Nigerian-Canadian. Economist, scholar, public policy expert. Chief Economist at NYCEDC, New York. Focused on trade policy, innovation, FDI, urban policy, and inclusive development
1. Why does economics matter?
Well, that’s an interesting question. And to do justice to that, let’s go back to the basics: economics is the study of resource allocation. How do individuals, firms and societies use their resources? It is about production, consumption, distribution, markets, profit, growth and the price system. It involves the study of individual choices, household preference, decisions of the firms, individual markets and the overall economy. So when you think about things like the business cycle, economic growth and recession, and other macro indicators like GDP, inflation, interest rates, unemployment and so on.
So basically, when we talk in economic terms, it’s often about scarcity. Resources are scarce, so efficiency matters in the allocation and use of limited resources. It is basically a way of thinking. Economics provides a decision-making framework for individuals, firms, policymakers and society at large. Ultimately, economic science is all about providing insights into how existing deadweight losses can be fixed. And that’s not necessarily an end in itself, but largely a way to increase social welfare.
So when you succeed in getting the economy to a state of Pareto efficiency, like we say, then you maximize welfare knowing that it is not possible again to achieve a resource allocation scenario where one individual is better off without making at least one individual worse off. Of course, it is another question entirely whether that construct is possible at all in reality. And I guess we will get to that in the course of this discussion, but my point here is economic analysis has broader implications.
For instance, you study deadweight losses in order to improve efficiencies and unlock more resources. In everyday language, that could mean increasing the GDP of a country like India, say by 0.5 percent. Now, think about what that means for the 1.4 billion people in India: it could mean reducing the corruption in the petroleum sector. Say in a country like Venezuela or Nigeria, which also exacerbates the unrest and security challenges.
In some sections of those two countries, again, think about what that means for a country like Nigeria where you have 83 million people who live below the poverty line. While you also talk about fixing inefficiencies and deadweight losses, it could also mean maximizing female workforce participation in industrial countries like the United States - where, as we know, women still earn far less than men in nearly all occupations. And the wage gap is notably wider and more profound, even for older female workers.
If I recall correctly, a 2015 report by the Council of Economic Advisors concludes that had women’s labor force participation remain at the levels they were at in 1970, the United States economy would have been two trillion dollars smaller. Which in percentage terms, that’s about 14 percent. Now, imagine that for a second: 14 percent reduction in the size of the economy had woman participation not moved up.
So when you think about these things in economics, you probably see them on your graph. You see numbers on the x axis, on the y axis, but those numbers do have broader implications. In economics you talk about welfare maximization. That means a wide variety of things in the real world: human poverty reduction, economic mobility, a higher quality of life, safe drinking water, safer neighborhoods, gender parity, global vaccines equity, the current environment, cleaner air. All in all you’re talking about a more just society. The list goes on.
So I’ll leave it at that and I guess we’ll be going through the nuances, but when you think about economics, it’s a framework for making everyday decisions, which oftentimes will require us to abstract from reality and use some simplified model to help us then graduate into more complex scenarios.
2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?
Again, that’s another very good question. And this is particularly important for me because much of my work really happens at the intersection between economics, public policy and society. My entire career has been dedicated pretty much to translating academic research and theory into practice and policy, and resolving the inherent tensions that often exist in those domains.
So I’m going to spend some time to really give a good account of my experience and observations here. Academic economics is largely about theory and methods, and when you think about this in terms of research dissemination - which is largely true of journal publishing - then you end up seeing economists communicating only with their peers, with other economist, across the board, pretty much on theoretical issues. Why? Because peer review and acceptance do matter.
Those are two key things that matter. But then you have a non-technical audience, or let me say non-economist who expect findings from economic research to be intuitive, things that make sense to citizens, to community leaders, political leaders and society at large. Without the need to amplify the models, the assumptions, the parameters and stuff like that. It’s like trying to convince folks about a two country, two commodity model in international trade - like seriously?
They don’t want those things, they just want to see those things in the appendix section of your paper, like we do in applied economic research. So that’s a little tough. And in a way, this explains why economic engineering could be more popular.
