Challenging conventional economics

The economic theories applied in public sector decision-making and policymaking can appear to be uncontestable. There is, however, a rich tradition of critique of mainstream theories and of their application. The critique has been lumped together under the umbrella term ‘heterodox’ economics – with just a hint of the implications of heresy.

Bureaucratic decision-making leans heavily into a handful of mainstream theories. First is rational choice theory in which each individual is assumed to pursue their best interest and the sum of the expression of those interests can be thought of as an optimal outcome. This is a basis for utilitarian calculation of societal benefit, using cost benefit analysis. This has many flaws. The one most acknowledged is the reality that we don’t always act rationally and in our best interests. This can be seen as a simple failure of access to information in mainstream economics or as a fundamental source of fallacy in heterodox economics. The second concern is that it is used on the assumption that individual benefits sum to overall societal benefit. Given that some benefits will clash with others, this at least suggests winners and losers. Mainstream economics wishes this away with quasi pareto optimisation which says that those who lose will be compensated – but beyond very direct losses (like someone whose house is needed for a road scheme) this does not happen. Individual choices may also add up to overall disbenefit for all. Mainstream economics can see this as a product of the ‘tragedy of the commons’ where common goods like the environment are exploited because they are a ‘free good’ (not priced), so an optimal position is not reached. Their response is to address ‘market failure’ by creating markets and appropriate pricing to adjust for this artefact of the theory. Here correct pricing and the market can stand in the stead of (or as a driver of) democratic decision-making. Another issue is that our views change over time. This is rarely accounted for in rational choice applications, so we may well be pursuing an optimisation that our later selves will regret – certainly an issue for the long termism needed for sustainable development. Equally, we cannot seek the views of the unborn – the future generations.

Public bureaucracy uses another mainstream economic theory that impacts future generations. This is the application of discounting. Discounting is based on time preference which is our tendency to prefer near term to long term benefits. This is reflected in public decision-making by reducing the benefits accrued in future years, valuing the short-term return (or costs) much more. This is rationalised by arguments about it reflecting inflation, future uncertainty and the opportunity cost of spending rather than investing. This application can be seen directly to contradict the emphasis on intergenerational equity in sustainable development.

Transport economics has long used value of time as the basis for justifying road schemes. Here actual alternative value of lost time or theoretical questions about individual willingness to pay are used to calculate the value of time gained as a result of new schemes. There are various issues with this. First, road schemes typically allow people to travel further rather than ‘save’ time. The value of time is converted into a property cost saving or a new recreational opportunity. What you are valuing is increased travel. This may well not add up to a societal good (see rational choice). Willingness to pay calculations are problematic. They favour benefits to those more able to pay and reach into absurdity when applied to attempts at valuing unique or common assets (the classic attempts at valuing a cathedral or aspects of nature). Using market values in calculations can also be distorting of policy choice. Calculations of benefit based on impacts on property -say in road schemes or flood defense – will, for example, favour protection of high-end neighbourhoods at the expense of poorer ones.

All these economic approaches to decision-making seek to turn decisions into simple comparisions of cash numbers, a monetisation to turn policy into a simplistic company investment decision. While assessment guidance, like that of HM Treasury in the UK, recognises that it may not be possible or appropriate to monetise everything, that is still the preferred route. Forms of narrative multi-criteria analysis offer an alternative approach where everything is described in its own terms as positive or negative impacts on issues of public concern, allowing the richness of the distribution of costs and benefits to be expressed rather than lost.

Less used in day-to-day bureaucracy but significant for assumptions behind policy decisions is agglomeration theory. This states that larger metropolitan areas are necessary for economic growth and competitiveness, rationalised by the impact of clustering of activities and wider job markets. More recent studies suggest the picture is less clear cut. There seems a diminishing return from very large conurbations, the public costs of servicing them are large (such as transportation) and wide access to information technology means that physical distance is becoming less important. Agglomeration theory treats the rural as a form of failed urban rather than recognising the potential of other places and those who live in them. The approach is still adopted unquestionably in policy and continues to lead to depopulation of rural areas and centralisation of economic activity at the expense of regional disparities.

The focus of economic policy is on a small percentage of the total economy – chiefly the traded international element reflected in the financial markets. This breeds a policy focus on chasing mobile investment and trade access. This is one of a number of economic shibboleths that continue to hold sway in policymaking, but which are challenged in particular by conceptions of Foundational economics. This places the emphasis on non-mobile activities used for the benefit of local communities. It is connected to ideas of asset-based regeneration drawing on the human and natural strengths of places rather than the planning-based approach of regeneration by gentrification.

Competition theory lies behind the rush to put public services into the private sector or to introduce internal markets. Competition theory is contingent upon clarity of products and markets and requires an absence of collusion among competitors. It also depends on the assumption that tendencies towards monopolisatic behaviour will be controlled. All of these are questionable, especially in the context of the nature of the public sector and the scale of its activities. In particular, privatisation of existing functions (or elements) can reduce flexibility of response and limit networks because of the difficulty of quantifying the nature of service provided. A collaborative approach offers an alternative, linked to building common purpose and ethics over market competition.