The geopolitical conquest of economics - Jordan Times

PARIS — From the Huawei affair to the AUKUS spat and beyond, a new reality is shaking up the global economy: the takeover, usually hostile, of international economics by geopolitics. This process is probably only just beginning, and the challenge now is learning how to live with it.

Of course, economics and geopolitics have never been completely separate domains. The post-World War II liberal economic order was designed by economists, but on the basis of a master plan conceived by foreign-policy strategists. Postwar US policymakers knew what they wanted: what a 1950 National Security Council report called a “world environment in which the American system can survive and flourish”. From their perspective, the free world’s prosperity was the (ultimately successful) conduit to containing and possibly defeating Soviet communism, and the liberal order was the conduit to that prosperity.

But although the ultimate objective was geopolitical, international economic relations were shaped for 70 years by their own rules. On occasion, concrete decisions were skewed by geopolitics: for the United States, providing International Monetary Fund financial assistance to Mexico was never equivalent to providing it to Indonesia. The principles governing trade or exchange-rate policy, however, were strictly economic.

The end of the Cold War temporarily put economists on top. For three decades afterward, finance ministers and central bankers thought they were running the world. As Jake Sullivan (now the national security adviser to US President Joe Biden) and Jennifer Harris pointed out in 2020, management of globalisation had been deferred to “a small community of experts”. Again, there was an underlying geopolitical aim: in the same way that economic openness had contributed to the Soviet Union’s collapse, it was expected to bring about China’s convergence towards the Western model. But for the rest, interference remained limited.

The rise of China and its growing rivalry with the US brought this era to an end. With the failure of convergence through economic integration, geopolitics has returned to the fore. Biden’s focus on the Chinese challenge and his decision not to dismantle the trade restrictions put in place by his predecessor, Donald Trump, confirm that the US has entered a new era in which foreign policy has taken over from economics.

In China, there was no need for such a takeover. Although the country’s leaders routinely pay lip service to multilateralism, both its historical tradition and governance philosophy emphasize political control of domestic and especially foreign economic relations. The transnational Belt and Road Initiative embodies this model: as Georgetown University’s Anna Gelpern and co-authors recently documented, Chinese loan contracts to finance infrastructure projects in developing countries are opaque, involve political conditionality and explicitly rule out debt restructuring through multilateral procedures.

Even in Europe, where belief in the primacy of economics was most entrenched, things have begun to change. “The beating heart of the globalist project is in Brussels,” US populist agitateur Steve Bannon declared contemptuously in 2018. This was in fact true: the primacy of common rules over state discretion is part of Europe’s DNA. But the European Union, too, is now waking up to the new reality. Already in 2019, European Commission President Ursula von der Leyen spoke of leading a “geopolitical commission”.

The question is what this renewed geopolitical focus actually implies. Most foreign-policy experts envision international relations as a power game. Their implicit models often assume that one country’s gain is another’s loss. Economists, on the other hand, are more interested in promoting the gains that cross-border transactions or joint action yield to all parties. Their benchmark concept of international economic relations envisions independent actors voluntarily entering into mutually beneficial arrangements.

In a 2019 article, Sullivan and Kurt Campbell (who now directs Asia policy at Biden’s National Security Council) outlined a plan for “competition without catastrophe” between the US and China. Their scheme combined across-the-board trade reciprocity with China, the formation of a club of deeply integrated market democracies (access to which would be conditional on economic alignment), and a policy sequencing in which competition with China would be the default option, with cooperation conditional on China’s good behaviour. They also rejected any linkage between US concessions and cooperation in the management of global commons such as climate.

This would be a clear strategy, but the Biden administration has not yet indicated whether it intends to pursue it. US middle-class economic woes and the resulting enduring domestic reluctance to open up trade contradict geopolitical aims and make America’s intentions hard to read. Foreign-policy types may have prevailed over economists, but domestic politics reigns supreme, and clear-mindedness is not what is guiding action.

