What should be the purpose of economic policy? And what role can, and should economists play in guiding economic policy decisions? – Rachel French

In essence, economic policy should be sustainable. However, it should not be focused entirely on sustainable economic growth, but on sustainable development for the present population, and future generations, and leaving the environment secure and intact for the people. The purpose of policy is to provide quality infrastructure, in which people have the opportunity to thrive.

This article is not a history of economic theory, nor will it make reference to all the philosophers of economic theory who have shaped the discipline. Instead it will focus on the needs of economic policy today. The article will be in two parts: the first will discuss the purposes of economic policy, and the second the role that economists should play in guiding policy decisions. It will conclude by stating that the purpose of economic policy should be to provide a sustain- able future, with economists having responsibility to assist in creating policies that reduce inequality.

Economic policy should target the big issues within an economy. For example, in their latest report (2018) the World Economic Forum cites persistent inequality and environmental dangers as two of the four biggest concerns— the other two being international and domestic political tensions, and cyber vulnerabilities (World Economic Forum, 2018, p. 9). Accordingly, the purpose of economic policy should be to sustain- ably target inequality in order to increase living standards for those who cannot afford to pay for private goods.

Just as simply, investments in the public sphere in sectors such as health, education and environmental quality will both mitigate present inequality and prevent further inequality increases in the future (World Inequality Lab, 2017,

1. 20). Investing in the public sector has been proven to increase living standards and decrease inequalities. Policy needs to be directed towards uplifting those at the bottom, and constraining those at the top of the income distribution.Before outlining what the purpose of economic policy should be, it is important to understand where current economic policy is often focussed: orthodoxy. Broadly speaking, orthodox economic policy can encompass macroeconomic stabilisation policies, trade policies, growth and development policies, and redistribution policies. The main goals of macroeconomic stabilisation policy are to maintain and improve levels of gross domestic product, keep unemployment at a steady and socially optimal level, account for fluctuations in the business cycle, and moderate inflation rates (Jefferson & Kuperberg, 2013, p. 84). Another form of government policy is fiscal policy; which is comprised of taxation and expenditure, with taxation allowing the government to raise funds for public goods and infrastructure. The tax system may impact income and wealth distribution, as well as the allocation of resources within an economy. (Brown, McLean & McMillan, 2018).Fiscal policy is often where individuals believe that the intervention of government into the economy should stop. Income tax is often a subject of discourse, and implementing progressive taxation is a practical means to reduce inequality. However, given the interconnectedness of politics and business, those with higher incomes are often able to advocate for a lower tax rate, under the guise of trickle-down economics.Nevertheless, this is not the optimal form of economic policy. Neoclassical economic theory focuses economic policy on correcting market failures. Using this neoclassical view, once certain market inefficiencies have been resolved (such as limiting monopoly, investing in public goods, and taxing negative externalities) the market can allocate resources and allow the economy to grow (Mazzucato, 2018, p. 5). Despite the fact that neoclassical economists claim that reducing market intervention results in optimal and efficient allocation of resources, free markets often end up neglecting social and environmental concerns, which can lead to suboptimal resource allocation (Mazzucato, 2018, p. 5). Therefore, the shortcomings of neoclassical economics regarding social and environmental factors, and the belief that markets will function well, and naturally reach a self-sustaining equilibrium, means that it is not the best way to consider economic policy.

   

   Empirical evidence can also be cited, such as the fact that income inequality has increased in almost all countries over the last few decades (World Inequality Lab, 2017, p. 9). Income inequality is not the only indication that the market in and of itself is not able to provide for everyone. Given that studies show that the top 1% of people hold more than half of global wealth – the system hardly seems self-optimising, much less fair (Neate, 2017). Therefore, it can be concluded that given unequal resources distribution, it is evident that perhaps the market does not naturally result in optimal resource allocation, which subsequently implies that current economic policy is not as effective as it could be. Neoclassical policies under market capitalism have resulted in widespread inequality, and a damaged environment. Given such high levels of inequality, it has become evident that basing policy simply on neoclassical theory is not providing a high quality of life to all.

   Economic growth is a subset of economic development, whilst economic development comprises education, health, housing, environment and other factors that contribute to living standards (Galadari, 2017, p. 2). It is import- ant to distinguish between the two, as there is no long-term economic growth without economic development. Accepting the notion of ‘development’ is a process involving restructuring the ways in which resources are distributed, owned, produced and used (Couto, 2010, p. 221). Development can be translated into policy as the redistribution of resources, and increasing access to those who do not have enough. Sustainable development policies can be integrated into the current system, it just involves shifting the focus from maximum growth, to providing opportunities for all. An example of an area in which economic policy needs to improve is health. Aside from the funding of a public healthcare system, one of the biggest economic issues in this area is that of pharmaceutical companies with intellectual property rights over particular forms of medication and treatments. As can monopolists in other sectors, pharmaceutical companies can price their product according to market supply and demand. Given high and inelastic demand in the health sector, and the high-profit aims of companies, they are able to charge whatever they like for medicine (Galadari, 2017, p. 10).

   Thus, economic policy should regulate health markets because a healthier population is more productive. Consequently, economic development in the health sector will lead to overall economic growth. Increased regulation in markets like this will allow more people to be able to afford more products, and will increase accessibility within markets. This is important in terms of development because an intrinsic aspect of development is access to resources. Though this may be a smaller-scale issue compared with global development needs, in the United States 8% of adults do not take medication as prescribed, simply because they cannot afford it (Cohen & Villarroel, 2015, p. 1). The percentage of adults who take medication as prescribed increases with their level of income (Cohen & Villarroel, 2015, p. 5). Increasing the number of people who are able to afford medication will result in higher growth and productivity in the long run. As health outcomes and inequality are correlated, gearing policy towards one issue will help address the other.

