Public Economics

Introduction to Economics and Policy Making

Economics is a branch of social science that is concerned with the production, distribution, and consumption of particular commodities and services and is concerned with the studies of individuals, firms, and nations on which principle they allocate goods and services (Garside, 2007). The study of economics is closely related to the study of political science by which policymakers make efficient and productive policies for their respective firms or nations. The studies of economics are broadly divided into two parts which are microeconomics and macroeconomics. Garside (2017) further explains that while microeconomics is concerned with the individual behaviors and firms and their effect on an economy, macroeconomics deals with the factors which overall are related with the economy of a nation, for example, GDP, NNP, Savings rate, unemployment, monetary policy, etc.

The core principle of economics is that human needs are unlimited and the world has limited resources. Thus the concepts of efficiency and productivity are very much important (Quere et al, 2017). Thus it can be said that economics is the study of how the resources are allocated and distributed for the reason of production, consumption, and distribution. Economics is thus primarily concerned with the maximum good of the maximum number of people which is tried to achieve with uses of efficiency and productivity. Economists from time to time have formulated and are formulating formulae and equations to find out this efficient allocation of resources within the framework of three primary systems being communism, capitalism, and socialism.

Theoretical Economics and Policymaking

Quere et al (2017) say that the primary problem associated with theoretical economics is that the formulae and theories made were based on the assumptions keeping the factors constant, though the theories gave a general idea of the market which are very useful for policymakers, however exact implementations of such formulae could not be applied due to assumptions and limitations of factors considered. To overcome such a problem, the applied version of economics came. Applied economics is concerned with the application of economics and mathematical economics in a specific situation. This is especially characterized by applying economics in a real-life situation and that how the developed knowledge can find a solution to that real-life problem. Ahluwalia (2015) explains the core aim of applied economics increases the efficiency and productivity causing human welfare by the uses of investigation and analysis techniques for the problems of the real world. The theoretical observation of problems, hypothesis production, and the development of varied statistical methods are the result of the inefficiency of theoretical economics towards a real-life situational solution.

This means that much of the field is based on human behavior, which can be somewhat irrational and unpredictable. The limitations of economics come when different recommendations of how things should go and how the redistribution or any other policy should be implemented, different economists come with different conclusions about which regulations and how to implement them even in the same kind of political setup say capitalism (Kauffman, 1995). In the USA there are separate economic policies within the two parties the democrats and the republicans, though both the parties support the capitalistic political economy. The field of economics also suffers from the problem of non-reliability. It is almost impossible to recreate a market on which a past policy or set of frameworks worked and thus made it unclear whether the policymaking for a situation will work or not. Unlike science where the researchers generally can isolate certain variables and factors and thus logically figure out the direct relationship between cause and effects but in the field of economics, when human behavior is the core of the subject, thus Kauffman (1195) concludes that there is no way to isolate any variable completely and find out cause and effect relationship, simply because markets are too large with perplexing human behavior and that’s is why it cannot be 100 % predicted.

Thus political economics is also affected by these disadvantages of the economics and thus it said that political policymakers do not reply much upon the principles and methods of economics, however, they use the data which is refined with the help of economical formulae and statistics analysis (Quere et al, 2017). The other reason for policymakers not much relying on the economical theories is that a theory talks about only one aspect of a problem and discards the other aspect where it's a fact that both the aspects are necessary to be maintained for welfare, growth, or any other aim specified. For example, in the case of flooring of minimum wages to raise the standard of living for the laborers, some economists say that this will raise the wages in informal sectors also and thus will increase overall consumption resulting in more employment, while others say that price flooring will throw out least skilled workers from the market. Now it is a fact that both these processes take place when wage flooring is done, but which factor affects more depends upon the nature of the economy, the market type, the response of laborers and employers, and the composition of the economy which are only a few factors (Ahluwalia, 2015). These contradictions on the part of economists thus discourage policymakers to employ one policy strictly, and thus they underline the core problem or situation, define the objectives of the government, acquire data related to that sector, and mold their policies to apply to that situation. Policymakers never rely on a single stream of science or social science to make their policies.

How is Economics Used in Decision Making

In reality, economics is rarely used in decision making because it is very difficult to separate political issues from decision making and policymaking processes for various reasons and the degree of importance becomes high if the decisions are to be taken in a short period or if there is a probability that the policy is not populist. Although economic models cannot be modified or manipulated by vested interests, the economic models can be justified on an already made decision rather than a genuine evaluation of the available options. This is done by political leaders to make the decision publicly acceptable as economic models are base on science and research. At the time of decision making, there exist particular biases which mean some factors and stakeholders are given more importance than others irrespective of the economic model suggests. The problem is the environment and future generations are not supposed to reside in a constituency, thus are not considered in decision making. Populist policies are more prone to economic disasters and thus economists are given the task of making policies that can satisfy the compulsions and other constraints.

