Andrew S. Nevin
Canadian. Economist, Advisory Partner and Chief Economist at PwC Nigeria, working at the nexus of economics, strategy, and regulation
1. Why does economics matter?
Well, it does matter. I mean, it matters to everyone in the planet. I mean, it was by my good friend at graduate school, Brad DeLong, professor at Berkeley, who taught me that Karl Marx was a political scientist for a year, he was a sociologist for a year and he was an economist for the rest of his career, 30 years… Because he understood that at the end of the day, the economic forces are what really affects people’s lives and we all live in the economy.
With you, we earlier before we started filming, we discussed kind of the air that we breathe. Economics is the air that we breathe. And you really don’t… If you don’t understand that, you’re not going to be able to make lives better. So in a very profound sense, no one on the planet can escape the impact of economics. And I don’t think… While we might go through some criticisms in this session, no one should doubt just the importance of economics as a discipline, as a way of thinking, as something that affects all of us.
2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?
Yeah, I think this is incredibly critical question. I mean, the reality is that there are literally hundreds of thousands, if not millions of people around the world that have to do economic engineering every day.
And as you think about it from the policy sense, an example we always talk about is kind of the lifting of five or six hundred million people out of poverty. In China, in the practice of policymakers… I went to China for the first time in 1983, I lived there for 10 years, I saw this happening on that and practical people had to make practical decisions about economics every day. And it happens, as you know now, I live in Africa, I lived in Europe… Of course, we’re both Canadians, and so there’s a whole body of economic engineering that is going on out there every day. And as you said, it’s not just the policy makers. Also in private organizations. I work for a very large private organization. It has to understand what’s going on in the economy. It has to make its own reactions. We try to make a positive impact on it as well. So it’s all economic engineering.
The problem is certainly kind of, since my graduate school for a few decades and back in the early 80s, I think academic economics is in a sense kind of not come to the party. So you’ve had all these people who’ve had to go out and do economic engineering and they’ve done it whether they have a theory about it or not. But the people that have done academic economics, in a sense, I think have become disassociated from the academic engineering and that golf became wider and wider and wider.
I think it’s only in the last 10 years we’re starting to see that narrow in the types of things that academic economists, certainly the most famous ones, are very practical problems, how to lift people out of poverty. Now we’re talking about sustainable growth. We’re talking about inclusive sort of growth. And those are sorts of new things. But but for academics, it’s a long way back because certainly leading into the great financial crisis, I mean, really, when you look at the academics, there was one, of course, famous macro economist, very famous, who taught me and I won’t name here, who declared in two 2006 that macroeconomics was fully understood.
And then yet we then entered into the gravest financial crisis since the Great Depression, which just shows: no, it wasn’t well understood on that. So that gulf between the academic economists, the engineering economists is still out there. As I said, I think the last decade we’ve seen a lot more practical thinking coming out of the academics, and that’s good to see. But whether the academics are contributing or not, the people that are making policy, that are doing economics every day, they have no choice. They need to make decisions.
3. What role does economics play in society? Does it serve the common good?
Well, I think this is actually a very difficult question, and I think maybe the starting point is to take a bit of a step back and pose a question that certainly was never posed when I was in graduate school. And it isn’t posed very often. That, I think is very critical, which is: what is the purpose of the economy? So you’re an economist, whether you’re an economics engineer or whether you’re an academic economist or whatever you say, presumably has to be related to what the objective of the economy is or what the purpose of the economy is…
So your starting point has to be: what’s the purpose of the economy?
And I think a lot of the troubles that economics has had as a discipline is what what is… (interrupted)
What role does economics playing society and does it serve the common good?
Well, I this is actually a critical question, and I mean, the starting point has to be: yes, it should be serving the common good, it should be serving society. I mean, why would you be an economist if you didn’t want to serve the common good?
I mean, I could understand, for example, someone wanted to be a mathematician and do a purely abstract mathematics. But presumably, if you’re doing economics, it’s about people and it needs to serve the common good. I think the problem, though, is that economists have been very reluctant to really embrace this implication on that. And of course, we have lots of discussions and academic economists about normative and positive, and we want to avoid making value judgments.
