Modern economics subject has formally evolved during the past four centuries in the context of analyses of markets on production and its utilization although markets started a long time ago in the human history through direct exchange of products each other known as barter system. However, invention and evolution of money have eased, expanded and sophisticated markets as well as economics.
Economics is believed to be a set of principles or hypotheses that drive markets to find choices between human wants and resources in order to solve basic economic problems, such as what to produce, how to produce and for whom to produce, confronted by human being whereas productivity/efficiency-based competition in markets gives optimum solutions or choices. Therefore, economics is largely focused on the production or supply side of markets in order to mobilize productive resources to solve basic economic problems.
As such, the demand side of markets is externally determined by needs and wants of human being from time to time. Accordingly, demand and supply are market forces behaving in opposite to maximize benefits where the volatility of market price naturally tends to bring the supply and demand into equilibrium in the quantity that ensures most economic welfare to market participants. This is the free market philosophy of Adam Smith. As such, the economy of a country or a territory is an aggregates of a large number of markets which are inter-liked at various scales.
However, people across the globe have been confronting crises in markets that have caused widespread socio-economic disruptions in countries and societies. Certain crises have spread across country regions and the globe. Therefore, effects of crises on humanity are considered to be significant. The best example is the present economic crisis confronting Sri Lanka due to crises in foreign currency and government debt markets. However, the time taken to reach the equilibrium is not a subject of economics as it is an integral part of market functioning.
However, it is claimed that markets fail from time to time as reflected in market or economic crises causing adverse living standards of people. Therefore, economics and economists are blamed for not being able to prevent market crise/failures and to protect living standards. In that context, country governors have been operating various public service or bureaucratic lines to intervene in markets to make them operate in a manner they believe desirable to improve economic welfare and living standards of people beyond what markets provides.
This line of bureaucratic intervention is fashionably known as macroeconomic management. Fiscal policy, monetary policy, fair market regulations and state business enterprises are major tools used in the macroeconomic management. The management is undertaken on various approaches such as facilitation of fair markets, prudent market conduct, market stability and market discipline depending on the nature and economic significance of respective markets and economic legislation enforced.
However, the macroeconomic managers often resort to a key set of economic statistics such as GDP growth, per capita income, inflation, unemployment rate and exchange rate produced by themselves and often alleged for creative accounting to justify the efficacy of their economic management on economic welfare gains and living standards.
However, markets still fail from time to time and they are blamed for improper conduct while economic managers wash their hands. In response, they further tighten intervention in markets and cause catastrophes to living standards. Some high ranking economic managers tighten the market intervention purposely to cause catastrophes in order to recover markets from the scratch.
For example, the present monetary tightening by the Central Bank targets a large contraction in the economy already contracted by the crisis. It is strange that some of leading economic managers are non-economists who are not aware of economic principles behind markets. Therefore, market failures in fact are caused by market intervention and bottlenecks created by those economic managers.
Therefore, the objective of this article is to present some views on the need for practice of economics on a new concept of humanity in modern economies in place of current concept of economic development and stability as interpreted and monitored by a key set of economic statistics used in macroeconomic management models. The reason is the failure of present macroeconomic management models to prevent market failures and to rescue living standards expeditiously. However, the usual debate on pros and cons of free markets and macroeconomic management is not touched in this article.
Joint evolution of markets and civilization
Markets have evolved side by side with human civilization. The civilization has been evolving from animal-like hunting man in the jungle by moving to mobile animal husbandry and agriculture-based livelihood in tribal societies, regional and country kingdoms, colonialism and modern industrialized sovereign states with democracy and other systems of governance. There is no dispute that evolution of markets was hand in hand with the evolution of governance as markets also fall within the governance system.
Territorial colonialism was a key milestone that helped civilization of many societies across the world supported by imperialist nations. Imperialism ranges from ancient territorial dictators/tribal leaders to European imperialism reported in the recent history of civilization. King Dutugamunu, King Dharmashoka, Kalinga Magha, Napoleon, Mogul Kingdom and British Kingdom are no different other than the time and scale.
Although imperialist nations are heavily criticized globally for exploitation of resources of colonies for the development of imperialist nations, such colonies could have still existed as tribal societies if not for such colonization that helped those societies to associate with other nations/societies or globalization.
For example, there are many tribes still living in jungles like ancient hunting tribes in areas belonging to present sovereign states as such areas were not captured in colony governance system. Therefore, they are neither captured in the present political governance system nor in markets analyzed in modern economics. If not for the British imperial governance system and the access gained through it to the world civilization, many villages in Sri Lanka could still be tribes living in remote forests without interactions with developed nations or more civilized societies.
The globalization of markets through colonization was a fine input for economics to evolve. Accordingly, various economic concepts and principles emerged to promote productivity and trade. For example, mercantilism, theory of absolute advantages and theory of comparative advantages helped promote markets cross-border. The concept of division of labour helped improvement in productivity and industrialization while the concept of free markets led to competition, innovations and mobilization of resources for betterment of human being and civilization.
