‘Let’s take back control’ and ‘America First’: the slogans accompanying last year’s political upheavals in the UK and the US illustrate what happens when large sections of the population feel disenfranchised and overlooked when economic policies are decided on. Much of the tension has centred around the consequences of global trade. While workers in traditional industries have seen their jobs disappear, policy makers have argued that they have done what economic theory dictates, which is to encourage trade and take advantage of different countries’ comparative advantage in producing different goods. But what is optimal from an aggregate market (or country or global) perspective may not be optimal for individual segments of the population at a given point in time. The political backlash in 2016 showed that if insufficient consideration is given to the distributional consequences of policies there will eventually be a reaction.

Why have the distributional aspects been ignored? Partly it is because economists are primarily trained to focus on efficiency and growth - on ‘enlarging the pie’ so to speak. Trade will create economic growth and so free trade has become the ruling policy almost without exception. We are less exposed to, and in some cases interested in, deliberations of fairness -  how to ‘split the pie’. This is now coming back to haunt us.

There has also been a reluctance – sometimes for ideological reasons – to interfere with the workings of the market. Economists are trained to propose regulatory interventions when markets don’t work properly on their own. Common market failures include the market for clean water or air (global commons) and certain types of infrastructure (the parts that can be described as ‘natural monopolies’), and economists usually agree that there is a role for government in those instances. But in addition to those cases where the failure of a market solution to provide the best outcome is immediately evident, there are a host of other situations where interventions can, and should, improve outcomes. These are the cases where the long term and largely unintended consequences of a policy are such that the appropriate policy prescription is different from the one you would have arrived at if all you had in your head was a simple supply and demand diagram.

The reliance on very basic economics to guide policy decisions is the subject of James Kwak’s recent book Economism, where ‘economism’ is a term used to describe the use of very basic economic principles in an unfettered way to suggest policies that don’t really hold up in the real world. Take for instance the drive for austerity in the UK since 2008, which received a surprising level of cross-party support for a long time. An acquaintance of mine defended the policy with the simple yet misguided idea that, like households, countries have to live within their means. Except that they don’t, at least not in the short run. The whole point of government investments is that they should increase when private consumption and investments decrease, in order to counterbalance the contraction in the economy that would otherwise prevail. I am not saying governments should spend recklessly or that a country’s debt shouldn’t be brought under control. But I am saying that the timing of the government’s response is very important.

The tendency to extrapolate from the household to an entire economy is one example of when economics is being used (or abused) to justify a policy that few serious economists would agree with. Why does this view prevail then, why does ‘economism’ get to dictate important political decisions? One reason is that ‘economism’ offers solutions that are easy to explain and that resonate with established ‘accepted truths’, such as ‘we have to live within our means’. Politicians are therefore able to convince the public easily, which obviously appeals to them as no one wins a political debate with complex arguments. At a deeper level, however, ‘economism’ is winning because it suits the elites. It just so happens that the types of policies that are simple and appeal to most people’s basic understanding of the economy benefit the rich disproportionately. Case in point: the resistance to minimum wage. There is a basic logic (‘Economics 101’) that economists agree on that goes against the use of a minimum wage or any other types of price floors.  But the evidence is mixed, at best: a number of studies have been carried out in the US and the UK on this topic and based on these there is no clear conclusion that a minimum wage increases unemployment. It may befuddle some economists, it clearly requires a more sophisticated framework of analysis than short-term supply and demand curves, and certainly goes against the interest of those who own businesses and have to pay their workers more. The easier narrative, and the one that suits the economic interests of the establishment, is that a minimum wage is a poor policy. Hence it continues to be propagated and presents powerful opposition to new evidence suggesting the contrary.

The tendency to rely on simplified models and not think about distributional consequences holds true for how Europe and the US have implemented trade policies as well. Trade is supposed to create economic growth, so the EU created its single internal market, the US agreed on NAFTA and both have numerous additional agreements with countries on the back of WTO rules. Don’t get me wrong; I am not arguing for protectionism as trade is so much better than the alternative. But to put it a bit crudely: while we all benefit from trade some benefit more than others. The inattention to the distribution of the gains from trade is arguably largely to blame for the rise of Trump and for Britain’s decision to leave the EU. Dani Rodrik, economist and professor at Harvard, has long held the view that trade is, well, complicated. He states in a thought-provoking recent Guardian article: “The economics profession is strange in that the more you move away from the seminar room to the public domain, the more the nuances get lost, especially on issues of trade.”

So, what can be done? If we want to avoid further depressing political developments of the sort we have seen in the last year, we would do well to pay a bit more attention to the distributional effects of our policies. And we need to create the room for deeper and more intelligent debates on economic policies. These debates will require more nuanced arguments and fewer politically motivated actions.  I’m not too optimistic about the prospects. But the world is a complicated place and we will do ourselves a disservice if we continue prescribing simplistic solutions.