The second thing to talk about when you are looking at the distinction between academic economics and economic engineering is novelty. Novelty is a key goal in academic research. So before you get your work published in any decent journal, you must be introducing something new, some fresh perspective, something novel. Which means that there’s room for mistakes. Experimentation is good in economic science. And that explains why fields like experimental economics allows us to test theories under controlled conditions. We suddenly cannot say the same for policy making, absolutely not. And you say, why? Because policy mistakes are costly. And it can occur very fast. And I think I have a good example here to corroborate that.
Take, for instance, the COVID-19 pandemic. The debate on whether policymakers should use the so-called value of a statistical life (VSL) to set an upper bound on the pros and cons of regulations in order to save lives. That’s a very important debate. So in academic research, it is simply the marginal rate of substitution between income, or say wealth, and the risk of mortality. You are just looking at a substitution between income and death. So you are asking people how much are they willing to pay to reduce the risk of death, what we call our willingness to pay (WTP).
So think about the implications of that in a society where you have extreme income inequalities. Compare what that means for billionaires and folks at the bottom end of the income spectrum. You ask a billionaire and folks who make less than ten thousand dollars per annum, you ask them for their willingness to pay. You know that does have broad implications.
And you also remember the value of a statistical life is used to determine the level of health, safety, environmental regulation, mention it. And you compare that to another measure, another metric called the value of quality-adjusted life years to evaluate the cost effectiveness of clinical diagnostic procedures, surgeries, medications and so on. You know, back in graduate school, I took a course in health economics. And I bet after a few hours in the library completing assignments and all of that, my estimated value of a statistical life and the other metric (quality-adjusted life years) were great, those were good estimates.
But it’s a different ballgame in reality, in the world of policymaking. So my point here is that the experimentation and novelty in economic science, they are not luxuries that can be afforded in the realm of policy making. Because policy interventions oftentimes have long lasting effects with major implications for intergenerational equity and justice. As I mentioned earlier, in general policymaking is essentially about moving the economy towards a Pareto-efficient state.
And by implication, that means you have to bring many actors, stakeholders, and vested interests to a common ground. It is very important to achieve consensus. You have to consider trade-offs, which often mean compromises, consultations, polling, concessions, politicking and what have you. All of those things are involved. In fact, that reminds me of David Baldwin in his book “Economic Statecraft.” The book provides some great insights. Of course, it focuses on the failure of economic instruments in foreign policy, but he nicely offers a framework which blends economics, political science, philosophy, history, law, psychology and sociology to give a clearer picture on how economic engineering is a different ballgame compared to academic science.
And this also explains the popularity of prospect theory, which is a strand of theory in behavioral economics. And it’s very popular in policy circles because behavioral public policy allows us to examine moral and political philosophy. As you know, the gold standard of Neoclassical economics is the assumption of rationality. Prospect theory was modified in 1992 by Kahneman and Tversky as an alternative to the Neoclassical doctrine of expected utility theory.
And that’s what they did to help make sense of how decisions are made under risk and uncertainty, and why people tend to consistently deviate from the assumption of rationality. So it has since been shown that the framing effect is real, and some form of biases, heuristics, they are all hardwired into the human brain. And in the current environment, also, you see that increasingly behavioral sciences are moving to the front burner. Of the two kinds when it comes to policy making because of their relative effectiveness in helping with policy designs when solving issues like poverty, retirement savings, pollution, addiction, obesity and all of that.
And a closely related work is the book called “Nudge”, which was published in 2008 or 2009, thereabout. You notice the rise in policy disciplines like environmental policy, consumer protection and health policy, because those are insights that are really useful when it comes to moving the needle, improving decisions about health, wellness, wealth, happiness.
All of this is a radical departure from the dominant Neoclassical models, which are all centered around value creation, free markets, capitalism. So to design policies, it is important for policy makers to know how their constituents and subjects behave, and why they behave in the way they do. Otherwise, such policies may not achieve their intended outcomes. So, while academic economics has its place in terms of the heavy reliance on scientific evidence, economic engineering ensures that policymakers and political leaders do a much better job and fulfill their social contract by getting informed by the sciences of behavior.
In closing, you also find that academic research often means that you pick a few specialties. So if you are an expert in applied microeconomics, then pretty much you are using data and econometrics to test microeconomic theory. And you using data to test your theory in order to apply them to a wide variety of questions around individual and household behavior and societal outcomes. And that will cover areas like labor economics, industrial organization, public economics, health, urban economics, environmental economics, education and all of that.
