/service, and not just the private cost . This principle of making the first and second parties e.g. polluter pay or internalise the external cost provides a case for Carbon Tax, congestion charges, alcohol tax, high sugary drinks tax, fast fatty food tax and tobacco tax. These products cause diseases such as cancer, obesity, heart failure, injury and it will cost government to build more hospitals, buy more medical drugs etc and there is opportunity cost of reduced government spending tax payers money on other areas such as education, housing, road/rail/air-sea-ports, industrialisation resulting in some sections of society being disgruntled and again causing political tension. Behavioural change policies are more effective in the longrun and they seek to ban, legislate, and prohibit such harmful products’ supply or demand. But as you know it takes time for a habit or behaviour to change, even though the government try to close the information gap by raising education and awareness campaigns through negative advertising or labelling on some of these demerit goods.
However, whether these policies get implemented depends on whether there is political will and support for them. For example, a congestion charge was proposed for Manchester, but it was very heavily defeated in a referendum. A new tax is rarely popular such as the recently introduced 2% transaction tax in Zimbabwe. As an economist, I would like to see more congestion charging or more informal sector contributions to the national treasury because it makes economic rationale and sense. But, what can make ‘sense’ to an economist can be politically unpopular. For example, TLN Economics (2007) is very unpopular among MDCA opposition cabal because he exposes the harmful aims and effects of Zidera Act 2001 or restrictive economic sanctions on Zimbabwe to make the economy scream and cause a regime change but if they truly interrogate their souls and economics, they would easily agree that sanctions hurts, sanctions kills, sanctions impoverishes the masses than any other section of society. In other words attempting to effect a political regime change through economic terrorism, are you noting the close relationship between economics and politics?
The Economic Structural Adjustment Program (ESAP) or Austerity Charm
The strong-positive relationship between economics and politics can be poignantly illustrated by austerity measures. Following the 2007-09 Global Financial Crisis or Recession triggered by the collapse of USA Lehman Brothers International on 15th September 2008, when they filed for the largest bankruptcy in history because their assets were $639 billion versus $619 billion liabilities or debt, toppling previous bankrupt giants such as WorldCom and Enron, there was a strong economic case in many parts of the world for expansionary fiscal stimulus and macroprudential monetary policies to boost Aggregate Demand (national consumption + Investment + Government Spending + (Export – Imports, where more exports > imports = Balance of Payment Surplus in Current Account or Capital account). However, politically, it is difficult to advocate for a policy which results in more government or national debt. There may be an economic rationale and logic to Keynesian-Demand-Side-Management-Policies in a recession than inviting political risk associated with ESAP or austerity of ‘tightening belts’ and ‘get on top of debt’, after all we are all dead in the longrun and money is neutral, it only affects nominal variables without much impact on real variables.
However, too fast economic growth can lead to over-heating of the economy under recovery or too much printing of money, romantically dubbed Quantitative Easing will result in hyper-inflation, “too much money chasing too few goods/services in the economy” with serious political repercussions as households, individuals and firms experience a real fall in their purchasing power, value of assets/wealth and savings erosion, consumption and living standards. Usually the masses will speak or ventilate their anger on incumbent administration in any country with their votes on election day. Is it politics affecting economics or economics influencing political voting patterns, the direct-strong-positive-relationship between economics and politics. “It’s the Economy, Stupid” is now a popular phrase was coined by James Carville, Bill Clinton’s election strategist in 1992, as part of a Democratic strategy to remind voters of the weak George W Bush economy.
The Case for Central Bank Independence, Should Economists or Politicians Run The Economy?
According to The Economist (20th October, 2018) “operational independence for central banks is relatively new. The principle grew out of work in the late 1970s and early 1980s by prominent economists working in the “rational expectations” school of economic thought, among them Finn Kydland and Edward Prescott, who were eventually awarded the Nobel prize. They considered the implications of people’s ability to look into the future and to anticipate the behaviour of self-interested politicians”. In most advanced economies, the monetary policy (mainly base or interest rates) used to be managed by the government. In recent years, there has been an appetite to give monetary policy to independent Central Banks. The idea is premised on the basis that “Central Banks will be more independent of political considerations and willing to keep inflation low – even if there are political costs to raising interest rates. The Central Bank officials are appointed by the government and are given broad guidelines (e.g. target low inflation)”, Pettinger (2017). The great question of the day is “how independent is the central bank independent from government then?”. But of importance is not that central bank policies pronounced by governors appointed by politicians in government positively or negatively affect individuals, households, consumers, voters, firms, producers or businesses belonging to real people depending on a case by case basis.
In conclusion, there is no way one can speak of economics without directly or indirectly talking about politics, the two are inseparable, they are umblically interconnected. A better economy results in better politics whilst poor politics lead to deteriorating macroeconomic fundamentals. It is critical for local, national, regional and international economic and political decision makers or leaders to have a sound knowledge and understanding of the direct-strong-positive-bi-causality relationship between economics and politics in order to promulgate and implement sound micro-and-macroeconomic policies and political ideologies that boost and uplift the people’s welfare, rising living standards and happiness including the wellness index globally.
Wishing you all merry Xmas and prosperous new year 2019 economically and politically.
Lazarus Nyagumbo is an International Economics expert, currently Head of Economics Department (UK) and Secretary for Commissariat Zanu PF UK & Europe, former Zimbabwean Banker, Business & ICT Lecturer (UK), Stock Market Broker(Self-Employment) and studied BSc (Hons) Politics & Administration, BSc (Hons) Economics at UZ and PGCE – Business & ICT (UK), MSc International Economics (UK). The views in this article are expressed in his personal capacity.
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