Politics = economics + psychology

I had lunch with a friend who works in financial services at the weekend. We talked, amongst many other things, about politics, and the recent and understandable domination of politics by economic issues. He put it simply: ‘politics is economics now’. He’s half right: politics is economics plus psychology.

That may seem pedantic, but I’m underling an important fact that most economists and many politicians overlook: we are human beings.

Since 2008, the powers that be have been worrying about one thing: how to kickstart the global economy. Different tacks have been taken in different places. The British government has adopted an austere stance – though, it is worth remembering, actuals cuts are highly backloaded. Germany has done similarly. Other countries have opted to cut back less, seeking to drive job creation through investment. Barack Obama is attempting to follow such a policy, though his legislature aren’t making it easy for him.

Politicians try to simplify these positions for the cameras. To paraphrase the ‘cutters’: deficits are unsustainable, and Western governments are spending eye-watering sums simply servicing debt. The ‘spenders’ note that the most effective way to cut debt is through growth, and that government debt is at historically low levels.

These positions are presented as factual – though of course they are interpretive. Fundamentally, economics it is not a science – it is an art. Economics makes assumptions, and many of those assumptions are about human behaviour.

To illustrate the point, Consider Steven Levitt’s anecdote:

“Within the economics departments at certain universities, there is a famous but probably apocryphal story about two world-class economists who run into each other at the voting booth.

“What are you doing here?” one asks.

“My wife made me come,” the other says.

The first economist gives a confirming nod. “The same.”

After a mutually sheepish moment, one of them hatches a plan: “If you promise never to tell anyone you saw me here, I’ll never tell anyone I saw you.” They shake hands, finish their polling business and scurry off.”

Why the embarrassment? As a behavioural economist sees it, the act of voting makes little sense. Your vote is vanishingly unlikely to change the result – in national elections, a ‘close call’ still involves thousands of votes. Why bother?

We bother, mostly, because of a sense of civic duty. To vote is to feel connected to the society we live in, and to show our appreciation of those suffered so we could have that privilege*. In other words, the benefits are psychological.

Human behaviour is the great unknown quantity in economics.

 

Occupy where?

The Occupy Wall Street movement has reframed the debate over the global economy as a moral one. Demonstrators speak a strong truth: what is best for the global economy is not necessarily what is best for most of humanity.

As an aside: I am ambivalent about their position. On the one hand, it is hard to deny that the extent of the financial services industry’s responsibility for our economic mire (very large) has not been reflected in the extent of their suffering (bugger all). At the same time, they are not solely to blame. Our working and middle classes hopelessly overstretched themselves – through greed, not through need – and the younger generation, as well as the rest of the world, will pay the price. ‘We are the 99%’ lets a lot of people off scot-free. If the financial crisis has taught me anything, it is that everyone is greedy – including our damned ‘squeezed middle’.

Anyway, Occupy Wall Street demonstrates something important – a sterile debate about economic policy is not how politics works, because we are human beings.

Take the 50p tax rate. Many argue that it is a foolish policy, because it drives away top rate earners who would otherwise contribute generously to the public purse abroad. A clutch of leading economists recently made exactly this argument in a letter to the Financial Times. Our Chancellor has asked the Inland Revenue to find out whether the rate actually makes the UK any money.

But this exercise in arithmetic misses something. The 50p tax rate’s value transcends top earners. We all know about it. Those of us lower down the food chain care that it is there, because it seems like justice to tax these rich people heavily. Even if it doesn’t add anything to the public purse, it ensures the rest of us are invested in the grand project of living together in a democracy.

What is happening at Occupy Wall Street, and similar events worldwide, could be seen in the same light. Our governments would do well to stop counting the change they don’t have, and start thinking about the people they do have. After all: economies don’t make nations, people do.

 

*I should point out that I am, however, no particular fan of voting for voting’s sake – see this column I wrote for The Guardian in 2009.