So chances are you can’t also be an expert in an area that is not complimentary. When you think about the tools and data, theory and context, you can’t be a jack of all trades. But when you compare that to policymaking, it’s a little different. Because in policymaking, once you develop the tool kit, it can be used to ask a wide variety of questions in various areas. As Mankiw puts it: when economists try to explain the world around them, we said they scientists. But when it comes to improving the world, then they become policy advisers.
So I’ll stop there, but I really like the fact that this session provides for a framework to look at the pros and cons of both disciplines. And I should also say that given what we have seen in recent decades in terms of the pace of digitization and the advances in technological innovations, both fields or both segments continue to overlap. And it remains to be seen what happens in the next 10 to 20 years with what we are seeing in tools and innovations.
3. What role does economics play in society? Does it serve the common good?
To start with, perhaps we should ask the question: what does society really want? Many things, you would say. Society wants public services, like infrastructure, education, security and so on. Not only that, society also wants those things to be reasonably priced. And we want the supply to be flexible, to be innovative and to be efficient. However, the barriers created by bureaucracies often hamper innovation. And given the ongoing digital transformation, you’ll find new innovations that can help governments and states to fulfill their social contract, are increasingly imagined.
So let’s put it this way: while the role of the state in creating incentives and reducing transaction costs is clear, insights are needed on the role of business before we can make sense of the role of contemporary social policy. So my point here is you need economics to resolve the dilemma here. Economics helps to provide insight on the costs and benefits and the distributional implications of government policies. In the corporate sector, economists also help business leaders on decisions that have major implications for the broader society.
So think about things like climate change, parental leave, the gender pay gap, diversity, equitable practices and so on. Of course, there are major caveats when it comes to how well economics does in terms of addressing welfare, and particularly issues like happiness, fairness, equity, social justice and all. For example, we have seen in the last four decades how socioeconomic inequality in the United States has been on the rise. And that has culminated in a recent backlash against economic globalization, international migration and other neoliberal economic policies.
So a good question that economics can help to answer here is: while the rise of nationalism and protectionism has been observed in much of the Western world, why has a backlash against economic globalization been more pronounced in the United States? And then you can start to examine structural issues and how the Great Recession of 2009 exacerbated both income and wealth inequality disproportionately in the US due to the prevailing highly capital intensive multinational system of production.
And in addition to capital concentration, the concentration of capital ownership, you find that this mode of wealth creation, that is capitalism, it does generate varying to the different categories of labor. And you would expect those at the top of the income spectrum to reap disproportionately larger rewards over time. So, again, when you bring economics to this conversation, you see, it can help to address the societal implications by providing a basis to examine the context for growing levels of inequality and how this generates concerns, thereby coming up persistently on the front burner of the national public policy debate.
And also when you look at the Global South, look at developing economies and emerging markets. A good knowledge of economics can help to make sense of why globalization has intensified technologic diffusion globally, leading to increased productivity in these regions. And where the extent of income convergence predicted by economic theory has not been realized, the so-called catch-up effect.
Again, economics can help us to explain why the so-called convergence has not happened, whether you are talking about sigma convergence or beta convergence, and we know that folks like Barro, Sala-i-Martin, Solow, Jeffrey Sachs, Robert Lucas, they have written extensively in this area. You think about Adam Smith. A major proposition by Adam Smith in his seminal work “The Wealth of Nations” is that low transaction costs are important for trade and wealth creation.
And our transaction costs are essentially about institutional design. The 2009 Nobel laureate, Oliver Williamson, also said transaction costs are determined by about five factors: frequency, specificity, assets, uncertainty, bounded rationality and opportunistic behavior. So the optimum structure based on his work is that, in essence, economic efficiency is important to minimize the cost of exchange and it is only economics that can help us make sense of this. Because the more inequality that exists in a society, in an economy, the less likely it is for economic growth alone to sufficiently lift up those at the bottom of the income spectrum.
And if the emphasis is on growth just for the sake of growth, then, that can perpetuate the status quo. And you can start to think about the notion of inclusive growth and how that has become very popular in recent times. Inclusive growth pretty much calls for more segments of society to participate in the economy because of the need to link microeconomics to macro. The aggregate is not enough, you have to examine what it means for individuals, for households, for various demographics and marginalized populations.