But how do you tell if you’re doing good economics, unless you have some view about whether the economy is doing well? And of course, as I said a little earlier, the economy doing well has to in some sense mean people doing well. I mean, you can’t have a situation where the economy does very, very well and the people are not doing well. It just doesn’t really make any sense to me. The economy is something that we construct to ultimately serve people.
So, for example, we’ve all seen this conversation where we say the stock market is doing well, but people aren’t. And of course, the stock market is not the economy and it’s not the people or GDP… And you and I discussed many times, GDP is high, but if GDP is high, that does mean that the economy is doing well? How does the economy do well in the absence of people doing well in some way? The problem is, once you say, well, people need to do well in a well functioning economy, you’re then led to all sorts of other questions you have to really answer.
I mean, what does it mean to do to do well? You have to define something around the good life in some broad sense. Doing well means: how many people have to do well? Does 50 percent have to do well? Does 80 percent to do well, just 10 percent have to do well? I mean, in the last few decades, we’ve seen one percentage point… one percentage point zero, one percent do extraordinarily well. Does that mean the economy is doing well?
So I think that economics does need to serve the common good. But if we properly address this, an economist properly address it, it would force discussion and some answers around very difficult questions. And I think to the extent that economics is not serving the common good, a lot of it is the reluctance of people who are economists, again, the academic economists, to don’t really want to confront these questions, who think they’re out of bounds.
I guess my response to that would be, well, those are the questions that matters. So those questions being out of bounds just means that you’re becoming more and more irrelevant to it. And, of course, that’s what we discussed a little earlier in the discussion, which is where the economic engineers, they don’t have any choice. They’ve got to confront these questions because they’ve got to make decisions that affect millions or billions of people’s lives.
The academic economists have drifted away from this and the results have just simply become less relevant. So I would like to see, you know, the academic economists come together and just be more more relevant. But that requires taking on some difficult and at times value laden questions. Otherwise, there’s no real purpose to me to kind of abstract economics.
4. Economics provides answers to problems related to markets, efficiency, profits, consumption and economic growth. Does economics do a good job in addressing the other issues people care about: climate change and the wider environment, the role of technology in society, issues of race and class, pandemics, etc.?
Well, I mean, the short answer is economics doesn’t do a good job of addressing all these other critical issues to us. So if you go back to kind of the… Let’s talk about kind of markets. I mean, I think what is incredibly powerful about economics is they’re the people that really study the power of markets and markets are a fantastic way to organize things in certain circumstances or where they’re fit for purpose for the objectives.
But they’re only one way to organize. Let me give an analogy here, an example here. So, I mean, Americans watching this in the United States, you could argue that the National Football League is the most valuable sports franchise. It’s incredible. It’s exciting. I’m worried about head trauma at this stage, but it is something that so many people are involved in, so many people love to be part of. But at the end of the day, the system is essentially a communist system, the way it’s organized as a communist system.
There’s revenue sharing, there’s a draft. In fact, you have so little competition. I mean, all that’s happening, you know, you agree on the dates that you’re covered together. You agree on the rules, you agree on how the television revenue is shared. You agree on who sells peanuts and what part of the stadium where people park. So you have an incredible amount of cooperation to produce a very small amount of competition in a very limited space under certain very restrictive rules.
So, you know, that to me sounds like… let’s call it communism. The other very valuable sports franchise in the world is the English Premier League, so there you have Manchester United, Manchester City, Arsenal, clubs like that… That is a capitalist system… Of capitalism we’ll talk a bit more later in the program. But there are people keep their own revenue. There’s no such thing as a draft, the richest club simply buy the best players to move up the table.
It’s really quite cutthroat. The bottom three teams drop out of the league and go to another league entirely. And there was actually an American that bought a English Premier League team. We didn’t know that. So when his team got round, he was making money. But when his team got relegated, they weren’t close to bankruptcy. So that is a capitalist system. So then how do you choose between, let’s call it the communist system and the capitalist system?
