I’ve been planning a series of posts on the issues of “the economy”, (free) trade and wages, public opinion on those subjects, and the role of economists in that debate. Unfortunately, I’ve been lazy and have had trouble narrowing it down to individual, bloggable bits. So in an attempt to start towards that, I give you a snippet from a somewhat interesting Q&A with former Labor Secretary Robert Reich:
Q: Do you believe that wealth concentration is bad for the economy and can U.S. manufacturing be revived to be competitive again?
A: Two different questions. Yes, wealth concentration is bad for the economy because it tends to depress aggregate demand. Not enough people can afford to buy all the goods and services the economy produces. The rich won’t do it because they already have most of what they need. That’s what it means to be rich.
What’s interesting to me about this question and its answer are the ‘conditions of possibility’ for the discussion to even take place. 100 years ago, this question simply could not be formulated. If we believe Timothy Mitchell, the phrase (and the associated idea) “the economy” did not come into usage until Keynes and others in the 1930s (including Karl Polanyi) invented it. One could talk about the unemployed, about the wealth of a nation, about lots of related ideas, but there was no single fixed entity called “the economy” with a national scope. Building on the work of folks like Kuznets who built the statistical tools necessary to describe the economic activity of a country, Keynes and other began to speak about the economy – aggregate demand, supply, the unemployment rate (rather than the unemployed themselves), etc. Economy moved from being a term an idea denoting some sort of efficient means of achieving an end (e.g. political economy) to being a separate thing associated with a nation.
Nowadays it seems quite common place to ask, “is this bad for the economy?” But it was not so long ago that this question could not be framed. Instead we might ask, “is this good for the poor?” Or, “is it good for industry?” But not “for the economy’. Reich’s answer is revealing as well – wealth concentration is supposed to be bad for the economy because rich people have most of what they need, and this will not spend their excesses. This lack of spending will reduce aggregate demand, and thus slow everything down. But notice what’s missing? It also means the people who have the least will be least able to get more. But the problem for ‘the economy’ is not that most (poor) people will not be able to afford what they want or need, but rather that aggregate demand will suffer. Sometimes it feels like the means (economy) has become the end (‘the economy’).
Indeed, at the end of the same interview, Reich makes the point eloquently:
Economists tend to believe that economic efficiency and economic growth are the two most important values. Therefore, any policies that reduce the incentive to work hard are suspect. (Economists worry, for example, that a higher Earned Income Tax Credit for low-wage workers may discourage them from working harder, since wage increases would lead to correspondingly larger declines in the E.I.T.C. wage subsidy.)
This strikes me as wrong-headed. The economy exists to make our lives better; we do not exist to make the economy better.
Sounds pretty close to right (although perhaps it ought to be amended to “the economy should exist…”). And yet, how have we come to a place where we need constantly remind ourselves of this seemingly obvious assertion?