Misguided Ideas on ‘Costs to the Economy’ Harm Our Individual Right to Make Choices in a Free Market

The essence of choice is allowing people to take what they consider the best decision, given the information and structures in front of them.
July 24, 2018 • Commentary
This article appeared on City A.M. on July 24, 2018.

One of the most cliched, misguided ideas in economic debate is the view that politicians are focused on GDP above all else. Yes, politicians of all parties clearly consider growth important.

But the existence of constrictive planning laws, migration controls, and regulation for social ends makes a mockery of the idea that MPs and government cast all other concerns aside for raising GDP.

Over the past few years, I’ve noticed a proliferation of economics‐​style campaigning that lends weight to the GDP‐​fetish theorists.

Groups seeking the introduction of new regulations or spending feel that they have to put economics front and centre of their reasoning — pointing out how much the status quo “costs the economy” and how their idea would boost it.

A simple search online, for example, implies that company culture, the gender pay gap, lack of sleep, mothers opting out of the labour force, obesity, and much else besides all “cost the economy” billions of pounds per year. The implied message is that if we only adopted some new intervention to counteract these problems, we’d all be better off.

To be sure, some of these examples (obesity in particular) may well have what we consider “social costs” — effects on broader society beyond those faced by the individual.

In most other cases though, the supposed problems arise out of decisions made by free individuals, with no obvious harm to a third party. Such behaviour should not be thought of as a cost to the economy at all.

Take the example of lack of sleep. A report in late 2016 by the Rand Corporation suggested that this cost the economy £40bn per year, because tiredness sees employees less productive at work than they might otherwise be, lowering measured output and hence GDP.

But GDP is emphatically not economic welfare — the true metric of our economic wellbeing.

Yes, being more productive at work comes at a cost. But our starting assumption should surely be that people do what they prefer — some people might value staying up late partying, caring for their newborn child, or a whole range of other activities.

People make these kinds of judgments every day, and they weigh up any potential adverse effects on their work performance against the enjoyment from all these other activities. When someone decides to leave a lucrative job in the financial sector to become a teacher, they might expect to be less “productive” from the perspective of measured GDP contributions. If this person is a woman, her decision might also worsen the nationwide gender pay gap.

But the individual is doing something that they believe will enhance their own wellbeing through virtue of making this choice. Almost by definition, we are better off as a society relative to a scenario where people are compelled to stay in occupations against their wishes.

Free decisions without harm to others are therefore not economically costly. The essence of choice is allowing people to take what they consider the best decision, given the information and structures in front of them.

In the labour market, many will prefer to work more flexible or shorter hours, or in jobs that fit better with care of their children. Other people may prefer eating lots of food, or getting less sleep, than being more productive at work.

In accordance with each of these preferences, we all go about making decisions considering our own wellbeing every day.

What all these campaigns really mean when they highlight “costs to the economy”, or unrealised potential, is that measured GDP is lower than it might be, in turn reducing tax revenues.

They conflate the economy with the bit of the economy that affects the public finances, as if we are all duty bound to maximise our contributions to the exchequer.

The irony about all of this is that classical liberal and libertarian economists, who oppose government interventions, are often labelled “materialistic”.

And yet, it’s often the interventionist progressives that want to pull levers to maximise measured growth and tax revenues, while the libertarians simply want an environment of economic freedom and free choice.

Of course, misguided policies really do cause damage to our prosperity, by restricting voluntary trade, or making mutually‐​beneficial activity more costly to undertake.

How ironic that it’s increasingly the left that adopt the language of “costs to the economy” to argue against free choice itself. Theirs is the truly materialistic ideology, even if it is a collective one.

About the Author
Ryan Bourne

R. Evan Scharf Chair for the Public Understanding of Economics