   Sustainable economists have a more benevolent approach to policy. Since there is a notion within many Western economies that consumers and firms act to maximise self-interest above all other considerations, with firms aiming to maximise profit, and consumers maximising their own utility (Huang, 2011, p. 41), this rhetoric is often pervasive of the ways in which policies are made. However, the emphasis on consumption as a positive factor for wellbeing, can often surpass the recollection that many resources are finite. Not only are such resources finite, but they are also unequally distributed. Given that more than 80% of the global quantity of natural resources is consumed by industrialised (often Western) countries, the unequal division of consumption across countries is an issue (Huang, 2011, p. 41).

   Thus, there is a need for redistributive policies that better protect natural resources, and also give greater access to developing countries. The aim of sustainable consumption is to minimise environmental impact, produce a better quality of life for the present population, and also exercise responsibility on behalf of future generations (Huang, 2011, p. 41). Such a drastic shift towards sustainable global development, would require a large level of altruism on the part of many of the developed economies’, as they can play a major role in aiding in the development of smaller economies. This links to financial integration of an increasingly globalised world. Developed economies have the ability, and the resources, to further their overall growth, and policy should be consistent with these abilities.

   Now that is has been well established that economic policy needs to be sustainable, the question remains how it can become so. It is the role of economists to guide policy decisions, show the potential implications of policies, and predict the effects of policies. Economists are able to use models, which are often ingrained in economic theory, to do this. Policy makers do not always request economists to determine the goal of policy, yet economists often help determine goals (Hausman, 2008, p. 21). As economists are not only finding ways to reach certain goals, but also setting them, it is incredibly important that they are provide holistic solutions, with goals large enough to make a positive impact — rather than just getting a politician re- elected. However, all economists are constrained by their biases. As the political beliefs of economists undoubtedly impact their professional training and scientific research, it is highly likely that economists will suggest policies that align with their beliefs (Horowitz & Hughes, 2018, p. 190). Thus, the bias of economists will affect the policy recommendations they make. Bias is not exclusive to economists, but it is imperative for it to be taken into consideration when they are advising policy decisions. Potentially, then, in an ideal world, it should be the responsibility of policy makers to obtain advice from economists of different schools of thought in order to receive balanced guidance.

   It is not only their political beliefs and biases that limit economists, on a more subconscious level the cognitive biases that inform their political beliefs also restrict their capabilities. Simply put, cognitive biases are an explanation that demonstrates the propensity for individuals to make systematic errors in reasoning. They influence the ways that individuals evaluate information (Leighton, 2010, p. 159). In terms of making decisions that require controlled, thoughtful and logical thinking, cognitive biases can be detrimental (Leighton, 2010, p. 161). Cognitive biases are a way of explaining some of the weaknesses and patterns within human thought. One such bias is confirmation bias. Confirmation bias is the result of an individual seeking and interpreting information in such a way that it is aligns with their assumptions and pre-existing beliefs (Hernandez & Preston, 2012, p. 178). As individuals have a tendency to assume that heir prior beliefs are right, these already existing beliefs become the reference point when interpreting new information (Hernandez & Preston, 2012, p. 178). This means that as individuals seek out information that verifies what they already believe, economists are likely to advise those who believe as they do.

   This is unsurprising, but also limits the possibilities of policy. It is therefore important for economists to be able to think multilaterally and have the ability to guide policy in different directions, rather than just furthering their own agenda.

   Another form of bias is present bias. Present bias is when higher value is placed on the immediate present rather than the future (Oliver, 2018, p. 272). This kind of bias is inherent among many economists because in many economic models, time discounting, which places a lower value on the future and prioritises the present, is used (Black, Hashimzade, Myles, 2017). Economists with a present bias, and who use time discounting in their models, would advocate for policies that have greater benefit in the present, irrespective of the implications for the future. This is unsustainable in many ways, but particularly in respect to caring for the environment. As many pollutants do not have immediate effects, environmental concerns often get neglected in lieu of other problems. This needs to change, and economists need to place greater weight on providing a stable world for future generations, rather than economic growth in the present.

   Historically, economists have had a propensity to consider political issues subordinate and a factor that they have no professional responsibility to provide solutions for (Grant, 2018). This is particularly true for those who work mathematically. However, this is a damaging perspective. Politics and economics are linked inextricably, and it is erroneous for economists to avoid political responsibility, it removes themselves from accountability and disregards their social responsibility as citizens. The entanglement of business and politics coincides with policies that better benefit those with power, money, and influence. Economists should be attempting to mitigate the differences between business people and politicians and they need to be able to analyse the social implications of policies, rather than neglecting them as secondary, in order to advocate policy that assists demographics other than the wealthy.

   To conclude, this is a world in which children are raised to believe that they have the power to change; and economic policy is a tool with which to do this. The purpose of economic policy should be to create opportunities for those who need assistance, to reallocate resources in a more equitable way, and to focus on policies that use the environment in a sustainable manner.

   

   Economists have the ability to guide policy in a way that creates a sustain- able, and stable, economy for future generations. Thus, using principles guided by sustainability economics, global inequality can decrease, and sustainable development prevail, creating a better, fairer, world for all.

 

References

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   14. Neate, R., 2017, ‘Richest 1% own half the world’s wealth, study finds’, The Guardian, viewed 23 August, 2018, https://www.theguardian.com/inequality/2017/nov/14/worlds-richest-wealth-credit-suisse.

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