One of 2015’s biggest blockbuster movies was Jurassic World. But the dinosaurs on the screen, realistic as they may have been, are not the ones that should scare us the most—those are the ones in our midst, the ones who wreak havoc through their failure to evolve and adapt to change, their failure to ask the right questions. Politicians, as we have established, largely fall into this category, as do some of the lemmings at think tanks. But there is another group out there with similarly scary traits. We call them economists.
The term economist may evoke visions of kindly, bespectacled wonks droning on about arcane theories, or perhaps government big shots mumbling unintelligibly before Congress. But we know better. These are powerful women and men. They have made giant policy decisions that have affected the lives of billions, often while working behind closed doors with data and strategies that few understand and fewer still believe in.
Economics has long been known as the dismal science. Thomas Malthus, a cleric who also wrote about economics, has become the poster child for illustrating the rationale behind this label. (Thomas Carlyle coined the term in reference to the study of slavery.) In the very last years of the eighteenth century, Malthus posited that population growth would ultimately derail human society’s efforts to perfect itself. “The power of population,” he wrote, “is indefinitely greater than the power in the earth to produce subsistence for man.” It is indeed a grim prognosis, but it highlights another reason economics might be seen as dismal: that is, just how off the mark its predictions can be.
Being wrong has long been a special curse of economists. You might not think this would be the case in a so-called science. But, of course, all sciences struggle in those early years before scientists have enough data has been collected to support theories that can reflect and predict what happens in nature. Scientists from Galileo to Einstein offered great theories, but, due to the limits of their age, labored under gross misconceptions about reality. And, in economics, we are hardly in the era of Galileo quite yet. It is like we are somewhere in the Middle Ages, where, based on some careful observation of the universe and an inadequate view of the scope and nature of that universe, we have produced proto-science, also known today as crackpottery. (See long-standing views that the Earth was the center of the solar system or the belief that bleeding patients would cure them by ridding them of their so-called bad humors.)
Modern economic approaches, theories, and techniques, the ones that policymakers fret over and to which newspapers devote barrels of ink, will someday be regarded as similarly primitive. For example, economic policy makers regularly use gross estimates of national and international economic performances—largely aggregated measures based on data and models that are somewhere between profoundly flawed and insanely wrong—to assess a society’s economic health (before determining whether to bleed the body politic by reducing the money supply or to warm it up by pumping new money into its system). Between these steps and regulating just how much the government spends and takes in taxes, we have just run through most of the commonly utilized and discussed economic policy tools—the big blunt instruments of macroeconomics.
(I remember that, when I was in government, those of us who dealt with trade policy or commercial issues were seen as pipsqueaks in the economic scheme of things by all the macrosauruses beneath whose feet the earth trembled, whose pronouncements echoed within the canyons of financial capitals, and who felt that everything we and anyone else did was playing at the margins.)
Think of the data on which these important decisions were based. GDP, as it is calculated today, has roughly the same relationship to the size of the economy as estimates of the number of angels that can dance on the head of a pin have to the size of the heavens. It misses vast amounts of economic activity and counts things as value creation that aren’t that at all. Even Simon Kuznets, who pioneered the idea of GDP in the 1930s, warned against using it as the prime measure of national economic well-being. Trade data, such as that used in measuring national surpluses and deficits, misses a big chunk of trade in services and much Internet activity, among many other swaths of trade, and is widely reported inaccurately. Labor statistics, such as unemployment rates, are cooked and deceptive. The list goes on. The reality is that only two things are dependably known about most of the data that policy makers use to make decisions: it is late, and it is wrong.
Michael Green of the Social Progress Imperative is trying to look beyond this insufficient construct of national success. “Robust economic growth,” Green argues, “does not automatically translate into well-being among people.” His Social Progress Index is an index based on social and environmental metrics to provide a more holistic assessment of national welfare and to provide policy makers with more insights as to how they can elevate citizens’ quality of life.
