For reasons I will not detail, I find myself in the position of teaching Year 11 Economics this term. No, it’s not ideal and I hope the bureaucratic machinery we are waiting on grinds into gear in short order.
For someone who advocates that domain specific knowledge beats generic skills, it’s an interesting prospect. I have domain specific teaching knowledge developed over 27 years but I’m not an economist. Yes, I have some general knowledge. For example, I understand how central bank interest rates impact inflation and why that relationship breaks down when inflation is driven by supply — as in the recent shocks caused by the war in Ukraine. But that’s not much and, crucially, I lack the specialist vocabulary. And I even have my suspicions about economists who are inclined to claim, for example, that we don’t need a manufacturing industry in Australia. So I have some measured doubts about the whole enterprise.
Nevertheless, I will give it my best shot and the sort of textbook economics that I have been learning so far has been interesting. Take, for example, externalities.
If you don’t know what these are then I shall briefly explain. Well, as best I can.
An externality is an effect a product has on others in the community that is not captured in the market price. Externalities can be positive or negative and they can come from either the production or consumption of a product.
For example, smoking has negative consumption externalities. Those around a smoker will inhale the smoke passively and society is impacted by the healthcare costs of looking after smokers. This is one reason why governments add large amounts of tax to the market price of cigarettes — to account for these additional costs. Similarly, a chemical factory that pollutes a river system will have negative production externalities and so governments will want to intervene.
On the other hand, a crop of beans has positive production externalities because beans host symbiotic bacteria that fix nitrogen from the atmosphere, improving the soil and reducing the need for fertiliser.
What is a textbook example of a positive consumption externality? Education. Educated people tend to be more productive, leading to greater societal wealth. They tend to engage in less crime and look after their health more, imposing fewer costs on the health system, and they tend to be more civically engaged. For this reason, governments do not rely on the market alone to deliver education and, instead, advanced societies transfer resources to it through taxation, enabling free and subsidised provision.
However, have you noticed that some of the above is, well, debatable? That strikes me as the interesting part. How dangerous is passive smoke? By passing away at a younger age, are smokers actually saving society the resources that would otherwise go into their prolonged social care? It feels bad even asking that question but it is valid when discussing the costs that smokers impose on society.
So, we attempt to set out cold, objective measures but in reality, they are laden with value judgements. Perhaps this is why my colleague, an economist who has been talking me through the lessons, explained that economics is just politics.
And although I have dedicated my life to education, I have to ask whether it’s all just positive consumption externalities.
Let us try and detach ourselves for a moment. What people most want to know about religion is whether it is true or not — whether God really exists and whether we live on after death. That sort of thing. However, we can look at it in terms of its externalities. Are religious people healthier? Are they more productive? You get the idea.
Now, let’s do this with education. Imagine we send a load of young people off to university to learn that the world is doomed, it’s too late to save it and the very foundations of a country such as Australia are racist and irredeemable. Regardless of the truth of such propositions, what would be the externalities?
It seems unlikely that such an education would deliver net productivity gains, although that may depend on the alternatives. If instead of being channeled into my gloomy thought experiment of a university degree, the young people became happy bricklayers, plumbers, cafe owners, wine makers and the like, then the degree route would be a net loss.
And what would such a degree do for civic engagement? Would it aid the building of a healthier society equipped to tackle wicked social problems? It seems unlikely.
Does a degree such as this exist? Probably not. It’s a caricature, but it does give us another way of looking at this project of ours.
Right. Back to the textbook.
Ha! Fair enough, but the question won't go away.
I would agree that Econ is all politics but not all politics is economics. It is a subset of politics that studies ways to allocate resources to a population’s wants.
As the trade offs between wants are value judgments there are no right answers in a sense of which trade off is correct.
The first term I learned in economics was ceteris paribus. All else being equal. This is the get out of goal card any economist can play to limit his answer.
So Australia doesn’t need manufacturing if we maintain peace and have demands for natural resources sufficient to maintain trade and provide a way to ease the transition.
The argument can easily fail if you force the proponent to accept their assumptions don’t hold.