Poverty and Inequality and the Policy Decision Making

Economics used in decision and policy making of the government has a particular process. This can be found out where the economic methods and theories fit into this decision-making process which will give an idea of the use of economics in such policymaking (Across, 2012). Firstly, the rationale is found out as accountable governments need to give reasons for any policy, for the chosen topic of inequality and redistribution (Onlinepointpark, 2017), the main government justifications are to address the market failures to promote efficiency and to distribute wealth more evenly and equally. Then the 2nd part is an appraisal, once a government decided to carry out a policy and the options related to it, it should critically appraise those options, for example, how will each of the options will change things, will these changes lead to the desired outcomes? And to which degree and how long (Davidson et al, 2018)? For example, if a government wants to ban liquor in a territory, it will have to critically appraise the decision as to what degree the ban will help the laborer class improve their living, on the other side, the revenue generated by the taxes of liquor which is spent on people’s welfare will diminish to what level and what will be the combined effect of it, whether positive or negative? Here it is to be noted that one theory of economics will relate to the banning of liquor and the other one on generating maximum revenue for public welfare and will discourage liquor ban. Here the policymakers will have the role of analyzing the general mindset and market which will decide as to which policy to be implemented.

The third analysis is to find out the value of each option, this is the part of economic analysis and which attracts the most attention as the value decides as to which option to be implemented because each option has its cost-benefit analysis which is a common approach to value options. The above example of banning liquor and its potential effects on the standard of living of laborers evaluation was an example of this cost-benefit analysis, the cost-benefit analysis has from time to time changed factors as more improved versions of social and environmental welfare came up, for example, a policymaker might choose to ban the liquor sale on state and believe on the hypothesis that alcohol consumption will automatically raise the standard of living by various reasons, whereas consumption of liquor will diminish more money into liquor no matter how much state welfare is active through its revenue funds for the sake of equality and opportunity to the least wealthy class. On the other hand, an economist might choose the option of the sale of liquor.

The fourth step is the evaluation of the option is the phase that takes place during and at the end of the procedure. Evaluations take place for the opportunity cost given for adopting a policy that is to evaluate what has been lost on applying of a particular policy. Changes take place for varied and complicated reasons, and thus it’s hard to point effects of policies.

Problems Faced by Policymakers to Rely Solely on an Economic Approach for Policymaking on Poverty and Redistribution

In a capitalist type of economy, the welfare of the poor relies on the idea of free-market and that utmost economic growth can take place in a free market which will automatically provide jobs to all and raise the standard of living. The socialist economists feel that revenue should be generated for welfare for the poor and not keeping them dependant on the free market (Across, 2012), for example, levying taxes on the rich for the growth of the poor. There are certain problems which are discussed below that the policymakers face when relying on a sole economical approach, it is seen that the main job of economic theory in the decision-making process is in the stages of evaluation. While there is an evaluation of the cost-benefit approach, there are still some other problems to focus on. 

The first problem is the price, there is an increased tendency to see the wider social and environmental outcomes of policy decisions, the very process of converting everything to monitory prices leaves many other social and ethical issues unanswered (Modig, 2020). For example, allowing liquor sales will have a longer disastrous effect on both social and economical backgrounds. Giving unemployment money to the unemployed may make him lesser encouraged to work as he is getting a particular amount by not working at all. The second problem is the failure to consider equality (Quere et al, 2017). The green book which is used for appraising any government spending says that appraisers must identify the level of costs and benefits accrued to the different classes but is not done in reality otherwise the final decision stage is not needed (Davidson et al, 2018). Then there is the problem of biased technical costs such as the cost of regulation are overestimated and others are underestimated and this is not because of human error but by the lobbying of analysts with vested interests, thus the nature of such conversations is often secretive. Economists cannot solely expect that His perfect plan will be applied to the market.

Then there is risk and uncertainty for it is difficult for predictions and assessments for such projects where there is uncertainty. Economical tools act as a perfect blueprint of the scheme but the right ingredients are never available which it demands (Modig, 2020). The problem is analysts spend a lot of time in minute details but have little information about the broader case. The economical planning and methodologies do not cover sustainable, environmental, and ethical approaches of development and thus policymakers have to alter them accordingly. After this, another one is subjective decisions are often presented as objective due to the reasons for not being factual or objective and in reality, they are thus made of assumptions and subjective decisions (Kauffman, 1995). Lack of democracy is another constraint in economical decision-making, although appraisals should be given which follow the best course of action it is not the case always.

