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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Post from Bloomberg

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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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Post from Bloomberg

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