Economics is sometimes called the dismal science, and if that sounds like a strange nickname,
consider this.
In 1976 a group of Finnish economists set out to study the net impact that smoking
would have on the national economy.
Over 27 years they tracked individuals, some of whom smoked and some of whom didn't,
and recorded how much of a contribution or burden they were to the economy through
things like taxes going in and welfare and medical expenses coming out.
The thesis that the economists had was that smokers would contribute less to the economy
or even be a net burden because they would get sick more often, becoming a drain on healthcare
infrastructure and be less productive even when they were in relative health.
That's not what happened.
Because the people who smoked on average lived 8.6 years less than the people who didn't,
they were less of a burden on the economy's publicly funded retirement pension.
Because the good little smoking economic participants mostly didn't die while they
were still contributing to economic output, but then died pretty shortly into being a net drain
on resources and retirement, their average net contribution to public finances was 133,000 euros
higher than non-smokers.
It was only when the economists conducting this study went soft and included the value
of human life that the results were reversed.
The logical conclusion of this study is that in order to maximize nominal economic output,
the government should encourage smoking.
Now obviously that particular suggestion is ridiculous, but it still highlights the often
difficult problem that what is best for the individual is often not what is best for a
society.
And since the science of economics is centered around what to do with fundamentally limited
resources, generally deadly trade-offs like these need to be considered, and the right
choice is not always so obvious.
This is also assuming that decision-makers within an economy from heads of state to regular
everyday people are acting in a logical way to maximize positive outcomes instead of making
decisions based on ideology, personal gain, or just regular old ignorance.
Which as most economists will know is a pretty big assumption.
The consequences of these tough decisions, even if they are made with the best intentions,
can and have cost the lives of billions of people throughout human history.
And if that sounds like hyperbole, many world-leading economists,
including one very notable Nobel laureate, beg to differ.
What's most concerning is that a lot of the mistakes made in the past from when economists
just didn't know any better or economists didn't exist are still being made today.
So, what are the examples of the biggest economic failures to learn from throughout history?
What failures are we making right now?
And finally, how many billions of people have died over time because of poor economic policies?
Economics can be a depressing subject.
When you get down to the raw numbers you can see just how much human suffering can be created,
even when people do have the best intentions.
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Economics as an academic discipline is currently in crisis.
Microeconomists that study small-scale interactions and personal decision-making
characteristics have been outed left right and center for falsifying the results of their studies
so they could report outcomes that just sounded interesting,
rather than outcomes that were actually true.
Macroeconomists on the other hand have been arguing over their ideas for decades,
because unfortunately it's very hard to run macroeconomic experiments at all,
since by definition it's the study of interactions across entire markets,
often at a national or even global scale.
The best that macroeconomists can do is learn from history,
and unfortunately there is an endless list of mistakes to learn from.
In 1958, in an effort to modernize,
China, which was in the process of redeveloping its economy following
the second world war under its new communist system, wanted to increase steel production.
The economic theory was that steel is a vital component of building out modern industrial
equipment, so the more steel an economy has, the more factories and machines and infrastructure
it can build, which will increase total output and result in more resources to be
shared amongst all participants.
In theory at least, this isn't wrong.
Economic growth and steel consumption are highly correlated in the world today,
for exactly this reason.
If an economy uses machines made of steel, it will be able to produce more
and further develop more stuff made from steel.
The way China went about this though, took a theoretically sound economic idea,
probably even made with the best intentions of genuinely improving the quality of life
of everybody in the country, and came up with backyard furnaces.
Instead of investing in a few high-quality steel smelting plants,
the Chinese government at the time encouraged farmers to produce basic furnaces
made out of bricks and clay that would burn whatever they could find for fuel,
like wood from trees, tools, and in some cases, even coffins.
The backyard furnaces were so heavily encouraged by the government at the time,
that farmers would fell entire forests surrounding their fields,
and prioritise producing steel over producing crops.
The government knew this was happening, but assumed that if they could increase steel
production and rapidly industrialise, then those same farmers could use tractors and
advanced harvesting tools instead of the basic hand tools they were using,
which would massively increase agricultural output in the long run.
Again, not an entirely terrible assumption; farming today is highly industrialised,
and just one farmer with a combine harvester can do as much work as
a hundred farmers with hand tools in the same amount of time.
Unfortunately for the Chinese economy, they failed to realise that industrial development
leads to producing more steel, but just producing more steel will not create industrial development.
