Henrietta Moore

The CIA use the term “blowback” to refer to the unintended consequences of an operation in which random acts of political violence occur without a discernible, direct cause, primarily because the public are unaware of the original action that precipitated the response.

The political disruptions in many developed countries in recent years have shadows of the same effect in which apparently random acts of political backlash make better sense when understood in the context of the effects on local economies and communities of decisions taken many decades ago to embrace a fully globalised economic model.

Popular protests in the EU and around the globe are fuelled by anger that governments cannot protect citizens from a global economic model that many believe is not working for them. While aggregate figures provide evidence for poverty reduction linked to GDP growth and global trade, evidence is increasing that such benefits are uneven and highly regionalized within countries.

The result is a significant percentage of national populations who feel left behind and excluded. The national economy is no longer their economy.

Many academics are looking at the political and social developments of recent years and asking themselves what we missed when we pronounced the globalised economy as an irresistible path to the future only a few decades back.

The picture looks quite different today with as many people looking for ways to ameliorate the effects of economic disruption as there are looking for ways to maintain global trade flows. There is broad recognition that to move forward from here we will have to do a much better job of understanding what allows societies to thrive in a changing macro environment.

Politicians and governments are responding to eruptions of dissatisfaction with a mixture of appeasement and popularism without much evidence or research to lean on that could inform interventions that would truly make the right difference.

Yet the problems that people face are not neatly encapsulated in monetary values that can be resolved with redistribution. When people are dissatisfied it signifies a complex of disturbances to senses of place, the perceived strength of their communities and the degree to which they feel that they belong where they are or where they are belongs to them.

How should macroeconomic models take account of these new pressures, especially given their destabilizing tendencies? Should theoretical reflection turn to a new ethics of market economies that might help to reduce the gap between rich and poor? The difficulties here are significant, not least because models of structural transformation assume that market integration will lead to beneficial redistributional effects. In reality, this assumption is no longer valid, and long run trends in the G20 of declining wages and productivity growth are especially worrisome in the context of accelerating digital integration, AI and automation.

Given these changes, how should macroeconomics begin to tackle the key questions: what forms of compensation might be necessary; how should the relationship between social welfare and economic growth be rethought; how might a study of aggregate economic fluctuations be linked to a revivified political economy?

Existing models of structural transformation provide scant comfort in the face of potential structural unemployment and long run models of economic performance cannot plausibly be developed in the absence of considerations of societal well-being and political stability.

These questions cannot be addressed currently from within macroeconomics. As the economist Abba Lerner noted in the 1970s, ‘Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain’ (a weakness as fundamental as assuming that all actors are rational decision makers) (1972:259).

The result is a) an inability to coherently address structural inequalities; b) fundamental weaknesses in macroeconomic theories of structural transformation that cannot accommodate distortions caused by political institutions, vested interests, citizen demands and capability requirements; c) an absence of powerful theories or models for understanding contemporary connections between economic openness and social solidarity.

Traditionally, social justice has not been a primary concern of economics, but the close relationship between political institutions, citizen needs and perceptions, and successful economic transformation in the 21st century has laid down new parameters and created new forms of uncertainty and volatility. We need new pathways and ideas to explore how macroeconomics can take account of these new uncertainties, develop new macroeconomic thinking based on new models, and rework the relationship between macroeconomics and policy development.

You can read more about the progress of the project here.

And you can follow the Global Institute for Prosperity on @glo_pro.

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01 April 2019