China, meanwhile, has flatly refused to carve out climate cooperation from the wider US-Chinese discussion, and recently wrong-footed the US by applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a regional trade pact that president Barack Obama designed to isolate China but that Trump chose to quit. Instead of being isolated, China is trying to outmanoeuvre the US.

Paradoxically, Europe is getting closer to defining its stance. It still believes in global rules, and gives priority to persuading partners to negotiate and enforce them, but it stands ready to act on its own. “Open strategic autonomy” — its new buzzword — seemed to be an oxymoron. But the EU now seems to know what it means: in the words of senior EU trade official Sabine Weyand, “work with others wherever we can, and work autonomously wherever we must.” In a more geopolitical world, this may well become Europe’s credo.

Jean Pisani-Ferry, a senior fellow at Brussels-based think tank Bruegel and a senior non-resident fellow at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa chair at the European University Institute.

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The geopolitical conquest of economics - Jordan Times
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Change is needed in the next generation of economists - Financial Times

Diane Coyle is Professor of Public Policy at the University of Cambridge and author of Cogs and Monsters: What Economics is, and What it Should Be

Economists have an influential voice in debates about society and politics, and with that influence comes responsibility. The role of the discipline in shaping policy rests on the formal and informal roles economists hold in giving advice to governments and businesses. This gives economic ideas and research power over the kind of society we have. And for all its strengths, economics is failing to meet the needs of our times.

The profession’s advisory status started in World War II, including the development of concepts and measures (such as GDP) that are still used today. The UK’s Government Economic Service was founded in 1964 and now has around 2,000 members. Other economists work in regulatory bodies, local authorities, businesses and think tanks.

Many economists think of themselves as engineers, or plumbers (as described by Nobel laureate Esther Duflo), or (in Keynes’s famous quote) dentists. These metaphors allude to the importance of economics as applied statistics in analysing contexts such as how to raise taxes most efficiently, or where infrastructure investment will most boost productivity, or which university degrees have the highest social and private return on the money spent. This kind of analysis is powerful, can be extremely rigorous and makes an important contribution to policy debates.

However, there are two key shortcomings that need to be corrected if economics is to stay relevant to the biggest challenges facing society today, from climate change and biodiversity collapse to the excessive power of big corporations.

One is the absence of ethics. It is not that economists are less or more ethical than any other profession. Rather, that many think of the values and ethics of decisions as separate from ‘positive’ economic analysis. The urge to be as objective as possible, and to base analysis on data and rigorous statistical techniques, is of course welcome. But it is a delusion to think the value judgments involved can be delegated to others — elected politicians, say — or to believe that the economic analyst can stand apart from the society they are analysing.

There is an implicit moral framework underlying the economic analysis of which policy will give the better outcome. Is one tax more efficient than another? It depends what the definition of ‘efficiency’ is. Yet ‘welfare economics’, the branch concerned with questions like these, is scarcely taught now. Just as AI is having an ethics moment, economics needs one too. Engineering society is inherently value-laden, and economists are part of society, even if not very representative of it.

The second shortcoming is the failure of economists to update their assumptions, benchmark models and ways of working to reflect the economy of today. For instance, digital technology is pervasive in everyday life and work but is still largely invisible in economic statistics, even lagging behind initiatives to incorporate nature into economic measurement.

The notion that people are individual maximisers, with fixed preferences uninfluenced by others, was always incorrect but is absurdly so in an age of social media driven by advertising revenues. The benchmark needs to flip to reflect mutual interactions. This is starting to happen, with growing interest in evolutionary economics, economic narratives and agent-based modelling, but these are not mainstream and far from textbooks. Economics needs to stop being inward-looking and work with (real) engineers, climate scientists, computer scientists or ecologists for an integrated analysis of societal challenges.

Many economists will point out that good research is being done. Young researchers are flocking to areas such as environmental economics or digital markets. But new approaches are not internalised across the profession, and are far from mainstream policy debate. For example, in discussions of monetary policy and inflation prospects, the self-fulfilling and narrative aspects rarely feature prominently, while we are all daily taken by surprise by news of unexpected economic bottlenecks. There is no data to analyse these events because economists have not thought of markets as ecosystems vulnerable to collapse and therefore not prioritised collecting the data needed to understand them.

