The Salopian Summer 2023

22
SCHOOL NEWS
Economics is not just about Money
Nick Zafar has taught in the Shrewsbury School Economics Faculty since September 2018.
He runs the Economics Society. This is the text of the lecture he recently delivered in the
Barnes Theatre as part of a lecture series entitled Dialogues.
It is the start of the
first lesson with a
new class. I advise
my new students
that the moment
they stepped into
my classroom they
agreed to leave their
humanity behind.
They were now
embarking on a
course to become
superhuman, to
understand and
explain things that
are currently just
a blur of facts, figures and opinions swimming in the ether
of their consciousness. I would explain that it was not my
role to get them a good A level grade, that was their job. My
job was to turn them in to economists, and the rest would
follow naturally. They would be able to intelligently discuss
economic affairs with their parents and stand their ground,
challenging opinions and long-held perceptions.
The start to this process often involves the post-it sticker (I am
sure there are more high-tech ways of doing this) exercise.
Each student writes down one word that economics means to
them and sticks it on the whiteboard. Unsurprisingly, the word
that appears most often is “money”. So starts the journey of
re-education.
Adam Smith, often referred to as the ‘father of modern
economics’, is still the prime influence on the way we view
economics in the Western world. He suggested:
1. Wealth is created through productive labour,
2. Self-interest motivates people to put resources to best use.
He set this out in his work An Inquiry into the Nature and
Causes of the Wealth of Nations in 1776, where he suggests
that self-interest and competition ensures sufficient goods are
produced at the lowest price to meet the demands of people,
and better products are produced at lower prices due to
competition.
Traditional economic theory, based on Adam Smith’s work,
believes that all needs and wants are met by an economy
where buyers and sellers meet and determine an appropriate
price which in turn is a measure of worth for all things that
people desire. Over-pricing cannot occur because the buyers
will not pay it and under-pricing will not occur because the
suppliers will supply at this price. Everything will be priced
fairly, and everyone will be happy.
With resources allocated efficiently through this mechanism
(often referred to as the “invisible hand”) there will be no
abject poverty, extreme inequality, environmental destruction
et cetera.
One can challenge traditional economic theory by discrediting
its underlying assumptions, including the existence of perfect
information, perfect mobility of resources, homogenous
products etc. However, disciples will respond by asserting the
assumptions are ideals that, while unrealistic, are still worth
pursuing as a yardstick of desirability. They will argue that
rational human beings will strive for these ideals and therefore
that they remain valid.
This piece of work, which has earned Adam Smith the
accolade of being the “father of modern economics”, is 247
years old, yet still substantially informs government policy and
thinking today. It informs political discourse. It informs the
teaching of economics which in turn perpetuates allegiance to
it by the next generation of economists.
247 years ago, the British economy was in its industrial
revolution heyday, with a manufacturing base fed by cheap
resources from a sprawling empire that reached every corner
of the Earth.
247 years later, the British economy, in common with most
developed economies, relies upon a highly developed service
sector fuelled by communication technology that would have
been regarded as magic in Adam Smith’s time.
247 years ago, environmental concerns were not even
conceived of, let alone recognised as arguably the biggest
crisis the world faces.
On a macro level, the success of economic policy is generally
gauged by reference to the achievement of key economic
objectives, the most important of which is generally regarded
as economic growth. Economic growth is measured by
reference to the gross domestic product or gross national
income of a nation which in simple terms is an indication
of the wealth of a country. So, GDP or GNI is a measure
of material wealth. If we can maximise this, and therefore
average incomes, we maximise satisfaction. That’s the way
traditional thinking goes.
However, an American economist by the name of Richard
Easterlin observed a puzzling phenomenon. Between 1946
and 1970, the US witnessed remarkable economic expansion.
And yet surveys failed to show any upsurge in happiness
throughout this period of post-war boom. This trend, as you
can see in the graph on the following page, has continued.
Easterlin Paradox
The Easterlin Paradox suggests that, once a basic level of
income has been achieved (in the US in the 1960s that was
considered to be $10,000) further increases do not increase
happiness.
This naturally raises the question of how ‘happiness’ is
measured. Most economists and academics have shied
away from the task of trying to measure what they see as
unquantifiable. Fortunately, not all.
Measuring happiness usually involves surveys asking people
to report their own happiness levels. In attempting to do this,
researchers have found that it becomes possible to measure
the immeasurable. This is done by attributing measurable
indices to generally agreed human desirables of happiness
which affect broader welfare levels. These generally agreed
human desirables include levels of literacy, access to health
care, political freedom, quantity of leisure, income levels
and pollution levels. Although not a comprehensive list of
happiness-deriving factors, it would be hard to argue that they
do not significantly contribute to happiness.