Today, the world stands at the dawn of a new era, thanks to the advent of big data and enhanced computing power. Already there exist data flows that will show economic fluctuations in real time and down to an incredible level of detail: by community, by block, by family, by business, by however you want to slice it. Using these tools and new sources of data to come, the world will be able to find correlations never imagined. Old ideas, like tracking national economic performance based on geography, will give way to new ones, like tracking customizable groups that share much closer correlations than borders. There is a “You-istan” out there full of millions of people who act more like you, who respond to stimuli more like you do, and who rise and fall more like you than do your neighbors. Next-generation economists using such tools will be able to target their predictions and prescriptions more surgically.
So, as we have asked “Where are the philosophers?” we might ask “Who will be the new economists?” What will they study, and how will that study differ from that of their predecessors?
Whereas today’s economic models rely on a relative handful of variables, future models will utilize a limitless number, creating opportunities for new approaches, theories, and methods. Many of these new models and tools will require not microeconomists but nanoeconomists, super-specialists in the relationships between much smaller economic units and the larger economy. Economic policy making will therefore devolve from central governments to state and local governments, which are not only closer to the issues and the solutions that workers, companies, investors, and citizens require but are also better equipped to work with the local private sector in real time to solve those issues.
New economic theories will also emerge based on growing sources of real-time data. Soon, money as we know it will be replaced by bit-based and mobile-payment systems, knocking old-school monetary policies for a loop. Your grandchildren and mine will likely never hold currency in their hands, nor will they ever go to a bank. Come to think of it, you probably very seldom go to a bank today. Those grandchildren will no doubt titter as old timers like me croak out stories about how in the days before cash machines (“What’s cash, Grandpa?”), if we didn’t get to the bank by three o’clock on Friday (“What’s a bank, Grandpa?”), we would be broke for the weekend (“What’s a weekend, Grandpa?”).
The early glimpses of our financial transformation come from some unexpected places. Many emerging economies are blazing trails in mobile money precisely because they are home to the majority of the 2.5 billion adults who lack access to a formal bank account, which is almost half of all adults worldwide. Not having access to a financial institution is a serious impediment to growth. Often the poorest in the world must go great distances to cash a check (even the government-assistance checks they desperately need), they can’t borrow (even though microlending programs repeatedly show they are among the most reliable borrowers in the world in terms of paying back what they owe), and they can’t send or receive money outside their small communities.
A solution has emerged that is now making waves globally. In Kenya and Tanzania, millions now use their cell phones as banks. The success of such programs suggests that hundreds of millions worldwide are likely never to see a bank in their lives as more and more people switch to completely virtual banking.
This has become possible because mobile data traffic, even in some of the most challenged economies in Africa, is growing at over 100 percent per year. This was seen by big telecom companies (the banks of the future?) as an opportunity to close the financial-services gap in these markets. Vodafone stepped in with a platform, M-Pesa, that it launched in Kenya and Tanzania in 2007. From those two countries, the technology quickly spread. Customers are now using M-Pesa to send, receive, and borrow money via their cell phones in markets elsewhere in Africa, Asia, and Eastern Europe, with more expansion to come. Thus, the mobile-money phenomenon has gone well beyond proof of concept and into practice. As quoted by Jason Kohn in an entry on Cisco’s Connected Life Exchange blog, Rene Meza, a managing director of the program, said: “The banking infrastructure in Africa is not as developed as it is in the West. Furthermore, a lot of our customers cannot meet the minimum banking requirements. This called for an alternative transaction model. The convenience of mobile services, the adoption of mobile telephony in Africa, and the merging of technologies has created an infrastructure that allows for money transfer services—in our case, M-Pesa.”
The rapidly burgeoning system offers many advantages. With people handling less cash, the risk of robberies and other crimes goes down. It becomes much easier to accept government social-service payments, and easier for the governments to get the payments to citizens. A man who effectively played the role of central bank governor in Peru described for me how it once cost more in postage to get benefits to citizens high up in the Andes than some of the checks they were sending were worth. What’s more, shopkeepers where the checks were cashed knew when the checks were received, and raised prices on the days they were most likely to be cashed. The new system saved costs and stopped the gouging, what the official described to me as “removing the artificial tax on the poorest that the old system had helped create.” It enables people to conduct transactions more easily and to have a more transparent view into their financial health.
