One of the first lessons I learned in economics is people are rational. They would always act in their best interest. I realized that the interesting part is by making decisions that are only beneficial for themselves. They are also able to organize society’s economic activities and allocate resources accordingly; thus, benefiting the larger society. It implies that we are in a situation where economics naturally stands for the people’s needs.
Upon closing textbooks and examining the real world, it is not difficult to find cases where everything I said previously is flipped. There were cases where the decisions made by people were not beneficial and led to negative consequences that entire societies had to face. Some even led to cascading problems that affected the world on an international scale.
The 2008 Financial Crisis is one of those cases. The decisions made by financial institutions like the aggressive lending of subprime mortgages to consumers, who are unable to repay, were far from being good for society as it led to massive defaults that caused lenders to lose money and bankrupt financial institutions. By taking unsustainably massive risks, we have seen a collapse that led to assets evaporating, people losing their jobs and homes, and countries with their growth rates plummeting. This is one of the instances when selfish economic activities were not for the people.
But there are also instances when the opposite happens. Like when sound economic policies bring good to society—when economics brings society forward. One example is the Philippine Competition Law that promotes and protects market competition. Our decision to pass that law ensures that the well-being and interest of consumers are protected from businesses’ anti-competitive behavior. So, indeed, economics can be for the people but it requires society to move past hurdles that make it difficult to achieve.
The first hurdle that societies must overcome is the inherent complexity of economics. In examining this hurdle, we will focus on economic policies.
There is no one right way of doing economics that can guarantee a net positive outcome every time. What worked before may not work again, and what worked for some, may not work for everyone. It means that implementing effective economic policies takes more than just finding what worked before or for others because no two or more situations are the same. It will be misleading to assume that the factors affecting a problem in one country will be similar to others facing a seemingly similar problem as each will have its nuances. A one-size-fits-all solution does not and will never exist, for a single approach can’t take into account every variable that might have caused the problem.
In 2013, there was a study that portrayed microlending, which is the act of giving small accessible loans, as a success because it increased income and consumption in Bangladesh alongside other spillover benefits. So, what is stopping all developing nations from just blindly increasing microcredits in their own countries? It is the fact that other countries were aware that each situation was different, and that they must conduct rigorous preparation and studies to make sure that the intended effect happens. It is also worth noting that some studies, like the one conducted by the Nobel laureate Abhijit Banerjee, pointed out that there is no clear evidence suggesting that microlending improves living standards. Again, the problem highlights the fact that economics is inherently difficult and complex, as sometimes it could even give conflicting answers to almost identical problems.
The next hurdle is that economics and politics are inseparable, and they influence one another. Economic situations affect political behaviors and vice versa. After all, economics traces its origins from political economy, which looks at how political forces affect economics and how the economy affects politics.
Economics is largely about economic policies. Economic policies passed by institutions will always be subject to value judgments. People who are elected, who should be acting in societies' best interests, are going to decide whether they should pass policies or not. The decision, or lack thereof, results in those policies bringing changes to society. The idea that policies could be influenced by many different factors other than reason implies that unreasonable beliefs and intentions that do not always coincide with what is good for society could be a deciding factor as well.
How citizens and lawmakers look at economic issues and policies will always be influenced by the political convictions they hold. This is also true the other way around: how people shape their political convictions will be influenced by what they deem true about economics.
There was a time in the United Kingdom when children, who were below the age of ten, had to work in cotton mill factories and face horrible working conditions. The solution was to pass the Cotton Mills and Factories Act of 1819. The law mandated children below the age of nine be barred from working. It also included that children between the ages of nine and thirteen should be allowed to work no more than twelve hours a day.
So, there was a law that defined and established child labor. This law was even criticized, not for still allowing child labor, but for being against the fundamental freedom of labor markets. Their view was that as long as both parties actively decided to engage in the transaction (when children agreed to work) they should not be hindered from doing so because barring them is against the idea of a free market. This situation shows that the way lawmakers view the world and what they consider true economically and politically influence their policies.
This challenge leaves us in a spot with only problems, and in dealing with them, we have to rely on the importance of a major player in society--institutions. Institutions are important because they run society. Thus, we must always examine them critically and make sure their actions promote positive values like growth, peace, and order among many things.
Institutions, particularly the government, play a very vital role in driving society towards growth and development. The challenge for them is that there is no single theory or solution that they could just apply, and it will solve all our problems. It is not like they could just implement the law and we will be fine indefinitely.
Institutions must perpetually reassess what will be good for society. It is a tedious and intricate process that poses another challenge: institutions are built by individuals each with conflicting views on things, and they must work despite that fact. They should not allow their differences to get in the way of doing what is good for society. They should not allow themselves to be blinded by their political and economic convictions, especially when confronted with reason.
What we should do now is to understand that institutions play an important role, and we, as citizens of a democratic society, determine who would play that part. We hold the power to choose who would run institutions. Thinking critically about the ideas and people we support will go a long way in driving our society forward.
It is unfortunate that because the world is very complex, sometimes it takes more than convictions to do good. We must choose people who are both wise and virtuous that could work through problems. We must choose leaders who are sensible and capable of hearing reason. We should always remember that we can make economics for the people by taking the responsibility of exercising our power by making sure that our institutions are as just and effective as they could be.
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Written by: Emmanuel Joseph Leonardo
Layout and Design by: Adrian Josef Nabua
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