Economics is changing and I am optimistic that the next generation will ensure that economists continue to deserve their influence. But the challenges we face are immense and urgent, so the sooner this change happens, the better.

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Change is needed in the next generation of economists - Financial Times
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Behavioral Economics Is Fine. Just Keep It Away from Our Kids - National Review

(anyaberkut/Getty Images)

A recent scandal within the field reminds of the benefits of plain old economics.

While universities exist to teach knowledge that stands the test of time, professors invariably face pressure to teach the new hot topic.

In economics, a field built on the premise that people rationally respond to incentives, there has been a push to incorporate more elements about psychology and human irrationality in our effort to understand why things work in the way that they do. The result has been to create a subfield called “behavioral economics.” Defenders of this field of study claim that such incorporation allows economists to better explain and predict behavior and improve policy.

This sounds promising enough, but students signing up for courses shouldn’t take the bait. While some results from behavioral economics are rock solid, other popular results are overturned within a few years. Indeed, most behavioral-economics results are based on research that is too preliminary for early college students, who ought to be learning proven insights within the field. For that established body of scientific knowledge, they should instead turn to plain old economics.

The most recent scandal within behavioral economics shows the problem of reflexively jumping on its often trendy results. Dan Ariely, a famous researcher within the field and author of the best-seller Predictably Irrational, allegedly fabricated data for a 2012 paper about dishonesty.

In August, Science reported that

some researchers are calling Ariely’s large body of work into question after a 17 August blog post revealed that fabricated data underlie part of a high-profile 2012 paper about dishonesty that he co-wrote. None of the five study authors disputes that fabrication occurred, but Ariely’s colleagues have washed their hands of responsibility for it. Ariely acknowledges that only he had handled the earliest known version of the data file, which contained the fabrications.

Ariely emphatically denies making up the data, however, and says he quickly brought the matter to the attention of Duke’s Office of Scientific Integrity. (The university declined to say whether it is investigating Ariely.) The data were collected by an insurance company, Ariely says, but he no longer has records of interactions with it that could reveal where things went awry. “I wish I had a good story,” Ariely told Science. “And I just don’t.”

Writing for Buzzfeed News, Stephanie Lee adds:

The imploded finding is the latest blow to the buzzy field of behavioral economics. Several high-profile, supposedly science-backed strategies to subtly influence people’s psychology and decision-making have failed to hold up under scrutiny, spurring what’s been dubbed a “replication crisis.”

Ariely is not the first big name in behavioral economics to have data issues. It’s common for research results not to replicate — meaning other researchers conducting the same experiment find different results. Even Nobel Prize–winner Daniel Kahneman admits that he placed “too much faith in underpowered studies” in a chapter of his best-selling book Thinking Fast and Slow.

Behavioral economics as a field of study still has merit. Over the years, its researchers have made positive contributions to economics writ large, earning many of them Nobel prizes. The question at hand, though, is whether it should be taught at the expense of timeless knowledge — i.e., theories of opportunity cost, trade-offs, and supply and demand.

Any science must start with the basics. In my physics undergraduate education, I learned classical mechanics before the weird world of quantum mechanics. This pedagogical approach helps for two reasons. First, most of the world is simply better understood through classical mechanics. Second, without understanding the baseline, the oddities that occur within quantum mechanics have no reference point against which they can be contrasted.

The same is true in economics — and countless others, I’m sure. Across the board, when teaching the basics, we should leave the fads out.

We’ve all heard the cliché: A course teaches students how to think, not what to think. Too often, college courses actually do neither. Still, students should walk away from their introductory course with a toolkit to better understand the world. In economics, that means that they know how to use the concepts of supply and demand.

Consider a real-world example. Let’s apply both plain and behavioral economics to, say, the car market. Prices have gone up wildly recently. Why? A student versed in the work of Nobel Prize–winner Richard Thaler — who is the co-author, with Cass Sunstein, of Nudge, a book onto which some governments have latched as a policy-making tool — may conclude that this spike in prices is a bubble driven by irrationality on the part of buyers and sellers. After all, that’s the explanation given for the rise and fall of prices in the housing and stock markets by another Nobel Prize–winning behavioral economist, Robert Shiller.

