By Atanu Biswas
As the global economy entered the 21st century, it unavoidably carried the scars and lingering effects of the 1990s dot-com bubble collapse. But, it might be intriguing to see how the concept of economics has been reshaped to a great extent thereafter. Well, technology changes with time, as do human needs and the nature of crises. Unfortunately, many economic ideas, like the theories that justified the wage stagnation in the US since the 1980s or the failed Washington Consensus approach to developing countries, are not appropriate to 21st-century economies, where human and natural capital are increasingly valued, and simplistic assessments of wealth, national product, growth, and human happiness are increasingly questioned due to bad economic ideas in high places. Thus, economic thought must be moulded to keep pace with these changes, adapting to new theoretical frameworks.
French economist Thomas Piketty views on rising enquality
In his 2013 book Capital in the Twenty-First Century, French economist Thomas Piketty analysed datasets from 20 countries spanning from the 18th century to uncover a crucial economic and social framework and showed that inequality is not an accidental event but rather a structural feature of capitalism. The book argued that capitalism inherently tends towards extreme wealth inequality as inherited wealth grows faster than earned income, creating a hereditary elite class.
The 20th century was a temporary deviation from the mainstream of economics when overall inequality decreased due to world wars, strong growth, and high taxes. Without such policy interventions, the 21st-century economy is returning to ‘patrimonial capitalism,’ as Piketty believed, where inherited wealth prevails over entrepreneurial merit. Piketty prescribed controlling this through progressive wealth and inheritance tax.
However, 21st-century economics has significantly expanded its scope, aiming to make it more relevant, realistic, and capable of addressing the unique challenges. Several new branches of economics have emerged, focusing on the vast complexities and deviations from traditional rational economic models. Beyond simply maximising utility, these newer branches are attempting to understand modern challenges such as inequality, climate change, healthcare, and nuanced human choices by integrating psychology, climate science, big data, and social justice.
The Nobel Prizes awarded to Daniel Kahneman in 2002 and Richard Thaler in 2017 have firmly established behavioural economics in the mainstream of economic theory. Behavioural economics integrates psychology to explain irrational human decisions, highlighting biases, emotions, and context. Furthermore, environmental and sustainable economics works with climate change, natural capital, and ecosystem services. It evaluates real wealth and total costs, going beyond the traditional measure of GDP. Furthermore, human-centered and social economics uses big data and new models instead of conventional models.
The 2008 global financial crisis and persisting inequality have highlighted the limitations of the perfectly rational and market-predicting neoclassical models. Along with this, the need for a more holistic, empirically grounded approach to address complex real-world problems such as climate change, technological disruption, and social inequality has been felt at various levels. Fortunately, technology advanced rapidly during this period. Aided by advanced computing power and experimental methods, it provided the opportunity to test theories against real-world behavior. The effort to extract valuable insights from the overwhelming amount of data through meticulous analysis is therefore intensifying.
How new technology is reshaping jobs in the 21st century
One of the defining characteristics of the 21st-century economy is rapid digital transformation through artificial intelligence (AI), automation, etc.—the growth of the digital economy, crypto assets, the shift of global power towards emerging markets, growing inequality, geopolitical trade shifts, and serious environmental challenges impacting natural capital. Historically, when new technology storms in, mostly unskilled workers lose jobs. But perhaps for the first time in history, a large number of college-educated people are now losing their jobs—courtesy of generative AI (GenAI). The first quarter of the 21st century has witnessed this extraordinary phenomenon.
Overall, the crises of the 21st century demand a new economic understanding, as economists like Nobel laureate Joseph Stiglitz have said. The global economic crisis of 2008 and the shock of COVID-19 have eroded people’s faith in the traditional demand-supply-based, supply chain-dependent economy. The need for different forms of redistribution and even projects similar in nature to Universal Basic Income has been emphasised in various forums.
As Oxford Professor David Vines has said, “The old model of ‘macroeconomics’ was built for a stable world free from large economic shocks. If we ever lived in such a world, we no longer do.” Vines and Oxford economist Samuel Wills have undertaken a project called ‘Rethinking Macroeconomics,’ where they call for a shift away from the assumptions that have underpinned economic theory for decades but don’t meet today’s challenges. A more open and diverse paradigm is emerging, which is far better equipped to deal with contemporary challenges such as the global financial crisis, climate change, and Covid-19, they believed. For long, macroeconomics has been dominated by the ‘New Keynesian Dynamic Stochastic General Equilibrium’ model. It’s based on the idea that all disruptions are temporary and the economy eventually returns to a stable ‘equilibrium.’ Vines believes that the old core idea is a major deviation from reality. If we want an economy suitable for tackling the challenges of the 21st century, understanding the possibility of multiple economic equilibria might be crucial.
Thus, economics in the 21st century so far is highly influenced by rapid digital transformation, shifting global power to emerging markets, rising inequality/ debt, geopolitical trade shifts, and critical environmental challenges impacting natural capital, leading to slower projected growth, labour market polarisation, increased focus on green tech, and a need for new social contracts balancing individual responsibility with societal support amid technological disruption and climate threats. These combine to create a turbulent, uncertain, but opportunity-filled economic landscape for the future, requiring adaptive strategies from governments, businesses, and individuals.
(The author is Professor of statistics, Indian Statistical Institute, Kolkata.)