We hear often about “the economy”. Some specific indicator – the stock market, employment or unemployment, interest rates, balance of trade, balance of payments, etc. - is up and this is good for “the economy”, or down and thus bad, or vise versa as the case may be. The author always means something much bigger and broader than this or that specific indicator. Yet one hardly ever finds a definition of this elusive thing called “the economy”. It is sort of like the ‘heffalump’ of Winnie the Pooh – everyone knows it is out there but no one can tell us just what it is.
Adam Smith, the father of economics, which has as its object the rigorous and systematic study of the economy, gives the following definition:
“... that great but expensive instrument of commerce (his Great Wheel) by means of which every individual in the society has his substance, conveniences and amusements regularly distributed to him in their proper proportions.”
[Wealth of Nations, Bk. II, Ch. 2]
Smith spent considerably more effort elaborating this Great Wheel metaphor than he did on his more famous Hidden Hand. To Smith’s credit this circularity notion was a major step forward from the simple accumulative notion of the predominantly mercantilist thinking of his day. But is this image of a Great Wheel supplying each of us regularly and proportionately with our “substance, conveniences and amusements” adequately capture what we mean by “the economy”?
I suspect not. In ordinary conversation, “the economy” covers more than the production and distribution of the goods and services we each consume. It includes in addition those things we consume collectively - defense, civil order, cultural events, although the economic aspect of these collectively consumed products may be relatively secondary. It certainly also includes the creation and then putting to good use of the many tools and machinery and infrastructure needed to carry on these directly productive and distributive activities. Most people, I think, would also want to include at least some aspects of things like participation in economic life, about freedom to choose the form of that participation, about sharing in the fruits of economic activity, about the effects of economic activities on other aspects such as the environment, about the implications of economic decisions today upon future generations, etc. In short, we instinctively see “the economy” within the context and from the perspective of our overall society.
This is as it should be! Like war not being left to the generals, the economy is too important to be left to economists. So we need to find a broader definition, one which draws the mind to include these wider, contextual aspects of economic activities.
Consider the following passage from the philosopher Bernard Lonergan:
“(Humans) strive in many fields: they organize human society by politics and war; they orientate their lives by philosophy and religion; they augment knowledge by science and perpetuate intuitions through art; they cool passions and regulate equity by law; they protect and hasten health by medicine; and generation succeeds generation in this heritage of culture through the testament of education. All of this is a rhythmic transformation of natural potentialities by human effort; none of it is, strictly, economic activity. Yet conditioning all culture and inextricably confused with it, there is the economic factor. Governments must have budgets even when they do not balance them; religion and law must have their churches and courts, their books printed and housed, their ministers trained; art needs its materials and its galleries, science its laboratories, medicine its hospitals, education its far-flung hierarchy of schools, colleges, and universities. Thus, the material fabric of culture’s living home is economic, and underlying this superstructure there stands as foundation the purely economic field concerned with nourishment, shelter, clothing, utilities, services, and amusements.”
[Collected Works, Vol. #21, “For a New Political Economy”, pp. 11-12]
This vision of economic activity seems to me to capture better what most of us instinctively mean by the economy. First, It locates “the purely economic” field into its relationships with other human activities. Education, arts, law, religion, medical care, politics, war, governance: each of these distinct domains not only depends upon the “purely economic” as a general foundation but also includes at least some economic activities within its own dynamic. In other words, all the various fields of human striving both rest upon and also include within themselves at least some measure of what we ordinarily mean when we say “the economy”.
Second, this vision of the economy keeps us grounded in the wholeness of human life. Like an individual, a society cannot be healthy in one part while sick in another. It is quite possible to have a broken leg and a healthy liver. Notwithstanding my healthy liver, the whole me is still suffering from the broken leg. Similarly with a society, it is foolish to think that a dysfunctional judicial or educational system is not affected by the economy, or vice versa.
Perhaps a better way to conceptualize the economy would be to look at it similar to the way we look at color. On its own color doesn’t exist. We can see that an object, say an apple or a shirt, is red; but in each case its color is only one aspect of the object. We can find other things which also have this aspect of “redness”. We can formulate the notion of color and define meaningfully “red”, “green”, “blue”, etc. But we can never find color itself, on its own; we can only find the aspect of color embedded into something, along with all the other aspects which make that thing that thing and not some other thing.
In a similar way, “the economy” is only one aspect of human life. The so-called “purely economic” dimension of any society will be very much affected if that country is, say, at war. The quality and coverage of education profoundly affects future economic activity. The law of the land establishes and enforces notions of property and contract, both of which are essential social foundations for economic activity. Religion gives substance and specificity to Smith’s “proper proportions” for distribution of the fruits of collective economic effort. In short, the “purely economic” domain is as affected by the other domains of human activity as those domains are affected by the economic. Indeed, the very idea that there exists a “purely economic” domain is as much a collective fiction as is the notion of color.
Like the apple or the shirt, human society is an integrated whole (albeit an extremely complex one) and “the economy” is only one aspect of it. Any discussion that abstracts out a single aspect of this whole and then holds that aspect up as though it were independent of these other aspects is necessarily incomplete, and therefore potentially dangerous. While this collective habit is tolerable for purposes of analysis and efficient discussion, when we move on to synthesis and remedieshe perspective must move back to embrace the whole social organism, not just a part of it. Otherwise we can get into trouble, like the sorcerer’s apprentice.
Because of convention and custom and easier communication, we will probably continue using the phrase “the economy”. Still, we ought not forget that we are talking about more, much more, than just GDP. After all, the economy on its own doesn’t actually exist.