“The economists are neglecting their social role” -- this is a refrain that we often hear. But what exactly is the social role of an economist? One way to answer this question is to say that the social role of economists is to satisfy society’s expectations of them. But what does society expect of an economist?
Let us begin by recognizing that an economist may have several identities. An economist may also be a teacher, a member of a research organization or a government official. We may also view an economist as an intellectual and a concerned citizen. Society’s expectations from an economist may relate to each of these identities.
To keep things manageable, in this article I focus on society’s expectations based on an economist’s core identity, ie, that of an economist, and not any broader identity that he or she may have. However, this does not mean that the other roles are unimportant.
Soceity’s expectation from an economist
I would suggest that society has four core expectations from an economist. First, economists are expected to provide a theoretical explanation of economic dynamics, both at macro and micro levels. What drives movements in different macroeconomic variables; how do these interact with each other; how do economic actors at the micro level, be they consumers or producers, households, or businesses, decide what to buy and how much, what to sell and at what price. Societies expect economists to explain to them in plain language how these dynamics work.
Economists are also expected to carry out empirical work, collecting and analyzing data. They may analyze past trends and current happenings in the economy and, based on that, offer some projection of what may happen in the future. Society also wants economists to help them understand the economic policies of the government. What is the likely impact of policies, both adopted and being planned. Economists are expected to recommend policies and strategies the government should take to address some problem or to realize some potential. As with other professionals and intellectuals, economists are expected to provide their analysis and recommendations frankly and objectively.
Society’s expectations from economists are derived from the overall aspirations of its members, some of which are economic. People may want to see a good rate of GDP growth, with reduced poverty, and adequate job creation with good wages. At the market, they would like to see a supply of quality goods and services at affordable prices. They may also want the environment to be protected, the workplace to be safe, and different groups treated equally. There may not be consensus on many issues. Different members of society may have different expectations or aspirations, partly because their values differ.
The core problem of resource allocation
In their endeavour to meet these societal expectations, economists are often guided by the following definition of their subject: “Economics is the study of how societies use scarce resources to produce valuable commodities and services and distribute them among different people.” In analyzing economic dynamics, economists must also recognize other dynamics, such as power play by different stakeholders and behavioural tendencies of economic actors. That is why economics is a social science and why economists are increasingly using behavioural insights or carrying out political economy analysis. However, the starting point for an economist, before these other dimensions are introduced in the analysis, is an analysis of resource allocation decisions.
Resource allocation decisions are undertaken at various levels within a society. Households decide how best to spend household income, both now and in the future. There are choices to be made: How much to spend on food vs clothing or watching a movie vs attending a sports event. Some allocational decisions are inter-temporal in nature, such as how much to consume vs how much to put aside as savings to fund future consumption. Decisions on how much to spend on childrens’ education is also an inter-temporal decision since such decisions have a bearing on the future income of the children.
Other economic actors such as businesses and farmers must also decide how to allocate resources. Businesses decide what to produce and in what quantities, what inputs to use and how much to pay their workers. Farmers decide on their crop mix and input combinations, and where and when to sell their produce.
Governments also need to make such decisions, such as how much to devote to education vs infrastructure, or to agriculture vs social protection. Within sectors too, decisions need to be taken on which projects to fund.
Increasingly, resource allocation decisions are also becoming important at the global level. Certain problems such as climate change, terrorism, and pandemics require cross-border solutions. Governments need to come together to address these problems, often intermediated by global organizations such as the United Nations, the World Bank, and the IMF.
As they take such decisions, economic actors are guided by their own motivations, such as maximizing utility or profits. Their decisions, while good for them, may not be so for society. For example, the pursuit of profits by businesses may often lead to socially undesirable outcomes such as low quality and high prices of certain products, lack of workplace safety and maltreatment of workers, or damage to the environment. It is the task of public policy to create an incentive structure that steers the decisions of profit-maximizing businesses in socially desirable directions. It does so through public investments, subsidies, and regulations.
Some concrete examples of economic analysis
This conceptual discussion provides a framework to assess the social role of economists. To properly carry out their task, economists need to thoroughly understand the resource-allocation decisions of various economic actors, such as households, farmers, and businesses.
An example will clarify this. Let us assume that society wants a more productive manufacturing sector. To help achieve productivity increases, the government has proposed to provide subsidies, tax exemptions, or tariff protection to manufacturing firms in some sectors. Will such policies improve productivity? The answer depends on the actions taken by firms operating in these industries.