One senior World Bank official told me, “We expect this will be the next major area in which we’ll see leapfrogging, as we did with cell phones. Communities that had no hardwired telephone infrastructure found themselves embracing the new wireless options more rapidly because there were no alternatives to impede adoption. We can expect the same here. In fact, I wouldn’t be surprised if this is one area in which circumstances will put the emerging economies ahead of developed ones in the eventual move toward a virtual banking world—one in which trips to brick-and-mortar financial institutions are increasingly rare.”
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In fact, such developments are happening so fast that they are blurring and altering the business models we have grown accustomed to in unexpected ways. Not too long ago, I sat with the president of the international division of the world’s leading logistics and shipping company as he explained why, since they covered the entire supply chain for many customers—from product fabrication to final sale—and did so via sophisticated, digitally driven services, there was no reason that they couldn’t become a bank themselves, offering financial services along the way to their clients. This is not an entirely new concept. Car companies and big-equipment providers offered leasing and financing services years ago. What is new is that it is becoming ever easier to blend the services they offer—often companies seeking to take advantage of captive customer bases with whom they work daily. Through such creativity, new possibilities are being created that will forever alter the way we see money and finance and the institutions that have, until now, defined them. In this new world, banks are invisible and held in your hand, and every company is a financial institution. It is a world without currency, and thus without central banks, and yet one in which the authors of a few algorithms that drive markets and exchange rates will have disproportionate power. In this landscape, microtransactions might take place constantly and invisibly and make megafortunes for new generations of innovators. Thus, it is also a world in which the nature and shape of crime may change, and with it our ideas of security. New laws and regulations will be needed. We’ll need new legislators who understand the current issues—issues that will only come at us more rapidly in the decades ahead.
Consider companies as they enter the big-data era—for example, General Electric. It produces jet engines, power plants, and MRI machines (among other things). Each of these will be fitted with sensors that will provide real-time data on the performance of the machines, but also on their location and usage, and thereby on critical aspects of key industries and the global economy. That data can be monetized: sold not only to traditional GE customers but to others who could use it to manage their own businesses, fuel their own models, and monitor global economic performance. That data is an important asset, with a real value to the company and its shareholders. Yet that data asset does not appear on the balance sheet at GE or most other companies. Similarly, the data liabilities associated with the risks that data producers and managers encounter are also absent from the balance sheets. (Data liabilities, for example, might include potential losses that a company might suffer because of data breaches.) This is a big gap. In the big-data era, virtually every company will have a big-data asset. That means that, until accountants and managers learn how to quantify and communicate data assets effectively, every company will be undervalued or improperly valued.
The world’s intellectual center of gravity tends to shift with its economic center of gravity—as it did from Europe to the US, and as it is now certainly doing from the US across the Pacific to Asia. That suggests that the creative leadership of the next generation is also more likely to come from Asia. That, in turn, means that the ideas that may be embraced may well be more driven by Asian values, and by the fact that the rising powers of Asia, like China, share much more with the rising powers of the rest of the world than they do with the 4 percent of the population that live in the narcissistic US. We have already seen this shift take root in a crucial debate about the Internet economy being an open or closed network.
Right now, there is an intense ideological battle between countries that believe the Internet should be open and those that believe it should be closed. Who wins this ideological battle will determine the distribution of wealth and power in the world of the twenty-first century, because it is increasingly clear that the Internet has become the primary mechanism by which global economic activity will be conducted in the decades ahead. And negotiations regarding that openness are certain to replace negotiations about trade in goods as centerpieces of international economic diplomacy.
