The voices calling for a new economic consensus are gaining ground. In a recent article for Project Syndicate, Mariana Mazzucato argues that the world is indeed on the cusp of a long-overdue paradigm shift. She advocates for revitalizing the state´s economic role since global goals such as a decarbonized economy and worldwide vaccine distribution can only be achieved by increasing public expenditure.

According to the Italian economist, the Covid-19 crisis has demonstrated that the economic paradigm that advocated for free-market policies during the last mid-century – the Washington Consensus with its mantra of deregulation, privatization, and trade liberalization – has set the international community up for failure. Mazzucato argues that we are entering an era in which the irreversible damage caused climate change will determine nothing less than the survival of the human species. Therefore, policy makers must prepare to turn the tide.

Ahead of the upcoming G20 Leaders Summit on October 30-31, she urges policy makers to consider a set of policy recommendations comprised under the umbrella term “Cornwall Consensus”. The term was coined by the G7 Panel on Economic Resilience, in which Mazzucato represents Italy, ahead of the G7 meeting this June. The recent report by this advisory group proposes a new international social contract. Among the concrete policy proposals are a reform of intellectual-property rights, an increase of state investment to 2% of GDP per year, and a new research institute aimed at developing solutions in the field of climate technology modelled after the European Organization for Nuclear Research (CERN). By adopting a new kind of economic agenda, to be implemented through mission-driven institutions and policies, world leaders can prevent repeating the mistakes of the past.

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This year’s Alfred Nobel Memorial Prize was awarded to three U.S. economists whose research has been instrumental in advancing “natural experiments.” The prize thus goes to a trio whose work on real experiments has challenged common economic beliefs.

The Nobel Prize in Economics is the only one that does not go back to Alfred Nobel. It is endowed by the Swedish Riksbank. The awards committee justified its decision by saying that the three scientists “revolutionized empirical research” by using natural experiments – real-life situations in which random events or political decisions create conditions similar to those in a clinical trial.

Laureate David Card and the late Alan Krueger, who died in 2019, proved that raising minimum wages does not necessarily lead to a decline in employment by comparing two groups of workers in the low-wage fast-food restaurant industry. A finding of revolutionary character, it broke with the hitherto prevailing consensus that higher minimum wages lead to more unemployment. Card also shattered another consensus among economists a few years later with a similar study in which he showed that immigration need not lead to wage losses for native-born workers.

Joshua Angrist and Guido Imbens receive the prize for their methodological contributions to the question of what conclusions about causality can be drawn from natural experiments. Methodologically, they have advanced economics on the question of correlation and causality. This year’s award is a tribute to those scholars whose research represents a departure from long-established, previously believed economic doctrines.

A detailed analysis of this year’s award can be found in this Handelsblatt article.

Also worth reading on the topic is this article from the Financial Times.

In a recent comment published in the Financial Times, Cambridge professor Diane Coyle calls for a change in economics – and across the next generation of economists. Coyle reasons that economics is a profession that with its influential voice in debates about society and politics comes with a special responsibility. In shaping policy and providing advice to governments and businesses, economic research and ideas hold power over the kind of society in place. Currently, says Coyle, the profession is failing to use its power so that the needs of our time can be met, and the most pressing challenges can be addressed.

For this, she blames two prominent shortcomings. One is the absence of ethics. According to Coyle, through the urge to be as objective as possible by basing economic analysis on data and rigorous statistical techniques, the illusion is being created that economists can stand apart from the society they are analysing – and delegate value judgements to those they are advising. Behind all economic analysis, says Coyle, lies an implicit moral framework. Yet welfare economics, the branch concerned with moral questions, is underrepresented in research and teaching.

The second shortcoming, according to Coyle, is the failure of economists to update their assumptions and models in accordance with the economy of today. The examples Coyle uses to underpin this point are digital technology and its invisibility in economic statistics, and the notion that people are individual maximisers, which cannot hold true in the age of social media driven by advertising revenues. Wherever change in perspectives and approaches is happening, it is not mainstream and far from textbooks, writes Coyle.

According to Coyle, it is hence left to the next generation of economists to ensure that change happens, so that economics can continue to deserve its influence – and the big challenges of our time can be met.

You can read the full article here.

Together with Jan Behringer, Till van Treeck has compared inequality in liberal economies with a leaner welfare state and a pronounced shareholder value orientation (e.g. USA, UK) and in coordinated economies with stronger social protection (e.g. Germany, Scandinavia) in a forthcoming publication. The authors identified different trends. In both ideal types of capitalism, economic inequality as measured by the Gini coefficient has risen sharply since the 1980s.

However, despite the traditionally stronger social partnership between business associations and trade unions, the wage share in coordinated market economies fell more markedly than in liberal market economies. On the one hand, this can be attributed to the veritable explosion of top incomes in liberal market economies and the stagnation of the more “export-driven” economies. On the other hand, large parts of corporate profits have been retained in coordinated market economies, according to van Treeck. In liberal economies, the rapid increase in executive salaries has induced higher – often debt-financed – spending among lower- and middle-income groups to maintain relative living standards, which is why the growth model of these countries can be described as “debt-driven”.

Till van Treeck argues for looking at other indicators besides the Gini coefficient when it comes to inequality and highlights the divergence between household income and corporate profits in Germany over the last twenty years.

Read the full article here.