Subsidies, tax exemptions, or tariff protection are likely to increase the cash flow of business firms. How would the firms allocate the increased cash flow? Will they invest in productivity enhancing measures or merely distribute these as profits to the owners of the enterprises? The former action may help increase productivity, but the latter may not. An economist’s task is to analyze the likely resource allocation decisions of the firm to assess ex ante whether the government’s policy of fiscal support will indeed achieve its professed objectives. If a policy has already been enacted, the economist may be called upon by the government or society to evaluate ex post the impact of the policy.
Society often expects economists to comment on the public expenditure decisions of the government. Economists commonly carry out some cost-benefit analysis whereby they calculate the expected benefits and costs associated with a project over a time-period. For example, a road project may be considered successful if it enhances connectivity and reduces travel time. For an education project, we would ask if certain educational outcomes have materialized. Project costs include both the costs of constructing the project and running it over the specified time period.
Value judgements and economic analysis
In the above examples, we have talked about specific types of policies or projects and how economists are expected to work out the implications of these. Sometimes, the government may not have any specific policy or other intervention in mind, but may have a problem that it needs to address. Members of society may also bring some problems to the economists’ attention.
In both cases, the objectives are decided by society, or by the government acting on behalf of society. Economists are then asked to identify alternative ways of meeting the objectives, and their costs and benefits. The task of an economist is not to decide on the end, but to find the means to an end.
Such a position brings us to an important question: Should economists concern themselves with value judgements? Economists make a distinction between positive economics, which is a study of things as they are, and normative economics, which discusses how things should be. The phrase “how things should be” necessarily involves a value judgement, often of an ethical nature.
Take the case of a government-mandated minimum wage for workers in the garment industry. Assume that society or government wants to see the minimum wage set at a particular level. Economists have the tools to analyze the implications of such a policy, be it on output, export earnings, profitability and productivity of garment factories, or the welfare of the workers. They can do this for the proposed minimum wage, as well as for alternative wage levels.
Such an analysis may reveal that there are trade-offs between impact on the companies and on the workers. A certain minimum wage may substantially improve the welfare of the workers but lower profits for the companies. Economists may analyze the impact of reduced profitability on the investment decisions of the companies. They may conclude that investment will fall if minimum wage is set at that level. They may also be able to estimate the impact of reduced investment on employment and show that such a policy decision will reduce new job creation in the garment industry by a certain amount. Economists may carry out a similar analysis of an alternative, ie, lower level of the minimum wage. The lower wages may lead to lower welfare for the existing workers. But, because of the profitability-investment-job creation nexus described above, it may create a lot of new jobs.
So, how do you decide between the alternatives? This requires a value judgement. For example, a choice between the welfare of existing workers and potential new workers. The former’s welfare will be greater with the higher minimum wage. But the potential new workers will benefit more with the lower minimum wage due to their enhanced chances of getting a job. So, who do you favour? That is not for the economist to decide. However, they may be asked to opine on that subject. In that case, a separate set of analysis will have to be carried out.
This brings us to the subject of ethics in economics. The British economist Wilfred Beckerman has written an authoritative book on the subject, Economics as Applied Ethics: Fact and Value in Economic Policy. He suggests that an analysis of economic policy issues need to make a distinction between “matters of fact” and “matters of values.” In the example above, evidence on how the minimum wage level affects investment and job creation by garment companies may be considered as a fact whereas a position on whether the welfare of existing workers is more (or less) important than that of potential new entrants into the workforce is a value judgement.
It may be noted that even “facts” may not be as objective as appears at first glance. Beckerman points out: “Many of the people involved in collecting and presenting the ‘facts’ have their own agendas or biases. Furthermore, there is no value-free method of measuring most economic variables, such as the degree of income inequality or the level of unemployment or national income.”
The economist as a social scientist
Our discussion has touched upon behavioural economics and value judgements, and therefore also psychology and philosophy, and political economy, ie, how different stakeholders in society seek to use political power to acquire resources. As they respond to society’s demand for rigorous, objective analysis of economic issues, economists need to consider insights from these other disciplines. But in doing so they need to be true to the core tools and methods of their profession and the core questions of their subject, such as resource allocation decisions.
As economists, they must focus on the means to an end. As conscious citizens, they may have views on the desired end.
Syed Akhtar Mahmood is an economist, previously with an international development agency. This piece is based on a longer article by the author, published in Imtiaz Ahmed (edited), Celebrating 100 years of the University of Dhaka, Volume 6 (Social Sciences for Life and Living).
