What Is the Economy?: And Why It Matters to You 9781786995605, 9780755641536, 9781786995612

Why are houses so expensive? Is our banking system going to collapse again? Should we be worried that robots are going t

244 71 5MB

English Pages [241] Year 2022

Report DMCA / Copyright


Polecaj historie

What Is the Economy?: And Why It Matters to You
 9781786995605, 9780755641536, 9781786995612

Table of contents :
Half Title
Title Page
Copyright Page
Preface (and a general warning)
How to use this book
Chapter 1: How did we end up here?
So, what is the economy?
What is economics?
How did we get here?
Economics the system: A great economic contradiction
Economics the science: Putting the world under a microscope
Economics the conversation
Chapter 2: What is ‘the economy’?
From value to values: What makes up an economy?
The science of power and fairness
‘The economy’ doesn’t really exist
Let’s take a closer look
Skills: How can I have better conversations about the economy?
Chapter 3: What’s an economy for?
Current measures
What else could we prioritize?
The ends versus the means
Chapter 4: You (and everybody else)
Micro versus macro
The different roles you play
Your values
Your circumstance
Your needs and wants
Your choices
Homo economicus
All of us: Macroeconomics
Chapter 5: Your high street
What is the cost of living?
Markets and exchange
From wheels to whizzy things: Technology
Chapter 6: Your home
What are houses for?
Who is responsible for building homes?
Why is housing so expensive?
But are high house prices really such a bad thing?
What is a housing bubble?
How do we know if we are in a housing bubble?
Expensive housing markets: Who loses most?
What do we mean by affordable housing?
Making all that expensive housing more affordable
Renting versus home ownership
Chapter 7: Your work
What do we mean by ‘work’?
Wages: What are we worth?
Power in the workplace
Equality in the workplace
Unemployment: The world of (no) work
Chapter 8: Your money
Coins, bills and symbols on a screen: Let’s talk about money
Everybody’s money: The financial system
Money in the bank
Chapter 9: Your society
What makes up the foundations of society?
The role of (in)equality in economies
Climbing the economic ladder: What is social mobility?
Chapter 10: Your government
Economics versus politics
Rules of the game: Regulation
Raising money: Taxes and more
Spending money: Budgets
Chapter 11: Your world
How do economists look at the world?
Trade and immigration
International development
The environment: Thinking about the Earth and the economy
Chapter 12: The world needs a new language
Without a common language, we’re having poor-quality conversation
A new language
What does this look like in practice?

Citation preview




And Why It Matters to You

Beth Leslie and Joe Richards

Zed Books Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY and Zed Books are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2022. Copyright © Beth Leslie and Joe Richards, 2022. Beth Leslie and Joe Richards have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as Authors of this work. For legal purposes the Acknowledgements on p. xii constitute an extension of this copyright page. Cover design by Adriana Brioso Cover icons © pressureUA/iStock All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. Bloomsbury Publishing Plc does not have any control over, or responsibility for, any thirdparty websites referred to or in this book. All internet addresses given in this book were correct at the time of going to press. The author and publisher regret any inconvenience caused if addresses have changed or sites have ceased to exist, but can accept no responsibility for any such changes. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Names: Leslie, Beth, Richards, Joe (Editorial director), author. Title: What is the economy?: and why it matters to you / Beth Leslie and Joe Richards. Description: New York, NY: Zed Books, Bloomsbury Publishing PLC, 2021. | Includes bibliographical references and index. Identifiers: LCCN 2021008908 (print) | LCCN 2021008909 (ebook) | ISBN 9781786995605 (hardback) | ISBN 9781786995612 (ePDF) | ISBN 9781786995629 (eBook) | ISBN 9780755641536 (ebook other)  Subjects: LCSH: Economics. | Finance, Personal. Classification: LCC HB171 .R44 2021  (print) | LCC HB171  (ebook) | DDC 330–dc23 LC record available at https://lccn​.loc​.gov​/2021008908 LC ebook record available at https://lccn​.loc​.gov​/2021008909 ISBN: HB: 978-1-7869-9560-5 ePDF: 978-1-7869-9561-2 eBook: 978-1-7869-9562-9 Typeset by Deanta Global Publishing Services, Chennai, India To find out more about our authors and books visit www.bloomsbury.com and sign up for our newsletters.

Dedicated to Sam Follett, for providing never-ending support, a sounding board for every rewrite and limitless cups of tea. And Pops. Special dedication to Terry Jones of Monty Python, who shared our passion to make economics just a little bit entertaining.


Contents List of Figures Preface (and a general warning) Acknowledgements How to use this book

x xi xii xiii

Chapter 1 How did we end up here? 1 Welcome 1 So, what is the economy? 2 What is economics? 2 How did we get here? 3 Economics the system: A great economic contradiction 7 Economics the science: Putting the world under a microscope 8 Economics the conversation 12 Chapter 2 What is ‘the economy’? 21 From value to values: What makes up an economy? 21 The science of power and fairness 25 ‘The economy’ doesn’t really exist 28 Let’s take a closer look 29 Skills: How can I have better conversations about the economy? 49 Chapter 3 What’s an economy for? 51 Current measures 52 What else could we prioritize? 59 The ends versus the means 64 Chapter 4 You (and everybody else) 67 Micro versus macro 67 The different roles you play 68 Your values 72 Your circumstance 76



Your needs and wants 77 Your choices 79 Homo economicus 80 All of us: Macroeconomics 83 Chapter 5 Your high street 85 What is the cost of living? 85 Markets and exchange 86 From wheels to whizzy things: Technology 96 Chapter 6 Your home 99 What are houses for? 99 Who is responsible for building homes? 100 Why is housing so expensive? 101 But are high house prices really such a bad thing? 105 What is a housing bubble? 106 How do we know if we are in a housing bubble? 107 Expensive housing markets: Who loses most? 107 What do we mean by affordable housing? 108 Making all that expensive housing more affordable 109 Renting versus home ownership 110 Chapter 7 Your work 113 What do we mean by ‘work’? 113 Wages: What are we worth? 118 Power in the workplace 122 Equality in the workplace 126 Unemployment: The world of (no) work 131 Chapter 8 Your money 135 Coins, bills and symbols on a screen: Let’s talk about money 135 Everybody’s money: The financial system 143 Money in the bank 147 Chapter 9 Your society 151 What makes up the foundations of society? 151 The role of (in)equality in economies 156 Climbing the economic ladder: What is social mobility? 160



Chapter 10 Your government 163 Economics versus politics 163 Rules of the game: Regulation 173 Raising money: Taxes and more 174 Spending money: Budgets 186 Chapter 11 Your world 191 How do economists look at the world? 191 Globalization 192 Trade and immigration 195 International development 198 The environment: Thinking about the Earth and the economy 200 Chapter 12 The world needs a new language 205 Without a common language, we’re having poor-quality conversation 205 A new language 206 What does this look like in practice? 208 Bibliography Index

211 215

Figures 1 2 3 4

Our illustration of ‘an economy’ The circular flow of income Maslow’s hierarchy of needs Supply and demand

22 70 79 90

Preface (and a general warning) Economics is highly personal. Despite some efforts over the years to present the subject as purely mathematical, the only thing economics is really about is the person reading this sentence: you. Well, you and everybody else. In short, economics is simply about the thing it has come to sound most detached from: humans. Yes, studying the behaviour of eight billion people and how they go about sharing one planet as their home gets a bit complicated at times, but such an important job doesn’t deserve to be reduced to complex numbers, scary sounding words and not much else. Economics is about all of us, the lives we lead and the choices we can or cannot make. And it’s about how all those decisions affect not just us but our family, our communities, our planet and all the other species that we share it with. This means that economics is also highly subjective. As authors of a book trying to make the subject accessible to everyone, we will (despite our best efforts) likely fall foul of our own biases from time to time. We invite you as the reader of this book (or any economic book for that matter) to keep your mind open by asking yourself if the things you’re hearing sound right, and what values and assumptions may be driving the person saying them. To be clear, we’re not anti-expert. Like we said, economics is a huge and often complex subject and we believe the role of the expert in figuring it all out is vital. We just want you to be part of the conversation too, armed with knowledge and a healthy dose of scepticism. Finally, economics is incredibly broad. We have consulted a wide range of professionals and academics and have a team of researchers to thank for helping us compile the information in this book, but ultimately we cover a lot of topics within these pages and we cannot claim to be experts in anywhere near all of them. On top of that, there’s an awful lot of economics stuff missing from these pages because we simply could not fit everything in. We picked the ideas that we thought were most relevant to our everyday lives and would give people new to economics a good broad-stroke introduction to the subject. But we’re sure that plenty of economists will be justifiably miffed that we missed out their favourite topic! We therefore encourage our readers to seek out other economics books, to research further the topics that interest them and generally to hunt down a deeper and more critical knowledge of any explanation given here. Our mission in economics is to make the subject accessible. We hope this book will offer you an enjoyable stepping stone on your journey into the wild world of economics.

Acknowledgements What Is the Economy? is a book built on many years of work. Without the following people this project would not have been possible. Economy trustees and staff including

Chuck Baker, Clare Birkett, Abdul Boudiaf, Joe Earle, Emily Pilkington and Will Jeffwitz

Early supporters of Economy Theo Kocken, Marja Koolschijn and Justin Weyers Illustrator and visual concepts

Julian Burton

Story editor and framework development

Victoria Waldersee

Academic editor

Dr Cahal Moran

Economy’s research designed by

Ali Norrish

Book researchers

Jacob Ainscough, Charlotte Cator, Brian Cepparulo, Willem de Cort, Joshua Eyre, Michael Harre, Rosa Hodgkin, Daniel Lapedus, Nandi Mkhize, Liam Mullany, Callum Tempest and Nina Weber

Academic consultation/ Thanks

Dr Marie Briguglio, Dr Ha-Joon Chang, Chief Economic Advisor Clare Lombardelli (UK Treasury), Professor Gregory Maio, Dr Jo Michell

Original learn co-editors

Ben Tippet and J. Christopher Proctor

Original learn contributors

Rethinking Economics collective (ecnmy​.org​/tha​nks)

Original learn academic advisors

Morris Altman, Laura Bear, Joel Benjamin, Wendy Carlin, Victoria Chick, Danny Dorling, Diane Elson, Madeleine Evans, Ben Fine, Gareth Groarke, Keith Hart, Susan Himmelweit, Geoffrey Hodgson, Alf Hornborg, Johannes Jäger, Rob Jump, Steve Keen, Eva Neitzert, Oliver Richters, Brett Scott, Fionn Travers-Smith, Frank van Lerven, Irene van Staveren, Gaston Yalonetzky

Book originally suggested by Ken Barlow at Zed Books Thanks to the staff at Bloomsbury

Olivia Dellow, Melanie Scagliarini, Max Vickers, Kim Walker

Special thanks to

The many citizens that shared their economic stories

How to use this book We designed this book to be flickable, which means you don’t have to read it in any particular order. Having said that, we do recommend reading Chapter 2 before embarking on any of the others, as this will offer you a framework for thinking about the economy and imagining the one you live in in different ways. There might be some bits of this book that you understand already, and some bits that might be new to you. Feel free to skip over the parts that feel familiar, but also challenge yourself to look twice at any sections that feel really obvious: you might find that some economists have thought about the topic in an alternative and surprising way.

Is this book ‘political’? Yes and no. Yes in the sense that it calls for a different way of talking about the economy, but no in the sense that we aim to be inclusive of all different kinds of politics. Everyone’s experiences of the economy are different, and as such not everything in this book is going to feel relevant to you or explain your life or the world around you. The hope is that at least some of it will resonate. This book is designed to be provocative, and may ruffle some feathers amongst those that have very set definitions of what economics is. However, we believe most economists are supportive of the idea of opening up the profession, especially in the name of building trust and efficiency. As authors we of course hold our own political opinions, but our aim with this book is to have better conversations about the economy, not influence what a better economy might look like. We do, however, believe that better conversation will lead to outcomes that more people will see as beneficial. While economic decisions inevitably involve trade offs and benefit some perspectives or lives over others, our hope is that by encouraging reflective conversation we can find more ways to ‘do’ economics that means almost everybody is better off. In that sense, this book is inherently political, while purposefully refraining from taking a partisan position.


CChapter 1

How did we end up here? Welcome The economy is confusing. We didn’t use to understand it either. How did the world come to be so organized without anyone intentionally organizing it? The economist Milton Friedman once remarked that ‘not a single person could make a standard lead pencil’. He saw that ‘literally thousands of people cooperated to make this pencil, people who don’t speak the same language, who practice different religions, who might hate one another if they ever met!’ Understanding the economy helps us get to the bottom of how this works and also why every now and then a seemingly organized system descends into chaos. It shows us why a world filled to the brim with all sorts of stuff still can’t always feed, house and employ all the people that are in it. As we go about our day, we are governed by a set of rules, though we’re not always fully aware of what they are or even sometimes that we’re following them. We are part of a system that both decides what we can and can’t do and asks us to decide what we do or don’t do. The lives we lead and the paths we each take are all defined by this system and its semi-invisible rules. And that system – as you are about to discover – is the economy. But where did this system come from? Is there a map to follow, and who’s drawing it if there is one? That is the work of more forces than one and – guess what? – you have your part to play, too. Understanding economics means understanding the way we humans live, and so it naturally follows that ‘doing’ economics (or making economic decisions) means nothing less than shaping the future of humanity. If all that sounds like a rather massive task, that’s because it is. But don’t worry! This book is here to help you make sense of it along the way.


What Is the Economy?

So, what is the economy? The word ‘economy’ might be a little confusing to us today, but its origins are quite simple. It’s rooted in the Greek words oikos (meaning ‘house’) and nemein (meaning ‘manage’). Economics literally means to manage your home. These days, oikos nemein means the management of our (8 billion people) home (510 square kilometres of planet Earth). The economy is all the things we do every day to survive and – hopefully – thrive. It’s the way we humans have either intentionally or accidentally organized ourselves, in an effort to meet some or all of our needs and wants. It’s everything you do and everything everyone else does. And it’s all the connections between all of us. It’s the actions we take with the things that we value. It’s how we carefully allocate limited resources, and it’s how we create alternatives to using them in the first place. It’s growing fruit, buying bus tickets and recycling mined minerals to make microchips, and also sharing ideas, protecting nature as a source of oxygen, deciding to sit at home and watch TV, cleaning the kitchen and baking your own bread. It’s all the actions and relationships of billions of people that are happening Every. Single. Day. It’s power, and it’s fairness. But what about the subject that supposedly studies all this activity in the economy: economics?

What is economics? You know how there are plants and then there’s biology, or there’s food and then there’s cooking? Well, there’s the economy and then there’s economics. What we mean is that if an economy is the thing, then economics is the doing of or study of that thing. We have learnt that an economy is the management of our home, and so economics must be the study, thinking or conversation about that management. They might sound like very similar words, but the distinction between an economy and economics, as we will see, is an important one to make. Economics belongs to a branch of study called social sciences which is concerned with how humans understand and organize themselves. Considering we are predicted to reach a population of almost 11 billion by the end of the twenty-first century, on a planet whose resources are depleting, that seems like a pretty important branch. Economics is a system, a science and a conversation: how we do, think and talk about stuff ‘Economics’ can be a hard term to grasp because it doesn’t mean just one thing. It’s a system, a science and a conversation.

How Did We End Up Here?


A system (how we do stuff): the way our economy looks is the economic system that we follow. These systems are the rules and structures put in place that help us meet our needs and wants (see Chapter 2). A science (how we think about stuff): as a science, economics aims to better understand what systems might be best for us to meet those needs and wants. It asks how things can be efficient or fair and explores where value might exist in the economy, how it is created and how it is distributed. Economics-the-science tries to help us answer some of life’s biggest questions: what’s the best way to organize ourselves so that we can stay fed, improve life expectancy and avoid or survive times of crises? A conversation (how we talk about stuff): perhaps most importantly economics is a conversation. It’s all the places we talk about the economy, from our front rooms, to WhatsApp, to the office and in government. It’s the conversations that lead us to vote one way or the other, buy one thing or another, end up with one law or another. That conversation isn’t as inclusive, popular or interesting as we think it should be, and that’s why we created this book.

How did we get here? For a subject that hopes to explain a decent chunk of human activity, economics is notoriously difficult for humans to engage with. Economists know that their work is about people, but the profession as a whole hasn’t always been that great at communicating with them. Economics seems to most of us to be about numbers and charts, yet trying to explain human lives and opportunities in a purely mathematical form is dull and confusing for many. That makes it harder for people to shape, or even fully understand, the world they live in. But there are stories behind the maths. And there were economies before ‘economics’. Indeed, while economies have existed forever, the study of them is a relatively recent endeavour, and economics as we know it is a very modern science. Economies of the past: A short history lesson The language of modern economics, even at a stretch, is no more than 300 years old. The subject as we are familiar with it today, which is concerned with the economy as a whole, is even younger: barely 100 years old. But if an economy is simply humans trying to get their needs met, then it goes without saying that economies have actually existed as long as humans have, i.e. a few hundred thousand years.


What Is the Economy?

That means that while no Roman legionary or prehistoric huntergatherer would have been familiar with ‘economics’ as a subject, they were all part of functioning economies which contained many of the same economic activities that economists study today: trade, tax, currency and so on. Since our earliest days, humans have puzzled over how to organize and share out scarce resources. One of the most important foundations of our modern economies started about 12,000 years ago when human beings began farming. To start with, this was generally small scale: individual families lived directly off the things they grew. This is known as subsistence farming and it can still be found to this day in regions like sub-Saharan Africa and Southeast Asia. Hierarchies formed among these farming families. Those at the top gained wealth by demanding resources from those lower down the pecking order in a system known as feudalism. Medieval lords were entitled to a share of their peasant’s crops, for example. By the mid-1600s, however, Europe started to shift away from this system. States, usually run by royal families, gained more control over their territories while markets began to expand and flourish. In this stage, known as mercantilism, it became more common for people to acquire many of the goods and services they needed via exchanges (i.e. buying and selling) rather than creating everything themselves. Over time, governments began providing more infrastructure – things like public roads and education – to support markets while increasingly leaving them to do their own thing. They also refined a justice system that would protect people’s rights in case of any conflicts. The rule of law – and the right to own something outright in particular – became seen as essential to keeping an economy running. We have a tendency to regard human history as a progression where modernity (and specifically Western modernity) is always better. But when it comes to economies, a lot of people question whether the changes we’ve made in the way we manage our time and resources have all been positive – for us and for the planet. Hunter-gatherers may not have had washing machines or Netflix, but anthropologists reckon their typical working week was just two days, leaving much more time for leisure than the average worker has today. Nevertheless, lots of us will consider the trade-off worth it for the conveniences of modern living. Others might be reminded of the infamous Fight Club quote about how ‘advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need, and the things you own, end up owning you’. Regardless of the size or style of an economy, it seems obvious that unless we study it we don’t have much chance of understanding how it works or how it could work better. However economies develop in the future, then, the role of the economist is likely to remain important.

How Did We End Up Here?

Brexit Brexit defined a period in British and European politics not just because of the sheer size, breadth and volume of changes it could mean for the UK and its EU counterparts but because of what it revealed about democratic processes and economic understanding across society as a whole. While everyone agreed that leaving the European Union would impact many aspects of the UK’s economy, from trade to immigration, prices to jobs, lots of people disagreed on what the impact would actually be. The public were repeatedly faced with directly conflicting economic information, with both sides accused of lying and misleading people on economic realities. One YouGov survey conducted after the Brexit vote revealed that while both Leave and Remain voters cited almost identical understanding of economics, those that didn’t vote at all expressed a noticeably lower understanding and confidence when it came to economics. This, then, is a clear example of how a lack of understandable economics can shut people out of democracy. The referendum had exposed a major crisis in the quality of national debate.

COVID-19 Very rarely do large economies change as radically and as quickly as they did when countries shut down in response to the coronavirus pandemic. For economists, the situation has given them a great deal of data about how different ways of structuring economies can affect the world. For everyone else, it’s shown us that it is possible for our economies to look radically different to the ones that we are used to. The coronavirus pandemic kicked off economic debates on everything from how local or international our supply chains should be, to how resilient and agile our workforce is, to whether we should reform our welfare systems. Of course, how these conversations will morph into real-world change is still to be seen. The economic changes that were enacted in the months after the outbreak of the pandemic may not be either possible or desirable in the longer term. But the sudden need for a radical restructure of our economies has at least opened up a space for societies to think about whether the economies they currently have are meeting their needs as well as they could be.



What Is the Economy?

So things can look very different As we can see from our whistle-stop tour of economies through time, an economy is not something that’s ever fixed or set in stone. Around the world, different economies are shaped and changed by their individual history, geography and politics. Historically: from hunter-gatherers to feudalism to robots, time has been the biggest evolver of economies. Regionally: your view of what a ‘normal’ economy is will depend on your current coordinates, from the planned economies of former Soviet countries to the more free-market approach of the United States. Politically: political actors or royal rulers can shape economies for centuries after they’re gone. Quickly or slowly: from the thousands of years of subsistence farming to the rapid change in the years of the Industrial Revolution, economies’ speed of change is not constant.

What we call ‘the economy’ today is the tale of thousands of years of evolution, battles of power, cooperation, knowledge, war and change. It’s a result of both conscious and subconscious human behaviour and organization. We got to where we are accidentally on purpose. Where we go next is anybody’s guess. Why should I care? Economics is at the heart of some of the greatest successes of human existence, from our technology to the high standards of living many people around the world enjoy. It is also at the centre of many of the core problems of our society: poverty, food shortages, homelessness, stagnating income, inconsistent job security, funding difficulties for public services, the affordability of housing and many more. Throughout time, different political and economic ideas have been applied to the world in the hope of making it better. How successful they have been is often a matter of opinion, and no one has ever succeeded in eliminating problems entirely. But the fact that almost everybody could credit an economic policy with a change they personally consider positive shows why economics is so important. You can never please everybody all the time. But we think we’ll have a much better shot at building an economy that most people support if we build an increasingly diverse and excellent base of economic ideas, discussions and economists. Getting that requires a much wider and more inclusive conversation about how these things affect all of us.

How Did We End Up Here?


Economics the system: A great economic contradiction The benefits of our modern economy can’t be denied. We have created the longest life expectancies in human history, via everything from the complex biomedical research that’s given us cutting-edge surgery and lifesaving drugs to the millions of farmers and food industry workers putting food in almost 8 billion mouths every single day. We can purchase (and translate) an entire book at the touch of a button. We are, for an essentially primitive species, not doing too bad. At the same time, nobody thinks our current economy is perfect. It’s no secret that we aren’t actually feeding all those 8 billion people adequately,1 and we certainly aren’t giving them all life-saving surgery. For a long time, the dominant solution has been that we need to ramp up all the economic stuff we’ve been doing so that more people can reap their benefits. But these days, an increasing number of people are growing concerned that the way we’re currently going about all this inventing, healing, eating and generally living has become a problem in itself. There are a few different strands to these arguments. The first is that we’re enriching ourselves at the cost of our habitat and that sooner or later all that environmental destruction is going to catch up with us in a bad way. The second is that our economy is tilted too much towards hoarding resources and not enough towards sharing. It’s therefore not so much that not enough economic activity is happening as the disorganized and routinely unequal distribution of its outputs means some of us flourish while some of us quite literally starve. The third strand is that while our modern economy has been undeniably successful at generating lots of monetary wealth it’s not doing a good enough job at improving people’s well-being. Indeed, some say it’s doing the complete opposite: making people unwell and unhappy and then creating wealth by selling ‘cures’ back to them. Of course, there’s plenty of contentious stuff in these arguments. Within each of these strands we’ll find disagreement and debate and nuances in opinion. But what is not in doubt is that every economic action our world takes will have ripple effects – and no matter what we do, some of these effects will be bad for some people. Economics is ultimately about trade-offs. We have to be aware that ‘fixing’ one economic problem may create another, sometimes in ways we never saw coming. Some of our biggest economic ‘mistakes’ are now only visible thanks to the

1.  Indeed, in 2020 an estimated 821 million people did not have enough food to live an active, healthy life.


What Is the Economy?

wisdom of hindsight. We put asbestos in our buildings, lead in our paint and tobacco in our cigarettes before we found out how harmful these substances could be to our health. Humans may never create a perfect economic system. But that doesn’t mean we can’t keep striving to design a better system that gives the world more of the good stuff and less of the bad. And we believe that our best shot of moving in this direction is through ongoing discussion. Discussion about what the goal(s) of our economy should be. Discussion about what is essential, and what can be sacrificed. Discussion about power and fairness, and how they are distributed throughout our economy. This discussion must include more voices if it is to accurately reflect our priorities. But how do we make sure a system does a good job of meeting those priorities once agreed? Working that out is the job of economics the science.

Economics the science: Putting the world under a microscope In order to understand the systems we live by, we study the economy as a field of science. This is the economics that happens in university departments, their labs and in the minds of experts and thinkers around the world. Economists have chosen no mean feat in making sense of the world by observing the interactions of billions of people – the boundaries of their work touch on just about every field of human understanding. So what does an economist do? An economist’s job is to explain, forecast and decide. They spend time understanding the world in order to explain what is going on in it right now, and along with other information, they forecast what might happen in the future. More specifically, economists are working to understand how we can organize ourselves and resources, often in a way that supports well-being and respects the limits of our planet. Sometimes, economists will conduct a cost-benefit analysis of a decision facing a government or business and make recommendations. So as well as predicting the future they can influence it too. To understand the world, economists will make a series of observations with the hope of identifying cause and effect. Perhaps they will look at how the legalization of marijuana in the United States is challenging drug trafficking organizations in Mexico, or the effects on wages of immigration into the UK, or how gender discrimination might affect a country’s standing in the global economy.

How Did We End Up Here?


Economists also spend a lot of time disagreeing with one another. Economists can disagree on the definition and boundaries of their own field (and its theories), and also on what kind of economic solution might be best for an economy. Having said that, at any given point in time there are usually at least some economic ideas that are particularly in vogue among most economists, to the extent that they are often seen as the belief of the profession as a whole. This may not be a good thing. A common criticism of the profession is that economists aren’t diverse enough, in terms of both thought and identity. Several studies have pointed to the disproportionately low number of female and ethnic minority economists, for example. A lack of diversity, to quote an article by the academics Amanda Bayer and Cecila Elena Rouse, is ‘constraining the range of issues addressed and limiting our collective ability to understand familiar issues from new and innovative perspectives’. Alongside this issue is the debate around how much knowledge, experience and skills a person needs before they get to introduce themselves as an economist. Focusing too much on qualifications can lead to unnecessary gatekeeping. At the same time, economists’ thoughts and recommendations can carry a lot of power and fundamentally change people’s lives, so it’s natural to want them to have a certain level of expertise. And unlike doctors or architects, there is no regulating body overseeing economists’ work and no formal code of conduct for how they should behave. Some economists argue this makes it harder for them to gain the trust of the public. Does economics follow ‘the scientific method’? Science follows the scientific method. Basically, this means scientists put forward a theory by making a statement that is possible to refute: e.g. ‘the earth is flat’. They then gather evidence, see if it supports or refutes the statement and subsequently accept, reject or modify their original theory. This process goes on until a certain theory is proven enough times it becomes known as a ‘law’. Unfortunately, it’s pretty hard (although not impossible) to follow the scientific method in economics. In natural sciences like chemistry, observations can be made in a strictly controlled lab. In social sciences like economics, it’s much harder to set up the rigorous laboratory environment, and instead data must be collected from the ordinary world. The economist also has to navigate many different variables, which will often change during the course of the experiment. This can lead economists to come to differing conclusions from the same data sets. Because of this, applying the scientific method to economics is usually fraught with difficulties. That draws criticism that the subject is prone to accepting things as fact that have never been proven as such. It is also the reason many statements by economists begin with the words ‘It’s likely that . . .’.


What Is the Economy?

Neoclassical economics and other schools of thought Be warned: here follows some jargon. A lot of universities teach a form of economics that is known as neoclassical economics. It’s very dominant and it typically has three fundamental features: individualism (it focuses on the individual rather than the collective), instrumentalism (a fancy way of saying we are driven only by our preferences) and equilibration (that a theoretical balance is the goal, even if it is never actually reached in the real world). Because neoclassical economics is so dominant, all alternative schools of thought are grouped together under the term heterodox economics. Economic approaches that try to incorporate both neoclassical and heterodox ideas (like this book!) are known as pluralist. Being pluralist means this book doesn’t seek to place one school before another in terms of importance or credibility. What it does try to do, however, is address what we think all economic schools uniformly lack: a working connection with public discourse and politics that would make economics more interactive, open to change and ultimately self-aware.

Predicting the future Forecasting plays a role in economics, just like with any other science. However, the discipline has a level of predictability that could be likened to meteorology (that’s weather prediction), not least because of how many metrics economists have to combine in order to make a reasoned guess about what’s about to happen. Despite its uncertainty, prediction remains an important part of economics because it allows us to adopt a ‘prevention rather than cure’ approach to problems and hopefully prevent full-blown economic crises. Why didn’t economists predict the financial crash? On a visit to the London School of Economics after the 2008 financial crash, the Queen asked a group of top economists why nobody saw it coming. Some years later, an economist named Sujit Kapadia pulled Her Majesty aside to try and give her an answer. Sujit basically said that while economists probably had got a bit complacent about how underregulated the financial industry was, accurately predicting when a fullblown crisis will happen is about as easy as predicting a new flu pandemic or earthquake: you know it will probably happen at some point but not when or where.

How Did We End Up Here?


Other economists, including the Australian professor Steve Keen, have been quick to argue that they did in fact predict the crisis. But because they couldn’t get everyone else in the economic profession to agree with them, their warning never gained enough traction to be heeded. Ultimately, for now there seem to simply be too many variables in economies – and too much disagreement among economists – for us to be able to predict future crises with any level or certainty. The economist’s laboratory An economist’s laboratory is the world we live in. There are times when they’re able to collect large amounts of data by looking back in time or across the globe in order to make comparisons. They can, for example, compare how different laws in different countries affect poverty, how the make-up of populations can influence things or how disasters can change economies overnight. But there are limitations to this approach. It’s not possible to put the whole world under a microscope, and when it comes to figuring out how a new economic idea might work in practice there are ethical implications to just trying it out on an entire population. So economists must devise other ways of studying how the world works (or might work). One of the ways they do this is by building models. Another technique is pilot projects – small-scale experiments that try out a certain economic policy on a few people and see if they fare better than their peers. Is there a ‘right’ and ‘wrong’ in economics? Ask this question to any group of people and you’ll hear equally strong answers from ‘absolutely!’ to ‘absolutely not!’. To help clear up the question, we first need to explain a bit more scientific lingo. Economists talk in terms of positive (also called descriptive) and normative statements. Positive statements begin ‘It is true that’ (and should be verifiable by irrefutable evidence), whereas normative statements begin ‘It is my opinion that’ (and can never be proven true or false). So yes, economists have got fancy sounding labels for facts and opinions. The reasons for distinguishing between the two are obvious, but it makes the answer to our question even more complicated. Because of the difficulty in applying the scientific method to economics, economists sometimes reach different positive theories which explain the same phenomena. That’s one reason they’ll disagree. Another is that they will make different normative statements (they’ll give different advice) thanks to the different value sets that they hold. So Economist A could state that Policy X will maximize profit (a positive statement) and that it is therefore a good policy to implement


What Is the Economy?

(a normative statement). Economist B could agree that Policy X will maximize profit but disagree that maximizing profit should be the goal. Economist C could also want to maximize profit but disagree that Policy X will achieve that aim. Clearly, this can quickly get complicated! But the important thing to remember is that there is a distinction between disagreeing with the effectiveness of an economic idea (this won’t work) and disagreeing with its aim (we shouldn’t be doing this). We all speak economics ‘Go and study economics’ said a member of the US Treasury (the department that looks after public finances) to climate activist Greta Thunburg when she attempted to make comments about reducing investment in fossil fuels. These words mirror the common implication that if you don’t have a degree in economics, then you aren’t entitled to an opinion on economics. This is weird, because it’s not a notion that carries through to health, education or politics generally, where us lowly citizens can comfortably hold beliefs on policy without being doctors, teachers or trained politicians. While there is clearly value in listening to the expertise of those who have spent a lot of time and energy studying economics, the subject as a whole so obviously concerns all our lives that any attempt to try and shut citizens out of the conversation can be seen as intellectual snobbery at best and a failure of democracy at worst. This issue requires special attention from economists and policy makers alike if they are to really gain the public’s trust. The complexity of their subject should serve as an invitation to all of us to understand more, not an instruction to speak less. This is especially true since it’s well known that the level of confidence with which something is spoken does not necessarily correlate with the soundness of the argument being made. Nobody who cares about economics should see wider literacy in the subject as a bad thing.

Economics the conversation The economist Joan Robinson once said that ‘the purpose of studying economics is to learn how to avoid being deceived by economists’. But while it’s easy to see why we should learn about something that governs all our lives, it’s harder to know how we can go about doing this. With so much economic information out there, it’s hard to know where to start or who to believe. A 2018 Daily Mail survey even found

How Did We End Up Here?


that most parents are more comfortable teaching the birds and the bees to their children than they are talking about the sordid world of money. Intimidated or confused? You are not alone Our work in economics has taken us into schools to learn how to teach the subject to young people. We found that primary school kids routinely get excited talking about the economy. Discussing the future, jobs and caring for the planet, their young minds are full of ideas. Tasked with balancing public finances, the kids’ solutions range from taxing anyone that is rude to a farmer to charging road tax according to how long your car engine is left on. Interesting and clever, by all means. But take the subject to teenagers, and the mood in the classroom is somewhat gloomier. Suddenly a palpable sense that ‘the economy’ is something to be feared arises. The economy is going to saddle them with debt or it’s somehow affecting their grandparent’s pension, though they may not be sure why or even what a pension is. Take the subject to adults and the mood is darker still. The majority of adults won’t even agree to talk about the subject, bringing any conversation to a quick close with a quick ‘not for me, sorry’. What was happening through a young adult’s life to turn a subject about opportunity into one that can’t even be broached? In 2016, YouGov conducted a survey asking people how they felt economics was communicated both in the media and by politicians. It didn’t surprise us to learn that the situation wasn’t very good. Nine out of ten people said that discussion of the economy is ‘confusing’. For a subject that concerns literally all of us, statistics like that are worrying. Further research led by Ali Norrish from the charity Economy concluded that most people feel that economics: ●● ●● ●● ●●

Is complicated and hard to understand Can’t be trusted and is often too negative Represents the opposite of what most of us value, which is people Is frankly intimidating to talk about

Perhaps more shocking than these findings, however, was the almost uniform agreement from within the media industry, and across politics, that this misunderstanding and confusion were also widespread within their own sectors. Journalists were crying out for easier-to-communicate information from politicians, who in turn were desperate for more human and relatable facts and figures from economists. But as any professional economist will tell you, studying economics in the twenty-first century doesn’t contain a module on ‘how to communicate to the public’. It was


What Is the Economy?

clear that there was a great chasm of understanding between economic professionals and the public, and far from being a problem that anyone was denying, it was one that almost everybody recognized needed a solution. Yet no one seemed to be demanding or creating that solution hard or fast enough. In fact, no-one seemed to even be talking about it. The lack of understandable economics sometimes seemed like the elephant in the room that professionals themselves were too embarrassed to acknowledge. And to be fair, few politicians would want to openly admit it if they didn’t actually understand how a particular piece of economics works, while many journalists don’t have the background in economics needed to easily cross-examine economic statements in detail. Some journalists we spoke to in the course of our work suggested it is common practice for writers, economists or politicians to simply find and focus on whichever economic ‘facts’ were relevant to their particular ideology. And with a public not used to seeing or asking for transparency where economics was concerned, economics became the holy grail with which any policy decision could be justified and not questioned. We believe that the majority of economists, journalists and even politicians enter the profession with the best intentions. It is the subject of economics that is letting them down. As the world has grown more complex and interconnected, it has become increasingly clear that public life is simply missing an entire economic vocabulary that both professionals and the public could share. Economics had failed to create an accessible language, and the world needed – and wanted – it fast. Picture the economy To begin undoing this mess, it was important to start with understanding what people knew already. Close your eyes and imagine the economy. Think of the different definitions you’ve heard over time and different ideas you have of what it is. Now settle on a definition and ask yourself how confident you feel about it. Now ask somebody else to do the same and compare your answers. The chances are you’ll have slightly or even completely different answers. How confident do you both feel about your definition now? This isn’t a trick question. If two economists carried out the same exercise, they’re likely to have the same experience. Or they’ll eagerly debate the various definitions that the two of them came up with for a good hour. The point is that it’s totally unfair to expect anyone to be able to confidently define the economy, because no one has ever offered them a clear and – more importantly – consistent answer.

How Did We End Up Here?


There are many reasons for that. One is simply that the economy is so huge it makes it really rather difficult to keep track of what it is and isn’t. And without schools teaching a basic understanding of it what tends to happen is that we pick up ideas here and there about what an economy is without ever quite having the opportunity to piece them together. This leads people to form different concepts or ‘mental models’ of what the economy is. That research we quoted earlier learnt that people might see the economy as: ●● ●● ●●




Money – the economy is simply money and everything we do with it A big circle – the economy is a big circle that stuff goes in and out of Populated circles – the economy is different themed circles, like jobs or finance A cycle – the economy is a cycle that has motion and flows, going round and round Diagram – the economy is a chart or diagram representing numbers and values Networks and nodes – the economy is a set of complex relationships of different things

Those images probably feel quite familiar. And if we look at the different ways the economy is described in the media, we can see where they’re coming from. Watch the evening news over the course of a year, and you’d hear that an economy might: 1. Move up or down (it’s always doing that) 2. Crash, collapse or flourish (hopefully more of the latter than the former) 3. Be made up of stocks or liquidity on balance sheets (and lots of other stuff that fits on a chart) 4. Have something to do with capital markets (whatever they are) 5. Be struggling to offer free busses for the elderly because councils are facing funding cuts (and what was the reason for that again?) 6. Have £X trillion wiped off it in terms of GDP (erm . . . ok?) 7. Have millions, billions, trillions or gazillions of pounds in it (and we wouldn’t really know the difference, because what are we comparing it to again?) You get the picture. All these different images of the economy contribute to each of us formulating different and somewhat confused pictures of what it is. All this grappling to understand it contributes to the poor-quality conversation held among the public. Couple that with a general fear of


What Is the Economy?

talking about the subject, and it’s no surprise that the economy remains, well, a surprise. Because of the difference between how it is reported and how it actually feels (stock plunges get headlines but don’t necessarily seem visible within our daily lives) the feeling is just further reinforced that while we know it’s supposed to be important, we just don’t quite know what it’s got to do with us or how we can affect it. In short, the economy ends up being reported: ●●


In a homogeneous total way that’s so huge and inhuman it’s hard to grasp or penetrate In finer detail that’s more relatable, such as funding for local libraries. But in these cases it’s often done without mention of the word ‘economy’ and so we don’t make or understand the association

The dictionary definition – oh wait . . . Illustrating further that the definition of economics isn’t particularly clear, even the dictionary versions have a degree of variation between them: ●●



‘the system of trade and industry by which the wealth of a country is made and used’ (Cambridge) ‘the state of a country or region in terms of the production and consumption of goods and services and the supply of money’ (Google/Oxford) ‘the structure or conditions of economic life in a country, area, or period’ (Merriam Webster)

None of these definitions fully capture the true extent of what economics has come to mean to most of us. Nor do they quite reflect what we see in the media when ‘the economy’ is discussed. Nor do they make it clear what the economy has to do with us. Homogeny We can see the wood but not the trees  Perhaps one of the reasons we have such a hard time relating to conversations on the economy is that it is usually presented as a homogenous whole, as if it is a living, breathing beast of its own. According to the news it has the ability to ‘stutter’, ‘fall over’, ‘fail’ and ‘crash’, and it can take the shape of a ‘blizzard’, ‘storm’ or be ‘blooming’. The metaphors that are commonly used to describe the economy may be helpful in communicating what could otherwise be dry economic data, but it also does a terrible job of painting the economy as anything other than a homogenous ball of ‘other’. The problem with that is that it

How Did We End Up Here?


can end up obscuring the real lives of billions of people, with our unique experiences and opportunities (or lack thereof). Clever metaphors may get our attention, but they can also drive a wall between us and our understanding of the world. Painting the economy as some separate thing means that saying we need to do something ‘for the sake of the economy’ often doesn’t wash with people because they can’t see or feel why it’s relevant to them. At the same time, describing a policy or idea as ‘good (or bad) for the economy’ is an oversimplification that ignores the fact that ‘the economy’ is made up of billions of people, roles, options and metrics. Policies that are good for some of them will almost always be bad for others, and vice versa. It’s not that generalizations can never be useful in helping us understand what economies are like. It’s just that they are not and should not be seen as the full story. Say you describe a particular country as having a ‘strong’ economy. There’s plenty of useful information we can glean from that statement. The country in question is likely to have high employment rates, for example, and to be producing lots of goods and services. But the statement doesn’t recognize that this country’s economy might also harbour a lot of unfairness, and that someone living in poverty within it might find the idea they lived in a ‘strong’ economy unrepresentative and even somewhat grating. What is the economy not? Since there are so many misconceptions about what an economy is, perhaps it’s more helpful to clarify a few things that an economy isn’t. An economy is not: ●●

Just maths ○○ Economics uses a lot of maths. Indeed, maths can be used to such great extent that we can start to believe economics simply is maths, but this is not true. It’s perfectly possible to ‘do’ economics without much maths. Ultimately, numbers are just one method we can use to explain the real activity that is happening in our real lives.


Just money and finance ○○ Money and finance are part of an economy, but they are not a whole economy. The financial system is simply a sector, just like food or education, and money is simply a common means of making economic activity happen. ○○ Because financial crises often cause economic crises, we also tend to think that they are one and the same. But non-financial things like natural disasters, pandemics and wars can all create economic crises too.



What Is the Economy?

Apolitical ○○ Economic policy will nearly always be influenced by the worldview of the people – often a government – who are implementing it. That should be obvious, but it’s not uncommon for people to use economic vocabulary to frame political opinions as economic facts (normative statements dressed up as positive ones).


Purely political ○○ The flip side of the previous point is that because economics’ main theatre is parliament, people can get the impression that all of economics is political. In actual fact, there are large parts of (positive) economic analysis that strive to be politically neutral.


Always at the national level ○○ Economies can be any size from local to national or global.


Everything ○○ Economics affects almost every part of our life, from access to healthcare to the price of a carrot, and all of us are in an economy. However, just because economics is everywhere, it does not mean it is everything.

Our approach We mentioned at the beginning of this chapter that we used to be confused about what the economy was. It frustrated us to the extent that we decided to spend a lot of time discovering what it was and then we spent a lot of time finding better ways to describe it to other people. There are a number of guides out there that make textbook economics accessible. And there are a number of longer academic papers offering a healthy critique of the dominant economic thought found in those textbooks. What was missing, however, is an everyday guide that brings the two together and makes economics relevant to everyday life. The definition of the economy in Chapter 2 is an invention by us, created over five years by working with many of the people making economics accessible. To create this definition we: 1. Looked at all the different ways the economy was described by economists, journalists, experts and citizens and found the lowest common denominators connecting them all 2. Learnt the words and phrases that people found the easiest to connect with 3. Included previously invisible elements that people felt but couldn’t see

How Did We End Up Here?


4. Studied the democratic process and how this interacts with economics 5. Developed it using people’s feedback until they said it felt obvious but original It is an imperfect contribution to economics that we hope will encourage further discussion of what the economy is and how we can – and probably should – all talk about it.


CChapter 2

What is ‘the economy’? We now have a sense of what economics is. From a science perfected in labs to a conversation that’s happening everywhere, economics is about the economy. We also have a sense of what dictionaries and the media tell us this economy thing is while seeing that none of those definitions feel quite right. So what, then, is an economy? An economy is the sum of the actions that we take with the things that we value to meet the needs and wants that we have. In other words, it’s everything we’re doing day to day to survive and make the most of the world around us. The economy is the system by which we organize ourselves. While that often means obviously economic-y things like jobs and money, these aren’t the whole story: we all value things other than money, and we all do more than just work. A great deal of what we value, from our time to the earth’s natural resources is limited (or scarce in economics speak). That means not everybody can have everything they want all the time. Humans need to constantly make decisions about how to divide our scarce resources and the economy is the system we use to do this sharing out. Economies are therefore about power and fairness.

From value to values: What makes up an economy? Economies can take many different shapes and sizes. From the small economy of your household to the huge global economy, all economies look different. However, they all share certain aspects (Figure 1).

              Figure 1  Our illustration of ‘an economy’.



What Is the Economy?

An economy is made up of: ●●

The things we value ○○ Like time, belongings, nature or money


The actions we take with those things ○○ Like exchange, produce, protect or sell


The limits we face or create in relation to those actions and things ○○ Like the minimum wage or the limited supply of oil


The systems that support that activity ○○ Like banks, shops, families or governments


The places and regions they take place in ○○ Like our home, village, country or planet


The rules we follow for those systems ○○ Like property rights, competition laws, social norms or home chores


The forces that cause us to change those rules and systems over time ○○ Like natural disasters, political movements, the changing weather or pandemics


Our needs and wants that define what we value ○○ Like hunger, love, crippling disease or our desire to be creative


The roles we play that define these needs and wants ○○ Like employee, entrepreneur, parent or citizen


The resulting collective needs and wants we share and prioritize ○○ Like ending poverty, supplying clean water, living long lives or having a supply of chocolate


Our values, identity, beliefs and circumstance that shape every one of these things ○○ Like equality, freedom, our religion or where we were born


The shifting power and fairness that permeates any economy

At first this might all sound a little abstract. The purpose of this book is not to bombard you with abstract theory however! For each chapter after this one we’ll focus on a part of the economy as you are most likely to experience it in real life – from your home to your work to your high street and government. But armed with the underlying knowledge from this

What Is ‘the Economy’?


chapter, we think you’ll have what you need to look at the economy you live in (and any others you might stumble across) with a fresh perspective and critical eye. We’re now going to look at each of these aspects of the economy in a bit more detail. To start, let’s spend some time thinking about those last two themes of power and fairness.

Why use this definition rather than the dictionary one? If you look the word ‘economy’ up in a dictionary, you’ll probably see something like ‘the economy is the system we use to allocate scarce resources’. So why didn’t we just repeat that here? Well, we wanted our definition to reflect some of the more recent work by economists which explores how the economy is more than just the divvying up of limited resources. Our definition also takes account of the wider political context in which an economy sits. For example, it allows us to think about actions beyond consumption and production, and wealth beyond just money, while still acknowledging an economy is often the result of decisions that are made in the face of scarcity.

The science of power and fairness One of the characteristics of the economies we live in is their ability to represent, reinforce and redistribute power within a society and around the world. After all, different economies have different ways of moving wealth among people and wealth often equals power. Another important factor is how much power various economic players – from companies to citizens to lobby groups – have when it comes to influencing or changing the way an economy is run. An economy that is tightly controlled by a democratic government may have different priorities than to one that is in thrall to the wants of big businesses. Because the rules can be so different, it’s little surprise that people from similar circumstances can end up with very different lives depending on when and where they live. We all know we live in an unequal world, yet we rarely consider quite how pervasive this level of inequality is. Perhaps the reality is just too uncomfortable to truly confront or too frustratingly impossible to overcome. Perhaps we just don’t care. That the world is unequal is a statement of fact, that it is unfair is a matter of opinion. After all, we’re


What Is the Economy?

constantly surrounded by plenty of systems that distribute power in ways that are often considered uncontroversial. Bosses have more power than their employees. Landlords have more power than their tenants. Rich countries have more power than their poorer neighbours. Still, we currently live in a world where it is normal for a person of average income to walk past a homeless person begging for shelter as they head home to watch somebody with 2,000 times their wealth entertain them on television. Is the position of these three people within the economy ‘fair’? On one hand, our economic position is influenced by things we have control over, like effort and ambition. On the other, it’s also influenced by things we have absolutely no control over, like luck and our family’s circumstances. Then there are factors like our abilities and talents, which are a mix of both. We’re not here to tell you what societies’ answers to questions of power and fairness should be. That’s something for you to decide in line with your own values. But it’s important for these things to be thought about and discussed, because they undergird the rules that our economic systems follow. Our ability to discuss and change those rules depends on the presence of that simple, human and specific vocabulary we call for in this book. Our question, then, is to what extent does the current language of economics reveal or conceal the patterns of power and fairness in society? Power The dictionary describes power as the ability to do something or act in a certain way. Perhaps more ominously, its second definition is the ability to direct or influence the actions of others. Economic power, then, gives people, places and businesses the means with which to bend the world around them towards their preferences. But where does economic power come from? And how does the answer to that question define what kind of economy we end up with? Finding out often means looking back through the past, because the norms and structures that make up our modern economy usually have long roots. Earlier, we talked about how a great deal of economic power is tied up with wealth and that how wealth flows through an economy is a good indicator of how power is distributed. Think about the last time you paid for something. Where did that money go? How might it travel through the economy, where is its final destination and what happens to it after that? What does it cause to happen, and who is it rewarding? When you purchase something, the business you hand your money to may use it to pay staff, or suppliers, or spend it on improving the business, or it may go straight to the owners as profit. Some of your original purchase may also go straight to the government via a sales tax, to then be spent on everything from new roads to welfare payments to civil servant salaries.

