Our shrinking economic toolkits

[Celerity]

For four decades, mainstream economists and policymakers have been wedded to fixed dogmas. Their blind belief in fiscal discipline threatens the very stability of societies.

https://www.socialeurope.eu/our-shrinking-economic-toolkits



In the natural world, humans stand out for the complexity of the tools, technologies, and institutions that we have developed. According to the anthropologist Joseph Henrich, we owe this success to our ability to accumulate, share and adapt cultural information across generations. But just as interconnection causes our ‘collective brains’ to expand over time, isolation can cause them to shrink. Economists should take note.

Since innovation and accumulation are socio-cultural processes, larger and more interconnected populations create more and increasingly sophisticated tools. The inter-generational expansion of our collective brains depends, according to Henrich, on ‘the ability of social norms, institutions, and the psychologies they create’ to encourage people freely to ‘generate, share, and recombine novel ideas, beliefs, insights, and practices’.

Disruptive isolation

To see how isolation can disrupt and even reverse this process, consider Tasmania, which some 12,000 years ago was separated from mainland Australia when the melting of polar ice caps flooded the Bass Strait. Archaeological remains indicate that prior to this separation, Tasmanian and mainland populations possessed the same skills—such as fire-making—and technologies, including the boomerang, the spear-thrower, and polished-stone and bone tools.

Yet, when Europeans arrived in Tasmania in the late 17th century, its inhabitants were using just 24 of the simplest tools any human population had developed. Not only had they been unable to develop new skills and technologies; they had also stopped using some of those they had previously possessed. In short, geographic isolation had caused them to lose significant cultural knowledge over generations. The Tasmanians did not choose their isolation. Yet, today, some societies and social groups are doing just that. And, as with the Tasmanians, this is having regressive effects, including the loss of both existing knowledge and some capacity to generate new knowledge and innovation.

Mostly ineffective

With interest rates still ultra-low or even negative in many countries, governments have few remaining monetary-policy tools with which to respond to a slowdown, let alone another recession. Yet they stubbornly refuse to employ fiscal policy—and, in particular, to increase public spending—choosing instead to implement tax cuts that are mostly ineffective in reviving real growth........

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About Jayati Ghosh

Jayati Ghosh is professor of economics at Jawaharlal Nehru University in New Delhi, executive secretary of International Development Economics Associates and a member of the Independent Commission for the Reform of International Corporate Taxation.