For a topic that captures such a large portion of our political and public policy focus, “the economy” is a relatively undefined term. So much that its ill-definition has made it the subject of public ridicule at times.
A common way to define the economy is “the total sum of trade of goods and services in a community.” This is a pretty good way to define the underpinnings of Gross Domestic Product, which many see to be a comprehensive definition of “the economy.”
There is a problem with Gross Domestic Product, though: it is not comprehensive. While it is a helpful indicator, Gross Domestic Product does not truly measure “the economy,” it measures formal market activity.
What is economic that does not qualify as “formal market activity?” Well one example is informal market activity. When children trade pokemon cards on a playground, value is created in the same way that it is when you buy a bottle of water at a CVS. The former does not show up in Gross Domestic Product, however. Same for when someone pays their neighbor’s teenage kid $20 to mow their lawn, someone buys drugs illegally, or someone pays a friend for a tattoo. Most of these are not being tracked by the Census Bureau, Bureau of Labor Statistics, or Treasury.
Another example is nonmarket activity. For instance, if you quit your job to take care of a young child, the cost of losing the job shrinks Gross Domestic Product, but the benefit of taking care of the child is not accounted for. Uses of time like volunteering, recreation, and sleep also are not formal market activity, though we trade the time away we could spend doing these things for time spent in formal markets. Ignoring the value of nonmarket activity can lead to wrongheaded assumptions, like the idea that increasing labor force participation rates comes with no tradeoffs. Increasing labor force participation unambiguously increases formal market activity all else being equal. But it does this by levying costs on society not seen in formal markets.
Another example is external costs and benefits of market activity, known by economists as “externalities.” External costs and benefits are costs and benefits of market activity that accrue to people who do not take part in a particular transaction. For instance, people who grow up nearby a coal-fire power plant may have higher rates of asthma than those who do not. The power generator generates power by burning fuel and releasing pollutants into the air that cause asthma nearby. The transaction levies external costs on people not involved in the transaction. Similarly, when someone purchases higher education from a university, they then increase their human capital, making a more skilled worker available to future employers. That is an external benefit of the transaction.
What these examples show us is that “formal market activity” is an insufficient definition of “the economy.” We certainly economize other parts of our lives than those found in formal markets.
So we’re back to square one. What do we mean when we talk about “the economy?”
I will offer an alternate definition that comes closer to what I really think we mean when we say “the economy.” The economy is a framework to understand how society meets the needs and desires of its members under conditions of scarcity.
Yes, dollars and cents are a part, and often a key part, of understanding the economy. But fixation on dollars and cents can leave a policy analyst–or worse: a policymaker–focused on outcomes that could undermine the fulfillment of needs and desires of members of society while trying to meet them. The aforementioned focus on labor force participation rate is a great example of this phenomenon. When hours worked increase, they are taken away from other activities, be they caring for loved ones, rest, exercise, or education.
A field where an impoverished understanding of “the economy” has caused confusion and even hurt people is in child care and early childhood education. A prominent study of the Quebec universal child care program showed that an ambitious child care program without quality controls led to negative effects on noncognitive outcomes, worse health, lower life satisfaction, and higher crime rates later in life. Policymakers were so focused on providing every way possible for mothers to enter the labor force that they created a policy that led to significant negative spillover effects.
Child care is riddled with problems of an impoverished conception of economics because of its heterogeneous market. Child care can be provided by formal centers, licensed in-home child care providers, unlicensed friends and family members, and parents themselves. These are on a spectrum of market formality. Some argue child care is higher quality in formal markets, but the Quebec counterexample calls that assumption into question. By subsidizing the choice to move children from at-home and informal care to formal care, that policy hurt outcomes for children and parents.
Ultimately, I started Scioto Analysis because I wanted people to think about the economy in a bigger way. A better economy maximizes welfare by focusing on how to get people things they need and want more efficiently. Yes, that means finding ways to make commodities like gasoline and groceries cheaper. It also means ensuring people have the means to be healthy, have sufficient time to spend with family and rest, and have access to educational resources that can lead to compounding benefits for society.
Anyone who has studied public policy analysis has had the ubiquity of “tradeoffs” drilled into their head, and for good reason. Tradeoffs are ubiquitous in society and economic thinking is a framework for tackling tradeoffs. But if we leave artificial barriers to our economic thinking where formal markets end, then we miss the larger picture: that people are economizing their lives across all aspects. They are deciding whether to take that promotion because the taxes make it not quite worth spending less time with their children. They are getting less sleep than recommended because they need to get up in time for their second job. They are incrementally risking the chance of a car crash in order to shave a minute off their commute.
These are all decisions we as human beings need to make every moment of our lives. The current life expectancy is 77.5 years in the United States, meaning on average, we each get about two-thirds of a million hours to spend on this planet. Each decision we make is an allocation of that precious time that we will never get back. With good public policy, we can gently caress society to make each one of those hours more valuable.
That’s the economy. And that’s why it matters that we understand it to its fullest. Because those hours become even more precious the more we know about them.