What does a healthy economy look like?

Do market economies work? The answer depends on what economies are supposed to do and how we are able to know whether they are doing it. If economies have a a "purpose", or a "job", then we can assess if the economy is "healthy" or not. Sometimes in the papers you might read about a healthy economy having lots of jobs, or low inflation, or high GDP, or some other metric. These, however, are usually not the "purpose" of the economy, but indicators of whether that purpose is being met.

Wants and needs

One way to think about the purpose of the economy is whether people are getting the things that they want and need. Some of these are straightforward: people need food, shelter, warmth. Ill people need medicine and treatment. But it can also be a little tricky. Does it matter exactly what food people need? Is entertainment something that people need in order to live, or just something that people want? How big and comfortable does shelter have to be? The difference between a want and a need can be a little hard to pin down clearly.

In general, economists are interested not only in people getting what they want and need, but on the economy innovating productively to increase people's quality of life. This means that if the line between want and need is a little blurry at times, we should be striving not to clarify it, but to surpass it.

Rational allocation

Some definitions of "economics" refer to it as the study of the rational allocation of scarce resources towards wants and needs. In some texts, "rational" allocation is not clearly indicated, but in others it refers to the satisfaction of wants and needs. Because the focus is on scarce resources, rational allocation often has to contend with issues of prioritising these resources - is it better to satisfy some types of needs over others? What about individual needs, such as a hungry person in Australia, over some sort of collective need, like the overall tajectory of the economy? Is it okay to let some people go hungry sometimes in order to build an industry that will help more people in the future (such as revolutionising farming)?

A lot of literature on rational allocation doesn't try to answer this question directly. It suggests that lots of people have different ideas about wants, needs and priorities, and that we don't have an objective way of deciding which people's ideas are correct. The best we can do, they suggest, is construct a system where these wants and needs can be aggregated and tends to work towards satisfying as many of them as possible. On the other hand, some literature suggests that there are clear ideas about some fundamental needs, such as reducing poverty and pollution.

Efficiency

Another part of economic health is efficiency. Efficiency is the idea that resources are used in a way to get the most out of them. One way of thinking about this is using resources to get more value out of them than they had in their original state. Another way of thinking about it is ensuring there is little waste from the use of resources. Of course, whether something is more valuable or more wasteful will again differ from person to person, as different people value different things differently.

Types of economic health and ill-health

With these ideas in mind, one way to think about economic "health" is to consider how an economy tracks in terms of deprivation and waste. While it may not be possible to measure these things exactly, we can at least intuitively understand the idea of an economy aiming for low deprivation (that is, meeting as many wants and needs as possible), and low waste.

An economy with low deprivation and low waste would be a healthy economy, while an economy that has high deprivation and high waste would be an unhealthy economy. Here's a table that considers the intersection of these two measures:

I've made this table to suggest that there are two issues we can consider regarding a healthy economy: production performance and epistemic performance. Production performance is simply how well the economy can make stuff, while epistemic performance is how good the economy is at figuring out where stuff needs to go.

For example, if there is low deprivation and low waste, the economy is making enough stuff to satisfy most wants and needs, and doing so with very little waste, which means that the stuff isn't being misallocated. That means that the economy is good at making the right amount of stuff and getting it to the right places.

On the other hand, high deprivation and low waste means that we're not satisfying enough wants and needs, but we're also not making much unnecessary stuff. In this case, our biggest problem is a production problem, and we need to figure out how to make more stuff.

If there is low deprivation and high waste, we're making enough stuff to satisfy wants and needs (and getting that stuff to the wants and needs), but we're also making all sorts of extra stuff we don't need. We obviously don't have a production problem, and we're also getting the right stuff to the right places; but we're probably overproducing.

Finally, if we have high deprivation and high waste, we potentially have the capacity to get enough of the right stuff to the right places, but we're not doing a good job at it. We have an epistemic problem, where we can produce enough, but we can't figure out how to allocate it rationally.

What sort of economy do we have?

It can be a little bit difficult to answer definitively what sort of economy we live in, because it is both hard to measure how much deprivation and waste exist, and it is also hard to know what counts as deprivation and what counts as waste, depending on who you ask.

For example, a luxury mega-yacht satisfies a "want", so perhaps the production of a luxury mega-yacht indicates lower deprivation. On the other hand, perhaps a luxury mega-yacht could be seen as a completely unnecessary use of resources, in which case it might count as waste. So, two people could look at the same set of data and disagree on whether it indicated low deprivation or high waste.

In some historical economies there have been clear occasions of high deprivation and low waste - where there has been some production bottleneck that has prevented people's basic needs being met. A lot of mainstream economics looks at the world through this sort of framework - as the rational allocation of scarce resources - even though it is clear that, as a whole, we are not in as fragile a state as some historical contexts.

But I want to propose that we are in a high deprivation, high waste economy. There are many people in poverty in developing countries. But it is very telling that there are also lots of people in poverty in developed countries. There are people who go hungry, even though the restaurant down the street is throwing out uneaten food. There are people who are suffering from illness, while unused medicine sits on the shelf. And whether we think these circumstances are rare or common, the fact that we can't get these goods to people who need them next door is pretty indicative of unnecessary waste and unnecessary deprivation. Why can't we get those things - things that no one is using and are throwing away - to those people who need them?

My contention is that we are in an economy suffering from an epistemic problem - we struggle to "know" what needs to go where. And I think the problem is structural; it's built into the very basic design of the economy. The problem is the exchange.