The relationship between economics and politics

Readers question: Why cannot politics and economics be seen in isolation?

Economics is concerned with studying and influencing the economy. Politics is the theory and practice of influencing people through the exercise of power, e.g. governments, elections and political parties.

In theory, economics could be non-political. An ideal economist should ignore any political bias or prejudice to give neutral, unbiased information and recommendations on how to improve the economic performance of a country. Elected politicians could then weigh up this economic information and decide.

Houses of Parliament london

In practice there is a strong relationship between economics and politics because the performance of the economy is one of the key political battlegrounds. Many economic issues are inherently political because they lend themselves to different opinions.

Political ideology influencing economic thought

Many economic issues are seen through the eyes of political beliefs. For example, some people are instinctively more suspicious of government intervention. Therefore, they prefer economic policies which seek to reduce government interference in the economy. For example,  supply side economics, which concentrates on deregulation, privatisation and tax cuts.

On the other hand, economists may have a preference for promoting greater equality in society and be more willing to encourage government intervention to pursue that end.

If you set different economists to report on the desirability of income tax cuts for the rich, their policy proposals are likely to reflect their political preferences. You can always find some evidence to support the benefits of tax cuts, you can always find some evidence to support the benefits of higher tax.

Some economists may be scrupulously neutral and not have any political leanings (though I haven’t met too many). They may produce a paper that perhaps challenges their previous views. Despite their preferences, they may find there is no case for rail privatisation, or perhaps they find tax cuts do actually increase economic welfare.

However, for a politician, they can use those economists and economic research which backs their political view. Mrs Thatcher and Ronald Reagan were great champions of supply side economists like Milton Friedman, Keith Joseph, and  Friedrich Hayek. When Reagan was attempting to ‘roll back the frontiers of the state’ – there was no shortage of economists who were able to provide a theoretical justification for the political experiment. There were just as many economists suggesting this was not a good idea, but economists can be promoted by their political sponsors. In the US, the Paul Ryan budget proposals were welcomed by many Republicans because they promised tax cuts for better off, cutting welfare benefits and balancing the budget. (1) A popular selection of policies for Republicans.

Economic thought independent of politics

On the other hand, economists who stick to data and avoid cherry picking favourable statistics may well come up with conclusions and recommendations that don’t necessarily fit it with pre-conceived political issues.

Many economists may be generally supportive of the EU and European co-operation, but the evidence from the Euro single currency is that it caused many economic problems of low growth, deflation and trade imbalances.

Economics needs political support

If you study economics, you can make quite a convincing case for a Pigovian tax – a tax which makes people pay the full social cost of the good, and not just the private cost. This principle of making the polluter pay provides a case for Carbon Tax, congestion charges, alcohol tax, and tobacco tax e.t.c.

However, whether these policies get implemented depends on whether there is political support for them.

For example, a congestion charge was proposed for Manchester, but it was very heavily defeated in a referendum. A new tax is rarely popular. As an economist, I would like to see more congestion charging because it makes economic sense. But, what can make ‘sense’ to an economist can be politically unpopular.

The political appeal of austerity

Another interesting example is the political appeal of austerity. After the credit crunch, there was a strong economic case for expansionary fiscal policy to fill in the gap of aggregate demand. Politically, it can be hard to push a policy which results in more government debt. There may be an economic logic to Keynesian demand management in a recession – but a politician appealing to the need to ‘tighten belts’ and ‘get on top of debt’ can be easier slogans to sell the general public, rather than slightly more obtuse ‘multiplier theories of Keynes’

Who runs the economy – Politicians or economists?

Another interesting case is the relationship between fiscal policy (set by government) and monetary policy (largely set by independent Central Banks)

In the UK and US (and Europe) fiscal policy has been relatively tight, given the state of the economy. As a consequence, it has fallen to Central Banks to pursue an expansionary monetary policy to offset the deficiencies of fiscal policy. If politicians pursue tight fiscal policy, Central Bankers have to adapt Monetary policy.

See: problem of politics and economics

Micro economics – free of politics?

There are some areas of economics we could argue are free of politics – basic supply and demand and concepts like the theory of the firm are not laden with political ideology. But, even in micro-economics, you could argue that politics can’t help seeping in. If you take an issue like privatisation – there is a clear political issue. Who should control key industries – private enterprise or the government?

Agenda

Another issue with economics is that some criticise the subject for prioritising economic growth and maximisation of monetary welfare. Some argue that the aim of society is not to maximise GDP – but to maximise happiness, the environment and being satisfied with what we have. Therefore, a politician from an environmental background may disagree with the whole premise behind macro-economics. It is not just about the best way to promote economic growth. But, whether we should be aiming for economic growth in the first place. That is a political issue too.

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