Can Economics Shake Its Shibboleths and move to a bolder economics?

Two related pieces:

  • Jim O’Neill points how economic orthodoxies have been collapsing as we have low unemployment, elusive inflation, weak productivity growth, and high profitability. But economists continue to tinker on the same old ideas.  Can they shake their shibboleths?

What explains this conundrum? It is not that Karl Marx was right all along that capitalism is doomed to fail. Rather, it is the result of particular developments in financial markets, regulatory policies, and incentive systems in the era since the 2008 financial crisis. Clearly, it has become far too easy for dominant market players to resist competition. But there are many ideas floating around that might address that problem. One issue that I have  is stock buybacks, which may be allowing corporate executives to boost their own earnings without having to invest in productivity gains.

Fortunately, politicians of all stripes have begun to question why current tax and regulatory policies seem to be encouraging such behavior. As a general principle, companies that are not contributing to productivity growth or helping to solve broader social challenges shouldn’t be enjoying a free lunch. The British construction company Persimmon, for example, has been posting higher earnings not because of investments it made, but because the UK government introduced a special loan scheme for first-time homebuyers. And most of the major  now seem to show an interest in research and development only when they are buying a new drug and need to conduct clinical trials to secure exclusive rights to it.

Finally, at the global level, the biggest challenge to economic orthodoxy is the continuing growth of China since it launched its policy of economic “opening up” in the Deng Xiaoping era. There is growing evidence to suggest that the US will do almost anything to stop China’s rise, even if it means denying prosperity to the Chinese people.

Will economists prove more helpful today, at a time when the challenges we face are nearly as pressing as those during the Great Depression? Unemployment may not be a severe problem in most advanced countries currently, but large segments of the labour force seem cut off from economic progress. Record levels of inequality and poor earnings prospects for younger, less educated workers are eroding the foundations of liberal democracies. The rules that underpin globalization are badly in need of reform. And climate change continues to pose an existential threat.

These problems demand bold responses. Yet, for the most part, mainstream economists seem preoccupied with marginal fixes—a tax-code tweak here, a carbon tax there, perhaps a sprinkling of wage subsidies—that leave untouched the structures of power underwriting the rules of the economic game.

Economists can rise to the challenge by adopting a broader vision. Last month, I joined a group of prominent economists to launch an initiative that we have called “Economics for Inclusive Prosperity” (EfIP). From labour markets and finance to innovation policies and electoral rules, the goal is to advance ambitious policy ideas that pay much closer attention to inequality and exclusion—and to the power imbalances that produce them.

 

 

 

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