Theory and performance
R.C. BeIlan An intriguing feature of post-war economic development in the Western world is that national economic performance has been worst in those countries in which theoretical economics has been elaborated in the highest degree. In the learned, journals of Great Britain, the United States and Canada are published the world's Most sophisticated analyses of economic issues. Using as criterion the degree of affliction by the Paramount evils of inflation and unemployment, Britain, the United States and Canada have among the Western world's worst records.
This inverse correlation between Performance and erudition of analysis reflects not happenstance but causal relationship. During the past decade or so, particularly in the Anglo-Saxon world, economists have taken very seriously their discipline's appellation of 'social science.' Sedulously copying the methodology of the Physical sciences they have concentrated on the development of Mathematical relationships between precisely measured magnitudes. It has been taken for granted that through such Procedure a body of rigorously established principles would be established that was sure and solid, free of the vagueness, un-. Certainty and subjectivity that inevitably characterise nonquantitative discussion.
All economic affairs involve human beings, however. In a definition which is as valid today ,as when he made it nearly a cen"IrY ago, Alfred Marshall defined economics as "a study of Mankind in the ordinary business of life." In any economic issue the Characteristics of the human .be gs involved are factors of prime significance. When economic „change occurs, the primary causative force very often is cLnange that has occured in the !inman beings involved — change in their capacities, attitudes, d.esires. But human capacities, attitudes, desires cannot be tneasured, certainly not with the degree of reliability and precision required to render them acceptable as scientific evidence. The 'u man element in economic issues is therefore resolutely ignored by contemporary economists; the "measurable is the unmention
able. Analysis of economic change focuses on those elements which are capable of exact measurement and whatever change has occurred is attributed to alteration in their magnitudes. It is tacitly assumed that the human elements are constant and therefore cannot have been responsible for the changes observed._ _
The presumption that economic phenomena can be correctly appreciated through analysis focused exclusively on objectively measurable parameters is dubious to the point of being absurd. But practically all of the discussions of inflation which have appeared in the learned journals in the last decade reflect this academic astigmatism. Attention is concentrated on those variables for which exact figures are available — the money supply, the interest rate, government spending, the balance of payments, the size of outlays on consumption and investment, the amount of saving, and so on. No reference is made to the fact that a new social mood prevails throughout the Western world, a mood that reflects the broad extension of secondary education, the multilateral impact of television, the parochialismliquidating effects of near-universal automobile ownership and vacation travel. It takes no great perspicacity to appreciate that these developments must have massively altered human attitudes in ways that are economically significant.
A better educated, more knowledgeable, more sophisticated population is less likely to countenance wide disparities in personal income, is likely to press aggressively in the direction of egalitarianisation. Such indeed has been the case. Today those persons who are in the socioeconomic categories which traditionally have received very small incomes are pressing determinedly for increases which will raise their level of well-being to something closer to parity with those who are in the traditionally affluent categories. Demands for higher wages, higher pensions, improved social services are all expressions of the same pressure for egalitarianisation. Pressed with sufficient vigour — as they have been — these demands have had inflationary effect; national economies have not been able to increase their real output to the same degree as the increases in money , payments. The inflationary effect has been compounded. Once prices rose persons in the traditionally affluent categories demanded increase in their money incomes so that they could maintain their purchasing power and their traditional margins of superiority. To an excess of money payments more was added. And as inflation became commonplace everyone demanded additional income increases — inflation premiums — to offset the anticipated erosion of purchasing power caused by future inflation. While the drive for reduction of. income inequality — and the resistance offered — have been among the most inflationary forces of our time, being unquantifiable they have been studiously ignored in the academic literature. Explanations of inflation are in the form of ever-lengthening equations relating Y, C, I, S, M, V. r.t, alphas, rhos and gammas. One is reminded of the man who having lost a coin on one side of the street, looks for it on the other side because the light is better there.
This total obeisance to an unclothed emperor has not been harmless. Academic economics has had considerable influence on public policy. The economic strategies adopted in the UK, the US and Canada in the last decade did not originate in the minds of ignorant laymen who stubbornly insisted on the implementation of their misguided notions against the advice of professionals. Those policies were formulated and developed by highly-qualified economists trained along the lines currently in vogue. They have served badly because of the false presumptions upon which they were based — that inflation has been caused primarily or exclusively by changes in measurable parameters and that if only these parameters were appropriately manipulated, inflation could be controlled. Public policy has given virtually no recognition to the new social mood, to the new balance of the social categories that contend for shares of the national income.
Comprehensive analysis of the inflation problem would include thorough studies of the new social mood and the new social balance and would produce assessments of them, however ill-defined. Antiinflation policy would have as a primary objective the mediation of conflict about the distribution of the national income, paying full heed to the altered balance of social power.
If resolution of the conflict by mediation is not possible, public policy should seek to change the rules according to which the battle is fought. Military combatants can be persuaded to pledge themselves not to use all-out weapons upon one another and not to kill one another's civilians; in the same way those who contend against one another for larger shares of the national income may be persuaded to refrain from weapons and tactics which cause inflation that harms everyone. Alternative weapons and tactics exist through which the conflict could be carried on, and more could be devised. The grand strategy against inflation should include thorough investigation of all the modes whereby the distribution conflict can be fought and unyielding pressure exerted on the combatants to employ only those which will not give rise to inflation. If study and action along these lines were undertaken the correlation between economic performance and economic erudition would become direct and not, as now, inverse.
R. C. Bellan is Professor of Economics at the University of Manitoba.
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