What Is ‘the Economy’?


How much money is sent down each path can depend on all sorts of economic decisions, like how much tax we charge, how globalized our supply chains are or how high the minimum wage is. The more money that pools in a certain channel, the more power the people who control that flow of money generally have. Many of these economic rules are human-made. Yet for all their apparent power, humans aren’t the only force that can shape an economy. Natural and biological events such as hurricanes or the coronavirus pandemic offer visible demonstrations of how much power Mother Nature also has to change what an economy looks like. That’s something many economists are now turning their attention to, via disciplines such as environmental and ecological economics. These events also remind us that while money has power, the power of money is not guaranteed. It is undeniable that the richest hold substantial economic advantages compared to everybody else. It is also undeniable that at key points in history all the money in the world hasn’t been enough to alter circumstances in your favour: think of the French Revolution or the rise of communism in places like Russia in the twentieth century. Alongside money and nature, another force that has the ability to influence and reinforce power within an economy is language. When economics is laden with difficult-to-understand jargon and complicated maths, it becomes easier to dissuade new people from joining the conversation. When economic ideas are presented as indisputable ‘facts’ rather than political opinions it stops people questioning whether the approach taken is the best one for people like them. That leaves those in the ‘in-group’ free to write the economic rules that suit their own interests. To be clear, we’re not suggesting that economists as a whole are some sort of secret cabal bent on pulling the wool over all our eyes. What we are saying is that the less accessible economics as a subject is, the easier it is for some politicians, public figures or even social media trolls to use it as a weapon with which to push forward their own agenda and dismiss any challenges as coming from people who just don’t ‘get’ it. It’s worth stressing that economic power is not itself an obviously bad thing. Rather, it can be harnessed and put to uses which different people will consider good or bad depending on their personal position. Take some of the ways that money can be used to rebalance power in an economy: donating to political candidates, boycotting disliked companies and prioritizing businesses that fit a specific metric, such as being environmentally friendly or black-owned. How you feel about these actions probably depends on additional factors. Is the money coming from lots of people or just a few rich ones? Which causes are they supporting? And is the newly created power fairly distributed or concentrated in certain groups?


What Is the Economy?

Fairness Because economies determine the distribution of wealth and power within society, the subject is also a discussion about how fair that distribution is. We can probably all relate to hearing a politician announce an economic policy and thinking ‘that’s not fair’. We may even have said at some point or other that the whole system ‘just isn’t fair’! Of course, what feels unfair to one person can feel perfectly fair to another. Getting a whole society to decide on what’s ‘fair’ is therefore tricky. It requires lots of frank conversations about our own wants and experiences as well as understanding and sympathy of others. Take unemployment benefits as an example. Most people will agree that some form of safety net is a fair economic policy. Of course, a few people will take more extreme positions and argue either for the abolishment of all such welfare or, on the other side, for a universal basic income, where everybody is guaranteed a liveable income whether they work or not. But a solid majority is happy with a system where you’re expected to work for your keep but won’t be left to starve if you fall on hard times. Problem solved? Not really. Because now a broad economic policy has been decided on, we’ve got to decide lots of other details, all of which in themselves can be considered fair and unfair. Should you only get unemployment benefits if you’ve worked in the past? If you were born in the country? How much money should you get? Who should pay for it? If government taxes pay for the programme, where should those taxes come from? Those on the highest incomes? Profitable companies? Everyone? Taking money from one person or business and giving it to another is called redistribution. How much economies and governments should forcibly redistribute wealth (rather than just letting it flow where it will) is a question at the heart of any discussion about fairness. On one hand is a desire to reward individual effort and success in order to encourage more of it. On the other hand is a desire to compensate people whose background and life circumstances mean they’ve been dealt a poor economic hand through no fault of their own. As you’ll see throughout this book, the problems that economists are facing will often boil down to a very simple yet equally complex question of ‘what is fair?’

‘The economy’ doesn’t really exist One last thing we want to touch upon before launching deeper into our definition is a bit of required pedantry. A familiar bad habit in economics is to only talk about the economy, singular, as if it is just one specific and whole entity. We’ve been guilty

What Is ‘the Economy’?


of it already in this book. In fact, there are economies everywhere, of all different shapes and sizes and often overlapping with one another. An economy

An economy is a group of activities that is happening with things that we value in order to meet our needs and wants.

The economy

There is no official definition of which economy is the economy, but most people use this term to mean either all economies in the world connected together or, more commonly, their national one.

[Spain’s] economy

All the economic activity that happens inside a certain country is often referred to as that country’s economy. This version of the term often refers largely to the health and size of that economy.

The global economy

This one’s interesting because it could refer to only the international parts of an economy (for example international trade or long and complex supply chains), or it could refer to all economic activity on the planet (all the global bits and national bits combined).

Local or regional economy

The activity within a certain geographical area, such as a village, town or borough. There are often no real hard borders to a local economy, and many will be connected to or even wholly within other economies. Local currencies, the Brixton Pound being perhaps the most famous example, attempt to strengthen a local economy by encouraging economic activity to stay within it.

Our economy

Can be used for any economy you’re part of but generally refers to the national economy of the country you are in.


‘Economy’ and ‘the economy’ are often used interchangeably by people unfamiliar with the subject. Technically, without an article, ‘economy’ refers to something being efficient or cheap. Think economy brand toilet paper.

To economize

Building on that, to economize is to make the most out of something, which in many cases means buying something cheaper.


Economics refers to the study, discussion or application of science to the economy. Economics can also be used to mean economic activity, as in ‘economics in the UK right now’.

The economics of. . .

When people use this phrase, they probably are referring to the economic policy and decision making behind a certain situation. It’s a pretty vague term, though.

Let’s take a closer look We finally got here: we’re ready to dive deeper in what an economy is! We now know that we’re not explaining the economy but an economy, that they come in different shapes and sizes, but that they all share some common features. So, are you ready?


What Is the Economy?

Some notes on our definition Ok, last thing before we start. Here’s some important notes on what we’re about to explain. Many parts of the economy are invisible: Much of it you can see but some of it you can’t. The more we understand both the visible and invisible bits, the better overall picture we have of what an economy ‘looks’ like. Endless examples: Within each part of any economy, there are endless examples that can be given. If we don’t mention something you were expecting it doesn’t mean it’s not part of the economy you live in, it just means we couldn’t fit it in this book. We hope to explain things in a way that means you begin to see examples all around you. Naturally occurring and human-made: An economy is a mix of both naturally occurring and human-created elements. For most of the parts of the economy we describe you’ll be able to find examples of both. The most obvious example of this is limits. The earth has a naturally limited supply of oil, but we have also created a human-made limit to the number of hours we think a worker should spend extracting it from the sea in a week (known in the UK as the Working Time Directive). In any order: You’ll find the following list presented in an order that allows each part to logically build on the last, but it can be organized in any number of ways – you could find it makes more sense to you backwards, for example. The building blocks of society: None of the following concepts are particularly complex; in fact you’ll see that economics is a set of quite basic building blocks common to society. It’s the way in which they come together that makes economics so complex. One of the reasons the subject seems so confusing is because there simply aren’t that many attempts to explain economics in this joined-up way. Economists often end up either zooming in on an important but obfuscated detail or looking at something so humongous and broad we can’t relate it to our real lives at all. What do you think? Hopefully, the definitions in this book bring a sense of clarity to economics to stimulate your thinking, but whatever you comprehend of these explanations, know that they are just one attempt to explain the economy. If you adapt, add on and jiggle bits about to create your own understanding, that’s great – we invite you to join the debate on what economics is and what economies are.

What Is ‘the Economy’?


‘The sum of . . .’ Economics is concerned not just with individual actions in an economy but with what happens when lots of actions come together as a whole. In very small economies this distinction might not be super interesting, but when you’re dealing with complex economies consisting of millions of people, it becomes a bit more important. We call this macroeconomics, and it’s explained more in Chapter 4. Things we value At the heart of any economy is the concept of value. From money to time, entire economies are built around valuing different things in different ways. You know that famous Shakespearean quote ‘a horse, a horse, my kingdom for a horse’? It demonstrates how what people value most can change massively depending on their current circumstances and how we’re willing to exchange almost anything to get hold of the things we value most. Economists call things of value capital or assets. As economics has evolved over the years, economists‘ understanding of what counts as a thing of value has broadened from obvious stuff like money and the work that we do to things like the natural environment and our social status. Slightly more complex than observing which things we all perceive as valuable is understanding what makes them valuable. Philosophers and economists have been puzzling over this for centuries, in a branch of their work called value theory or theory of value. One of the earliest attempts to put this idea into words came from Ancient Greece, when the philosopher Aristotle pointed out that ‘of everything which we possess, there are two uses; For example a shoe is used for wear and it is used for exchange’. What Aristotle had observed was that something is valuable to us if it meets an immediate need or if it can be used as a method in which to obtain something that meets a need. Later, economists expanded on this theory to suggest that the value of a thing wasn’t just determined by how much people wanted it (demand) but also how much of it there was (supply). Economists concluded that scarcity was a key component of value, which is why water is cheaper than diamonds even though it is undoubtedly more useful. Economists also started to look at the idea that a thing’s value can come from what it costs to make or obtain. In particular, three economists named David Ricardo, Karl Marx and John Stuart Mill contributed to what is now known as the labour theory of value, which says all value should be considered a product of the work that people do to create it. This theory isn’t universally accepted, but it’s popular among people who claim that workers are the central creators of value in an economy and should be rewarded as such. Theories of value are important because it is the shared definitions of what we value and how we value it that fundamentally define what an economy, and therefore our lives, looks like. How an economy weighs the


What Is the Economy?

values of nature and wealth determines how likely it is to keep a beautiful forest or chop it down for timber, for example. And because the concepts we use to define economic value haven‘t always kept up with what we value, it has sometimes led to situations where people struggle to articulate why something is valuable and therefore (as in the case of the forest) find it harder to protect. ‘Land, labour and capital’ You might have heard of the phrase ‘land, labour and capital’ before. This is a way that economists think about how stuff is made, and these three things are known as the factors of production. They’re an interesting way to think about what we derive value from. They also explain how mainstream economists think about how resources become goods. Land Land in economics has a slightly broader definition that you may be used to. It means any natural resource derived from the planet: from the land in a field to the trees growing on it and the coal stored deep beneath it. Of the three factors of production, land is the most fundamental. Things like stones, fish and water were used in our earliest and most basic economies, and were crucial to the survival of the human race. Land resources are categorized as renewable (more of it is always being made) and non-renewable (there’s a finite supply that will one day run out). While there’s a link between a resource being non-renewable and being scarce, the two terms cannot be used interchangeably. Water, for example, is a renewable resource that can be very scarce in some places. As a rule of thumb, the value of land is determined by a combination of its use and its abundance. Labour  Labour is the valuable work that goes into creating goods. It is a product of both our skills and our time. In the modern world, we generally recognize the value of labour via a salary. But this isn’t a perfect system. As we’ll discover later in the book, humans clock in plenty of unpaid labour, and even labour that is paid isn’t always compensated in a way many people consider fair. Capital  Confusingly, economists use the word ‘capital’ in several different ways. In this sense, it means any sort of machinery or other asset that combines land and labour to make goods. In the olden days, this was a bit more obvious: factories, farming equipment and windmills were all forms of capital. Combining them with raw materials and hard work was the viral third ingredient to the economics of making stuff. Nowadays there are debates over whether things like software and knowledge are a kind of capital.

What Is ‘the Economy’?


The price of everything and the value of nothing Traditionally, economics understood value through one main lens: price. The problem was that many people don’t feel that price accurately reflects all of what we value as humans. After all, there are some things that we might all agree we can’t by definition put a price on because they’re priceless. That’s why some economists – like us! – are now pushing for a broader understanding of value. To make this clearer, we’ve divided value into different categories. Economists call these different categories different types of capital. However, capital here does not mean the same thing as it did when it was one of the factors of production. We know that’s confusing! Please bear with us. Financial capital

i.e. money

The most ubiquitous form of capital as we know it, a globally recognized symbol of value that can be used to buy other things or simply stored as a thing of value itself.

Natural capital

i.e. the planet

Everything in the natural earth holds value to us, whether as a natural resource, for its sheer beauty or its ability to clean the air we breathe.

Produced capital

i.e. the stuff we make

There’s a lot of stuff in the world. Some of it stays as it is, and some of it will be turned into yet more things. This stuff often holds value or is scrapped because it no longer does.

Human capital

i.e. our skills, Human capital defines our ability to get stuff done. knowledge and time We build it up through education and innovation, and pass it on from one generation to another.

Social capital

i.e. our relationships Social capital often affects our ability to do stuff and experiences through trust and social cohesion. Globalization is often criticized for eroding the social capital once abundant in communities.

Descriptions of types of capital go beyond these five types depending on who you ask, with spiritual, cultural and experiential capital all gaining traction among some economists. It’s worth thinking about what you yourself may value that isn’t included in the examples we’ve given here. But however we categorize them, it’s clear that the more individuals, businesses and governments develop their understanding of these things we value, the better they can make sure their actions enrich all of them while depleting them as little as possible. The UK government, for example, has recently acknowledged the importance of natural capital and committed to protecting natural environments despite the fact that there are financial costs to this. Non-financial types of value are also a key concept in ideas such as sustainability and promoting long-term wellbeing rather than just economic growth alone.


What Is the Economy?

However, there is one major problem with expanding our understanding of value beyond things we can stick a price on: quantifying them becomes increasingly difficult. Even the most priceless of things needs to be measured if economists are going to be able to make decisions about how we can maximize benefits from our limited resources. One – often controversial – version of this is the value of life, a calculation that tries to balance the cost of things like road safety improvements against the benefit of reducing the risk of road deaths. As clinical as this sounds, it reflects an unavoidable reality. A person charged with improving road safety will have access to a limited supply of money and needs to find some way to make a choice about the most effective way to spend it. Sometimes, economics can help them. A similar idea used by medical professionals is quality-adjusted life years (or QALYs). This is another economic calculation that assesses the value of medical interventions by deciding how much value an extra year of life might offer someone based on factors like their age and overall health. Clearly these can be complex and heart-breaking decisions, which is one of the reasons that economics can be a minefield of ethical considerations. Other methods of quantifying the immeasurable include the willingness to pay principle, where economists will survey a group of people on how much they would be willing for their community to pay in order to keep a certain non-financial asset, often an environmental one like clean air. This method is fraught with problems, however, not least because those least likely to be affected by environmental problems are usually the wealthiest. So the difficulty of finding a reliable and consistent way to put a price on things that you, well, can’t continues to puzzle economists and statisticians everywhere. But if we have a hard time deciding exactly what value is, perhaps we might have an easier time deciding what it is we would like to do with it. Actions: what we do with what we value The next key building block of any economy is the actions we take with the things that we value, what economists call economic activity. If we just left everything as we found it, we wouldn’t really have an economy to speak of, and we probably wouldn’t be doing much else either. If we turned no trees into chairs or put no time and knowledge to use in lifesaving research, we’d all be here sitting on floors and not living as long. As a bare minimum, we need to find food to eat, collect water to drink and build shelter to stop us from freezing. On the other hand, every action we take has the potential to create negative consequences, so the more stuff we do, the more likely it is that something will go wrong. What we do with the things that we value fundamentally defines what our economy looks like. You can insert an almost limitless range of verbs here: from producing to exchanging, owning to sharing, destroying to

What Is ‘the Economy’?


regenerating. With billions of people around the world doing these things on a daily basis, suddenly you can start to imagine an economy coming to life. A lumberjack exchanges their labour for some money and cuts down a tree, a factory turns that wood into a bench and sells it on for profit, members of a community sit on that bench and talk about the economy. What’s interesting about economic activity is that just like with value, economists’ view of what constitutes it is broadening over time. Some of the actions we take in an economy are: ●● ●● ●● ●● ●● ●● ●● ●● ●● ●● ●● ●● ●●

Exchange Buy Sell Rent Produce Protect Own Share Give away Destroy Reuse Recycle Renew/regenerate

Economics traditionally focuses on the acts of producing, buying and selling. These actions (along with most economics transactions) are ones of exchange. Exchanges are often facilitated by money but not always. People sometimes barter goods directly; think of children swapping Pokémon cards on the playground. Within a home two adults might exchange making dinner for doing the washing up afterwards. When we’re employed we are exchanging our skills and time for money, and when we purchase a loan, we’re buying the opportunity to repay the money gradually for the price of the interest charged. All these actions are forms of exchange. Exchange isn’t the only way two or more people’s economic actions can interact. There’s also sharing. This has always been a common way of doing things among families, friends and communities, but it’s become of heightened interest to economists because of the growth of what some now term the sharing economy, where people who don’t know each other well share something of value between them without anyone owning it outright. A community-owned garden might be an example.  AirBnBs and similar internet platforms are often held up as the lodestars of the sharing economy. However, critics point out that referring to the economic actions facilitated by these companies as sharing rather than exchanging is disingenuous. When a resource like a two-bed flat is ‘shared’ on AirBnB what’s really happening is that the flat’s owner is exchanging the space for money. The flat remains the sole property of its owner throughout. 


What Is the Economy?

Alongside exchanging and sharing, we can protect parts of an economy. This often happens with natural capital. A national park, for example, is land that is protected from being used in traditional economic ways and kept in its natural state for the well-being of humans, animals and other species. Protecting the natural parts of our economy is a big focus of environmental and ecological economics, which we discuss in Chapter 11. Actions are the result of (limited) choices Economics is often described as the science of choice: the economy is what we do and do not do. Economists study these choices via consumer choice theory and the psychology behind them in behavioural economics. Fundamental to mainstream economics is the idea that every decision has a cost: the road we didn’t choose in order to travel down the one we did (more on that later). But what is not so often discussed in economics is that what we do and don’t do is often decided by what we can and can’t do. Our choices are limited by many things, including our personal circumstances and the rules we (are supposed to) follow. Especially in the longer term our choices may be limited by powers or systems that are hard to influence. It is therefore possible that describing economics as the science of choice suggests a bigger sense of freedom than actually exists. Exchange creates value Why is it that we’ve become so used to producing just a handful of things for ourselves and getting most of the things we need by exchanging with others? Economist Adam Smith, commonly regarded as the ‘father of economics’, famously theorized an answer to this question in an explanation we still largely hold true today. It is but a very small part of man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and society itself grows to be what is properly a commercial society.

Adam Smith believed that this natural inclination of humans to trade with each other in order to advance their own interests automatically creates a widely beneficial market system that works without any direct control – a phenomenon he dubbed the invisible hand. Voluntary trade creates value simply as a side effect of the process. A hungry person doesn’t value water very highly, in the same way that a thirsty person doesn’t

What Is ‘the Economy’?


highly value food. But when they exchange their food and the water they each end up with objects they do value highly and therefore the exchange has created value. Of course, it gets a lot more complicated than this in real life, where our value judgements will also factor in things like what information we have (a food truck is arriving soon) and our knowledge of how our values might change in the future (it’s going to get very hot and we’ll want water then). Actions decide who gets what One way of viewing economic activity is that it is a way of ‘allocating’ things of value to people. Indeed, economists will often talk about the allocation of resources. Exactly how this allocation happens is a direct result of the kind of economic system an economy decides to follow. Some of that allocation may be ‘automatic’ as the result of people making choices (like Smith’s invisible hand), and some of it will be decided by the government. What allocation looks like is a big theme of economic study. As well as being defined by the economic system that is followed, it is in large part a discussion of what is considered fair or not in an economy. What this allocation ends up looking like is what economists called income distribution, and when money ends up going in large volumes to one particular spot it’s called an accumulation of wealth. Actions mean value is moving around Once actions are happening with things of value, you’ve got the basis of an economy. As we start to get a picture of all these actions taking place, we can begin to see that value is beginning to flow around the economy. Part of getting a clearer picture of how an economy works is to visualize where exactly these flows of value are happening. Of course, that’s easier said than done. Flows – or chains of economic activity – get really complex. Let’s take a silly but perfectly plausible example to demonstrate our point. At some point in your life you’ve probably decided to exchange a £1 coin for a bag of crisps. Simple. But £1 you swapped for the crisps didn’t stop moving there, it went on to pay bills the shop-owner had, including the wages of their staff. Those staff then used it to pay  for things like their taxes, which in turn might have paid for an upgrade to the road on which the shop selling crisps was located or perhaps a smidge of their country’s membership to the World Bank. That World Bank smidge might have then been lent out as part of a much chunkier smidge of money to a water purification programme in another country. That water might be given to members of a community who grow potatoes which are then purchased by the world’s biggest crisp manufacturer to turn into another packet of crisps. . . . OK, you get the point.


What Is the Economy?

It is this complexity which can make a sense of ‘grasping’ the economy quite difficult. But the important point to remember is that every action we take has a cause and every action has an effect. All mashed up together, actions are what keeps the economy spinning along.  Actions happen thanks to information  Information in economics is really quite as simple as it sounds (no trick definitions here!). It’s important because it helps you make decisions. Economists say that when we know everything we could or should about something, we have perfect information. Take a price for example. This is probably the most prominent piece of information you’ll find in an economy; they’re everywhere and they signal whether you can afford to buy something, how much it costs to make, if it‘s in high demand or perhaps short supply. All in all there is a lot of information wrapped up in a single price. And if that price were to change? Well, that’s a piece of information too. An increasing price might indicate that the item is becoming rarer, harder to make or perhaps in even shorter supply. You might therefore buy more or less. And what about if a whole load of prices began changing at once? Information at this level is seen daily in the stock markets, and it is this information on which vast sums of money are traded at the drop of a hat. So information is not just present in an economy, it drives a lot of economic activity. That’s why economists talk about information a lot, and we will talk about it more too, in Chapter 5.

Can we reduce all behaviour to a transaction? We can see that economics primarily views life as a bunch of actions interacting with each other – that is to say life is transactional. Even more niche economics schools broadly adopt this view of the world (feminist economics highlights the invisible transactions taking place in the home, environmentalist transactions regarding the environment). But to acknowledge that intangible things like friendship can be transactional (say when we cash in on an owed favour) does not mean we need to reduce these things to only being transactional. Instead they merely have a transactional element. The point is that while most of the things we do can exist outside of an economic paradigm, many of them can be viewed through an economic lens. So while economics is quite literally everywhere, it’s not everything.

What Is ‘the Economy’?


The limits we face or create As humans just going about our daily life we constantly face limits. Some of these limits are imposed by non-human entities like Mother Nature or the laws of physics. Examples would be how much oil there is in the world or how many hours of sunlight in a day. Other limits have been imposed by us humans. These include the amount of time we (are supposed to) work in a week or the minimum amount of money we can pay someone for an hour’s work. Limited resources can also be categorized into renewable and non-renewable. It might seem counterintuitive to describe a renewable source as limited, but how much we can produce of them is ultimately constricted by things like production capacity, time and energy. It is limits which create what economics refers to as scarcity. One of the key questions at the heart of economics is how we square potentially unlimited wants with a limited supply. Traditionally, thinking around scarcity was mainly focused on what is sometimes called the extractive economy (one that continually extracts limited raw materials from nature). While these sorts of limits are still relevant, these days many economists are shifting their focus away from the amount of raw materials we have and looking instead at our planetary boundaries (such as how much carbon we can release into the atmosphere before we cause irreversible changes to our ecosystems) and the limits of human potential. Economies have tended to see non-human limits as challenges to overcome. Human progress, especially via the creation of new technologies, is often focused on either pushing them backwards (think of increasing human life expectancies) or creating more value from within the same limits (e.g. genetically modified crops that contain more nutrients per plant). But a question we need to keep asking ourselves is how far we can go. Will we be able to keep creating more and more value from what we have available to us or will there be a peak realization of human possibility? And if the latter is true, are we approaching it now? When it comes to human-created limits the story is somewhat different: these limits are intentionally imposed in order to align economies with society’s values – that certain prices are too expensive, say, or that certain standards are too lax. Unsurprisingly, this makes them a hotbed of debate, discussion and change. Our society’s human-created limits are very different today compared to a 100 years ago, and 100 years in the future we’d expect them to be very different again. The small print: Rules We are all governed by written and unwritten rules, including when it comes to our economy. From formal laws that say we have the right to own property to the unspoken agreement that if we hoover our partner dusts, rules lay out the way in which we do all the stuff that makes up our economy.


What Is the Economy?

Generally, this is a good thing! If you tried playing a game without rules, you can imagine how quickly it would descend into chaos where nothing makes much sense or holds much purpose. Laws, agreements, social constructs and power dynamics keep things running smoothly. They guide our behaviour to that which is socially acceptable or fair. Without them humans can – wittingly or not – take advantage of one another, or our ungoverned actions can have some unintended consequences (economists call these externalities, which we will explore later). But that doesn’t mean that the rules can never be harmful or that they should be static and not up for debate. The most obvious rules: Laws Laws are the most official and constrictive type of rule that can affect an economy, as breaking them can land you in prison. Examples of economic laws include the right to own property and be paid the minimum wage. Some are more subtly connected: laws on things like how many parks should exist within an urban area, or a minimum size for bedrooms, may not immediately strike you as ‘economic’, but they have a big effect on prices and levels of taxation. They therefore define what people can afford and what quality of life they might get to experience, which are both matters of economic importance. Policies More flexible than laws, economic policy is set by governments and the institutions it has delegated powers to, like central banks. Economic policy concerns things like levels of taxation, government budgets, interest rates and the amount of money in circulation. There are two main groups: monetary policy (controlling money) and fiscal policy (controlling how that money is taxed and then spent). The reason these things are policy rather than law is that governments need the ability to change them at short notice in response to whatever is currently happening in the country or world at large. It’s for this reason that you’ll often hear policy described as a ‘tool’: it’s not too dissimilar to taking a spanner to an engine and tweaking the moving parts. Nudges Nudging is a psychological concept that has been enthusiastically taken up by some economists and politicians. Nudges encourage us to take a certain course of action by playing on our psychological preferences. For example, most people love a discount, so saying a fine will be reduced if it’s paid early apparently makes ne‘er-do-wells more likely to settle up promptly. (In fact, this exact strategy was used by the UK government for fines related to people breaking coronavirus restrictions.) Other nudges include making the most desired outcome the default one

What Is ‘the Economy’?


– such as making organ donation opt-out rather than opt-in – or making preferred option more prominent, for example by placing healthy snacks near shop tills and cigarettes under the counter. Nudging is praised by those who see it as a way to get desirable outcomes without being heavy-handed or making people feel coerced. But it’s also seen as paternalistic and manipulative by some, while others think it won’t create real change in attitudes or long-term ‘good’ behaviour. The unwritten rules Beyond nudges are the truly unwritten rules of our economy. These exist as cultural norms, and the ‘punishment’ for breaking them is usually some form of social disapproval or ostracization. Despite its lack of officialness, that can be an incredibly effective tool for changing behaviour. Unwritten rules often govern economic exchanges that don’t involve money. Parents don’t (usually) present their adult children with a bill for raising them, but they may expect them to take care of them in their later years. (These sorts of arrangements are sometimes considered part of ‘the caring economy’.) Similarly, if a neighbour loans us a cup of sugar, it would be considered more ‘normal’ to reciprocate by inviting them over for dinner rather than giving them cash, despite the dinner option being ultimately more expensive and time-consuming, and therefore technically less economically ‘efficient’. How flexible are these rules? Clearly, all the types of rules that govern an economy can – and do – change. We do not have the same workplace laws or social conventions that our great-great-grandparents did. At the same time, the rules we live by can become so embedded into our culture and psyche that it can sometimes be difficult to even begin to imagine doing things differently. And, of course, opting out of following the rules as an individual is not always possible – you need mass agreement from the people around you too. That’s why it’s important to keep noticing the rules that govern our lives, to keep talking about them and to keep debating if they are helping or hindering our efforts to build the economy we want. Bringing it all together: Systems Everything we have discussed so far (our daily economic activity and the rules that govern it) combine to make an economic system. Economic systems can be large and interconnected (such as that of a country) or small and bounded (such as a barter system in an ancient village). Different systems are made up of different rules and handle different activities. Technology, population growth and globalization have resulted in huge interconnected and complex systems. Trying to understand all their moving parts can be mind-boggling.


What Is the Economy?

The design of an economic system doesn’t just decide what we end up with; it also decides how we end up with it. Systems can be quite different, depending on things like: ●●

●● ●●

The way we allocate resources (e.g. free market, planned, mixed, participatory or gift economies) Who owns the means to make things (e.g. capitalism or socialism) Political or religious beliefs (e.g. left wing, right wing, environmental, Buddhist or Islamic)

A major difference between various systems, then, is how they distribute wealth and power. So being mindful of how we go about designing our economic systems is crucial if we want to create an economy that works for all of us. Designing the right system While there isn’t universal agreement on what makes for a right or wrong economic system, it’s actually not that hard for humans to agree on what at least some of the outcomes of their economic system should be. Most of us are in favour of reducing poverty, improving health and increasing life spans, for example. Much more contentious is which methods our systems should employ to achieve those outcomes. People can strongly disagree which benefits and costs a particular system will produce. One way of testing how well a current economic system is working is to see how it performs in times of crisis. These periods tend to highlight the system’s strengths and weaknesses and inspire governments, communities and individuals to make improvements. That’s why we can often map big changes to our economic system to national emergencies. The NHS and the welfare state were set up in the UK in the aftermath of the Second World War. The financial system was overhauled after the 2008 crisis. The coronavirus pandemic is inspiring a rethink about everything from how we work to how we holiday. Another feature – and sometimes bug – of economic systems is that they dictate how economic decisions are made and therefore who gets a voice on how the economy is run. Systems are often a mix  Systems are often categorized into specific types (like in our list earlier) and directly compared against each other. You can find a lot of discussion about whether free markets or planned economies are best, for example. (If you’re not sure what these terms mean, we discuss them in Chapter 5.) But in the real world we often combine several different system types together. The UK has a largely free-market approach to many areas, including trade, housing and employment. But its healthcare and education system are centrally planned by the government.

What Is ‘the Economy’?


Systems need tools  Tools – also referred to as instruments – are the things we use to adjust or control our economic system. Examples include changing interest rates or altering the money supply, via something like quantitative easing. Tools are usually deployed to help economists and politicians achieve a previously set target, such as a certain inflation level or amount of economic growth. Economic tools tend to receive a lot of attention and news coverage. That can sometimes make them seem like they’re a large chunk of what an economy is, rather than a lever we use to change what an economy is. Think of tools as akin to the thermostat in your house. It has an important use in allowing you to maximize the comfort of your home, but it’s probably not top of your list when you think about what makes your home ‘homely’. Phenomena For all the criticism of the media describing economic systems as unwieldy beasts with a life of their own, there is some truth in the notion that economic systems result in strange and unplanned phenomena – even if it is usually humans that cause (and hopefully control) them. The most obvious examples we witness is that of inflation (prices going up). Other types of phenomena are crashes, slumps, recessions and depressions, all of which are names given to times when an economy is shrinking at a rate economists deem to be a problem. These things may just be an observation of what happens when humans go about their daily business (successfully or not), but their existence helps us see that economies might in some ways be greater than the sum of their parts. Where is the economy? Places and spaces Economic activity can happen anywhere and everywhere, so an economy exists in many different places, all of which are different shapes and sizes and often overlap or interconnect: ●● ●●






Homes – such as when you share skills or food with your housemates Groups and communities – perhaps trading clothes among friends or sharing spaces and resources Local – local economies might make use of local resources, agriculture or heritage Regional – some regions might have specific strengths or suffer from structural weaknesses like poor transport National – a country’s economy, probably the most common scale we refer to Blocs – nations might come together to form trading blocs like the European Union Global – the whole world makes up the global economy




What Is the Economy?

Inter-planetary – we’ve only recently started making forays into space, but we’re already exploring all sorts of non-Earth economic possibilities like new colonies or mining Virtual – economics can happen across great distance via virtual networks

You’ll notice that the rest of the chapters in this book are also organized into the main places that the economies with which you are most familiar exists: ●● ●● ●● ●● ●●

●● ●●


You (wherever you go, you’re in an economy) Your high street (shops and other businesses) Your home (how you live in it and how you pay for it) Your work (our livelihood and the education that gave it to us) Your money (and all the places it goes, from banks to governments to under the bed) Your society (and the communities, culture and institutions within it) Your government (from councils to departments to national governments) Your world (whether tourism, trade, sharing ideas or immigration)

One of the ideas we’re hoping to get across here is the changing sense of scale: from the individual economic actions you personally take to the billions of economic actions that are simultaneously happening around the globe at this very moment. Some economists are also trying to work out how to achieve economies of scale and the benefits of globalization while also protecting local economies that support communities and maintain a sense of social cohesion. Plenty of regions in the UK are familiar with the experience of weakening local economies, whether it be the loss of regional manufacturing or ‘cookie-cutter’ high streets and digital retail extracting profits from an area. The Preston Model is an example of such a project that wants to turn these experiences around, promoting local procurement. The idea is that business that can happen locally should. Permaculture is another long-standing movement embedded in the idea that the use of resources closer to home is preferable. Resources are zoned in order of preference and least impact on the environment, from your kitchen windowsill via your back garden and local farms to manufacturing from afar. Overall, some industries are naturally better suited to local supply chains than others. A locally made salad benefits from freshness, compared to a smartphone which benefits more from a global supply chain. Markets and industries A market is a place where buyers and sellers meet to trade goods and services. There are many different types of markets, some of which exist

What Is ‘the Economy’?


physically (such as farmers markets, shops and auctions) and some of which happen in the virtual realm (such as streaming services, online shopping and carbon emissions trading). Buyers and sellers can both be split into three main types: individuals, businesses and governments. Industries group certain businesses and individuals together based on their production of a similar type of good or service. Auto-mechanics, Audi and car washes are all part of the car industry, for example. Economics happens in different places, too Economics-the-conversation happens within different places too. From a chat around the family dinner table to a global summit of world leaders, discussions on an economy can take place anywhere. And that leads us onto our next subject: change. ‘In the long run, we’re all dead’ Nothing stays the same forever, and the economy is no exception. After all, our economies are tightly wound with our history and our politics. From the Suffragettes to Windrush, from Christopher Columbus to the Great Depression, every time our world changes our economies change with it. It’s not just large, era-defining events which change the economy either. The economy is constantly in flux, every second of every day. A hotter-than-normal weekend may lead to a spike in ice cream and trips to the beach. The timely discovery of a large new oil reserve may give a government some extra cash to spend on a new policy or project. When discussing changes to an economy, economists therefore talk about the short run and the long run. But what are some of the main forces of economic change? Politics and democracy Political parties implement policies, which all tinker with the economy to a lesser or greater extent. Different parties have different ideologies, so each time a new party comes to power, they will try to remould the economy to fit their own aims and beliefs. Some policies can be quite subtle or specific in their effect, to the extent that we may not really notice any difference to our everyday life. Others can be seismic. Examples of this include the stay-at-home orders issued by the British government in March 2020, which attempted to combat a pandemic by essentially shutting down most of the economy. Of course in a democracy, these parties and policies are in turn shaped by citizens and elections. Many of us contribute to what our economy looks like every time we cast a vote. Some of us also form pressure or lobby groups to advocate for specific interests.


What Is the Economy?

Grass-roots Organizations, movements, riots and revolutions Throughout history, some people who regarded their status quo as unacceptable have organized and attempted to change it. Many ended up leaving their mark on the economy in the process. Winning the vote for women doubled the number of people who got a say on which political party – and therefore which economic policies – would win power. Labour movements, including unions, fundamentally changed the way we work and the conditions we work in. Climate change marches led by activists like Greta Thunberg are now attempting to reshape the way we power our modern life. Conflict and war As with pandemics, wars often result in a host of new restrictions on everyday life and an increase in central planning from governments. As with natural disasters, various economic schemes to alleviate the suffering and destruction of conflict are frequently set up during or shortly after wars. Natural disasters Natural disasters change economies in dramatic (and usually disastrous) ways. They often destroy people’s homes, bankrupt the companies that provided their livelihood and put great strain on governments. Most people caught up in a natural disaster will therefore experience at least a short-term dip in economic well-being. In some places, especially poorer ones, the negative economic after-effects will linger for a long time. The government may not have the resources to rebuild what was lost, and because so many people’s finances were hit at once, it can be difficult for individuals and companies to find the money to kick-start the economy again. External sources of investment – such as tourists or foreign businesses – may consider the place too risky and stay away. However, this isn’t always the case. In fact, natural disasters can have economic silver linings. Communities and companies may come up with creative responses to the situation and therefore spur innovation and entrepreneurship. Where things need to be replaced, governments and citizens may take the opportunity to redesign the economy in a way that is more beneficial to people now and more resilient to similar shocks in the future. As long as there is money and resources with which to rebuild, there will be lots of new work and business opportunities linked to that rebuilding. That’s why it’s not uncommon for disaster-struck areas to see a subsequent boost to economic growth. Technology Technology is anything that helps us produce stuff quicker, easier or better (see Chapter 5 for more on this). It’s therefore unsurprising that technology is constantly altering how we work, live, buy stuff, handle money and much else related to our daily economic lives.

What Is ‘the Economy’?


Pandemics Like natural disasters, pandemics can suddenly and dramatically change an economy, and their effects can be felt long term. By its nature, stopping the spread of an infectious disease requires a community-level response and cannot be up to individual preference. Therefore, pandemics often see governments becoming much more heavily involved in the economy than they were before. During the COVID-19 pandemic, the nominally conservative UK government dictated which businesses were allowed to operate and paid a large chunk of the nation’s wages. Trends While less dramatic or noticeable than the aforementioned forces of change, trends build upon themselves and therefore push an economy to evolve. A trend towards automation, for example, will result in humans doing less and less of our traditional work tasks and machines running larger and larger chunks of our economy. While trends can always change or reverse direction, in general observing them helps us make reasonable predictions about where our economy might be heading. You You are a force for change. Yes, you. Through engaging with economic ideas and policy you can influence what the economy you live in looks like. From using your right to vote to educating yourself and joining discussion groups, your mind and voice have the power to make a difference. And when your mind and voice are used together with others then you have as much power to cause change as any other force we’ve mentioned earlier. The counterweight to change: The status quo Economic change is constant and inevitable, but that doesn’t mean it happens unchallenged. While as a species we humans can be incredibly creative and innovative, we often also hold a preference for the familiar and are happy to do things a certain way for no other reason than that is the way those things have always been done. Our attachment to the status quo is therefore part inertia and part fear of the unknown, and it can often be used – intentionally or unintentionally – as a barricade with which to stop, or at least slow down, some types of economic change. A just transition When big changes to economic rules and systems come about as the result of human endeavour, economists sometimes ask if what happened was a just transition. All economic actions and policies create winners and losers, so it follows that a large change to the economy will end up hurting some, even if it helps others. A just transition would


What Is the Economy?

acknowledge this and try to minimize both the amount and severity of the hurt. For example, imagine that a country suddenly decides to become vegan en masse. Without a just transition, all of the businesses and jobs associated with the dairy and meat industry would suddenly vanish, leaving lots of people in hardship. A just transition might give these people financial compensation or assistance retooling business and reskilling workers so they can switch over to vegan food production instead. Individual needs and wants We have already stated that incentives drive actions. Our individual underlying needs and wants are the propelling force behind all our economic activity. Collective needs and wants We do not live in a vacuum. Just as our needs and wants are driving our own choices, so are everybody else’s needs and wants driving their choices. And all these choices are interacting with and affecting each other. So we also need to talk about our collective needs and wants – as families, communities and societies. We also need to be able to make choices together. Democracy is the major forum we use for doing this collective decision making. By voting and debating and lobbying we come up with a set of shared economic priorities that dictate everything from which public services our area provides to how much tax we pay. Roles, values and circumstances From parent to policy maker. From investor to immigrant. From spender to saver to shopkeeper to swot-that-has-all-the-bright-ideas. Each of us play multiple roles within our economy. What these roles are dictated by our circumstances, and how we act within them is dictated by our values. There’s a lot more to say about needs, wants, roles, values and circumstances, but as we’re going to cover it in much more detail in Chapter 4, we’ll leave it here for now. That’s it. That’s an economy We’ve now laid out the foundations of an economy. Before we go on to explore the inner workings of one, it’s worth taking a moment to ask yourself if you now see anything differently. Can you notice any of the formerly invisible

What Is ‘the Economy’?


parts of the economy around you? Do you see value, power, systems, tools, values and what’s fair or unfair? The economy can be simple, but it shouldn’t be simplistic We’ve tried to show throughout this chapter that while the basic components of an economy are actually rather simple, the way in which these components interact can quickly become complex. It’s important to realize when talking about the economy that for every phenomenon you see, there will be some that you don’t. Things are connected in more ways than we often realize, and there are more layers to actions than might immediately be obvious. That’s why governments and economists are often cautious about making big sweeping changes, and it’s why we, too, should always be self-critical of any economic policy suggestion we put forward.

Skills: How can I have better conversations about the economy? Talking about the economy can be difficult. The subject is home to topics that deeply affect us all. Our economic experience can be wrapped up with generations of injustice that are still impactful today or situations that feel so profoundly terrible or unfair that talking about them is an emotional experience. That’s why as well as encouraging people to talk about the economy, we think it’s important to consider how we talk about the economy. How can we discuss controversial issues without things descending into a family spat or internet mudslinging? How do we build trust and respect? ●●


●● ●● ●● ●●

●● ●●


Seek to understand your assumptions, ask others to share theirs and then aim to see where each other are ‘coming from’. Make nuanced arguments and avoid polarizing extremes (and be aware that the format of internet sites like Twitter is particularly bad for this). Hold your own ideas to account, as much as those of others. Ask fair questions, and do your best to answer those put to you. Find reliable sources for your information, and ask the same of others. Allow yourself and others to be emotional, but don’t be disheartened if empathy isn’t returned. Don’t interpret questions about your opinions as criticisms. Explore finding agreement in the middle, instead of only proving one argument right or wrong. Show kindness to those you speak with.


What Is the Economy?

What makes a good conversation? Good conversation is crucial to good economics. Because the subject is never likely to be one of great agreement, we should instead all practice disagreeing well. The idea of disagreeing well promotes the idea of being specific about what we disagree and persisting to find the things on which we do agree. Many of the skills listed earlier are built on this principle, and the following diagram outlines how we may do this.

Action & Compromise

Good Conversation & ‘Disagreeing Well’

High Quality News & Information

Shared Vocabulary

Building good conversation from the ground up.

Spotting fake news As with many other topics, fake news is a problem in economics. Media outlets, governments and social media platforms do now appear to be waking up to the problem and making attempts to tackle it. But there are still things we should be doing ourselves to make sure that most of the information we consume is based in truth. It’s worth remembering that it’s much easier to be taken in by fake news when it is on a subject you don’t consider yourself an expert in – which for many of us includes economics. The solution is to approach everything we encounter with a healthy degree of skepticism, to seek out confirmation of the points made from other sources and to find authors and news sources we can trust. Just. Get. Talking. The single most important step towards a high-quality conversation about the economy is to start one. Down the pub with friends, on a walk with your family, at lunch with colleagues – these are all great places to ask questions, discuss ideas and share thoughts about the economy and what it means to you.

CChapter 3

What’s an economy for? Discussions on what the ‘goal’ of an economy should be aren‘t actually that common. Ask an economist what an economy ‘for’, and you might be met with a blank face. An economy quite often just is. Philosophers have these concepts of free will and determinism. Free will means our choices are genuine choices – we always had the possibility of taking a different path. Determinism means our choices are already set by some external force – such as a god or fate – and our lives could never have turned out any other way than the way they did. The reason we bring this up is because traditionally many economists have acted as though free will exists at an individual level but not at a collective one. Their logic is that a single person can freely choose to buy this or that or work here or there, but an economy, being the sum of billions of individual choices, has too many moving parts to be effectively directed by any one person or even group of people. Its outcomes are therefore determined by intangible and uncontrollable forces. Trying to force the economy to spit out specific results is therefore very difficult, if not impossible. These economists therefore often default to focusing on how well the economy as an entity is doing, rather than how well all the people that make up that economy are doing. That’s why they talk a lot about the size of the economy and often think we should put most of our efforts into making it grow. That’s not as heartless as it maybe sounds. Lots of economists think the unruly forces that decide what our economy does are generally pretty good at the job, and consequently that giving them a boost will result in lots of positive things like lower unemployment and higher standards of living. But not everyone agrees that this is the right way to go or even that the premise that the economy is uncontrollable is correct. These days, more and more economists are wondering if the reason we can’t determine our economic outcomes is because we’ve never really taken a step back and asked ourselves: (1) what we want those outcomes to be, and (2) whether


What Is the Economy?

the way our economy is currently designed helps or hinders those things from happening.

Current measures Measuring an economy is part of the field of economics known as macroeconomics (we’ll explain this shortly). Various different measurements are used, and some are more dominant than others. What does it mean for an economy to be doing well? Generally, economists will look at how many of people’s needs and wants are being met. The more people that are having more of their needs and wants met, the better the economy is considered to be doing. Importantly, this means an economy could be considered to be doing well even if some people are having very few of their wants and needs met, as long as they are a minority compared to the overall population. This is slightly different from what makes a good economy When economists say an economy is doing ‘well’ or ‘badly’, they’re talking about its outcomes. Has unemployment gone up or down? Does the average person have more or less wealth than they did ten years ago? But when they describe an economy itself as ‘good’ or ‘bad’, they’re talking about the design of the overall economy. Has it been structured in a way that makes it resilient to economic shocks? Is it more open or closed to the outside world? A ‘good’ economy can therefore be performing ‘badly’ at a certain point in time, and vice versa. How do journalists describe what’s going on in the economy? The problem with just describing an economy as good/bad or doing well/ badly is that these are very broad and subjective terms. So reports on the performance of an economy usually add in some numbers, with the idea that this will add some specificity and make it clearer what’s going on. In theory, numbers help us discuss the economy because they are objective and something we can all agree on. But numbers are often coupled with verbs and adjectives which give a positive or negative spin to the measurement in question, and that spin can be a question of opinion, not fact. So is there ever an ideal numerical outcome for the economy – an elusive goal that we should be striving towards? If so, what is it? Here are some examples of economic numbers and measurements we hear a lot in the news. Let’s see if we can find any clues.

What’s an Economy For? What you’ll hear


What it means

Why does it matter?

‘Growth forecasts have been cut to 1.3 per cent’

Economists have revised down their estimation of how much bigger the economy is going to get.

The size of an economy can have an effect on the number of people in work. But growth doesn’t always reflect lived experience, especially as many things – like housework or illegal activity – aren’t counted.a

‘Manufacturing is now about 1/4 of the UK economy’

A quarter of things that make money in the UK economy come from manufacturing businesses like car production lines, brick makers or bleach making companies.

Knowing the state of the jobs market and how it may be changing allows people to make decisions about their education, training and career choices.

‘The economic The economy was not Changes like this have a real impact downturn of 2008’ producing as much as it could, on our daily lives and can push some which will usually mean that of us into poverty. life got more expensive for most people. ‘Economic jitters Traders are responding to surge as £3 billion predictions about what is wiped off the stock about to happen in the world. market’

We may shrug our shoulders at headlines like this, but sometimes what traders do can end up having a real impact on jobs and prices.

‘Borrowing exceeding 8 per cent of national income’

How much debt a government is taking out compared to how much it gets in from things like taxes.

This type of measurement can be confusing because it is not on the human scale. But it’s important because more debt could be an indication that politicians will reduce spending on other things or raise taxes to pay the debt off.

‘Bank of England set to push QE to £1 trillion’

The UK’s central bank will create more money from nothing, probably because not ‘enough’ economic activity is happening.

Actions like this are about keeping inflation rates and prices stable over a longer term, because stable prices mean a more stable country.

‘Public revenues are depressed for the second year running’

For one reason or another, a government isn’t earning as much money from tax.

This could mean that a government has to borrow more money to meet its spending commitments or raise taxes.

‘UK economy shrinks by 3 per cent’

The total value of the things the UK is making is less than it was in a previous period, possibly because there is less demand.

Smaller economies often mean less spending, which can sometimes mean there is less work to go around, which may lead to unemployment.

‘A £300 million cut in government spending’

The government is reducing the amount of money it is spending on things like schools, police or roads.

Government spending is usually done to improve the lives of citizens. Sometimes spending cuts will have a direct impact on people’s lives.

‘The oil price slid to The average price of a barrel $30 a barrel’ of oil is falling, probably at a faster rate than usual.

We’ll probably notice big changes to the price of a core commodity like oil because we use it so much. It can also have a wider effect on other prices.


What Is the Economy?

What you’ll hear

What it means

‘The FTSE closed This is about how well big down three points’ companies are performing on the stock market as a group.

‘The closure of fifteen stores leading to the loss of 3,000 jobs’

Why does it matter? Stock markets are constantly in flux without people outside of that industry really noticing. However, a very big or sudden drop may mean job losses are coming.

A business decision has been Some people will lose their main made that will have an impact source of income – their job and on many people’s employment. finding another one might be difficult.

‘Lockdown to cost People are spending an Less spending in businesses can the economy £8bn average of £8bn less than they mean less work for staff, which can a day’ would have done under normal lead to unemployment. circumstances. ‘GDP has risen by Economic activity has 7 per cent, which is been different from what less than expected’ economists predicted, and fewer things of value have been created.

