Politics and economics are two powerful lenses for understanding the world around us.
As a civil society that has done away with rule by the fist, we now live by different rules – rule by the will of the people and rule by the coin of the people.
We have politicians to deliver the will of the people, while we are largely free to make our own spending decisions. We hold elections to coordinate choosing our representatives and we set up markets to coordinate buyers and sellers.
So far different.
One similarity is that every now and then they surprise us. For example the election of Donald Trump and the global financial crisis.Why is this? One obvious explanation is neither is completely understood. But beyond that perhaps it is that they are actually not that different.
At a basic level both politics and economics are systems we have created as a way for us to get along peacefully. Politics allows us to peacefully have different views and markets allow us to peacefully get our hands on goods and services. Imagine instead if you took what you wanted and controlled how others thought.
Getting back to the earlier observations about differences, it appears that politics will be your way of expressing your wants when you are relying on your vote to get what you want, while the economy is more relevant when you are relying on your wallet.
Why was Trump’s victory a surprise? Because people failed to understand how deep resentment of the establishment ran. Some part of this reflected economic factors such as a perceived lack of job opportunities for the white uneducated male. Why was the financial crisis a surprise? Because people failed to understand how government housing policies had promoted home ownership to an unsustainable point. The American dream after all is more equity (or fairness) focused than efficiency (or who values it the most) based.
Of course there are many other explanations, that is the benefit of hindsight, we can all be expert analysts. But what I take from this is that both surprises highlight that politics and economics interact, the outcome is some weighted average of our collective demands in both these systems, and politics or economics can start becoming unsustainable a long time before you see the outcome.
At the end of the day we are all trying to get along peacefully and this is a balance between efficiency (the market) and equity (the politics).