And we can’t conclude this session without also bringing COVID back into the analysis. We have seen huge interventions from governments across the board and across the world. While traditional Keynesian fiscal stimulus can help to restore an economy back to its pre-crisis growth path, the disproportionate impact of COVID-19 on certain demographics and occupations where they are overrepresented underscores the need to address underlying structural economic issues. Until those issues - that perpetuate widening inequality and its concomitant effect on aggregate demand - until those issues are fixed, building a more sustainable and equitable economy will be wishful thinking.
You go back to the drawing board, you can only make sense of all of these big questions and intergenerational issues by using the framework provided by economic science. So I will leave it at that.
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.?
It depends. It depends on the context. And I guess that’s no surprise to you, like you would expect the average economist to respond, right? It’s always much safer than saying yes or no.
We don’t often say yes or no in economics. It always depends. What are the assumptions? But really, this question is really about the philosophical foundations; different research philosophies inform various debates in economics. In reference to the Scottish historian Thomas Carlyle, he described economics as a dismal science. Now, you may say, that’s a little harsh. But really, economics is such a unique discipline because it is hard to generally say where it belongs as an academic discipline.
Does it belong to the humanities, to the arts, to the sciences, or social sciences? And of course, this has a long history when you trace it to the ethos of how economics is taught, particularly in the quantification of the discipline in terms of positivism, which leans heavily on scientific methods and rationally justifiable assertions that lend themselves to logical or mathematical proof. And that therefore rejects things like religion or metaphysics and so on. So in that sense, logical positivism provides a wide array of possibilities for economic analysis to include reasoning, theory, econometric modelling, testing and inferences as valid means to knowledge production and assimilation.
The father of the popular economist John Maynard Keynes, himself known as John Neville Keynes, was a major proponent towards the end of the 19th century, before positivism gained ground and became popular by the middle of the 20th century - which are interventions from folks like Milton Friedman, Harry Johnson, Wassily Leontief and the rest of them. And then you come to the second part, which is normative economics. Normativism is not really about the moral questions of right and wrong, but rather good or bad. Which means that rational choices could mean you are selecting between several bad, or unfavorable alternatives. We discussed economic engineering earlier, so where are you in the realm of public policy that you lean heavily on normativism and value judgments.
Let’s take a simple concept like like human dignity as an example. What is the foundational linkage between human rights and human dignity? The overarching idea is that the worth that demands respect, the worth that each person has just by being human.
It is a recognition that everybody has worth no matter what their situation is. Their ability to participate in society as an equal, someone with an inherent value. A value that you cannot lose in any circumstance. So human dignity is for humans, period. And very simple. But then when you extrapolate that and bring political economy to it, you are likely going to want to say that dignity is about freedom. Making free choices. So in a way, this becomes rooted in classical liberalism, because they are talking about civil liberties, political freedom, the rule of law and economic freedom. And the core moral insight then becomes what it means to respect a person as a core moral agent. They need to give them the freedom to choose. Remember what we said earlier, it’s about good or bad, not right and wrong. So the dignity of a human person is giving that person the freedom to choose. And the moral insight is the basis of classical liberalism, free enterprise. You talk about economic freedom, so things like free markets, free trade, property rights and so on.
The Indian Nobel laureate, Amartya Sen, believes that the expansion of freedom is both the end and primary means of development. He pretty much sees development as freedom rather than just the economic or social progress that we often emphasise, and that the concept of dignity takes us a step further along that route. This also takes me back to the issue of human dignity. Jonathan Glennie with Save the Children UK often talks about the danger inherent in the limited interpretation of dignity.
He says development is dignity or nothing else, it’s not a binomial situation, it is either dignity or nothing else. And this makes sense when you follow the debate on the charity industry. Despite the many good intentions that philanthropy that they bring, the lack of dignity that comes with charity, especially from the West to the Global South remains a downside. So my point here is that these philosophical foundations have their pros and cons.
But positivism has had a profound impact on the discipline of economic science because it’s had a profound impact at the stump and the stamp is hard to erase. Even though it has many limitations. When you ask most students of economics about Adam Smith, everybody would tell you about “The Wealth of Nations”, but many probably don’t know that before that work came into being in 1776, his other book, which was published in 1759, the book titled “The Theory of Moral Sentiments”, that book provided the philosophical, ethical and methodological foundations for “The Wealth of Nations” and his other works. So to round up here, the philosophical foundations, ethics, value, judgment, positivism and normativism, all of these foundations converge together and determine how much economics can help to move the needle on different areas. And you will find that before the emergence of the Neoclassical doctrine, before economics became highly scientific, with a lot of heavy mathematics, political economy was a blend of all of the various components. But again, with capitalism and the dominant rationality concept that has landed us where we are, the debate continues, but I hope that does justice to to that question. That seems like a longer response.
