Economists almost everywhere are scratching their heads. Why is the world economy performing better than predicted six months ago after the pandemic stopped much of commerce? Total output has not contracted as much as expected. And the International Monetary Fund (IMF) even sees global growth of 5.2% next year. Which of the many theories in the “dismal science” called economics are actually working?
The IMF cites “unprecedented” government support of $6 trillion to both businesses and households. Others point to debt relief offered by wealthier nations to 73 poor countries. Some praise well-targeted safety net programs. Still others commend workers and employers for coping with the coronavirus and trying to maintain income.
Such a debate is the point. Each major economic crisis – from the Great Depression of the 1930s to the Great Recession a decade ago – has generated new ideas and a broader consensus about what sustains an economy. The coronavirus-induced recession will be no different. Economic progress has long been linked to progress in practical, proven ideas that transcend old debates.
“If the economics profession is going to help solve the world’s biggest problems – from pandemics and climate change to deglobalization and inequality – economists must stop tweaking the edges of their models and think outside the box,” writes Financial Times columnist Rana Foroohar.
A hint of this can be seen in the latest Nobel Prize in economic sciences. It was awarded Monday to Paul Milgrom and Robert Wilson of Stanford University for their insights on the best rules for bidding in auctions, from homebuying to government sales of radio-wave spectrum. While their work may seem narrow to a particular activity, the prize committee at the Royal Swedish Academy of Sciences makes a larger point: “Their discoveries have benefited sellers, buyers, and taxpayers around the world.” In other words, their ideas had universal application that transcends controversy.
The 2018 Nobel laureate in economic sciences, Paul Romer of New York University, says his own work on “the economics of ideas” shows that progress is always possible, “even when the news is grim.” As the world economy has become driven more by new ideas in technology, governance, and, yes, economics, these ideas can sustain growth in a world where resources are scarce, Dr. Romer says.
And they come with a good side effect. “We start to see other people as allies because if they discover something, we can benefit from their discovery.” We will have a “better sense of connecting with, and appreciating, others; not seeing them as hostiles.”
This path of progress requires imagination, courage, and humility. “Imagination helps us see new possibilities,” he notes. “Courage lets us try them when we are uncertain. Having committed, humility prepares to revise as new evidence comes in.”
From the data-watching analysis by the IMF and others, the news about the pandemic’s effects does seem grim. Poverty is rising after the worst global downturn since the Great Depression. “The ascent out of this calamity is likely to be long, uneven, and highly uncertain,” writes Gita Gopinath, the IMF’s chief economist.
Yet every big shift in the economy can bring fresh ideas – and with them, a spirit of collaboration. Head-scratching economists might even start to agree.