Amongst some other factors, the proliferation of backyard furnaces were one of the primary
drivers of the great Chinese famine that started a year after and led to the death of between 15
and 55 million people.
Approximately the same amount of casualties experienced by every country in world war 2
combined.
This tragedy was not born out of violence, but just bad decision making.
Beyond simply taking farmers attention away from focusing on farming,
this failed economic project also led to soil erosion because of all of the
trees that were cut down around fields to fuel the furnaces.
Millions of unified workers all banding together to create steel for the common good of the nation
also might have aligned nicely with the ideologies of the party,
but even after all of the damage it did, it created really crappy steel that wasn't useful
for anything and most of it eventually had to be reprocessed at a proper steel plant
like it probably should have been in the first place.
Now it's almost easy to look back at decisions like this and see that just like encouraging
more people to smoke, encouraging farmers in a mostly agrarian country to stop farming and
ruin their fields was never going to be a good idea even if it did have some theoretical economic
justification.
There is unfortunately no limit to other historical lessons like this,
even over the past century, and this is to say nothing of the instances when economics
is intentionally used as a weapon to subdue a population or entire nation
through things like trade restrictions and sanctions.
In some of these cases the ends may justify the means and economic hostilities may be
seen as preferable to military hostilities, but there will still be casualties.
Even maintaining the focus on just policies enacted to benefit economic participants.
Where this gets a lot harder is when we don't have the benefits of hindsight,
and untested theories are all we have to determine what is for the greater good.
The reason that it's important to realise that economics is much more than just making people
as wealthy as possible, and that it's a discipline that impacts everybody in the
world in drastic ways, is not just to feel more important than chemists and physicists
who get nolan movies made about them, it's more that it shows the need to take economic
policies very seriously and understand what economic success really is.
Now that might sound a bit philosophical, but perhaps that's the point.
There is a very real debate being had right now amongst some of the greatest minds in the
profession about what the role of a good economist should be.
On one hand there are those that argue that economics is a science like any other science,
and everything should be done with rigorous experimentation and subservience to the data.
To that end, economists should find and support policies that maximise measurable
results like output, wealth and human development.
According to world-leading economists, and most importantly the economists that are
actually making policy decisions in governments and organisations around the world,
a data-backed and somewhat clinical approach to economics has been the
predominant way of effectively running the planet for the past four decades.
This is a trend that has been helped along because collecting and analysing
economic data is a lot easier now with computers.
Using data and rigorous analysis takes a lot of the emotion, and most importantly
ideology out of the economic process and gives leaders a guide on what to do in
order to maximise measurable outcomes.
Put simply, it removes the opportunity for people to make catastrophic economic mistakes
because they think they know best.
Now of course, as fantastic as the scientific method is, there are some genuinely fatal
problems with this approach that have led economists to argue that a more philosophical
basis for conducting economics might actually be better.
One obvious problem is that policy makers don't always follow the advice given to them by
economic advisors, and overly technical ideas are even more difficult to explain to the general
public, which in a good functioning democracy should be the ultimate decision maker.
Sometimes a good enough idea that will actually get implemented is better than
a perfect economic plan that will never be considered.
There is also the problem of applying very rigid statistics to what is fundamentally
a human-focused science.
If all an economist cares about is maximising measurable outcomes, then their solution to
the trolley problem might be to run over the single person tied to the train tracks, and
then back up and run over the second group because it eliminated six economically dependent
individuals and doubled the time worked for the tram driver.
If that sounds overly dramatic, there are genuinely solutions like this that modern
economic theories have supported, but more on that later.
One other major problem with treating economics, especially at a macro scale like other sciences,
is that it is much harder or in many cases totally impossible to run experiments on an
economy because it is filled with millions of unpredictable variables that can't be
controlled like experiments in a nice sterile lab.
Even running microeconomic experiments, which are more focused on individuals and their
decision-making processes, are notoriously difficult because even though economists
sometimes assume that people are perfectly rational, they are of course anything but.
And finally, an overly data-driven approach to economic decision-making will naturally
put a greater emphasis on improving things that are easily measurable, rather than intangible
stuff like human fulfillment and happiness, which is much harder to plug into data analysis
software, but arguably even more important than stuff like net output per capita.
The alternative to the cold-hearted, data-driven approach to economics is to have economists
basically be philosophers and make judgements about what people truly value and the best
way to achieve those goals.