People make decisions based on economic predictions. When these predictions are wrong it can have consequences.

‘The economy is A country is creating more People are very interested in growth. growing at a rate of things of monetary value than That’s because it creates good things 15 per cent a year’ they were before. like jobs and more public services, as well as bad things like pollution and fossil fuel depletion. ‘Noticing a squeeze on standards of living as the average salary falls to £27,500’

It is generally getting more expensive to do basic things.

Some people may find making ends meet harder or even not be able to sustain a basic quality of life.

Interestingly, illegal drug sales are often included when a government measures the size of its economy, since they’re so significantly large. a

You may have noticed some common themes from these examples: ●● ●●


What the size of the economy is How many jobs there are compared to how many people are looking for them How valuable parts of the economy – particularly businesses and stocks – are

However, the following (important!) things are mentioned far less: ●●

How economic growth is distributed (who is benefiting and who is not?)

What’s an Economy For?

●● ●●


The quality and stability of those jobs The effect that the state of businesses and stock markets will have on our day-to-day life or the cost of living

Why is that? Well, sometimes these things can be hard to measure. Sometimes they can be measured but including them would add so much detail to the statement that it would get long-winded and confusing. Numbers don’t tell the whole story Numbers are important, and measurements like those in the previous table help us understand the economy. But numbers don’t tell the whole story. Here’s an example: when it comes to education, governments often look mainly at test scores. If test scores are going up, they conclude that education is getting better. But some teachers disagree with this assessment and say test scores show kids can pass specific exams but not whether they’re gaining a deeper and richer understanding of school topics. There’s therefore an argument that the numbers of the test scores should be supplemented with non-numerical factors such as teacher assessments. The problem with this sort of approach is that it can all get a bit wooly. Numbers are particularly good at bringing a specific clarity to economic policies that helps us figure out what we’re doing, if it’s going well and how it compares to any alternatives. That in turn helps people to hold governments and other key figures to account. But numbers can also cause confusion, and they can make discussions about the economy feel less approachable for many people. Economic numbers can be neutral and objective, but they can also be cherry-picked or based on assumptions rather than real-life data. They can therefore slant the way an economic issue is perceived. Furthermore, some say that peppering economics with so many numbers gives it an air of being scientific and unquestionable, which can then be used by advocates of specific economic policies to ward off challenges and shut down the sort of debate that might make the economy work better for more people. Of course no one is suggesting we ditch economic numbers entirely, you’ll be pleased (or perhaps not so pleased) to hear. But perhaps we should try to use maths carefully and to switch it up with non-numerical ways of understanding the economy from time to time. That should then stop us from over focusing on the economic stuff that can be easily measured at the expense of less-countable – but no less important – things. A big example of this is economic value, which is often thought about in terms of either money (very number-friendly) or well-being (less so).


What Is the Economy?

Which number would you choose? Imagine this: you turn on the TV and hear the leader of your country announcing that your nation has just achieved the biggest rise in a single statistic ever. They’re hopeful that the number will remain stable, and thanks to the last few years of their economic policies, they think it will do. What would you most like that statistic to be? Perhaps it’s the number of jobs available or the average wage. Perhaps it’s the number of schools built, police officers hired or people who have switched to a vegan diet. Whatever you pick, try to think of a realistic measurement that would indicate a fundamental success in the world you would like to see. If picking the target seems easy, the more challenging thing may be to come up with what the policies needed to achieve it would be, and – more challenging still – how you could convince others to support them in the first place.

GDP is the magic number (for economists) Of all the numbers and measurements associated with the economy, the one that comes up the most is gross domestic product, or GDP. GDP measures the monetary value of all the goods and services an economy produces in a period of time (usually a year). The more doctors and doughnuts your country has, the higher its GDP. Economists like GDP because it gives us lots of useful information. It tells us how big an economy is and how much activity is happening inside it. It can also give us an indication of how much we are producing, whether we are doing much work and whether or not we’re spending very much. Per capita  It’s very common to hear the words ‘per capita’ tacked onto the end of a GDP figure. Per capita means per person, so GDP per capita is the all that goods and services value divided by the population. It’s how rich we’d all be if we took all the income of our country and divided it equally. Of course that’s not actually how we do things, so GDP per capita isn’t a great indicator of how much money a random person picked from a place will have. What it is good for is comparing different places. Obviously some countries are much larger than others, and the bigger a place is, the easier it is to have a big GDP. You have more people to be workers, more space to build factories and shops in, more resources to turn into products. Just comparing GDPs can therefore hide interesting patterns. For example, the United States has had the largest GDP in the world for years. It was $20 trillion in 2018, which was equivalent to almost a quarter of the entire world’s GDP. But when it comes to GDP per capita, the vastly smaller economies of Ireland, Switzerland and Singapore are among the

What’s an Economy For?


dozen or so countries that all have higher figures than that of the United States. Which would you consider richer? How did we end up with GDP? GDP was invented by a guy called Simon Kuznets in 1930s America. The country was going through the Great Depression (a really severe economic downturn) and it was decided that if policy makers were to have any chance of fixing the economy they first needed to understand what it looked like: what stuff was it producing, and how much of it? Large-scale measurements of economies weren’t new – rulers had done things like censuses to work out how much tax they were owed – but Kuznets was the first person to start monitoring all of a country’s spending in the hope that the data could be used to improve the economy. He did not, however, foresee how dominant his invention would become. We can also guess that Kuznets wouldn’t actually be too happy to know that increasing GDP has become a key economic goal. In the work that introduced the concept, he wrote that ‘the welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP. . . . Goals for “more” growth should specify of what and for what’. Does high GDP = a good economy? GDP isn’t the only way economists measure how well an economy is doing, but it is the most common, and it is probably given more importance than any other indicator. Why? The Chief Economist at the Treasury (probably the most important economist within the government) says that GDP sticks for the simple reason it is so reliably correlated with outcomes we like. Care about the environment? High GDP countries have cleaner environments. Want education? High GDP countries have better educational attainment. Passionate about healthcare? Same story. Increasing GDP, after all, means a country is getting richer and that means there’s more money around which people can spend meeting their needs and wants. But that may not be the whole story. The Easterlin Paradox contends that although initial rises in a developing country’s GDP correlate with selfreported improvements in well-being, beyond a certain point it stops. Why? There are a number of things GDP doesn’t tell us Firstly, perhaps the most common criticism of GDP is that although it’s frequently used as a shorthand for how well an economy is doing, it misses out loads of the information we would need to make that judgement. In particular: ●● ●● ●●

GDP ignores economic inequality. GDP ignores non-monetary economic activity. GDP doesn’t differentiate between desirable and undesirable economic activity.


What Is the Economy?

GDP tracks an increase in riches. But it doesn’t track where those riches end up. You probably share most people’s opinion that an economy which shares its wealth out is better than one where money ends up in the pockets of a few rich individuals while most of the population live in perpetual poverty. But just looking at its GDP figures will tell you nothing about how economically equal a place is. That calls into question how much we can use it as a barometer of how well an economy is doing. Secondly, because GDP counts up the money-value of goods and services, it doesn’t capture lots of economic activity that is unpaid but considered essential to keeping the economy growing or even just functioning. Volunteering and work in the home are big examples. Thirdly, GDP doesn’t discriminate between the types of economic activity we want to encourage and types we want to minimize. Two economies that were preparing for war could see their GDP spike as they ramped up their bomb, gun and chemical weapon manufacturing, but you probably wouldn’t be very keen to live in either of those economies. The problem is that GDP considers only one type of value – the monetary cost of something – when in reality humans value so much more. One area where it’s really easy to see this is the environment. Think about the pros and cons of building a new factory near your home, for example. You probably came up with some money-value pros (creating stuff we want to own or more jobs) and some non-money-value cons (dirty air, noise, greenhouse gases). In GDP terms, though, there are only pros. As the journalist David Pilling once wrote in The Financial Times: ‘GDP likes pollution, particularly if you have to spend money clearing it up.’ Alternatives to GDP Because the shortcomings of GDP have been understood for years, several alternative measures have been developed. None of them have quite achieved the fame of GDP itself, though. One such alternative is the Human Development Index (HDI), which was created by the UN in the 1990s. Economists had long been measuring various basic ‘quality of life’ indicators, such as infant mortality rates, life expectancy and access to education. The HDI collected together a bunch of these indicators and standardized them. Another offering is the Inclusive Development Index, which is measured by the World Economic Forum. One of the economic measurements it puts a lot of weight on is intergenerational equity, including whether current generations are leaving enough resources for future ones. Then there is the General Progress Indicator (GPI). Similar to GDP, it measures growth but tries to mitigate against its criticisms via things like weighting people’s spending according to their income, adding up all the things without a price tag that contribute to welfare and accounting for the deterioration of natural resources.

What’s an Economy For?


In 1972, the country of Bhutan became famous for replacing GDP with Gross National Happiness. At the time this was seen as a bit of a quirky outlier – after all, happiness is subjective and therefore difficult to measure – but in more recent years the idea that we should be focusing on people’s well-being has caught on. Well-known economists such as Joseph Stiglitz and Amartya Sen turned their attention to developing wellness measurements some time ago, and like many other countries the UK government now routinely measures a rich set of data in its Measures of National Wellbeing Dashboard. Among these different models, there can be some interesting variations in what types of things count towards well-being. Bhutan’s, for example, includes participation in traditional cultural activities. The UK also looks at involvement in the arts but not specifically traditional, home-grown ones. (Presumably they didn’t think a lot more Morris dancing would lift the nation’s spirits all that much.) At the other end of the scale, the economist Arthur Okun created The Misery Index, which focuses mainly on unemployment rates and rises in prices. His work has been criticized, however, for putting equal emphasis on both measures, when in reality most people are a lot more unhappy about losing their job than the stuff in shops being slightly more expensive. All these alternatives to GDP share a common problem, however: it’s much less clear what manipulates them, which means it’s much more difficult to create policies that will improve a country’s ‘score’. That’s partly because many of them include things, like happiness, that are hard to define and measure. Whereas economists have a well-tuned toolkit of things to tweak GDP, they’re less skilled in tweaking people’s happiness. However, that might not always be the case. These days, we live in a world of big data, which opens up new possibilities for how we measure and understand the world around us. Economists can use technology to look at things like mobile phone usage, how many lights are turned on at night, public transport journeys and satellite images and crunch all that information together in a computer to create a much richer and more detailed picture of economic activity. How all this data might change the way we measure economies remains to be seen. Of course, economists getting creative with their economic measurements is only half of the equation. For GDP to be displaced as our main metric of economic success, politicians, media and ordinary people would also have to start talking more about different types of measurements.

What else could we prioritize? One thing that should be becoming clear is that whatever numbers and metrics we use to measure an economy, they should be chosen carefully to align with whatever our underlying priorities for the economy are. It should be those priorities that determine what we measure, not the other way around.


What Is the Economy?

So what should we prioritize and which numbers should we then use to measure it? There may be no consensus on what the goal of the economy should be, but there are certainly plenty of ideas. Surviving and thriving At their base, economies are about meeting our needs and then subsequently about meeting our wants if time, resources and power allow. In other words, economies should be designed to help us to survive and – hopefully – to thrive. While broad, surviving and thriving can offer a reliable anchor to return to if feeling a little lost when we ask ourselves: what is an economy for? Making sure everyone has a job A basic goal of an economy might be to make sure that everyone who wants a job has a job. (Well, almost everyone – something called frictional unemployment means completely full employment is pretty much impossible. See Chapter 7.) That’s because in general an economy with high levels of unemployment is regarded as not very healthy. There are several reasons for this assumption. Work not only creates income that people can spend on maintaining their needs and well-being, but it also creates the outputs (food, health services, police on the streets) that are needed to maintain that well-being. Fewer people working should therefore correlate to less stuff being produced in an economy, and production is associated with economic growth and a higher standard of living. Then there’s cultural expectations: many people regard work as a good thing in and of itself, a way for individuals to provide for their families and contribute to society. Then again, not everyone agrees that a targeted focus on employment is a particularly worthwhile economic goal. Thanks to modern technology and automation, it’s no longer true that large swathes of the population need to work for our species to survive or even for our species to have Xboxes and iPhones and Jimmy Choos. Working also isn’t the only way people could meet their needs. One alternative is universal basic income, which is basically strings-free money from the government. As long as your needs and wants are being met, there are plenty of benefits to unemployment. It gives individuals more time for leisure or getting involved in their community, for example. Alongside this, there are all sorts of other reasons people might be okay with more unemployment. Some environmentalists think we need to produce much, much less to save the planet. Some economists see unemployment as an important economic motivation to work hard or change up your skillset to match industry changes. Others think we need to switch our attention from job quantity to job quality. They’d like our economic goals to be centred around

What’s an Economy For?


things like worker satisfaction and the kind of work society feels it should be focusing on, rather than how many people have a job. Straight up growth Larger economies are generally considered a good thing. There are strong correlations between the size of an economy and how many of its inhabitants are fed, educated and generally safe. That’s why a lot of economists highlight economic growth as a priority. Growth is measured by changes in GDP. As we explored earlier, growth at a national level does not always mean equal improvement for all individuals, and it can lead us to value things that have large negative impacts, particularly to the environment. That’s why there’s a growing call, especially from younger people, to abandon economic growth as a measure of success. Some people think that’s an overreaction, and that the trick is to be more specific about which types of growth we measure and try to increase. It’s important to note that growth doesn’t always mean a physical product is being created, only that money-based value is. Services can contribute to growth, as can recycled or upcycled stuff. While our current consumer habits make it difficult to decouple growth from extracting more stuff from the planet, the two don’t technically have to be linked. Maintaining the planet According to the WWF, a conservation organization, humans are currently using resources as though we have 1.5 Planet Earths to take them from (spoiler alert: we don’t). Sticking to our current rate of economic growth means this ‘ecological overshoot’ will get worse. We have two choices: either stop the growth or radically change how we achieve it. That’s why some people have started to talk of a ‘post-growth’ world, by which they mean one that is sustainable. Really well-designed postgrowth economies can even be regenerative, undoing the damage that an unsustainable model has done over time. These days, the idea of sustainability is everywhere. More and more individuals are adopting sustainable lifestyles, and more and more governments are trying to factor sustainability into their policies. There are also sustainable organizations that lobby against ‘productivism’ – the culture of making things – that is embedded into many modern economies. To be sustainable, we need to reduce our collective demand for stuff. One way to do that is through efficiency gains (doing more with less). A more efficient factory could make a product faster and therefore release less CO2 while making it, for example. However, in a culture like ours that still prioritizes growth, efficiency gains are often reinvested into yet more


What Is the Economy?

consumption. Making a product faster might just encourage that factory to make more products, meaning their overall carbon emissions won’t decrease. So being sustainable might be about not just changing how we do things but changing how much we do things. This is where the idea of degrowth – deliberately producing less stuff – comes in. One quite radical degrowth approach that’s being increasingly discussed is cutting down the number of hours that make up a ‘normal’ working week. Another example is the introduction of ‘right to repair’ laws, which force manufacturers to make it easy to repair their goods if and when they break. The degrowth movement gets plenty of criticism, including from people who are fans of sustainability. They say that sustainability does not need to equal less growth, and that degrowing an economy will lead to mass unemployment.

Unsustainable/ degenerative


Regenerative (eg. rewilding)

Why stop at being sustainable?

Maintaining people’s well-being Pretty much everyone agrees that well-being is important, and that a good economy will improve the well-being of its inhabitants. The problem is that well-being is very tricky to measure and also very subjective. That’s why many economists, including the Chief Economist of the UK Treasury, still default to using GDP and economic growth as a substitute, on the basis that the two concepts are roughly correlated. As we’ve mentioned throughout this chapter, however, that correlation isn’t as tight as it could be, so economists have become increasingly interested in how we can measure well-being directly. Some of the ideas they’ve come up with include measuring life expectancy, reported happiness, access to education, absolute poverty and homelessness. Together, these statistics can give us a picture of overall well-being and provide data to politicians who can then try and improve these figures. Ensuring everyone has equal chances in life The idea of treating everybody in an economy exactly the same is known as equality. The idea of treating people differently depending on their needs is known as equity. Both ideas are about making economies fairer.

What’s an Economy For?


Economic systems that are designed with fairness in mind often concentrate on sharing out two key things of value: wealth and opportunity. There’s no strong consensus on which of these two should be prioritized. Does being equal mean everybody having the same wealth or just the same opportunities? One common tool that nations use to achieve a level of equity are taxes that are higher for wealthier people and businesses. The idea is to make it harder for wealth to accumulate in any one place. Another way societies might try to achieve greater equality is to look at how representative workplaces or governing bodies are in terms of gender, race and social background, and implement policies to improve the chances of underrepresented groups reaching these places. Keeping everything in equilibrium There is sometimes talk of the ideal economy being one of balance. This may include a government with balanced budgets, reducing debt and the ‘right’ level of public spending, and the idea that markets that are largely left to their own devices will naturally tend towards equilibrium. An economy that is designed to be balanced will probably have smaller governments, with fewer public services and ownership, and more powerful markets. However, the important thing to remember is that there is no ‘natural’ way for economies to be, so balance is as subjective an economic goal as any other aim on this list. Protecting ourselves from future disasters The modern world is facing an increase in natural disasters, pandemics and disruptive technology, and that increases the need for its economies to be resilient. A resilient economy isn’t shaken by huge economic shocks. Its people are able to maintain their income and livelihood, and things like education, research and healthcare do not experience largescale disruption. Resilience usually comes from good planning and preparation for unexpected events. It needs economists, officials and communities to work together to spot and mitigate against disaster. Unfortunately, it is often the case that no one sees the weaknesses in an economy until the worse has already happened (something we saw during both the 2008 financial crisis and the 2020 coronavirus pandemic). Some people think the smaller your economy is, the easier it is to make it resilient, and people should therefore focus their attention on their local economy rather than being reliant on a global system. Others point out that being that insular carries its own risks – you may struggle to get additional help during disasters if no one outside your community has a stake in your success.


What Is the Economy?

All of the above? Many of these economic goals aren’t mutually exclusive. Indeed, you probably thought while reading through that several of them would be good goals for your economy. So there’s value in citizens, economists and governments trying to work towards achieving all of these ideas of a successful economy. At the same time, it’s worth thinking about which ones we would prioritize if we had to.

The ends versus the means There’s a difference between us agreeing what the outcomes of a system should be (i.e. that we should have a certain level of fairness or equity) and agreeing what system we should use to get there (e.g. being more conservative or socialist or something else entirely). Both aspects are influenced by the individual values and experiences we each hold. That means that unfortunately it is inevitable that some people will always disagree with each other. However, one of the main ways discussions become disconnected is when a disagreement over the fairness of a method leads people to believe that they disagree on the fairness of a desired outcome when the latter disagreement often doesn’t actually exist. Almost everybody, for example, wants to live in a society where every child has enough to eat. We just disagree about the best way to achieve this goal. In other words, a lot of time in politics and economics is spent arguing about the how rather than the what. That’s why an accurate economic language that supports us all in sharing our views and listening to those of others could be so effective – not because we won’t always disagree but because we often don’t realize how much we do agree and therefore have a shared foundation to build off. Why metrics matter If we take a deeper look at how systems work then we can see that while having good measurements is helpful for observing what’s currently going on, it’s not the most effective way to make changes. Unless we specifically stipulate a goal and create a plan to move towards it, measuring alone won’t achieve anything beyond revealing just how much (or little) of something we’re already doing. The key is to effectively change structures and systems so that the decisions which are made at every level all contribute towards the desired outcome. In the UK, The Green Book that is used by the Treasury is a great example of how this (at least supposedly) works in practice. The

What’s an Economy For?


Green Book is a formal document that leaders at every level are supposed to bear in mind for every decision they make. It basically lays out how to work out the costs and benefits of any action and asks decision makers to evaluate both before doing anything. This document is perhaps the closest thing we have to codifying our goals in an economy in the UK.


CChapter 4

You (and everybody else) We’ve already said it: you are the economy. Well, you and everybody else. From the choices we make to the place we are born, from the values we grow up with to the needs that we want met, we, and our actions, are the very fabric of the economy. We affect the economy as much as it affects us. So how do we play our part in it, and what do economists know about us?

Micro versus macro Before they start studying an economy, economists choose how close or far away to observe it from. It’s this idea of perspective that divides economics into the two fields of microeconomics (the activity of individuals) and macroeconomics (the activity of everyone). The division is not perfectly neat, and many topics overlap. But the broad distinction is important. Observing individuals won’t always give you a good idea of what’s happening at a societal scale, and observing what’s going on in the economy as a whole may not tell you much about individual people or markets. Microeconomics Microeconomics takes a bottom-up approach to understanding the economy by studying individual decisions and behaviour. Microeconomists observe everything from how and why you make choices to all the buying and selling that takes place in different markets. Macroeconomics Macroeconomics takes a top-down approach to understanding the economy. It studies the decisions and behaviour of countries and governments. Macroeconomists prioritize the whole picture, rather than just adding up all the parts. For example, you can’t understand tax by just


What Is the Economy?

looking at individual tax receipts. Instead, you need to look at collective tax revenue and how different tax rates affect a country as a whole.

The different roles you play The biggest part of any economy is us. And as humans we don’t play just one role in our economy. Instead, we wear several hats throughout our life – sometimes at the same time! From cheese-buyer to cheese-maker, cheese-investor or cheese-regulator, the things we value (tasty cheese, a reliable supply of cheese, profitable cheese and safe cheese), the actions we decide to take (spending on cheese, producing cheese, investing in cheese, policy making around cheese) and how big a fan of any particular policy we are (tax-free cheese, zero tariff export cheese, government mandated eating of cheese), all change depending on the particular role we are playing in the economy on any given day, hour or even minute. Whether we are aware of it or not, these various economic hats all come with different driving forces and responsibilities. Our actions as, say, a small business owner might be quite different to those of an employee at a large company. Take interest rates. It may sound dry, but it makes a big difference to how much money we have or spend, so how high or low we’d like it to be will probably be quite different when we’re a saver compared to when we’re a borrower. So whatever they are, the different roles we play in the economy will ultimately define the choices we make within it. The economy at every stage of your life With each year comes a new part of your journey in an economy. From your first savings account to leaving the family home, getting your first job, getting into (and hopefully out of) debt and voting based on levels of taxation, your life will weave its own path through the economy. It can be hard to imagine how you are linked to the economy at any one moment, but a simple exercise you can undertake is to ask yourself the following question: what if everyone did what I did? Imagining everybody making the same decisions, doing the same job and spending the same money as you do right now makes the world look quite different – suddenly your impact on it and its impact on you can reveal itself, no matter what stage of your life you are at. ‘Multiple self’ problem It’s obvious that different economic positions come with different economic preferences. An airline CEO looking to grow their business and a citizen living near a busy airport will probably have different views on

You (and Everybody Else)


whether a new runway should be built there. What makes things a bit less straightforward is that people often hold multiple economic roles at the same time, and these roles can come with conflicting preferences. If that airport CEO also lived near the airport, they’d presumably still find the extra traffic and noise of another runway annoying even if it was good for their business. This type of conflict leads to something economists call the multiple self problem. It comes up a lot. As employees, we might want to keep as much of our income as possible and therefore dislike taxes, but as citizens we might expect a bunch of public services that are paid for by those taxes. Our worker selves might want to prevent our jobs being shipped overseas while our shopper selves simultaneously enjoy the lower prices that outsourcing brings. A parent investing some savings for their child’s future could be drawn to an account with the highest returns (extra money earned as interest) at the same time as the environmentalist part of them decries that the money is being invested in non-sustainable businesses. The multiple self problem is why it can be so hard to figure out what decisions people will make or which policies they will prefer. Just like us, our economic choices are complicated and a mishmash of different values and preferences. Economists call people ‘agents’ When an economist thinks about the different roles people play in an economy, they (in the pursuit of simplifying that complex web) think of people as economic agents. In the type of economies we are most familiar with today – with a mix of private and government activity – economists put agents into three groups: ●● ●● ●●

Households (made up of a single or several individuals) Businesses (more commonly called firms by economists) Governments

This method of labelling people – or groups of people – can sound a little clinical. Referring to humans as ‘households’ and so forth is a good example of the way some economic language can obscure the real human stories which an economy is made up of. On the other hand, this sort of grouping helps simplify all those billions of economic actions in a way that makes them easier to model and study. Agents all interact with each other. Households spend money (consume) with the wages they earned from firms that made money (profit) from the households spending. Both households and firms are taxed by governments which redistribute their income to other households and firms (and so on). This flow of money is demonstrated in this diagram


What Is the Economy?

Figure 2  The circular flow of income.

known as the circular flow of income. Economists have used this simple model for years to observe the general flow of money between agents in the economy (Figure 2).  One of the biggest criticisms of this model of economic activity is that it misses way too much stuff out. Seeing households predominantly as consumers means it ignores some of the most important roles households play, including unpaid care work and involvement in the local community. The diagram also doesn’t reference big cultural institutions – like religion or marriage – that impact how money and activity flows around the economic system. For example, before the introduction of civil partnerships (and later same-sex marriage) in the UK, households headed by a heterosexual couple had access to forms of tax relief that gay couples did not. Economists who defend these sorts of models generally say that simplification is an important starting point that helps us understand complex systems, but that their simplification should be kept in mind when we’re using them to draw conclusions about how things really work. By now, you’re hopefully starting to get a picture of how economists have traditionally observed most of the flows of activity taking place within an economy. (They also have fancy equations which are supposed to show how you can balance all these flows and are designed to help businesses and governments make decisions about things like tax levels or shop prices, but we won’t go into that here.)

You (and Everybody Else)


How am I part of the economy? Every role we play will have an impact on what the economy looks like, although clearly some roles are more influential than others. We’ve listed some of the main ones here, and we’re willing to bet that you’ll see yourself in quite a few of them. Hopefully it will serve as a reminder that no matter how disconnected you may feel from an economy, you are very much part of it: Role

What’s it got to do with the economy?


Pushes for changes in how an economy works. This could be a new social norm around recycling or a new law about how many women must serve on a company board


Stimulates the economy by spending the money they have been lent


Provides a service of great value to people in need. Unpaid caring by family members also reduces the pressure on public services (and the taxes that pay for it)


Alters what the economy looks like both by voting for the government that runs it and by making daily choices within it

Civil servant

Puts government policy into action

Community member

Provides a service of value to a local area, which is often uncounted in economic calculations


Spends their money at firms and therefore affects what these companies produce and how much their products cost. May also consume goods and services in other influential ways, for example by sharing items or growing their own food

Cultural and political leader

Influences big decisions that change the economy for millions of people


Hires people and decides where any company revenue goes (investing in a new product or giving staff raises, for example)


Comes up with innovative ideas that can shape how economies look for years to come


May offer each other things of economic value for free, such as helping someone move house or leaving them a large inheritance


Moves skills and culture around the world


By picking ideas and companies to lend financial and other types of support to, investors can end up influencing the direction an economy takes


Their appetite for risk will affect how much investment happens in different situations


Holds the power to decide what happens to things they own. These decisions can have small or really quite large impacts: a billionaire might decide to build a new hospital or school with the wealth they own


Their decision to make something is what allows people to have access to it


What Is the Economy?


What’s it got to do with the economy?


Takes money out of economic circulation in the now but may spend it later down the line


Holds a small bit of ownership in firms and can therefore influence how they are run. Households are often shareholders via things like their pension funds


Moves money from one area to another, and new businesses and jobs often pop up to cater to them


Produces the goods and services that firms sell. May also influence employment law and conditions via things like trade unions


Even if none of these roles related to you, by virtue of existing within a human society you would be part of an economy

We can also look at how two people fulfilling the same role might be regarded as different from one another. Let’s take workers as an example. Coal miners, chefs and CEOs are all workers, but the way their worker roles are regarded and rewarded within an economy can be very different. This sort of economic value that is placed on roles is not fixed. Indeed, it is constantly in flux. After Brexit, the UK government introduced an immigration policy that said most migrants who wished to work in the country would first need to secure a job that paid £30,000 or more a year. £30k is the average UK salary, so the government was sending a clear signal that it thought higher-paid workers contributed more to an economy. However, during the 2020 coronavirus pandemic the UK created a category of ‘key workers’ who it said the economy could not do without. Many of these roles, including nurses, supermarket cashiers and carers, routinely pay a lot less than £30,000 a year.

Your values At the heart of how we feel about economics is how we feel about the world. Questions such as ‘What’s the optimum number of working hours per week for peak productivity?’ are only relevant in a world where performance is valued. To those with fundamentally different priorities this might feel like the wrong question to ask. Our perspective on everything in an economy is shaped by the values we hold as individuals, cultures and societies. Being based on subjective, varying morals is one reason why we end up with different looking economic systems in different times and places. On one side of the globe a deep-rooted culture of sharing might turn people off free markets, while on the other side a strong emphasis on individual freedom might translate into an economic system that is underpinned by private ownership.

You (and Everybody Else)


A 2003 Pew poll found Americans are more likely than any other nation to believe that individual effort and control is the key to success (or failure). Almost 65 per cent agreed, with Canada not far behind at 64 per cent. But other than Japan, every other nation surveyed disagreed with the States. Instead, a majority of their citizens believed that ‘success in life is pretty much determined by forces outside our control’. Could this data explain the creation of the famous ‘American Dream’, a belief that fame and fortune is possible for everyone, despite very few achieving it in reality. Low odds and high stakes make sense in a world where individual success is a core value. It’s not just our core beliefs or the systems we live by that are shaped by our values, so too are the individual choices we make. From buying Fair Trade to buying British, our values shape our day-to-day transactions as much as they do the economic system we live in. That’s why to fully understand why any economy is the way it is, we must understand why we hold the values that we do. Say you ordered an Xbox from Amazon and by mistake you were sent two. Would you call customer services to let them know about the second one? And if you kept it what would you do with it? Keep it as a spare, sell it, share it, donate it? Such questions can reveal your position on a number of issues, from how much you respect (certain) rules to how you think wealth should be distributed. Do you care about Amazon? Jeff Bezos? His employees? Yourself? Do you think a single decision about an extra Xbox will have a small or large effect on other people? As this example shows, our values are interwoven into the myriad of choices we make every day. Beyond deciding what we might do with an extra games console, they define what political party we vote for and which economic policies we choose to support. But what exactly are these values? Political theory notes two for their dominance: ●●


Freedom: everyone is different, and they should have the freedom to choose the things they want most. Equality: people should have access to the same things, no matter how much power or money they have.

In reality, both of these concepts are ideals that are hard to fully realize on any level. But we can strive towards them. However, it has often been noted that these two values seem to be fundamentally incompatible. The more freedom people have, the less equal things may be. The more strictly equal things are, the less freedom we may perceive we have. So economics and politics often become a constant tussle between these two values. Economics has attempted to solve this problem by speaking in terms of equity rather than equality. Equity is about finding fairness by


What Is the Economy?

tailoring policies to individual need, rather than strictly divvying everything up. But of course this comes with its own set of problems. Here is a table popular with psychologists which lists a series of values that we each hold in varying amounts. Look at each value and think what it might mean for the economy. Pick three that feel close to you, and imagine how an economy might look if these were the main values it perpetuated. You might find this task feels different when you have read more of this book and perhaps have a refreshed view of what the economy is. The more familiar you become with the economy around you, the harder it is to imagine that holding any of these values will not shape the economy significantly. Power Social power Authority Wealth Preserving my public image Social recognition

Self-direction Creativity Curious Freedom Choosing our own goals Independent Privacy

Tradition Devout Accepting one’s portion in life Humble Moderate Respect for tradition

Achievement Successful Capable Ambitious Influential Intelligent Self-respect

Universalism Protecting the environment A world of beauty Unity with nature Broad-minded Social justice Wisdom Equality A world of peace Inner harmony

Conformity Politeness Honouring parents and elders Self-discipline Obedient

Hedonism Pleasure Enjoying

Benevolence Helpful Honest Forgiving Loyal

Security Clean National security Social order Family security

Stimulation Daring A varied life An exciting life

Responsible True friendship A spiritual life Mature love Meaning in life

Reciprocation of favours Healthy Sense of belonging

Your values – and those of the society you live in – will permeate all levels of an economy, defining what is valued (does your society invest more in arts or science?), what rules are followed (does your society declare that parks are private or shared?) and what systems support them (are economic systems decentralized and easier to change or centralized and controlled by larger democratic processes?). But while it‘s easy to see how our values can affect every corner of every economy, economists don’t always spend much time talking about

You (and Everybody Else)


them. That’s because the current language of economics simply doesn’t have much room for our values, despite the fact that our values shape our views on many major economic topics. For example, value-based positions on immigration influenced Britain’s decision to leave the EU in 2016, an event that will significantly reshape the UK economy. Just as values can push people apart they can also bring them together. Research reveals that people with different political stances are more likely to agree with one another if they are shown they share the same values. (In contrast, giving people more facts about an issue rarely changes their minds.) When it comes to discussing what we want from our economy, then, we need to talk about not just the things we value (e.g. less or more immigration) but also the values that are underpinning those preferences (e.g. a sense of security or fairness). Because our personal values translate to wider social, cultural and political values, they end up aligning us with particular groups and movements. Liberalism, Conservatism, Collectivism and Individualism are all -isms that push for different economic ideas and are built on personal preferences of one way of being over another. This method of sorting ourselves according to our values gives many of us a sense of identity. It also increases the power we have to shape the economy according to our own preferences. A longer list of political movements and ideas encompassing personal and economic values include: ●● ●● ●● ●● ●● ●● ●● ●●

Community Society Rationalism Constitutionalism Multiculturalism Nationalism Fascism Anarchy

Markets are another important section of the economy which is shaped and influenced by personal values. The values held by consumers will affect what businesses sell and how they sell it. A growing concern for animal and worker welfare has led to the creation of ‘Fair Trade’ and ‘Free Range’ products, for example. Similarly, the regulation set by governments can be influenced by moral codes as much as business sense. Rules around genetically modified crops, designer babies or trade in human organs are not designed to maximize profit or satisfy an existing demand but to honour value-based ideas around safety, ‘Playing God’ and a general ‘ickiness’. Businesses themselves are also beholden to a set of values. Sometimes these are purposefully selected as part of the firm’s branding. The outdoor clothing company Patagonia is one such example. It is very deliberate


What Is the Economy?

about being environmentally friendly and anti-consumer culture doesn’t seek to maximize profits and encourages its customers to reuse items or buy them second hand. Other times the values that businesses display are unintentional; they may be a side effect of their policies or an extension of their senior staff’s personal beliefs. Intentional or not, business values clearly matter to societies, because they hit the headlines on a semi-regular basis. Stories of firm’s poor treatment of staff, philanthropic moves, tax avoidance or use of government schemes are often discussed in the media and by the public less in terms of what is legal than in terms of what is ‘right’, a subjective but undeniably value-based analysis of companies that can have plenty of economic consequences, from consumer boycotts to staff retention to new regulations.

Your circumstance There is no universal experience of living in an economy: everybody’s situation and reality are different. The country we live in, the education we receive, the things we may or may not inherit and the privileges that we do or do not have are all factors. Our race, gender, faith and other aspects of our identity all play a large role in how we engage with the economy around us. Your economic circumstances aren’t just about where you’re going but also about where you’ve come from. Where we are born matters, because local economic decisions – specifically budgets – have a large effect on people’s real-life opportunities. And this is true on a historical level as well as a personal one: the actions you can take in the economy are defined by the last century as much as by the last year. Circumstances also have a profound impact on the thing that could be said to alter our economic experience the most: how much money we have. How high our salary is will be influenced by what our parents did (or encouraged us to do), whether our education was disrupted from a young age and whether we left school in a recession. How much of our income we save will depend partly on how much financial literacy we were taught in school and how biologically prone we are to addictions that can make spending money very easy and saving it very hard. How wealthy we are will be at least somewhat down to what the housing market looked like in our twenties and whether our family is well-off and willing to help us out. These disparities are compounded by the fact that it’s harder to work your way out of being poor than it is to stay rich. Those who can only afford to buy smaller quantities of products at more regular intervals are not able to cash in on the savings of bulk buys. People on higher salaries

You (and Everybody Else)


are generally given lower interest rates when they borrow money. Our circumstances may even define how we value things, because prices feel different to people on different incomes. £500 goes from being a lot to a little depending on if you’re rich or poor. Our circumstances also affect the likelihood of us joining conversations about what the economy should look like, because our education and upbringing influence our ability and desire to engage with discussions about the policies that affect us. As we’ve said throughout this book, it is these conversations that ultimately shape what the economy is, so the fact that certain groups of people are much more likely to be shut out from them is concerning. Circumstances, in short, help or hinder our ability to achieve our economic wants and needs. The strength of this effect depends on a number of factors and is referred to as social mobility. We talk more about this in Chapter 9.

Your needs and wants Aristotle once said that value is derived from our needs. So it comes as no surprise that along with our wants, they drive a lot of economic activity. We wake up in the morning hungry, thirsty and perhaps a little dirty. We need food and water, and it would be nice to have a shower too. If we’re lucky, we slept in a warm room, in a secure house, with a roof that shielded us from the elements. Having access to all these things will almost certainly have required us to spend some of the money that we earned in anticipation of needing to meet our needs and wanting to meet our wants. In economics, a person’s needs and wants are said to be their preferences. But what is the difference between needs and wants? The distinction isn’t always clear. While we might have an instinctive feel for what is a need and what is a want for us personally, other people may disagree with our categorization. If you’ve ever tried to challenge someone craving a cigarette that they don’t in fact need one and instead merely want one, you know that you’d better do so from a safe distance. Adding to the complexity is the fact that there are several different ways to meet a need. Being hungry necessitates food but does it necessitate a Big Mac? Some economists, including those who subscribe to more traditional economic theories, say that there is no relevant distinction between a need and a want, because all economic activity is driven simply by the utility (satisfaction) it will give somebody. Other economists say a need is defined as something that is vital for survival whereas a want is something that is simply desired. If a person cannot meet any one of their needs then they will eventually suffer a loss of life, whereas going without all of our wants is possible, if not desirable.


What Is the Economy?

Where you sit on this debate is important, because it will inform how you think a society should share out things of value. As we mentioned at the start of this book, looking at the allocation of scarce resources has always been one of the main interests of the discipline of economics. Imagine a farmer who has a crop of wheat. Should the wheat be made into bread or beer? Bread is a staple foodstuff that many people still rely on to survive, whereas beer is generally used as a source of pleasure. Does that mean we should all give up beer for as long as there is still hunger in the world? Or is it okay to sometimes prioritize some people’s wants over other’s needs? Does it make a difference how much extra happiness a want like beer puts out into the world? There are no easy answers to these questions, but it’s certainly a conversation worth having, especially when it comes to economics. One of the most famous attempts to categorize needs and wants was the work of an American psychologist named Abraham Maslow. His hierarchy of needs, presented as a pyramid, layers human motivations from most to least essential for survival. Maslow actually named all the layers of his pyramid as needs, differing from the definition of a need as something necessary for life, but by layering them allows us to see how some needs may precede others. While this is just one way to look at our motivations – and Maslow’s work has had its fair share of criticisms since its creation in the 1940s – looking at his pyramid it is possible to picture what motivations lie behind most day-to-day economic activity and what kinds of things governments raise taxes to pay for. It may, too, raise some questions about our priorities in an economy or the level of freedom each of us has to reach the top of the famous pyramid (Figure 3).  Maslow may have highlighted that some wants may actually function more like needs, but that doesn’t mean that all our economic wants are anywhere close to the necessary. Indeed, an economist called Thorstein Veblen came up with the term conspicuous consumption to describe his observation that many people seem to enjoy spending money on expensive items purely because they are expensive. Designer brands are a good example of conspicuous consumption. No one buys a Chanel handbag because they have no other way of carrying around their belongings. They buy it because the Chanel brand is associated with status, style and exclusivity. Publicly displaying one’s wealth is hardly a new phenomenon – the pyramids are assumed to have been built to be the grandiose tombs of ancient Egyptian kings. But conspicuous consumption became much more widespread in the twentieth century when living standards began to rise and the middle classes began to have more disposable income. Veblen called them the ‘leisure class’ and, along with other economists, studied their purchases and behaviours in order to understand what motivated people to keep engaging in economic activity even after all their basic needs had been met.

You (and Everybody Else)


Figure 3  Maslow’s hierarchy of needs.

Further economic research suggested that it wasn’t just being wealthy that motivated conspicuous consumption. It was also the desire to show that one had moved from one social class to another. In other words, humans were purchasing bling in order to signal their greater social status. There is no consensus on whether conspicuous consumption, or indeed any other type of economic want, is a reasonable goal for individuals to pursue within an economy. Some people think we should be able to go after anything that makes us happy. Some people want us to check any economic wants that cause the depletion of the planet’s resources or increase global inequality. Some think that while certain wants are frivolous they are part of a system that allows other people to meet their basic needs. After all, the money spent on designer items creates thousands of jobs designing, making, transporting and selling them. What is clear is that the line between needs and wants is blurry, and the question of which needs and wants economies should prioritize is hotly contended.

Your choices Your values, circumstance, needs and wants all accumulate to define the path you will take in an economy via the choices you can and will make. Since all economic activity is the result of these decisions, economists have spent a fair bit of time trying to understand our choices and how we make them. But, as usual, they have come to several different


What Is the Economy?

conclusions. Are we driven by logic or are we more spontaneous? Do we always know what we want or might we be influenced by the decisions of others around us? To try and understand economic behaviour economists modelled an ideal human decision maker capable of repeatedly perfect choices. They called it homo economicus, or the economic human.

Homo economicus Homo economicus is the most widely used portrayal of human beings in economics. It is also perhaps the most widely criticized. Homo economicus is a persistently rational being, programmed to make optimal decisions enabled by perfect information. These decisions will be selfinterested even if altruistic in nature, for their decision will be based on the good feeling it produces or because it will be worthwhile for them in the long run. Homo economicus wakes up in the morning and before choosing their optimal breakfast combination will examine all options from the cornflakes in the cupboard to a drive-thru Egg McMuffin meal deal to a banana from the office fruit bowl. Homo economicus computes all possible choices before deciding on which outcome optimizes their own utility (that is economics speak for satisfaction). When at work, homo economicus will work the exact number of hours that they want to in order to balance desired income with desired time off. Homo economicus never stops optimizing. Homo economicus also has perfect information available to them, from a full range of alternatives and their prices to catalogued information about future price rises. All the time that homo economics is behaving in this way, economists say they are being rational, and all these decisions adhere to rational choice theory. Rationality Rationality is a big deal for economists. It’s important to flag that in economics, rationality does not mean the same thing as it does in regular usage. If we describe a friend as ‘rational’ we’re probably alluding to a personality that is sensible, practical and just generally quite chill. But when economists talk about rationality, they’re talking about people acting like the homo economicus we described earlier, using perfect information to make choices that optimize their utility. Utility is influenced by personal preferences (those needs and wants that we explored just now) so rational choice theory does not see humans as homogeneous. It does, however, see them as consistent and clear-eyed about the pros and cons of every decision they make.

You (and Everybody Else)


Since its inception, the concept of economic rationality has remained pretty much the same, although we’ll see in a moment why critics have attempted to improve or even dismantle the idea. One of the reasons the theory is so enduring is that the behaviour of rational humans is easier to predict and understand. Economists know perfectly well that we aren’t actually all-knowing robots – sorry, homo economicus – but many of them see the theory as the only practical way of modelling human behaviour en masse, which can help us understand our economy a bit better. Bounded rationality We’ve already mentioned the obvious flaw in this whole rationality thing: it probably doesn’t sound much like you or anybody you know. Ever eaten a whole packet of biscuits and then immediately regretted it? Then you’ve made irrational choices. Ever bought something without checking out other stores for cheaper or better options? Then you’ve made a decision from imperfect information. It’s not that humans never act like homo economicus. After all, you may also have gone to the gym rather than hitting the snooze button or checked a book price on Amazon before buying it in a store. It’s more that things are a little more complicated than traditional rational choice theory suggests. Some economists think the theory can be adapted in a way that makes it slightly more realistic without losing its easy-to-model quality. Enter the theory of bounded rationality, which replaces homo economicus with a satisficer. Instead of going for the absolute best choice possible, satisficers go for a ‘good enough’ option that is adapted to the circumstances at hand. They’re likely to look at more alternatives before buying a house than before buying a pint of milk, for example. Satisficers’ decisions are also influenced by things like peer pressure, social norms, ethics or whims, which homo economicus is untouched by. The satisficer is consequently much more complex than homo economicus and much less easy to predict. It could therefore help explain economic decisions in a more nuanced and realistic way or make everything so complicated that economists end up throwing up their hands in frustration and we end up with no predictions about human behaviour at all. Behavioural economics Behavioural economics is a field of economics concerned with human psychology. It was invented by economists that found homo economicus to be a bit too perfect and uses more complex concepts of psychology to explain the choices we do (or don’t) make. Alongside bounded rationality and satisficers, behavioural economics is heavily associated with nudge theory, or the idea that policy makers


What Is the Economy?

can persuade us to make ‘better’ choices via some low-key psychological manipulation. For example, real humans are more likely to buy healthy foods if they’re placed at eye level, so school cafeterias might rearrange their lunch options in this way to get students to eat more greens. The UK government has its own nudge unit, known as the Behavioural Insights Team. People disagree on whether nudging is helpful or sinister. One thing that isn’t debated is that nudging would have no impact in a truly rational world. Homo economicus’ lunch choice would be completely unaffected by how the foodstuff was arranged. Choices and your shopping basket Consumer choice theory is economists’ attempt to figure out why we buy what we buy. It has various real-world applications, such as allowing businesses to make predictions about shopping behaviour. Consumer choice theory is built on the back of rational choice theory: it states that shoppers will behave like homo economicus while staying within their budget. It also assumes three things: that consumers will always prioritize utility, that no matter how much they shop they’ll always want more (fancy name: the principle of non-satiation) and that for each extra one of something you buy, you will like it a little bit less. This last item is known as diminishing marginal utility and it’s the reason why we enjoy the first bite of a big meal more than the last and why millionaires usually don’t end up with 500 puppies, even though they could afford them. Like with rational choice theory, consumer choice theory isn’t an exact replica of the real world. Most of us don’t manage to fill up our shopping trolley with the exact combination of products that will maximize our utility without going over budget every time we go to Asda. But if you’ve ever stood in a supermarket aisle umming and ahhing over what’s in your shopping basket, putting some items back and generally trying to ‘optimize’ your spend, you’re computing the sort of decisions economists study as part of consumer choice theory. Opportunity cost In order to make a choice, we have to give up all the other options we could have selected but didn’t. These forgone choices are called opportunity costs, and they exist everywhere. The next time you buy or do something, consider what you are not buying or doing as a result. Opportunity costs don’t stop at the lunches you’re not eating or the events you’re not attending. The opportunity cost of a university degree, for example, is the roughly three years of salary and work experience you would have if you’d taken up a full-time job instead of studying. Of course,

You (and Everybody Else)


plenty of people might consider this worth giving up if your future career prospects and salary significantly improve as a result of that degree. This process of weighing up the benefits of one choice against its opportunity costs is another aspect of rationality. It‘s something that most humans often do to some level but rarely do for every single choice they make. Cultural and social norms That brings us neatly onto social norms. As well as the social pressures we discussed earlier in the section on behavioural economics, the norms of our culture actively define the types of decisions we make and preferences we have. Owning pets is considered perfectly normal in most countries but owning a pet lion is usually not. Cultural and social norms can be thought of as a type of unwritten rule. They define what‘s acceptable, preferable and respectable, and, perhaps surprisingly, they can be incredibly powerful at dictating our decisions. Although their influences might not always seem particularly ‘economic’, they certainly affect the economic decisions we make. While some of your own cultural norms will be obvious, you’re probably following more of them than you first imagine. Cultural norms say who should own what and who should live where. They decide whether it’s acceptable for anybody to live on the streets and whether we’re treated differently because of our race, gender or class. They can be behind many of the things we value most about our existence, but they have been responsible for some abhorrent human practices in the past, and they may well be responsible for practices today that we will find equally unacceptable in the future. Understanding them is therefore an important part of understanding exactly what is driving our economy beyond any rational preferences or pyramid of ranked needs. It is also only by observing them we realize that actually we could choose to not follow them if we thought there was another, better way.

All of us: Macroeconomics Macroeconomics studies the phenomena which happen as a result of everybody’s economic behaviour. These phenomena include inflation, booms and busts, and the level of unemployment. Importantly, these things cannot be properly explained or understood by just looking at all our individual choices and adding them up. That’s why macroeconomists start with a zoomed-out perspective, so they can get a big-picture view of these crucial aspects of the economy. Monitoring macroeconomic activity is the daily task of many economists. They use this data to make forecasts about what might


What Is the Economy?

happen in the future, which governments and businesses in turn use to try and keep the economy as stable as possible. Economists have been making macroeconomic observations for years, but just as astronomists constantly seek to improve their observations of the planets, so too do economists constantly seek to improve the accuracy of their observation of the economy. Much of the rest of this book covers topics which would fit into macroeconomics, from government spending in Chapter 10 to social inequalities in Chapter 9 and globalization in Chapter 11. For that reason, we won’t go into detail about them here. But to give you a brief overview, these are some of the main things macroeconomists care about: ●●




Macroeconomic measures – these look at the output of the economy as a whole and include measures like GDP, which we examined in Chapter 3. Inflation – the change in price levels across the economy as a whole. We talk about this in Chapter 8. Unemployment – the number of people without work, which macroeconomists believe will always exist in some form even in a well-functioning economy. We explore this in Chapter 7. Macroeconomic policy – things that attempt to control the economy as a whole. Monetary policy and fiscal policy are the main examples, and we cover them in Chapter 8.