Improvement in humanity through governance and markets
The evolution of country governance and markets has no doubt led to humanity or development of living quality of population or people captured by the governance and markets in respective countries. Humanity is the opportunity given to people to enjoy a quality of life at contemporary living standards or civilization. If the governance system and markets are not fair enough to distribute opportunities of markets to all population to seek the contemporary quality of humanity, those who receive less opportunities will stay outside benefits of markets and economics.
For example, people in remote villages without easy roads and access to modern health and education services will not be able to access markets competitively for the improvement of humanity. In many countries, the fate of aborigines despite that they are in the present governance system such as voting rights and law and order is a good example for the denial of the access to markets to enjoy the humanity parallel to the rest of the country population.
In some countries, there are tribes or races living without identities and human rights recognized in the governance system and, therefore, the formal access of such tribes to markets and humanity are denied. Therefore, economics will benefit humanity only to the extent of the access of markets locally and cross border given to people and societies. In that context, it is pathetic that present civilized governance systems in some countries have led some tribes or people to exist in rock-bottom poverty without access to governance and markets.
Concentrations of access to markets
There is no dispute over the wide disparity of market access among the persons, societies and geographical areas. Instead, high concentrations of markets among some parties/player are not secret when the distribution of economic wealth and living standards which are outcomes of markets is considered. Although Marxism or other socialistic ideologies attach such disparities as outcomes of governance systems that permit freedom in private property or capitalist systems, it is largely an outcome of differences in access to markets among persons where the governance system also is a contributory factor. For example, regulations and state licenses will help concentrations of markets in persons supported by the prevailing governance system.
Instances of such concentrations are regarded as systemically important participants or players. They are often treated as too-big-to-fail and, therefore, awarded with preferential treatments over smaller participants. In fact, some markets such as money markets and state monopolies are directly run by the government/governance system. In addition, state policies such as fiscal policy, monetary policy, fair market regulations and state business ventures operate through special preferences awarded to selected persons to enjoy influential market powers or concentrations. Insider dealing practices and conflicts of interest of market participants including regulators are also some sources contributing to concentrations.
The market concentrations spread from local markets to global markets with the help of a network of institutions such as governments, associations and supra-national institutions, i.e., IMF, World Bank and WTO, whereas the supporting network is known as the safety net mechanism. The existence of market concentrations implies that the access of other participants to the market is limited by those concentrations whereas only trickle-down effects of markets are passed on to them at different levels. As such, the subject of economics has got diversified from microeconomics at the initial stage to open economy macroeconomics and public economics at present to cover diversity of markets.
Market Concentrations, Crises and Humanity
Economic crises are nothing but crises of concentrations in markets. It is an established fact that market participants who have concentrated powers or high market shares drive markets for their profit because markets effectively operate within them. Although market movements are initially seen as natural volatilities of market operations, markets do not separate them from unsustainable bubbles at times until some concentrated market participants confront bubble bursts and losses or bankruptcies that threaten them throwing out of the market despite they are considered as too-big-to-fail.
Such bursts are known as market crises. As markets are inter-connected in modern economies, a crisis in one market can have contagion across many other markets and participants to the extent of their exposure or linkage to the crisis-hit concentrations. Most popular example is financial crises that cripple economies and cause economic crises.
For example, present economic crisis in Sri Lanka is a burst of excessive concentrations of government debt and foreign currency markets which caused default due to failure to manage market concentrations. Monetary and fiscal policy operations without taking into consideration of economics of markets have largely contributed to this eventual default.
Therefore, there is no difference between Priyamali financial market model and Government financial/Treasury market model in managing concentrations, other than the systemically importance of the Government model. For example, the default by the Government has entailed a wide range of business bankruptcies and erosion of living standards across the economy (present economic crisis) whereas Priyamali’s default has no national significance. Therefore, the law enforcement is discriminated between Priyamali model operators charged with financial fraud and the Government Treasury model operators (who are leading economists) protected with safety net measures such as debt restructuring, IMF programmes, tax hikes and diverse market controls without any charges of financial fraud.
For example, foreign currency shortage and excessive foreign debt caused default of government foreign debt. As a result, exchange rate rose by nearly 85% and a wide range of import and foreign currency controls were imposed whereas international business trust in Sri Lanka collapsed. This led to historically high inflation at 70%, government interest rates to 33% and loss of production/businesses, employment and income due to trickle-down effects on all markets in the economy. As a result, humanity in view of living standards and opportunities to markets has deteriorated to record lows whereas its recovery would take several years until the Government restructures debt and rebuilds foreign currency market and reserve.