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?
I will explore this from the Neoclassical perspective. Economic globalization has evolved rapidly in the 21st century, with the adverse impacts felt more in the industrialized countries. And of the several narratives that have emerged about the impacts of globalization, you find that the increasingly inequitable distribution of the gains from trade is one of the most researched topics. Folks like Paul Krugman, I mean, Paul Krugman has written extensively on how previous models failed the discipline.
And the social backlash: this has resulted in the rise of nationalism and protectionist policies. But then, technological progress continues to foster deeper market integration. So these have obviously produced two different narratives of globalization and has led to the curiosity on which narrative is true. Of course, the answer depends on the assumptions underlying the coherent system of ideas in economic science. So those model and parameters. Such a simultaneous rise of economic nationalism and digital integration that we have seen, they introduce different complexities and pitfalls in evidence-informed policy formulation.
And this further amplifies the view that the link between trade and inequality is a complex web of interrelationships that needs to be disentangled before any meaningful conclusions can be drawn. With what we have seen in the innovation discourse, the evolution from its purely scientific and technical focus to new business models, you see that even in the current environment, with the COVID-19 pandemic, major shocks have been unleashed on economic systems and all of these economic systems are being redesigned everywhere across the globe.
Let’s look at trade. Let’s go back to trade. I would say the role of international trade in the determination of long term growth is well documented. And a substantial and growing literature on that aspect continues to focus on the distributional implications. And traditional trade theories like the Heckscher-Ohlin factor price equalization theorem, explains how free trade often results in the equalization of factor prices under key assumptions like similar production patterns, technology and perfectly competitive markets.
So in theory, this means that free trade raises aggregate welfare by equalizing wages and rents globally. But here, in reality, we know that is far from it. Winners and losers are often created in the process. A 2018 year study by Oxfam concludes that 82 percent of the increase in global wealth in 2017 accrued to the top one percent, leaving the bottom 50 percent with no increase at all. Now, think about that, think about that for a second.
So globalization and technological progress have been largely blamed for much of the inequality, weakness in the last three decades. And the rapid pace of trade globalization and income inequality have far reaching impacts on economics and societies, with huge social costs of adjustment. And then you also look at economic convergence, technology, institutions, how those will continue to drive and sustain globalization. Given the trends that we’ve seen in technological innovations, demographics and geopolitics, many pragmatic policy interventions that can help to fix the structural barriers to social and economic mobility need to be revisited.
For instance, while the debate on socioeconomic inequality has traditionally focused on national trends and central government and federal governments, you find that increasingly, regions - cities and local communities - are often in a better position to address the needs of vulnerable populations, low income neighborhoods. So to me, it appears that they said this, and this again is where economics can help us to provide a framework to address the gaps and the missing middle. I hope that does justice to that question, let me leave it at that.
6. Does economics explain Capitalism? How would you define Capitalism?
Yes, so earlier we did talk about the flaws of the Neoclassical model. So a major feature of the model is the standard assumption of profit maximization by firms. And so in that model the changes that you see in the revenues of firms are linked to the changes in the cost of capital and labor. And that’s a construct that has implications for competition, for efficiency, for transparency and for innovation. And then you take it to entrepreneurial capitalism, Schumpeter’s innovation theory, which explains growth in the industry through three major channels: creative accumulation, creative destruction, and rejection of competitive market equilibrium. These three channels underscore the evolutionary growth and endogenous innovation, with the major force behind capitalism being the innovation and that entrepreneur who is willing to make things happen through the dynamics of markets, expectations around profit and expectations that in the long run, the bottom line will makes sense. Think about these other models, Bowley’s constant wage share law. This is an important stylized fact of growth and distribution in classical political economy.