It’s important to remember that while macroeconomic terms can sound rather technical, they’re actually just what happens when a heck of a lot of humans do a lot of things in coordination.

CChapter 5

Your high street Walk down your local high street and you’ll see lots of businesses: supermarkets, banks, cinemas, designer clothing stores, charity shops . . . the list is almost endless. This chapter is all about those businesses, the relationships they have with each other and the relationship we have with them as a customer, or to put it into economic-speak, as a consumer. The other key terminology you need to know for this section is market economy. That’s what economists call this system of producing, buying and selling. Of course, for many of us the high street isn’t the only (or even the main) place we do our shopping. In the UK, we currently buy a fifth of all our purchases online, and that percentage has been going up for years and years. In fact, many people are concerned that high streets are in irreversible decline as the number of people visiting them keeps falling. But while calling a chapter about businesses and shopping your high street might be a little old-fashioned we still think it’s a nice vivid image that represents what market economies really are, why they matter and how they’re related to our everyday lives.

What is the cost of living? The cost of living is how much money you need to be able to live in a specific place. It is enmeshed in many of the other things we’ve talked about in this book, such as our wages, education, homes, job security, public goods and services and borrowing money. The intersection of those things with the cost of living can determine what we can do with our time and how we live our lives. The cost of living is also a super slippery number to pin down, because how much money we ‘need’ to live is so subjective. But economists have taken a stab at answering this question via something called the Consumer Price Index (CPI). It’s basically an imaginary shopping basket filled with all the things everyone needs to live comfortably: food, housing, healthcare, electricity, clothes, transportation . . . you get the idea. An average price is assigned to each item and added up together they equal the cost of living.


What Is the Economy?

Why do we need to know about it? If we know how much it costs to build a life somewhere, that gives us important information about how much income people need to obtain in order to live there. That information can be used by individuals who are, say, weighing up a move or debating doing some further education or training. The cost of living can also be used by governments to figure out policies such as what the minimum wage should be and by businesses when figuring out which salaries they should offer to workers. Measuring the cost of living – or, more specifically, changes in the cost of living – can also give us an idea about how well communities are doing now compared to in the past. The cost of living changes when inflation (or deflation) happens at a faster rate in one market than in another. So if house prices go up while wages stay the same, the cost of living goes up. We’d often interpret that as standards of living going down. Conversely, if wages are rising while food production is getting cheaper, the cost of living goes down and standards of living go up. However, there are limitations to using the cost of living as a standard of life quality. It makes the assumption that the affordability of goods and services is all that matters, without taking into account the quality of those goods or, indeed, the quality of the work that has to be undertaken in order to buy them. And because it’s all about averages, it won’t feel at all relatable to lots of people’s personal experience of how expensive life is. It also makes value judgements about what is needed for a ‘comfortable’ standard of living that not everyone will agree with. When we put together a Consumer Price Index – that imaginary shopping basket – should we include just enough food to stop us being hungry or should we be able to afford non-essential items that bring us joy, like curly wurlies or peach schnapps? Should most adults be able to buy their own home or just rent a room in a shared accommodation? What about TVs, smartphones or holidays abroad? Some people think we should move away from trying to find a rigorous mathematical formula to measure quality of life and focus instead on how an economy feels to the people living within it. That’s why so-called Wellbeing Indexes are gaining ground in some places. These look at things like how happy and satisfied with our lot in life we are.

Markets and exchange What is a market economy? We’ll talk about markets a few times throughout this book, particularly in regard to our work (labour markets), homes (housing markets) and money (financial markets). Markets are places where we exchange

Your High Street


things of value, usually goods and services and usually via buying and selling. Markets can be described as ‘free’, which means no government interference; ‘planned’, which means run by governments; or ‘mixed’, which is a combination of the two. Traditional economic thought says market economies are meant to be made up of completely free markets. (In practice most modern market economies have government regulations and other policies to contend with.) That means its exchanges and prices are determined by the independent decisions of individual people and businesses. Market economies are usually heavily associated with capitalism (discussed subsequently). These two entwined economic concepts make up the most common type of economic system we have in the world today. This system has been both credited with significantly raising average living standards and criticized for contributing to things like inequality and poverty. It’s important to remember that every economic system, including this one, is just one way in which a society can organize its humans and other resources. We didn’t have as many capitalist market economies in the past as we do now, and we might not have as many in the future. What do we mean by a capitalist economic system? A main component of capitalism is the private ownership of the things we need to produce other things. Economists call these producing things factors of production. In classical economics, they’re split into land (which doesn’t just mean actual land but any raw material), labour and capital. Capital is all the non-natural, non-human stuff you can use to make things, like machines and factories and money. Another big part of production is time. In the short run companies are somewhat limited in how much they can change their factors of production. But in the long run they can make big changes: building a new factory, hiring lots of new staff etc. After using their factors of production to create goods and services, capitalists exchange them in markets through a price mechanism, which is just a fancy way of saying people buy and sell them with money. In a capitalist system, the main purpose of producing and exchanging stuff is to create profit. The chance to make even more money is seen as a great incentive for owners of capital to take the risk of investing it into more production rather than, say, just sticking their wealth in a bank account somewhere. In theory, capitalist systems will benefit society at large by first creating wealth and then by pushing that wealth into creating new products, jobs, knowledge, skills and ideas, not to mention more wealth. Of course plenty of people think this theory is baloney, which we explain more about in Chapter 10.


What Is the Economy?

Black markets: The informal side of economies Both black markets and informal economies are markets that avoid governmental oversight and rules. People tend to make the distinction that black markets are deliberately trying to circumnavigate the authorities (because they’re selling illegal products, usually) while informal economies are more likely to be a product of circumstances. They are often found in countries where the government is inept or the rule of law is weak. There are several reasons people might want to exchange goods and services in these types of markets. They may want to acquire something difficult or impossible to get hold of legally, such as drugs or exotic animals. Or they may want to avoid the costs of a regulated market, such as having to pay taxes on sales and profits. Black markets and (to a lesser extent) informal markets are often seen as bad things. By not paying tax, they short-change governments who then have less money to spend on public goods like education or healthcare. They are also often linked to crime, from denying workers proper benefits to bringing stuff into a country that many people consider dangerous or immoral. But many generally law-abiding people find these types of markets helpful and even necessary, particularly if their governments are incompetent, autocratic or corrupt. For example, for the last few years in Venezuela the government has heavily restricted the amount of food, money and other necessities available in its official shops. So some desperate, hungry people have turned to the black market (and paid much higher prices) in order to meet their needs. Is there such a thing as a perfect market? A perfect market is one where buyers and sellers have perfect information, where low barriers to entry means there’s lots of competition and where prices are set by supply and demand and cannot be manipulated. (Don’t worry if some of those terms didn’t make sense to you, we’ll explain them in a minute.) Perfect markets are considered ‘perfect’ because they represent optimal efficiency, where all resources are allocated to the places where they will create the most value. Of course, as we’ve already talked about, ‘value’ is a bit of a tricky concept because it is hard to measure or agree on. Economists often use theoretical prices as a proxy – the amount you’d be willing to spend to own a resource is how valuable it is to you. There is a problem with using money as a yardstick for value, however. We all have different amounts of it, so the price you’re willing to pay for something often depends in no small part on how much money you’d have left once you’d bought it. Calling a market perfect can give off the impression that it should work well for everyone. Indeed, there is a linked economic concept called

Your High Street


Pareto efficiency, which says that in a totally efficient market everyone is as well off as they could be without making someone else worse off. But that doesn’t necessarily make it an ideal situation. Pareto efficient markets can still have a huge amount of inequality and unfairness baked into them. An economy which gave a big windfall to the wealthy while everyone else’s situation remained unchanged would be Pareto efficient, whereas an economy where everyone grew richer but the richest were heavily taxed would not be. All the ideas we’ve mentioned here – perfect markets, Pareto’s efficiency and efficiency in general – are just that: ideas. Nobody thinks they actually exist (or could exist) in real life. Traditionally, many economists have thought of them as goals to work towards, but there’s also plenty of disagreement about that. Markets become ‘efficient’ via supply and demand Supply is how much of a good or service there is. Demand is how many people want that good or service. When they are perfectly balanced (i.e. the number everybody wants to buy is exactly the number that are available to buy) then the market for that good or service is said to be in equilibrium and therefore efficient. Supply and demand are constantly changing. It probably doesn’t surprise you that people buy more ice cream when it’s sunny and more umbrellas when it’s raining or that an energy company that’s just discovered a new oil field has more oil to sell than one whose wells are running dry. But one of the biggest influences on both supply and demand is price. What does this mean for the price of stuff? As a very general rule of thumb, the more expensive something is, the more businesses want to supply it, because they can make more profit from it. Similarly, the cheaper something is, the more people will buy it. There’s a couple of reasons for this. One is utility (economist speak for pleasure). The more expensive something is, the more utility you’d need to get from it to consider it worth spending money on. A casual fan of rugby might be willing to spend £20 to see a match but not £200. The second reason is affordability. Even if you’re the biggest rugby fan in the world, you still won’t attend that match if you don’t have a couple of hundred pounds to spend on it. Economists often represent this idea in the following graph. Don’t worry if it looks a bit confusing right now, we’ll explain it later. A quick warning: this is probably the most theoretical section of the book. But we want you to know how economists think about markets so you can understand them when they start talking all jargon-y (Figure 4). 


What Is the Economy?

Supply and demand are supposed to naturally reach equilibrium According to market theory, anyway. Here’s how it’s supposed to work: suppliers will seek the highest and most profitable price possible for their good or service. But at some particular price point demand will fall below supply, leaving suppliers with excess stock they can’t sell. To shift this stock, they end up putting the price down again until they find the sweet spot where the price is as high as it can be while all their supply is still being bought. Boom: the market is in equilibrium. You may be wondering why suppliers wouldn’t just produce fewer things rather than putting down prices. One of the main reasons is competition. The juicier the profit margins, the more likely it is that other businesses and entrepreneurs will spy a money-making opportunity and start selling the item themselves. And because everyone wants to gobble up as much of the demand as possible, everyone is incentivized to churn out lots of items. But the finite amount of people willing to pay very high prices for an item means that sooner or later all these suppliers will end up with excess stock, which they can only get rid if they lower their prices. Which they’ll do, because even a tiny amount of profit is better than not selling the item at all and making a loss. Of course, as prices drop and profit margins slim and eventually disappear, more and more businesses will decide it’s not worth putting the money and effort into procuring the item, and supply will drop again. All these combating forces are therefore constantly nudging supply and demand towards equilibrium. Because they’re working on every good and service within an economy at once, economists say free markets as a whole should trend towards the perfect balance of supply and demand, where most people can get hold of most of the products they

Figure 4  Supply and demand.

Your High Street


want for a price they’re happy with. This is sometimes known as General Equilibrium Theory. Theory is kind of the key word here though – plenty of people disagree that if we left buyers and sellers to their own devices everything would work out for the best. We’ll highlight some of the reasons for this throughout this chapter. Market economies rely on information Information, in economist speak, is different to knowledge. Information is data, usually short-term and high frequency, and is used to help us make decisions. Knowledge, meanwhile, is the interpretation of this data. It is often seen as a type of capital, a wealth that can be invested to produce returns. Economists also have these concepts of perfect and imperfect information. If you have perfect information, you know all the possible outcomes and possibilities of making a choice. If you have imperfect information, some of this data is hidden from you and you experience uncertainty. It’s sort of like how a chess player can see every move their opponent does or could make, while a poker player’s opponent cards are hidden. When people are involved in some sort of economic exchange, it’s not uncommon for there to be information asymmetry, which means one person has more information than another. Unsurprisingly, that can lead to power imbalances and outcomes many would consider unfair. All this might sound kind of abstract, but it actually underpins many of our day-to-day interactions with the economy. Think about choosing between two job offers. The more information you have on both companies – on their working hours, culture, salary bands and the like – the easier it will be to determine which role will be a good fit. Prices are basically bundles of information The twentieth-century economist Friedrich Hayek said that prices allow us to act as though we had lots more information than we actually do or could ever possibly compute ourselves. Say a broccoli-eating bug has infested most of our vegetable patches, meaning there’s no longer enough of the green stuff to go around. The majority of shoppers who still want their five-a-day fix will have to switch to carrots or spinach instead. But none of this information has to actually be relayed for that outcome to come about, because the reduction in broccoli supply versus the usual demand will push its price right up. Most people would rather switch veggies than pay a load more for broccoli, so demand drops. Prices, then, allow us to organize resources without the need for central planning, i.e. some hands-on authority figure actively controlling


What Is the Economy?

everything. Prices can signal to us how much there is of something, how much other people value it and how often we might need it. That in turn affects supply and demand, that is how likely we are to buy things and how likely businesses are to make things. Economists call this automatic system the price mechanism. Is the price mechanism a good way to organize resources? There are three main pro-price mechanism arguments. The price mechanism makes business profitable while preventing price-gouging As mentioned previously, prices are usually seen as a quick and obvious indicator of the supply-and-demand balance for a good or service. That allows people to easily notice when the balance is skewed and change their behaviour to correct it. If prices for a product seem unusually low, people will buy more of it, and that extra demand will raise the price. If prices for a product are higher than the cost of producing it, savvy entrepreneurs will start making and selling it themselves, leading to increased supply and a lower price. One problem with this theory is that it oversimplifies how things work in real life. Some products – take some medicines – have huge profit margins, but new businesses don’t swoop in and compete the profit away because of things like patents and the huge upfront expense of setting up a pharmaceutical company. The price mechanism makes popular things cheaper and gets rid of useless products  People don’t only consider cost when making a purchase. They also consider how much utility (satisfaction) they will get from it. Higher prices, then, don’t just indicate that something is in demand. They also indicate that the thing is really liked by lots of people. This transmission of preferences is an additional encouragement for competitor businesses to pile in, which has the benefit of reducing the price of this popular product for everybody. By the same token, if demand for a product falls so low that it’s no longer profitable for companies to make it, they’ll usually stop doing so – ridding us of unwanted stuff that is a waste of resources. But it’s not always true that popular things are the most important ones. Only a small minority of people will ever want to buy a wheelchair but it’s a pretty essential purchase for those who need it. Another example might be the frustration often voiced by people with non-white skin tones at the limited amount of UK cosmetics that are made for them.

Your High Street


The price mechanism ensures limited resources go to those who desire it the most Prices are a way for us to ration limited but highly desired resources. Price can function like an eBay auction, where as it rises more and more people will decide it’s not worth it and drop out, leaving it for the person who is willing to spend the most on it. Because traditional economic thought often equates how much you’ll pay for something with how much you value it, the system was considered fair: property falls to those who value it most. But you can probably spot the big flaw in this assumption. People around the world have vastly different amounts of wealth, so how expensive something ‘feels’ is relative. A millionaire will be more willing than a financially struggling family to drop £500 on a fancy meal out. It doesn’t follow that the rich person gets more utility from having a hot meal that day than the poorer family would. What’s a sticky price? Learning that prices are supposed to be super-sensitive to any shift in supply and demand gives the impression that prices should be constantly changing. But our own experience shows this is rarely the case – the things we buy regularly, from train tickets to frappachinos, usually stay close to the same price for months or even years. This phenomenon is known as sticky price theory. One explanation for this is that there are costs associated with changing prices that make companies reluctant to do it too often. These are sometimes known as menu costs, to reference a commonly used example that a cafe would have to pay money to reprint its menu every day. A special price just for you: Price discrimination In our technological age, however, menu costs are in many ways reduced. Prices can be changed online (or even in electronic readers on real-life shelves) almost instantly. Indeed, thanks to both modern tech and the huge amounts of data collection that happens online, companies have the ability to go even further and sell the same product at different prices to different customers. The advantage of this technique – known as price discrimination – is that it gives businesses the chance to both entice on-the-fence customers with discounts and squeeze as much money as possible about of customers who are willing to pay over-the-odds. It’s a real-life example of information asymmetry. Generally, buyers really dislike price discrimination. Companies are therefore less likely to engage in it if they think customers have access to information that could tip them off about it (via the news, perhaps,


What Is the Economy?

or review sites) and if they face enough competition that annoyed customers have somewhere else to go. Why is competition so important in market economies? Competition means that sellers (and buyers too) have competitors, i.e. other people and companies who are buying and selling similar products. Economists say that markets have perfect competition when no single person or company can influence prices. Competition keeps prices in check by giving everyone options. If you are desperate to obtain a product and there’s only one seller around (a so-called monopoly) then they could set the prices sky-high and you’d have no choice but to pay up. A rival shop, however, would know they could get your custom by setting their price just a little bit lower. At which point the original seller might cut its price to win customers back, and so on and so forth until cutting prices anymore would be unprofitable. Creating competition can be easier said than done In theory, competition should just happen naturally. Entrepreneurs will spot goods and services that are making lots of profit and set up a rival business to capture a slice of the action. But in reality there are often barriers to entry which make it hard to enter (or exit) a market. Examples of barriers to entry are the money it takes to set up a rival business, patent and copyright protections that stop people from producing a similar product and government regulation that says only people with certain qualifications or companies that meet certain requirements are allowed to be sellers. Businesses can also attempt to swing the market in their favour in several ways. They can, for example, agree with their rival companies not to compete and to all keep their prices equally high, an act known as collusion. Collusion is particularly easy in oligopolies, where a product is provided by only a few big companies. Alternatively, a business can attempt something called predatory pricing. They set their prices really low – below the cost of making a product – and wait for all their competitors to go bust. Having created a monopoly, they then whack up prices for their unsuspecting customers. (Amazon and Walmart are examples of companies who have been accused of using this tactic.) For some people, the lack of perfect competition in the real world is evidence that free markets don’t really work and governments have to be heavily involved to protect consumers. Others say that governments are responsible for creating many of the barriers to entry themselves, for example by requiring unnecessary accreditation or setting complicated rules that are harder for small businesses to navigate. Another way that governments can influence competition is by setting up bodies – the UK’s is called the Competition and Markets Authority – to scrutinize industries and determine whether markets are competitive enough. If not, they may decree that a planned merger (joining of two companies)

Your High Street


can’t go ahead or that a big business needs to be split into several smaller rival businesses. Most countries have also made collusion illegal. Monopolies are not always seen as wholly bad things If a company is the only one selling something but the barriers to entry for that industry are really low, they might act like they’re in a competitive market (i.e. keep their prices low) even though they’re not, because they know if they started making lots of profit someone would immediately come along and compete it away. This is known as the contestable market theory. Countries also have so-called natural monopolies, where societies have decided that it makes sense to allow just one company to sell something because introducing competition would create a worse outcome for consumers. Water companies in England and Wales are examples of natural monopolies. The government doesn’t want loads of water businesses placing tons of unnecessary duplicate piping and other infrastructure all over the country, so it gives the sole right to sell water in London to Thames Water and the same to United Utilities in the North West, and so on. (It also caps the prices they can charge.) Why some economists idolize ‘perfect’ free markets If you look back at the market forces we’ve described in this section – competition, supply and demand, information – you’ll notice that they’re all supposed to be autonomous and automatic. Nobody has to consciously organize them, they’re just the natural outcome of multiple people and companies making multiple individual decisions. For pro-marketers, this is absolutely key. Put any person or authority in charge of such a system, they reckon, and they’ll probably muck it up – out of greed or confusion or stupidity. But have a system that works with human’s worst impulses, that takes our desire to put our own needs first and neuters it by using other people’s selfishness to balance it out, and voila! You have a system that is not only fair but foolproof. In theory. Adam Smith, an eighteenth-century economist who is often considered the ‘father of economics’, captured this idea with his metaphor of ‘the invisible hand’. Markets, he reckoned, naturally tend towards a system where everyone has the ability to get hold of the things they value most. All we and our government have to do is get out of its way and not try to control it ourselves. Many regular people disagree and consider real-life market economies to be unfair There is an obvious counter to the idea that free markets give all of us what we need – all those people living in market economies who don’t have access to the things they need, from food to medicines to housing. There’s been a lot of criticism that says market theory doesn’t take into


What Is the Economy?

account the power imbalances that exist within society and that free markets can increase inequality. For an example of this, let’s go back to prices and competition. We said that most economists and governments consider competition a good thing because the more businesses that are fighting each other for your custom, the cheaper the goods and services you want to buy are going to be. But cutting profits isn’t the only way businesses can lower prices – they can also cut the cost of making their product in the first place. And what’s often a big cost in production that might seem ripe for cutting? Workers’ salaries and benefits. Free-market economists tend to respond to these sort of arguments by saying that inequality and power imbalances are a sign that the market isn’t working as it should, and something or someone is blocking it from being truly perfect and therefore truly fair. After all, the example given earlier shouldn’t happen in a world where the supply and demand of labour is in equilibrium, because workers who are having their wages cut too much would simply move to another job. It can be a bit difficult to countenance this sort of response, because no real-life market is ‘perfect’ enough for anyone to be sure if it actually would increase or decrease equality, which is a bit of a problem in and of itself. Is market theory too simplistic to be of use in real life? The economy is ultimately billions of people making billions of decisions, constantly. That makes it really, really complicated. So it’s probably not surprising that many of the theories that underpin how it works, including markets, are ultimately based on a simplified and stripped-down version of reality. For some people, that’s fine, because market theory still helps us make sense of what’s going on and helps us make some sort of analysis rather than throwing up our hands and declaring it all too complicated to make head or tail of. But for others, doing this is dangerous because it makes us less likely to take effective action against real-life problems. Another critique is that by pretending all our markets are close enough to perfect free markets, we ignore all the parts of our economy that are actually structured more like planned markets. Take big corporations. The way they interact with each other might be free-market-ish, but the way they work internally is rather central-planning-esq: a hierarchy of bosses will direct different departments on how to exchange and share resources.

From wheels to whizzy things: Technology What is technology? To most people, technology means iPads and Alexa speakers. But economists have a slightly wider view of tech. For them, it’s anything that

Your High Street


increases productivity. That means anything that allows us to improve goods and services – or to create them more easily, quickly or cheaply – is technology, from combine harvesters to MMR vaccines. Even things like languages and democracy can be considered technologies from an economic point of view. Why is technology important in economics? Technology is a big driver behind economic growth. In fact, it’s usually credited as being responsible for most of it. If you looked at a graph of worldwide GDP over the course of human history, you’d see a mostly flat line until just before the nineteenth century, at which point growth exploded. Plenty of people think the reason is that this is when we took a big leap forward technology-wise: the Industrial Revolution began at this time. Not coincidentally, we now invest a great deal more of our collective resources in developing new technology than we did in the past. Go back a few hundred years and inventors were generally individual geniuses like Da Vinci tinkering away for their own amusement. These days, governments and big business pour billions of pounds into state-of-the-art research and development labs staffed by thousands of specially trained scientists. The good and the bad of technology Technology has not only brought untold riches into the world, but it’s also given us new freedoms and creative outlets and ways of living that haven’t been possible for most of human history. Home appliances like the dishwasher have been credited with giving women more independence by freeing up some of the time and labour they were traditionally expected to put into homemaking, which could then be put into a paid career. Medical breakthroughs such as vaccines have given millions of people longer and healthier lives. Yes, an upgrade in technology has often made older versions (and the jobs that go with them) obsolete. But many economists think that the demise of certain parts of the economy is a good thing if something better grows in its place. They call this creative destruction. But there’s a dark side to technological advances, too. One of the most commonly cited is that technology has a bit of a habit of taking jobs away from people. In theory, that could be a good thing if it freed people from boring or unpleasant tasks and allowed them to concentrate on more fulfilling things. But in many historical cases, including during the Industrial Revolution, technology has been associated with making the lives of multitudes poorer, more dangerous and – presumably – unhappier. An oft-repeated argument is that most of the downsides of technology happen in the short run, while over a longer time the benefits accrue to everybody. But as our society becomes ever more aware of the


What Is the Economy?

consequences our economic habits are having upon the environment and climate change, that maxim doesn’t seem to hold up as well. That doesn’t necessarily mean we should all become technophobes. Plenty of people think technology is our best hope of solving problems like the climate crisis, because we could invent new ways to suck carbon out of the air or change weather patterns. But it does mean that we should all think about how technology can harm as well as help, and that governments and societies should consider the ways in which they can compensate those people who do lose out to technology. There’s a suggestion that robots taking most of our jobs wouldn’t be such a bad thing if we used the wealth from their extra productivity to create a universal basic income, for example.

CChapter 6

Your home Access to shelter is one of the fundamental human rights, according to the UN. But what the quality of that shelter should be, who should provide it and how much we should pay for it are all topics of disagreement and debate. As a society, we haven’t even fully managed the basic access to shelter: it’s estimated that around 100 million people around the world are currently homeless. Where we live also has a big impact on what our economic reality looks like. Many people spend more of their income on accommodation than any other item. A house is often the biggest asset people ever own. Our home’s location, size and standard can influence everything from which jobs we can commute to, to what size our family becomes. All of which is why the housing market is an element of the economy that many of us already have some familiarity with and why phrases like ‘housing crisis’ often come up when people talk about the ways in which they feel the economy isn’t working or needs to change.

What are houses for? The role houses play in our lives and the economy is multifaceted. Houses are used as places in which to live, holiday, socialize, work, store wealth and much more. Insofar as economics goes, their uses can be broken down into three categories: A commodity This is the ‘shelter’ use of housing and the only one that is indispensable. Houses offer a form of protection from things such as the elements, wild animals and nefarious humans that threaten the well-being and survival of us or our possessions.


What Is the Economy?

An asset An asset is any valuable item that people can own. Houses are often regarded primarily as assets and purchased as a financial investment. This practice is done by everyone from regular homebuyers hoping to eventually sell their home for a higher price than when they bought it to professional landlords who own hundreds of homes and rent them out for profit. A centre of activity Homes are hubs of economic and social activity. For a start, a lot of work is done in the home. This includes paid positions such as remote work and in-house roles like decorators and professional carers, but also a large amount of unpaid labour, including cleaning and childcare. Homes are also often shared spaces, and the people we live with are often tangled up in our economic behaviour: we may share our income, wealth, property and skills with them. That’s why economists often talk about households as one of the key players in the economy (alongside businesses and the government) as opposed to individuals. One issue with having so many uses for houses is that sometimes their different aspects can be in tension with each other. This means societies need to decide which use they want to focus on when crafting housing policy. An economy that prioritizes housing everybody will look different to one that wants houses to be a sure-fire way of accumulating wealth.

Who is responsible for building homes? House builders come in three main types. Type one is private enterprise and includes developer businesses and individuals building their own home. Type two is the government. In countries like the UK it is local authorities, also known as councils, who are primarily responsible for home building. Type three is housing associations. These are non-profit organizations that are interested in creating low-cost housing for people who are struggling to afford market rates. To make things slightly more complicated, sometimes more than one type of homebuilder is involved in the construction of a property. A private business may build some homes and then sell them to a housing association, for example. However, in general none of these house builders can build homes wherever and whenever they like. They usually have to follow a set of rules that can dictate everything from what size a house can be

Your Home


to what colour the outside walls are. These rules are generally set by the national government as part of their housing policy. Different countries and areas can have vastly different rules, which is one of the reasons why houses and housing markets can vary so much around the world.

Why is housing so expensive? House prices, like all prices, are influenced by three main factors: supply, demand and government policy. (Prices are also subject to inflation, which we speak about in more detail in Chapter 8.) Supply is how many homes that there are. Demand is how many people want to live in them. Housing policy is a set of rules that the government has put in place. Governments can influence house prices directly. For example, rent controls prohibit landlords from raising rent over a certain amount. They can also influence prices indirectly, by changing the supply-anddemand balance. For instance, the UK government currently forbids everybody to build on greenbelt land, which restricts the number of homes available. People disagree on pretty much everything in economics. But perhaps the one topic people are reasonably united on is that the cost of housing in countries like the UK is very high. (However, not everybody thinks this is a bad thing. We’ll talk about why in a bit.) That’s because over the last few decades house prices have risen significantly faster than wages. That means the average person now needs to earn a lot more to be able to afford the same standard of accommodation. And it is a lot more: the housing charity Shelter says that if your wages had grown like house prices since 1997, you’d be earning an extra £29,000 a year. But why have prices gone up so much? We said that supply, demand and government policy change house prices. Let’s take each in turn. Demand has increased Everybody needs to live somewhere, so it’s pretty self-evident that if the size of the population increases then demand for housing will go up. Countries like the UK have seen their population steadily grow for hundreds of years. That’s partly because scientific advances have seen longer lifespans and more people surviving long enough to procreate, and partly because of immigration from elsewhere in the world. At the same time, there have been cultural changes that have had the effect of spreading people out among more households. More people live


What Is the Economy?

alone for at least a portion of their life, because of trends like marrying later and moving out of your parents’ home as soon as possible. Smaller households mean more houses are needed overall. Demographics can also influence house prices on a more localized scale. Across the world, there’s been a general movement of people from the countryside into the cities. That means lots more demand for housing in cities, which is why house prices there are often higher than in more rural areas. Another factor is the financialization of the housing market. While house prices have been much lower than they are now, they‘ve never been dirt cheap. To buy one outright you either needed a big stack of cash or someone who was willing to lend you their big stash of cash. Before the twentieth century, both of these options were limited to the rich. But then things started to change. Banks began offering house-buying loans, called mortgages, to more and more people. Suddenly, the number of people in the market to buy a house soared. Because banks could charge interest on mortgage payments and the house could be put up as collateral (i.e. if you didn’t pay your mortgage the bank would take the house off you and sell it) it was seen by them as a pretty risk-free way of making money. Banks were also generally encouraged in this enterprise by governments – that thought homeownership made residents into more settled and contented citizens – and by regular folk, who liked the idea of having their own place and not having to deal with fickle landlords. Mortgages therefore became easier and easier to get. Even people who didn’t have high incomes or a great credit history were offered mortgages, because the banks thought they could do some clever financial stuff to minimize the risk of defaults. It turned out they couldn’t, and these subprime mortgages ended up being one of the main contributors of the 2008 financial crash. But this didn’t turn governments or people off the idea of homeownership, so bar a few tweaks the mortgage industry is still going strong. Indeed, since the crash many countries have had persistently low-interest rates, which has the effect of making mortgages more attractive to most people. After all, there’s not much point waiting and saving for your dream house if you could get hold of it much quicker for not much extra money! Many economists think low-interest rates in places like the UK is the main reason house prices have stayed buoyant since 2010, despite things like austerity and Brexit and the COVID-19 pandemic. The more mortgages banks are willing to hand out, the more demand for houses rises and therefore the higher prices go. As long as the monthly payments are affordable and they believe house prices will keep rising, people are happy to take out ever bigger mortgages because they think

Your Home


they can recuperate the cost (and make some extra on top) when they sell. This process is what is meant by the financialization of the housing market. It is frequently cited as the single biggest cause of spiralling house prices in the last few decades. Supply has decreased To build houses, you need land to build them on. Land, however, is a finite resource – at some point, you’re going to run out of it. Luckily, that’s usually quite hard to do. The UK is considered a relatively densely populated country, but the percentage of its land that is built upon is estimated to be a tiny 1 per cent. Plus, modern architecture means that houses can be built upwards as well as outwards. Tower blocks of flats manage to cram multiple homes onto the same parcel of land. However, just because there’s a lot of free land lying about doesn’t mean that it’s available for housing. There are all sorts of constrictions that can limit how much space we have for homes. For a start, plenty of unbuilt-on land around the world is privately owned by people who have no intention of selling it off to build homes on it. Plenty more is in the neighbourhood of so-called NIMBYs (not in my back yard) – people who are against more development in their area because they think it’ll ruin their view, strain local services or decrease the value of their own house. NIMBYs form an influential lobby group or voter block, which means local governments (who sign-off house building plans in their area) are likely to take their wishes into account. Another big contributor to the limitations on land use comes from regulations set by the government. One blocker is planning restrictions and codes. In London, you famously can’t build anything that disrupts the view of St Paul’s Cathedral, which limits the height of all the buildings in its surrounding area. It’s also not uncommon for governments to engage in zoning, where land is divided up into certain areas and specific things are restricted to different zones. A government may say that buildings in the centre of town can only be used for business purposes, for example. They may also decree that certain areas can’t be built upon – because they’re areas of natural beauty, say, or habitats for wildlife, or buffers to stop urban sprawl (cities getting too big, basically). Even if you do manage to get hold of some suitable land, that’s still only half the battle – you then have to do the physical building on it. For years, countries like the UK have been considered a bit rubbish at knocking up houses at a fast enough rate. In the twenty years between 1997 and 2017 around 3.3 million new homes were built – which sounds like quite a lot until you realize that over the same period of time the population grew by 8.4 million. While not everyone lives alone, the average UK household size is just two people, meaning the country would be about


What Is the Economy?

a million houses short even if you ignored things like second homes, AirBnB’s rentals and properties purchased as an investment rather than for living in. So why aren’t we building more homes faster? There are a few possible reasons. One is that building a house is a big job that just physically takes a fair bit of time. While improving technology or productivity can narrow the gap, there will always be a lag between deciding to build more houses and having those houses built. In a similar vein, how many houses we can make in a certain period of time will be constrained by how much we can get of the factors of production we need; think specific material and workers with certain skills. Another possible factor is profit-chasing by developers. Private developers tend to be for-profit companies, and they make more profit when house prices are high. They therefore have an incentive to keep the supply of housing down. This often results in there being a delay in the number of housing ‘starts’ and ‘completes’ (i.e. there are a lot of halffinished building sites). This is part of a practice called landbanking where developers buy up sections of land and don’t develop on them (or pause developing on them) while they wait for prices to rise. People see the solution to this as either more regulation from the government (banning landbanking for example), or increasing competition in the housebuilding industry. Some government policies increase these trends Governments have the power to intentionally and unintentionally influence pretty much everything we’ve mentioned earlier. Everything from their immigration policy to how their stewardship of the economy affects interest rates can end up moving the house price needle. One UK-specific policy that is often quoted as having a big impact on what the housing market looks like is the political decision to decrease the number of council houses over the last few decades. Council houses are rented out at lower rates than private accom­ modation, so having lots of them reduces the overall cost of housing. However, council-house creation is not generally a key policy of Conse­ rvative governments that have ruled the UK for more than half of the last thirty years. (As a general rule of thumb, parties on the right of the political spectrum tend to believe society is better served when things like houses are provided by markets rather than governments.) The Tories also introduced the Right to Buy programme, which is designed to provide an affordable pathway for long-term council-home occupants to purchase their house. This provided lots of lower-income people with a very valuable asset but reduced the stock of low-rent homes available. There are therefore many intertwining factors which contribute to high house prices. People disagree about which of these causes is

Your Home


the most important but what isn’t contentious is that when combined, these factors have led to many people struggling to find affordable accommodation. In fact, the problem is so bad that it’s usually dubbed a housing crisis.

But are high house prices really such a bad thing? For some people, high house prices are actually beneficial. Developers, for example, can make more money if the houses they build sell for higher prices, which can in turn mean they invest in more housing. Higher rents also mean more income for landlords, especially those who bought the property when its price (and therefore mortgage) was lower. Similarly, homeowners who have seen the value of their property balloon since they purchased it now have access to a large amount of wealth that they wouldn’t otherwise have. Finally, higher house prices mean larger property taxes for governments that levy them. Plenty of these ‘winners’ from high house prices are people who would not be considered part of the rich elite. Many of them have used their windfall to improve their standard of living in ways they wouldn’t have otherwise have had access to. It’s not uncommon for older people to use the money from a house sale to fund a better standard of later-life care, for example. That can also mean less pressure on the public purse, while the extra property tax can go towards funding things that benefit everyone in society. However, wherever there are winners there must also be losers, and the negative consequences of high house prices are substantial. Housing is bought by regular folk, not (just) billionaires or big businesses or governments. A big jump in house prices means that there is a large transfer of wealth happening between people who haven’t yet bought houses and those who have already done so. Add in that homeowners and landlords also tend to skew towards certain social groups (namely richer people and older generations) and it’s easy to see how expensive housing has become a huge contributor to social inequality. This is often seen as a problem. It’s not just that some people will struggle to ever buy their own home, which in many places is regarded as an important cultural milestone. It’s also that the more expensive shelter gets, the greater the number of people who will be unable to live in homes of a decent standard. Indeed, some may end up without a home full stop. This has all sorts of knock-on implications for their health, work, well-being and so on. Alongside inequality, another widespread concern about ever-climbing house prices is that they are fundamentally unsustainable and that what is currently happening is actually a housing bubble that will eventually pop. This is a particularly big deal because so much of overall wealth is tied up


What Is the Economy?

in housing. This trend is particularly strong in the UK, where over a third of the country’s total wealth is in property, according to the Resolution Foundation, a think tank.

What is a housing bubble? An economic bubble is when prices rise faster than the intrinsic value of the underlying asset. So a housing bubble is when house prices are higher than the actual homes are worth. What does this mean? Well, generally the way we value items is that we assess how great we think it is, compare it to the asking price and purchase it if we think the benefits we’ll get from owning it are greater than the benefits of holding onto that money (and perhaps spending it on something else). But in bubbles, people are instead assessing whether they think handing over some money for an item now will result in them getting more money back when they sell it in the future. This is called speculation. If you believe house prices will continue rising indefinitely, you’ll consider it a smart financial move to buy a house at any price, regardless of how great you think the actual house is. Of course, you’d still have to be able to get hold of the money to make the purchase to start with. But in a world where banks are willing to lend many people a huge sum of money with which to buy a house, that’s easy-ish to do. Mortgages are also low interest, which is important. You’d be much less likely to take out money for a financial investment if most of the profit you’d make would be swallowed up by interest payments. When lots of people believe they will definitely make money from houses and banks are willing to lend them the money to buy houses with, house-sellers will discover they can find willing buyers at ever higher prices and respond by putting the cost up and up and up. But the problem with this sort of speculation is that it’s ultimately guesswork. Nobody can know for sure what house prices will look like in the future. One thing we do know is that bubbles have nasty habit of popping. Sooner or later, house hunters may start to decide that the price is too high for what they’re getting and decline to purchase. Or existing homeowners may stop being able to afford their mortgage payments, perhaps because the economy slows (leading to a dip in incomes) or interest rates rise (leading to an increase in mortgage payment costs). If this happens, some house-sellers will find they’re stuck with expensive assets they can’t get rid of, panic and slash the price to try and recuperate at least some of their money. The result is a sharp and sudden dip in prices. That’s great for buyers, who can suddenly get much better deals. But anyone who sells property for a much lower price than they purchased it loses out massively. For the housing market that would include lots of ordinary people who would lose their only major source of

Your Home


wealth and/or be stuck paying back huge loans without the prospect of getting that money back when they sell.

How do we know if we are in a housing bubble? Skyrocketing house prices and the common belief that investing in property is quite literally ‘as safe as houses’ certainly have the hallmark of an unsustainable bubble, and many people think when that’s happening, we should be bracing ourselves for the inevitable crash. But not all economists are willing to predict a big slump based on these factors alone. They think that most of the demand for housing is genuine rather than speculative – that is, people’s main reason for buying a house is that they want the security and stability of having their own home rather than because they’re hoping to make money off it. If that’s true, house prices will only dip if supply overtakes demand.

Expensive housing markets: Who loses most? It always feels unfair when some people benefit from something and others lose out, but this sense of unfairness can be particularly strong when many of the winners belong to the same social group. This is the case when it comes to the housing market. People who have benefited from rising house prices are disproportionately likely to belong to highincome groups and older generations. Younger, poorer people are more likely to experience the negative side effects. Why is this? Well, to benefit from rising house prices you need to own property. Homeowners can make money from selling their house for more than they bought it or for renting it out for a higher amount than their mortgage payments. In contrast, if you’re a tenant then rising property prices tends to mean that both your rent and your household taxes go up. But to be a homeowner you need to have a stash of savings for a deposit and a salary high enough that a bank is confident you can pay for a house in monthly mortgage payments. People who are well off or who were adults when house prices were much lower find it easier to meet this criteria. However, an interesting thing about generational inequality is that most of us come from family units that span across them. This means that while younger people as a whole are disadvantaged by the housing market, those that come from wealthier backgrounds can benefit indirectly. Houses, and the wealth they’ve accrued, are often passed down to younger generations via inheritance. Being well off also increases how much money the bank of mum and dad (a colloquial way of referring to parents helping their kids financially) can pass on to younger family members looking to get on the property ladder.


What Is the Economy?

High house prices and homelessness The worst possible outcome of high house prices (whether to rent or buy) is that some people become unable to afford a shelter – a basic human right – at all. The reasons someone becomes homeless are often complicated and varied. Mental health, relationship breakdowns, substance abuse, domestic violence, unemployment and the criminal justice system can all play a role alongside the unavailability of affordable homes. But the housing market clearly plays a big part. American researchers have found that places where rents are more than one-third of many people’s income are more likely than most to have a homelessness crisis. It’s also why you tend to see more homeless people in big cities like London and Los Angeles, where house prices are high. There’s also a growing movement among charities and governments that are trying to end homelessness which believes the single most effective way to improve the well-being of homeless people is to first give them their own home. That might sound obvious – people aren’t homeless if they have a home! – but it’s actually a relatively new approach. Previously, homelessness policy and help groups focused on things like getting homeless people a job or clean from substance addiction, figuring that if these things were fixed then getting a home would naturally follow. In contrast, the housing-first model thinks that if people have a safe space to live in it becomes much easier to make positive lifestyle changes. Cities like Helsinki in Finland and Charlotte in North Carolina are examples of places which are trialling this, to reported success.

What do we mean by affordable housing? That’s a question with many different answers, not least because people tend to approach it in two different ways. The first is to look at the whole housing market – i.e. what accommodation costs generally – and designate the bottom chunk as ‘affordable’. This is what the UK government does. It says accommodation is affordable when its rent is 80 per cent or less of the local average or when its mortgage is ‘below market levels’. The problem with this method is that when house prices are really high, even the cheapest homes can be unaffordable for many people. That’s why some people prefer to define affordable housing by how much of

Your Home


people’s money it takes up: a common measure is that it should be no more than a third of your income after taxes. For some, even this method is too general. Handing over more than a third of your income might not make much difference to your living standards if you’re very well off, while for the poorest even spending a smaller percentage of your income on housing might make it impossible to pay your other bills. Similarly, spending a large chunk of your money on housing will be less detrimental to your financial well-being if your other expenses are low, say, because lots of competition among local businesses has driven down prices or because you live in a place with lots of free or subsidized public goods and services.

Making all that expensive housing more affordable There are plenty of suggestions to achieve this, but the four main ones are. Make (big) mortgages easier to get There are two ways to make something more affordable: decrease its price or increase the amount of money you have to buy it with. Some governments, including the UK, have created policies which do the latter. An example would be the Help to Buy scheme, in which the government offered low-interest loans to help some first-time homeowners afford a deposit. The advantage of this approach is that it’s quicker and easier than building new houses, and it doesn’t hurt existing homeowners by decreasing their property value. The big downside is it keeps pushing house prices upwards, making them even more unaffordable for anyone who doesn’t qualify for a government help scheme. Price caps These are limits on how much you can charge someone to buy or rent a house. Rent controls in particular are becoming more popular – California has them state-wide, and Berlin froze most rents for five years at the start of 2020. Controls and caps stop house prices spiralling upwards and are particularly helpful to long-term renters who no longer have to worry about their landlord springing a sudden price increase on them each year. But they’re also often criticized as ineffective at best and an exacerbation of the problem at worse. Opponents of rent caps point out that squeezing the profits of landlords and developers makes them less likely to create new


What Is the Economy?

properties or maintain existing ones. This leads to less (and worse-quality) accommodation overall. Plus, because rent caps are rarely universal, they can also discourage their occupants from moving. That can have a bunch of economic side effects: people may not take a better job because of its location, or commute times and traffic jams may grow. Build more homes This is fairly simple logic: building more houses increases the supply of homes available. Buyers and renters don’t have to compete as fiercely over limited options, so landlords and sellers drop their prices to try and attract bidders and tenants. It’s a pretty popular government policy – the UK in 2020 has a target of 300,000 new homes a year. However, people point out a couple of problems with this approach. The first is that it often isn’t met. In 2019 the UK created more homes in a year than it had for over a decade. But at 161,022, it was still just over half the annual target. The second problem is that getting supply higher than demand – especially in the most desirable locations – is made really difficult by the way our economy is currently set up. Zoning laws, including the UK greenbelts, cap how many homes can be created. And building more homes won’t shift demand substantially as long as people can own multiple properties and houses are seen as a good investment. Build more affordable homes This is a variant on the aforementioned option that is tailored towards putting explicitly affordable options on the market. There are several ways it can be measured. The UK government often mandates that a particular number or percentage of new homes be ‘affordable’, for example. Of course, this approach can be criticized as using the ‘below-average cost’ definition of affordable, rather than ‘can be paid for on a low salary’ definition. It also has to be combined with some sort of means-testing or risks the result being that some well-off people get a cheap home. All of which is why there is a call for ‘building more affordable housing’ to mean building more council homes or housing association homes, i.e. dwellings that are explicitly given to people lower down the socioeconomic ladder at cheaper rates.

Renting versus home ownership Throughout this chapter, we’ve talked about how patterns of homeownership and renting have changed over time, who is more likely to be a homeowner and who is more likely to rent and how various decisions by policy makers and societies can translate into more people becoming homeowners or renters.

Your Home


But what we haven’t discussed is how these two methods of securing accommodation measure up against each other. Is one better for the economy than the other? Is one better for individuals than the other? In a world where more people found it affordable to both buy and rent property, which avenue should policy makers try to nudge them down? Is homeownership good for the economy? As we’ve explored in this chapter, homeownership is often seen as a wise financial decision for an individual. It gives them control of a valuable asset which can be drawn on if they need money in the future. Owning wealth like this makes us less vulnerable to economic shocks and less likely to need state support if we meet financial difficulties. In other words, owning something physical (and useful!) can seem more attractive than just having money, especially in times of uncertainty. All this would remain the case if house prices were stable. But of course in both distant and recent history, they have a habit of shooting up. For homeowners, that means they’re not just in possession of a store of wealth, they’re in possession of a store of ever-increasing wealth. Clearly there’s lots of benefits to that! All this created wealth also pushes up GDP, which is often used as a metric of a successful economy. Higher house prices mean more money collected from property taxes, too. But we know from this chapter that rapidly rising house prices also increase economic inequality and ups the risk that there will be a sudden crash which could leave lots of people in a really bad financial situation. For some, then, the ideal is to have high levels of homeownership without rapidly increasing prices. Is this possible? As we mentioned previously, house prices go up when mortgages are readily available. But without big mortgages, the vast majority of people could never afford their own home. However, there are other influences on house prices and plenty of arguments that we could stabilize them by fiddling around with the supply-and-demand balance. Loosening planning permission restrictions, speeding up house building and banning the purchase of homes you don’t live in have all been suggested as methods that would allow for a nation of homeowners without huge house prices. But should homeownership in general be a key goal for policy makers? Well, some studies suggest that making residents into homeowners benefits local areas because homeowners tend to do more investment and engagement within their community. That’s partly because they’re more likely to stick around – buying and selling homes is a time-consuming, complicated and costly process, so people don’t tend to do it often. It’s also partly for financial reasons – the nicer your local area is, the more likely your property value will go up.


What Is the Economy?

There’s one final reason we should consider: preference. In places like Britain, most people would prefer to own rather than rent their home. That matters, because one of the key ideas of economics is that all economic transactions should be about maximizing our utility, or well-being. However, it’s important to note that this preference for homeownership is largely a product of the current culture. In other parts of the world, or at other times in British history, renting was largely seen as the better option. In other words, the British obsession with homeownership is not fixed and may change. Is renting good for the economy? It’s obvious that there are big downsides to paying rents that are unaffordable or increasing faster than your income. But renting generally can have plenty of benefits. One of the big ones is flexibility. It’s not usually practical or desirable to spend time and money purchasing a home if you’re not planning to stay in an area for that long. University students, workers on short-term contracts and young people looking to live alone or with friends before settling down are all examples of circumstances where renting may be preferable to buying. In general, economists are also fans of things like renting that allow people more freedom to move around. The idea is that it makes it more likely that people will go to where the best jobs are, which improves overall economic productivity. However, lots of people renting doesn’t change the fact that all their homes have to be owned by someone. Some people therefore think a society of renters just means all the benefits and wealth of homeownership will be held by a very small circle of well-off private landlords. But this doesn’t have to be the case. Governments can impose regulation on landlords that is designed to ensure they meet minimum standards and caps how much profit they can make. Another solution would be for the state (or possibly other non-profit entities like housing associations) to own large amounts of property, with the explicit goal of renting it out at fair and affordable rates. This model exists in the real world. In Singapore, over three-quarters of the population live in government housing. Residents can get 99-year leases and the homes cost below market rates. The flip side of this, or any type of renting, is that tenants don’t have the same control over their living situation that a homeowner does. They’re often constrained in what they can do to or on the property so can end up not having access to the well-being boost that could come from things like painting their walls purple or adopting a puppy. Their living situation is also less secure, because a landlord could always decide to end the lease and kick them out of their home. Plus, they’re reliant on someone else’s cooperation when things go wrong and need fixing.

