Symposium: Renewing Economics by Diane Coyle
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- Authors: Diane Coyle
- Published: March 4, 2024
Context and critique of standard welfare economics
- The formalization of economics in the 1950s and ’60s occurred in the context of a manufacturing sector that drove growth and employment, producing standardized goods, and trade was dominated by finished goods rather than components.
- Keynesian economics shaped the categories of statistics gathered in the System of National Accounts and in the linear input-output models and macroeconomic models newly built by econometricians.
- The branch of “welfare economics” asserts that market outcomes are the best attainable if certain key assumptions hold. Those assumptions, as described in the source, include:
- People need to have fixed preferences—including for things that do not yet exist.
- All goods need to be “rival,” or able to be consumed only by one person; many goods are nonrival—from the atmosphere to public roads to digital movies.
- There must be no externalities such as pollution or CO2 emissions.
- No firms can have market power—there must be perfect competition.
- There must be constant returns to scale as production levels increase.
- Kenneth Arrow’s “impossibility theorem” (1970s) shows it is never (on very reasonable assumptions) possible to determine the welfare of society as a whole by adding up the welfare of individuals.
- For at least the past 40–50 years, the absence of solidly grounded welfare economics has been an uncomfortable vacuum in economics, leaving policymakers to rely on practical tools such as cost-benefit analysis and growth maximization despite theoretical shortcomings.
Drivers of economic change undermining mid-20th-century assumptions
- Environmental constraints:
- The urgency of addressing the environmental crisis—both climate change and loss of biodiversity—means nature can be the binding constraint on economic prosperity.
- In the mid-20th century the binding constraint was shortage of physical and human capital; in the middle decades of the 21st century, nature will be the binding constraint.
- Structure of production and technology:
- Production is highly globalized and increasingly intangible (in terms of economic value added, material inputs matter as much as ever).
- Global production is enabled by digital communications and logistics; digital platforms are becoming the preeminent business model.
- There are pervasive economies of scale and concentration of market power in many countries and sectors; a small number of firms can have significant market power.
- Massive movement of data and ideas across borders makes pinpointing the location of value creation next to impossible.
- Rapid development of artificial intelligence indicates the technological transition will endure.
- Measurement, taxation, and regulation challenges:
- There are no definitions and statistics to adequately monitor the contemporary economy.
- Governments find it difficult to collect taxes and regulate corporate activities given the intangible, globalized nature of production and data flows.
Implications for policy, measurement, and welfare analysis
- The prevailing default mental model—constant returns, competitive economy of manufactures—is no longer appropriate for many sectors.
- Economists must:
- Make a major effort to develop natural capital statistics.
- Devise new ways of measuring the social cost of nature’s services.
- Integrate analysis of the human economy and nature in a meaningful way rather than relegating environmental issues to isolated “externalities.”
- Practical policymaking cannot rely solely on legacy tools; new toolkits are required to handle nonlinear, interdependent, intangible global economic structures with concentrated market power and emerging inequalities.
Research agenda and the challenge for the economics profession
- Academic economists are aware of the changing economy and there is exciting research underway, but:
- There is not yet a 21st century synthesis analogous to Keynes’ vision paired with the statistics to measure and forecast the modern economy.
- Economists, especially in policy roles, often default to older mental models due to the lack of updated frameworks and statistics.
- Key research and policy questions posed:
- How should economists analyze the highly nonlinear, interdependent, intangible global economy, with its concentration of market power and new emerging inequalities?
- What do good outcomes look like in the digital, intangible, but nature-constrained economy?
- What needs to be measured so policymakers can tell whether outcomes are improving?
- What new toolkit can economists provide to help policy decision-making?
- The author references her book Cogs and Monsters as a discussion of these challenges.
Source: Symposium: Renewing Economics. Diane Coyle. March 2024. F&D Magazine.
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- Renewing Economics