And it supports the notion of a constant labor compensation share in total output. So before the changes in the patterns and processes of capital accumulation associated with the highly dynamic nature of the US economy and other countries, with the capitalist mode of production, you see that Bowley’s notion of wage share really makes sense as a reasonable model of production and economic growth. So the changes in the patterns and processes of capital accumulation after World War Two and the economic boom and concomitant, highly dynamic nature of those models, would help to explain all of the issues around capitalism that we have seen since the end of World War Two.
And if we bring it back to the current moment, we find that COVID-19 has perpetuated and deepened existing inequalities. So from a policy angle, we say that any practices that favor economic activity reallocation, with asymmetric and distortionary impacts on labor’s share in total output can only worsen the existing gaps. Interventions must prevent a further erosion of the share of labor in GDP and the unintended consequences like inequality and other things.
And the more I think about the capitalist system, the more I think about economic recessions and how they are often the result of global imbalances from structural and cyclical forces, which then will lead to the transmission of financial shocks to the real economy. And you talk about things like an overheated economy, because of demand and supply imbalances. So, you talk about COVID: although not caused by overheating, but it is still some form of shock to the economy, which is external, because it was triggered by a health crisis. So it’s an exogenous shock.
And due to the large supply costs and pandemic-induced high pressure economy that we have now found, the output gap is there. It lingers because everybody - policymakers around the world - they are trying to prioritize short term interventions in order to contain the damage, and rightfully so. Because redistribution is needed to smooth the shock and make sure that vulnerable populations can at least weather the storm.
You also look at temporary shocks, which often have persistent effects. We know from both theory and empirical evidence that if the context is not right, it would be hard for interventions to not produce unintended consequences, especially in the presence of market failures and disruptions and externalities, which are all existential. This means that if the crisis is not managed well, it could produce even a more persistent crisis, what we call a hysteresis effect in economics. So essentially, we need to look at some of these issues from the lens of transaction costs, the transaction cost model, which talks about the need for regions to minimize costs by learning from the vantage point of others.
After all, the progress of humanity is essentially about having lower transaction costs, which again takes us back to how we started this conversation talking about fixing deadweight losses. So that’s that’s my perspective on that. Capitalism has been the force that has really helped to provide incentives to drive the economy and increase the size of the pie. There are ups and downs and issues, but it is what it is.
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?
I’m going to really bring economic history here. I think history will offer some useful insights. The global economic order is in a state of flux. And as I think about this question, I think about the danger and risk of oversimplification when interpreting history. It appears to me that we are going through a gradual decimation of the old sociopolitical economic order. With a caveat, an important caveat that this is still evolving, a new order is yet to be born.
Branko Milanovic, in his 2016 book, explores the dynamics of globalization and inequality by attributing the periodic rises and falls in inequalities to war and disease, education, technology and redistribution, with the conclusion that inequality will not grow in perpetuity. Milanovic also laments the relative importance of the two traditional tools for reducing inequality: that is taxation and transfers. And his argument is that they seem to have reached their limit.
So as an alternative he wants to see the distribution of endowments by reducing disparities in both capital endowments and human capital. And he also talked about other policies, like more open migration policies and what have you. But my point here is what is the role of a crisis in socioeconomic and political transformation? You would notice that new economic agents, new technologies, new business models often emerge on the heels of major global crisis.
And and I’m going to start here at home: New York City. Let’s bring New York City to this conversation. As you know, this is a global capital of reinvention. Right from its founding as New Amsterdam, through the various demographic, political, cultural and industrial shocks that have shaped the emergence of New York as a global leader in finance and innovation. You find that its industrial core, its industrial fabric has always enabled you to transform structurally.
And this is obvious when you consider how the city has been able to reinvent itself to address major shocks in the global economy. So from its beginning as a trading outpost, to how it evolved to become a commercial and maritime power, and later transforming to an industrial and manufacturing power, before then becoming the global capital of finance and innovation, real estate and media. So in the aftermath of the fiscal crisis of the 1970s and then the 9/11 terrorist attacks, the global financial crisis of 2007 and 2008, Superstorm Sandy, what you find all of this is that the city persevered and bounced back stronger.
That’s from a city perspective. And then you extrapolate that, let’s look at the global arena. You have seen that a series of wars of conquest, colonialism and imperialism have always led to the emergence of a new strand of global capitalism. We can trace this to Europe. Let’s look at Europe during the Age of Discovery, from the 15th century to the 18th century, when European overseas exploration led to the bloody conquest of the Americas starting in 1492, the trans-Atlantic economy, colonial and interstate systems, and deepened East-West trade.
