Can we find our way in the dark?

About budgets, energy availability and economic matters

Within the context of the South African speech and the energy crisis, economist Catherine Kannemeyer highlights some crucial elements of modern economics.

In the South African context, notions of progress are surely contingent on the distribution of goods and services within the economy, with the access to energy being fundamental for participation in the modern economy. Yet we have witnessed a decline in the availability of electricity, as a result of poor planning and investment, a function of both politics and economic incentives.

In this year’s budget, we might witness the displacement of social policy priorities, health and education. The budget is not infinite, and strain might result from the concern to keep Eskom and SAA going, or the expanding burden of public sector wages.

Economics is a broad discipline, which in some cases has yielded immense insight into specific topics. Yet, in the wake of the financial crisis – fostered by the great divergence between the underlying value and ostensible value of a raft of bad debt – the grasp on how economies work is shaky. Fancy modelling purporting to be scientific has failed and will fail, but fortunately progress is not contingent on a scientific understanding of economics. Poor policy making can stunt innovation, but it is difficult to completely stifle it.

Income 2015 budget courtesy National Budget Review

Income 2015 budget courtesy National Budget Review

Fundamental economics still relates insight from one of the founders of the discipline of political economy, Adam Smith. His theory that competition and the pursuit of self-interest tend to advance the common well, still holds in many contexts. The philosophy of Adam Smith emerged at a time where political economy was a contextualised descriptive practice.

It was in the 19th century that Economics began to evolve into one more “scientific”, describing well-oiled, efficient systems to facilitate the allocation of scarce resources in order to produce desired goods and services.

The study of economics diverged from reality, incorporating mathematical ideals independent of the discipline’s social, political and historical context. Assumptions about rational optimisation in the context of stable and tractable preferences differed much from how individuals actually make decisions. The precision with which some economists make predictions about how the world works and what the future holds in a context where false assumptions matter greatly is very dangerous.

Expenditure 2015 Budget. Courtesty National Budget Review

Expenditure 2015 Budget. Courtesty National Budget Review

The simplifying assumptions of the field of economic theory, serve to reduce uncertainty arising from the complex interaction of different agents. Critical to the outcomes of many economic ideals is the assumption of perfect information amidst numerous agents. In a context of uncertainty with an unequal power distribution, planning on any basis, using economics or otherwise is a fraught activity.

In the context of an uncertain supply of electricity, accurate information that would facilitate better planning is not communicated widely, reducing the capacity of individuals to adapt. A detailed understanding of “who turned out the lights?” isn’t necessary to everyone affected, and “keeping the lights on” relies on innovation.

How the cake is cut. A 2013 graphic done for Wits students

How the cake is cut. A 2013 graphic done for Wits students

The quality of information available stunts policy makers of all types. Policymaking is a complex task, one that can be informed by a variety of disciplines, to an appropriate degree. “Ignorance in the short run is seldom profitable; in the long run, it is invariably disastrous.” Logic alone even when valid may not be convincing, and to place all our trust in it seems foolish. Yet, ignorance is far worse, lacking both clarity and consistency.

Finding our way out of the dark relies on the broad spread of the understanding that interdependence of all the economic actors is a fact, and the importance of appreciating logical approaches to overcoming challenges. Failure to think and act clearly, when confronting fundamental crises, threatens the very foundation of our social democracy.