An economics blind to production

This is my latest comment from Fund Strategy.

An economist transported from the mid-20th century, let alone earlier, would no doubt find the contemporary discussion of economics bizarre. The focus is almost entirely on developments he would regard as at most of secondary importance, including inflation, quantitative easing and personal consumption.

In contrast, the big issues of the previous era are hardly discussed. There is little debate about productivity, capital investment, profitability or even unemployment.

Such omissions are remarkable as the production side of the economy is still of central importance. Firms still have to invest and make profits if they are to survive. Labour productivity remains a central factor in determining the health of an economy and of corporations.

From an analytical perspective, factors such as inflation are not fundamental. High inflation can be problematic for individuals and companies but it is best seen as a symptom of more basic economic weaknesses. For example, firms may raise prices in an attempt to compensate for falling profit rates.

This incredible one-sidedness of contemporary economics, most strikingly its blindness to production, needs to be explained. There must be a reason why so many experts are making more or less the same myopic mistakes at the same time.

The most obvious explanation is the character of this recession. It started with a crash in the financial sector rather than, say, a shake-out of industry.

But even before 2008 the discussion of economics veered away from production. The shift pre-dates the economic crisis.

The key reason for the lack of a perspective of production is the shift that occurred with the end of the Cold War. This development was not simply about international relations and the Soviet bloc. It also consolidated the idea that There Is No Alternative to the market. The productive side of the economy, no longer seen as contestable, was viewed as natural and fixed.

This is in contrast to the earlier period when there were big debates about the relative merits of capitalism and socialism. As a result, the health of the productive sector was constantly open to discussion.

A related effect of this shift was the demise of the discussion of unemployment. Mass joblessness was no longer seen as a political issue but more a matter of the individual well-being of the unemployed.

Until the economy is viewed in a more balanced way, with production restored to its former importance, any discussion of economics is bound to be superficial. To move forward to the future there are lessons to learn from the past.