And then we saw the Industrial Revolution in Britain, the ascendancy to power of the bourgeoisie. And then the American Revolution and the French Revolution of 1776 and 1789, respectively. Then came the latter part of the 19th century, marked by the rise of country-level corporate capitalism, which again heralded a new wave of imperialist conquest, which manifested through the consolidation of industrial financial corporations, nation states and national markets under one global system.
This ultimately led to the oil and fiscal crises of the 1970s. And the rapid inflation that we saw in that era, which eroded the purchasing power of savings, and the ultimate decimation of the gold window, Keynesian economics and a unified, fixed exchange system. And then that led to the collapse of the Bretton Woods system and the global financial system. I think that was an inflection point, that was a key moment in history. Capitalism pretty much went global at that point, with the full integration of the global economic system.
And that then heralded the rise of multinational capital and multinational, transnational states. And what have we seen in the past few decades? We have seen a gradual erosion, again, in labor’s share of total output in favour of capital due to the prevailing capital-intensive multinational national system of production, which started in the era I just talked about. In addition to the concentration of capital ownership, this mode of wealth creation continues to generate varying returns to different categories of labor.
And what you often find is that workers at the top end of the income distribution would benefit more disproportionately over time. It’s also important to mention that the share of labor in total output is not falling within a typical firm. Instead, what you find is that it is a gradual relocation, it’s a steady reallocation across firms. So from labor-intensive firms, which are very small, often, to big capital-intensive superstar firms. It can make sense of the way you think about the Amazons, the Facebooks, the Googles of this world.
In the immediate aftermath of the pandemic, Harvard University’s Opportunity Insight - which is a special research project that tracks data and other distributional implications - their research found that a few months after the pandemic, while jobs were fully back to pre pandemic levels for the highest wage earners, it was a different ball game for those at the lower end of the spectrum. They found that more than 50 percent, that’s more than half of those earning below 20 dollars per hour still did not have their jobs back.
Look at that. That’s clearly not acceptable. So the challenge that we face today in some way is similar to what was faced by FDR when he introduced the New Deal in 1933 after the crisis of that era. And in today’s times, you would even think that was radical. I mean, you think about many of the components of the 1933 deal, from government-backed deposit insurance for the banking systems, to large public works programs, massive regulation of Wall Street, minimum wage legislation, social security reform, trade policy reform, housing reform, etc.
The challenges of this era in some ways show that maybe this is another point of inflection. We are getting back at an inflection point, and that does require some moment to really recalibrate and look at the implications of the policies and initiatives that will drive the new economy. Today, we are talking about a global pandemic, the rise of nationalism, protectionism and de-globalization.
So in my view, I think that global capitalism is under serious danger again. But this time, not from the usual suspect. The issue today is not about inflationary pressures, but it’s under threat from things like externalities, market failures, all of this triggered by the inadequate attention given to social, political and environmental issues. So in order to avert a major catastrophe, in order to avoid a total breakdown of the political and economic system, existing models and frameworks are not adequate, and economic science, economic engineering and other complementary disciplines - psychology, philosophy, political science, engineering, finance, all of these disciplines have to come to agree on what are the best practices and how do we rethink the next economy and the new economy? I will leave that there.
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?
Maybe the question we should ask, I guess, is how has a capitalist system evolved over time? Capitalism has been and will continue to be defined by a consistent pattern.
And that is capital accumulation with manifestations like crises, polarization, wars, resentment and so on. As with any system, whether that be economic, political, chemical, physical or biological, it will continue to exist in a perpetual state of growth, development, transformation, ultimately demise. And then after death, some new form will emerge again. I think this is a situation with capitalism. It’s a process, it’s a cycle.
That reminds me, in December of 2015, former Federal Reserve chair and current Secretary of Treasury Janet Yellen was asked what might likely bring the economic expansion to an end. And her response was simple: she said it is a myth that expansions die of old age. So for context here, in the sub-field of survival analysis, when you look at positive duration dependence, it explains that due to a snowballing effect, the longer an expansion is or a contraction, whichever is applicable, the higher is the probability that it will end.
