Economics needs human touch

This is my latest comment for Fund Strategy.

As Ben Hunt argues in this week’s cover story there is a desperate need for a new form of supply side economics. Only it will be fundamentally different to what is normally meant by that term.

Mainstream economics nowadays is overwhelmingly focused on demand. Or, to put it more precisely, it is essentially a generalisation from the perspective of the individual consumer.

The most obvious manifestation of this trend is the emphasis on questions related to demand. So there is ample discussion of consumer behaviour, branding, marketing, finance and so on, while relatively little attention is paid to production.

But even when it does discuss production it is still from an inherently narrow perspective. Manufacturing, for instance, tends to be viewed in terms of consumer demand and its impact on resource consumption.

It is this viewpoint that informs most of the mainstream policy prescriptions on the economy. Bolstering demand through stimulus packages, as well as reducing interest rates and quantitative easing, is essentially a way of increasing consumption

However, there is a fundamental problem with the premises on which these policies are based. The economy is not just an aggregate of individual consumers. It is, both logically and chronologically, a production unit first of all. It is not possible to consume what is not first produced.

The economy is also far more complex than the consumer model suggests. It consists of a web of complex relations between numerous different actors.

Supply side economics, which is generally associated with free market thinking, at least tries to grapple with the production side of the economy. Typically it advocates lower tax rates and less regulation as a way of bolstering economic activity.

But while this at least indicates a slightly broader vision it still shares many of the assumptions of demand side economics. Although free marketeers talk more about production they still tend to privilege the consumers’ perspective.

A new economics should start from the assumption of human beings as real living individuals rather than merely consumers, recognising people as producers and creators, not just consumers of resources.

An economics based on these assumptions could show the way for a transformation towards a more productive society. Such a move would necessarily need to be based on strong democratic involvement.

In contrast, the mainstream economics beloved of technocrats takes an inherently blinkered view of economic activity.