Plain old economics argues that there is generally no need to resort to buyer irrationality or bubble mentality to explain why prices move in the way that they do. Instead, prices are determined by the forces of supply and demand, where each person is rationally responding to her incentives. While that statement is true, it doesn’t actually tell us much. We need more details. Luckily, a student who has taken Econ 101 can explain to us that the computer-chip shortage affected the market through the supply side. When the supply is reduced, prices go up. That price change then spilled over into the used-car market. Prices go up and down, reflecting the forces of supply and demand.

The challenge of teaching basic economics is more important than ever. Last school year, we lost two giants in the world of economics education: Walter Williams and William Allen. Williams, a professor at George Mason, taught basic economics in the classroom and through his syndicated column. Allen did likewise through his textbook (co-authored with Armen Alchian) and on his radio show. Without these powerful voices, it is up to the rest of us to pick up some of the slack of teaching basic economics this school year.

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Behavioral Economics Is Fine. Just Keep It Away from Our Kids - National Review
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Economics class: German workers strike for higher pay as eurozone inflation surges - Financial Times

This article picked by a teacher with suggested questions is part of the Financial Times free schools access programme. Details/registration here.

Specification:

•  Inflation, AD & AS, market failure and government intervention

Click to read the article below and then answer the questions:

German workers strike for higher pay as eurozone inflation surges

• Distinguish between real and nominal wages.

• ‘Increasing numbers of German workers are demanding higher pay amid rising inflation.’ Explain the impact of rising inflation on real wages.

• ‘Widespread demands for higher wages could start a self-fulfilling inflationary spiral.’ Explain what is meant by a wage-price spiral.

• ‘Propelling inflation higher are rising energy costs and supply chain bottlenecks.’ Evaluate the extent to which governments and central banks can take effective action to ameliorate these upside inflationary pressures.

Gavin Clarke, Emmanuel College

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Real World Economics: When good intentions go bad - TwinCities.com-Pioneer Press

Todd Buchholz’s “New ideas from dead economists” is a classic little history of economic thought. But sometimes one must go back centuries to dead theologians and philosophers to understand contemporary issues.

Edward Lotterman

That is the case for Minnesota Attorney General Keith Ellison’s action against Sparboe Eggs — so taken because the prices the company charged for eggs during some months in 2020 exceeded a limit mandated in Gov. Tim Walz’s COVID emergency orders.

To help understand this kerfuffle, one can go back to 13th century Catholic theologian Thomas Aquinas, Greek philosopher Aristotle and 16th century Protestant reformer John Calvin.

The core principle here is that of “just price” — a doctrine that has caused more hunger, suffering and waste of resources than nearly any other idea in western philosophy. Yet it remains strong in Catholic social thought and in the secular political and economic cultures of Latin America. It is big among U.S. progressives too.

It is also one of those ideas — like the rent control initiatives currently being considered in both Twin Cities — that universally maddens economists across a wide ranges of political affinities or schools of view within their discipline.

Understand that prices are not just ad hoc, isolated numbers. They are key in complex information-generating and incentive-transmitting social systems that promote efficient use of resources to meet people’s needs. Yes, market systems don’t work perfectly in all circumstances. Often victims are created. But they usually are better than alternatives — especially when cautious, prudent measures to correct “market failures” are applied. Prices should not be dictated, nor their movements quashed, without deep consideration and for important reasons. Limiting price rises to an arbitrary percentage during an epidemic in which the incomes of the large majority of households did not suffer do not meet these standards.

One needs to look at historical real-world outcomes. Economists dislike rent controls because it is impossible to find a historical case where they did suppress housing supply — either construction or the offering of more rental housing, thereby actually raising prices for those entering the market, disincentivizing home ownership, with resulting benefits flowing more to higher- rather than lower-income people.

