A history lesson in Global Economics and why we need a different perspective
Economics has always been a favorite subject of mine. Economics were a central part of my undergraduate and postgraduate university studies. The books and works of Keynes, Smith, Galbreath, Friedman, among many other leading economic thinkers, sit in my offices today and I’ve read them with great enthusiasm over the years.
Yet during my business career as an entrepreneur, speaker, and author, the belief systems representing what is (and perhaps was) modern economics appear to be less and less relevant. In fact, to the extent public policy has anything to do with economics, and as this post will attest it has, the underpinnings of those policies apply less and less. In reality our economic assumptions and related policies are making the world worse in many cases, and we need to reexamine their tenants. Unhinged growth, without an accounting for its consequences, is not a good footing in the long run.
Modern macroeconomics considers how consumers and firms make decisions, and then evaluate how these choices interact. To yield economy-wide outcomes while largely impacting the state of wellbeing for humanity. Macroeconomic policies can theoretically be applied to impact those outcomes. Various competitive considerations, the nature of financial markets, and the interaction of fiscal and monetary policies could optimize nation’s economies. Theoretically they could even reduce the pain of downturns and thereby improve the well-being of people; mainly through increased consumption and growth.
A short history of 20th century economics
The financial crises of the past century created some notable shifts in thought, when the nature of economic emergencies exposed defects in economic theories. The first event was the Great Depression of the 1930s. High unemployment, including a quarter of the US population (with even higher levels in other countries) and sustained low output could not be explained by Marshallian economics, the most prevalent theory at the time. British economist John Maynard Keynes was the leading economist then and is considered by many to be the inventor of modern macroeconomics. His theories, it seemed however, had become detached from the reality of the Great Depression.
Over the decades, Keynesian economics developed, involving a new general equilibrium model, which showed how different types of markets, including labor, goods, and money, interacted with each other. One of the key basic principles of Keynesian economics is that the government can help the economy by deficit spending (when a government’s expenditures are higher than its revenues). For several decades Keynesian economics was relied upon to guide policy making, which was based on fiscal policy and the role of government intervention. The economy performed well for some time based on Keynesian theories although that did not last.
In the 1970s an unanticipated inversion of the relationship between growth and inflation occurred. Following a recession, industrialized nations were hit by “stagflation”. Stagflation refers to a situation in which inflation climbs while economic growth stagnates and unemployment rises. Keynesian economic models seemed to have become unworkable.
Economics entered a new phase born at the University of Chicago, an institution that has employed more economics Nobel prize winners than any other. By the mid 70s American economist Milton Friedman promoted belief in free markets (a focus on money supply) and advocated less government intervention. His prominence paved the way for the policy of inflation targeting at central banks, downgrading the importance of fiscal policy in favor of monetary policy.
When Friedman won the Nobel prize, another economist of the “Chicago School” leveled criticism at the prevailing macroeconomic thinking, particularly Keynesian economics. Robert Lucas, who won the Nobel prize 19 years later, believed it was naive to predict the effects of a change in policy entirely on the basis of past observations. The “Lucas Critique” emerged: that an economic model isn’t good enough if it ignores the dynamic that agents’ behaviors change when policy changes.
In 2003 Lucas sounded a triumphant note about the state of the field of economics, believing that economic depressions had been averted for decades to come. That, of course, proved false. Within a few years, the global economy sank into the worst recession since the Great Depression.
Why didn’t we see this coming?
Lucas, along with many other economists of the time, failed to take into account some important dynamics. First, a key sector of the economy, finance, wasn’t given the scrutiny it required. The models used at the time by central bankers and other policymakers did not foresee the crisis emerging from the banking and financial sector. The models didn’t properly consider financial institutions as agents in the economy, with their own unique incentives and risks.
Secondly, an accounting for the implications of advancing globalization and the rise of the rest were not adequately weighed in the overall dynamics of economics. In 2006 and 2007, 124 countries grew their economies at over 4 percent a year; including more than 30 countries in Africa. Over the last several decades, lands outside the industrialized West have been growing at rates that were once unthinkable. Antoine van Agtmael, the fund manager who coined the term “emerging markets”. This is a trend that is more than the celebrated rise of China or even Asia. It is the rise of the rest of the world.
What does this mean for the future?
Now we are entering a third era of economics. The rise of the rest (and the global economy) will continue to drive global warming and pollution. It will have growing material costs to us all, most of which will be unprecedented and are unaccounted for. There are significant implications which will result from this (the earth simply doesn’t have the resources). Secondly, technologies and their implications on markets, including labor, will have implications that well exceed prior impacts from technological revolutions like agriculture or industrialization. The result is that one of the largest gaps are being created between the haves and have nots in history. The richest 1% now control over 45% of wealth. These two real world dynamics will probably unhinge economics again.
Economic growth when measured by gross domestic product hasn’t produced greater levels of happiness. Inequality among people and their means is still rising even though global poverty is reduced. All of this is happening as humans are heading towards a climate-change crisis that capitalism appears incapable of avoiding and actually is making the problem worse. These are also failures of economics. Where are the solutions? Ten years after the financial crisis, economists wonder how they can address these challenges with models that originated in the 1970s and have already failed them once before.
We have entered an era where our assumptions of growth as the key driver of economic measure is no longer as relevant. We must rethink our economics and assumptions; shifting from consumptive assumptions that drive making more stuff cheaper and in greater quantity to a utility model; where sustainability, efficiency, and innovation are designed to do much more with much less.
If we had infinite resources, infinite growth would work but we don’t. Trying to grow forever will result in unintended consequences. It is time for more policy makers to embrace these realities and focus on a new paradigm before it is too late.
This is a story of the Futurist Club
Written by: Bryan O’Rourke
Bryan O’Rourke serves as chairman and CEO of Vedere Ventures, a private equity firm with investments in Europe, Asia, and the Americas. He is considered a thought leader in technology, health, and consumer trends and has been quoted and interviewed in periodicals like the New York Times, Wall Street Journal, Inc. Magazine, and others. He has contributed with colleagues to seven published books and has been a keynote at nearly 100 events on four continents in the past decade. Bryan serves as an advisor to a number of well respected global fitness and technology brands and sits on a number of boards of directors including the International Health Racquet and Sports Clubs Association, and The Fitness Industry Technology Council, among others. You can follow Bryan on most social networks @Bryankorourke.
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