From clipping the wings of the property market to re-assessing the place of the banks, our big brains nominate one lesson they wish their colleagues would learnby Prospect Team / April 14, 2018 / Leave a comment
Larry Summers: Get to grips with vicious cycles
The central lesson of 21st century economic experience is that modern economies are not self-equilibrating systems. Indeed, modern economies are often dominated by positive feedback effects that destabilise. Margin calls, bank runs, portfolio insurance, option hedging all cause more selling of assets as their values go down. When selling causes lower prices, which cause more selling, the market mechanism is in trouble. We now understand how it can give way to long-term economic problems such as secular stagnation, where excessive saving drags down demand and economic growth slows.
The challenge is to prevent vicious cycles from developing and to contain them when they start. This will mean more, smarter government policy, not a retreat into market fundamentalism.
Larry Summers, former US Treasury Secretary
Deirdre McCloskey: Cheer up
Don’t believe the gloomsters claiming that the sky is falling, and that we are doomed to stagnation. No it isn’t, and no we aren’t. The gloom produces policies of zero sum, protecting what we have. But the recent history tells of spectacular positive sums. China and India produce riches and engineers at astonishing rates. Wages in the old rich countries are said to be stuck, but they’ve actually kept rising, once allowance is made for the immense r ise in the quality of goods and services.
As for the robots taking our jobs, since modern growth got going—around the year 1800—technological unemployment has never happened, so don’t believe that some half-understood phantom of artificial intelligence is going to put you out on the streets. Be of good cheer. Since 1800, real income has increased 3,000 per cent in many countries, and soon the world. Let it happen.
Deirdre McCloskey, Distinguished Professor of Economics, History, English, and Communication at the University of Illinois at Chicago
Martin Wolf: Pathology, prophylactics and palliatives
Macroeconomics needs to grapple with three linked questions. First, what causes financial crises? Second, what policies would best reduce the risks of such crises? Third, what should the policy response be to crises once they have happened?
On the first, how should we understand the interaction between the financial and monetary systems and the real economy? Sometimes the economy seems to depend on a combination of asset-price bubbles with the unsustainably rapid growth of debt. Why should…