Well, you can’t make that choice unless you have what the objective is. So if your objective is to have a sport where you have a high degree of parity and almost every team, but one I believe, has gone to the NFL Super Bowl, for example, that’s how you choose the system. Whereas if you wanted to have kind of the English top teams competing with people like Barcelona and Inter Milan in Italy and Bayern Munich, the top teams in Europe, you would want the kind of English premier system.
So the systems that we choose are related to what the objectives are. So how does this relate back to the question? So all the things you laid out, things like climate change, things like inequality, things like the environment, the role of technology, those are also part of the human experience. And I think the problem for economics has been… We have something very powerful to say about part of the human experience, but we’ve tended not to work with other people that have things to say about other parts of the human experience.
And I think economics is much more powerful as part of a kind of -let’s call it- holistic or a more complete view of what we’re trying to accomplish for people at the end of the day. So we have anthropologists, they have very important things to say about people. We have increasingly neuroscience, which has very important things to say about people. Obviously people who study the environment, and we all understand the last few years the kind of context of the climate emergency, how critical that is.
All of those are also critical parts of the human experience. And I think economics would make a bigger contribution to the common good, like we talked about last question, if economists were working with these other disciplines and of course, when I was studying economics, started in 1980, we didn’t really have anything to do with other disciplines. And there’s also always been this kind of hubris about economics. We could do mathematics. We had numbers. We had complex and linear linear equations, multiple linear equations that required advanced mathematical techniques to solve.
So we kind of separated ourselves from the other disciplines. But the result is that our contribution to the common good, I think, is being has been diminished. So we haven’t had enough to say. And of course, if we come to a question like the environment, I think the contribution of economists needs to also be understood to be part of the solution. We don’t have the answer to all of those issues. We have part of the answer and we need to work with others.
But I think you’re going to see increasingly much more powerful insights coming up by the combination of disciplines. To take one example, the neuroscience I mentioned, I mean, I think economists approach this in a very simplistic way. We had condemned Tversky start thinking about the bounds of rationality and economics. But when you look at what the way neuroscience understands human behavior, that is so much richer than what economists have. And if we combine forces with economists and neuroscientists to think about the way people behave beyond just kind of the very basic behavioral economics we see in the last 10 or 15 years, I think we’ll get much more powerful insights.
And I also think economists would really find it fascinating to work with people from other disciplines on that, and it would kind of expand. And we have a much more holistic view of what people are about.
5. As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?
Well, it would be a heartwarming thought to think that economists could be held accountable, but I have to say I’m skeptical of how that would actually work. If we think about how we held…
First off, we don’t hold people accountable enough. So you take the great financial crisis, as far as I can tell, in the United States, there was not a single bank official that went to jail, for example, despite, you know, the impact on tens of millions of people, ordinary people in the United States and around the world on their lives. So there was no real accountability there. The economists, I mean, at the end of the day, I mean, if you compare them, say, to lawyers or to medical doctors… Lawyers, medical doctors have a code or a standard of practice, you compare to some semi objective sense where they’ve met that, you can hold them accountable, they can lose their license…
In some cases, they can be criminally liable. Accountants, in fact, are also in that scale. But I think a little bit strategy consultants and economists are two groups that have gotten away with saying, in effect, anything and with no accountability. So if we go back, I mean, I remember well, I was actually taught by Jeff Skilling when I was at McKinsey in a McKinsey course. And of course, you know, we had a little over a decade later, we had the Enron scandal on there, and he was held accountable.
And, of course, Arthur Andersen disappeared. So you can say in a sense they were held accountable. But there were many strategy consultants that were serving Enron who quietly put away all of their decks that extolled the Enron business model and never spoke of it again and no accountability. And, of course, their stories in the press now about not just the ethical judgment and lapses in judgment, a strategic sense but also ethical lapses in judgment by strategic consultants that are not really held held accountable.
So those two groups, strategic consultants and economists, I think they kind of got a little bit of a free pass. And I’m not sure there’s a way to hold them accountable. I think the only solution we have is that the people that are kind of listening to them have a degree of sophistication to understand what’s fit for purpose and what has to be thought about more broadly. So I think, I hope no policymaker takes what a macro economist says as kind of the truth of what they should do next for their country.
