It’s been a long time since I studied at the London School of Economics, but there were two curves that loomed large in my imagination in those days. The first was macroeconomic: the Phillips curve—named after an LSE professor—that charted an inverse relationship between unemployment and inflation. The second was microeconomic: a U-shaped marginal cost curve, which meant that as firms grew, their marginal costs would fall but then at some point rise, helping limit the size of the firm. Together, those two curves were key to a well-regulated economy.
But both concepts have been obliterated in recent years. Inflation is nonexistent, despite record low unemployment; and marginal costs in many businesses, particularly digital, tend toward zero. As a result, we’ve lost our common understanding about a host of economic issues, including how to run monetary policy, how to set antitrust policy, or how to determine the pricing of things like pharmaceuticals (the prices are too high!) or news media (the prices are too low!)
This week’s Economist explores one aspect of that change—the disappearance of inflation—and is worth reading here. Less worthy, in my view, is a new book by New York Times editorialist Binyamin Appelbaum, The Economists Hour, which I finished this weekend. It lays the blame for a host of modern social ills at the feet of the economics profession.
Appelbaum faithfully tracks the rising influence of economists in the post-World War II era. But he sidesteps the extraordinary benefits that resulted—most notably, a billion people lifted out of poverty. Instead, he focuses on rising inequality, and blames economists for the deed. Our problem, he says, has been excessive reliance on markets—a misguided thesis that unfortunately reflects the prevailing view in today’s Democratic presidential primary contest. President Trump, of course also has turned away from economists—rejecting their views on trade, in particular. As a result, economics finds itself in crisis—both as a tool for understanding today’s economy, and as a guide to making economic policy.
What is needed is not a rejection of market or economic thinking, but rather a new understanding of how an economy based on digital products, intellectual property, and abundant capital actually operates. Let’s hope a new Keynes or Friedman emerges soon.
More news below.