So, Yellen’s response was obviously a departure from what the original models tell us. I mean, recently I was engaging a Norwegian economist, Martin Sandbu. We were talking about his new book “The Economics of Belonging.” And in the book he talks about what happened in the immediate aftermath of World War Two. The prosperity with many jobs that offered adequate incomes, status and dignity. Those willing to work could be rewarded with material comfort, with security and social respect. You saw income gaps between social classes and geographical regions vanishing. A robust middle class.
And then suddenly, suddenly those things were not anymore. You suddenly started to see large swaths of the population that feel left behind by economic opportunities that are being taken advantage of by the elite. I go back again to the standard growth model. You can explain how capitalism contributes to improvements in living standards by various combinations of labor, capital, technology, and maybe in today’s environment you talk about economies of scale. And that brings me to one inherent issue with the capitalist system.
And that is that in order to achieve scale economy, then access to markets and raw materials must be certain. Because this is key, this is key for seamless growth and distribution. This explains why empires often clash: because of the requirement of a seamless imperial expansion possibility. So all in all, I think capitalism will always survive. You think of it in terms of business cycles and in terms of the pitfalls of capitalism. When you talk about the pitfalls of capitalism, they are well documented. As I have said earlier, you’ve seen different issues, different strands, falls on rises.
But then it is what it is, we must improve on it. There is still no alternative to capitalism. We can refine it, we can improve on it. Paul Krugman once said that capitalism can run, even flourish in a society of selfish cynics. But he said a non-market economy cannot. He alluded to how we’ve all seen communism, why did they not provide a reason for this?
Why did it crash? Paul Krugman says maybe it could only work under on a crisis or something like that. So the point here is that capitalism has its pitfalls, but it is still the basis for incentives, private property and what have you. A closely related, or a good example here is infrastructure. Let’s pause for a second and look at infrastructure. Infrastructure has traditionally been defined in terms of our roads, bridges, airports, water mains, public transit and power lines.
But you find that in the current environment, the debate is changing fast. The care economy, care infrastructure is now on the front burner of the policy debate. And the idea is simple: it’s pretty much saying that investment - investment in care infrastructure, not just about childcare and families. But that they are the very fabric for building a robust and sustainable economic system. You don’t find that anywhere in the Neoclassical growth model, where you say growth is all about capital, labor and technology and what have you.
But increasingly now, the debate is about ensuring that care for children, for elderly, all of those people should be accounted for when you look at the broader theme of infrastructure. That’s an example of how capitalism can be refined, how a lot of the assumptions and coherent systems that we’ve been working on can be can be improved upon. And I also think that it is important to mention that over time, more and more hybrids of capitalism are emerging. When you see how states and markets are having complementary roles in entrepreneurial capitalism, even in the United States, the very the very epicenter of capitalism, you still see state intervention in some key sectors.
The same in Canada, when you think about the health care model in Canada, which is judged to be a global model, that various jurisdictions are praising, saying kind things about. The same thing in China and Europe. Even though you may say that the Chinese model is heavily state dependent, but the fact is that they have succeeded in moving more than 850 million people out of poverty. That is profound. They are obviously doing something right. Is it a perfect model? No, but do they have results? Yes. Can they can improve on it? Yes. Of course, some of these, again, come with different nomenclatures when you talk about the hybrid model.
Some talk about industrial policy, impact investing, public-private partnerships, and even at the regional level you see how governments continue to incentivize the private sector. They incentivize private sector investment in strategic industries through innovative public-private partnerships to ensure that good jobs are created and pathways are provided for residents from a broad spectrum of society to participate and be part of the economy. And that, again, takes me to the notion of inclusive growth, which is about taking an holistic view about the economy.
It is not enough to increase GDP, you have to think about what does it mean for individuals, for households? What does it mean for marginalized populations? What does it mean for the quality of life, for happiness? What does it mean for the environment? You’re talking about the clean energy transition, that’s a big debate. You look at the whole notion of the energy trilemma trying to resolve the challenges around affordability and environmental sustainability, pricing and all of that.
So at the end of the day, there is an opportunity to move the needle. Economic science, again, is that framework, is that platform that brings all of the pieces to the table and then helps us to abstract from all of the complexities and then filter what you think is important to help you make sense of the noise. And then upon doing that, you can increase the level of complexity, do a more nuanced analysis, and based off of that pragmatic solutions can then be devised. I would leave it at that. That again seems like a pretty long question, but I hope it does justice to the question.