Wednesday, February 12, 2014

How Should We Manage The New Economy?

Everyone knows the story of the industrial revolution.  The rise of the machines increased productivity, and this made it possible for a substantial number of people to have a piece of a much larger economic pie.  Keynes even imagined that more people would have an opportunity to enjoy the kind of life that was common to his class.  They would spend more time engaged in activities that expanded their minds and cultivated the enjoyment of art, music and the humanities.  To some extent that happened.  According to Martin Wolf we are in the midst of a new economic revolution.  New technologies and globalization are transforming the economy and increasing productivity.  How we shape the good things that are happening, and manage the bad things, will determine whether the outcome will be a tiny minority of winners and a large majority of losers from the changes that are underway.  We need to remember that economies are not a natural phenomenon; they are determined by the economic and political decisions that we make.  We have to choose the kind of economy and society that we want.

The Tom Friedman's of the world tell us that every nation is engaged in new arms race.  The nation with the smartest people will win the race.  Martin Wolf correctly argues that education is not a panacea.  Education is a personal and a public good but it will not determine the shape of the new world that we are entering.  We don't know what new skills will be needed 25 years from now, but more importantly, a relatively small number of creative entrepreneurs and skilled technicians will be needed to perform the necessary work.  Education cannot turn us all into the happy few. We will be forced to reconsider how we deal with the opportunity for leisure.  Rising productivity enables us to provide more output with fewer hours worked.  How do we provide a reasonable standard of living to the large numbers of people from whom we require fewer hours worked?  Moreover, as our ability to produce more output increases, how do we expand the demand for the increased output in an economy that requires less labor?

We have tendency to look at our current economic situation as if it is just another downturn in the business cycle.  We have the tools to deal with business cycles.  We may not use the tools that we know how to use but we may also be in the midst of more fundamental changes that are similar to those that we experienced during the industrial revolution.  If that is true, and I agree with much of what Martin Wolf wrote about the changes that have been underway, we will require a level of leadership that has been difficult to find in much of the world.

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