I think it needs to be thought of to the extent it’s valuable in the context of all of the things you’re trying to do for the country, some of which you alluded to earlier around the environment, around today’s age, race relations, of course, around geopolitical relations. So the economics can only be a part. So I don’t think we can hold the economists accountable. I think the decision makers just need to be sophisticated enough that they’re able to kind of put the economics piece into into the jigsaw puzzle.
They’re trying to to solve on that. I’m not putting some economists in jail. This is maybe, as I said, a heartwarming thought, but I’m not sure it’s going to solve all our problems.
6. Does economics explain Capitalism? How would you define Capitalism?
Well, let me start by saying in general, I’ve talked a little bit about this, I think one of the problems with economics is that it hasn’t been prepared to take on the big questions. And as I said, part of the big questions tilting necessarily over into kind of questions about values that need to be addressed. So I think, does economics explain capitalism? I don’t think so. I think people have tended again to shy away from the kind of the grand treatise in the last 30 years.
And that was what was so, so amazing about Thomas Piketty. He came up with a very big question about income inequality empirically done over decades and kind of the world said, wow, we need to really reflect on that. So all credit to him for putting up the big picture on there. So I don’t think the economics profession has, you know, gone in the direction of trying to explain capitalism. But if I step back for a minute from, I would say, I’m always a little bit reluctant on the labels.
We have human systems and the way they’re organized varies greatly, but sometimes those common characteristics. So if you think of the health system in most of the OECD countries, right… So you have publicly funded health system. So the states involved in some cases, it’s delivered by a private actor. Of course, the equipment and the pharmaceuticals that are part of the system are delivered by other private actors who are profit driven. So let’s call them capitalist entities and that system more or less work.
In some countries it works better. I think France, for example, delivers very good health outcomes. For Canadians, I think most Canadians are relatively satisfied with our socialized health care, but the system itself is a mixture of different kind of approaches. And I think it also shows one thing that’s critical for economics: economics, or the economy, is a human construct and the subsystems within it are a human construct. The way we can make those human constructs is up to us at the end of the day. Within limits, because we try to do something that the people are going bend the rules or can’t follow or is impossible they are gonna do. But we can have quite different ways of organizing in the capitalist principles. In most systems it will play a role. So, again, if we take education, if you think of all OECD countries in primary and secondary education, most education is delivered in a state delivery system. So actually, the teacher, unlike the doctors, in many cases, the teachers are employees of the state. But the textbooks are supplied by private capitalist enterprises.They’re out to make a profit. They’re trying to get you to use the new textbooks. So, again, it’s kind of a mixed system. Or you take an example like Hong Kong. So I think many people would, if they thought of Hong Kong, they think perhaps it’s the most capitalist system in the world. But again, Hong Kong has socialized medicine where the government owns all the tertiary hospitals and pays for the primary health care. It also, in fact, 50 percent of people in Hong Kong live in government owned housing.
So, again, you have this mixed system. So I think the term capitalism is critical. But again, like we’ve talked about the NFL and the English Premier League example, you need to get into the system details and which parts of it work well with a market mechanism, private capital, which ones work better with a more socially directed sort of system, either for reasons of efficiency in some cases and reasons of fairness. I mean, one of the other critical aspects to this is… There was an incredible book written by Fred Hirsch who sadly died when he was young, a book written in the 1970s called The Social Limits to Growth.
And he had two incredible insights, one of which is the social limits to growth and what happens as we become wealthier and we all pursue more positional goods and get better off. But the other great insight he had is that if something is privatized, you’ll get too much of it and something is publicly funded, you get to a little of it. So in a sense, you know, it’s not as though the market system necessarily delivers a better outcome.
It delivers more of something in the public sector. Usually you have scarcity to some extent. Either system can work depending on what you’re actually trying to accomplish. To give an example, the United States, you have private sector prisons. Well, in a system with private sector prisons and high amount of political contributions to campaigns, you get a result, which is there are more people in prison in the United States than anywhere else.