As such, the governance system is such that it promotes concentrations and bailouts of concentrated market participants despite their risky and erroneous conduct. Such bailouts lead to moral hazard problem which encourages such parties to take undue risks by expecting the governance system to bailout them in the event of crises. In that context, such systemically important (or too-big-to-fail) market participants in fact are systemically risky participants that should be avoided from markets.
However, economics presents that it is the level of productivity or efficiency that determines the growth as well as bankruptcy of markets or market participants. Accordingly, crises should represent a market phenomenon in economics. However, if market concentrations are created by the governance policy and concentrated markets are protected and bailed out by the governance system at a cost to market mechanism in general, it is against both economics and humanity, given the denial of the access of the markets to people in favour of such concentrations and the cost of bailout passed on to other people.
Therefore, economics does not present a phenomenon known as market failures. Markets cannot fail but operate with diverse fluctuations in response to acts of market participants where external parties are not able to pinpoint a particular stage of markets as stable or healthy or sustainable. Therefore, market failures are the instances or descriptions created by the economic managers in the prevailing governance system. In fact, they are nothing but failures of economic managers to deliver their public promises for economic management.
Has economics failed to serve humanity?
Therefore, economics does not seem to have been used to serve humanity in present economies although the subject of economics has got sophisticated in its concepts, coverage and research.
- First, as highlighted above, economists have been unable to prevent risky market concentrations and resulting market/economic crises or to recommend crisis resolution tools to expedite the recovery.
- Second, certain market participants such as large corporates and multi-nationals have been guided by economics to gain high market shares and concentrations with the support of the governance systems from time to time. In this regard, the economic principle of productivity, efficiency and competitiveness is sold to governments/economic managers.
- Third, the public economics has emerged to advocate for market intervention by governments to correct distributional disparities of market outcomes against free market principle followed in derivation of all fundamental economic principles. However, as different governments have different approaches and concepts in determining desirable levels of disparities, geo-political differences have complicated the market mechanism.
- Fourth, actions by markets themselves to address side effects of markets such as disparities of market outcomes and access have not been significant. For example, charities managed by philanthropists and private investments in social impact bonds and green businesses are not significant as compared to prevailing problems. The delay in market solutions or response could be partly due to red tapes or bottlenecks fondly kept by economic managers.
- Fifth, the subject of economics has turned to economic mathematics on unreal assumptions where that economics serves only professional objectives of those who master such mathematics to secure academic qualifications. Therefore, most of economic text books, research publications, seminars and policy prescriptions have no use for finding solutions to basic economic problems that economics itself attempts to solve. Therefore, any economic crisis tends to persist at least a decade until markets themselves resolve it over time. This is not a problem of economics but a problem of economists to apply economics to the real world.
Urgent need to practice economics with a new concept
Therefore, it is necessary that economics is practiced with a new concept to improve humanity through the expansion of opportunities for production and access to markets while preventing risky concentrations of markets. In this regard, present economic governance models that have been targeting certain macroeconomic numbers such as GDP growth, inflation, unemployment, interest rate, exchange rate and debt should be terminated as they do not measure or indicate improvement in humanity and have miserably failed in front of the global Corona pandemic as reflected by four-decade high inflationary pressures and expected recession spreading across the globe at present. The origin of Sri Lankan economic crisis highlighted above is a different circumstance although the global inflation and recession have aggravated the crisis.
Everybody believes that global inflationary pressures are a result of several supply side disruptions caused by the Corona pandemic 2020/21 and Russian invasion in Ukraine. However, following a habit of interpreting inflation as a result of the excess demand in the economy, central banks who participate in and control over money markets have started restricting credit market conditions by raising interest rates and curtailing printing of money. This follows a disputed monetary economics concept of inflation always and everywhere being a monetary phenomenon consequent to excess supply of money in the money market and resulting excess demand in the commodity market.
As a result, economies have started confronting large-scale recessions in the supply side spanning to several years to come as present monetary economies operate on credit markets. Economic recession means adverse impact on humanity created by economic managers in the second round after the first round effects of supply disruptions and inflationary pressures. However, central banks advocate this kind of market demand side control and forced recession on the supply side against both the principle of automatic market mechanism expected to work efficiently to solve basic economic problems and humanity.
Accordingly, it is proposed that improvement in humanity be targeted in the governance system to be gained through wider and fair access to markets through supply side while economics is allowed to correct instabilities such as concentrations to support humanity. This requires termination of economic numbers targets-based market intervention adopted by diverse economic managers at present.
Therefore, the usual practice of state grants or redistribution of the demand side of markets to support consumption and living standards of the poor or people not privileged to market access is not recognized in this concept.
In this concept of approach to economics and markets, the governance system is not just a means of political democracy to those who govern but a democracy in humanity across all people and societies. In that context, present economic rescue models proposed by same economic managers who caused market failures and economic crisis in Sri Lanka are against humanity of people living in Sri Lanka.
(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)
Former Deputy Governor, Central Bank of Sri Lanka
(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles publish.
The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)