We spend a lot of time hearing, reading and arguing about The Economy, and we’ll be doing a lot more of all that after we’ve seen Tuesday night’s federal budget.
But while we’re waiting, let’s take a moment to make sure we know what we’re talking about. What’s the economy for? How does it work? What does it do? Who owns it? Who runs it?
Why am I suddenly so deep and meaningful? Because Dr Shane Oliver, AMP’s chief economist, has written a note saying the economy doesn’t seem to be giving us what we want.
As individuals, it’s easy to think of the economy as something that’s outside ourselves, something that does things to us, over which we have little control.
As individuals, that’s true. But if you take us altogether, it’s not true. Why not? Because if you took all the people out of the economy, there wouldn’t be an economy. What’s more, you wouldn’t need one.
You’d be left with a lot of homes and other buildings, roads, cars and machines that had been abandoned, were just sitting there and so were worthless.
So, in that sense, the economy belongs to all of us because it is us. It’s most of us getting up each morning, going to work and earning a living, and all of us spending what’s been earnt.
Most of us have paid work, some of us do unpaid work, while some of us are still getting an education and others are too old or sick to work. But all of us consume.
So don’t think of the economy as high finance beyond your understanding. It’s actually as basic as you can get. This is why it’s important to remember the economy is just a means to an end.
At its most elemental, the end we’re seeking is for the economy to provide us with food, clothing and shelter, plus a few luxuries. But all of us want to do more than barely subsist. We want our lives to bring us enjoyment.
Economists say we want all our earning and spending to bring us “utility”. A better word would be satisfaction. But it’s no stretch to say what we want from our lives is happiness. And it’s on happiness that Oliver finds we aren’t doing as well as we should be.
All this is why the best way to think about the economy is that it belongs to all of us. Legally, however, most of the capital – whether physical or financial – is owned by companies, big and small. So most of us are employed by companies.
Where does government fit in? Apart from employing a lot of workers, it owns most of the roads and other public infrastructure. It makes the laws that limit what businesses (and the rest of us) are permitted to do and the way we do it.
Governments discourage some business activities and – as we’ve seen with the Albanese government’s recent announcements – seek to encourage others.
But the central bank also uses its control over short-term interest rates to “manage” the strength of the private sector’s total demand for goods and services, encouraging it when unemployment is high, and – as now – discouraging it when inflation is high.
As well, the federal government uses its budget – government spending on one side, taxes on the other – to discourage or encourage private demand. Hence, all the fuss next week.
But how are we, and other rich countries, going in our efforts to use our economic activity – earning and spending – to keep us happy and getting happier? Not well, according to Oliver’s research.
For Australia, he finds that, though our real annual gross domestic product per person has increased fairly steadily over the past 20 years, the average score we give ourselves on our satisfaction with our lives (as surveyed by the World Happiness Report) has actually been falling over the same period.
It’s a similar story for the United States, where its real GDP per person has risen steadily since 1946, while the proportion of Americans describing themselves as “very happy” has fallen slowly over most of that period.
In particular, he finds that younger people in the US, Canada, Australia and New Zealand are the least happy age group. This is a major change from 20 years ago.
Why is this happening? We can all have our own theories, but I think the big mistake many of us – and certainly, most economists – make is to focus on improving our material standard of living: using our increasing income to buy bigger and better things. Homes, cars, smartphones, whatever.
Trouble is, our materialism puts us on a “hedonic treadmill”. We think buying a bit more stuff will make us happier and, at first, it does. But pretty soon the thrill wears off – we get used to our higher standard of living – and tell ourselves it’s actually the next new thing that will make us happy.
Many people use their pursuit of promotions and higher income to make them happier by raising their social status. But this, too, is a step up you can get used to. And, in any case, it’s a zero-sum game. If passing you on the status ladder makes me happier, why won’t being passed by me make you less happy?
Actually, as I explained in a book I wrote some years back, there’s a lot of evidence that what’s better at giving us lasting satisfaction is the quality of our relationships with partners, family and friends. Beats just buying more stuff or getting a promotion.
And while it’s true that the economy, and our small role in it, can be seen as just a means to an end, it turns out that “extrinsic” benefits – such as wanting to earn money because of the nice things it buys – aren’t as satisfying as “intrinsic” benefits: such as finding a job you enjoy doing, not just do for the money it brings.