So the term capitalism, I would say we’re always going to have I mean, I think for for a long time, certainly the next few generations, we’re always going to have systems that are mixed with different elements in the capital. What we term as capitalism, which is private capital market, determined decisions by actors intersecting prices set by the market, that element is going to remain a strong part of many, many systems. And of course, in some systems, you know, the private sector is 90, 95 percent of it.
So if you take, for example, restaurants, I mean, I went, I mentioned, I went to China the first time in 1983. Communist China barely opened up. And we’re in Beijing. There were very few restaurants and the restaurants that were there were owned by the state and they weren’t very good, of course. Now you go in many, many places in the world, but certainly Beijing and China, you have a private sector where restaurants are absolutely fantastic. The role of the state in that capitalist system is largely just to health and hygiene regulations on that. But ninety five percent of what happens is capitalism, works perfectly fine. So there are many systems where the capitalist system should dominate, but there are other systems like health, education issues around the environment where there’s always going to be a mixed model. But I suspect the pricing mechanism used in the right way is going to be something of almost everything that humans do because it’s such used properly, the pricing system is so powerful.
7. No human system to date has so far been able to endure indefinitely - not ancient Egypt or Rome, not Feudal China or Europe, not the USSR. What about global Capitalism: can it survive in its current form?
This is a very interesting question, and I think one thing that people need to understand is: we’re in the midst of let’s call it a demographic collapse. Like if you look at a chart that shows over centuries the global population growth, what you’ll see is really the beginning of the 20th century. So one hundred and twenty years ago, a massive spike in the global population growth reaching about two point one percent, I believe around 1960, and then a massive collapse in global population growth.
And I’ll relate to this to Capitalism in a minute. But, the total number of, outside of sub-Saharan Africa, the total number of children is essentially peaked and is going to decline. The total number of working age adults has essentially peaked and is going to decline. And you have country after country where you don’t have a total fertility rate that’s, you know, well below replacement. I mean, people think… They obviously understand Japan, they understand China, Russia, Spain, Italy, Germany, all these countries, France, Canada, having a TFR (total fertility rate) that is below replacement rate.
But what they may not understand is even India is essentially at replacement rate and is going down as well. So, and the reason I raise that is so much of what we think of as capitalism is based on a kind of overlapping generation model of growth and the accumulation of capital and growth and capital return on capital. I mean, when I was doing my graduate work, I think it was Nobel Prize winner Tom Sargent taught an entire term’s course, just an overlapping growth models on that.
So the reason is… There are lots of other issues we discussed. But this issue is particularly interesting: what is the model for capitalism in a world of shrinking population? So there was an update done to the population projections that basically has - done by The Lancet, a very reputable organization and I think the UN will follow shortly - that just has, after country after country after country, a collapse in population over the rest of the century. So to me, that is a very interesting challenge to capitalism, so much of it is tied together in the concept of economic growth and so much of economic growth is based on population growth.
But we’re already starting to see in Europe, I mean, the markets for everything are essentially shrinking in Europe. And this is going to start to happen in China soon. It’s been happening in Japan for a long time. So can capitalism survive in its present form? I think just because of the demographics alone, probably not. I think there’s going to have to be a whole new thinking about economics. How do you do economics in a world where the population is at best stable and likely to be to be shrinking?
What happens to asset values? What happens to real estate values? How do you create value in the kind of the financial sense? How do you accumulate assets? All of that, I think is kind of new territory for that. And I suspect we’re going to have to create a new type of economics over the next couple of decades to deal with that. And of course, I hope the new economics includes, well, and that will have to include thinking about the natural capital of the natural systems as well on that.
And of course, we may come - and it may sound like a great surprise right now - but we may come to the point in time where we actively think about how to increase the population, right?. Because, I mean, the latest projections, as I said, having us peaking at two billion people lower than the current UN population. So peaking at about nine point seven billion in 2068 or so. So not that far away. And of course, all of our children are going to be middle aged at that point.
