The Future of Economics Post author By Philip Lane Post date July 30, 2012 This article collects the views of some of the most active research economists – see here. Categories In Uncategorized 14 Comments on The Future of Economics ← Lucinda Creighton on Bank Debt Deal → Bond Investors 14 replies on “The Future of Economics” Nothing particularly striking here. Nicholas Bloom says: “I am personally working on management practices: people in developing countries are poor because wages are low, and wages are low because firms are very unproductive, and firms seem to be unproductive in large part because of bad management.” Like so much else in the real world, most issues cannot be explained by one factor. Where labour is plentiful whether locally or via migrant workers, pay may still be low in a relatively well run place. Owners get most of the gains while the government aids the owners by providing food and fuel subsidies to the workers. It’s a recipe for a ‘middle income trap.’ As for uncertainty among consumers and investors as a cause of low growth in the developed world, this is a Republican talking point. Stagnant wages? Owners of capital getting the biggest share of economic returns in 60 years? 5% of the population responsible for 37% of consumer outlays? Raj Chetty says he will try to identify the determinants of intergenerational mobility, with an eye towards finding policies that increase equality of opportunity. Should we be focusing on increasing access to higher education? Changing the structure of elementary schooling? Revamping the tax code? A second set of projects will explore the implications of behavioral economics for policymaking. There’s nothing new here but they are important issues. With political polarisation, most people who want to know the pertinent facts, do so already. Xavier Gabaix says: “Progress in understanding limited rationality will lead to progress on answering the concrete questions. Low levels of growth are in part due to misapplied cognitive heuristics that lead people to be timid, inert, and gullible.” That seems interesting. ‘the biggest unanswered question in economics is the status of the rationality postulate: the decision to analyze actors as utility maximizers with consistent preferences. [peter leeson] +1 ‘The most central open question in economic theory, as I see it, is how to model realistic economic agents. Traditionally, economists have relied on the rational-actor model, but it is clear that it is just a rough caricature. [xavier gabiex] +1 I am not dart throwing fan, so I am sorta amused by this crew throwing darts at everything but the target. Growth. You’d think it was something that simply came out of thin air. A given. Just was. Just is. Just will be. Those guys and gal are in for one nasty suprise. There are 7 bill folk on this planet. Lets just make a Miltonian assumption and pretend there will be no increase beyond this number. So if some want to ‘grow’, then others will have to un-grow. We cannot all grow together, even at different rates. Unless someone has found an inexhaustibe supply of liquid hydrocarbon fuel that is. Nat gas, solar, wind and hydro are not up to replacing LHF as the global energy supply of LHF as these fuels go into decline. The ‘alternates’ can readily replace 40% of LHF needs, the next 30% is iffy – both these numbers are highly dependent on the level of your existing technical sophistication and the maintained quality of your energy infrastructure. The remainder is unreachable. That leaves a 30% energy gap. That’s an awful lot of un-growing. Its worse if the number of folk keeps increasing geometrically. Growth goes over that Seneca cliff. Those pesky human folk are doing geometric growth real well, but LHF growth is flattish. Something will give. The Irish population was growing geometrically until 1845 – then what happened? @BWS, There isn’t a practical limit to recoverable energy. If all else eventually fails, plenty of geothermal will be recoverable using fracking-like technologies to create channels to heat water. For the foreseeable future, there won’t be a general shortage of energy, simply because so many more sources of energy are coming online, and because recoverable gas and oil reserves are shooting up with better technology and high oil prices. The reasons to be concerned about liquid hydrocarbons are that they account for a significant chunk of all energy consumption, and they are handy for powering transport. It’s not possible to shift away from them instantly, but over time it will be straightforward to ramp up production of energy from other sources, and to substitute electricity, hydrogen or gas for the petrochemicals that go into our motor vehicles. The net implications are that the cost of energy may go up Or it may go down, depending on how recovery technologies develop. The shifts in energy infrastructure required will be over a timeframe of decades, just like we are already used to. In short, there are plenty of things in the world worthy of panic, but the supply of liquid hydrocarbons isn’t one of them. There are so many genuine concerns by each of the economists to improve the well-being of everyone including those in under developed countries. I can only assume they still imagine that banks are intermediaries which lend existing money. This harmless model of banking hasn’t existed for decades and today banks create the money they lend and record a matching debt. To me this is obviously the root cause of the debt crisis and indeed many of the world’s social problems. It is also the case that when a loan is repaid to a bank the money doesn’t exist anymore. The banks liabilities go down as a result of the drop in the borrower’s current account. And their assets go down since the borrower’s promise to repay is lower too. The banks balance sheet contracts and the money has effectively been deleted. This is why reducing our debts doesn’t leave us in a better position financially. The introduction of debt-free digital money carefully created by Central Banks for their Governments could ease the debt burden almost overnight. Indeed to try to resolve the debt crisis under the current debt based system seems so illogical. Regardless of Sensible Money’s proposed reform of the monetary system some of you may find our analysis of how unique this recession is insightful. A good 9-page document for this can be downloaded at; http://sensiblemoney.ie/data/documents/Controlling-the-Need-to-Implement-New-Taxes.pdf