What it’s not about is the kind of economics you read about in the news. It’s not about growth or unemployment, fiscal stimulus or interest rates, trade agreements or productivity. It might be indirectly related to those things — Holmström’s work on financial crises and debt certainly has relevance for what happened in 2008. But it isn’t what you expect to see economists arguing about when you open up Bloomberg or pick up the New York Times.

It’s not macroeconomics — the study of how the broad economy works.

Macro Research

That’s interesting, because in the past, the Nobel went almost exclusively to macro research. In the decade after the prize was created by the Bank of Sweden in 1969, nine out of 10 prizes went to things that we would call “macro.” In the 1980s, it was about half.

Nowadays, prizes for macro research are less dominant. The last true macro prize was in 2011, for the empirical work of Christopher Sims and Thomas Sargent. Other macro prizes came in 2010, 2006, and 2004. The prizes in 2013 for financial economics and 2008 for the economics of trade and geography have some macro flavor — after all, trade and finance both affect business cycles and growth — but both are now considered distinct fields, with their own distinct methods and data sources.

Meanwhile, the number of prizes in fields like game theory is on the rise. This year’s winners do work that’s somewhat similar to that of 2014 winner, Jean Tirole, who studied corporations. Micro theorists also won prizes in 2012, 2007 and 2005. Though this is a small sample to work with, it does seem as if micro theory’s star is on the rise within the profession.

Economics debates in the news media and on the blogs tend to make a big distinction between macro and micro, painting the former as unscientific and the latter as serious science. There’s a grain of truth to that, but it’s not that simple.

What really happened was that macro developed first. Economists saw big, important phenomena like growth, recessions and poverty happening around them, and they wrote down simple theories to explain what they saw. The theories started out literary, and became more mathematical and formal as time went on. But they had a few big things in common. They assumed the people and the companies in the economy were each very tiny and insignificant, like particles in a chemical solution. And they typically assumed that everyone follows very simple rules — companies maximize profits, consumers maximize the utility they get from consuming things. Pour all of these tiny simple companies and people into a test tube called “the market,” shake them up, and poof — an economy pops out.

Even today’s macro theories are similar in spirit. Most of what you see in academic seminars or at central banks are so-called general-equilibrium models.

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The U.S. is fairly close to full employment and seeing continued positive momentum. Supposed remedies such as making interest rates negative, with the goal of accelerating monetary circulation, seem better suited to 2010 than 2016.

Maybe it’s time to start paying more attention to other approaches, specifically those based on the supply side. Supply-side economics has been discredited since the Bush tax cuts failed to boost economic growth, but there is another way of thinking about the problem. It is not enough for funds to be left in the hands of the wealthy; rather they must be invested in risk-bearing equity capital, focused on innovation.

So argues Edward Conard in his new book, “The Upside of Inequality: How Good Intentions Undermine the Middle Class.” Think of it as a revamp of supply-side economics but with the concept of risk-bearing at the core, a fitting perspective for an author who was a founding partner of the private equity firm Bain Capital and a former business associate of Mitt Romney.

Secular Stagnation

In this view, traditional demand stimulus is at best defensive in nature. It may limit further collapse, but it won’t much revitalize risk-taking.

Weak demand is not a cause in and of itself. It is a symptom of a shortage of equity willing and able to bear risk.

You may recall that the iPhone made its debut in 2007, and it sold very well during the tough economic times that followed. Had there been more innovations of import, a simultaneous growth of production and market demand could have been self-validating and pulled the economy out of recession more quickly.

This framework makes Conard a revisionist on the U.S. trade deficit. The traditional story is that Americans buy goods from, say, East Asia, and the sellers respond by investing those dollars back in the U.S., a win-win situation. Conard believes that analysis would hold only if people who accumulate cash from foreign transactions invest their funds into risky, innovative enterprises.

