Complexity and Community are crucial for rethinking economics

What could society look like if we do economics better?

Do mine eyes deceive me? I came across this post by Evan Davies on the BBC website, where he blogs about the changes taking place in economics. For those fond of the TL;DR, he says that economics has been, and still is, in need of a radical overhaul, given that most economists did not foresee the 2008 financial crisis, and that economics has not addressed its flaws in the decade since. Davies sets out the “two Cs” that make “neoliberal” or orthodox economics models risky (to put it mildly), and these are Complexity and Community. The short version is that people are Complex souls who live in Communities. Well, duh! Some of us have a been banging on about this for a while now.

Davies is clear not to make a straw man of mainstream economics though. And this is an important point. Microeconomics – the small-scale interactions between actors – has been remarkably successful in boiling down our collective lives into theories, formulae, and models that guide economists towards understanding how we act (and then nudging us in the right direction to make better decisions). But macroeconomics – the larger scale stuff that includes GDP, interest rates, international trade and investment and so on – tends to draw on the microeconomic theories and scale them up. But as we all know from experience, the more people you include, the more complicated it becomes to plan anything. And that’s before you start on complex interaction patterns across communities and societies.

Why have things started to change now? As I wrote in a previous post, change occurs gradually. Many successful careers have been built on the status quo of neoliberal or neoclassical, orthodox economics. The core of the academic economics community has developed, advocates, practices and teaches this approach. So revolutions, as in most areas of life, tend to be the exception. When we start to question the entire shape and direction of a discipline, there are myriad interests at play that all need to be reoriented. The mainstream journals, senior economists, and general momentum is geared towards neoclassical theory, and its implementation as neoliberal economic policy. In short, we are steering an oil tanker rather than a Mini Cooper.

Secondly, neoliberal economics is plugged into and reflected in the political mores of the day, and neoliberalism in politics remains in the ascendancy. A theory of economics that retreats from and questions this is bound to raise eyebrows. Perhaps then, eleven years might be a relatively short timespan for the reorientation, or evolution, of a discipline.

So what changes are actually happening now? The past decade has seen a wave of literature questioning the type of society we want to live in, both locally and globally, and the type of economics that might realise this.

But there are more recent projects turning explicitly to the way we do economics and its role in society that are much more exciting. The NIESR has a project underway Rethinking Macroeconomics, which is ESRC funded. The IFS is launching a project looking at inequality in the UK and targeting questions like the kind of society we want (a particularly timely question in the light of the most recent UN Report citing poverty as endemic in the UK). And then there are the centres rethinking traits of orthodox economic theory like the Paul Woolley Centre at LSE, the full title of which is “The Paul Woolley Centre for the Study of Capital Market Dysfunctionality”. The Centre essentially asks what happens if the frictionless markets featured in economic models suffer from, well, friction.

But what alternatives are there? If you’re familiar with some of my previous posts, you’ll know I’m a fan of socio-economic and econo-socio-legal approaches that take economics back into the social sciences. There are myriad alternatives though within these disciplines, including relational work, actor-network theory, community lens, network analysis, systems analysis, and many more. Zooming out somewhat, historical, geographical, psychological and anthropological approaches can also contribute to an understanding of economics as it really is performed in the real world.

But, why should we care? To make a bold, and controversial statement, economics is usually one cause of most social issues facing us today. What do I mean? The rise of populist politics caters to the anger and frustration of the “have nots” in society (economics). Austerity as a response to the financial crisis enacts neoliberal economic theories (economics). The lack of living wages and the rise of insecurity, the precariat, and the gig economy has resulted from technology and a reluctance of government to intervene based on neoliberal economic theories about the free market (economics). Climate change and global warming continue unabated because of the economic consequences of actions to tackle environmental issues head on (once again, economics).