Similarly, in the old days, religious scholars Calvin and Aquinas railed at grain merchants with full warehouses who raised prices after short harvests. If they had grain in store, they should continue to sell at pre-shortage prices, the theologians thought. After all, the goods had been produced even before rains began to fail or frost hit.

The problem is that if we ban any increase in price in times of scarcity, we also kill incentives to build warehouses to guard against future scarcity. And these worthy theologians never proposed any remedy for the merchant when a bumper crop depressed prices. Calvin did not order consumers in Geneva to buy grain at above-market prices just to keep merchants from losing money. Nor did Gov. Walz or his well-meaning cohorts in other states with similar price-limit edicts.

The same doctrines applied to trade. If a Venetian merchant sent five ships to Constantinople and one foundered on the way back, was it permissible in the ideas of well-meaning theologians for him to charge more for the remaining cargoes when landed on the Rialto? No. The loss of a ship was the will of God. Spreading the cost of that loss was sinful, an attempt to evade the will of God.

Similar situations arise today. If a hurricane down trees, leaving hundreds of thousands without power, some enterprising individuals fill rental trucks with chainsaws and generators swept off the shelves of big box stores in the north. Driving through the night, they soon are parked somewhere, selling saws and generators at double the price. People sitting in comfortable chairs watching TV news are outraged at such gouging, such greedy advantage-taking of those in need! Yet they themselves don’t rent trucks to drive south filled with tools that they will sell at cost plus a few bucks for gas.

Granted there are situations where wage and price controls are the least-bad alternative, such as major wars. These also usually involve a vast rigmarole of rationing and hordes of workers tallying costs, quantities and allowable prices as the Office of Price Administration did during World War II.

This is imperative in some situations. The real historical example of allotting “Dresser couplings” is part of Herman Wouk’s novel “War and Remembrance.” These allowed the quick and inexact connection of steel pipe without elaborate threading. They speeded dropping engines into wooden landing craft. They also permitted connecting successive sections of the enormous gaseous-diffusion cascade at Oak Ridge, Tenn., for bomb-grade uranium. There wasn’t time or information for markets to work.

The impulse to keep anyone from sinning seems a natural one to some, but they leave objective questions unanswered. Why a 20 percent price limit rather than 17 or 24? Why eggs but not sauerkraut?

Many food prices fluctuate all the time. Why cap one that is just coming off a five year low just as one that is at a three-year high? What was magically “just” about the particular set of prices in effect just before the price controls were imposed? Egg prices rose far more dramatically when millions of Minnesota chickens died of avian flu in 2015 and they subsequently plunged to historic lows in the year prior to COVID. Government did nothing in either case.

Proponents will say that we need to protect the poor. Yet when price caps bite, there usually are shortages — as would happen with rent controls. If one has to hunt for eggs during a pandemic, who can do so more easily? Mid-level earners working safely from home, with two computers to check prices and availability, plus two vehicles to snatch up suddenly-discovered stocks? Or the 80-year-old pensioner or single mother living in a rental who must take a bus and walk 10 blocks to scope out one supermarket? As with rent controls, in real life, most of the benefits accrue to those far from needy.

In a historic situation such as a pandemic, helping the most affected and poorest to continue to meet their needs is an admirable and essential function of government. There are efficient and proven ways to do this, particularly if a system is planned and ready to be implemented ahead of time. Ad hoc price controls imposed on an arbitrary set of products at some arbitrary sweeping percentage increase cause more harm and injustice than they help or solve. Aristotle, Aquinas, Calvin and the lot were bright thinkers, but on “just price” they were not only dead wrong, but tragically so.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.

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Real World Economics: When good intentions go bad - TwinCities.com-Pioneer Press
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Fuel crisis and supply shortages are a product of the UK’s economic model - The Guardian

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Fuel crisis and supply shortages are a product of the UK’s economic model  The Guardian
Fuel crisis and supply shortages are a product of the UK’s economic model - The Guardian
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Facebook’s First Female Engineer And An Economics Researcher Launch Fellowship To Solve Complex Problems - Forbes

Daisaku Ikeda, the Japanese Buddhist philosopher, said, “No matter how complex global problems may seem, it is we ourselves who have given rise to them. They cannot be beyond our power to resolve.” Even while maintaining the confidence that all problems are in our power to solve, even the most cock-eyed optimist would acknowledge that our current systems for solving these problems are not up to the task. New models for partnering with, financing, and supporting those seeking to make profound change in the world are necessary. A new partnership between the South Park Commons and The Agency Fund strives to do just that. 

