The International Economic Association’s triennial World Congress has long been one of the most important global gatherings of economists, owing to its success in bringing together researchers and policymakers from the poorest to the wealthiest corners of the world. The 19th edition of the event earlier this month, albeit held via Zoom instead of in person, was no exception.
One recurring theme 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 view, other major shifts — from climate change and the rise of digital technology to the changing nature of labour markets — have been increasingly salient. The pandemic has merely accelerated these shifts or thrown them into sharper relief.
As a result, 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 where they were previously low and fall where they were high, leading to greater levelling.
On the other hand, salary disparities will increase, because the labour market will tend to be more of a common pool with heightened competition for talent. Most important, globalisation, after some initial stumbles, will accelerate, with rapid growth in cross-country outsourcing. This is likely to have a significant effect on labour markets, national politics, and the nature of conflict.
Understanding this new world will require major breakthroughs in economic thinking. Economics normally proceeds by contesting the explicit assumptions and axioms on which theory is built. But all scientific disciplines also have hidden assumptions that are so deeply embedded that we do not state them explicitly and often forget they exist. In their celebrated research in the 1950s that provided a formal structure for understanding Adam Smith’s idea of the “invisible hand”, for example, Arrow and fellow Nobel laureate Gérard Debreu showed the many assumptions that were needed for Smith’s conjecture to be valid.
There were other assumptions that were taken for granted — simply part of the woodwork of economics — including the symmetry of knowledge among buyers and sellers. One of the biggest breakthroughs of modern economics was the insight 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 2001 Nobel prize in economics, and led to new forms of regulation that made the modern economy possible. We owe many of our regulations concerning quality control and product standards to this breakthrough, which showed definitively that the market’s invisible hand cannot ensure standards when information is asymmetric.
It remains to be seen what form the economics profession’s new intellectual discoveries will take and what regulations we will need to apply them. What is clear is that the strain humanity has imposed on the environment means growth as we currently know it cannot be sustained. But that does not mean we have to learn to live with lower growth. In fact, I believe future growth will be faster than we have seen thus far.
The lower-growth camp’s mistake stems from a common misunderstanding of GDP or national income. A higher GDP is often taken to indicate more wasteful consumption and consumerism of the kind we are indulging in now. But that need not — and now must not — be the case.
The consumption of more art, music, and learning, as well as better health and greater longevity, are all components of GDP, and are, or can be, environmentally friendly. Reforming our regulatory system can foster rapid GDP growth — but with the content of GDP changing dramatically, and with a disproportionate amount of human labour directed to creative activities. The nature of reform for the new world is a big topic, but policymakers will need to focus on curricula that nurture creativity, because routine work will increasingly be automated; shift consumption away from environmentally wasteful goods; and redistribute wealth radically to lessen inequalities.
My recent research on group morality, however, highlights a caveat that we must address. When discussing matters like climate change and current global inequities, we urge people to be other-regarding. In other words, they should not be concerned solely about their own well-being but also consider the welfare of the current poor and future generations who will be affected by our decisions.
But as moral philosophers have long known, group morality is a problematic concept. I have recently tried to address the “Samaritan’s Curse”, whereby a future generation can end up being hurt when all individuals today take its well-being into consideration. This problem, like the prisoner’s dilemma but in the moral domain, can potentially defeat our best intentions.
So, the road ahead will not be easy. Economists and society as a whole must confront profound intellectual and moral challenges in order to come to grips with the changing world. But humans have done it before. One can only hope that our intelligence and resolve enable us to do it again.
— Project Syndicate
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