Is It Time For A New Model Of How The Economy Works?

Economists and other experts present figures and charts and reams of statistics to explain how they think the economy works. Some of what they say makes sense and some warrants closer examination. What makes the difference?

Traditional models

One explanation is that some commentators are too closely wedded to traditional economic models that have lost claim to any meaningful relationship with real markets.

Digital technology, for instance, is going through a revolution even though some experts are asking if a slowdown in the effects of technology is leading to lower levels of growth.

The evidence for such a point of view stems from historic models of growth and productivity that take little account of developments in the recent past or what may happen in the future.

Theories, statistics and economic models tend to trump the reality of what is happening in the economy or what may be causing low levels of growth.

Economic models sometimes favour theory over fact and predict the future by reviewing the past; in times of stability and predictability this may work but in times of instability and unpredictability it is less effective.

Not least because many models of how the economy works often fail to capture the effects of new activities created by new technologies.

Today’s markets need to be better understood not least because the digital technology revolution is happening in parallel with a period of slow growth.

Another view not embraced by traditional economic models is that the effects of digital technology may actually increase the scale and scope of growth to exceed traditional levels.

The rationale for such a belief stems from the potential of the transforming effects of current and future technologies in so many different disciplines and areas of activity.

The spread of entrepreneurs

The spread of entrepreneurs in countries all around the world is another new factor and one likely to have an enormous impact on global growth.

When people in countries, previously centrally managed and controlled, start their own businesses they will naturally do what millions of others have done and create wealth where none previously existed.

Technology and the energy of countless entrepreneurs spread across the borders of every country have the potential to create millions of jobs and drive economic growth.

Economic models were originally developed to explain how the economy works but like thinking in many other disciplines they need to capture and reflect a more entrepreneurial and technology driven world.

SO, economic models were developed to make sense of a predictable world and as a result make less sense in today’s less predictable environment.