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commonweal
26.03.20

Is Economics That Scary?

Back from a short break, our regular guest writer Jenny Floki returns with an introduction to economics for someone who has been too scared to look at it till now. Given how economics pervades everything we do in our lives, should we really leave all of its critical decisions to someone else?

What Economics Looks Like.

For most of us, economics is such a complex subject that very few are willing to put the effort to make sense of, while the rest of the population remains ignorant, letting economists go about their jobs blissfully uninterrupted.  Economics, for the majority of people looks something like Picasso’s Guernica: lots of abstract patterns and vaguely familiar themes that are put together to form a fabulous yet obscure result. In a Picasso painting, a hexagonal cow might be depicted next to a giant eyeball that sits on top of a staircase, which although a beautiful form of high art, for some is understandably difficult to grasp. To the same extent, in people’s minds, economics represents this inaccessible dark art which, while not understood by everyone, happens to be at the heart of everything and define everyone’s lives. It is as though it is placed behind a pane of frosted glass through which we, on the other side cannot fully understand or truly challenge its condition.  Therefore, just as it falls to the role of an art specialist to step in and explain to us what Picasso’s paintings really mean, so too economists show up on our TVs to fill us in on any new economic measures taken by the government and how they might affect our lives. 

What It Really Is.

In reality, economics look more like us than a Picassian figure because it is really just there to serve societal operations and manage the scarce resources. The word economics comes from the ancient Greek “oikonomikos” or “oikonomia,”, which literally translates as “the task of managing a household.”

Imagine a family of four. First of all, the parents have to manage the money that they both bring in to the household and then plan how they will allocate their funds in accordance with the family’s present and future needs. Secondly, the family members will have to ensure the maintenance and wellbeing of the household through allocating different tasks to each family member.

Let’s now think of different family scenarios. Family X has decided that of their monthly income, 20% will be put aside as savings in case of emergency, leaving enough to pay for their monthly expenses and some to spend as they wish. All family members contribute equally to the housework.

Family Y, use all their monthly income to cover their expenses and spend what remains. They then borrow money from the bank to implement an ambitious investment plan that will be profitable in the long run. The adults in this family have decided to be fully focused on their jobs and the kids will do all the household tasks. In the event that their investments prove fruitful, the parents will decide how the assets are going to be used and for what reasons.

Family Z adopts a more radical household plan in which each family member has to financially contribute to the household regardless of their age. The household income is put into a collective bank account and each member equally contributes to the household tasks. The youngsters, having less skills and experience inevitably get low level jobs and hence they contribute smaller amount of money than the parents. Each family member however, has access to the same food and privileges because each one contributes towards the wellbeing of the household.

If all the above seem easy to understand, then understanding economics should not seem so far-fetched. Think of a national economy as a scaled-up version of a household. The government have to manage the nation’s revenue and they are responsible for allocating the resources and duties in such a way that they believe will be most beneficial for the wellbeing of the citizens as well as for the nation’s prosperity.

How a government chooses to do this will differ according to the political ideologies and interests that those in power represent. Family Z, was inspired by northern European countries which use high taxation as a wealth redistribution mechanism. People contribute large amounts of their individual income in exchange for a very good welfare system. Family Y, represents a pro-neoliberal model in which the free market idea was not the dominant one and as a result, countries were more self-sufficient with lower national debt levels. Low-income citizens contribute more tax relative to their income than high-income citizens but the income inequality is not that significant. Last but not least, family X represents the mainstream political economy that is the most widespread method of managing national and international economies. Letting markets run free is the golden rule in this society.

To put the above into perspective, family/nation X chooses to become heavily indebted in order to improve public infrastructure and modernise its means of production. The underlying reason for this is that the current GDP of the country at any given time does not meet the cost of realising such ambitious plans without external financial support. The national debt, in such a scenario is highly exposed to the volatility of the free market, which means that in the case of, let’s say a coronavirus outbreak, investors are more reluctant to lend money for fear of the borrower’s vulnerability to bankruptcy. What will happen if the family/nation X does not have the funds required to cover its fixed expenses, i.e. pay for food as well as meet monthly debt instalments? It will either become further indebted by acquiring new loans that will help repay its short-term financial obligations or it will implement austerity to each family member/citizen, or it will have to do both. There is always the possibility of bankruptcy but we will focus on the first two herein. Family X will have to cut out its take away consumption and visit the cinema less often in the hope of saving some money and the kids might have to get an evening job to help with the family’s financial needs. On a national level, this translates into higher taxation for the citizens, lower wages, cuts to benefits and so on.

The various methods of household economics that were described herein are nothing but a simplified version of national economics. Hence, a government makes important decisions that define your quality of life. So if your healthcare system is underperforming, this is due to someone’s decision to invest the money into something else other than it. If you feel like the minimum wage you are getting paid is not enough to cover your basic needs, it is due to the government’s underestimation. If you pay more taxes as a UK citizen rather than your German counterpart, it is because the economic policies that these two governments have adopted value different things as essentials. Hence, the next time you will say that you are not interested in politics and economics, think that what you are saying is that you are not interested in your quality of life.

Economics is the way our lives are being handled and organised in the capitalist system we live in. It’s not a scary Picassian hexagonal cow and it is not just for the few bright minds as most of us seem to think. Would you ever hand your wallet to someone you do not know and allow them to buy your monthly shopping? Would you trust them to choose the food you like, the milk you drink and that they will not keep some money for themself?  Most likely, you would rather write on a piece of paper exactly what you want from the shops and you would certainly ask for the receipt. Why then do we let the economic ministers choose how much money our hours of work are worth and whether our taxes will go towards recapitalising the banks rather than supporting the healthcare system?

The more we realise that our lives depend on decisions made by people that we vote for (and some that we don’t), the more we will realise that understanding economics and becoming involved with political organisations and trade unions are as essential to our quality of life as breathing is to our lungs.

This is the first article out of more to come. Economics has become more and more complex in the recent decades and the metaphor I have laid out fails to address certain aspects of national economies. I wanted to lay out the basic foundations of what makes our economies. I will follow this article with more, addressing the more nuanced functions of economies that the above metaphors neglect, such as financialisation, globalisation, private corporations and their influence upon national politics and so on. As with this article, my aim will be to demystify the workings of modern economics.

 

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