The South Park Commons (SPC), which describes itself as an “anti-incubator”, is a “community of builders, tinkerers, and domain experts that challenge you, encourage you, help you build and validate your ideas.” Ruchi Sanghvi, the first female engineer at Facebook and later a successful entrepreneur who sold her startup, Cove, to Dropbox in in 2012, launched this community to figure out her next move. “I started this learning community for folks who are like-minded to intentionally explore and learn and discover together what they were passionate about and want to work on next,” she said. SPC is inspired by historical societies like Benjamin Franklin’s Junto or the Bloomsbury Group. SPC also runs an early-stage investment fund “for people who dream big and build big too.”

Like SPC, The Agency Fund invests in big ideas. They inject philanthropic capital into technology-enabled solutions to help people, no matter where they are born, to live with self-determination. Temina Madon, the co-founder of The Agency Fund, comes from a background in development economics research. While big development projects can drive outputs and outcomes, there is a gap in their funding models. “They often don't make the investment in people's internal mental models, in improving their affective states, and we want to make those complimentary investments which we think are essential for people to play the protagonist role in their own development,” Madon explained. 

The new Social Impact Fellowship is a collaboration between The Agency Fund and SPC, where Madon is a member. “We built it together, we are funding it together. It is a program that marries the focus of The Agency Fund with the expertise, insights and community of SPC,” said Madon. This partnership focuses not only on solving problems for people living in poverty in developing markets but also on solving the problems that block people’s self-determination everywhere. “We want to support people with steep struggles. We want to support  formerly incarcerated people in the U.S, who don't have the kind of information they need for reentry. We want to support teachers who struggle in low income schools with the lack of agency in their classrooms,” said Madon. Interestingly, the fund will also invest in products originally designed for wealthy and empowered customers that can have positive spillover benefits for people living in poverty. 

In addition to $65,000 in funding, Fellows will go through an 8 week, virtual program. Learning will take place through forums covering topics such as social psychology, behavioral science, impact evaluation and evidence generation, personalization, building ethical organizations, and more. It seeks to bring tactics commonly deployed in the tech industry and to adapt them for a development context. “How do you customize or personalize interventions for variation across user groups? This is something that tech does easily because they have a lot of rich data on users demographics and their interactions, but is much harder to do in a development context. We want to blend what's being done in research with adaptive trials with the A/B testing and modeling that's done in the software industry,” explained Madon. Forums will be enhanced with peer-to-peer feedback sessions and tailored mentorship. 

Applications to the program are still open, but Madon and Sanghvi are glad that they are seeing diversity in the applicant pool so far. That being said, a program run out of the West Coast of the United States to solve the deep challenges of inequality and poverty needs to be intentional about seeking and supporting the applications of proximate leaders. The Fellowship is working with communities of data scientists in Africa and Microsoft Research in India to source applicants. “We're working through networks of engineers in countries where there is a lot of poverty and we're hoping to leverage people who have lived in those countries as Fellows,” said Madon. “We also want to help people who may not have that context but who have other skills to come in as co-founders and do some matching of expertise. We think that there's real value in co-founding relationships where people bring complementary skills,” she continued.

Sanghvi built products at Facebook that are used by more that ⅓ or the world’s population. She understands how to build technology at scale. Madon has spent her career identifying solutions for global poverty and economic development through innovative and rigorous research. The problems that create poverty and prevent people from exercising agency are systemic, but if any Fellowship is going to support the next generation of pioneering organizations to solve them, this one has promise.

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Facebook’s First Female Engineer And An Economics Researcher Launch Fellowship To Solve Complex Problems - Forbes
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