CChapter 7

Your work What do we mean by ‘work’? What counts as work and what doesn’t is actually quite difficult to pin down, not least because different people could assess the same set of tasks and come to different conclusions about whether it is work or not. Consider someone painting a picture. Are they working? If they’re a professional artist, they’d almost certainly say they were. But if they were a hobbyist who enjoys creating art as a way to relax, they’d probably say they weren’t. People often try to pin down work as something that requires one (or two, three . . .) of the following things: payment, effort and created value. Let’s take each in turn. Work as something you do for money is a familiar concept to most of us. It’s how most economists have traditionally identified work. But it excludes all sorts of things that many people still consider work, from unpaid internships to volunteering to caring for family members. These roles usually include similar tasks to those that paid workers perform and create things of value just like paid work does. That makes it difficult to justify why they shouldn’t be counted as work. So what if instead of defining work as something that is paid, we defined it as something that requires mental or physical effort? That doesn’t seem like a perfect fit either. Going for a run or winning a game of Jenga requires mental and physical effort, but most of us wouldn’t say they are ‘work’. And under this definition, how do we count people who are employed but for one reason or another aren’t putting any effort into their job? That’s hardly unheard of. In Uganda, for example, 27 per cent of teachers don’t bother to show up to school and globally, teacher absenteeism accounts for the loss of up to one-quarter of primary school spending. The final way to think of work is via value-creation. By this metric, work is anything you do that provides something someone benefits


What Is the Economy?

from. But value can be a difficult thing to measure, not least because it can change over time. If we jumped in a time machine and spoke to a contemporary of Vincent Van Gough, who famously sold just one painting in his lifetime, they may have told us that his artsy sunflowers contribute no value to the world and Vincent should try his hand at some more productive, proper ‘work’. Few art historians would agree with that assessment today. The ‘labour market’ ‘Labour’ is just another term for work. (The UK Labour Party’s name comes from the fact that it was set up to be the party of the working classes.) The labour market is anywhere work is exchanged. When you accept a job, you’re exchanging your time and abilities – usually for money but sometimes for work experience or a quid pro quo or something else. Work is how most of us get the income we spend on taxes and consuming and investing and all that other economic-y stuff. It’s also how societies produce most of their goods and services. There’s no education without the labour of teachers, no Nintendo Wiis without the labour of game designers and factory hands. As with housing and other markets, economists often look at the labour market through the lens of supply and demand. As a quick refresh: demand is how much people want something. Supply is how much of it there is to have. The balance between the two is generally regarded as having a strong influence on things such as how many people are employed and what wages they’re paid. We’ll go into more detail about that later. Investing in ourselves, or ‘human capital’ ‘Capital’ is the word economists use to describe something of value. It often – but not always – refers to money. People can invest their capital in something – a business, a house, the stock market – in order to make money or other things of value. Human capital, then, is the value of humans themselves: their skills, their talents, their general manpower. When we do a job, our human capital is invested into producing more things of value, just like with regular capital. Every time we improve our skills or gain new ones through education, training and experience, we’re increasing our human capital. Doing this usually benefits us as individuals, because we can translate our increased human capital into higher wages or a more interesting job. But it is also seen as benefiting employers and the economy as a whole, because more skilled workers are more productive workers. That’s why both businesses and governments often pay for education and training programmes: to improve the total amount of human capital.

Your Work


Of course, some people find the concept of human capital creepy, because it can be seen as treating people like machines constantly in need of an upgrade. There’s also a worry that seeing education and experience only through the lens of productivity and money-making will prevent us from seeing learning as valuable in its own right. Why do we work? The obvious answer is ‘for money’. Unless we happen to be part of a wealthy family, we generally need to secure ourselves some sort of income source in order to be able to eat and pay rent and get a round in at the pub and just generally buy all the stuff we want. But for many people, money isn’t the only reason why they work. They may also consider their job to be a source of personal fulfilment, a civic duty, a status symbol, a good way to pick up new skills or meet new people or even all of the above! Of course, it’s unusual to find a job that satisfies all of these requirements. So many workers end up making trade-offs. A highly paid businessperson might decide to take a big pay cut to work for a charity that they feel makes a positive difference in the world. A new parent might choose a job with less impressive responsibilities but a better work-life balance. This trade-off phenomenon can sometimes make it hard for economists and politicians to figure out why a labour market looks the way it does or how it can be changed to meet policy goals such as lowering unemployment. For example, economists often assume that if lots of well-paid jobs are created in one area of a country, then unemployed or underemployed people from elsewhere will move to take advantage of the opportunity. But in reality, many of us want to stay in the community we have put roots down in. How much should we work? When economists tackle this question, they often think about it in terms of time versus money. They work out how much money a person makes for each hour of work and designate this as the ‘cost’ of an hour of leisure time. The idea is that you’re constantly weighing up whether spending an hour playing video games or reading a good book is worth giving up the £10 or £20 or £100 you could have earned if you worked instead. By this logic, the more money we earn, the more we’ll work, because each hour of leisure time means forgoing a larger chunk of cash. This can feel a bit odd to those of us who are used to consistent working hours that are set by our boss when we take a job. But economic models like this are often divorced from the real world in this way in order to make


What Is the Economy?

them simple enough to work. (People are divided on whether this gives us rough rules of thumb that are useful for making generalizations about economies or is so unrealistic that we might as well not bother.) Is work a choice? The supermodel Linda Evangelista famously said she wouldn’t get out of bed for less than $10,000 a day. While most of us would struggle to relate to that, it’s not uncommon to hear people say there are certain jobs they’d never do or salaries they’d never accept. But taking that position assumes that you’d never have to choose between a hated, poorly paid job and starvation. And that’s a choice that millions of people around the world still do have to make every day. But that may eventually change. Many modern societies have introduced various welfare policies that are explicitly designed to ensure that unemployment doesn’t stop people from having access to food and shelter and some form of income. In countries like the UK, societies broadly agree that certain groups of people, including children, the elderly, the ill and the disabled, should be able to live comfortably without having a job. Some people go further still and push for the introduction of a universal basic income, which would give a sum of strings-free money to every resident each year. But there’s also hard limits to how optional most people think working should be for healthy adults. In countries like Britain, a lot of anger has been directed towards people who are perceived as abusing unemployment benefits in order to get out of having to have a job. This backlash has seen recent governments reduce welfare payments or attach more stringent conditions to them (including having to take any job you’re offered while on them). People who support such policies often say it’s about fairness: nobody likes working, so why should they have to work harder to pay for someone else to just chill out and have fun? There’s also an economic spin to this issue. As we said earlier, jobs are the way much of our economy’s stuff and wealth is produced, and the way most of us get the money we need to buy things and keep the economy growing. If you’re an economist who subscribes to the idea that economic growth is a good thing (which is most of them), then you want lots of people doing lots of work all the time. Work and productivity Productivity is a measure of how much output you’re getting per unit of input. Inputs could be anything from money to resources to time. Outputs are the final product – an apple pie, a pair of shoes, a therapy session, etc. Economists, governments and business owners are often obsessed with improving productivity or getting more output for the same or even fewer inputs.

Your Work


Productivity is closely linked with wages. One of the assumptions underpinning a lot of economic theory is that they increase and decrease together: a more productive worker can command a higher wage, and a larger salary will incentivize greater productivity. In the same vein, higher productivity tends to translate into higher profits for a business. Those profits can be funnelled into all sorts of well-liked things: money for the business owners (including shareholders); pay rises, new job openings and improved working conditions for staff; tax for governments; and price cuts or product improvements for consumers. Productivity, therefore, is generally seen as widely beneficial. Henry Ford, the American carmaker, is often cited as one of the top productivity-enhancers of our times. (The Ford car is also usually credited as the first model which ordinary middle-class people could afford.) Ford’s productivity trick was to become the first entrepreneur to make use of the modern assembly line. His employees all worked on a small part of the car-making process rather than each worker making a whole car from scratch. This specialization technique is called division of labour, and it increases productivity because when you’re responsible for just one task you not only do it quicker (you don’t have to move much, say, or get different equipment) but you also develop expertise in it much faster. On the flip side, if all you do during your work day is the same small task over and over and over again, you’re not only more likely to be bored but you may wind up feeling alienated from your company’s actual product because it’s more difficult to see the impact your contribution has made. That’s not good for your own sense of well-being, but it’s also not great for your boss or productivity in general, because plenty of research suggested that feeling unhappy or disengaged lowers our productivity. There are several possible solutions to this problem. The first is that companies could offset the negative aspects of productivity-enhancing workspaces with other things employees value, like decent wages or good work benefits. The second is that companies could find new workers who aren’t so pesky as to have feelings about things like long hours and dull tasks, aka robots. (Of course this wouldn’t be so great for humans, who would be out of a job.) The third, and possibly most radical, solution is that we could rethink our obsession with maximizing productivity. As we mentioned earlier, economists tend to believe that upping productivity is always a good thing, because it translates to more (or more valuable) stuff that everyone can enjoy. In some cases, like food production, increasing productivity is vital if we want to be able to adequately feed a growing global population. But lots of people are now pushing back against the theory that more is always better. Environmentalists point out that constant production damages the earth and climate and leads to some really bad consequences. Anti-consumerists say that we don’t actually need unlimited stuff and should instead stop at the level where everyone has enough to satisfy their


What Is the Economy?

basic needs and just some of their wants. Although they acknowledge that plenty of people around the world still live in acute poverty, they think we could solve this by more fairly sharing existing resources around rather than producing more.

Wages: What are we worth? Who decides how much you earn? You may think the answer to this is ‘your boss’. But it’s actually a little more complicated than that. Excluding people who are forced to work, you as a worker (at least theoretically) have a say in how much you earn, because you can turn down work that you don’t think is worth your while. Governments often have a hand in wages too, by setting pieces of regulation such as a minimum wage. And everyone around you is also involved because how much they compete with you for each job can influence which salary you end up with. Back to supply and demand There are actually two types of supply and demand exerting an influence over wages. The first is around the product workers are being hired to produce. If more people want to buy this product (i.e. demand is high) than there are units of it currently being supplied, then companies will have an incentive to ramp up production by hiring more workers. And because more demand than supply usually translates into bigger profits, wages can be higher too. But there’s another piece to this equation, which is the balance between the number of jobs employers are offering and the number of people who can and will do the job. It’s worth pointing out at this stage that when economists talk about supply and demand between employers and employees, they assume two things. Firstly, that all employers (who represent the demand side) will attempt to pay the lowest wage they can for a certain piece of work to be done to a certain standard, and secondly that every worker (who are the suppliers in this equation) will charge the highest price possible for their labour. This means that where wages end up depends on whether the supply or demand side is higher. If an employer is struggling to find anyone to do the work they need, perhaps because it requires an unusual skillset or because there are better jobs available to workers elsewhere, they will have to raise wages to persuade people to come and work for them. If instead there are lots of workers who are keen to take on the same job – perhaps because there’s not many jobs around or because the work in question is particularly cool – then the employer can keep wages low because at least one of the applicants will consider it better than nothing.

Your Work


In theory, supply and demand should balance itself out in a way that means no employer is stuck with sky-high wage bills and no worker earns too little to meet their basic needs. As wages for, say, coders climb, the job becomes more attractive to non-coders who are incentivized to learn coding and switch careers, thus increasing the supply of coders and pushing down wages. Similarly, if wages for coders were really low then lots of budding entrepreneurs will conclude that it’s a good time to set up a website as they can get it coded cheaply. This increases demand, so coder wages go up. Unfortunately, it’s a little more complicated than that in real life. Many specialist skills are difficult, expensive or even just time-consuming to acquire, putting them out of reach of many people. (Try as we might, most of us will never have the vocal skills required to take home Beyoncé’s annual pay cheque). And our world is both so globalized and technologically advanced that many employers facing rising wage bills have the option to replace staff with machines or to outsource to another country where wages are lower. ‘So why should I hire you?’ Technically, the reason any job exists is to produce something that is needed or wanted by society. So some economists say that this production aspect is largely what wages are based on. This has a fancy technical term: the marginal product of labour. The idea is that as long as whatever a company is churning out is being consumed by people, then every extra product equals an extra sale which equals extra profit. That means that new workers should keep being hired as long as the wage they are paid is not higher than the profit that will be made on the amount of product they can produce. At the same time, wages shouldn’t fall below this profit level, otherwise a competitor company will swoop in and snatch up all the staff in order to make more stuff (and more profit) for themselves. There are a couple of criticisms that are often levelled at this theory. For one, when economists talk about it, they sometimes act like companies have no barriers to expanding their business (or setting up a rival company) apart from persuading consumers to buy extra stuff. But in practice there are all sorts of logistical limits. You might not be able to find enough job applicants with the skills you need. Or you might not be able to get hold of enough equipment or factories or technologies or so on that any new staff would need to do their jobs. An airline who suddenly has lots more people clamouring to buy tickets can only sell them if it can (a) find more people who have had the extensive training needed to be a pilot and (b) has new planes for those pilots to fly. Additionally, it can be really difficult to work out how much value many jobs actually bring in. Many goods and services are created by teams of


What Is the Economy?

different people, and it can be next to impossible to sort out exactly how much impact each person had. This problem gets even trickier if the value in question isn’t money but some sort of intangible good, like education or health or happiness. Perfect markets versus imperfect realities All these common labour-market theories are grounded in a lot of assumptions that aren’t always present in reality: that employees and employers are primarily focused on maximizing the money they make, that both will always be subjected to fierce competition from other workers and businesses and that everyone has access to lots of information about what wages are being paid where. They also often act as though these markets are unregulated, or have no government interference, which is rarely the case. This abstract set-up (called a perfect market) obviously fails to capture many of the complexities of actual workplaces, but people disagree over whether it provides enough of a rough guideline to still be useful when we think about how the economy works. Wage regulation Almost all countries have rules and laws which influence wages. Perhaps the most obvious one is the regulation which sets minimum or maximum wages. But legislation around things like unions and employee rights can have an impact too. Governments also have a less direct effect on wages through their tax regime. Putting large income taxes on high earners, for example, might push the highest salaries down because if the government is taking most of the extra money, a pay rise becomes less appealing to employees, which makes it a less useful recruiting tool for employers. On the other end of the scale, taxing companies more if they have a lot of low-paid workers may result in pay rises. The American politician Bernie Sanders has pushed for exactly this sort of tax, arguing that companies whose workers are not paid enough to stop them requiring additional government welfare should be hit with higher taxes. (The bill proposing this is rather pointedly called the BEZOS Act, after Amazon’s CEO Jeff Bezos.) Minimum wages A minimum wage is the lowest amount that you can legally pay someone for a portion of work (they’re usually done by the hour). Minimum wages are set by governments. Some companies or industries adhere to minimum wages that are set by other people – the Living Wage campaign in the UK is a good example of this – but they’re not bound to it by law.

Your Work


The minimum wage doesn’t just force employers to comply with it – it forces employees too. This is to stop people who are particularly desperate for a job (or perhaps a specific, highly desirable job) from trying to outcompete other applicants by offering the company ever-cheaper labour. Fans of minimum wages argue that they simultaneously help people and the economy at large. They are designed to guarantee that working will allow everyone to meet at least their basic needs. (Whether minimum wages are high enough to actually do this is hotly debated.) But they also aim to ensure that the wealth generated by businesses is spread around rather than being hoarded by its owners. Putting more income into more people’s pockets allows them to buy more (which fuels consumption, which in turn fuels growth) and reduces the amount a government has to spend on welfare for low-income people. However, not everyone agrees that minimum wages are helpful. Some people think that because they make low-skilled staff more expensive they encourage businesses to hire fewer workers. They may also make it more difficult for small businesses and start-ups to make financial ends meet. If the response is that fewer companies are set up or grow bigger, the result could be less competition between sellers. Mainstream economic theory says that limited competition means prices go up, because customers have nowhere else to go. It therefore increases the cost of living, in a way that is most detrimental to the least affluent. There are alternatives to a minimum wage for a government whose main aim is to decrease poverty. It could, for example, increase welfare benefits instead. That would take the responsibility for funding a reasonable quality of life for workers off business and put it onto taxpayers instead. But this sort of system tends to be less popular with the general public. Of course, businesses are usually taxpayers themselves, so in theory a government could raise taxes on company profits in order to pay for top-ups to low-paid workers’ salaries. This system would lower costs for just-starting-out companies. But some people would say that it would discourage companies from growing bigger and more profitable. So many governments prefer to stick with raising the minimum wage. It also helps that most of the studies done on the effects of the minimum wage suggest it doesn’t seem to have a negative effect on employment. Maximum wages The polar opposite of minimum wages, these are laws about the absolute top amount someone can be paid. They’re sometimes calculated to be a certain ratio between the highest and lowest paid employees – so, for example, a CEO can earn no more than ten times the salary of their janitor. They’re nothing like as common or as popular as minimum wages, although they can


What Is the Economy?

sometimes be found in specific roles or industries. British MPs, for example, have a set wage that is determined by an independent body each year. Plenty of people dislike the idea of maximum wages, because they think that the government has no right to stop people from benefiting as much as possible from their success and hard work. Some people are worried that focusing on limiting wages, rather than wealth generally, will completely cut off the path to the top for people who were not born into money, therefore making societal inequality even worse. Others believe that capping someone’s earning potential will curtail their ambition and the end result will be fewer world-class companies or inventions or expertise that lots of people can benefit from. However, the idea of a national maximum wage has started being talked about more and more in some left-wing circles. The thought process is often grounded in ideas of fairness and the opinion that having too wide a gap between the highest and lowest earners is bad for society, not least because it builds resentment.

Power in the workplace Who has more power: Employees or employers? What employees want and what employers want aren’t always perfectly aligned. As a general rule, most people would probably like to be paid more to work less, whereas a company with a firm eye on the bottom line may consider low wage bills and high productivity the ideal. Similarly, lots of the work benefits that employees like having, such as sick leave, paid holidays, spacious offices and fancy coffee, are ultimately costs to their employer. So the two sides often have to negotiate to find a balance that suits both of them. Many people feel that in such negotiations the deck is stacked against the employee. Companies, particularly large ones, often have more resources and knowledge that can put them at an advantage. They can hire lawyers to draw up and enforce employment contracts that suit them or compare the salaries their top job applicants have asked for and take the lowest one. In an increasing number of cases, they can also replace human workers with robots and other machines if it‘s more cost-effective to do it that way. But employees have power in this situation too. They can withhold the labour a company needs. Even more effectively, they can do this en masse, via a strike. They can also damage a company’s reputation and scare off other workers or customers, especially in the age of internet sites like Glassdoor and TripAdvisor. We talked about the theory of supply and demand and how it affects the labour market. It also affects how much power workers or employers

Your Work


have to set the terms they want with the other. When unemployment is high, there are lots of people competing with each other to get a job, and workers who are employed know that if they lose their current job they may struggle to get another. That means an employer can offer low wages or cut back on workplace benefits without worrying that their staff are going to quit in droves or that they’ll struggle to replace anyone who does leave. When unemployment levels are low, the opposite is true. Skilled workers generally have more power than unskilled workers One of the criticisms that can be levelled at the supply-and-demand argument is that it is an oversimplification that assumes all people can do all jobs. In reality, how many jobs and people are available may not matter as much as how well the jobs available match up to the skills of the people looking for work. A hospital can’t fill a doctor position with someone who doesn’t have the relevant qualifications, in the same way that a car repair shop wouldn’t want to hire someone with no mechanical skills. How much power an employee has to bargain for the wage and working conditions they want, then, may depend less on the general employment level in their area and more on how many other people have the skills and expertise they do. Clearly, the more specialized and impressive your skills are, the less likely a company is to find anyone equivalent to you and the more likely competing companies are to try and lure you away with promises of more work perks. This is why the footballer Lionel Messi can take home pay cheques of close to a million pounds a week, despite the fact that there are no shortage of people who would be willing to take his place if he quit tomorrow. Pretty much no one else can score goals and win matches like he can, so his bosses are willing to shell out to keep him around. The less employers there are, the more power each of them have Competition means that there are enough companies selling the same good or service that consumers have a genuine choice about who to buy it from. By the same token, lots of competition means that employees have a choice about which company to work for. But competition isn’t a given. Sometimes, a single employer can dominate an entire market. Economists describe this situation as a monopsony. No, we didn’t misspell ‘monopoly’ there, although they are confusingly similar terms in both spelling and meaning. A monopoly is when there is only one seller, whereas a monopsony is when there is only one buyer – in this case, for labour. When there are a few businesses selling the same thing but not enough to give customers and workers much choice it’s known as an oligopoly.


What Is the Economy?

Both tend to put employees at a power disadvantage because they have nowhere else to work and therefore have to accept the company’s terms. Workers can band together and gain power via unions A union is an association of workers who collectively negotiate their workplace rights, including pay. Unions can exist within a single company, across industries or over the workforce at large. Unions have various strengths that individual workers do not. By representing large numbers of employees at once, they raise the costs employers will suffer if those people refuse to work until their demands are met (called going on strike). Unions also remove the incentive for individuals who are desperate for work to undercut each other, which tends to leave them with worse work conditions than an employer would be willing to provide if pushed. Unions, which were criminalized until 1867, are often credited with creating many of the things we now see as basic workplace rights. That includes safe working conditions, eight-hour days and the end of child labour. They were a correction to some of the excessive inequality that existed between the rich and the working classes during times such as the Industrial Revolution when governments (who tended to come from the ruling classes themselves) didn’t seem all that inclined to help. Big unions can still firmly tip the power balance back towards workers, because losing the majority of your workforce is still so economically ruinous to most businesses that it quickly brings them to the negotiating table. And by collectively bargaining for higher pay and other benefits, unions have made millions of people around the world better off. But there are also lots of criticisms that can be directed at unions. They prioritize the needs of one group of people (union workers) over everybody else and that can cause harm. For example, by making it hard for an employer to fire a bad union member, they may be costing a better nonunion member a job. Indeed, by making it harder for employers to lower wages, they may be costing lots of people jobs, if companies respond by hiring fewer people and getting in more machines. Strikes can affect not just an employer but the people who use the good or service produced. That can have negative impacts on their life – think of commuters who can’t get to work during train strikes or rubbish piling up in the street during bin collection strikes. Moreover, most work benefits, including pay rises and more time off, cost the employer money. If the extra money is passed on to consumers via price rises, it may raise the cost of living in a way that will hit the poorest the hardest. If that money is taken out of profits, it may lower the amount of tax the government receives, which may lower the amount it spends on public services. (And of course when it comes to public sector unions there’s an even bigger correlation between increasing their member’s pay and lowering tax spend elsewhere.)

Your Work


Union membership in the UK In the UK, membership of unions has been falling steadily since the early 1980s. In 1979, 55 per cent of British workers belonged to a trade union. It’s now about 25 per cent and on track to fall further: in 2015 just 5 per cent of all trade union members were between sixteen and twenty-five years old. That’s despite the fact that your right to belong to a union is enshrined in law, and any employer who tries to punish you for union membership can be taken to an employment tribunal. Britons may also be turning against the idea of strikes. In 2019 they re-elected the Conservative Prime Minister Boris Johnson, who floated the idea of banning complete railway strikes after South Western Railway employees refused to work the entire month of December.

Automation can threaten the power of workers The gains workers can get from both unions and supply and demand rely quite heavily on the assumption that bosses need human employees. But in a world of ever-improving technology and automation, that assumption is looking increasingly shaky. From an employer’s perspective, robots have a lot of pluses. They don’t require salaries or time off. They don’t get bored or tired or distracted by a conversation with a colleague. They’re also often much better than humans at everything from doing maths to lifting heavy weights to producing the exact same thing over and over again. This is why lots of people are very worried that the age of artificial intelligence and automation is going to leave workers completely powerless and, possibly, completely unemployable. There is a flip side to this equation, though. Humans can still outpace robots in some areas, particularly creative ones, or can work out as more cost-efficient than an expensive and prone-to-break-down piece of equipment. Humans sometimes also have the benefit of being preferred by customers: just because you can have a robo-doctor doesn’t mean that most people wouldn’t want to speak to a real person when they’re sick. Plus, as long as humans are somewhat in the equation, employers do have two strong incentives to treat them well. The first, economics-friendly incentive is that workers who are happy and healthy and like their job tend to be better at it; that is they’re more productive. It is therefore sometimes cheaper for an employer to invest in things like raising their employees’ pay because in turn they will churn out more, higher-quality product. The second, optimist-friendly, is that bosses are ultimately people too and are likely to have more complex motivations than simply profit-maximizing.


What Is the Economy?

Yes, there are tonnes of examples of cruel and mercenary employers in the world. But there are also lots of examples of bosses who wanted to pay well and treat their employees decently simply because they think it’s the right thing to do. Ultimately, people control businesses, so people control the labour market Failing a robot uprising, businesses are still ultimately run by people, who exist in a society of lots of other people – which means that ultimately how much power businesses and workers have is up to all of us. Of course, as we’ve observed elsewhere, the power that we hold as individuals is often not equally distributed, so some of us have more sway over the labour market than others. But individuals can band together in groups to effect change. Companies still have to sell their product, so customers could choose to boycott workplaces that they think don’t treat staff fairly. Businesses also still have to follow the rules of governments, so people could elect politicians that promise to crack down on workplace abuses or raise taxes on companies that use lots of robots.

Equality in the workplace What’s up with all the pay gaps? A pay gap, or wage inequality, is when people get paid different amounts of money for doing the same amount of work. Most people are okay with wage inequality as a principle, because most people think different jobs, or different levels of expertise within the same job, should be valued differently. A boss getting paid more than an intern is fine with most folks, as is the idea that a master concert pianist should be paid more than a parish church organist. Of course, ‘most people’ is not the same as everybody. Communist thinkers often argue that the rewards people get for a day’s work shouldn’t be dependent on what type of work it is. (Communists also tend to eschew paying people money in favour of just giving them the stuff they need to live, but the point remains the same.) What is more common, however, is for people to be uncomfortable with the scale of wealth inequality. Someone might be cool with a boss getting paid 5x more than an intern but not 50x. Where exactly someone sits on this spectrum can differ massively from person to person, though, which makes it difficult for societies to figure out which level of wage inequality, if any, is acceptable. Those who want to limit wage inequality tend to give one of two reasons. The first is based on the idea that wealth is a zero-sum game,

Your Work


which means for someone to benefit someone else has to lose out. In short, if a few highly paid people are hogging all the wealth then there’s going to be less to spread around the lowest earners. Some people argue that this is both not fair and economically inefficient. Not fair because poorer people need extra money more than wealthier people. Economically inefficient because the money could make more significant changes to a poorer person’s health or happiness or human capital, whereas a rich person presumably already had the resources to push these aspects of themselves to the max. The second reason is grounded in the idea that all human beings are fundamentally the same and therefore should have access to as equal a life as possible. When some people’s income allows them to exist in a totally different world, society becomes fractured and resentment and alienation grow. On the other side of the equation, some think that we shouldn’t do anything about wage inequality because it’s the inevitable result of a world where some people work harder or are simply more talented than others. If we tried to cut back the privileges of this group, then these people would become less ambitious or less interested in pushing themselves to become the best of the best. An important component of this argument is that it asserts that when some people succeed, lots of other people indirectly benefit. An entrepreneur whose start-up turns into a billion-dollar company may have also provided people with a product that makes their lives better, created hundreds or thousands of new jobs and paid governments loads of tax that can be used to improve public services. This idea, that wealthy individuals create a wealthier society, is called trickle-down economics. What about the pay gaps between genders, races or other social groups? It is well documented that if you look at certain groups of people – men versus women, say, or white people versus people of colour – that on average one group is paid significantly more than the other. One reason that is given for why this happens is prejudice. When someone from an underprivileged social group is paid less for a job purely because they are from that social group it is known as unequal pay. Many people are pretty uncomfortable with the idea that you should be worth less because of your gender or the colour of your skin, which is why there have been lots of efforts to get employers to tackle their biases when it comes to hiring and promoting candidates. However, it is important to note that the mere existence of a pay gap between social groups does not in itself prove that unequal pay is happening. Indeed, there are plenty of people who say gender or racial wage inequality isn’t really about sexism or racism at all.


What Is the Economy?

Pay gap figures don’t usually come from comparisons of wages paid for the exact same job. Instead, they are averages across all the jobs people of that social group hold. And that means that can be influenced by something called occupational segregation, which is the fact that certain people are more likely to hold certain jobs. Take airlines. In 2018, 94 per cent of EasyJet pilots were male, while 69 per cent of its cabin crew were female. Pilots are paid £92,400 a year and cabin crew £24,800. EasyJet will therefore have a very large gender pay gap, but if it hired a lot of new female pilots and male cabin crew that pay gap would disappear. The question that is raised by occupational segregation, though, is why certain social groups are less likely to do certain jobs. The answer is important. If women just don’t like flying planes or women just aren’t as good as men at flying planes, then there’s no problem with this pay gap: few people would suggest that we should force anyone into work they don’t like or that employers should hire the worst people for the job. But if women don’t fly planes because of a sexist culture that makes many people believe that women can’t or shouldn’t fly planes (when they’d actually do just fine at it if given the opportunity), then that may be something a society wants to fix. Similarly, another reason often given for the gender pay gap is that women are more likely than men to take on unpaid care work that pushes them to quit work or go part time. That could be because women are on average more ‘caring’ than men or more likely to want to stay home with their kids. But it could also be because traditional gender roles shape people’s expectations of who should take on care work and make it more difficult for men and women to switch roles. A good example of this is parental leave, which is more often than not restricted to mothers only. For heterosexual couples, that means there’s an extra cost to having the father stay home with the baby. The work we don’t pay for The largest and most common type of unpaid work is housekeeping and care work (looking after children, the elderly, the ill or the disabled). But unpaid work also includes volunteers, unpaid interns and modern slaves. There’s some debate among economists about whether unpaid work can count as regular labour. But what isn’t in doubt is that if all the people currently doing this type of work suddenly stopped doing it, we’d notice. In fact, it would almost certainly generate a whole bunch of paid employment, as social workers and care home assistants and nurses and charity workers and regular employees step into the gap left by unpaid workers. This raises the question: Are we undervaluing unpaid labour, and what would happen if we started paying for it?

Your Work


Why is care work important to the economy? Every single one of us requires care at some point in our lives. This is particularly true when we’re very young or very old, but many of us will also struggle with an illness or disability during our working-age years. Similarly, many of us will perform unpaid care work during our lifetime. (There are of course paid care workers too, but for this section we’ll only be focusing on the unpaid kind.) From a purely transactional perspective, we need care work to create and nurture society’s future workers (aka kids) and nurse our off-duty workers back into the workplace. But there’s more to it than that. Unpaid care work improves the quality of people’s lives; it teaches children to be nice adults and allows older people to continue living in their own home. It meets a universal human need, and our economies would struggle to function without it. Why does it matter if care work counts as ‘real’ work? Economists and society at large have a tendency to undervalue activities that aren’t considered to be equivalent to a regular salaried job. That undervaluing can take many forms and have a variety of negative consequences. It can leave caregivers feeling frustrated and alienated because their contributions are being dismissed by society at large. It can keep wages for paid caregivers low by framing what they do as something that doesn’t require the skill or commitment of ‘real’ work. And it can lead to care work being pretty much ignored by many economists. Not only is the subject very understudied compared to, say, labour economics, many of the metrics (like GDP) that we use to gauge how our economy is doing don’t include it. That matters. Economic data is one of the main things used by politicians, journalists and voters to see what’s working well and what needs changing within the economy. If unpaid care work isn’t even included, then nobody really knows what it’s doing or how important it is to the economy’s overall health. That makes it – and the people who do it – easy to ignore. The replacement cost method: Pretending to pay The replacement cost method attempts to fix economists’ traditional undervaluing of care work. It measures how many hours are spent looking after children, the sick and the elderly and doing basic household chores like cooking and cleaning and school runs. It then looks at how much money would have been paid out if professional caregivers had done all these tasks.


What Is the Economy?

When the UK tried using the replacement cost method, it found that unpaid work is worth almost £1 trillion. That’s over half of the country’s GDP (aka the total value of goods and services). Volunteering our time Volunteers, who give their labour for free to a cause they care about, provide lots of benefits to society. They are a mainstay of the charity sector, or the part of our economy that explicitly aims to meet ethical, social, health and environmental goals rather than maximize profit. There is also the concept of pro bono work, where skilled professionals like lawyers or CEOs share their expertise with clients who couldn’t afford to pay them their going rate. But there are problems with the concept. Not everyone can afford to give time away for free, so charities and other volunteering initiatives often become dominated by similar types of people: those who are wealthy and have time on their hands, perhaps because they are retired or don’t need to work. Add in that people from ethnic minority, immigrant or working-class backgrounds are disproportionately unlikely to be part of this time- and money-rich class and you quickly end up with a situation where certain experiences and backgrounds are shut out from the volunteering sector. That often means the loss of valuable insights and perhaps a closer kinship to the communities the volunteer is supposed to be serving. It’s a tricky one, because when charities do pay staff well, they often come under fire from donors for ‘wasting’ their money on administration and overheads. It’s understandable that people who give money to, say, a monkey sanctuary want that money to be directly used to buy bananas or rope swings. But if a charity doesn’t pay staff well, then the best people will be tempted to find work elsewhere (perhaps in the for-profit sector), and without the best people for the job, the charity won’t be as effective at caring for monkeys or whatever it does. ‘Work experience’ The same arguments against volunteers are often applied to unpaid internships: it gives an advantage to the well-off who can afford to pay rent and food bills while working for free. Because internships are often stepping-rungs into well-paid or desirable jobs this is seen as particularly unfair. After all, people from wealthy backgrounds already have advantages in this area, including being able to afford more educational opportunities, from private schools to extra-curricular activities, and being able to lean on a network of successful and powerful family and friends. There was a big uptick in unpaid internships after the 2008 financial crash (that’s supply and demand in action). There was also lots of backlash against them, eventually leading the UK government to ban most of them. These

Your Work


days, if you do anything that looks and feels like work (such as having to show up at a set time or do tasks that are assigned to you) then you have to be paid the minimum wage for it. Does slavery still exist? Unfortunately, it does. The United Nations estimates that currently there are about 21 million people in the world who are being forced to work through violence or intimidation. That’s equivalent to about a third of the British population. Alongside things like human trafficking and bonded labour, the UN counts the worst (but not the majority) of domestic and child workers as slaves. Most countries in the world have outlawed slavery on paper. But in practice the authorities often can’t or won’t help the very vulnerable people who end up as slaves, because of things like limited resources to investigate the crime or because they’re paid off by the people running the slave operation. Plus, many slaves are also illegal immigrants, which means there’s no official record of them being in the country. It also may make these slaves reluctant to alert the police themselves, for fear of getting in trouble with the law. Slavery as an industry generates billions of pounds and produces an untold number of products – some of which you may have unwittingly used yourself. It’s therefore an undeniable, if ugly, part of the economy. Removing it entirely means not just hunting out where it’s happening but making sure the incentives for slave owners are removed by prosecuting them harshly and putting pressure on businesses (and consumers) to do as much as possible to ensure slavery isn’t part of their supply chains.

Unemployment: The world of (no) work Who counts as unemployed? Anyone without a job, right? Well, actually, usually not. Generally, whenever a politician or economist cites an unemployment figure, they’re only counting the number of people who don’t have a job but are actively looking for one. When you think about it, this approach makes sense. Just under a fifth of the UK population are currently under sixteen years old and a similar percentage are over the retirement age. Most of them, obviously, don’t have a job. Then there’s the thousands of university students, trainees, gapyear backpackers, stay-at-home parents, ladies and gentlemen of leisure and so on who are making a deliberate choice to not work right now. If we counted all these people in the overall unemployment figures it would distort the data so much that it would be difficult for anyone to know how well our labour market is working for those that are actually


What Is the Economy?

trying to be part of it. That’s not ideal, because one of the things most of us generally want to know about our economy is if it’s providing enough good jobs for people who want them and what policies our government is putting in place to fix it if it isn’t. However, most unemployment figures also don’t include adults who did want to work but gave up after being unable to find anything for a long time. These people are disproportionately likely to lack many skills or be subject to employer discrimination. Disabled people, people with chronic health conditions (including mental ones) and people with criminal records are all common examples. Some think not including these so-called discouraged workers in unemployment statistics makes it easier for governments or other groups to forget about them. The causes of unemployment There are many reasons for us not being in work, but economists often highlight five main causes: Cyclical unemployment This is the idea that employment booms and busts along with the economy as a whole. When the economy is doing really well then lots of businesses are being set up and selling lots of stuff, which means they’re hiring lots of staff. When times are tight and companies are struggling to make ends meet, they lay off workers instead. Frictional unemployment Anytime someone becomes unemployed (because they’ve been laid off or graduated or moved or whatever) it always takes them a bit of time to get a new job while they’re looking for a good fit and planning their applications and interviewing and so on. That means that even if there were enough jobs for everyone in the world we’d still have some unemployment as people switch roles. Unlike the other types of unemployment, frictional unemployment is not considered much of a problem. Systemic unemployment This theory argues that a certain level of unemployment is an unfixable feature of a capitalist system, because only when workers are worried about the possibility of being unable to pay their bills will they accept working hard for a low wage in a way that creates a lot of profit for companies. Political unemployment Like systematic employment, this lays the blame for unemployment at the feet of special-interest groups. But instead of businesses it points the

Your Work


finger at trade unions and governments, who it says create unemployment by keeping wages artificially high, i.e. not letting them fall in recessions in line with the supply-and-demand theory. Structural unemployment Structural unemployment is when people can’t get jobs because there is a mismatch between their skills and the work required. This often happens when workers who were specialized in a particular field suddenly find their role obsolete. That’s often because of a piece of technology, but it could also be because a new wage or workers’ rights law suddenly makes hiring someone to do their job too expensive for businesses or because there’s been a big shift in social attitudes and tastes that means a certain good or service is no longer in demand. Structural unemployment is linked to economic instability Structural unemployment is often regarded as a big threat to economic stability. It often affects lots of people at once, and getting these workers into new roles can be hard and expensive. They may need to retrain or move away from their current location, which some might be reluctant to do. Because of these challenges, workers who fall victim to structural unemployment can end up out of work for a long time. Some may become resentful that after years spent working hard at their craft they had their livelihood taken away from them. And when the job in question was concentrated in a particular area, as is common, structural employment can send entire areas into decline, because all those unemployed people suddenly have less money to spend at local shops and other businesses. This is what happened in many manufacturing towns in the North of England after much of the work was outsourced abroad. In the longer run, however, economies generally recover quite well from waves of structural unemployment, as younger workers shy away from dying industries and learn the skills suited to newly formed roles. There’s an argument that by getting people (or machines) to produce more stuff for in-demand sectors, this sort of restructuring brings benefits that outweigh lots of people losing their jobs at once. Of course, the people whose livelihood and sometimes whole identity is lost in the shuffle may not agree with that assessment. Why do some economists talk about an ‘ideal’ level of unemployment? The concept of an ideal level of unemployment is grounded in the idea that if there was work for everybody then nobody would have to worry about keeping a job. After all, if you were fired you could instantly get more work elsewhere. If that meant more employees would show up late,


What Is the Economy?

or refuse to do a piece of work they found boring, or be rude to customers then productivity and growth would go down, which would be seen as a bad thing by many economists. Of course, this theory assumes we all only do good work if we’re sufficiently scared of being unemployed. Some people would argue that we will also do good work because we’re conscientious, or believe that what we’re doing improves the world, or enjoy the specific workplace or job we have. After all, just because you could get another job tomorrow doesn’t mean you’d have as good colleagues or as interesting tasks or as short a commute.

CChapter 8

Your money Coins, bills and symbols on a screen: Let’s talk about money Money. We all need it, many of us want more of it, some of us wish it didn’t exist at all, but most of us don’t really understand how it works. What makes money, money? What role does the financial system play in economic crises like the 2008 financial crash? And will we all soon be paying our bills with Bitcoin? Money: What actually is it? We all know money when we see it, but defining why that money counts as money can be trickier than it first appears. Partly, that’s because money has taken many different forms in different times and places. When most of us are asked to picture money we think of coins and banknotes. But shells and cigarettes and animals have all been used as money. And these days for many of us most of our actual money takes the form of numbers on the screen of an ATM or digital bank account. You can make anything into money, but first you have to get someone to agree with you that it’s worth something. When you think about it, the round bits of metal, coloured rectangles of paper and electronic string of numbers that we currently count as money actually hold no inherent value of their own. You can’t eat them or wear them or shelter from the elements with them. Units of money are seen as valuable only because a large number of people agree that they’re worth something. This sort of ‘social contract’ (which much of economics is built on) is much more likely to happen if the money in question is backed by governments and banks and other financial institutions and if most people trust those institutions. Remove one of these conditions and money can quickly lose most or all of its value. That often has devastating consequences for the people who are paid in it or buy their food and other necessities with it.


What Is the Economy?

What do we use money for? The obvious answer is ‘to buy stuff’. But there’s actually a little more to it than that. In fact, economists talk about three main functions of money. A medium of exchange This is the ‘buying stuff’ bit – money can be swapped for the goods or services that we want, from croissants to divorce lawyers. Money is uniquely suited to this purpose, because everyone finds it equally valuable. A ten pound note is as useful to a baker as to a lawyer1 because both of them can go on to exchange it for ten-pounds-worth of whatever they want. A unit of account This means that money lets us price very different things in the same terms (i.e. it’s worth a certain number of pounds and pence). That allows us to compare, say, the pay we get for an hour of work with the price of our rent or a loaf of bread. Storing value Money is generally seen as a safe way to put some wealth aside for the future. Because it’s less likely than many other things to wear out, or break, or become out of date, we feel confident that if we gather more of it now (by working overtime, say) we can use it when a future need arises (to pay for a holiday, perhaps, or a house deposit). This value-storing function of money is why it’s such a problem when money does decrease in value, through inflation. An economy without money People do occasionally barter goods and services directly instead of using money as an intermediary. If you ever swapped stickers or Yu-Gi-Oh cards with your school friends, you’ll have experienced this system first hand. The problem with bartering is that it relies on two parties having something the other wants, which is often not the case. A divorce lawyer might be happy to swap her services for a baker’s pain au chocolat, but the baker won’t accept that trade if he’s currently in a happy marriage. The history of money There are actually two alternative histories of where the concept of money came from. The first is that it naturally arose as a solution to the 1. There is, however, an argument that says the more money we have, the less valuable each unit becomes. This is known as diminishing returns and it’s one of the theories some people use to argue that the more we earn, the more of that extra earnings should be taxed.

Your Money


bartering problem mentioned earlier. The second is that it came into being when rulers realized they needed a unit of account with which to measure wages, calculate taxes and fines, and settle debts. What’s interesting about these two versions of the story is that they mirror a debate at the centre of economics: Do economic systems spontaneously come into being because of the individual decisions of lots of different people and businesses (or markets) or do they require the guiding hand of a government or other ruler (or the state)? As we explain in Chapter 10, drawing a strong distinction between these two options isn’t a good reflection of reality. The answer is almost always that both markets and states influence the way economies are shaped. Who creates money now? If we’re talking about physical money – coins and banknotes – the answer is governments. They’ll own or hire machines that take bits of metal and paper, stamp numbers and famous faces onto it and turn it into cash. That money is then shipped to banks and given to all of us when we make a withdrawal. It’s almost always illegal for anybody but a government to commission the printing of new coins and bills. But this cash money only makes up a tiny percentage of all the money that exists in the world – about 8 per cent of it, in fact. The remaining 92 per cent is digital money. And most of that money is actually created by banks when they give out loans. Confused? Let’s break it down. Imagine you want to borrow £10,000 from your bank. You wouldn’t just go into your local branch and leave with a big briefcase filled with cash (cool as that would be). Instead, your bank will give you an electronic deposit, which means the next time you checked your bank account the number on the screen would be £10,000 higher than it was before you took out the loan. This money is ‘real’ in the sense that you could walk into any shop and spend it or withdraw it all from an ATM. But it’s not ‘real’ in the sense that after they approved your loan application someone from the bank went into some vault somewhere, collected ten grand worth of coins and bills and put them in a physical place with your name on it. Instead, the money came into being because a person or algorithm programmed some numbers into a computer. Government can put limits on how much banks can lend (and therefore how much money they can create) but generally these rules are relatively relaxed. Why money creation matters Interestingly, economists haven’t traditionally been all that interested in money and money creation. Many subscribed to a theory called the neutrality of money which says that although the amount of money in an economy affects prices, it doesn’t have any impact on big things like jobs and salaries.


What Is the Economy?

More recently, that idea has come under more scrutiny. Many economists now think the money supply impacts things like whether recessions occur or how much economic growth happens. That in turn has led to a debate about how much control governments have over the money supply and whether banks have too much power when it comes to money creation. Nations have a few options if they want to change the money supply. They can raise or lower limits on how much money banks can lend and therefore how much money banks can create. They can change how much people and businesses want to take out loans by attempting to manipulate the interest rate. (The higher the interest rate, the more money the borrower has to pay back on top of the initial sum borrowed, which makes taking out a loan a less appealing prospect.) They can also create money themselves through processes like quantitative easing (we explain what this is below). Bank lending limits are usually set by governments, but in many countries the other tools are left in the hands of the central bank (discussed further). Governments used to have direct control over central banks, but most countries subsequently made them independent. Many even put in rules that explicitly stop governments having much influence over them. The idea was to stop money creation being used for political ends such as making the ruling party look good just before an election. Even when it comes to changing bank loan limits, governments are hamstrung by the fact that no matter how high they raise lending limits, they can’t force banks to give out loans. They have more sway when the problem is too much lending, but banks still have strong incentive to find ways around the system. There is therefore often tension between governments and banks, which is exacerbated by the fact that they are often on completely different pages when it comes to whether the money supply should be increased and decreased. When the economy is doing poorly, with lots of businesses struggling and lots of people out of work, governments generally want to increase the money supply. That way, businesses can borrow the money they need to keep hiring and paying staff, which stops the unemployment problem getting worse, and people who are short of cash can borrow to keep being able to buy things from businesses, which stops more companies from collapsing. But from the bank’s point of view, lending money to people and firms who are financially struggling makes no business sense, because they’re more likely to be unable to pay the money back. Similarly, when the economy is doing really well and companies and people have the money to make good on their loans, banks are keen to lend as much as possible. After all, the interest paid on loans is profit for them. But governments may worry that all that extra money building up is going to push up prices. This is known as inflation and it essentially makes money worth less, which makes debt more manageable but

Your Money


decreases the rainy day fund of savers. A big increase in private debt is also a problem if incomes (which are generally needed to pay back the debt) aren‘t increasing alongside it. If the economy suddenly takes a turn for the worse and incomes sharply decrease, lots of debtors are going to struggle to pay back what they owe. The way that banks would choose to structure lending, therefore, has the potential to make good times bad and bad times worse. Some people worry that governments having inadequate control over bank’s money creation is a key factor in economies cycling through periods of booms and busts. Such instability can harm many ordinary people. Should we be aiming for a cashless society? Digital money doesn’t just make up the majority of our money these days. It’s also fundamentally changed how our money systems work. For a start off, digital money can be transferred between two parties instantly and requires zero physical transportation. Lots of people benefit from that. It means you’re less likely to get mugged or lose your life savings because you stored them under your mattress and your house burned down. It means you don’t have to wait if you need money urgently to pay some unexpected cost. It means you can easily send money around the world. That’s particularly important for migrants, who often send money back to their family and friends in the form of remittances. Remittances are also really important to the overall economy of many poorer countries with large amounts of external migration. They make up over a third of Kyrgyzstan’s GDP, for example. However, using digital money comes with certain barriers that hit some groups harder than others. Businesses usually have to pay a fee every time a customer pays with digital money, which can be burdensome for smaller companies (though some say in the long run it‘s cheaper than handling cash, because it requires fewer trips to the bank and no need for a safe). Digital money also requires infrastructure like bank accounts, bank cards and sometimes an internet connection: things the poorest and most vulnerable people are the least likely to have access to. There’s also a concern that psychologically people don’t seem to see paying with debit and credit cards as akin to spending ‘real’ money, meaning they’re more likely to overspend. And the vulnerability of digital money to hackers, rogue governments or even just really bad power cuts may lead to significant problems down the road. Brixton pounds, US dollars and bit coins: What are currencies? Different forms of money are accepted in different areas of the world. We call these currencies. Usually, each country creates their own currency, although there are exceptions to this rule.


What Is the Economy?

