It is fair to say that trust in economists and economic forecasts has been damaged in recent years. This is partly due to the unprecedented shocks the global economy has suffered – from the pandemic to geopolitical tensions and wars. But a significant part is due to macroeconomists’ sometimes narrow focus on theoretical models.
Shocks, crises and false alarms by Philipp Carlsson-Szlezak and Paul Swartz (Harvard Business Review Press, £25) sets out a rational new approach to decoding the international economy in uncertain times. The authors, both economists at the Boston Consulting Group, believe that the current focus on simplistic cause-and-effect models increasingly fails to take into account the true complexity and dynamics of macroeconomic relationships. Their approach is based on three key pillars.
First, to end the “master model mentality,” in which a dogmatic focus on empirically observed economic relationships can obscure interacting factors. Central bankers’ reliance on the Phillips curve – the observed inverse relationship between inflation and unemployment – in the current interest rate cycle is just one example.
Second, the authors stress that negative or even ominous messages, amplified by the media, are gaining the upper hand. They warn analysts to take a step back to understand whether the risks and mechanisms that make the worst crash or crisis scenarios possible in the first place are in place. One example they cite is the overly ominous predictions about the impact of the Covid-19 pandemic on the global economy, which, in their opinion, did not take into account government responses and a rational assessment of the shock itself.
Third, they favor “economic eclecticism,” an approach that combines economic theory with narratives and insights from a broader range of disciplines. This is a fresh, thorough, and practical book for anyone seeking to sharpen their macroeconomic judgement, and it is easily accessible and insightfully structured. It provides an invaluable framework for better understanding growth, the financial sector, and the key trends shaping the global economy.
The balance between central and local governance is crucial for sustainable and equitable economic prosperity in the long term. Yet few countries manage to Left behind (Allen Lane, £25) Paul Collier, Professor of Economics and Public Policy at the University of Oxford, provides a detailed analysis of how and why overly centralised bureaucracies and orthodox approaches to economic policy undermine national prosperity.
Drawing on his experience as a development economist, Collier examines case studies from across the developed and developing world, from run-down former industrial cities in the UK to once-thriving copper mining regions in Zambia.
Collier’s core argument is that building local institutions that are better prepared to ensure policies that respond to local needs is generally better for overall prosperity than highly centralized decision-making.
He uses insights from social psychology and behavioural economics to underline his argument, highlighting how local governance empowers people and gives them a stake in their own economic success. Collier places a significant amount of the blame for Britain’s lagging rural, coastal and post-industrial regions on what he sees as the overbearing British Treasury.
It is a fundamental, global and interdisciplinary analysis of the problem of inequality of opportunity that still exists in too many parts of the world and has a destructive effect on our democracies.
In the 20th century, the Polish and Vietnamese economies were weakened by war and poor governance. Today, economists and politicians see both countries as symbols of development success. How nations escape poverty by Rainer Zitelmann (Encounter Books, £21.99) The author, a German historian and sociologist, describes how the two nations managed to turn things around.
Zitelmann’s thesis is unashamedly pro-capitalist. He argues that Poland and Vietnam owe their successes to economic growth that was geared toward wealth creation and entrepreneurship, and to the reformers who encouraged it. Although there are mechanisms through which too much inequality can hamper economic dynamism, Zitelmann reminds us that income inequality can be, and has been, both a side effect of rapid economic growth and an important entrepreneurial incentive that can dynamize once-opportunity-poor nations.
This is a novel that offers a different perspective on how people in emerging markets view the principles of capitalism. It also offers useful insights into two fascinating countries that will play important roles in the 21st century.
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