Poverty, Inequality, and Redistribution in Australia

Australia is a signatory of the United Nations SDGs which aims for 17 goals to be achieved until 2030 (Povcertyandinequalirt, 2020). The first goal is No Poverty. Australia has 16Th highest poverty rate among the 34 wealthiest nations in OECD (Povertyandinequality, 2020), higher than the OECD average, New Zealand, Germany. Children in Australia often miss out the school education. In 2020, 3.24 m people in Australia are living below the poverty line of which 18 % are children and 14 % young people (Davidson et al, 2018). The poverty line in Australia is being calculated at people living below $ 5.5 per day (Povertyandinequality, 2020). Now most people living poverty line in Australia rely on the social security given by the state, the type of housing also affects their income and consumption below low-level income consumes a large part in rental and it is found that the majority of people which is 56 % are renting their houses (Povertyandinequality, 2020), thus a greater chance of more people pushing to poverty. Thus it is the need of the hour for Australia to provide affordable housing to people to stop a large proportion of people to push into poverty, though economic policy for Australia similarly as the case in India, where people were being pushed to the property because of the heavy out of the pocket medical expenses. Thus policymakers need to find a middle way for the welfare of people by providing them affordable housing and allowing a free market to that extent which can provide jobs to them.

Conclusion and Recommendations on Economics and Policy Making

It is understood that there are several political and social factors which are needed to be taken into account when making public policy for redistribution, inequality, and poverty reduction, the economists rely on a single approach which does not work due to various factors nonreliability, changing conditions, the behavior of the people, environmental and ethical issues, and political purposes are also needed to be considered. Economical tools act as a perfect blueprint of the scheme but the right ingredients are never available which it demands. The problem is analysts spend a lot of time in minute details but have little information about the broader case. The economical planning and methodologies do not cover sustainable, environmental, and ethical approaches of development and thus policymakers have to alter them accordingly.

References for Economics and Policy Making

Acroos.org.au (2012) Poverty in Australia. Retrieved from https://www.acoss.org.au/wp-content/uploads/2015/06/Poverty_Report_2013_FINAL.pdf?__cf_chl_jschl_tk__=d28c554f85a631dc73de8abfa592f6e96d73314c-1601183436-0-AW-KHqxYD11A_XvEF6n9bRcZETvlZMhVzxif1EVi84phfy7gjkpRozwjPAK9rrw02tZ9dxiYz4bExfzIyhY_oGba4uzgiGoVF-um_r_DhnVKjWInoD1mpDSkm-0uPvAwK5N5PyHqbDbak01vKNtrmFu0O3npw6SXLs6PmHEwJNk0hyJH16lxM67SVNC1oXklFS2xh-E-em-OMgg3j889KQXmPBmc6QB5AbIfha41pf8ef49V6RSOxmOwEL-hR7kHkHTLuEWJ0upmAQfnI93k-H1Kgi2v0h17mAhOZBLCKqNv9T2uzJroyKqHVGfODGv8QO_QWVxH_41_BggzN2QOYNQXMlpvU7ISLngi31AKSBt6K4ARiHFFXqCr2mRubyZpFvXGd4VLc3UhFxb5QSOt6Rw3p-uF40vs6o3mXapDf8BD

Ahluwalia, M. (2015) Role of economists in policy-making. WIDER Working Paper 144. UNU-WIDER DOI: https://doi.org/10.35188/UNU-WIDER/2015/033-1

Davidson, P., Saunders, P., Bardbury, V. & Wong, M. (2018) Poverty in Australia. ACOSS/UNSW Poverty and Inequality Partnership Report 2.

Garside, R. (2007) Introduction: Economic Growth and Development — An Institutional Perspective. Institutions and Market Economies. DOI: https://doi.org/10.1057/9780230389946_1

Kauffman, G. (1995) The role of economists in public policy. Economics and Finance 35(2). 177-185.

Modig, N. (2020) What do economic scholars consider powerful economic knowledge of importance for people in their private and public lives? Implications for teaching and learning economics in social studies. Studies in Higher Education. DOI: https://doi.org/10.1080/03075079.2020.1716319

Online.pointpark.edu (2017) An introduction to the public policy-making cycle. Retrieved from https://online.pointpark.edu/public-administration/policy-making-cycle/

Quere, A., Balnchard, O. & Tirole, J. (2017) What role for economists in policy-making? Notes du Conseil d’analyse Economique 42 (6) .1-12

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