Economics never claimed the markets are always right. That is a dismal myth

Government intervention was always seen as essential, and few economists see the pursuit of growth as the only goal

Economics was accorded the title “the dismal science” by the 19th-century writer Thomas Carlyle because of the opposition of economists to slavery. I wear that badge with pride.

Five decades ago when I was a student, various lecturers tried to define our subject – one of them simply said “economics is what economists do”. But while it’s easy to see what other professions do – doctors make people better, electricians keep the lights on – it’s more difficult to explain the work of economists.

The discipline of economics never taught that markets always produce the right answer. Keynes showed that economies don’t self-correct, and that governments should play a role averting slumps and counterbalancing overheating. In 1920 his fellow Cambridge economist Arthur Pigou laid the foundations for modern environmental economics, and the “polluter pays” principle. He pointed out that, left to the market, we would overuse and abuse the environment, so public intervention was essential.

Greenhouse gases damage the environment wherever they occur, heating the whole planet. In this case the state should intervene to raise the price of pollution

While the Chicago school of the 1960s emphasised the role of markets in allocating resources efficiently, in recent decades much of the training of economists, and most of their work, is concerned with how markets often don’t work well and how human welfare, assessed in different ways, can be improved by government intervention.


An economics training is helpful in assessing the merits of different policy approaches, and what tools might be most successful to counter failures of the market. Take water pollution, and greenhouse gas emissions.

While rivers with a large flow of water can absorb some pollution without too much damage, in other cases the absorptive capacity of waters is very low, and any pollution is seriously damaging to the environment. So a one-size pollution tax is not the most efficient approach: the appropriate strategy is a set of differentiated regulations and penalties, appropriately calibrated for absorptive capacity.

By contrast, greenhouse gases damage the environment wherever they occur, heating the whole planet. In this case, as Pigou suggested, the state should intervene to raise the price of pollution, reflecting the true damage to society, making the cost of to the individual or company responsible for greenhouse gas emissions equal to the cost to society of the damage involved. This has guided the implementation in Ireland of a gradually rising carbon tax, to incentivise us to move away from climate-harming practices. However, economic insights also indicate that a suite of other policies are needed.

As Pigou noted, taxes on spending, such as carbon taxes, tend to fall heaviest on those with low incomes. That’s why the Government has allocated a large part of the income from carbon tax towards raising welfare and other measures for poorer households.

Harnessing markets to signal the changes we need to make is still vital. But without government intervention, markets will send the wrong signals for the planet. If I go to the supermarket to buy tomatoes, I check the price and guess at how they will taste. If I also have to consider “food miles” – how much carbon was involved in getting the tomatoes to the supermarket – I might never finish my shopping. But if I know that the price marked on the shelf reflects the cost to the planet of the tomatoes, my choice becomes much simpler. So using prices to communicate how we need to change our behaviour is an important part of the policy toolkit.

GDP is far from the only yardstick, and a very imperfect one for Ireland, and there’s research into other ways of measuring wellbeing and sustainability

Economics students aren’t taught that markets are perfect. In undergraduate courses, they study monopolies and oligopolies, and how they should be controlled or managed in the public interest. In every country in Europe the electricity grid is a natural monopoly because competing sets of wires to our homes wouldn’t work. That is why, right across the EU, the power grid is publicly owned. We also regulate sectors with small numbers of very big players, like telecommunications and energy production. This is to protect consumers and rein in excess profits, while encouraging ongoing investment and innovation.

Behavioural economics is a big growth area. Combining insights from economics and psychology, it looks at how our economic choices are affected by influences other than price, for example by how choices are framed.

Economics also looks at new ways to measure human welfare – and indeed environmental welfare. Few see the pursuit of growth as the only goal. GDP is far from the only yardstick, and a very imperfect one for Ireland, and there’s research into other ways of measuring wellbeing and sustainability. Some, like Nobel winner Angus Deaton, have ventured into “happiness” economics, but for me, I’ll stick with the dismal science.