So how can we stop savings from being deployed in too risk-averse a manner? To provide my own personal list, let’s target the bureaucratization of society, excess regulation, the high cost of moving talented labor into cities with building restrictions and thus expensive rents, overly cautious financial intermediaries (most capital isn’t venture capital), policy instability and a general fear of the future all may choke off entrepreneurship.

Keynesian economics

Keynesian economics focuses on sticky nominal wages as one obstacle to increasing production, but especially these days that seems like only one small part of a much bigger story. Some good news is that the Chinese are interested in further diversification into equity and away from government securities.

Maybe supply-side economics isn’t as wrong as its reputation indicates. Maybe the earlier supply siders just spent too much time focusing on one supply obstacle – high taxes – when other barriers were bigger problems.

Conard recognizes that there are many factors behind slow innovation, but for my taste he plays up tax cuts too much, believing that the wealthy are sufficiently willing to bear risk and dynamically invest. Consistent with this view, Conard argues that the American middle class has in recent times experienced bigger real income gains than the numbers indicate, once job benefits are counted properly.

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Instead of clarity about the economic outlook, the Federal Reserve is delivering Kodak moments, highly staged events that seek to communicate control but which really suggest that form has replaced substance. If the Fed’s objective last week was to put its September meeting back into play as the potential venue for a rate increase, it can claim a partial success.

Prices in the futures market show traders now see about a 34 percent chance of a hike on Sept. 21, up from 22 percent two weeks ago. But you still have to go out to December before the likelihood rises above 50 percent.

There’s a very good reason for that market skepticism. Raising rates at a time when inflation is dormant and miles away from the central bank’s 2 percent target seems somewhat perverse.

The Jackson Hole Symposium (and let us note in passing what a great word symposium is, adding gravitas to what would otherwise be a mere conference) was an opportunity, as the event title said, to consider “Designing Resilient Monetary Policy Frameworks for the Future.” Instead, Fischer’s comment suggests it’s business as usual at the Federal Open Market Committee, with no room at present for such innovations as changing the inflation goal or targeting nominal gross domestic product.

Fiscal expansion

That’s a shame. There’s a consensus that monetary policy is becoming impotent, and that governments need to step in with fiscal stimulus. But until central banks admit that their firepower is waning, politicians can continue to evade responsibility. “You can’t expect us to do the whole job,” Christopher Sims, a Nobel Prize-winning economist from Princeton University, said last week. “Fiscal expansion can replace ineffective monetary policy at the zero lower bound. So long as the legislature has no clue of its role in these problems, nothing is going to get done. Of course, convincing them that they have a role and there is something they should be doing, especially in the U.S., may be a major task.”

Finance — particularly in an era of fractional reserve banking — is essentially a confidence trick. Depositors have to be confident their money will be there when they try to withdraw it. Businesses have to be confident that the economy is on a sound footing otherwise they won’t invest and hire. Central bankers aren’t just economists and policy makers; they’re also salespeople, selling a story.

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Most of the world’s wealthiest and best-governed countries got there without super-rapid bursts of growth. Denmark, which has a per capita income of about $52,000 and is frequently ranked as one of the happiest countries in the world, never experienced what anyone would call an economic miracle. If you Google that phrase, the main entry will be a research piece detailing how, in the 1990s, the country lowered its unemployment rate without having to dismantle its welfare state.

Economic Record

Denmark’s overall economic record is gloriously boring. From 1890 to 1916, per capita growth averaged about 1.9 percent per year, and if in 1916 you had forecast that this pace would continue for another 100 years, you would have been off by only about $200. Denmark had positive growth about 84 percent of the time and no deep recessions, according to a recent study by Lant Pritchett and Lawrence Summers.

Or consider the U.S., where per capita income surpassed Latin America in the 19th century –thanks mainly to the latter’s stagnation. U.S. growth rates at the time were typically below 2 percent, and even lower up through 1860, hardly impressive by the standards of today’s China or India — or for that matter today’s U.S. The big advantage of the U.S. is that it avoided major catastrophe for long periods of time, apart from the Civil War, and pushed ahead with fairly steady progress.

