This article first appeared in Forum, The Edge Malaysia Weekly on July 6, 2020 - July 12, 2020

Whenever there is an economic crisis, there will be opinion pieces that criticise economics as a methodology and even as a discipline of the social sciences. Some of the pieces are written by people who call themselves economists. The ongoing Covid-19 pandemic also sees views being expressed — that there is a need for new economic models, as the prevailing ones are no longer suitable for the new normal.

During the 2008 financial crisis, the field of economics and the profession itself were taken to task for “failing” to anticipate the emergence of asset price bubbles and their eventual bursting that led to the crisis! Of course, it does not require sophisticated economic reasoning to conclude that the easing of credit and a policy to keep the construction sector going would lead to an accumulation of sub-prime mortgages in the US, which were propped up so long as prices increased.

It was also political decisions — as manifested in both regulations and legislation — to be loose on regulating the proliferation of all kinds of financial derivatives that were based on these sub-prime mortgages. The property asset bubble fuelled the financial assets bubbles, and when the property bubble burst, everything collapsed.

It was policies — decisions made with political considerations — that created the incentives and environment that led to the crisis. In the US, the Glass-Steagall Act of 1933, separating the regulation of investment and commercial banking and a remnant of the Great Depression, was repealed in 1999 and can be partly blamed for the 2008 crisis. It made it possible for lenders to also invest and blurred the lines between equity and depositors’ funds. It was policy choices that contributed to the crisis, not the inability to understand what it all meant.

There is a wide range of people who call themselves economists, with an equally wide range of how they were trained and in which sub-discipline of economics they were trained in. Economists are also employed in various professions for various purposes, and unlike the professional disciplines, there is no certification beyond academic qualifications themselves. This can be part of the problem why the discipline itself suffers from the criticisms levelled at it — it gives a huge target to aim at.

On one polar end is the formalism of economics as a discipline and with such formalism comes the use of mathematics as its lingua franca. That represents the monks of the field, and then there are the rest who speak the normal language and are averse to the formal approach. The positive analytical parts of economics are simply tools whose custodians are the monkish clan; the internal tension within the field is basically between competing normative views, political views.

Economic models or economic systems, on the other hand, are political constructs. They define the scope and extent of private and public interests and rights, and define the boundary between the two. The size and role of the state, the public sector, is a political decision and these affect how private economic actors behave and how the various markets price their respective goods and services.

In the end, it is politics that will shape the institutions and the economic environment that will be formed. It is appointments, policies and legislation introduced through the political process that will shape the incentive structures and therefore influence how economic agents make their decisions. In so doing, the demand and supply will be formed, and depending on the nature of the market — the extent of distortions — some equilibrium prices will be obtained. It may or may not be efficient, but the market obtains a set of prices.

It is therefore not economics, the positive analytical framework, that needs remodelling; it is the political marketplace that should be cognisant of the economic implications of its decisions. Policies are by definition exogenous — a shock introduced into the market to achieve some policy outcome. Such decisions must be made with eyes wide open — knowing the trade-offs to obtain the true costs of the policy decision.

Politicians are particularly bad at recognising the total costs of a decision. Enamoured, they are usually only interested by the benefits and are driven by, in spite of the rhetoric, self-interest rather than the greater interest.

The failure, if I may, is with politics. We can understand the expediency in politics but it is the ideological face of politics that often times becomes problematic. And we can see this quite clearly elsewhere in the world as well. The self-proclaimed paragon of individual liberties and democracy, the US, is now somewhat dysfunctional with its electorate sharply divided, resulting in an equally partisan and dysfunctional politics with a president who is bent on destroying the traditions and institutions of government in the name of making America great again. The US ended up looking like a developing country in the way it is managing the Covid-19 pandemic.

Donald Trump’s “Make America Great Again” is an isolationist agenda devoid of any economic logic, as is his globally destabilising trade war with China. The nationalistic, anti-science and anti-intellectualism as a guise of returning to something “purer” remind us of the various cultural revolutions and fascist regimes of the past that have led to wars and high crimes.

Here, in Malaysia, we have a series of unstable governments in a political marketplace that was disrupted during the last general election just over two years ago and one that still has not found its equilibrium. The electorate went past the tipping point but what that means remains unclear. Memories of the conventions and political traditions built over 60 years of a single coalition rule linger and still dominate in this equilibrating environment, an environment that is, however, distinctly different from the one that formed the conventions and traditions.

Sixty years after an independence obtained by recognising our diversity, we are now coloured by the rhetoric of race and religion, all of which puts us on some slippery slope to nowhere good. We need platforms to have a national conversation but that requires a mindset shift and reforms, and distracted governments do not focus on fundamental reforms.

The previous government started some reforms to clarify separation of powers and attempted to enhance the idea of independent jurisdictions. Although there were new select committees being set up in Parliament, they were largely dysfunctional and did not substantively change the way business is conducted here.

The fundamental institution of politics, Parliament, remains largely the same. Under this present government, it has not even been convened to do any business, and its members seem more interested in securing positions in the very statutory entities Parliament is supposed to have oversight over rather than immersing themselves in policymaking and using Parliament to enact laws to effect their policies.

Without reforms in this important institution, politics remains frivolous and fractious as it searches for a new equilibrium. So, the state and the calculus of politics will determine the economic environment, which will then influence decisions taken by economic actors. Investors anywhere, while motivated by returns, adjust them by risks, including political risks where the strength of governance and regulatory certainty weigh heavily. It is clear that politics is weighing down economic sentiments in an already challenging environment.

Some of the signs we are seeing are not positive for the economy. There will be no “normalisation of demand” as the pandemic gets under control and a vaccine is eventually found. Some of the aggregate demand lost — which are the results of business losses and loss of household income during the pandemic — will not return. In fact, a part of the supply side will be gone and that defines the extent of economic contraction from which the economy must grow out from and investor confidence is crucial. For this to happen, hard choices will have to be taken, which is possible only if there is some sort of consensus.

So, for Malaysia, this political uncertainty and all that comes with it do not augur well for what is required on the economic front, none of which is easy — from the challenging state of government finances to the inequality made worse by the Covid-19 pandemic, increasing unemployment and the unending search for new sources of growth.

Politicians of all stripes have to get their act together; they are in much worse shape than economists! Never mind economic literacy in political decisions, some display of altruism will be highly appreciated. We are now at many cross roads, an important time in our history.

Dr Nungsari A Radhi is an economist and the views expressed here are not related to any of his organisational affiliations

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.