One of the big things that confuses me about economics is the way we tend to think and talk about it. It’s confusing that we can be so confused about what an ‘economy’ is.
How we think about the economy matters, because it influences our decisions in many areas of our lives, from small everyday choices around spending, saving and giving, all the way to big life decisions, career choices and political preferences.
In 2017, the charity now known as ‘Our Economy’ published a research report called ‘Exploring How People Feel About Economics‘, capturing their findings from speaking with over 5,000 people. The second part of the report, ‘Understanding “the economy”‘, is based upon 35 hour-long interviews all with people sharing ‘a sense of disengagement from economics
communication’. From these interviews, the authors identify two different mental models people tend to use when thinking about the economy.
The report itself gives a great summary of what mental models are but, in short, a mental model of something is the idea we have in mind when we think about that thing. It is the way we imagine the thing to be, or the way we envisage it as working. The two mental models of the economy are:
- Like a personal or household budget, but on a large scale (e.g. Britain’s economy is like a budget for the whole of Britain)
- A relative state of ability, health or worth (e.g. Britain’s economy is a sort of state-of-play of how well things are going for Brits, relative to other times and other places)
Mental models are useful because they simplify things that are too complex to hold in our minds, and enable us to think about and interact with things even if we don’t fully understand them. For example, I don’t fully understand my car, but with my mental model of it as something that needs petrol and is controlled in the way I learned, I make an adequate driver. My mental model helps me get by without having to learn engineering, physics and chemistry, and without having to train as a car mechanic. Equally, we rely on our mental models of the economy to get by without having studied economics.
There is a risk, though, that a mental model might not fully align with reality, and might therefore cause problems for us when it informs our actions. If my mental model of all cars was that they use diesel and have automatic gearboxes, things aren’t going to be pretty when I try to fuel up and take a drive in a petrol car with a manual gearbox. Similarly, there is a risk that our mental models of the economy might lead us astray.
The economy as a budget
It’s understandable why many of us would conceive of the economy as a kind of macro-budget:
- It is common for the media and politicians to refer to ‘gross domestic product’ or ‘GDP’ when talking about the state of the economy, and this is a single number in a currency. In 2022, the UK’s GDP was £2.2 trillion. Looks kind of like a huge budget, right?
- People often talk about money or value ‘going into’ or being ‘taken out of’ the economy, just like money can go into and out of our bank accounts and impact our household budget.
- The government can borrows money and can have debts to pay, just as households can.
Despite these similarities, this mental model leads us astray because an economy, even when measured by GDP, is less like a big pot of money and more like a huge machine with lots of moving parts, where money is just one of the things being chucked around in it. As such, if we think of the economy as being like a household budget, we might overlook all the things relevant to an economy that aren’t just the sum of money moving around in it. We might forget the people, what they’re doing, the reasons they’re doing it, the value of what they’re doing (whether in money or not), and how value and money is moving among them. And forgetting about these things seems like forgetting about a lot that is relevant to our decisions and actions.
Perhaps more alarmingly, even a government budget doesn’t work like a household budget, and so we’re making a huge mistake if we believe that governments should manage their spending and borrowing just like households must in order to ‘live within their means’. Positive Money have a good article explaining this. Given the dire impacts of austerity in the UK, a political choice that was misrepresented as sensibly ‘living within our means’, it is not an overstatement to say that the ‘household budget’ mental model has helped legitimise a significant degree of unnecessary hardship and suffering. (The Wikipedia article on the UK government’s austerity programme gives a detailed overview of the impacts, while this Guardian article captures more personal stories from citizens and workers.)
The economy as a state of health, ability or worth
It’s also understandable why many of us would have the second mental model, conceiving of the economy as a relative state of ability, health or worth:
- Media headlines and summaries often assert how week or poorly the economy is doing, or compare whether it’s doing better or worse than at other times in the past, or better or worse than the economies of other nations.
- Political campaigning and debating often focuses on whether doing something would be good or bad for the economy.
- As mentioned earlier, claims about economic performance or health often focus around one number: ‘gross domestic product’ or ‘GDP’, and we’re often just told how much it’s gone up or down by, with up considered good and down considered bad.
- When we’re told things are going badly for the economy, this tends to come along with things not going so well for people (jobs are lost, businesses close, we can’t afford as much), and when we’re told things are going well in the economy, this tends to come along with things going well for people (jobs pay well, businesses survive and thrive, we can afford more).
All of this does suggest that the economy is some sort of needle or dial moving up and down, indicating how well or poorly we’re doing, how good or bad things are, or how healthy and stable our situation is.
This is not perhaps as damaging as the budget mental model can be. It’s not entirely inaccurate either; measurement and comparison really is the backbone of most economics and talk of the economy, so it’s possible we’d barely mention the economy if we weren’t interested in how well or poorly a bunch of people were collectively doing.
However, what this mental model does mask is the sheer depth of detail and breadth of potential that underlies any particular measurement of how well or poorly an ‘economy’ is doing.
There is an excellent article here on The Conversation that gives a great insight into the complexities of ‘measuring’ an economy, highlights the flaws of GDP as a measure, and surveys the emerging alternatives. If we think the economy is ‘just’ a measure of how well or poorly we’re doing, we risk allowing social progress to be represented by a number or indicator that masks all of the complexity lying behind it, such as:
- What is and isn’t measured.
- How it’s measured.
- How the things measured are linked to ‘progress’.
- How we’re defining ‘progress’.
- What the impact of the measurement will be; how it will impact our understanding of progress and how it will inform decisions and actions.
And if we overlook these details, we might be tempted, in the midst of all the talk of GDP and the economy, to think that there just is some objective and clear-cut thing that we call ‘the economy’ and that GDP is the one scientifically rigorous measure of that thing.
But this is far from the case. Because for each of the details listed above there is a choice to be made. Contrary to what would seem to be the case from the way politicians and the media tend to talk, what constitutes ‘the economy’ and how we measure it really is in the eye of the beholder; how we do it now is a choice, and that choice has consequences – it’s well within our ability to make a different choice and change those consequences.
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