Sometimes, countries decide to use another country’s currency. Ecuador and the Bahamas use the American dollar, for example. Some countries club together and create a new, shared currency, of which the euro is the most well known. (These are called currency unions.) It is also possible to have community currencies that are only accepted in a single city or neighbourhood. The Brixton Pound in London and the BNote in Baltimore are examples. These local currencies can often be swapped one-to-one for the national one. Digital currencies (the most famous being Bitcoin) are also becoming more and more popular. Why do different countries have different currencies? There are plenty of disadvantages to a world of many different currencies, especially in a world as globalized as ours. After all, if we all used the same currency, we wouldn’t have to deal with the faff of exchange rates every time we travel or buy stuff from abroad. On the flip side, one of the reasons some people think different currencies are a good idea is that they encourage people to spend more of their money locally. This is a particularly strong motivation behind community currencies, which can usually only be spent in locally owned shops or on locally sourced items. There’s also the fact that if national governments have their own currency, they have much more control over the money supply within their borders. They can print more currency if they want to. They can also devalue it, which means deliberately make it worth less than another currency. That is a tool that can help their economy, by making it more expensive for residents to buy from abroad (so they spend more money locally, boosting local businesses) and cheaper for foreigners to buy exports (so they buy more of it, also boosting local businesses). Why do some countries have the same currency? Some countries decide to share a common currency because they are part of the same union or club. The eurozone, which is a subset of EU countries that use the euro, is probably the most famous example. Having the same currency makes it easier to spend and earn money throughout the bloc, which aligns with the EU’s goals of free movement and free trade. But the shared currency also makes it harder for individual governments and central banks to exert as much influence over money flows around their country. That can make it difficult for them to combat economic downturns and recessions. In other cases, a country may decide to adopt the existing currency of another country because it is more trusted or stable than their own (i.e. its exchange rate isn’t fluctuating and it’s not subject to high inflation). The most commonly adopted currency in these situations is the American dollar. As with currency unions, going this route means governments have

Your Money


to cede control over the value of the money that makes up important things like their wages and prices. And unlike with currency unions, the country which controls the adopted currency may have little interest in how their monetary or fiscal policy (see Chapter 2) will affect people in other countries who happen to be using their currency. Fiat currency Fiat currency, or fiat money, is when the value of money is derived from a belief that it is valuable, rather than the fact that the money itself is worth something. A £50 note is technically just an almost-worthless bit of paper. What makes it different from Monopoly money is that the government has said it’s worth £50, and businesses and individuals have agreed to treat it as such. Almost all the money we use today is fiat currency. The opposite of fiat currency is commodity currency  Commodity money is something that would have use or value even if nobody accepted it as money anymore. Precious metals, salt and cigarettes are all examples of things that have been used as commodity money in the past. Commodity currency used to be much more common than it is today. Fiat money is a relatively new invention that became the rule after the decline of the gold standard. The gold standard The gold standard is when a currency is either literally made out of gold or can always be exchanged for a set amount of gold. The gold standard was very common throughout the world until the twentieth century. That’s because it gave people a lot of trust in a currency. After all, gold usually doesn’t lose its value. The gold standard also constrained government spending. Governments could only create as much money as they had gold, and gold is a finite resource, particularly if you don’t happen to control many gold mines. That, incidentally, was also the reason the gold standard was eventually dropped (the UK ditched it in 1931, the United States in 1971). Governments wanted to get their hands on more money in order to fight the world wars and implement large welfare systems and so on. With fiat currency, they could print as much as they wanted. Plus, the twentieth century saw the economy expand at an unprecedentedly rapid rate. Eventually there simply wasn’t enough gold in the world to back all this newly created wealth. Swapping currencies  An exchange rate is how much of one currency we can swap for another currency. It’s a way for people to buy stuff in a different currency to the one in which they’re paid, which is handy if you’re holidaying abroad or are a business that needs to buy some supplies from another country.


What Is the Economy?

Before the United States abandoned the gold standard, most countries used fixed exchange rates that were pegged to the dollar. One pound or yen or franc was always worth a certain number of dollars, which in turn was worth a certain amount of gold. That rate couldn’t change without international approval. This system was simple and stable. But once America ditched the gold standard it fell apart, because there was no longer an inherent ‘worth’ behind each dollar. Most countries switched to floating exchange rates, which change constantly depending on supply and demand, or how many people want a certain currency at a certain time. A country’s currency could become more desirable because lots of people want to go on holiday there, or are buying lots of stuff from it, or want to own lots of that currency as a backup in case local politics destroys the value of the currency in their own country. And it could also go up in value because of trading positions in financial markets. Forget betting with money, some people bet on money  Floating exchange rates can cause big fluctuations in the ‘price’ of a currency. That causes problems for individuals and businesses who buy a lot of stuff from abroad. They can’t be sure how much they’ll have to pay for products on any given day, which makes it difficult to know what prices to charge their customers. To solve that problem, financial markets invented something called currency derivatives. These are contracts where two parties agree to swap two currencies at a specific exchange rate on some future date, regardless of what the real exchange rate is at that time. That provides security to many businesses. But it also provides a gambling opportunity to investors. Say that £1 is currently worth $1, but you are convinced that in the next few months £1 will be worth $2. You could get a currency derivative with someone who promises to give you £1 million for $1 million dollars in three months’ time. If your bet is correct, you can take their £1 million and turn it into $2 million on the real exchange rate, thus doubling your money. Furthermore, changes to exchange rates don’t just happen randomly. They respond to big global events like Brexit or international warfare, which in turn are influenced by political actors. This creates a worry that rich and powerful people may have the opportunity to tip the odds in their favour when it comes to things like commodity derivatives. The future of money Despite our general reliance on money, not everybody is convinced it’s the best system for storing and transferring wealth. For some people, it’s not so much money itself that’s the problem but the infrastructure around it. Criticisms range from the idea that money in its current form is too vulnerable to theft to a belief that it is controlled

Your Money


by the wrong people (or governments). But for other people, the whole concept of money is problematic. For them, money really is the root of all evil, from inequality and poverty to general selfishness. Unsurprisingly, these two camps have very different ideas about how money could be upgraded in the future. One of the ideas most strongly associated with the first group is cryptocurrency. For the second group, local exchange trading systems such as time banks are often mentioned. Cryptocurrencies  Cryptocurrencies, of which Bitcoin is the most famous, are entirely virtual and not controlled by any authority like a government or a central bank. This appeals to people who want to reduce the power the state has over their lives. But cryptocurrencies have also come under a lot of criticism for both being linked to crime (as they’re designed to make their users hard to identify) and for fluctuating hugely in value as most are not backed by anything implicitly trustworthy, like gold or a well-run government. Time banks Time banks, as the name suggests, involve an exchange of time. You ‘earn’ time by working a certain number of hours, which you can then ‘spend’ on hiring other people’s work time. When time banks have been trialled in real life, they’ve tended to treat each hour of work as equally valuable, rather than, say, swapping two hours of a lower-skilled task for half an hour of a higher-skilled one. Fans of this system think it could both reduce wealth inequality and change the way we think about important but undervalued types of labour, such as care work. But others worry it would reduce the incentive for people to upgrade their skills through education and training, as there’s no bigger reward for becoming better at something.

Everybody’s money: The financial system What is the financial system? The financial system is the way we move money around the economy, from the people and businesses who want to save or make money to the people and businesses who want to borrow or spend money. It’s a powerful force because it determines who gets the funding they need to do everything from buy a house to build a factory to pay for a degree. The financial system is really like any other marketplace you see in the economy. It sells products and services (for example it might sell you money for a period of time or a place to store it). But since it’s involved in buying and selling the same thing that you’re ultimately


What Is the Economy?

buying and selling with (money), things can get to a whole new level of abstract. This understandably leads to confusion and, on the odd occasion, chaos. Who controls it? The financial system isn’t one homogenous mass. It’s the sum of billions of actions and decisions by individuals, banks, businesses, financial service companies and so on. Because the financial system is so important, governments usually regulate these actions and decisions. But sometimes these regulations aren’t enough to stop the financial system from going wrong, as it did during the 2008 financial crash.

The 2008 financial crash The financial crash was essentially a breakdown of the financial system, where money stopped moving around as effectively as it had before. There’s still some disagreement on what exactly caused the financial crash of 2008, although the general consensus is that there wasn’t enough government regulation of the financial industry and that too much money was being lent to people and businesses who didn’t have the means to pay it back. (This was mostly via the resale of mortgages that were known as ‘subprime’ because the credit rating of their borrowers was lower than normal, which is generally seen as making it more likely the loan won’t be fully repaid.) What we do know is that the crash caused a lot of hardship for a lot of people all around the world. That’s because so much of our economy is reliant on the financial system: our savings are deposited in banks, our homes purchased with mortgages, our workplaces traded on the stock market, our pensions sourced from funds and so on. Since the crash, governments around the world have introduced lots of new banking regulations to try and prevent it happening again. These new rules have mainly focused on splitting the risky parts of a bank away from its more reliable bits, changing banks’ culture and appetite for risk and putting more emphasis on individual bankers taking responsibility when things go wrong. However, some economists say that these changes are only superficial and won’t stop another crash happening in the future.

Your Money


What about financial markets? A financial market is anywhere people trade financial instruments like shares, bonds and derivatives. Stocks or shares – these are little bits of ownership in a company. Their price goes up and down depending on how valuable people think the company in question is. Shareholders usually get some of the company’s profits and a vote on the big decisions the company makes. Bonds – basically a loan to a company or government, which issues bonds when they need money. Bondholders usually get paid interest on top of the principal amount they invested. Derivatives – contracts that are essentially promises by one party to pay a certain amount of money for a certain good on a certain date. For the seller, this can hedge against the chance that the price of their goods drops dramatically at some time in the future. For the buyer it’s about reducing the risk of the price rising. There are lots of reasons why people get involved in the financial markets, but for many a big motivator is the chance to profit by making clever – or lucky – bets on how the value of financial instruments will change. Interest rates – what are they? Interest rates are the fee you pay to borrow money or the reward you get from lending money. They’re usually calculated as a percentage of the money loaned and charged at monthly or yearly intervals. There are simple interest rates, where interest is only charged on the original sum borrowed. Then there are compound interest rates, where each time you’re charged interest it’s added to the total amount you owe interest on next time around. Credit cards are generally charged compound interest rates. So are savings accounts, which means if you have money to save, you can grow that wealth without having to put in any extra effort. Economists see interest rates as having two main uses. Firstly, they incentivize people to move money around the system (via borrowing and lending). Secondly, they are seen as a way to control inflation (price rises). Dominant economic thought says that when interest rates go up, inflation will go down, and when interest rates go down, inflation will rise. This is because interest rates should affect how much we spend and save. When interest rates are high, it’s more lucrative to save money and more expensive to borrow it, so spending goes down, and vice versa. The problem is that currently in many economies around the world both interest and inflation rates are low, and economists are a bit stumped on why that is. In theory, lenders set interest rates. If you have multiple savings accounts or credit cards with different banks, you may have noticed that most of them have different interest rates. Banks will try and set these rates to be attractive to users (so they get more business) while still being as good a


What Is the Economy?

deal as possible for themselves. That means they need to take into account what their competitors – other banks – are doing. But holding a really significant influence over most interest rates are central banks, whose job is to look after the money supply in the country or area they oversee. Central banks usually have a target interest rate that they think is best for the nation. That’s the rate banks are charged when they borrow from and lend to other banks, including the central bank, which they do a lot. When the central bank’s interest rate is on the higher end of the spectrum, lending banks can take the money they’ve made from interestpaying borrowing banks and pass it on to customers as an enticement to save their money with them. When the central bank’s interest rate drops, banks generally want to cut the interest rate they’re giving their customers too, so they don’t start losing money. Interest rates were often seen as the best way to incentivize people who have money they’re not using to lend it to people who want money but don’t have any. Most economists think such exchanges are beneficial to the economy and society at large. For example, when someone who is not well off but has a great idea can take out a loan to start a business that ends up employing lots of people, paying lots of taxes and creating a product that lots of people love, many people win. But a big question these days is whether the incentive of interest rates is still needed to encourage lending. After all, most of us borrow from banks, who can create more money for lending whenever they want. And interest rates have plenty of drawbacks. They can make it harder for people and businesses to escape debt, which can translate into lay-offs and foreclosures and other negative things. Changing interest rates changes economic behaviour. When interest rates are high, lenders and savers benefit more, so everyone is incentivized to lend and/or save. When interest rates are low, the opposite is true, because it’s cheaper to borrow and spend. Governments are usually quite keen on being able to manipulate these behaviours, because they have ripple effects across the economy as a whole. That’s why you often hear of governments trying (and sometimes succeeding) to influence interest rates, usually by leaning on the central bank. Inflation and how it impacts how much we pay for stuff There are actually quite a lot of forces exerting influence on the sticker price of any item you pick up in a shop. Supply and demand is one. Government policy, in the form of sales taxes and regulations, is another. And then there’s inflation. Inflation is when prices go up. Generally if you hear economists talking about inflation they’re talking about general inflation, or the prices of almost everything going up at the same time. (If prices go down, it’s called deflation.)

Your Money


Stuff getting more expensive: The causes of inflation If you asked an economist what causes inflation, many would admit that they aren’t quite sure. One dominant theory is that inflation is caused when too much new money is created, say by the government printing a load of new banknotes. The logic is that the more money people have, the more they can pay for a good or service. If the amount of money increases much faster than the amount of goods/services on offer, supply and demand means people will be willing to hand over substantially more money for the same product, so prices rise. This theory is why many people are so against governments or central banks creating money. Inflation tends to hit prices faster than wages, so lots of inflation can make people feel substantially poorer. Hyperinflation (really high inflation) has caused misery in places like Zimbabwe in the 2000s and Venezuela in recent years. But not everyone is convinced that creating money does cause inflation. After the 2008 financial crisis the Bank of England created lots of money via quantitative easing (QE), but inflation rates have stayed very low. There isn’t any consensus on why that is. Some economists think it’s because QE stayed in the financial markets and didn’t touch the ‘real’ goods-and-services markets, stopping it from having an effect on their prices. Others think that money creation will not cause inflation as long as it is invested in something that spurs economic growth. After all, if more goods and services are created then supply and demand will be rebalanced, prices won’t rise as much, but there’s still more money to share around.

Money in the bank What do banks do? That depends on which type of bank you’re talking about. There are four kinds: retail, private, investment and central. Retail banks are the ones you’ll find on your local high street and probably have your accounts with. Their main role is to borrow and lend out money. When you deposit your pay cheque in your bank account, you’re actually loaning it money. That’s why banks usually pay you interest on your savings. Your money becomes part of the bank’s pool of resources which they can use to fund all their banking operations. We tend to think of our bank as ‘storing’ our money but that’s not technically true. Banks don’t keep our savings in individual vaults like Gringotts in the Harry Potter series. Instead, they essentially issue us an IOU which they promise us we can cash in to get our money back whenever we want. This promise is usually backed up by the government, which would give you your money back (up to a certain amount) if the bank collapsed.


What Is the Economy?

Retail banks make money by charging a higher interest to people who borrow from them than they pay to people who lend to them. This is called the interest rate differential. They also collect money from the fees and charges they levy on their customers. Private banks have similar functions to retail banks, but they’re aimed exclusively at very rich people. Alongside savings accounts and mortgages and the like, they offer wealth management advice and products to help their clientele grow their money pile. What about ‘investment banks’; are they any different? Like private banks, investment banks manage large sums of their rich clients’ money with the intention of making it larger, and they usually do this by investing in parts of the financial market. But they work with companies and governments, not individuals, and they don’t offer ‘regular’ banking services like deposit accounts. They also help with the financial side of big business deals like listing a company on a stock exchange. For banks, doing the retail and private banking stuff tends to make less money but is a safer bet. Investment banking, in contrast, offers both high risks and high rewards. So some banks do both types of banking. If the investment side is doing well, the profits can help prop up their retail services. But if the investment side does unexpectedly badly, it can put their retail operations – including the saving deposits of regular people – at risk. This is what happened during the 2008 financial crash and led to some governments, including the UK’s, stepping in to bail out the banks and protect customers’ deposits. Since then, governments have introduced regulation to force banks to separate their retail and investment operations in order to try and stop the same thing happening again. What are central banks and why are they so important to the economy? A central bank is the national bank of a country (or group of countries). Its main goal is to keep the financial system stable. That means stopping prices changing too quickly through high inflation or deflation. They also tend to be interested in keeping economic growth up and unemployment down. In most countries, including the UK, they operate independently from the government of the day. That’s to stop governments manipulating the economy in a way that could help their electoral prospects but cause longerterm damage. On the flip side, some people don’t like that an institution with that much power over our lives is not democratically elected. Central banks have four main functions. They are in charge of monetary policy, they buy government debt to finance government spending, they enforce a variety of banking rules and they act as a bank for other banks.

Your Money


In particular, they are a lender of last resort, which means they’ll loan money to financially struggling banks and other institutions that are so important to the economy that there would be a lot of hardship if they went bust. Money as a tool: Monetary policy Monetary policy is a set of measures that a central bank uses to control the money supply and interest rates of the economy it is responsible for. As we mentioned earlier, interest rates influence economic activity. So the central bank sets a higher interest rate if it wants people to spend less and save more, and a lower interest rate if the opposite is true. Central banks also tell banks how much money they have to physically keep in-house at any one time (called reserves) and trade government bonds. They buy these bonds directly from the government and sell them to investors such as commercial banks. They also buy bonds back from these investors. Why? Well, it’s about influencing the money supply. When investors purchase government bonds, they hand money over to the central bank in exchange for them. By holding onto that money, the central bank takes it out of circulation around the economy and the money supply decreases. When central banks buy government bonds, the opposite happens – money goes out into the economy. QE (not Queen Elizabeth but quantitative easing): What is it and does it work? Quantitative easing is when central banks buy lots and lots of government bonds and other financial assets from financial institutions in a short period of time, in the hope it will increase the money supply. The idea is that these institutions will then lend this new money out or spend it elsewhere, thus kick-starting economic growth. After all, governments often sell bonds to the central bank when they want to raise money to invest in extra public spending. QE is quite new and was first used in the UK as a way to respond to the 2008 financial crisis when the economy was sluggish (i.e. people weren’t spending money setting up new businesses or buying products and so on). It’s sometimes referred to as printing money, although most economists don’t like that term. Usually, the way a central bank tries to perk up a sluggish economy is to cut interest rates. But in 2009 to 2012 UK interest rates were already close to zero. The central bank could have tried negative interest rates, but as that would basically mean lenders would have to pay to give people their money it doesn’t tend to get people lending in the way the bank wanted. So the central bank turned to QE as an alternative.


What Is the Economy?

Some people credit QE in the United Kingdom, United States and European Union as helping those economies recover over the last decade or so, although some are worried it may cause inflation down the line. Others think it was a colossal – and expensive – failure. They say that the money stayed within the financial markets, encouraging more reckless spending by financial institutions but never influencing the rest of the economy or benefiting ordinary people.

CChapter 9

Your society Throughout this book, we’ve tried to show that, fundamentally, the economy is about you. But it’s also about your mum, your best friend, your neighbours and all the other seven-billion-plus people who share this planet. We live in a society and that means the economic decisions made for or by one person, business or household can – and does – impact others. This chapter will look at how economic choices can affect different people differently. It will also explore how the way we relate to our economy can depend massively on the circumstances in which we were born into or find ourselves in later life. All human beings are connected to each other and the global economy in some way, but we are also part of smaller and generally more influential groupings which have a substantial impact on our economic choices and experiences. The area we live in, the institutions we are part of and the social groups we belong to all have a hand in shaping our economic experiences.

What makes up the foundations of society? Culture Culture is a set of ideas, beliefs and ‘ways of doing things’ that is shared by a group of people. Unique cultures often spring up in different geographical areas, heritages, religions and social groups. It’s probably no surprise to you that different people can live their lives in very different ways, but because we are so used to our own cultural ways of doing things it can sometimes be difficult to notice quite how much influence it has on your everyday life, including how your economy looks and how you experience it. Take religion. If you are part of a religious group, some of the spiritual actions you perform are also economic ones. Examples might be donating part of your salary as a tithe or avoiding loans that require interest payments. Even if you’re not actively religious, your economic reality


What Is the Economy?

may well have been shaped by the religious history of your country. For example, there is a theory that the Industrial Revolution happened in Protestant countries because Protestantism has a strong focus on working hard and forgoing luxuries (so money-makers reinvested profits back into their business rather than spending it on nice things for themselves). Culture also informs what we see as ‘good’ economic actions and ‘good’ economies. If we grew up being told that the more money we make the happier we’ll be, we’ll have a very different idea of how our economy should be structured than if we grew up being told that everyone should have exactly the same amount of wealth. In the same vein, culture can embed in us norms about economic power and who it should belong to. Whether women should own property or free markets should exist are both examples of cultural ideas that determine who gets what in exchanges of value. Because of this link between culture and morality, people from very different cultures can sometimes struggle to conduct economic transactions. There is a famous story about Britain’s first attempts to establish a trading partnership with China in the eighteenth century, where differences in cultural expectations led both sides to consider the other arrogant and the mission to fail. In our globalized world, the success or failure of international business transactions can sometimes come down to how much time and effort each side puts into learning about the habits, expectations and culture of the other. Education You almost certainly spent most of your childhood in an educational institution: school. Degrees, apprenticeships, graduate schemes and vocational training are other common examples. What we are taught in these educational institutions has a big impact on what our economy looks like. If we receive high-quality education we tend to go on to become more productive workers who collectively make our economy larger and richer. Exactly what we are taught can also change which skills and activities are prevalent in an economy. If a country had lots of high-quality and low-cost baking apprenticeships, for example, you’d expect it to be a nation of many star bakers. The economy-education influence works both ways, though: what an economy looks like affects which subjects educational institutions teach. Imagine two counties, the first of which gets most of its wealth from a thriving manufacturing sector and the second of which has a more services-orientated economy. It’s probable that the first country would have more vocational training schemes, to supply its key industry with new workers equipped with the appropriate manufacturing skills, while

Your Society


the second country might have more universities to churn out the ‘whitecollar’ workers its firms require. Who should pay for our education? The close link between education and the economy underlines a common argument about who should pay for schooling: individuals, businesses or the state? When we gain skills or training that qualifies us for a higher-paying job, we personally benefit from the higher wage. Should we therefore be responsible for the initial investment? Then again, the businesses that need those key skills in order to function at maximum capacity also benefit when there are good educational institutions. So does a country’s overall economy, because all that extra value we’re creating translates into a higher GDP (not to mention higher tax bills). So maybe our government or our future bosses should foot the bill instead? In practice, education is often funded by a collection of all three. In the UK, governments pay for schooling up to the age of eighteen, but parents may supplement this with their own income to provide things like musical instrument lessons or extra tutoring. Individuals usually pay for their own further education but may have government support (bursaries and the student loan system) or be sponsored by a future employer. Businesses foot the bill for specific staff training but get help from the government to run apprenticeships. Not everyone is happy with this hodgepodge system. There’s been a growing movement in some countries to make all further education free for individuals on the basis of equality. The argument is that people from poorer backgrounds will be less able to stump up the initial fees, so the current system works as an obstacle between marginalized people and higher-paid jobs. The counterargument, of course, is that higher education brings economic benefits later in life, so it is fair for students to pay back loans. This was the reason given by the UK government for its recent-ish increases in tuition fees. The law We all have to follow the laws of the place we’re in, whether or not we agree with them. At their core, laws are a set of restrictions on what we can and can’t do, and they therefore establish certain parameters which societies and economies have to work within. Elsewhere in this book, we’ve talked in more detail about some of the laws that are particularly influential in economies, including property rights (Chapter 10), regulation (Chapter 10) and workplace rights (Chapter 7).


What Is the Economy?

In democracies, the theory is that imposing these legal restrictions will help everything run better for everyone. In practice, there will always be people who experience certain laws as obstacles that stop them getting what they want. Economists also frequently disagree on what amount or types of law is best for the economy. One way to think of laws is as development-enhancing or marketenhancing. A law is market-enhancing if it allows more exchanges to take place in a market. A law is development-enhancing if it creates some sort of positive societal change. So a law that bans children from working in factories would generally be considered development-enhancing (most people believe kids shouldn’t be expected to perform hard and dangerous manual labour) but market-constricting (because it reduces the pool of labour for factory owners). Identity (race, gender and sexuality) Identities weren’t ever much of a factor in traditional economic analysis and theories. That has started to change, and more and more economists now try to shine a light on the ways our gender, race, sexuality and other characteristics affect our economic actions, choices and opportunities. There are even established economic schools of thoughts that specifically focus on the way identity, power and the economy intersect, of which the most established is feminist economics. Throughout history and around the world, our identity has functioned as an economic boost or barrier. One of the places this is most notable is in the workplace, where certain social groups are prohibited from performing certain types of work, either explicitly through legal institutions (think Trump’s ban on transgender members of the armed forces) or implicitly through cultural expectations (the idea that men shouldn’t be nurses or women can’t be engineers). Another key example is the various attempts to stop certain people from having a say on what their economy looks like via voting or holding a government office. The Jim Crow laws, which among other racist things attempted to disenfranchise African-Americans for much of the twentieth century, are a well-known example of this. Class Unlike other forms of identity, the idea of class – or grouping people based on the position and power they hold in society – has always been embedded into the way economies are thought about. Class used to be primarily about what you did for a living. Workingclass people held lower-paid, lower-status and generally more physically demanding jobs, while upper-class people either lived off their family assets or held influential and powerful jobs that could shape the world around them: they were politicians, writers, philosophers and generals.

Your Society


The middle classes occupied the space in between – they tended to hold white-collar jobs and earn enough to maintain a reasonable standard of living, without ever acquiring the wealth or prestige of the nobility. These days, the concept of class is more nuanced and perhaps more muddled. Instead of just being about your job or how much money you have (or for that matter your father’s job and how much money he had), class is now often also defined by your accent, your hobbies, your holidays, your friends and just about anything else about you. That’s partly because people now are more likely to possess a combination of lots of different class markers than in Downtown Abbey’s upstairs-downstairs times. People like Alan Sugar can go from poor backgrounds and little formal education to running billion-pound companies, while many millennials from middle-class families have struggled to secure the homes, savings and salaries that are associated with a middle-class lifestyle. (Of course, the link between your upbringing and your future is far from broken. See the ‘Social Mobility’ section for more on this.) However, this shift in the way we think about class doesn’t mean it’s now an irrelevant concept. At its core, class is about who has access to power and influence within an economy. And this idea still undergirds many of the economic debates you’ll see and hear every time you open a newspaper or talk politics down the pub. The idea of class, power and fairness has been at the heart of many revolutions and social change movements, from the 1789 French Revolution to the 2018 Gilet Jaune protests, and it is likely to be at the heart of many more in the future.

What did Karl Marx say about class? Marx said the working world was divided into the proletariat and the bourgeois. The bourgeois (upper classes) owned capital and the factors of production, which is to say they owned the things you need to start a business or make money. Factories, tools and money are all examples. By renting these things out, or investing them, the bourgeois could live off the profits of their capital without ever having to engage in any sort of manual labour. The proletariat (working class), on the other hand, had to work for their income, which they did by labouring for the bourgeois. For Marx, this was an unfair deal. The proletariat were the ones creating everything people need to live but the bourgeois were the ones who mostly benefited from it. Marx believed that the proletariat would eventually realize this and overthrow the upper classes, replacing them with a communist regime where wealth and labour was shared equally.


What Is the Economy?

The role of (in)equality in economies What’s economic inequality? When analysing inequality, economists tend to focus on how much money people have. They often divide this focus into how much money you have coming in (income) and much valuable stuff you own (wealth). Incomes are made up of salaries, plus things like rent from tenants, dividends from shares and profits from a business. Wealth is made up of assets – a large savings account, a house, shares, cars, gold bars etc. For much of human history, there has been (often substantial) income and wealth inequality throughout the world, even though poverty in general has declined over time. Humans may often rail against it, but the fact remains that inequality is a pretty consistent feature of our civilizations. Since we started to move away from a hunter-gatherer model of living, there has frequently been a gap in living standards between the elite and everybody else: think of all those history lessons involving pharaohs and slaves, or knights and peasants, or princesses and chambermaids. Zooming in on particular time periods, however, will reveal a more varied pattern as the amount of inequality in the world is constantly changing. The twentieth and twenty-first centuries are a good example. Globally, the inequality gap started off pretty wide in the 1900s but narrowed a lot in the last few decades of the twentieth century. This was largely due to huge economic growth in formerly poor countries, particularly the so-called BRICS (Brazil, Russia, India, China and South Africa). However, something different happened within most Western countries. There, economic inequality dropped significantly from 1910 to 1979 (due to a combination of quite-nice things like the creation of welfare policies like the NHS and some not-nice things like the World Wars) before spiking upwards in the 1980s (an era of Thatcher and Reagan and a lot of neoliberal economic policies) and then levelling off (bar a little dip during the 2008 financial crash). So while this is not a universal experience, in countries like the UK many of the rich have spent the last half a century getting richer while those lower down the socioeconomic scale have seen their incomes and wealth stagnate or decrease. According to the Equality Trust, a charity, the average salary of FTSE 100 CEOs (that’s the bosses of the 100 most valuable companies in the UK) was 386x the National Living Wage in 2017. Even from a global perspective, our current wealth inequality is reasonably significant. In 2016, Oxfam, another charity, announced that the sixty-two richest people in the world owned as much wealth as the poorest 50 per cent of the global population. The 2020 coronavirus pandemic, which deprived many people of their livelihoods but enriched many billionaires, has almost certainly exacerbated this gap.

Your Society


Can economic inequality be about more things than income and wealth? Yes. Although it’s less common to hear economists discuss this, some are starting to turn their attention to the way that economic advantages and disadvantages involve much more than how much cash we can get hold of. Imagine two people with the same income but one of them uses a wheelchair. Both of them are interested in a new, better-paying job but the office is located on the third floor of a building with no elevator or ramps. Who’s more likely to end up with the position? Or picture two new mothers, both with the same amount of savings, but one of whom lives in a country that subsidizes childcare and one who would have to pay for it out of pocket. Who’s more likely to be able to return to work fulltime? What if one of them has a partner and the other is a single parent? There are almost unlimited ways that our ability to make the economic actions and choices we want to can be constrained in ways that do not apply to other people. That can make it difficult for economists and policy makers to both measure economic inequality and find workable solutions. But without this extra context, it can be easy to fall into the trap that inequality can be ‘solved’ by simply trying to make everyone’s income and wealth more similar, when the reality is a little more complex than that. How do economists measure inequality? The Gini coefficient The Gini coefficient is a mathematical measure which looks at the total income (or sometimes wealth) of a group of people and calculates which percentage of that income belongs to each resident from richest to poorest. It then spits out a number between 0 and 1, where 0 means everyone has the exact same income and their society is completely equal, and 1 means just one person has all the income and the society is as unequal as it’s possible to be. This number is sometimes also represented as a percentage. In 2019 the UK had a Gini coefficient of 0.325, or 32.5 per cent, according to the ONS. As data collection goes, the Gini coefficient is a simple way to measure inequality that makes it easy to compare inequality across different groups, countries or times. But it can mask situations where inequality has decreased for some people but worsened for the poorest. A policy that put extra taxes on the richest to fund something that almost exclusively benefited middleclass households would be an example of this. (Schemes to help people buy houses or to fund higher education are often cited as examples.) Ratio measures An alternative to the Gini coefficient is to compare how much of a society’s wealth belongs to the richest section of society compared to the poorest.


What Is the Economy?

You can split the groups any way you like, but common groupings are the richest 1 per cent versus the other 99 per cent or the richest 10 per cent versus the poorest 50 per cent. The Palma Ratio (top 10 per cent vs. bottom 40 per cent) is particularly popular within the international development community, which thinks this ratio should ideally be less than one (i.e. the top ten per cent own less than the bottom 40 per cent). The UK’s Palma Ratio is currently 1.4. One criticism of ratio measures of economic inequality is that it doesn’t do a good job of distinguishing between wealth-on-paper and lived experience. For example, plenty of people with well-paid jobs and comfortable lives are technically thousands of pounds in debt from student loans and mortgages, so would be considered ‘poorer’ than someone who is debt-free but living pay cheque to pay cheque. Is inequality really a problem? People often default to talking about economic inequality as though it is a bad thing. But not everyone agrees with that assessment. Some think that a focus on reducing inequality can take our attention away from the real issue – reducing poverty – by automatically vetoing policies that would benefit the poorest and the richest. Former prime minister Margaret Thatcher famously alluded to this train of thought when she told an opposing MP that he ‘would rather the poor were poorer, provided that the rich were less rich’. This idea that it is wrong to take things away from the most fortunate for the sole purpose of levelling the playing field is known as the levelling down objection. Another common defence of inequality is that it is the only way to provide incentives for ‘good’ economic behaviour like working hard or to provide a ‘fair’ reward to people who do something that is particularly beneficial to the economy, like inventing a new medicine. Detractors respond to this by pointing out that the correlation between economic contribution and economic reward isn’t always clear. For example, jobs that a majority of people consider important and worthwhile, like carers and teachers, usually have lower salaries than jobs that many people consider less important to society, like lawyers and bankers. There’s some evidence that high inequality can create society-wide problems that impose large costs on everyone. Research has linked inequality to everything from crime to mental illness to teenage pregnancy and substance abuse although there’s some debate about how accurate all these studies are. Although it is widely accepted humans are generally hard-wired to ‘keep up with the Joneses’ and assess their own success and well-being in terms of how it compares to those around them, economists and other social scientists often struggle to categorically prove that there is something fundamentally toxic about inequality. Part of the problem is untangling causation and correlation.

Your Society


Many economists also subscribe to the theory that the best thing we can all do with money is to keep it flowing around the economy by continuously buying and selling stuff. But richer people are more likely to take their money out of circulation by putting it in things like savings accounts. There is therefore an argument that giving some of that money to people who are more likely to spend it paying their bills or upgrading their standard of living could be better for the economy as a whole. Of course this is a controversial stance! Plenty of people also argue that wealthy people do invest in an economy in a productive way, particularly via capital (see Chapter 5 for more on this). Take from the rich; give to the poor Wealth redistribution is about taking money from richer people and giving it to poorer ones in order to reduce income or wealth inequality. Progressive taxation is the most common method governments employ to do this (see Chapter 10). Some inequality campaigners would like societies to employ other tactics. One idea is restructuring the way companies work to share the value of a firm among its employees, perhaps by putting workers on boards or giving every employee an ownership stake. Another is reforming the way inheritance works or confiscating assets from one set of people and giving them to another. The alternative: Trickle-down economics Trickle-down economics, also known as supply-side economics, is the idea that the best way to make everyone better off is for governments to lower any barriers that may prevent businesses and capital owners from investing in the economy and boosting economic growth. In practice, this means lowering taxes and paring back regulation. That’s because of a belief that the more of their profits they have to hand over to the governments and the more rules they have to follow, the less inclined people will be to start new companies and hire employees and create products and buy stuff. All of these things, fans of supply-side economics say, put money into the pockets of other folk and therefore benefit everyone. There are lots of critics of trickle-down economics. They point out that plenty of wealthy people save their money rather than invest it, and that even when they do pump it back into the economy that investment and economic growth doesn’t always translate into more jobs or higher standards of living for everybody. There’s also the fact that people who start at the bottom of the ladder are rarely able to amass wealth and become investors themselves, which contravenes many people’s idea of fairness.


What Is the Economy?

Climbing the economic ladder: What is social mobility? Social mobility is all about how easy it is to change your economic status. You’ve probably heard terms like ‘he’s climbing the corporate ladder’ or ‘she’s going up in the world’ which encapsulate this idea. Indeed, the idea of social mobility is heavily baked into many cultures – think of the quintessential ‘American Dream’. We’re taught that if we try hard and swing big we can be and do anything, and many people subsequently expect to move upwards in terms of career and wealth throughout their lives. Economists sometimes talk about social mobility in terms of intergenerational and intragenerational mobility. The first is about being able to transcend the economic status of the family we grew up with. The second is about vastly changing our personal status within our lifetime – the classic ‘rags to riches’ story. Despite how heavily the idea of social mobility features in everything from political speeches to Hollywood movies, social mobility is actually not very mobile in many countries around the world. In the UK, for example, your prospects in life are still exceedingly likely to mirror those of your parents. Children whose parents were middle class are 80 per cent more likely to end up in a professional (white collar) job than someone whose parents are working class. Barriers to social mobility Many of the countries with the highest levels of social mobility (places like Denmark, Norway, Finland and Canada) are also places which have higher-than-average levels of public spending. That has led some people to conclude that the best way to help social mobility is for governments to pay for high-quality public goods and services such as schools, transport links and welfare safety nets. The logic is that this will mean everyone will have access to the sort of help and support that people from richer backgrounds already provide for themselves and their families. Some would like the government to go further and actively stop better-off people from using their wealth and status to their advantage. An example of this would be campaigns to ban private schools, on the basis that family money shouldn’t entitle you to a different education, especially one that usually comes with more resources and networking opportunities. Another key focus for some social-mobility campaigners is inheritance. Being able to pass our money and assets on to other people makes it easier for certain people to amass wealth without having to actively create it themselves. That’s why some people are in favour of governments putting some level of tax on inheritance. Others go still further and say

Your Society


inheritance should be banned altogether. When we die all our wealth should instead go back to the state to be invested into providing a better future for everyone. Unsurprisingly, this concept is hugely controversial. Many people feel that the things they earn during their lifetime, whether money or houses or heirlooms, are their property to do with as they wish and that they should have the right to give their loved ones a better start in life. Alternative ideas to social mobility Even if we removed all the barriers to social mobility, some people still wouldn’t be a fan of the concept. After all, if we can move up an economic ladder we can also move down it, and not everybody likes the thought of a society where there will be economic losers as well as winners. Indeed, it’s worth pointing out that the whole idea of economic ladders and hierarchies and changing fortunes is an example of a cultural institution that has much stronger roots in some societies (particularly Western, capitalist ones) than others. In some places – from hippy communes to parts of the Tibetan Plateau – people regard all the economic roles they play within the community as more or less equal and similarly try to share their wealth and possessions between all. That’s not to say there aren’t disadvantages and drawbacks to these systems too, just that there are lots of different ways of thinking about how we structure our lives and economies.


CChapter 10

Your government Flick through a copy of the 2017 manifesto of the (then-ruling) UK Conservative Party and you’ll find the word ‘economy’ no fewer than seventy-four times. That’s more mentions than made it into the manifesto of the main opposition party, Labour, but not by much. Clearly, governments have a lot to say about the economy. This is hardly surprising, considering the impact government policy can have on economies. Governments spend large amounts of money and fund a wide variety of public goods and services. They exert control over many of our economic interactions by requisitioning chunks of our earnings and spending via taxes and by setting rules – in the form of laws and regulations – which we all have to abide by. How much influence governments should have over the economy is one of the biggest debates in economics. Many people think it’s their government’s responsibility to make sure the economy is working for them: ensuring prices don’t rise too high or wages fall too low, for example. Others believe that too much government involvement is bad for the economy. They’d prefer for governments to step back and leave the majority of the economic activity to the markets. These conversations – how much governments do shape economies and how much they should – are what this chapter is all about.

Economics versus politics At the start of this book, we talked about the idea that the economy is invented, controlled and interpreted by humans. It would naturally seem to follow that governments will be particularly influential in designing these human-created economies. Indeed, if you’ve ever watched a debate between two politicians, you’ve almost certainly heard them argue about how their economic policies will lead to prosperity while their opponent’s different economic ideas will lead to ruin.


What Is the Economy?

However, had you found yourself at a dinner party with some of the most revered economists of the late twentieth and early twenty-first century, you probably would have left with the impression that they all believed economics and politics have almost nothing whatsoever to do with each other. In their telling, ‘the economy’ existed mostly as a self-sustaining system governed by the unchanging rules of logic and mathematics. Sure, governments with their different ideologies and belief systems would sometimes come along and try to tinker with it, but as soon as they stopped their meddling the system would right itself back to ‘normal’ again. The recent popularity of this view means it has dominated a lot of the current economic textbooks and thought. But it’s not universal. Throughout history, many economists have argued that politics and economics are actually strongly linked. In this view, what your economy looks like depends in no small part on who is ruling over it. If governments have the power to design economies, then voters have the power to design economies In democracies at least, there’s something quite exciting about the idea that governments can change economies, because that means that the ordinary people who elect them get a substantial say in what their economy looks like. If our current system isn’t working for us then we can effect change simply by selecting politicians who will (re)design it to realize our values and reach our goals, whatever those may be. Of course in reality it’s not that simple. Throughout this book, we’ve mentioned many other forces, from businesses to supply and demand, that also shape the economy and which governments may not have substantial control over. There are therefore limits to what governments can do to economies, especially in the short time frame that make up most political terms. Furthermore, even in the best-case scenario a government will not represent everyone’s economic views or implement economic policies that everyone likes. The most democratic election results in a minority of disappointed voters. Then there’s all the government elections that aren’t really democratic or even aren’t really elections. After all, there are many routes to power that don’t involve a ballot box, from war victories to monarchies. Ultimately, pretty much every government that has ever existed has been criticized by someone for handing vast influence to people who are unable to use it fairly or effectively. In places like the United Kingdom and the United States, there’s also plenty of concern being voiced that certain pressure groups, from lobbyists to the media to activists, have an outsized influence over government policy. All of which begs the question: just because a government can influence an economy, does it mean it should?

Your Government


What’s the difference between a government and a state? People often use ‘the state’ interchangeably with ‘the government’. And to be fair, they are closely linked. However, while ‘the government’ refers specifically to the actions of the individuals who are in power at a particular moment in time, “the state” represents the underlying country itself and the unchanging political institutions that come with it.

Market versus state: Are they really separate things? We talked at the start of this book about how lots of economics is underpinned by the exchange of things of value. Many of these exchanges exist between us and our government, such as when we pay them taxes and receive public goods and services in return. But of course we also exchange goods and services with non-government parties. We swap a pound coin for a Twix in our local corner shop or agree to lend a business our skills in return for a monthly pay cheque. All of these non-government transactions are what economists call the market. You’ll often hear the state and the market talked about as though they’re two completely separate things. Indeed, many traditional economic textbooks speak of a completely free market (i.e. free from any government interference) as the ideal setup for an economy. On the flip side, communists and other fans of planned economies – where governments control almost all economic exchanges – regard the market as something that is fundamentally ineffective and unfair and therefore best minimized as much as possible. But neither of these views are very good representations of what actual economies look like. Real-life economies almost always have a mix of market and government exchanges. Countries like Cuba which describe themselves as communist still have markets which provide many of their citizens with day-to-day essentials. Countries like the UK which consider themselves mainly capitalist still have governments that set the framework of regulations and laws within which markets have to operate. Indeed, the amount of crossover can be significant. Think of the world’s two biggest powers, China and the United States. The latter is considered by many people as the poster child for red-blooded capitalism, while the former proudly touts its communist credentials. However, China is also the world’s biggest exporter and home to some of the world’s most successful private companies, such as Huawei and Bytedance (who owns


What Is the Economy?

TikTok). Meanwhile, the US government often directly intervenes in its economy and used to do so even more if you look back a little bit in history. For example, in the 1930s then President Roosevelt set up the Works Progress Administration scheme where the government personally hired millions of unemployed American to combat a big dip in employment. Governments often also take responsibility for creating the infrastructure which markets rely on. Infrastructure is anything that helps societies and businesses function. Roads and bridges are examples. So is the justice system. Governments (states) and markets, in summary, are almost always closely intertwined. Planned, free or mixed? Defining the system we have As we have seen, it’s very difficult to draw a distinct line between states and markets. But economists still use these labels to help describe ideas. Planned economies A planned economy is one in which the government controls all or most economic exchanges. The market might still exist but in a constrained and limited form. For example, a resident of a planned economy might be able to set up their own shop, but the government might decide what they can sell, what price they can sell it at and whether they’re allowed to keep any of the profits. Planned economies are often linked with communist and socialist political systems. Free-market economies A free-market economy is one where private businesses and individuals (i.e. the market) control all or most economic exchanges. Regulation is kept to a minimum and the government‘s role restricted mainly to enforcing property rights. Free-market economies are usually linked to capitalism. Mixed economies Mixed economies, perhaps unsurprisingly, are a combination of the first two systems. The framework within which economic exchanges take place is decided partly by the market and partly by the government. For example, you may be able to set up a shop selling whatever you want at whatever price you want, but your goods have to pass safety-inspection checks and your staff have to be paid minimum wage. Some goods and services will be provided by private companies, some will be provided by the state and some will be provided by both. In practice, almost all real-life economies are mixed, even if people generally describe them as being capitalist or communist societies. Why is

Your Government


that? Well, one way of looking at it is that real life is simply too messy and complicated to be able to align perfectly with any single system. Another is that the world is currently in a transition period between the two systems. This was the argument of the economist Joseph Schumpeter, who said that a super capitalist society will naturally end up trending towards socialism. He thought that as capitalism tends to result in mass education and rising standards of living, it creates an intellectual class who will push back against the parts of capitalism they see as unfair and vote in socialist ideas such as welfare policies. Perhaps unsurprisingly, Schumpeter’s ideas around this are very controversial, and to this day people are still arguing about whether he was onto something or not. Other (false) dichotomies Markets versus states, then, is an example of a false dichotomy. A dichotomy is when something can be separated into two clearly opposing camps. A false dichotomy is when separating something in this way is an oversimplification, to the point that doing so can be confusing. Economics actually has a fair few dichotomies that might be helpful as discussion points but are a poor reflection of how the real world works. Big versus small When people describe a government as ‘big’ or ‘small’ they’re generally talking about how much involvement it has in the economy. As a rough rule of thumb, big governments tend to have higher taxes, spend more money, provide more goods and services and have more regulation. A small government is more likely to restrict its focus to law and order and property rights and leave everything else to the market. There’s a correlation between being pro big government and holding left-wing views and similarly between preferring small governments and leaning right. However, there’s not actually any quantifiable way to measure whether a government is big or small, so the terms are used subjectively. That means the same government could be regarded as too big and intrusive by one person and too small and hands-off by another. There’s also more than one measuring stick for the ‘size of government’. For example, governments which spend a lot may be less intrusive in terms of regulation and monitoring of their populations. Left versus right ‘Left’ and ‘right’ (and ‘centre’) are the terms we use to describe political leanings. They do not have fixed definitions, and most of us hold views that span across the political spectrum. And just to make it more confusing,


What Is the Economy?

perceptions of what is right or left wing can shift massively between times and places. However, as a very rough guide, a modern left-wing person would probably be pro big government and may align themselves with ideas such as socialism, generous welfare systems, trade unions, minority rights, more regulation and higher taxes. Someone who considers themselves right wing is more likely to be pro free markets, free trade, lower taxes, low regulation and low provision for public services. Centrists often hold more moderate versions of these opinions or a combination from both sides of the political divide. Socialism and communism versus capitalism  Capitalism gives primacy to private actors over the state. It puts a lot of emphasis on the importance of capital (something of value, often money, that can be used to produce more things of value) as an investment tool to spur production and growth. It’s also big into property rights – in a completely capitalist society, individuals and businesses will own almost everything. Critics of capitalism say that it unfairly restricts the majority of a society’s wealth to a few lucky individuals. Socialism and communism are similar to each other in that they both think the economy and its resources should belong to all people and be shared (somewhat) equally. To achieve this, they think the state should be responsible for overseeing the production and consumption of all goods and services and that private property should be heavily restricted or even outlawed. Critics of communism and socialism argue that they are inefficient systems which restrict freedoms. It’s important to note that the ideologies which underpin nominally communist/capitalist states don’t always match very well with what actually happens within them. China, for example, is a communist country but individuals there are allowed to amass lots of private property and wealth. The UK may think of itself as a capitalist society, but the NHS is a socialist structure within it. And so on. Some economists have tried to fix this problem by introducing unwieldy new descriptions such as ‘capitalist social democracy’. Others say it is time to drop these sort of labels altogether.

Did you know? The terms ‘left’ and ‘right’ to describe political leanings originated in France in the eighteenth century. The king and his supporters sat on the right, while the oppositional and revolutionary politicians sat on the left.

Your Government


Do economies need governments to function? An economy is just a system for organizing ourselves and our resources, so in theory that could happen without a state overseeing things. Indeed, that’s what an anarchy is. But in reality this has never really happened, partly because it seems highly unlikely that economies of anything like the scale and complexities we have today could exist without governments. That’s probably because states can support an economy in five very important ways: ●●

●● ●●



Governments debate and define what sort of economic system we have. States enforce law and order and protect your property rights. States provide things that markets can’t or that we preferred they didn’t. Governments can step in when an economy fails, or markets aren’t working as they should. Government can enforce a more equitable distribution of income than a market economy should a society want that.

