Gross national product…measures neither the health of our children, the quality of their education, nor the joy of their play. It measures neither the beauty of our poetry, nor the strength of our marriages. It pays no heed to the intelligence of our public debate, or the integrity of our public officials. It measures neither our wisdom nor our learning, neither our wit nor our courage, neither our compassion nor our devotion to country. It measures everything, in short, except that which makes life worth living, and it can tell us everything about our country except those things that make us proud to be a part of it. 

Robert Kennedy; Address, University of Kansas, Lawrence, Kansas, 18 March 1968.

 

The quote above adequately captures the moral force with which Dr Paul Mills, a senior economist at the IMF and PhD holder from Cambridge, delivered a seminal talk entitled “The Moral Failure of Economics” on Wednesday 27th April at Strathmore University. A man of many accomplishments, Dr Mills addressed a gathering of undergraduate students, FOCUS staff and Strathmore staff among others in a talk organized by The Hesabika initiative in conjunction with Strathmore School of Finance and Applied Economics and SUFFESA club.

 

Dr Mills began his address by painting a picture of the current strangeness in the world economy. We see negative mortgage and interest rates that are unlikely to go any lower and forecasts that tend to be too optimistic about growth in key regions of the world like China. There is a general dissatisfaction with the state of human welfare in many world economies, developed and developing. In short, there is an existential crisis about the role of economics in our lives in as far as increasing human flourishing is concerned. This state of affairs is driven in part by forecasting failures but more so by a moral failure by the economic establishment. This is the moral failure of economics, according to Dr Mills.

 

In order to fully understand this crisis, Dr Mills posed two big questions: ‘What is the aim of economics in general?’ and ‘How do we go about achieving such an aim?’

 

The key concern is whether materialism satisfies people: does wealth mean health? Apparently not. Dr Mills suggests that happiness is more about healthy relationships and social welfare. Unfortunately, Economics as currently practiced, downplays and even actively erodes the relational and social aspect of human flourishing, focusing on large macroeconomic indicators such as Gross Domestic Product (GDP). This is the classic moral failure of economics.

 

The second question begs a more nuanced answer. Current trends suggest that mathematics plays an increasingly important role in economic analysis and forecasting to the point that many attribute this trend to science envy – Economics trying to ape the exactitude and precision of the physical sciences. Although this approach may be great in microeconomics, it fails spectacularly in the macroeconomic context, where public policy plays a huge role. The two reasons for this discrepancy are that economic modelling isn’t sophisticated enough to handle nonlinear processes and that we end up valuing only what we can measure hence ignoring the relational aspect. The end result is that modelling becomes naïve and inadequate in tackling real human issues.

How then should economies pursue human flourishing in light of current inadequacies in economic theory and practice? Dr Mills turned to the founder of Economics as well as the rich Jewish Christian tradition for answers.

According to Dr Mills, a look at how the Israelites organized their society provides crucial lessons for our current economic conditions. He looked at how they organized themselves around two key economic drivers: product markets and factor markets.

 

In Israelite tradition, product markets were very much like our own. There was a free market with minimal government intervention focused only on enforcement of property rights, maintaining a fair judicial system (hence building trust), ensuring stable price levels and a fixed tax regime. This is only half the story.

The other half of the story centres on factor markets, which were radically different from those in modern times. Factor markets generally refer to land, labour and capital markets. In the labour market, there was labour protection with minimal mobility and job security. In the land market, there was roughly equal allocations of land hence equal opportunity based on assets owned by families. This illustrates the key advantage of asset redistribution over income redistribution. In the financial capital market, there were prohibitions in the charging of interest on debt, periodic cancellations of debt and fairer practices in repayment of debt. This avoided the common modern problem of debt slavery at the personal and institutional level. This set of conditions meant that society flourished with social security embedded in the economic system.

 

Thus the key lesson was that product markets were sufficiently liberalized while factor markets were highly regulated. This is the kernel of the solution to the moral failure of economics according to Dr Mills.

 

Dr Mills wrapped up his deep and insightful talk by simply stating that economics isn’t wholly inept and can be saved.

 

 

Article by BBS Finance Economics Student, Tim Avedi Musungu