In short, if we want to get society right, we need to get economics right. And that means a retreat from the belief that there is one “right” way of “doing economics”. It means recognising (or re-recognising) that economics is about how people act and interact. And that we do not always act rationally, or even in our best interests. Until economics models and formulae reflect this, we are left with a hollowed-out version of economics that cannot reflect the full complexity of real life. And this is something we all pay the price for. A broader, richer understanding might help us spot the next financial crisis looming on the horizon.

Between the Gigs and the Reels: novel approaches to understanding the gig economy

The rise and rise of companies like Uber, Lyft, TaskRabbit, UpWork, JustEat and Deliveroo has been termed the “gig economy”. Even the term itself can be wince-inducing to labour lawyers who are uncomfortable with the implications of the term “gig”. But there are broader issues, and a lot of ink has already been devoted to the economic and regulatory issues that arise as a result of this new form of working. At its heart, the issues tend to arise initially from the introduction of technology into the labour market that enables informal work. This has allowed the regulatory and statutory protections that workers have campaigned and fought for over the past two centuries to be summarily side-stepped. Sure, there are benefits, and it can present opportunities for people to get out of the house and supplement their income. But the problem is when this form of working begins to challenge the main, or more formal, economy.

The gig economy really took off in the wake of the 2008 financial crisis and the unemployment wave that followed, and is rooted in the informal sector which lacks government oversight, creating dilemmas about regulation and worker protections. Not that this is a completely new issue. The matter of informal sector work with a lack of recognition and worker protections and rights is a problem that women have been facing since labour rights came onto the scene. Women’s work – work generally done in the home – has yet to receive the same recognition as work done in the formal sector. Informal sector work includes not only a lack of pay, but also rights, holidays, sickness, insurance and so on. This analogy tends to be underplayed in the public debate about gig economy pros and cons. As Catherine Powell notes, the gig economy is business as usual for women. What’s new here is that the advent of technology and the self-employment or contractor-status of (usually) men has been sold to us as the epitome of the free market “in which app-driven services are seen as an example of unfettered market activity that is free of the intrusive, cumbersome hand of government regulation”.

At the same time, drivers working for Uber are contractors rather than employees, and therefore do not have access to the regulatory protections that employees do, like holiday pay, sick pay, pensions, national insurance contributions, and so on, although there are legal and regulatory challenges underway. In her recent book, “Hustle and Gig”, Alexandrea Ravenelle also argues that society is the poorer for this labour market model, as reduced tax incomes and reduced provision of social security nets by employers as well as the state have wider detriments throughout society.

In a different approach to most of the literature on the gig economy, economist and Stanford Professor Paul Oyer signed up with Uber and worked as a driver for them to understand the gig economy from the inside. This article links to an interview with him about his research and findings.

If you’ve read any of my previous posts, you’ll be expecting a comment here about economic methodology and how exciting it is to have an economist taking a sociological, quasi-ethnographic approach to understanding how a market works. Oyer notes that he took care not to tell his Uber customers that he was an undercover economist, and as he was employed by Stanford, his Uber wages were donated to charity. Nevertheless, his observations are valuable for their insight into the inner workings of companies leading and shaping the gig economy, like Uber. One observation that stands out here is the lack of social interaction among gig economy workers. If you work in an office, you see the same people every day, and a sense of community can develop. But working as a contractor in a car or on a bike can mean that you are isolated and solitary, and the loneliness of this was highlighted by Oyer’s undercover work; a sociological commentary on an economic phenomenon.

There are few insider accounts in general, and little literature on the importance of algorithms that form the backbone of the company like Uber. These are being developed by economists brought in by the firms, and have unpleasant, although perhaps unsurprising, side effects. The algorithms tend to channel higher paying work to men who are prepared to work at short notice, during “surges” in demand where prices are higher, and at periods of scarcity. Thus, male Uber drivers earn on average 7% more than female drivers. Male drivers are also more likely to “game” the system, learning how to be strategic in their pick ups and how to cancel less profitable journeys without incurring a penalty, provoking angry discussions like this online. Women are less likely to engage is this less-than-honest behaviour, putting their wages further behind.