The Changing Map of the Economy by Kaushik Basu
The global economy and capitalism are at a crossroads, due to the COVID-19 pandemic, climate change, the digital boom and the changing nature of labor markets. Understanding this new world will require major breakthroughs in economic thought and a closer examination of some of the fundamental assumptions of the discipline.
NEW YORK – The Triennial World Congress of the International Economic Association has long been one of the world’s premier gatherings of economists, due to its success in bringing together researchers and policymakers from the poorest to the richest corners of the world . The 19th edition of the event earlier this month, while hosted via Zoom rather than in person, was no exception.
One of the recurring themes of this year’s Congress was that the global economy and capitalism are at a crossroads. While the COVID-19 crisis was the immediate impetus for this point of view, other major changes – from climate change and the rise of digital technology to the changing nature of labor markets – have been to more and more salient. The pandemic has only accelerated these changes or made them more visible.
COVID-19 has forced us into a sort of ‘learning by doing’ idea, an idea that Nobel Prize-winning economist Kenneth J. Arrow, who pointed out that much of learning ‘is the product of experience ”, developed in the abstract a long time ago. We learned how to lecture and host conferences through Zoom, and how to make complex decisions in meetings conducted through Webex. People suddenly realized that they were spending more time than they needed at the office and could do a lot of their work from home. And we also learned to shop at home, through digital platforms.
As a result, the demand for office and retail space will fall, even after the pandemic. And because more people will have the freedom to work remotely, property prices will gradually rise to where they were previously low and drop to where they were high, leading to greater leveling.
On the other hand, wage disparities will increase, as the labor market will tend to be more of a common pool with increased competition for talent. More importantly, globalization, after some initial stumbling blocks, will accelerate, with rapid growth in transnational outsourcing. This is likely to have a significant effect on labor markets, national politics and the nature of conflicts.
Understanding this new world will require major breakthroughs in economic thought. Economics normally proceeds by challenging the explicit assumptions and axioms upon which the theory is built. But all scientific disciplines also have hidden assumptions that are so deeply ingrained that we do not state them explicitly and often forget that they exist. In their famous research in the 1950s which provided a formal structure for understanding Adam Smith’s idea of the ‘invisible hand’, for example, Arrow and his Nobel Prize-winning colleague Gérard Debreu showed the many hypotheses necessary for that Smith’s conjecture is valid.
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There were other assumptions that were taken for granted – just part of the backbone of the economy – including knowledge symmetry between buyers and sellers. One of the greatest breakthroughs in modern economics has been the idea that knowledge is often asymmetric and that this asymmetry can shatter the invisible hand. This breakthrough earned Joseph E. Stiglitz, George Akerlof and Michael Spence the Nobel Prize in Economics in 2001 and led to new forms of regulation that made the modern economy possible. We owe much of our regulations regarding quality control and product standards to this breakthrough, which has definitely shown that the invisible hand of the market cannot guarantee standards when information is asymmetric.
It remains to be seen what form the new intellectual discoveries of the economic profession will take and what regulations we will need to apply them. What is clear is that the pressure humanity has placed on the environment means that growth as we know it today cannot be sustained. But that doesn’t mean we have to learn to live with lower growth. In fact, I think future growth will be faster than what we’ve seen so far.
The low growth camp’s mistake stems from a common misunderstanding of GDP or national income. Higher GDP is often taken to indicate more wasteful consumption and consumerism of the kind we are now indulging in. But that doesn’t have to – and now doesn’t have to – be.
Consuming more art, music and learning, along with better health and longevity, are all components of GDP and are, or can be, environmentally friendly. Reforming our regulatory system can promote rapid GDP growth, but with the contents of the GDP changing radically and with a disproportionate amount of human labor devoted to creative activities. The nature of reform for the new world is an important topic, but policymakers will need to focus on programs that nurture creativity, as routine work will increasingly be automated; divert the consumption of goods that are not environmentally friendly; and radically redistribute wealth to reduce inequalities.
My recent research on group morality, however, highlights a caveat that we must address. When we discuss issues like climate change and current global inequalities, we urge people to care about others. In other words, they should not only be concerned with their own well-being, but also consider the well-being of current and future poor generations who will be affected by our decisions.
But as moral philosophers have long known, group morality is a problematic concept. I recently tried to address the “Samaritan’s curse,” according to which a future generation can end up being hurt when all people today take their well-being into consideration. This problem, like the prisoner’s dilemma but in the moral realm, can potentially defeat our best intentions.
The road ahead will therefore not be easy. Economists and society as a whole face profound intellectual and moral challenges in dealing with a changing world. But humans have already done it. We can only hope that our intelligence and determination will allow us to start over.