Americans have long expected that the rules of the Internet will largely resemble the vision for the Net promulgated by its creators in the West. US companies and political leaders have promoted an idea that might be characterized as cyber-internationalism, the idea that the Net will transcend borders and drive the opening of all societies. However, an alternative narrative is emerging. The Chinese have embraced a view that might be characterized as cyber-nationalism or cyber-protectionism, which suggests that they may exercise the same controls over the Internet use of their citizens as they would any other activity within their borders. This has included everything from the creation of the so-called Great Firewall of China, which blocks sites and exchanges they deem unsuitable, to other forms of censorship and regulatory control. That may seem like a losing proposition, echoing the failures of the closed societies of the Cold War era. However, it would be a mistake to think that American or Western views will necessarily dominate. History is against such conclusions. How will these new powers shape the future of the Internet and the economy within it? Because, rest assured, it will ultimately be they who do so.
China’s views do not make it an outlier; Singapore, India, Saudi Arabia, Russia, Venezuela, and Brazil have all embraced stringent controls on the Internet or the way business is conducted there: who can or cannot buy and sell products and services associated with the Web. It’s clear that there is a growing cyber-nationalist movement around the world. More than twenty-two nations have added significant new controls of this type in the past two years. This movement will be central to defining the economic landscape of the twenty-first century, determining how easily Internet-delivered services or capital can flow from one part of the world to another or how challenging such future commerce will be. New rules will need to be written, and new international regimes and pacts will likely emerge.
If, as we have asserted, a central economic question of this new era is “Who owns the data?” then the mechanisms by which that ownership is determined become vitally important. In the European view, where citizens must opt in to relationships with companies that harvest their data (in other words, give their consent to let the data be taken), the default protects the citizens’ right to their data. In the US view, where the model is to opt out, it means the default makes it easier for companies to reap the economic benefits of the private customer data they harvest. How that tug-of-war plays out will be another giant factor in selecting the winners and losers of the economy of the century ahead.
Global regulation of the Internet, of financial transactions in cyberspace, and of increasingly global monetary policies shaped by the shifting modalities of e-money, as well as how we regulate and value work in a world in which human labor will be seen in a much different light, are all issues that will similarly have to be addressed, questions that must be answered, before the shape of this new era will be clear.
The questions economists ask, and the way they keep score, have an enormous impact on how we judge our leaders and our own progress as a society. We stand at the threshold of an enormous leap forward, but as we make it, additional questions loom. How should the disappearance of money as we know it alter the shape of governments and policies? How will the identification of strong correlations across borders change the imperatives for government policy makers? Who will benefit disproportionately in this new system? Can we create new ways to ensure opportunity and equity? Will instant information flows force us to be too reactive and not strategic enough? Will we be able to predict the economic future more accurately? Will that information be used for the many or the few?
Again, we can’t answer the questions if they are not even being asked, if our economists are unfamiliar with the underlying forces that are transforming our economies, if our political leaders know no better, and if the business innovators who do understand the change are not seen as vital partners of their counterparts in the public sector (or, as is so often the case, they distrust the public sector and would simply prefer to be left alone). The result is a knowledge gap that leads to an enormous vision deficit. Ultimately, the crashing sound you hear is the result of obsolete systems running headlong into cold, hard realities that could have—and should have—been anticipated.
Indeed, tomorrow’s economics will be so unlike that of today that it might just take a Hollywood device—like a mosquito preserved in amber, carrying the blood of former US Fed Chair Alan Greenspan, whose viable DNA can re-create this macrosaurus—for future generations to fully grasp the Jurassic Period of economic thinking and approaches that have governed and guided our daily lives. More important, as that era closes, we must recognize that another is beginning. As transitions between historical epochs in the past have shown, those who evolve are the ones who will survive. The beginning of evolution is recognizing what is changing. But the secret is recognizing how we must change, and then implementing those changes effectively. For companies, for governments, for economists, for investors, and for each of us who works for a living, we must recognize that much of what we take for granted will soon be eclipsed: jobs, money, economic theories, the way governments interact with the economy, how societies grow, and how they take care of their people. Getting them wrong or leaving it to the few to capitalize on the changes to the disadvantage of everyone else invites the kind of upheaval and crises that have accompanied many of the biggest transitions in history. Getting these changes right promises less burdensome, less risky, more prosperous lives.