Do we really understand the waves of Economics?
For most people, economics is all about money and finance and issues of supply and demand. While these are important elements, economics is about much more. Economics provides a framework for understanding the actions and decisions of individuals, businesses and governments. It provides a means to understand interactions in a market-driven society and for analysing government policies that affect the families, jobs and lives of citizens
If you watch the news at all, you will probably hear the word ‘economy’ branded in many contexts. But if you are like many people, you may not understand what economics is and why it matters so much.
According to the American Economics Association (AEA), “Economics can be defined in a few different ways. It’s the study of scarcity, the study of how people use resources and respond to incentives, or the study of decision-making. It often involves topics like wealth and finance, but it is not all about money. Economics is a broad discipline that helps us understand historical trends, interpret today’s headlines, and make predictions about the coming years.”
Economics may seem obtuse in the abstract. However, it has very powerful real-world implications. Specifically, according to the AEA, economics can help us answer many big questions, such as why some countries are rich while others are poor; why men earn more than women; how data can help us make sense of the world; what causes recessions; and why we ignore information that could be used toward better decision-making.
Economics Help provides several examples of times when economics come into play, including dealing with shortages of raw materials; working out how wealth is distributed and redistributed within society; determining the extent to which the government should intervene in the economy; and using principles and measures such as opportunity cost, social efficiency, forecasts, and evaluation.
Friedrich August von Hayek once proposed: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” In this sense, economics lies at the intersection of the natural sciences and the humanities: applying a quantitative, data-driven approach to human behaviour. “As such [it] is one of the most important and relevant skills for the world today, helping us choose wisely when it comes to our personal, social and professional lives,” asserts Financial Express.
In 1998, as the Asian financial crisis was ravaging what had been some of the fastest-growing economies in the world, the New Yorker ran an article describing the international rescue efforts. It profiled the super-diplomat of the day, a big-idea man the Economist had recently likened to Henry Kissinger. The New Yorker went further, noting that when he arrived in Japan in June, this American official was treated “as if he were General [Douglas] MacArthur.”
In retrospect, such reverence seems surprising, given that the man in question, Larry Summers, was a dishevelled, somewhat awkward nerd then serving as the U.S. deputy treasury secretary. His extraordinary status owed, in part, to the fact that the United States was then (and still is) the world’s sole superpower and the fact that Summers was (and still is) extremely intelligent. But the biggest reason for Summers’s welcome was the widespread perception that he possessed a special knowledge that would save Asia from collapse. Summers was an economist.
During the Cold War, the tensions that defined the world were ideological and geopolitical. As a result, the superstar experts of that era were those with special expertise in those areas. And policymakers who could combine an understanding of both, such as Kissinger, George Kennan, and Zbigniew Brzezinski, ascended to the top of the heap, winning the admiration of both politicians and the public.
Once the Cold War ended, however, geopolitical and ideological issues faded in significance, overshadowed by the rapidly expanding global market as formerly socialist countries joined the Western free trade system. All of a sudden, the most valuable intellectual training and practical experience became economics, which was seen as the secret sauce that could make and unmake nations. In 1999, after the Asian crisis abated, Time magazine ran a cover story with a photograph of Summers, U.S. Treasury Secretary Robert Rubin, and U.S. Federal Reserve Chairman Alan Greenspan and the headline “The Committee to Save the World.”
In the three decades since the end of the Cold War, economics has enjoyed a kind of intellectual challenge. It has become first among equals in the social sciences and has dominated most policy agendas as well. Economists have been much sought after by businesses, governments, and society at large, their insights seen as useful in every sphere of life. Popularized economics and economic-type thinking have produced an entire genre of best-selling books. At the root of all this influence is the notion that economics provides the most powerful lens through which to understand the modern world.
The crisis of 2008 may have been the wake-up call, but it was only the latest warning sign. Modern-day economics had been built on certain assumptions: that countries, companies, and people seek to maximize their income above all else, that human beings are rational actors, and that the system works efficiently.
But over the last few decades, compelling new work by scholars such as Daniel Kahneman, Richard Thaler, and Robert Shiller has begun to show that human beings are not predictably rational; in fact, they’re predictably irrational. This “behavioural revolution” landed a debilitating blow to mainstream economics by arguing that what was perhaps the centrepiece assumption of modern economic theory was not only wrong but, even worse, unhelpful.
