This year’s economics Nobel Prize has gone to Oliver Hart and Bengt Holmström, for their work on the theory of contracts. It’s about incentives, and imperfect information, and long-term relationships. But it’s related to lots of real-world economic issues — performance pay, mergers and acquisitions, and bank lending.
During the past two years, we have seen signs that wage pressure is building as the economic recovery grinds on. Enough evidence has now accumulated to suggest that it is already happening.
Since the Great Recession, macroeconomic discussion has been dominated by discussions of aggregate demand, and how to create more of it through monetary and fiscal policies. That has led to a strange state of affairs where those topics still dominate the debate, even though they’ve done the job economics expects of them.
Traders and investors trying to parse the statements coming from the world’s most important central bank are at a loss: Will an interest-rate increase come in September? And will there be one, two or no hikes this year?
For a few decades, economists used to imagine how the world works, write down a theory describing their idea, and call it a day. If some statisticians came along and found some support for the theory, well, great! But usually they didn’t, and that was fine too. As one old joke put it, if an idea worked in practice, economists would ask whether it worked in theory.
One of the less heralded truths of economics is that growth miracles, while they make for good press, are overrated. It’s an insight that could help us better understand the outlook for developing countries such as China.