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Contextual Economics: "Economics as if people mattered."

Maybe the best thing to come out of the current recession is a return to common sense. More and more it seems like people are coming out of the woodwork to point out that the Emperor's naked. I think that most reasonable people have had a feeling that things are f****d up for a while now, but we all had a problem putting our finger on exactly what it is. Now it seems like we're finally hearing from people who are able to put a voice to all of our discontents.

My latest hero is Neva Goodwin, co-director of the Global Development and Environment Institute at Tufts University. She's a proponent of what she calls "Contextual Economics," a view of the "dismal science" that doesn't reduce everything to impersonal market forces. Instead, her view takes into account how culture influences the economy and (perhaps more importantly) how economics influences our culture.

Here are some of the highlights of an interview with her in Tufts Journal:

Q: We’re in the worst economic situation since the Depression—how did we get here?

...The impacts on the culture, both through advertising and through political contributions and other political influence, are critically important. They persuade people to buy more than they can afford—persuade them that they are going to look bad to their neighbors or the people they care about if they don’t appear wealthy. And they even persuade [former Federal Reserve chairman Alan] Greenspan that he ought to reduce the interest rate to keep people buying houses and other things to keep the bubble going.

Q: Could it be argued that this growth model inevitably leads to the crisis we’re seeing now?

...A good test is what embarrasses people. The New York Times this morning quoted a person who had worked for AIG who was asked, ‘Do you mind all this publicity?’ And he said, ‘Yes, it’s terrible. I feel as if I’m stripped naked.’ He didn’t say, ‘It’s terrible—people are suffering.’ But he was embarrassed. It’s gotten to be very, very hard to embarrass a corporate executive by saying, ‘You’re doing harm to people, to the environment.’ That has not been taken as embarrassing for quite a long time.

Q:If we’re at this inflection point, how would it change things for the better?

...Shrinking inequality is the essential first step for turning this around. I do think that the current temper of the country, for the first time since 1980, is really trending toward believing that continued growth in inequality is not a good thing. And if you have less inequality in both income and wealth, you also have less psychological drive to consume, because people don’t have these big differentials to compare themselves to.

Q:What else has to change?

To make our economy more sustainable, we need to examine the quantity and type of production and consumption. There is more throughput in the economy than the environment can sustain in absolute terms. The total quantity probably cannot continue growing for very much longer, because we live in physically finite world. But it probably can continue growing for a while.

Q: How do government subsidies play into this [people being more rational about what they're spending and what they're spending it on]?

There are a lot of black subsidies rather than green ones, like the subsidies that encourage mega-farming rather than sustainable farming. You don’t have to subsidize the sustainable farming—just take off the subsidies for the other. People complain about the subsidies going to rail transportation, which needs it, but other means of transportation have been highly subsidized—road building and airports are very much subsidized by governments. In some cases, just taking off the black subsidies would do it. In other cases, shifting them would make things move even faster.

Q:One advantage of an economic downturn is that people might be getting their values back in line, but many people are out of work, and those at the lower end of the socioeconomic scale are suffering the most.

...We’re in this deep recession now, and let’s make the best of it. By making the best of it, let’s see if we can take this opportunity to make some pretty deep cultural changes, going back to values that were very much American values in the 19th century—of thrift and making do and a sense of responsibility to one’s employees.

Thrift is either alien or positively unattractive to a lot of young people today. You look really bad or nerdy if you are saving and careful with your money. That could change. It has changed before. But we’ve had a tremendously strong engine bringing us to where we are now, which was the motive of the corporations to sell ever more stuff.

Brilliant stuff, and (I think) vitally important. The "economy" is not some set of physical laws that exist outside the realm of human experience. Instead, the "economy" is human experience. Artificially separating economics from the cultural context it exists in seems to me like some remarkably simplistic 19th century dualistic impulse. The economy can't exist without people and people are complicated. Economics isn't about math as much as its about psychology and sociology. As Goodwin implies, its impossible to really understand the economy without understanding the people that make up the economy.

Market forces are people. Don't forget it.