The 19th-century Latin American stagnation, aside from wasting valuable time, left much of the region with weaker infrastructure, poor educational systems and a more dysfunctional politics.

Slow growth doesn’t mean that the U.S. or Denmark were failures in the 19th century. It’s hard for economies at or near the technological frontier to rapidly improve living standards, because invention is usually slower than playing catch-up by borrowing technologies from wealthier nations. Such borrowing of know-how, along with exports and rapid investments in education and infrastructure, is what later allowed the Asian tigers of Japan, South Korea, Taiwan, Hong Kong, Singapore and China to achieve growth rates of 8 percent to 10 percent a year.

Slow and steady

If you’re an investor, the experience of Denmark and other “no drama” growth stories provides some clues to the future of developing economies. The East Asian growth model, for all its wonders, belongs to history. Slow and steady may be the only option left. For whatever reasons, few countries have been able to scale up their educational successes as rapidly as the East Asian tigers. Trade growth, which exceeded overall output growth in the late 20th century, now seems stagnant. Many export industries are automated and hence don’t create as many middle-class jobs as they used to.

In other words, today’s world may resemble the 19th century more than the last few decades. That could mean fairly low measured growth rates, a premium on stability, few if any “break out of the box” alternatives and a time to invest in institutional quality. American democracy arguably was working better by the early 20th century than it was during the presidency of Andrew Jackson, and that helped America cope with later crises.

What’s also striking about the 19th century is that some countries, such as China and India, didn’t keep up. Indeed, their economies actually shrank for sustained periods of time. They had some bad luck, pursued bad policies and suffered under colonial and imperial oppression. Foreign rulers often were more interested in control than in producing public goods for the citizenry.

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I have my own suspicions that monetary stimulus works well enough to thaw frozen credit markets, as it did amid the 2008 financial crisis. But if we want to stimulate the economy, then a fiscal, rather than monetary policy, is the way to go (nevermind that lots of pundits also claim that the federal government’s 2009 economic stimulus package didn’t work either).

But proving the efficacy of monetary or fiscal policy can’t easily be accomplished. This is one of the biggest challenges for economics, and why critics sometimes say that economists suffer from physics envy (I’m ignoring the Freudian implications here, but would note that the phenomenon has its own Wikipedia entry).

Testing the thesis

The problem with any line of economic policy argument is that there often isn’t much of a way to test any one thesis in order to prove or disprove the underlying claim. There is, for example, no laboratory where we can test side-by-side how QE performed for the U.S. economy versus an alternative scenario without QE. If we had that ability, we could get a better idea of whether QE, zero interest rates, fiscal stimulus or other programs work. Alternatively, we could run experiments about what would happen if there was no central bank or federal government economic intervention, letting the system cleanse itself of excesses.

If only. Instead, many pundits fall back on partial arguments without recognizing what the lack of a counterfactual means to their analysis. As we noted two years ago:

This flawed analytical paradigm has many manifestations, and not just in the investing world. They all rely on the same equation: If you do X, and there is no measurable change, X is therefore ineffective.

The problem with this non-result result is what would have occurred otherwise. Might “no change” be an improvement from what otherwise would have happened? This, or course, has consequences not just for economic-policy choices, but also for corporate decision-makers, investors and — not least of all — voters in the U.S. presidential election.

Policy experiments

There is some good news on this issue: the states, those so-called laboratories of democracy, have been engaging in a variety of different policy experiments. These are obviously not perfect scientifically rigorous experiments; it’s impossible in complex social and economic systems to create two identical test groups, with the variable to be verified versus a control group. However, the various states can give us some ideas about how successful one form of public policy may be versus its peers and the national averages.

We may never have a laboratory for national economic experiments such as QE, but at least we have an approximation at the state level. It’s something worth watching.

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