Ireland’s attempts to stem the decline in property values is an old ploy. Indeed puffing up property values is a mainstay of modern government. The link outlines Veblens ideas on ghe subject. michael-hudson.com/2012/07/veblens-institutionalist-elaboration-of-rent-theory/ @BCT: I’m not in panic mode, yet! But LHFs are un-substitutable. They are unique chemicals. Electricity is a generated energy so it sits on a foundation of another energy. Hydro, solar, wind, geo, bio, nuclear, etc. are complements to LHFs. If LHFs falter, and they look a tad dodgy at the moment, the others are stalled. Anyhow, its our geometrically increasing population that will do the damage. No physical-based resource can match this rate of growth. Our economic systems are embedded in a physical system, a system whose technology (no matter how wonderful) has physical limits that cannot be exceeded – except in Terminator. Hence my comment. One man’s growth is another woman’s un-growth. You neatly made my point about technology: only those with the best will be able to avail, the rest will go into the skip of history. A maintained technology without energy, or energy without a maintained technology cannot do work. And it all about work – “Let the Watts do the walking!”. Its the simple things that catch us out. Lets say we here in Ireland consume the equivalent of 5 liters of LHF/person/day. Some consume more, some less. Now consider ‘gifting’ our standard of living to one bill folk in the under-developed world. That is some nightmare vision! And you still have 4 bill to go! If in the US they cannot maintain their own infrastructures what chance for the less engineeringly endowed? @BWF, Most energy related uses of liquid hydrocarbons are substitutable by all of those energy sources given the adoption of electric or hydrogen transport technologies. They are also substitutable by liquid gas technologies, and the supply of gas will be plentiful for at least some decades. And our population is not increasing geometrically. The rate of growth is slowing dramatically. Here’s what the UN is projecting. 3 Billion: 20 October 1959 4 Billion: 27 June 1974 5 Billion: 21 January 1987 6 Billion: 5 December 1998 7 Billion: 31 October 2011 8 Billion: 15 June 2025 9 Billion: 18 February 2043 10 Billion: 18 June 2083 With rising incidence of cliamte change and strong demand in the big emerging economies for common commodities, drought or a slight pickup in economic growth can trigger a price spike. 70% of all water is consumed by agriculture and 12% by energy production. In Uganda, water shortages have led to rising energy prices, which led to the use of more wood fuels, which led to deforestation and soil degradation that threatened the food supply. Cheap commodities underpinned economic growth for much of the 20th century but that situation has changed dramatically over the past decade. By the year 2000, the world had become accustomed to relatively low international food prices when price inflation-adjusted food commodities were below those recorded during the Great Depression. However, since 2003, the prices of commodities have risen to levels not seen since the early 1900s. @BCT: Thanks for your reply. Lets leave the energy bit here for the moment since this thread is about ‘young economists’ and their ideas for the future of their profession. My beef with them is that they have a poor grasp (or perhaps not displaying a mature grasp) of the real physical attributes of a real physical system and instead are relying on heroic assumptions and the logical arguments of mathematics. Their ‘modelling’ appears to be based on virtuality (well mostly) and not on reality. Example: A Production-Consumption (PC) economy is real and physically based. It makes stuff which is sold (traded) externally and after costs are paid down it leaves a surplus to be ‘distributed’. This surplus is the ‘hedge’ against a reduced level of future income (debts are negative future income). Some of the surplus may be invested in better technology to improve productive effort. But you better have a market for the ‘extra’ stuff you make. The margin is reached when you ‘robotize’ production. Robots are globalizable labour units. Once you neuter your PC economy by ‘offshoring’ and rely (mainly) on a service-based FIRE economy you will encounter a nasty outcome. You cannot accumulate a sufficient surplus (over time) to shore-up the decline in future income if you simultaneously rack up a geometric rate of increase in your debt levels (your future income is being decremented geometrically). It has taken 4 decades and this is exactly what has happened. Folk were warned – repeatedly about this and seemed to have ignored the warnings. I see no evidence that the young economists are aware of this divergence between positive-income and negative-income. Perhaps they are. Cobb-Douglas modelling of production does not include high-density (HD) energy as a factor. There is a causal relationship between the level of input of HD energy and GDP. More HD energy in, more GDP out – but the total embedded HD energy in all the physical parts of the GDP output is always less than the total HD energy input (Joule for Joule). There is a ‘hidden’ amount of embedded in all technology. This cannot be discounted when you come to aggregate GDP increases. Robert Solow tried to model energy input v GDP otput and ‘failed’. Still, he was rewarded for this failure. Now if our ‘young economists’would like to get their heads around this HD energy – GDP output conumdrum their prognostications might be different. I believe its known as Lateral Thinking. Hey BCT! Check out fron page pic on http://www.nytimes.com great advertisment for modern technology! @Brian Woods Snr great posts. I heard somewhere that the real name for economics is political economy. It is one one extra word, but when you add the political to the discipline, it becomes more obvious that the discipline has a role to play outside of “science”. @ Bklyn_rntr: Bingo! Political Economy it is and always was. Its just that the dy/dxer crews got the upper hand (numbers are very seductive) and it was “off to the races”. You can model economic activity, but only in a rough-and-ready qualitative manner. That will not win you any ‘prizes’. The current math-based modelling crews are in a bad pickle. Go back or go o’er? That is their dilemma. This should be interesting! Comments are closed.