Governments as rule-enforcers  Of all the roles governments can play in an economy, their status as enforcers of law and order and property rights are probably the least contentious among economists. Even the most diehard of free-marketers tend to support having a government for these purposes. That’s because governments are uniquely suited to rule-enforcing, due to having what is known as a monopoly on violence. That doesn’t mean that nobody but the state is ever violent. It means that if you pick a fight with a state, the state is going to win. After all, the state is the one with the army and the police force and the prison cells and the widely recognized laws that, say, you can be locked up or punished for not doing what they tell you. Without rules, and enforceable punishments for breaking them, economic systems tend to collapse. If you think about it, many of the exchanges of value which underpin our economy rely on the premise that everyone will follow the same rules. When you make a purchase, you expect the seller to actually give you the good or service and to not misrepresent the quality of the product. Governments – and their monopoly on violence – give everyone a strong incentive to play by these rules. Oi that’s mine! Property rights  Property means anything that can be owned. Property rights, then, are about determining and protecting ownership. For many people, they


What Is the Economy?

are the foundation of a strong economy. For others, they are the driver behind some of the worst aspects of our society, like wealth inequality and environmental degradation. Both sides agree that the main point of property rights is to give control over a particular resource to a particular person (or people or business) and stop everyone else from using it without that owner’s permission. But they disagree on whether this is a good or bad thing. When someone has unquestionable authority over a resource, it deters people from physically fighting over it or spending more time arguing about how it should be used than actually using it. It also stops popular but limited resources from being quickly used up or destroyed by overuse. This phenomenon is known as the tragedy of the commons. The example usually given to illustrate it is a communal field where individual farmers graze their cattle. Each farmer benefits from having their cattle eat as much as possible but gains nothing if a patch of grass is eaten by someone else’s animals. They therefore all push their cattle to graze more and more until all the grass is gone and the field is ruined. Moreover, property personally benefits its owner, which means they have a big incentive to use the resource to create value. This valuecreation happens via investment (doing something to increase how much the property is worth) or exchange (passing the property on to someone who values it more). The value created, incidentally, doesn’t have to be money. Philanthropists, for example, may donate some of their property with the aim of increasing other people’s health or happiness or general well-being. At the same time, the exclusionary nature of ownership means that many people are prevented from accessing things that could benefit them. That is often seen as problematic, for several reasons. Firstly, acquiring property in the first place is easiest for the rich. Secondly, the benefits a piece of property could provide if it was available to all could be bigger or considered more important than the benefits it could provide to a single individual. Imagine that you owned the only drinking well in a village. After you satisfied your own thirst, you could sell the rest of the clean water at high prices and make yourself extremely rich. That’s good for you, but plenty of people would feel it would be fairer if everyone in the village could have access to clean water for free. The tragedy of the commons theory has also been challenged by economists such as Nobel Prize winner Elinor Ostrom. Her research indicates that when communities share ownership of common resources, they use them in a more equal but still sustainable way. Property rights versus property wrongs Even among people who support property rights in principle there’s still plenty of disagreement around whether humans should actually be

Your Government


allowed to own all the things they do. Some of these debates centre around what can be considered property and some centre around how property can be acquired. An example of the first type of debate would be the standoff between pet owners and some animal rights activists over whether it’s morally acceptable to own cats and dogs. An example of the second debate would be whether land that became the property of white families through the violence of colonialism can be confiscated generations later without any compensation. Providing things that markets can’t, or we preferred they didn’t  Whenever we need or want something, be it a haircut or a heart operation, there are a few possible ways we can get hold of it. The first is that we could build or create or do it ourselves. However, that’s often too difficult or expensive to be feasible. So we can instead turn to the market, which may be able to provide us with what we need but tends to require us to exchange something of value (usually money) to acquire it. Often, that’s the end of our options. But for some goods and services, we can also go to the state. Of course exactly what (if anything) a state provides is a political choice that varies from country to country. Both the United Kingdom and the United States offer all children state-funded education, for example, but only the UK offers all residents state-funded healthcare, in the form of the NHS. That distinction isn’t because the American state doesn’t have the resources to provide free healthcare (the United States is a richer country than the United Kingdom). It’s because a plurality of American legislators believe that the state will do a worse job of providing universal healthcare than the market. This idea that states are inefficient at providing goods and services is a common one. It often focuses on the fact that unlike the market, states don’t generally intend to make profit out of the things they provide to us. Profit makes an enterprise financially self-sustainable, and the extra money can be repeatedly invested for constant improvements. Without profit, governments have to get the cash for their public goods and services from somewhere else, which in practice means taxes or debt. But of course not focusing on making money has good sides to it too. It means state goods and services are often free to use, available everywhere and focused on non-financial outcomes like increasing well-being. State-provided goods and services have other advantages. States can use their economies of scale which may allow them to provide certain things at cheaper prices than individual businesses could. States can also ensure that none of their citizens have to go without something just because they can’t afford it or the market doesn’t deem it financially worthwhile to provide it.


What Is the Economy?

Sometimes, as with education and healthcare in the UK, states and markets both offer versions of a good or service that people can choose between. But it’s also common for societies to decide that the state will be the only permitted provider. Generally, this decision is rooted in a desire to enhance security (on the basis that private companies are more likely to make reckless decisions that could cause widespread harm) or equality (ensuring you don’t get a better version of something just because you’re rich). The free rider problem  The free rider problem is a common justification for getting the state involved in providing goods and services. It says that markets will often fail to provide things that are very important and beneficial to society because it is too difficult to get everyone to pay for it. Imagine that a giant asteroid, sure to wipe out all human life, is hurtling towards Earth. A scientist says they can put together an asteroid-vaporizer and save the world, but they’re going to need some money from everyone in order to do it. If you refused to pay your share and left your neighbours to cover it, you’d benefit just as much from not being annihilated as those who actually funded the project. That not only seems fundamentally unfair, it could disincentive everyone from paying in the first place. Why bother when you can get the same benefit for no cost? But if everyone thinks that way, the upshot will be that the asteroid-vaporizer is never bought at all, with negative consequences for everyone. Governments, however, can force everyone to pay for such a project, via taxes. That’s why many people want them to take the lead on real-life projects with free-rider potential, such as clean air or the armed forces or flood defences. Another type of market failure that often has governments prescribed as the solution is externalities. We talk more about them in the ‘tax’ section below. Mitigating for economic problems   Sometimes, the economy starts behaving in a way that causes a lot of problems for a lot of people. Perhaps prices start going up rapidly, making it difficult for people to afford the things they need to live. Perhaps lots of companies do badly at the same time and have to lay off large numbers of their employees. Perhaps a bank gets so far into debt that it can no longer repay its customers the money they deposited in it. When these sorts of things happen, governments will often step in to try and fix things (often with help from their central bank – more about them in Chapter 8).

Your Government


Redistributing income to achieve fairness  Free markets, even when working perfectly, are not designed to make everybody equally well off. Indeed, they funnel wealth towards certain people and businesses – those that partake in a lot of innovation and investment. The idea is that this will incentivize people to engage in economic activity that benefits everyone (because exciting new products are being invented, say, or new jobs are being created). Plenty of people think that’s not how free markets work in practice and that we need to fix the flaws in the system to stop wealth getting stuck in places where it’s benefiting nobody but the lucky person who happens to own it. But some think that we shouldn’t structure our society in any way that distributes wealth unequally, regardless of how much ‘good’ the well off do with it. Instead, they argue that we should focus on making everyone’s standards of living more equal. And one way we can do this is by enlisting our governments to redistribute wealth from the richest to the poorest, to ensure everyone ends up on a more equal footing. But can’t governments also fail? For every person who holds up governments as the solution to market excesses and failures, you can find someone who thinks the market is the only available correction to government excesses and failures. There is certainly no doubt that governments can be incompetent, corrupt or representative of a specific social group to the detriment of everyone else. That’s why we should always bear the specific circumstances of our time or place in mind when deciding what role we want our government to play in our economy.

Rules of the game: Regulation Regulation is a set of government-created rules that are imposed on the economy. Governments use regulation to bring about their goals, whatever they may be. A government that wants to ensure that all work pays well enough to meet people’s basic needs may bring in minimum wage regulation. A government that is worried about the environmental impact of single-use plastic might mandate a 5p charge on all plastic carrier bags. And so on. Why do we need regulation? Rules impose order. Imagine playing a game of football without any – it’d almost certainly be chaos. Government regulation makes it easier for us


What Is the Economy?

to interact with the economy by telling us everything from what counts as money to what happens if we run out of it. The ‘right level’ of regulation Although there’s generally a huge variation in how much regulation people think will best help everyone lead their happiest, healthiest, wealthiest lives, it’s pretty rare to find anyone that wants no regulation at all. Many arguments around regulation therefore centre on whether a specific regulation should be changed, cut or created, rather than whether the overall amount of regulation is too much or too little. However, there are a couple of more general debates around the quantity of regulation that crop up often in economic discussions. The first is the idea that less regulation is good for business, because it gives companies the freedom to buy and sell however they see fit. A counterargument says this is a mischaracterization of what businesses want, and that what they actually hate is regulation that is confusing and constantly changing, and therefore hard (and expensive!) to comply with. By this logic, companies may prefer governments that consistently heavily regulate their industry to ones that lightly regulate businesses but are constantly switching around the rules. Another debate centres around how regulation applies to individuals. It asks whether government rules should go beyond protecting people from being unwittingly harmed to protecting people from knowingly harming themselves. An example of the first type of regulation might be compelling food producers to list their ingredients, so someone with an allergy can see if eating it will make them sick. That’s pretty uncontentious. An example of the second type of regulation might be restricting the sale of cigarettes and consequently cutting off smokers who are fully aware that tobacco increases their risk of contracting a serious illness. That’s more contentious. Those who feel governments should not try to influence our choices via regulation often prize personal autonomy and freedom. They think that as long as customers have all the information they need about a product, they should be free to weigh up the pros (the pleasure of a cigarette) against the cons (the risk of lung cancer). The other side say we’ve not got as much free will as we think we do and therefore our choices are never as informed as we think they are. We may purchase something harmful on impulse, based on things such as if the product is prominently on display or how attractive its packaging is. Plus, our decision-making capacity may be impaired by things outside our control like addiction or illness.

Raising money: Taxes and more Fixing market failures, enforcing property rights and all the other things governments do don’t come cheap. So governments need money (‘revenue’, in economic-speak) to carry out their functions.

Your Government


There are three main ways governments can raise this revenue. They can (1) introduce taxes, (2) borrow money and (3) sell or rent out their assets (things of economic value). Tax What is tax?  A tax is a fee you are forced by law to pay to a government. Taxes are one of the main mechanisms states use to share and reorganize a nation’s wealth. For many governments, taxes are by far their biggest money source. The tax collected by the UK government in the financial year 2018/2019 was 11x bigger than the amount of new debt they took out over the same period, and this was at the tail end of the austerity years, when government debt tended to be higher than average. .  . . And where does it go?  Tax can often feel like it‘s being taken away from you and never coming back. But is that actually happening? In terms of its function, there’s a few things tax does that we will outline here. But in terms of where the money is actually going, it can be helpful to visualize it going in three main directions: To everyone, you included This is what you might hear called universal services, or paying for public goods like a police force, medical care and school places. ●●

To people other than you Depending on how much tax you or the companies you spend with pay, you may be contributing to the redistribution of money within the economy. We call these transfers of wealth.

Back to just you In times of personal need tax can be repaid to you as part of the welfare system. This happens when you are out of work, either unwillingly or as part of your planned retirement. Tax therefore can function as a sort of collective savings and insurance scheme.

Why we tax There are other ways governments can get money. But taxes have been their go-to revenue generator for pretty much all of time: archaeologists have found clay tablet tax records from 6,000 BC. Why?Tax allows societies to redistribute individual wealth  As we’ve discussed, shifting wealth around an economy is usually one of the key functions of governments. Tax is an effective way to achieve this: it is a mechanism by which money can be taken from one individual and given to another.


What Is the Economy?

Tax can function as a public savings and insurance device Human beings are notoriously bad at saving money for high-cost events – like being laid off or retirement – that seem far-off or that they don’t think will happen to them. Taxes essentially force people to put some of their income aside now for when/if they need it later. Tax can encourage or discourage certain behaviours Tax can also be used to nudge people and businesses into behaving in a way the government considers more ‘desirable’. For example, a government that wants to reduce obesity rates and healthcare costs might put high taxes on sugary goods, knowing that many people are price-sensitive when it comes to food. Or a government that believes in traditional family values may cut taxes for married couples, giving people a financial incentive to get hitched. Tax funds and legitimizes the state Forcing everyone to give over part of their money to you is a pretty clear way to signal that you’re in charge. In modern democracies like the UK, tax is usually seen through the lens of giving citizens the things they want. But in plenty of other times and places it’s been a way to give powerful rulers the things they want – from luxurious palaces to the ability to wage war on their enemies. Tax can be manipulated to help minimize economic booms and busts Every day, you make decisions about when to spend and when to save your money, based on a host of different factors related to your personal circumstances. So does everyone else. But sometimes, big events push many people into making the same decision at the same time. The result is that a lot more money is suddenly either being put into circulation (if people are spending) or withdrawn from circulation (if people are saving). These abrupt changes can cause shocks to the economy which leads to problems. For example, say a big employer in a small town suddenly goes bust and all its workers lose their jobs. The financial insecurity faced by those people will make most of them cut back on their spending. That means other local businesses won’t sell as much, which eventually might mean they have to lay off staff, who then will also cut back on spending and so on in a vicious cycle. Taxes can be deployed against this effect by making spending or saving more attractive than it otherwise would be. If you put a tax on savings, for example, many people will spend them rather than see them dwindle. Put a tax on consumption, and people might think twice about buying as much. Tax can create demand for the national currency National currencies give governments a lot of power, because they can print it (see Chapter 8). But this power only works if people actually want

Your Government


to use the currency – otherwise no one will accept the bills and coins the government prints. One way of ensuring people definitely do want to get hold of the national currency is to mandate that they pay their taxes in it. Who should pay (the most) tax?  How much tax you pay depends on quite a lot of factors. Where you live, for one. What you spend your money on, for another. But one of the biggest determinants of how much tax you pay is how well off you are. Taxes divide into those that are progressive, which means they hit the wealthiest the hardest, and taxes that are regressive affect poorer people more. Progressive taxes are based on the principle that a single unit of currency is worth more to an individual on a lower income than it is to somebody with more financial wealth and is generally seen as a fairer model to follow. That’s why income taxes in places like the UK are structured with the intention that people give over a larger percentage of their salary as they rise up the pay chain. But put income tax aside and you’ll find that most taxes – and therefore the tax regime as a whole – are actually regressive. This isn’t always obvious at first glance. Unlike with progressive taxes, regressive taxes do not generally explicitly ask poorer people to pay a higher amount of money than richer people. Instead, they hit the less well off in two ways. The first is that the tax is linked to something poorer people use more than richer people. This is one of the major criticisms behind so-called ‘sin taxes’ on sugar, alcohol and tobacco. As a general rule, people in lowerincome brackets consume more of these types of goods, so they are the ones who pay most of the tax. The second reason is that many taxes are what we call flat taxes, i.e. a specific, unchanging amount that is not linked to the wealth of the person paying it. The consumption tax (known in the UK as VAT) on a carton of orange juice, say, will be the same amount whether it’s bought by you or Bill Gates. But because paying that tax requires you to give up a larger per cent of your income than a billionaire’s, you’re shouldering a heavier tax burden. The thing to bear in mind with regressive tax systems is that even though the richest people are giving over a smaller percentage of their income in tax, they’re still almost always giving a larger amount of money in tax. That’s because they’re earning and spending more money overall. (To extend the comparison, Bill Gates may well buy more expensive orange juice than you do or buy orange juice more often.) This is the reason why some people think it’s not a big deal if taxes aren’t progressive, because the richest are still funding the majority of the government’s tax bill. The rebuttal usually given to this is that our primary focus when it comes to tax should be how much financial hardship it imposes, not how much revenue it delivers.


What Is the Economy?

How does income tax work in the UK? Like most developed countries, the UK has income tax ‘bands’ that are charged different rates. These rates change all the time, but as of early 2020 the first £11,500 UK workers make each year is income-tax free (unless you earn over £100k). Then it’s 20 per cent up to £45k, 40 per cent up to £150k and 45 per cent after that. That doesn’t mean someone earning £50k gives the taxman £20k in income tax each year. Instead, they pay nothing on £11.5k of their £50k salary, 20 per cent on £33.5k of it and 40 per cent on the last £5k. That makes their yearly income tax bill £8,700.

A little more jargon before we move on . . .  Alongside being progressive and regressive, taxes are also described as direct or indirect. The difference is simply this: direct taxes are paid directly to the government. Indirect taxes are paid to an intermediary who then passes it on to the government. Income taxes are direct, because the government takes them straight from your pay cheque. Consumption taxes are indirect, because you pay them to a shopkeeper who then passes them on to the government. Thinking about what to tax  Governments could, if they wished, decide to introduce levies on anything they fancy. Indeed, there have been some truly odd taxes over the course of human history (in Tudor times there was even a beard tax). But some things are more commonly taxed than others, namely: ●● ●● ●● ●● ●● ●●

Income Consumption (or buying stuff) Capital gains (something you own increasing in value) Profits Property (e.g. council tax) Imports and exports

Are these the right things to tax? As ever, it depends who you ask. There are lots of competing ideas floating around for how tax systems should look. Many people think we can make the tax system more lucrative or fairer (or both) by introducing different types of tax to the ones we currently have. Some of the most popular ideas in this field include:

Your Government


Wealth taxes Some people think that economies should switch their focus from income taxes to wealth taxes to reduce inequality, which sounds a little confusing because most of us would think of income as a form of wealth. But economists distinguish between taxing our earnings (which they call income tax) and taxing our assets (which they call wealth taxes). Assets are things of value: a house, a car, a ruby necklace, a pension pot, savings. Many of these things look like they’d be covered by some of the more traditional taxes we mentioned earlier, but the difference lies in when you are taxed. Under the current system, you only pay tax on assets when you buy them, sell them or, in the case of pensions and savings accounts, start to use them. But you would have to pay regular wealth taxes on assets for as long as they’re in your possession. So if your savings were subject to a wealth tax, you’d be paying tax on it all the time it was sitting untouched in a bank. That’s why a common criticism of wealth taxes is that they would discourage people from saving money and therefore increase the cost to the state should those people fall on hard times and need welfare or other government assistance. Externality tax Externalities are any side effects (good or bad) that result from an economic transaction but aren’t included in its price. Pollution is a good example of a negative externality. If you go and buy a truck, the price you’ll be charged will factor in things like the cost of material and labour and profit for the seller, but not all the greenhouse gases and dirty particles that will get put into the air as a result of making and driving the truck. But those things aren’t cost-free. They cause climate change and respiratory illnesses, which someone else (usually a government) will have to pay to mitigate or fix. An externality tax, then, is a way to force sellers and buyers to take financial responsibility for any costly consequences their trade has. It sounds pretty sensible, but it can be really tricky to implement in practice. That’s because it can be difficult to (a) measure externalities and (b) cost them. If climate change causes a flood that causes £1 billion worth of property damage, how much of that should a single oil company or individual truck driver be responsible (and therefore financially liable) for? Financial transactions tax The nature of this tax is pretty self-explanatory – you have to pay the government every time you carry out a financial transaction, such as buying or selling a share. It’s a progressive tax, because richer people are more likely to be big investors in the stock market. Fans of financial transaction taxes think they can stop traders behaving as recklessly and allow the government to capture some of the huge


What Is the Economy?

wealth that exists within the financial system. They also argue it would be a fair way to claw back some of the billions governments spent bailing out the sector during the 2008 financial crash. Detractors worry that these sorts of taxes will clobber an industry that they say benefits a lot of people. They may point out, for example, that the financial service industry in the City of London employs over 3 per cent of the British workforce. It also already contributes 11 per cent of the UK government’s total tax revenue. Existence tax Taxing people for just existing sounds somewhat Machiavellian. But it’s based on the premise that from the moment we’re born we start benefiting from state resources – schools, hospitals, the armed forces – so it makes sense that we should always be contributing to them in some way, even if we’re not employed or running a company or doing other taxable things. That, however, is also the big problem with existence taxes. Unlike salaries, property and profits there isn’t any inherent money-value in just existing, which means there’s no ready money source for people to draw on in order to pay this sort of tax. That makes it deeply regressive – poorer people will struggle much more than richer people to pay it. Margaret Thatcher’s infamous poll tax can be seen as an example of an existence tax: it required every adult to pay their local council a set amount of money each year. Because the amount was the same regardless of the individual’s wealth, the poll tax was seen as hugely unfair by many people. Many refused to pay it and riots broke out against it. Robot taxes There’s been growing concern that technological advances in robotics and other impressive bits of machinery could end up putting humans out of work. That’s partly because robots are better than us at doing various tasks. But mostly it’s because robots are often better value for money than human employees. Employers don’t need to give them minimum wages or lunch breaks or nice offices with coffee machines. A tax on robots, however, would make them more expensive for business owners. That should make human labour more competitive. Some other questions on tax  Are high taxes good or bad for the economy?  That depends on two things: what the economy in question is trying to achieve and who you ask. On the first point, economic goals matter because different tax regimes create different outcomes. A tax regime that’s good at helping businesses grow may not be as good at improving social mobility, for example. On the second point, who you ask matters because people who want the exact same economic goal can still

Your Government


completely disagree with each other about whether raising or lowering taxes would best help achieve it. That’s often counterintuitive. After all, you’d expect a complete overlap between the people who want governments to have lots of tax revenue and the people who want high(er) taxes. But this isn’t actually the case, because some economists think that higher taxes collect less money overall than lower taxes. The logic behind this argument is that high taxes put people off doing the economic activity that’s being taxed. In other words, people may be less likely to push for a promotion or start a company or buy a bunch of new clothes if they have to pay more tax to do so. How high taxes have to be before this effect might take place is, however, widely debated. Some economists have argued that they need to be approaching 100 per cent before the drop-off in productivity outweighs the gains from collecting more tax money. Why do some people think lower tax revenues are a good thing? Of course, some people want lower taxes and think they lower tax revenues. There are plenty of reasons you could think lots of tax revenue is either non-essential or even actively harmful if you’re aiming for a strong economy. Low taxes, for instance, mean that workers get to keep more of their pay cheque and can spend the extra money on whatever is most important to their well-being. Lowering consumption tax means all the things we buy become cheaper, which is particularly beneficial to people on lower incomes. Low corporate taxes mean businesses can invest more of their profit in creating new products or raising staff wages or rewarding their shareholders. Another common argument is that using high taxes to fund generous government handouts creates perverse incentives. Having access to unemployment benefits might reduce someone’s desire to work, for example. And for some, giving people the chance to accumulate lots of wealth (rather than sharing it out through redistribution) leads to a more productive and wealthy society overall. That’s the trickle-down economics theory we discussed in Chapter 9. How do people avoid paying tax? Tax-dodging splits into two distinct camps: tax evasion, which is illegal, and tax avoidance, which is legal but often frowned upon. Tax avoidance is possible because there’s usually loopholes in tax laws that can be exploited, because rich and powerful people can use their influence to get governments to write tax rules in their favour, and because different places in the world have different tax laws and it is possible to move your money and wealth between them. You’ve probably heard of tax havens, which are places where welloff people can stash their cash without having to pay (much) tax on it or


What Is the Economy?

tell their home government about it. You may not know that although tax havens are often stereotyped as small beachy islands, that’s not entirely true. Ireland is one of the biggest tax havens in the world. So is the UK. That’s partly because there is a big financial benefit to being a tax haven. Most of these places charge various fees to keep your money. It’s still worth it to the tax avoiders because the fees are lower than the tax they’d otherwise have to pay. But they add up to a significant revenue stream for the tax haven (and since the tax avoiders often aren’t their own citizens, they wouldn’t have benefited from their taxes anyway). Plenty of people argue that tax avoidance is a legitimate response to governments trying to take too much of your hard-earned cash. But the practice is also widely criticized as a way for rich people to avoid paying their dues to society. Debt and deficits: When tax isn’t raising enough money Governments have several options if they’re not raising as much tax money as they’d like it to. As we’ve just discussed, they could change up their tax policy. But if you’re a government who doesn’t fancy mixing up your tax policy for whatever reason, there are other options. You could, for example, take out some debt instead. Borrowing money  Government debt and government deficits  Government debt is borrowed money that has to be paid back at a later date. Governments get these loans from various people and places, including individuals, other countries and institutions like the International Monetary Fund. A government deficit is when a government spends more money (or plans to spend more money) than they have collected (or plan to collect) from taxes and other sources. A government that takes out lots of debt will therefore end up with a deficit unless they up their tax revenue or get more income from somewhere else. Government debt is also referred to as public debt. Debt that is taken out by individuals or businesses is called private debt. Public debt is fundamentally different to private debt On the surface, government debt looks pretty similar to taking out a business loan or putting an upcoming holiday on your personal credit card. Indeed, politicians often talk about public and private debt in the same terms: the former British prime minister David Cameron famously gave a lot of speeches where he talked about how the opposing Labour Party had ‘maxed out our nation’s credit card’ while in power.

Your Government


Like most private debts, governments (usually) have to pay interest on the money they borrow. Governments have something akin to a ‘credit score’ which changes depending on how reliably they back their loans. Countries with a bad credit score often find it more expensive to borrow, because they have to pay a higher interest rate. But on closer inspection, the comparison between public and private debt doesn’t hold water. For a start, going heavily into debt as a government is rarely seen as catastrophic. Japan, a rich, highly developed country, currently has public debt equivalent to 249 per cent of its GDP. If you as an individual owed 2.5x your annual income, you’d be in serious trouble. In fact, you’d probably be deemed insolvent, or unable to pay your bills. You’d then have anything valuable you owned, like a house, taken away from you, and you’d probably be turned down for mortgages and credit cards in the future. Even if you could find someone to lend you more money, pretty much any financial planner worth their salt would tell you to stop borrowing and try to live within your means. Japan, in contrast, still has a stellar credit rating and can keep borrowing money with ease. Governments generally can’t be insolvent, because they have a power no individual person or company does: they can print themselves more money. The reason most of them don’t do this is because many economists think that printing money leads to lots of inflation, i.e. rapidly rising prices that end up throwing many people into poverty. (This is what happened in Zimbabwe in the late 2000s. The government printed loads of money, prices rose ridiculously high, wages couldn’t keep up and the end result was ‘starving billionaires’.) Governments also find it easier than people and businesses to quickly increase their income in order to pay back some debts. An individual can only increase their salary if they find an employer willing to pay them that much, and a company can only up their prices if customers are willing to fork out more. But if governments put tax rates up, everyone has to cough up or end up in jail. What happens if governments don’t pay back their loans? Despite the extra repayment tools they have, it’s far from unheard of for governments to announce they’re unable to pay back their loans, or default in the official lingo. Argentina alone has defaulted eight times since it became independent in 1816. Usually when defaults happen the lenders end up losing some or all of their money. They might try to claim the government’s assets as recompense, but they’re unlikely to succeed unless the government willingly gives them up or the assets are being looked after by a different country that is sympathetic to the creditor’s plight.


What Is the Economy?

Is a large government deficit a bad thing? Plenty of people – and plenty of economists – think so. Their dislike is often grounded in the fact that all the debt big-deficit governments are carrying comes with interest payments. That means governments who don’t pay off their debts have to keep paying their lenders extra money on top of the initial borrowed sum. And we’re not talking pocket change here: in 2018 the UK spent £48 billion on public debt interest payments. That’s 8 per cent of its entire tax revenue. That’s money it wasn’t able to spend on school textbooks, or hospital beds, or salary increases for firefighters. But not everyone completely agrees with this assessment. There’s an argument that big government deficits are no bad thing if they (a) allow governments to invest in things with big future payoffs or (b) alleviate the problems of the present. Their logic is basically that the benefits of running up a government deficit can outweigh the costs of paying all those interest payments. The UK found itself caught between these two opinions during the decade following the 2008 financial crash. The Conservative Party, which won all the elections during that period, argued that shrinking the government’s deficit (by heavily reducing government spending, known as austerity) was the only way that the country could have a healthy economy again. Dissenters said that the government should instead have spent more money during the downturn in order to protect people from the nasty economic side effects of a recession (by increasing unemployment benefits, perhaps, or bailing out companies that were about to lay off lots of staff). The idea was this would not only increase people’s well-being but also kick-start the economy again, because people who still have jobs are still producing stuff and have the money in their pocket to buy other people’s products. They’re also paying more tax, which means government revenue goes up, potentially by enough to balance out the original deficit. This, then, is the other big difference between a debt-laden person (or company) and a debt-laden government. Pretty much everyone agrees that individuals shouldn’t spend beyond their means – i.e. you shouldn’t borrow more money than you can pay back. But only some people (the David Camerons of this world) believe that governments shouldn’t ever spend beyond their means. Others think that doing so can lead to a virtuous circle of economic benefits. Assets, bonds and MMT  Governments can also get money from their assets  Assets are things of value. People can own them, companies can own them and governments can own them too. A major asset owned by most governments is land, including bits that are highly prized for their beauty (national parks, for example) or location (city centres, perhaps) or resources

Your Government


(oil, say, or gold, or even rare earths. Yes, that’s a thing. China’s got most of it). But there are all sorts of different government assets, including roads and railways and airports and mail services and hospitals and schools. Governments can get money from assets by charging people to use them. They could sell entry tickets to those national parks, for example, or rent out buildings they own. They can also sell them off entirely. This is called privatization. Governments who privatize a lot of their assets aren’t generally just looking for a new way to pay their bills. They tend to subscribe to an economic ideology that says it’s better and more cost-efficient to leave the provision of most goods and services to the market. That was why the UK privatized many of its assets in the 1980s under the Conservative Prime Minister Margaret Thatcher. The government can also do this process in reverse: it can take other people’s private assets and make them the property of the state. This is known as nationalization. Their monopoly on violence means governments can – and have – nationalized assets without compensating the original owner or even getting their permission. Zimbabwe confiscated farmland from white farmers between 2000 and 2001, for example, and Chile also refused to pay compensation on most of its copper mines when it nationalized them in 1971. Theoretically, then, nationalization is a way for governments to get something valuable for nothing. But as with privatization, raising money is not usually the main motivation behind nationalizations. Indeed, many governments in democracies with strong rules of law pay owners a market rate for their assets they seize and risk having their plans challenged and overturned in court. That can make nationalization a very expensive process. Governments who do it anyway tend to cite national security concerns (they think the asset in question should only be looked after by the state) or fairness, or disgruntlement with how the asset is being run. If essential items are unaffordable for many people at market rates, for example, the state may decide it needs to step in to ensure its citizens have access to a reasonable standard of living. Sometimes, governments also nationalize to protect an important asset that is in dire financial straits, such as when the UK government partly nationalized the Royal Bank of Scotland during the financial crisis. Bonds Another way for governments to raise money is to issue bonds. Bonds are a specific type of debt that governments often use. (Companies can issue bonds too.) Bonds are essentially just a digital IOU: the government puts out a call for money and tells anyone who lends them some that they’ll pay it back, with interest, on a specific date.


What Is the Economy?

Bonds are a popular way for people and companies to make money. Lending governments some of your spare cash is seen as a good investment because stable, rich-country governments are really likely to pay you back. Bonds are also often traded in financial markets (more of this in Chapter 8), which means the individual who originally lent a government money for a bond might not be the same person that the government eventually pays back. Modern Monetary Theory, or couldn’t the government just print money? Modern Monetary Theory (MMT) is a new idea about how governments could get money. The basic principle behind it is that governments don’t need to be reliant solely on taxes or debt but can also print the money they need. Now, as we mentioned earlier, most economists think printing money is a bad idea, because it inevitably leads to runaway hyperinflation, where prices rise so fast that everything becomes really unaffordable. But MMT-fans say that, actually, this will only happen if the government doesn’t intervene to stop rising inflation or if government spending outstrips the amount of actual resources it’s spending money on. Resources are anything that can be used to create economic value: jobs, machinery, precious stones. If a government wanted to build a road, the resources they would need might include some diggers and some human builders. MMT advocates believe that as long as the government only printed as much money as is needed to pay for the specific number of diggers/builders you need to complete a set amount of road in a set amount of time, there wouldn’t be a problem. What might cause huge inflation would be if governments printed money to support twice as many builders and twice as many diggers as are needed. Whether this would be true in practice is yet to be proven. But we may eventually see MMT in action, because it’s becoming a popular policy of some famous left-wing politicians in the United States, like Alexandria Ocasio-Cortez and Bernie Sanders.

Spending money: Budgets What do governments spend money on? The short answer: lots of stuff. We’ve mentioned many aspects of this public spending already: infrastructure, welfare, public services, interest on debts. Governments also have to pay to maintain their assets, which could take the form of anything from hiring staff to replacing old parts. Other items you’ll commonly see in a government budget include outsourcing costs, which are payments to private companies that are

Your Government


undertaking a task on the government’s behalf, and subsidies, which is where governments pay part of the price of something to make it more affordable. Governments also spend a fair bit of money making themselves function. The best example of this is the civil service, which is the organization that figures out what governments should be doing, pushes forwards whatever they’re actually doing and analyses how effective what they did was. All these pencil pushers need wages and computers and coffee machines and, well, pencils. .  . . And how do governments decide what to spend? Different governments – across time, across geography, across political persuasion – have had vastly different budgets. How much they spend and what they spend it on is decided by a number of factors. For a start, governments don’t make their spending decisions in a vacuum. Indeed, governments will quite often be persuaded into taking a different spending route from what they originally planned or even from what they themselves would prefer because of external pressure from other groups. The most important of these groups are: ●●




Voters – in democracies, wannabe-governments win power only after they make a series of promises about what they’re going to do in office, via a manifesto. So their spending priorities are dictated by which spending priorities are popular with a majority of the electorate. Lobbies and pressure groups – companies, special-interest groups and powerful individuals often try to influence the government into spending (or not spending) money on something they’re personally interested in. They might do this by networking with politicians or offering goodies (like investment or job creation) if governments do what they want. Some groups, such as public sector unions or environmental groups, can also threaten to make problems for the government if they don’t get their way (through strikes and protests, for example). Media – media primarily influences governments indirectly, by providing information and critiques of a government’s spending plans to voters. Media scrutiny and criticism of governments is essential to a healthy democracy, but it is also true that a press story doesn’t have to be nuanced, deeply investigated or even accurate to succeed in building momentum against (or for) a government spending policy. Dominant economic theories – we talked in our opening chapter about how a certain way of ‘doing’ economics has become mainstream among economists and politicians. Part of the effect of that is that governments will often shape their spending plans around the advice of these economic theories.


What Is the Economy?

Additionally, government spending decisions are often influenced by: ●●


Economic growth – one of these dominant economic theories is that economic growth is a good thing. It is usually linked to low unemployment and less pressure on government services like welfare and healthcare, for example. That means most current governments heavily prioritize helping economic activity succeed. This often takes the form of investing money into things they think will have big payoffs in the future. That could be anything from providing skills training to create specialist employees, to building a new port so more sea trade can happen. Cost-benefit analysis – governments usually want to make sure that if they spend money on something it’ll actually benefit their citizens and benefit them enough to make the initial cost worthwhile. Costbenefit analyses are the main way they figure this out. Essentially, you add up all the costs of a policy and all of the benefits and see which side is bigger. One of the big criticisms of cost-benefit analyses is that they’re not very good at measuring intangible benefits. It can be easy(ish) to see how much money cutting a welfare programme will save. It’s much less easy to see how much happiness it will take away.

Value of life The UK’s Department for Transport uses a cost-benefit analysis called the Value of Life to figure out how much money it should put into safety improvements. Basically, they work out a monetary value for a human life, based on things like how much you’d expect the average person to earn if they keep living another ten or twenty or fifty years. They then divide the cost of the proposed new safety improvement by the number of lives it will save. If that number is lower than the value of a human life, it’s seen as good value for money and implemented.


Meeting international commitments – governments often go meet other governments at various global summits and meetings. While there, they sometimes come up with agreements that they think would be mutually beneficial to everyone. The Paris Climate Agreement, where 175 governments promised to keep global warming below 2 degrees celsius, is a good example. Other examples might be international commitments to uphold conventions on human rights.

Your Government




Market failure – as we’ve talked about elsewhere in this chapter, governments often step in if they don’t think markets are working as they should. Inequality and redistribution agenda of the time – this is also spoken about in more detail previously.

Who benefits the most from state spending? This is a very tricky question to answer. For a start, it depends on which government and which bit of their spending we’re talking about. Different governments – and different government policies – benefit different groups to a greater or less extent. And it’s also not actually so obvious what we mean by ‘benefit’. Are we talking purely in financial terms? Or in broader, more-difficult-to-measure concepts of things like happiness and well-being? There’s an idea floating around that government spending primarily benefits poorer people. A lot of what governments do is about ensuring everyone has access to a basic standard of living – a home, some food, money in your pocket – and people who are well off enough to pay for their own versions of these things don’t need the government to do it for them. But that’s a simplistic read that doesn’t really capture the nuances of how we can all benefit from government spending. Even the richest members of a society make use of a lot of the things governments spend money and political capital on, from schools to roads to tariff-free goods from another country. And all of these things can help us improve our economic position. Education makes us more valuable employees. Roads widen the area within which we can easily commute. Free trade makes a wider variety of goods available and affordable. Even when it comes to very contentious parts of government spending, like unemployment welfare, the benefits may be spread around more than we realize. The shops that welfare recipients buy things from benefit indirectly from this form of government assistance, for example. Similarly, companies that hire a lot of low-paid workers face less pressure to raise their wage bills if their staff are receiving financial assistance from the state. Government safety nets that prevent vulnerable people from being pushed into desperate situations have even been linked to lower crime rates and of course everyone benefits from living in a safer society. What is a budget? A budget is a government’s spending plan. It’s usually made public, especially in democracies, so the people it’ll affect can scrutinize it and criticize it if it’s not going to achieve the stated goals of the government, or what they personally think those goals should be.


What Is the Economy?

Governments can – and often do – deviate from their original budget, especially if an unexpected event affects the economy. Budgets, after all, are based on predictions: how much revenue the government thinks it’s going to raise, what it imagines the economy will look like in the next few months, what the probable effect of its policies will be. Ideally, governments should be constantly searching for policies that make some people better off without costing anyone else anything (whether the ‘cost’ is money or well-being). In practice, it’s almost impossible to find policies that have only winners and no losers. So government budgets are mostly about trying to find acceptable tradeoffs, or compromises between different groups of people.

‘Budget Cuts’ You’ve almost certainly heard politicians and the media bandy around the term budget cuts. It is usually used critically to talk about a government reducing the amount of money it spends on a certain area of the economy – policing, say, or council homes or fuel subsidies. Budget cuts can be a response to an economic downturn or to receiving less revenue than the government expected. But they can also be purely political. A pacifist government may make big budget cuts to the armed forces, for example, even if they had the money to pay for it. And even among people who agree that a budget cut in a certain area is necessary, there will inevitably be disagreement about how big or small the reduction should be.

CChapter 11

Your world Planet Earth. It’s a big place. But in modern times even the furthest corners of it have become much more accessible to many of us. Someone living in the UK can eat fruit from Costa Rica for breakfast, make a conference call to New York at lunch, order a new yoga mat from China in the afternoon and jet off to Morocco for a holiday in the evening. But while in some ways our global economic links have made all products, places and people closer than ever, in other ways we’ve lost touch with the world around us. We’re often totally unfamiliar with how, where and by whom our goods were made. And we often don’t see the environmental and social impact behind some of our economic choices. This chapter is about what economics looks like when it’s done at a global scale and what that means for the planet we all call home. As with many other topics we cover in this book, you’ll see that one of the key debates concerns fairness – but this time it’s not just about balancing the needs of different people but about balancing the needs of humans, other species and the environment as a whole.

How do economists look at the world? There are two broad areas of investigation: 1. How human activity coordinates over shorter or greater distances around the globe, which economists explore through concepts like trade, globalization and protectionism 2. How all this global activity relies on – and impacts upon – the world in which it’s happening, which is understood through the lens of sustainability and environmental and ecological economics Everything you’ve ever used – from the apple you had for lunch to the book you’re currently holding in your hands – has somehow come from the earth. Some of those things will also have travelled around it, which brings us onto globalization.


What Is the Economy?

Globalization What is globalization and where did it come from? Globalization is the process by which businesses, societies and economies started operating on a worldwide scale. It’s often heavily associated with our current era of one-tap internet shopping and superspeed air travel, but in reality our economies have had an international dimension ever since the first humans walked out of Africa. History is dotted with international wars, empires, trade, travel, migration and colonization, all of which involved attempts by people to utilize the resources of countries other than their own. What is a more recent phenomenon is the rise of international organizations whose role is to shape, direct and manage the world economy. These are the bodies whose acronyms you’ve probably seen talked about by politicians and in the news: the WTO, the IMF, the UN and so on. Where did all these international organizations come from? Most of them have their roots in the years during or directly after the Second World War. That was a period when global systems were experiencing a huge upheaval. Empires (including the British one) were crumbling. Former colonies were declaring independence. The gold standard (see Chapter 8) was being pushed to its limits. Countries around the world were reeling from the horrors and counting the financial and social costs of two global wars. These conditions meant that there was a desire for global leadership at the same time as there was a newfound appetite for peaceful ways for countries to relate to each other and share resources. International organizations were created to fill this gap. One of the key building blocks was put in place in the early 1940s, while the Second World War was still raging on, when a group of economists from the allied nations met in New Hampshire. Their plan was to design a new economic system that would prevent further wars by making all countries’ financial well-being dependent on the success of each other. This meeting became known as the Bretton Woods agreement. Bretton Woods laid the groundwork for our modern global economy. It tied together different currencies by pegging them to the dollar, a system that later transformed into the floating exchange rates most countries use today. (We talk about this more in Chapter 8.) It created the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade (GATT) which became the WTO.

Your World


Who are the main global organizations and what do they do? All the global organizations we mention here have the same basic principles. They are backed and funded by member countries but are supposed to be neutral actors who are working to bring about global benefits: stability, peace, prosperity and so on. All of them have been the subject of a good deal of praise and criticism, and all have had a huge impact on the way our economies look. The World Trade Organization (WTO)  The main aims of the GATT – the precursor to the WTO – was to facilitate international trade by removing tariffs (taxes on buying and selling stuff from abroad) and to put an end to dumping. Dumping is when a country sells something in another country for much less than it would cost for the buying country to produce that good itself. The selling country can usually only afford to do this if its production has been subsided by its government. The result is that local producers get priced out, which makes dumping very unpopular. The WTO replaced the GATT in 1995 and was designed to be a much bigger and more powerful organization. Instead of just being a set of collective trade agreements, the WTO had a specific mission to negotiate new trade deals and enforce old ones. The WTO currently has 193 member states and oversight over 96.4 per cent of global trade. It judges trade disputes (and punishes transgressors), signs off on trade agreements and has a ‘most-favoured nation’ rule, which means its members must give each other the same trade deals unless they sign a special free-trade agreement like USMCA or the EU’s single market. By opening up our marketplaces to products from all over the world, the WTO is credited with helping people have access to goods and services that are cheaper, higher quality or just simply different to what their own country could produce. But it’s also come in for a lot of criticism. People say the WTO is undemocratic and prioritizes some countries’ interests over others. Usually, this argument is centred in the idea that rich countries benefit more from poorer countries lowering their trade barriers than poorer countries do. The United Nations (UN) The UN is probably the closest thing we have to a global government. It was set up in 1945 and aims to keep the whole world healthy, safe, equal, prosperous and at peace. It also functions as a meeting place for countries to talk about big global issues and come up with solutions. Almost every country in the world belongs to the UN (the exceptions are states whose independence is contested, like Palestine and Taiwan).


What Is the Economy?

Members pay into the UN’s budget, which was $3 billion in 2020. They also agree to follow its recommendations and rules, although they can leave any time and the UN can’t force its members to keep doing what it says or keep giving it money. The UN is made up of six main bodies. These include the International Court of Justice (ICJ), which settles disagreements between countries and enforces international law, and the Security Council that, among other things, can impose international sanctions and authorize military actions by members. The Security Council is also in charge of the Blue Helmets – troops that go into conflict zones to act as peacekeepers. Alongside these six bodies, the UN functions as the parent organization of lots of smaller, specialized agencies and programmes, some of which you may be familiar with. They include the United Nations Educational, Scientific and Cultural Organization (UNESCO), the International Labour Organization (ILO), the World Health Organization (WHO), the International Monetary Fund (IMF) and the World Bank. The UN was also behind the Universal Declaration of Human Rights (a list of thirty freedoms every human being should have) and the Millennium Development Goals (ambitions for improving people’s lives and the global economy). The UN, then, has its fingers in many pies. But people disagree on how effective and how useful the organization really is. It has been criticized for being too big and bureaucratic, for prioritizing some members interests’ over others (especially the rich and powerful ones) and for not being very good at its main aim of resolving conflict (it has recently presided over several failed peace talks in Syria and Yemen, for example). At the same time, fans of the UN point to its many achievements in improving human lives and decreasing poverty and illness, not to mention the fact that we have not had another world war yet. The International Monetary Fund (IMF)  The IMF’s main role is to keep the global financial system stable. It does this by basically acting like the world’s piggy bank. Its members all pay into it and then whenever one of them has a crisis and needs some financial help they can ask the IMF for a loan. It also provides financial advice and assessments for member countries. The IMF will loan to countries that have been cut off from other forms of borrowing because they are considered too high risk (i.e. lenders don’t think they’ll pay the money back). But these loans come with conditions attached. Countries that take them must implement free-market policies, remove barriers to trade and decrease government control over the economy. The IMF requires this because it believes that these measures will grow the economy, increase the number of jobs and generally make everyone better off. But lots of people don’t agree and criticize the IMF for asking for things that they believe make inequality and poverty worse.

Your World


Some are also uncomfortable with the idea that a non-elected organization should tell governments how to run their economy. Over time, the IMF’s recommendations have shifted somewhat in response to these criticisms. The World Bank  Like the IMF, the World Bank is funded by members and gives advice and loans to other countries. But there are key differences. IMF loans are intended to help countries get back on their feet following a specific financial crisis and are available to all members. World Bank loans are intended to spur long-term economic development and reduce poverty and are only available to low and middle-income countries. The World Bank is particularly keen on funding infrastructure projects. (It was originally designed to help rebuild a post-war Europe.) Economists are often a fan of this approach – infrastructure like hospitals and roads are well known and easy-to-measure methods of improving economic well-being. But this love of building things has also opened the World Bank up to criticism that it promotes things that damage the environment and displace communities. It’s support for dam constructions has been a particularly notorious example.

Trade and immigration When economists talk about how different countries in the world relate to each other, they often talk about it in terms of things moving between borders. These things fall into four main categories: 1. Goods 2. Services 3. People 4. Money The international buying and selling of the first two, goods and services, tends to be what we mean when we talk about trade. Free trade Trading is described as ‘free’ when there are few barriers to it. Common barriers to trade are tariffs (taxes on what you buy), quotas (limits on how much you can buy) and restrictions (not being allowed to buy certain things). Free-trade agreements, such as the one you’ll find throughout the EU, remove all or most of these barriers. Like most things in economics, free trade is loved by some and hated by others. Fans think it makes us all richer because businesses can sell


What Is the Economy?

more things to more customers, and consumers can buy more things for less money. Critics think most of the generated wealth goes to those who were already better off and that local businesses struggle to compete with cost-cutting conglomerates. What is comparative advantage? Comparative advantage is a theory that lies at the heart of the free trade debate. It says that each country (or business or person) will be better at creating some things than others. France, for example, is world-renowned for its wine but not so much for its whisky. Scotland has the opposite problem. But French and Scottish people enjoy drinking both beverages. The countries could spend a lot of time and effort producing subpar versions of the drink they don’t specialize in. But if they instead concentrated on making the tipple they do best and then traded some of the final product with each other, everyone would end up with better booze overall. Being protective of your own economy Protectionism sits at the opposite end of the scale to free trade. It’s about prioritizing local goods and services, even if they’re not as good as the ones you could buy from abroad. Usually the way governments implement a protectionist policy is by putting high tariffs on imported goods. By making it much more expensive to buy, say, a foreign car, the odds are more people will opt for a home-grown banger. Some places go further and bar foreign imports entirely. Protectionism is often criticized for forcing people to put up with more expensive or shoddier versions of things, not least because it means local businesses face less competition. It can also be used as a way for corrupt governments to help out their rich business-owning friends. But protectionism can also combat some of the negative impacts of trade. It is often popular with environmentalists, because the less products have to travel to reach you, the smaller their carbon footprint. Furthermore, protectionism is seen as a way for poorer countries to give local industry a chance to develop to rich-world standards by guaranteeing them customers and not exposing them to a competition fight they cannot yet win. This is referred to as the infant industry argument. Protectionism can also be a way for all types of countries to increase the number of jobs and wealth within their borders, not to mention capability in strategically important areas. How does immigration affect economies? Immigration is about the long-term movement of people from one place to another (usually countries, but it could also be between different areas

Your World


such as cities and the countryside). People migrate for all sorts of reasons, but the one that is often most mentioned by politicians and economists is economic migration. That’s about moving to improve your economic circumstances – to get a better job, a higher wage or an improved standard of living. Immigration is a very controversial topic that a lot of people have very strong opinions about. Most of these opinions boil down to whether you believe the addition of a group of (certain) people to an area adds or subtracts value. Economists often talk about this value in terms of money. For example, there’s been lots of research that suggests freedom of movement gives a big financial boost to both the migrating individuals (who can travel to the place where they can get the best remuneration for their skills) and the GDP of the countries which accept them (because it gives them a much larger labour pool to recruit the workers they need from). Another common area of study is the impact immigrants have on local jobs (especially low-skilled jobs). Some people dislike economic migration because it means locals have to beat out more competition to get work. They may also think that immigrants from poorer countries are willing to accept lower wages and worse work conditions, which means locals either have to accept these conditions too or go without employment. A slightly different concern is what happens to the economies of the countries which lots of people migrate from. While remittances (the money migrants send back to their families) can be a key source of income for many people, losing a large chunk of their working-age population can cause these countries problems. There may be a shortage of essential workers such as doctors and teachers. And without the talent and skills of all their citizens, it’s harder for poorer countries to create new businesses and grow their own GDP. This situation is often called a brain drain. All these questions are complicated enough to answer on their own, but of course there are lots of other types of value other than money that people associate with migration. Pros and cons for more immigration often refer to the effects of adding other types of culture to the local mix, for example. Keeping money within borders Capital controls are limits on how much money you can take out (or bring into) a country. They’re used to force people to keep their wealth in the place they earnt it, usually with the hope that it’ll then be invested into the local economy. In more recent history they’ve lost much of their former popularity. Part of the economic orthodoxy of globalism is that people should be able to invest their money wherever they like, because they’ll seek out the places where it’ll bring the biggest returns and therefore make the world as a whole richer.