So I think that’s a very interesting challenge to capitalism. But the other thing I would say is going back to the systems we talked about, the health system, education system. I don’t think, and particularly coming out of the great financial crisis, now covid-19, there’s no avoiding the question of what the purpose of the economy is. And I think that that question gets addressed and there’s going to be some answer around the well-being of people in the economy. Then I think what’s going to happen is the existing capital is called the capitalist doctrine will be nuanced.
So how do we use the market system? How do we use capital? How do we use finance in a way that helps us achieve that purpose? And so if we go back a little bit, I mean, the financialization certainly of the Western world, I mean, I don’t think… There was definitely a naïve belief that the financial system was kind of self-regulating and that the financial system itself would constribute you; in a capitalist system, that it would allocate capital to the best use and ultimately, you know, society, economy, most people, would end up better off. I think the great financial crisis showed us that that’s not necessarily the case and that there’s elements of the capitalist system that are inherently unstable. There are asymmetries and reward systems. I mean, certainly for Wall Street, if you can make a one way bet with other people’s money, that’s a fantastic bet to take. So to the extent beyond the demographic issue and to the extent that capitalism develops, I just think will become more nuanced and linking, as I said, the particular elements of how a system, whether it’s the health system or the social system or the education system, work with what the objective is and then which part our traditional capitalist principles can support that.
So it won’t be a scattershot approach where we say: capitalism is good, market forces are good, it’ll be much more nuanced. No, no, no. In this particular situation, what’s going to work to help achieve the objective of the economy? But all of this, as I said, is against the background of the rapidly changing demographics. And I do think 2020 is a bit of a pivot point with this. We’ve obviously had excess deaths around the world and I think we’re going to come out of really starting to grasp.
We have a new economic challenge with the changing demographics.
8. Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?
Yeah, I think you can see my philosophy on this is sort of pick and choose for the subsystem that you’re trying to work on. So, I mean, I’m not going to stand up and say, I mean, I’m not a big fan of neoclassical economics, as you know, even back from my graduate school days. On the other hand, no one can doubt the sort of the system that allocates capital, how critical that properly… how critical that is. Or the price system that is operated properly, how critical that is.
But it’s just a component of it. And in particular, I think one critical thing to see is: we also need to recognize when it’s not working. So if you look at the finance system today, I mean, I mentioned before, I think it’s not clear is a stable, necessarily stable system on its own. But we look at the way finance has done today, I think 80 or 90 or perhaps more percent of equity trades.
The United States are done by high frequency trading. Right. So by computer algorithms that are trying to get a millisecond or less advantage over their competitors. That, actually, it’s just an apriority level, cannot be right. If we think of the system as allocating capital to productive uses in some way, that system cannot be right. So, I mean, we have these challenges with capitalism. I do think if we have a more purpose driven economy and we have more thought about what it is trying to accomplish, will be able to better choose where to use the capitalist principles that are appropriate to it.
And we’ll be able to have a language, I hope, that sort of says: the reason that this part… So for example, the health care system. The reason that the device part of the health care system operates with capitalist principles largely is A, B, C and D. OK, we understand that. The reason in this part of the health care system we don’t operate with capitalist principles is A, B, C and D. Indeed, it has to do with equity. It has to do with asymmetric information, has to do with the vulnerable position of a patient. Whatever it is on that.
So I think we’ll get more sophisticated. I mean, my hope coming out of COVID is people can stand back. We talk about build back better. What does build back better mean? Presumably build back better has to mean something around building back an economy - because it still is, let’s call it the Ether, in which most people, you know, have a good life or not - build back an economy that’s more able to help people build a good life.
So will capitalism survive? Elements, it will always survive everywhere and elements and the way it’s used. I just would like to see us more sophisticated and not have these blanket statements. The market systems is good, the market system is bad. And, you know, in some of the thinking at work that I’ve done, I’ve tried to approach this not from an ideological viewpoint. And of course, everyone must be ideological at some point, but just asking, you know, if the purpose of the economy is to help people have a good life, what are the implications of that for the way that we structure the economy?
And I think we’ll find that, as I said, it’ll be always a kind of very mixed thing. And I just want to see people get more sophisticated about how these subsystems that we operate in actually function in a practical sense.