Let me be clear: Economics remains a vital discipline, one of the most powerful ways we have to understand the world. Economics remains a vital discipline, one of the most powerful ways we have to understand the world.
Economics promotes understanding of and insight into problems specific to our times, including everything from education and the environment to health care and national security.
“One of the principal jobs for economists is to understand what is happening in the economy and investigate reasons for poverty, unemployment and low economic growth. For example, in a political debate such as – Should, the UK leave the EU? There are many emotional arguments made about immigration. Economic studies can try and evaluate the costs and benefits of free movement of labor.
Economic studies can try to examine the economic effects of immigration. This can help people make a decision about political issues,” says Economics Help
The problems that we want economists to help us solve are more like predicting how leaves will fall on a windy day than predicting how objects will fall in a vacuum. Economic phenomena are affected by a very large number of causal factors of many different kinds.
The world is now facing what observers are calling a “synchronised” growth upswing. What does this mean for the economic “convergence” of developed and developing countries, a topic that lost salience after the Great Recession began a decade ago?
The answer will depend on developing economies’ ability to find and tap new, more advanced sources of growth. In the past, the key engine of convergence was manufacturing. Developing countries that had finally acquired the needed skills and institutions applied advanced-country technologies locally, benefiting from plentiful, low-cost labour.
Rising interest rates, increasing trade tensions, Brexit uncertainty… the world economy in 2019 faces many headwinds, but there are also many positive signs that global growth will continue in the coming year. The incoming and outgoing chief economists at the IMF discuss in this video where we are headed.
Maury Obstfeld, Outgoing Economic Counselor, IMF; Gita Gopinath, Incoming Economic Counselor, IMF; Gerry Rice, Director, Communications Department, IMF
Moreover, today’s cutting-edge technologies – such as robotics, artificial intelligence (AI), and bioengineering – are more complex than industrial machinery, and may be more difficult to copy.
And, because intelligent machines can increasingly fill low-wage jobs, developing countries’ cost advantage may have been diminished significantly.
Of course, for robotics and AI to appear in developing-country value chains, including services that rely on frontier technologies, a minimum set of specific skills and infrastructure will be needed. But deploying some new technologies and tasks in the emerging economies may turn out to be no more difficult or costly than in advanced countries.
Here, much will depend on what kind of complementary labour is required. It is often assumed that a pool of very highly skilled labour is crucial to deploy AI. That may be true in some cases, but the opposite may be true in others.
For example, the new labor-displacing technologies could make feasible activities for which there had been insufficient skilled labour. Thus, complete automation can lead to a greater share of an economic activity being located in a developing country.
Another factor that will shape the process of technological upgrading in developing countries is global firms’ willingness to invest. Global market structures and pricing will partly determine the distribution of benefits. But so will countries’ efficiency at learning regulatory lessons, including how to design rules that attract investors, capture important segments of value chains, and secure a sufficiently large share of the gains from innovation. Those countries that learn quickly may actually grow faster than advanced economies, even in high-tech sectors.
Of course, for many countries and sectors, there remains considerable room for traditional catch-up – a process that will likely continue to fuel growth. But it will not be enough to fuel true convergence. For that, developing countries will need to deploy new technologies relatively efficiently, taking into account the role of labour-market skills and regulations. This will not be easy, and we may never return to the “golden age” of convergence that preceded 2007. But new technologies should not be expected to stop convergence, even if, as is likely, they slow it down.
My final word: Economics remains a vital discipline, one of the most powerful ways we have to understand the world. Economics remains a vital discipline, one of the most powerful ways we have to understand the world.
But in the heady days of post-Cold War globalisation, when the world seemed to be dominated by markets and trade and wealth creation, it has become the dominant discipline, the key to understanding modern life. That economics has since slipped from that pedestal is simply a testament to the fact that the world is messy.
The social sciences differ from the hard sciences because “the subjects of our study think,” said Herbert Simon, one of the few scholars who excelled in both. As we try to understand the world of the next three decades, we will desperately need economics but also political science, sociology, psychology, and perhaps even literature and philosophy. Students of each should retain some element of humility.
As Immanuel Kant, an influential German philosopher, in his doctrine of transcendental idealism said:
“Out of the crooked timber of humanity, no straight thing was ever made.”