What Is the Economy?

International development What do we mean by development? We all know that some countries are much richer than others and that standards of living can differ wildly depending on where you live. The terms ‘developed’, ‘developing’ and ‘undeveloped’ are often applied to countries as a way to distinguish how wealthy they are. Economic development, then, is generally about things like improving GDP, average income or economic growth. There are all sorts of ways economic development can happen. However, two of them are very closely aligned to the idea of global intertwining that we’ve been talking about in this chapter. These are foreign direct investment and aid. However, there are other ways of viewing development. Human development uses a similar concept to economic development but goes beyond money. It looks at things like improving freedom, health, education and civil rights. Sustainable development takes another tack – it’s about meeting people’s needs now in a way that won’t harm future generations and is linked to environmental causes. What is the development industry? The development industry is generally about trying to lessen global poverty or inequality. It includes governments, charities, businesses, big international organizations like the ones we talked about and social movements. The industry has funded innumerous projects that do indisputably good stuff, from giving children an education to giving treatment to people who have fallen ill. It has stepped in to help people when their governments and institutions have been too weak or corrupt to do so. But the industry has also come in for its fair share of criticism. Some see it as making poorer countries dependent on the handouts of their richer counterparts rather than giving them the opportunity to build wealth for themselves. Others see it as circumnavigating democracies because it provides things (like that education and healthcare) that should be the purview of the state. And some worry that any help comes with strings attached and pressure to structure economies and societies after the Western model regardless of whether that is the preference of local people.

How should we think about aid? Aid is anything that is given with the intention of helping someone or something. Foreign aid is about people in one country helping people in another, and it’s often divided into two categories.

Your World




Humanitarian aid is a short-term response to a specific emergency, such as a war or natural disaster. Development aid is designed to tackle more long-term and systematic issues such as poverty.

Development aid in particular tends to flow from richer and more economically developed countries to poorer and less economically developed countries. Some people dislike the concept of aid. These criticisms fall into two broad camps. The first group think it would be better if the rich world stopped just throwing money at problems in the poorer world, because it fuels corruption and makes poorer countries dependent on richer ones. Instead, they say, poorer countries should be given the space to grow their own industries, implement their own policies and generally develop their own solutions. The second camp thinks richer countries should be giving resources to the poorer world but have a problem with it being thought about as ‘aid’. They say that many of the problems poorer countries face can actually be laid at the door of the wealthier West, which have mucked up other societies to help their own through everything from colonialism to unfair loans to dodgy business practices. Giving back some of the wealth these exploitative practices created is therefore more about repatriation than altruism. What is foreign direct investment? Foreign direct investment (FDI) is when a company in one country creates a version of their business in another country. They may do this by opening up new outlets, by taking ownership of an existing company or by merging their business with one in the invested-in country. All the Apple stores that exist outside the States are examples of FDI. So is the purchase of Cadbury’s (a British confectioner) by Krafts (an American conglomerate) in 2010. FDI is about more than just putting money into another country. It involves having substantial influence over how a business in another country is run and usually involves the investing company bringing in new skills, technology and knowledge. It also tends to be a long-term investment. Economists and international organizations generally see FDI as a positive thing. The companies that do FDI are often very successful already, so they can be a great tax source and create lots of new jobs and infrastructure that local people benefit from. Plus, by sharing different tech or ways of doing things they often upskill workers, allowing them to get higher-paying jobs, as well as give other local companies ideas about how to make themselves more profitable.


What Is the Economy?

But there are of course criticisms attached to FDI too. Regardless of how successful they are, plenty of people aren’t fans of foreigners owning lots of their country’s industry, for reasons ranging from nationalism to concern that they will influence local politics to benefit outsiders rather than citizens. Plus, foreign-owned companies often send a chunk of their profits back to their HQ country, whereas domestic companies are more likely to spend it all locally.

The environment: Thinking about the Earth and the economy Everything you have ever eaten, worn or otherwise used was made from the Earth’s resources. And all of our economic activity, from building a new railway line to buying clothing from our favourite international brand, impacts the environment in some way. Yet despite this, for a long time economists didn’t really think about the environment much during their studies. That’s started to change, not least due to growing awareness of climate change and how economic activity contributes to it. It’s worth remembering that the way humans relate to the world around them has changed dramatically in what is (for the Earth) a very short span of time. The consumption level of our early ancestors was pretty much limited to what they needed to survive – a few animals and plants for food, plus some wood and stones and other materials with which to make shelters and weapons and so on. All of which would have been sourced within walking distance of their home. These days, most of us consume things that were made thousands of miles away in giant factories by complex machinery and then sent to us via a huge transport network. We buy things not because we need them to survive but because they seem fun or cool or convenient. And all this consumption requires more and more of the Earth’s resources and often the burning of more and more fossil fuels. Of course, we shouldn’t underestimate the benefits of having access to much of this stuff. Billions of people’s health, well-being and quality of life have been vastly improved by our society’s ability to manufacture things like vaccines, books and aeroplanes. But more and more people are starting to worry that all this consumption is not sustainable and that we’re going to see widespread environmental and economic collapse if we don’t change our ways. The way economists think about the environment There are two main strands of economic thought relating to the environment. These schools are known as environmental economics and ecological economics.

Your World


What’s the difference? Well, put simply, environmental economists see the economy and the environment as two separate but related things, while ecological economists see the economy as an inextricable part of the environment. That might not seem like the most obvious difference, but it often means the two groups come up with very different ideas and solutions for how we can improve the environment and the economy. Environmental economists are more likely to see the environment as just another resource that has its own market, like the labour or housing market. They will therefore look at existing ways of studying and improving markets and apply these to the environment. Carbon taxes and natural capital are examples of environmental economic ideas that are based on existing economic theory. Ecological economists, however, believe that we shouldn’t see the environment in this way. At its core, much of economics is about pricing and ownership – i.e. figuring out how much things are worth and who gets access to them. Ecological economists say that because neither the economy nor life itself can exist without it, the environment is fundamentally priceless and belongs equally to everybody, including nonhuman species and people who haven’t been born yet. What are carbon taxes, carbon offsetting and emission trading? All three are environmental economic tools and known as market-based instruments. They aim to reduce climate-damaging behaviour by making it more expensive to do environmentally destructive things. The idea is high prices make an activity more undesirable and less affordable for most people. ●●



Carbon taxes charge people a fee for engaging in activity that damages the environment by releasing carbon dioxide and other greenhouse gases into the air. Carbon offsetting means that for every carbon-releasing activity you do, you reduce carbon emissions elsewhere by the same amount. That could take the form of planting trees, sucking carbon dioxide from the air and storing it underground or investing in renewable energy sources. Emissions trading, sometimes called cap and trade, bans people from producing carbon unless they have a government permit. These permits are limited in number, so the state can control how much carbon is produced in total. Businesses can burn more carbon by buying extra permits from either the government or other firms.

Market-based instruments are designed to change people’s behaviour even if they don’t personally place any value on environmentalism. They also raise money which can be used for green policies. But they are


What Is the Economy?

sometimes regarded as unfair, because they essentially allow richer people to keep doing polluting stuff like air travel or setting up a manufacturing company while making it harder for poorer people to access the same opportunities. They may also create the mindset that we don’t have to worry too much about things like climate change because we can always buy our way out of it, which may not be the case. What is the circular economy? Unlike most modern economies, a circular economy doesn’t use any (or many) new resources and tries to cut waste down to a minimum. It’s sometimes also called a regenerative economy. A common mantra of circular economies is ‘reduce, reuse, recycle’. It’s about cutting our consumption way back and expanding the life of the resources we do still use. The circular economy is so called because it positions itself as the antitheses to a linear economy, where stuff has a set lifespan of being used before it’s disposed of.

What’s the Green New Deal? The Green New Deal is a set of policies that have been taken up by a few American politicians and embraced by environmentalists around the world. The idea is that governments could use state money and resources to create green jobs, boost green businesses and generally grow the environmentally friendly bits of the economy. The point is to combat a concern that focusing on sustainability will take away economic opportunities for people, especially those at the bottom of the socio-economic ladder.

Does helping the environment mean hurting the economy? Opposition to environmental policies often comes from people who are worried that we can only go green by making some people (or everyone) worse off. If we stop using fossil fuels, for example, we’ll get rid of all the jobs that the industry provides. And remember that economic growth is entirely based on us producing more stuff than we did last year. So if we stop making and buying as many things, economic growth will decline. Economic growth is often associated with more jobs, more wealth and better standards of living. There are different ways of responding to these concerns. Some people say that we don’t have to lose out if we can replace any jobs

Your World


and businesses that disappear with new, environmentally friendly ones. People who used to work in coal plants can instead work in solar panel factories, for example. Some have faith in our ability to create new green technologies, which will allow us to do less damage to the planet while still having our usual lifestyle. For example, there are currently scientists working on ways to suck carbon out of the air or to grow beef in vats rather than relying on methane-emitting and land-hogging cows. But not everyone is convinced that these techniques will ever be good enough to really offset the environmental problems caused by our current way of living. That’s why there is a call by some environmentalists to degrow our economies. That basically means giving up things we enjoy but don’t need, like plane travel or fast fashion or next-day delivery. They say that without this sacrifice, we (and future generations) will lose a lot. After all, climate change is associated with everything from more intense natural disasters to higher rates of disease. The link between environmentalism and equality The environmental movement has often been criticized for deprioritizing the needs of poorer people around the world. Rich, industrialized countries have not only had years of enjoying the benefits of their carbon-intensive set-up, but they are also primarily responsible for creating the emissions which caused climate change in the first place. Some less economically developed countries therefore bristle at the suggestion that they shouldn’t be allowed to use these same techniques to raise standards of living for their own citizens.


CChapter 12

The world needs a new language At the beginning of this book we explored some of the feelings and misconceptions about economics. The remainder of this book attempted to equip you with an understanding of the economy that felt relevant to your life and real-world problems. Here we look at why we think this is so important and how it could be done on a bigger scale.

Without a common language, we’re having poor-quality conversation Ultimately, the only thing that is clear when it comes to defining the economy is that there is no clear definition and certainly not one that relates it to our everyday lives. At the same time, its importance means we continue to talk about it constantly while ignoring the confusion and hoping it will somehow go away. The result is a muddle of confusing and abstract technical words to describe what could be incredibly personal moving human stories. This is a recipe for a poor-quality conversation. That has consequences: it’s inhibiting our ability to effectively imagine, discuss and shape our collective future. Economic communication lacks context and relevance As we mentioned at the start of this book, the economy is a tangled jumble of actions and connections that is usually described as a homogeneous single entity. Reporting on the economy is therefore a very difficult task. The links between each economic story and its impact on an individual’s life are so varied and complex that it would be difficult to make the connection even if reporters and viewers weren’t in the habit of seeing the economy as a single, separate Other Thing.


What Is the Economy?

It becomes inflammatory and polarized Because we don’t put enough importance on communicating complexity in a way that feels palatable but not oversimplified, we often end up lumping large sections of the economy together and forgetting the real-life details. We talk about ‘banks’, ‘benefit claimants’ or ‘corporations’ as though each of the entities within these groups are identical and almost always as though they are remote from us. The result can be rhetoric that stirs up an idea of ‘us’ and ‘them’, an obviously inflammatory concept. Part of the problem is that economics is often discussed via the forum of public debate; think Prime Minister’s Questions, lively panel shows or radio phone-ins. This primes us to see economics as an argument that can only be ‘won’ or ‘lost’ by each side, rather than a collective conversation with a shared goal: a better economic future for everyone. It’s mixed with political spin and hides values The lack of a shared value-free vocabulary means that economic terms can be adopted and adapted to support certain political beliefs. It’s not that economics should not be used in politics, but that economic terms can become overly politicized while retaining a pseudo ‘value free’ front. In this sense, economics is always at risk of being biased. On a more basic level, we’re often all looking at the same problem from different perspectives and values. Unless we bring those things into the conversation too, it becomes difficult (and tiring) to discuss effectively. It becomes boring and overwhelming News of the economy is often depressing, and we feel we have no power to change it. Add in all the complicated jargon, maths and general snobbery that often surrounds the subject, and we can quickly become tired of feeling frustrated and overwhelmed by its homogenous and huge nature. Eventually we lose interest.

A new language It is clear that the public language of economics is preventing us from discussing problems effectively and sometimes preventing us from seeing them in the first place. To develop a true picture of the world around us, we need to create a simple, specific and vivid vocabulary that will help shine a light on all the parts of the economy that we don’t see at first glance and enable us to connect all its parts together with us in the picture. In short,

The World Needs a New Language


as well as making the economy more human, we need to make it visible. A new language of+ economics can: ●●



Enable conversation: describing the economy in a tangible way will allow us to better define the things upon which we can agree and disagree Promote transparency: precise language will help us ask the right questions when things don’t seem right Engage imagination: redefining the economy as something that we can alter and reshape will allow all of us to create economic ideas that serve society’s needs.

Reveal the people behind the numbers . . . The language of economics needs to be more people-friendly. That means less jargon and more everyday words that mean something to most people. This helps remind ourselves of what all that jargon and numbers actually represents: human activity. Whatever words we use to talk about the economy, the language needs to subsequently reveal the real and human composition of the economy that the mathematical language was hiding. The way we talk about the economy must reveal each of our unique positions and level of agency within the economy, enabling us to know exactly how we as individuals can effect change. .  . . And make the invisible visible . . . You are surrounded by them, you are part of them, yet economies feel invisible. But the more their components and workings are discussed and explained, the easier it is to see them, how they operate, their benefits, their restrictions, and – vitally – the easier it is to imagine different ways they might exist. That process of observing, understanding and imagining is quite literally the work of economics and economists! Having now read this book, ask yourself – can you now see the economy around you? When you look for it you’ll see that it’s everywhere. And more importantly, you will see ‘yourself’’ in it. A true view of the economy (and therefore a true picture of the world around you) reflects the real complexity of the world, rather than an unhelpful homogeneous blob that confuses us all. A true view of the economy allows us to draw real connections between cause and effect and gives us all a more accurate sense of what policies might reinforce or dismantle those connections. A true view of the economy shows us the ripple effect of our own decisions and where the ripples that affect us are coming from. Joining the dots between seemingly random events becomes easier and armed with this true view, we have a much clearer map ahead of us to decide where to go next.


What Is the Economy?

.  . . So that we can be intentional about the world we live in The whole point of being able to visualize and understand the economy is so that we can decide what we do with it. With a clear view of the economy comes more self-awareness and an intentionality about the kind of economics we want to see in the world. Knowing how the economy works enables us to make more informed decisions about the future. In our experience, people feel they’re able to understand government policy when it comes down to things such as health or the NHS or education. They therefore arguably have an informed vote in these areas. But when it comes to economics, what we’ve found is that people simply don‘t know what certain economic policies mean or what the end result would be for them. Therefore, you could argue that they are making a less informed voting decision. With a vocabulary that people are comfortable with, we can stimulate people’s imagination of what future economies could look like and help shine a light on the interactions and interrelations we may yet to have even defined. With greater discussion comes more stories and with more stories emerge more themes. The more effort we put into developing the language of economics, the better a chance we have that economics is used as a power for good. Plus, the potential rewards for being more intentional in the way we talk about the economy are huge. We can ask ourselves important questions about how we want our economy to work and what part we want to play within it. For example: ●●

●● ●● ●●

How can I spend money but not contribute to the extraction of depleting minerals? What policy should I support to protect my savings or reduce inequality? What might happen to the housing market in a few years’ time? What is the fairest way to support countries with problems greater than ours?

We can also begin to imagine completely different ways of doing things and start sharing ideas among one another that previously may have been left undiscussed. In short, speaking economics lets us talk about the future in a way that turns ‘well what can I do?’ from a dismissive statement to a conscious question.

What does this look like in practice? For academia Academic economists are already becoming more mindful of how they communicate their subject to the public. Taking on the responsibility for

The World Needs a New Language


public understanding is a great place to start for any academics looking to contribute towards a more understandable economics. For education The majority of students never study economics at school. While not everyone needs to study it to GCSE level, better resources for schools to teach the basics of being a citizen in an economy are vital to preventing some of the problems we have seen, such as the sheer terror or talking about the subject as an adult. For the media The media plays a vital role in shaping not only what we know the economy to be but how we feel about economic policy. Consider how these following phrases convey a different tone to the same economic theme: Budget cuts

Balancing the books


Slashed spending

Responsible budgets

Cutting wastage

Responsible use of adjectives and other language can make for more transparent reporting. Training and resources that help journalists contribute to the truer picture of the economy we just described are therefore needed. One piece of advice that we have found particularly helpful for journalists is to use relative rather than absolute numbers. What does it actually mean when a government spends a million or even billion pounds on a particular policy. Is that more than usual? Less? What percentage of its overall spending is it? How does it compare to what governments in other places are spending? And so on. For politicians and the government Politicians can also make better use of everyday economic vocabulary, avoid absolute figures, discuss things on a human scale and make the context of their statements and figures clear. They should also avoid politicizing economic policy and be transparent about the values behind decisions. For all of us A truly democratic economics would harness the voices of all of us. Whatever our age, background or experiences, we should be able to share our perspectives on the economy with our families, friends, school, work or local community.


What Is the Economy?

The phrase ‘financial health’ has become popular recently. It describes a person’s ability to manage their own finances and control their financial future. We believe we should also have economic health, which means a person can understand the economic world they live in, develop and vocalize their views on it, and take measurable steps to changing it. Economic health comes from having economic conversations. For those conversations to happen, the language of economics must be widespread between all of us. In reading this book, you are taking a step towards making that a reality. Can everyone be an expert?  Everyone‘s an expert of their own experiences. Does that mean everyone can be an expert on the economy? Well, yes and no. Not everyone can – or should – spend the years of studying that give trained economists their academic expertise. But regular citizens’ perspectives can – and should – be included in discussions about the economy to a much greater extent than they are now. The relationship between the two is similar to that of a doctor and their patient. The doctor holds specific and valuable expertise that can help diagnose the problem and suggest treatments, but the patient is the one who knows exactly how the problem feels and which treatments will align best with their own priorities and goals. Similarly, economists should be listened to and trusted, but citizens should be the ones who ultimately decide which path is taken. And we believe that the more willing economists are to engage citizens in economic decision making, the more trusted and welcome their views will become.

Bibliography Alexander, S. (n.d.). Limits to Growth: Policies to Steer the Economy Away from Disaster. [online] The Conversation. Available at: https​:/​/th​​econv​​ersat​​ion​.c​​om​/li​​ mits-​​to​-gr​​owth-​​polic​​ies​-t​​o​-ste​​er​-th​​e​-eco​​nomy-​​away-​​f​rom-​​disas​​ter​-5​​7721. Anderton, A. G. and Gray, D. (2015). Edexcel AS/A Level Economics, 2. London: Pearson Education Limited. Aristotle and Jowett, B. (1955). Politics: Book I, Chapter IX. Para 1257. Chicago: Great Books Foundation. Arnsperger, C. (2008). Pluralist Economics, 14–19. London; New York: Zed Books. Backhouse, R. E. and Medema, S. G. (2009). ‘Retrospectives: On the Definition of Economics’. Journal of Economic Perspectives [online] 23(1): 221–33. Available at: https​:/​/pu​​bs​.ae​​aweb.​​org​/d​​oi​/pd​​fplus​​/10​.1​​257​/j​​​ep​.23​​.1​.22​1 (Accessed 14 November 2019). Bayer, A. and Rouse, C. E. (2016). ‘Diversity in the Economics Profession: A New Attack on an Old Problem’. Journal of Economic Perspectives 30(4): 221–42. BBC (2018). Cocaine’s Unexpected Economic Impact. [online] BBC News. Available at: https​:/​/ww​​w​.bbc​​.co​.u​​k​/new​​s​/av/​​45104​​007​/w​​hy​-gd​​p​-inc​​ludes​​-the-​​il​ leg​​al​-dr​​ugs​-t​​rade (Accessed 26 August 2020). BBC Bitesize (n.d.). Breaking the School-to-Prison Pipeline. [online] BBC Bitesize. Available at: https​:/​/ww​​w​.bbc​​.co​.u​​k​/bit​​esize​​/arti​​cle​s/​​zd9wk​​mn (Accessed 26 August 2020). Blanchard, O. and Johnson, D. R. (2013). Macroeconomics: Global Edition. Harlow: Pearson Education. Briguglio, M. (2019). ‘Wellbeing: An Economics Perspective’. Perspectives on Wellbeing, 145–57. Leiden: Brill | Sense. Casey, K. and Richards, J. (2016). Making Sense of the Economy: A Conversation with Joe Richards. [online] The Totality. Available at: http:​/​/www​​.wond​​rousk​​ ennel​​.com/​​2016/​​03​/ma​​king-​​sense​​-of​-e​​conom​​y​-int​​ervie​​w​-j​oe​​-rich​​ards.​​html (Accessed 26 August 2020). Cavalcanti, T. and Tavares, J. (2016). ‘The Output Cost of Gender Discrimination: A Model-based Macroeconomics Estimate’. The Economic Journal [online] 126(590): 109–34. Available at: https​:/​/ww​​w​.rep​​osito​​r y​.ca​​m​.ac.​​uk​/bi​​tstre​​am​/ ha​​ndle/​​1810/​​26727​​8​/Cav​​alcan​​tiTav​​aresE​​JFina​​l​.pdf​​?​sequ​​ence=​​1​&isA​​llowe​​d=y (Accessed 19 February 2020). Chang, H.-J. (2014). Economics: The User’s Guide. Gretna: Pelican. Charles, K. K., Hurst, E. and Roussanov, N. (2007). Conspicuous Consumption and Race. [online] National Bureau of Economic Research. Available at: https:// www​.nber​.org​/papers​/w13392 (Accessed 26 August 2020). Dale, G., Mathai, M. V. and Puppim, A., eds (2016). Green Growth: Ideology, Political Economy and the Alternatives. London: Zed Books Ltd. Dasgupta, P. (2007). Economics: A Very Short Introduction. Oxford: Oxford University Press.



Dawnay, E. and Shah, H. (2005). Behavioural Economics: Seven Principles for Policy-Makers. London: New Economics Foundation (NEF). Di Tella, R., MacCulloch, R. J. and Oswald, A. J. (2001). ‘Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness’. American Economic Review 91(1): 335–41. Dorling, D. (2017). The Equality Effect: Improving Life for Everyone. Oxford: New Internationalist. Dustmann, C. and Frattini, T. (2014). ‘The Fiscal Effects of Immigration to the UK’. The Economic Journal [online] 124(580): F593–F643. Available at: https​ :/​/ac​​ademi​​c​.oup​​.com/​​ej​/ar​​ticle​​-abst​​ract/​​124​/5​​80​​/F5​​93​/50​​76967​ (Accessed 16 March 2019). Earle, J., Moran, C. and Ward-Perkins, Z. (2017). The Econocracy: The Perils of Leaving Economics to the Experts. Manchester: Manchester University Press. Easterlin, R. A. (1974). Does Economic Growth Improve the Human Lot? Some Empirical Evidence. [online] ScienceDirect. Available at: https​:/​/ww​​w​.sci​​enced​​ irect​​.com/​​scien​​ce​/ar​​ticle​​/pii/​​B9780​​122​05​​05035​​00087​ (Accessed 23 February 2020). Economy (2016). Economy. [online] Economy. Available at: https​:/​/ww​​w​.ecn​​my​.or​​ g​/lea​​rn​/yo​​u​/soc​​ial​-i​​nflue​​nces-​​cultu​​re​-in​​forma​​tion/​​what-​​​are​-s​​ocial​​-norm​​s/. Economy (2017). Does It Make Sense to Think of Governments and Markets as Separate Things? [online] Economy. Available at: https​:/​/ww​​w​.ecn​​my​.or​​g​/lea​​rn​ /yo​​ur​-go​​vernm​​ent​/t​​he​-ro​​le​-of​​-the-​​state​​/gove​​​rnmen​​ts​-an​​d​-mar​​kets/​ (Accessed 26 August 2020). Economy (n.d.). What Is ‘Rational Choice Theory’ and Who Is ‘Homo Economicus’? [online] Economy. Available at: https​:/​/ww​​w​.ecn​​my​.or​​g​/lea​​rn​/yo​​ u​/cho​​ices-​​behav​​ior​/r​​ation​​al​-ch​​oice-​​theor​​y​​-hom​​o​-eco​​nomic​​us/. Economy and Rethinking Economics (2018). Doing Economics Differently. London; Manchester: Economy, REPCE. Fioramonti, L. (2014). How Numbers Rule the World: The Use and Abuse of Statistics in Global Politics. London: Zed Books. Fleming, D. (2016). Surviving the Future: Culture, Carnival and Capital in the Aftermath of the Market Economy. White River Junction: Chelsea Green Publishing. Foundational Economy Collective (2018). Foundational Economy: The Infrastructure of Everyday Life. Manchester: Manchester University Press. Gavrilova, E., Kamada, T. and Zoutman, F. (2017). ‘Is Legal Pot Crippling Mexican Drug Trafficking Organisations? The Effect of Medical Marijuana Laws on US Crime’. The Economic Journal 129(617): 375–407. Goodwin, B. (2007). Using Political Ideas. Chichester: Wiley. Hatton, E. (2020). Under Compulsion: Why College Athletes and Graduate Students Are Like Prisoners. [online] Times Higher Education (THE). Available at: https​:/​/ww​​w​.tim​​eshig​​hered​​ucati​​on​.co​​m​/fea​​tures​​/unde​​r​-com​​pulsi​​on​-wh​​y​-col​​ lege-​​athle​​tes​-a​​nd​-gr​​aduat​​​e​-stu​​dents​​-are-​​priso​​ners (Accessed 26 August 2020). Heywood, A. (2012). Political Ideologies: An Introduction. Houndmills: Palgrave Macmillan. Kolbert, E. (2017). ‘Why Facts Don’t Change Our Minds’. The New Yorker. [online] Available at: https​:/​/ww​​w​.new​​yorke​​r​.com​​/maga​​zine/​​2017/​​02​/27​​/why-​​facts​​-dont​​ -cha​n​​ge​-ou​​r​-min​​ds (Accessed 25 February 2019). Krugman, P. and Wells, R. (2013). Economics. New York: Worth Publishers.



Loayza, N. V., Olaberría, E., Rigolini, J. and Christiaensen, L. (2012). ‘Natural Disasters and Growth: Going Beyond the Averages’. World Development [online] 40(7): 1317–36. Available at: https​:/​/id​​eas​.r​​epec.​​org​/a​​/eee/​​wdeve​​l​/v40​​ y2012​​i7p13​​​17​-13​​36​.ht​​ml (Accessed 26 August 2020). Mankiw, N. G. and Taylor, M. P. (2017). Economics. Andover: Cengage Learning. Meyer, R. and Liebe, U. (2010). ‘Are the Affluent Prepared to Pay for the Planet? Explaining Willingness to Pay for Public and Quasi-Private Environmental Goods in Switzerland’. Population and Environment 32(1): 42–65. Neate, R. (2012). ‘Queen Finally Finds Out Why No One Saw the Financial Crisis Coming’. The Guardian [online] 13 December. Available at: https​:/​/ww​​w​.the​​ guard​​ian​. c​​om​/uk​​/2012​​/dec/​​13​/qu​​een​-f​​i nanc​​ial​-​c​​risis​​-ques​​tion (Accessed 26 August 2020). Ngai, L. R. and Sheedy, K. (2011). Macroeconomic Principles. Second edn. Essex: Pearson. Norrish, A. (2017). Exploring How People Feel About Economics (and Why We Need to Improve It). London: Economy. Noy, I. and Vu, T. B. (2010). ‘The Economics of Natural Disasters in a Developing Country: The Case of Vietnam’. Journal of Asian Economics [online] 21(4): 345–54. Available at: https​:/​/ec​​onpap​​ers​.r​​epec.​​org​/a​​rticl​​e​/eee​​asiec​​o​/v​_3​​a21​_3​​ ay​_3a​​2010_​​3ai​_3​​​a4​_3a​​p​_3a3​​45​-35​​4​.htm​ (Accessed 26 August 2020). Patrinos, H. A. (2013). The Hidden Cost of Corruption: Teacher Absenteeism and Loss in Schools. [online] blogs​.worldbank​.o​rg. Available at: https​:/​/bl​​ogs​.w​​ orldb​​ank​.o​​rg​/ed​​ucati​​on​/hi​​dden-​​cost-​​corru​​ption​​-teac​​her​-a​​bsent​​eeism​​-​and-​​loss-​​ schoo​​ls. Pew Research Center (2003). Chapter 6: Social and Economic Values. [online] Pew Research Center’s Global Attitudes Project. Available at: https​:/​/ww​​w​ .pew​​resea​​rch​.o​​rg​/gl​​obal/​​2003/​​06​/03​​/chap​​ter​-6​​-soci​​al​-an​​d​​-eco​​nomic​​-valu​​es/ (Accessed 26 August 2020). Prentice, A. and Bryan, L. (2020). Economics for Beginners. London: Usborne Publishing Ltd. Raworth, K. and The Extinction Rebellion (2019). This Is Not a Drill: An Extinction Rebellion Handbook (Chapter 25). London: Penguin Books. Roine, J. (2017). Pocket Piketty. London: Zed Books. Ryan-Collins, J., Greenham, T., Werner, R. and Jackson, A. (2011). Where Does Money Come From?: A Guide to the UK Monetary and Banking System. London: New Economics Foundation. Ryan-Collins, J., Lloyd, T. and Macfarlane, L. (2017). Rethinking the Economics of Land and Housing. London: Zed. Schwartz, S. (2012). ‘An Overview of the Schwartz Theory of Basic Values’. Psychology and Culture Article, [online] 11: 12–13. Available at: https​:/​/sc​​holar​​ works​​.gvsu​​.edu/​​cgi​/v​​iewco​​ntent​​.cgi?​​artic​​le​=11​​16​&co​​​ntext​​=orpc​. Steger, M. B. (2009). Globalization. Oxford: Oxford University Press. Stiglitz, J., Sen, A. and Fitoussi, J.-P. (2009). The Measurement of Economic Performance and Social Progress Revisited: Reflections and Overview. [online] ideas​.repec​.o​rg. Available at: https​:/​/id​​eas​.r​​epec.​​org​/p​​/spo/​​wpmai​​n​/inf​​ohdl2​​ 441​-5​​l6uh8​​ogmqi​​ldh09​​​h4687​​h53k.​​html (Accessed 26 August 2020). The Daily Mail (2018). Britons Would Rather Discuss Sex than Talk about Their Finances. [online] Mail Online. Available at: https​:/​/ww​​w​.dai​​lymai​​l​.co.​​uk​/ne​​ws​



/ar​​ticle​​-5978​​729​/B​​riton​​s​-dis​​cuss-​​sex​-t​​​alk​-f​​i nanc​​es​.ht​​ml (Accessed 26 August 2020). United Nations (2019). World Population Prospects 2019: Highlights | Multimedia Library – United Nations Department of Economic and Social Affairs. [online] Un​.or​g. Available at: https​:/​/ww​​w​.un.​​org​/d​​evelo​​pment​​/desa​​/publ​​icati​​ons​/w​​ orld-​​popul​​ation​​-pros​​pects​​-2019​​-h​igh​​light​​s​.htm​​l. YouGov (2016a). Poll (Economics and the EU Referendum). YouGov. YouGov (2016b). Poll (Feelings towards Economics in the Media).

Index 2008 financial crash  144, 148, 184 academia  208–9 accumulation of wealth  37 actions  37–8 affordability  89 affordable housing  108–10 aid  198–9 allocation of resources  37 Amazon  73 American dollar  140 assets  31, 99, 100, 179, 184–5 austerity  184 automation  125–6 the bank of mum and dad  107 banks  102 governments and  138 lending money from  138–9 money in the  147–50 types  147–8 barriers to entry  88, 94, 95 barter  136 behavioural economics  36, 81–2 below-average cost  110 biased  206 Bitcoin  140, 143 black markets  88 Blue Helmets  194 BNote in Baltimore  140 bonds  144, 185–6 booms and busts  139, 176 borrowing money  182–4 bounded rationality  81 bourgeois  155 brain drain  197 Bretton Woods agreement  192 Brexit  5 Brixton Pound in London  140 budget cuts  190

budgets  189–90 buyer  123 capital  31, 32, 87, 114, 155, 159 types of  33 capital controls  197 capitalism  87, 167, 168 capitalist economic system  87 capitalist social democracy  168 carbon offsetting  201 carbon taxes  201 care work  128–9 cashless society  139 central banks  146, 148, 172 main functions  148–9 monetary policy  148–9 central planning  46, 91 Chile  185 China  165, 168 choices  79–80 circular economy  202 circular flow of income  70 circumstances  48, 76–7 civil service  187 class  154–5 collateral  102 collective needs  48 collusion  94 colonization  192 commodity  99 commodity currency  141 common currency  140 communism  168 communist regime  155 community currencies  140 comparative advantage  196 competition  88, 94, 96, 104, 109, 121, 123, 196 compound interest rates  145 conflict  46

216 conspicuous consumption  78–9 consumer  85 consumer choice theory  36, 82 Consumer Price Index (CPI)  85, 86 contestable market theory  95 cost-benefit analysis  8, 188 cost of living  85–6, 121 measuring the  86 costs  93 council houses  104 COVID-19 pandemic  5, 47 CPI. See Consumer Price Index (CPI) creative destruction  97 credit cards  183 credit score  183 cryptocurrencies  143 Cuba  165 cultural and social norms  83 cultural capital  33 cultural institution  161 culture  112, 151–2 currencies  139 common  140–1 different  140 fiat  141 gold standard  141, 142 swapping  141–2 currency derivatives  142 currency unions  140, 141 cyclical unemployment  132 debt  171, 182–4 default  183 deficits  182, 184 deflation  86. See also inflation degrow  203 demand  31 for housing  101–2 supply and  88–90, 92, 101, 114, 118–19, 122, 123, 125, 142 democracy  45, 48 demographics  102 derivatives  144 determinism  51 devalue  140 development, defined  198 development aid  199

Index development industry  198 development law  154 different currencies  140 digital money  139 diminishing marginal utility  82 direct taxes  178 disagreeing well  50 discouraged workers  132 division of labour  117 dumping  193 ecological economics  191, 200–1 economic agents  69 economically inefficient  127 economic development  198 economic exchanges  165, 166 economic growth  61, 97, 138, 147, 148, 159, 188, 202 economic health  210 economic inequality  156 Gini coefficient  157 income and wealth and  157 measure  157–8 problem  158–9 ratio measures of  157–8 economic ladder  161 economic laws  40 economic migration  197 economic numbers  55 economic policy  40 economic power  26–7 economic rationality  80–1 economics as conversation  12–18 defined  2, 16 environmental and ecological  200–1 new language of  205–8 of the past  3–4 vs. politics  163–73 politics and  64, 73 as science  3, 8–12 as system  3, 7–8 technology in  97 economics-the-conversation  45 economic system  41–3 economic theories  187 economic tools  43 economic values  75

economies of scale  171 economist’s laboratory  11 economy(ies) balancing the  63 conversation  49–50 defined  2, 21 education and  152–3 effect of immigration on  196–7 environment and  201–3 free-market  166 ‘good’ or ‘bad’  52 governments and  164, 169–73 measuring  52–9 mixed  166–7 places and spaces  43–5 planned  166 protectionism  196 resilient  63 role of (in)equality in  156–9 roles we play in  68–72 shapes and sizes  29, 43 true view of  207 without money  136 education  152–3, 171–2, 208, 209 emissions trading  201 employee’s power  122–3 employer’s power  122–3 environment  200 and economy  201–3 environmental economics  191, 200–1 environmentalism and equality  203 environmental problems  203 equality  62–3, 73 environmentalism and  203 in workplace  126–31 Equality Trust  156 equilibrium  63, 90 equity  62–3, 73–4 euro  140 eurozone  140 exchange rate  140–2 exchanges  35–7, 165, 166 existence tax  180 experiential capital  33 exports  140 externalities  40, 172, 179 externality tax  179 extractive economy  39



factors of production  32, 87, 104, 155 fairness  21, 26, 28, 64, 173 FDI. See foreign direct investment (FDI) feminist economics  154 feudalism  4 fiat currency  141 finance  17 financial capital  33 financial crash  10–11 financial health  210 financialization of the housing market  102, 103 financial markets  142, 144, 186 financial system  143–4 control of  144 financial transactions tax  179–80 financial year  175 fiscal policy  40, 141 fixed exchange rates  142 flat taxes  177 floating exchange rates  142, 192 flow of money  69–70 foreign aid  198–9 foreign direct investment (FDI)  198– 200 France  196 freedom  73 free-market economies  166 free-market policies  194 free markets  42, 87, 95 free movement  140 free rider problem  172 free trade  140, 195–6 comparative advantage  196 free will  51 frictional unemployment  60 FTSE 100 156 GATT. See General Agreement on Tariffs and Trade (GATT) GDP. See gross domestic product (GDP) gender  154 gender pay gap  127–8 General Agreement on Tariffs and Trade (GATT)  192, 193 General Equilibrium Theory  91

218 general inflation  146 General Progress Indicator (GPI)  58 Gini coefficient  157 globalization  191 defined  192 global organizations  193–5 international organizations  192 global organizations International Monetary Fund (IMF)  192, 194–5 United Nations (UN)  193–4 World Bank  192, 195 World Trade Organization (WTO)  193 global poverty  198 gold standard  141, 142, 192 goods  32 and services  171 government bonds  149 governments  137, 209 and banks  138 big vs. small  167 budget  189–90 debt  182–4 deficits  182, 184 difference between state and  165 and economies  164, 169–73 failures  173 left vs. right  167–8 non-payment of loan  183 raising income by assets  184–5 bonds  185–6 borrowing money  182–4 Modern Monetary Theory (MMT)  186 taxes  175–82 regulation  173–4 as rule-enforcers  169 spending decisions  187–9 spending money  186–9 GPI. See General Progress Indicator (GPI) grass-roots Organizations  46 greenbelt land  101 greenbelts  110 Green Book  64–5 Green New Deal  202

Index green technologies  203 gross domestic product (GDP)  56–9, 111, 130, 139, 153, 183 alternative measures  58–9 criticism of  57 Gross National Happiness  59 Hayek, Friedrich  91 HDI. See Human Development Index (HDI) healthcare  171–2, 208 Help to Buy scheme  109 heterodox economics  10 hierarchy of needs, Maslow’s  78–9 high house prices  105–6, 108 high-income groups  107 high taxes  180–1 homelessness  108 homeownership  111–12 homo economicus  80–3 homogeny  16–17 house builders  100 households  100 housekeeping  128 houses/housing  99–100 affordable  108–10 demand for  101–3 government policies  104–5 prices  101–2, 104–8, 111 regulations  103 supply for  103–4 housing associations  100 housing bubble  105–7 housing crisis  105 housing policy  101 human capital  33, 114–15 human development  198 Human Development Index (HDI)  58 humanitarian aid  199 human rights  189 hyperinflation  147 ICJ. See International Court of Justice (ICJ) ideal level of unemployment  133–4 identity  154 IMF. See International Monetary Fund (IMF)

immigration  101–2, 196–7 immigration policy of UK  72 imperfect information  91 imperfect markets  120 imports  196 Inclusive Development Index  58 income  156, 157 income distribution  37 income redistribution  173 income tax  177–8 indirect tax  178 individualism  10 individual needs  48 Industrial Revolution  97 industries  45 inequality in economy  156–9, 198 wealth  126, 143, 156, 159, 170 inequality gap  156 infant industry argument  196 inflation  84, 86, 101, 136, 138, 145, 146, 183, 186 causes of  147 informal economies  88 information  38, 91, 93 information asymmetry  91, 93 infrastructure projects  195 inheritance  107, 159–61 insolvent  183 instrumentalism  10 interest  102, 183 interest payments  184 interest rate differential  148 interest rates  68, 104, 106, 138, 145–6, 149 intergenerational mobility  160 international commitments  188 International Court of Justice (ICJ)  194 international development  198–200 International Labour Organization (ILO)  194 International Monetary Fund (IMF)  182, 192, 194–5 international organizations  192 intragenerational mobility  160 investment banks  148 the invisible hand  36



Japan  183 Jim Crow laws  154 a just transition  47–8 Kuznets, Simon  57 Kyrgyzstan’s GDP  139 labour  32, 87, 114 labour market  114 labour movements  46 labour theory of value  31–2 land  32, 87 landbanking  104 large government deficit  184 laws  40, 153–74 left vs. right  167–8 lender of last resort  149 levelling down objection  158 limits  39 linear economy  202 listing a company on a stock exchange  148 lobbies  187 long run  45 lower tax  181 low interest  106 low-interest rates  102 macroeconomic measures  84 macroeconomic policy  84 macroeconomics  31, 52, 67–8, 83–4 marginal product of labour  119 market economy  85–7 market-enhancing, law  154 market failure  172, 189 market law  154 markets  44–5, 75, 86–7, 137 vs. state  165, 167 state and  171–2 market theory  96 Marx’s class  155 Maslow’s hierarchy of needs  78–9 maths  17 maximum wages  120–2 Measures of National Wellbeing Dashboard  59 media  187, 209 medium of exchange, money as  136 menu costs  93

220 mercantilism  4 microeconomics  67 middle-classes  155 Millennium Development Goals  194 minimum wage  86, 118, 120–1 The Misery Index  59 mixed economies  166–7 MMT. See Modern Monetary Theory (MMT) models  11 Modern Monetary Theory (MMT)  186 monetary policy  40, 141, 148, 149 money  17. See also currencies in the banks  147–50 bet on  142 in borders  197 creation of  137–9, 147 description  135 economy without  136 functions of  136 future of  142–3 history of  136–7 power of  27 supply  43, 138, 140, 146, 149 monopoly  94, 95, 123 monopoly on violence  169, 185 monopsony  123 mortgages  102, 111, 183 low interest  106 multiple self problem  68–9 national currencies  176–7 nationalization  185 natural capital  33, 201 natural disasters  46 natural monopolies  95 needs  77–80. See also wants Maslow’s hierarchy of  78–9 negative interest rates  149 neoclassical economics  10 the neutrality of money  137 NHS  42, 156, 168, 171, 208 NIMBY. See not in my back yard (NIMBY) non-renewable resources  32 non-satiation  82 normative statement  11 Norrish, Ali  13

Index not in my back yard (NIMBY)  103 nudges  40–1 nudge theory  81–2 numbers  55 occupational segregation  128 Okun, Arthur  59 older generations  107 oligopoly(ies)  94, 123 opportunity cost  82–3 outsourcing cost  186 ownership  170, 201 Oxfam  156 The Palma Ratio  158 pandemics  47 Pareto efficiency  89 patents  92 pay gaps  126–8 pegging them to the dollar  192 per capita  56–7 perfect competition  94 perfect free markets  95 perfect information  38, 80, 88, 91 perfect market  88–9, 120 permaculture  44 personal values  75 phenomena  43 pilot projects  11 planned economies  42, 166 pluralist  10 policies  40, 45 political unemployment  132–3 politicians  209 politics and democracy  45 and economics  64, 73 economics vs.  163–73 poll tax  180 positive statement  11 ‘post-growth’ world  61 power  21, 25–7 defined  26 of employees/workers  122–3 automation and  125–6 union and  124–5 of skilled/unskilled workers  123 in workplace  122–6 predatory pricing  94

preferences  77, 80 pressure groups  187 The Preston Model  44 price caps  109–10 price discrimination  93 priceless  33 price mechanism  87, 92–3 price rises. See inflation prices  33, 91–3, 96 of houses  101–2, 104–8, 111 pricing  201 printing money. See quantitative easing (QE) private banks  148 private debt  139, 182–3 private schools  160 privatization  185 produced capital  33 productivism  61 productivity  104, 116–18 profit  87, 171 profit margins  90 progressive taxation  159 progressive taxes  177, 179 proletariat  155 property rights  169–70 vs. property wrongs  170–1 property taxes  105 protectionism  191, 196 public debt  182–3 interest payments  184 public goods  175 and services  109 public spending  160, 186 beneficiaries  189 decisions  187–9 QALYs. See quality-adjusted life years (QALYs) QE. See quantitative easing (QE) quality-adjusted life years (QALYs)  34 quantitative easing (QE)  43, 138, 147, 149–50, 183, 186 quotas  195 race  154 racial pay gap  127–8



ratio measures of economic inequality  157–8 rational  80 rational choice theory  80, 82 rationality  80–1 real-life economies  165–7 real-life market economies  95–6 real work  129 redistributing income  173 redistribution  28 regenerative economy. See circular economy regressive taxes  177. See also progressive taxes regulation  144, 159, 166 defined  173 reason for the need of  173–4 ‘right level’ of  174 remittances  139, 197 renewable resources  32 rent caps  109–10 rent controls  101, 109 renting  112. See also homeownership replacement cost method  129–30 reserves  149 resilient  63 resources  32, 186, 192 restrictions  195 retail banks  147–8 revolutions  46 ‘right level’ of regulation  174 Right to Buy programme  104 riots  46 Robinson, John  12 robots  125–6 robot taxes  180 roles  48, 68 Roosevelt’s Works Progress Administration scheme  166 rules  39–41 salary  32 sales tax  26–7 sanctions  194 satisficer  81 scarce  32 scarcity  31, 39 Schumpeter, Joseph  167

222 scientific method  9–11 Scotland  196 Second World War  192 Security Council  194 Sen, Amartya  59 sexuality  154 share  179 shareholders  117, 181 sharing economy  35–6 short run  45 simple interest rates  145 sin taxes  177 skilled worker’s power  123 slavery  131 Smith, Adam  95 the invisible hand  36–7 social capital  33 social groups pay gap  127–8 social inequality  105 socialism  167, 168 social mobility  77, 160 alternative ideas to  161 barriers to  160–1 social norms  83 society, foundations of class  154–5 culture  151–2 education  152–3 identity  154 law  153–74 speculation  106 spiritual capital  33 state  137 difference between governments and  165 and market  171–2 market vs.  165 status quo  47 sticky price theory  93 Stiglitz, Joseph  59 stocks or shares  144 strike  122, 124 structural unemployment  133 subprime mortgages  102 subsided  193 subsidies  186 subsistence farming  4 supply  31

Index and demand  88–90, 92, 101, 114, 118–19, 122, 123, 125, 142 for houses  103–4 supply-side economics  159 sustainability  61–2, 191, 200 sustainable development  198 swapping currencies  141–2 systemic unemployment  132 tariffs  193, 195, 196 tax avoidance  181–2 taxes  159, 171, 175–8 avoid paying the  181–2 defined  175 high  180–1 on inheritance  160 lower  181 paying the  177–8 regime  180 types  177–80 tax evasion  181 tax havens  181–2 technology  46, 104 defined  96–7 in economics  97 good and the bad of  97–8 Thatcher, Margaret  158 poll tax  180 privatization of assets  185 theory of value  31 time banks  143 time vs. money  115 tools  43 trade-offs  115, 190 trade/trading  191 barriers to  195 defined  195 protectionism impacts on  196 tragedy of the commons  170 transaction  38 transfers of wealth  175 transmission of preferences  92 trends  47 trickle-down economics  127, 159, 181 UK. See United Kingdom (UK) UN. See United Nations (UN)

uncertainty  91 unemployment  60, 84, 116, 123, 131–2, 148 benefits  28 causes of  132–3 ideal level of  133–4 structural  133 unequal pay  127 UNESCO. See United Nations Educational, Scientific and Cultural Organization (UNESCO) union membership in the UK  125 unions  120, 124 United Kingdom (UK) education and healthcare  171–2 immigration policy of  72 income tax in  177–8 United Nations (UN)  58, 99, 193–4 United Nations Educational, Scientific and Cultural Organization (UNESCO)  194 United States (US), education and healthcare  171–2 unit of account, money as  136 universal basic income  60, 98, 116 Universal Declaration of Human Rights  194 universal services  175 unpaid care work  128, 129 unpaid labour  32, 100 unskilled worker’s power  123 unwritten rules  41 upper-class  154–5 US. See United States (US) utility  77, 80, 89, 92, 112 value of life  34, 188 values  31, 36–7, 48, 72–6, 88 categories  33 value-storing of money  136 value theory  31 Veblen, Thorstein  78



volunteering  130 voters  187 and economies  164 wage inequality  126–7 wage regulation  120, 173 wants  48, 77–80 war  46 wealth  156, 157 distribution  173 inequality  126, 143, 156, 159, 170 redistribution  159 wealth management  148 wealth taxes  179 welfare system  175 well-being  62 white-collar workers  153 WHO. See World Health Organization (WHO) willingness to pay principle  34 work choice  116 and money  115–16 and productivity  116–18 reason to  115 work experience  130–1 working-class  154 workplace equality in  126–31 power in  122–6 Works Progress Administration scheme  166 World Bank  192, 194, 195 World Health Organization (WHO)  194 World Trade Organization (WTO)  193 Xbox  73 zero-sum game  126–7 Zimbabwe  183, 185 zoning  103