Angus Deaton won the Nobel Prize in Economic Sciences in 2015 for his work analysing the
role that economic consumption plays in human welfare.
He has since released a number of works, including a book titled Economics in America that proposes
an alternative to how modern economists should study economics, and his arguments are particularly
relevant to one of, if not the most significant economic issues being debated today, globalization.
Globalization is the general trend of countries to trade, invest, and cooperate more freely
instead of being completely self-sufficient.
Just like how on an individual level we are wealthier today because we work together with
other people and specialize in different tasks, countries get a lot of the same benefits from
specializing in one particular field and trading with other countries to acquire the goods and
services that they are not so good at producing themselves.
By almost any measurable economic metric,
globalization has been a massive force for good in the global economy.
It has given opportunities to countries like China, South Korea, Taiwan, and India to lift
hundreds of millions of people out of poverty and develop world-leading industries.
It has also allowed traditionally wealthy economies like the USA,
Australia, Canada, and Western Europe to enjoy consumer goods at a price that is
far lower than what they would cost with local manufacturing employing higher-paid domestic
workers. Appliances that would once be considered massive luxuries like a washing machine,
vacuum cleaner, and enormous flat-screen television are now commonplace in almost
any household in any given advanced economy.
Beyond that, companies in advanced economies, the USA in particular, have benefited greatly
not only from being able to take advantage of lower wages and economies of scale in places like
Asia, but they have also benefited from having hundreds of new markets and billions of new
potential customers opened up to them. Measurably it has been a win-win for
everybody, but some have won a lot more than others.
Average workers that now have to indirectly compete for jobs with people in countries
with much lower costs of living have been left behind.
And beyond that, especially in advanced economies, the wealth generated from global
industries has been great, but it is resulting in some incidental things becoming cheaper,
but really important things like housing in particular becoming much more expensive.
Highly paid workers, investors, and global citizens who have made lots of money for
themselves by working in or investing in the organizations that have grown rapidly thanks
to global trade have become almost a class onto themselves so that regular economic
participants working in regular jobs that only add value to the regular domestic economy
just can't compete with.
Someone working in a supermarket can only add so much value with the work that they are doing,
and assuming that the supermarket they work for wants to make a profit,
they can't make more than the value they are adding for any given amount of work.
Compared to someone that designs technology that can be sold around the world,
or manages trade routes for an import business, or hey,
even someone that makes youtube videos that are consumed by a global audience,
this second group might add less value to their local economy,
but they add more value to the global economy, and so they can sustainably earn more and
outcompete the people working in regular jobs for limited resources, like housing.
This kind of hard-to-measure problem presents very real human consequences.
In the USA in 1992, university graduates on average lived 2.6 years longer than those
without a bachelor's degree. By 2019, the gap had more than doubled to 6.3 years,
and in 2021 it was 8 and a half years.
Deaton's work argues that modern economics which has pushed globalisation has fundamentally
failed to realise the unmeasurable consequences such a radical change has done.
There is the statistic that for every 1% increase in unemployment in the USA,
40,000 people die, which we did an entire video on a long time ago.
Deaton and a growing handful of other economists have made similar connections and have blamed
economic policies that look good on paper, but hurt a lot of people in practice for
major societal problems like the opioid epidemic and mass homelessness among others.
The solution is difficult, if economics is run off numbers alone then we end up in a world where
the government encourages smoking to reduce the burden on retirement welfare, but if economics
turns into philosophy or worse still politics then we just as easily end up with backyard
furnaces fuelling the growth of collectivised heavy industry.
If nothing else, consider this thought experiment at a scale that we have influence over in our
everyday lives. Someone has just finished a meal at Macca's and their table is covered
in disposable food wrappers. Should they or should they not take their own trash and put
it in the bins? If they don't then Macca's will need to pay someone to clean up the trash which
will boost employment, but if they do they will make the lives of the workers there easier,
although possibly at the expense of the company just cutting down on how many workers they will
employ. Now we are not going to give you the answer to this one, partially because there
is no definitively correct answer, partially because we will feature the best common answer
in our next video, and partially because we have covered issues like this extensively in
our videos on economic fundamentals, and as always I don't want to repeat too much here,
but if you do want a refresher we have put them all into a playlist that you should be
able to click to on your screen now. Thanks for watching mate, bye.