The Need for New Economic Theory: CEO Daily

Good morning.

It’s been a long time since I studied at the London School of Economics, but there were two curves that loomed large in my imagination in those days. The first was macroeconomic: the Phillips curve—named after an LSE professor—that charted an inverse relationship between unemployment and inflation. The second was microeconomic: a U-shaped marginal cost curve, which meant that as firms grew, their marginal costs would fall but then at some point rise, helping limit the size of the firm. Together, those two curves were key to a well-regulated economy.

But both concepts have been obliterated in recent years. Inflation is nonexistent, despite record low unemployment; and marginal costs in many businesses, particularly digital, tend toward zero. As a result, we’ve lost our common understanding about a host of economic issues, including how to run monetary policy, how to set antitrust policy, or how to determine the pricing of things like pharmaceuticals (the prices are too high!) or news media (the prices are too low!)

This week’s Economist explores one aspect of that change—the disappearance of inflation—and is worth reading here. Less worthy, in my view, is a new book by New York Times editorialist Binyamin Appelbaum, The Economists Hour, which I finished this weekend. It lays the blame for a host of modern social ills at the feet of the economics profession.

Appelbaum faithfully tracks the rising influence of economists in the post-World War II era. But he sidesteps the extraordinary benefits that resulted—most notably, a billion people lifted out of poverty. Instead, he focuses on rising inequality, and blames economists for the deed. Our problem, he says, has been excessive reliance on markets—a misguided thesis that unfortunately reflects the prevailing view in today’s Democratic presidential primary contest. President Trump, of course also has turned away from economists—rejecting their views on trade, in particular. As a result, economics finds itself in crisis—both as a tool for understanding today’s economy, and as a guide to making economic policy.

What is needed is not a rejection of market or economic thinking, but rather a new understanding of how an economy based on digital products, intellectual property, and abundant capital actually operates. Let’s hope a new Keynes or Friedman emerges soon.

More news below.

Alan Murray


Libra Troubles

Facebook's Libra project has had a very bad last few days. First it was key partners such as Visa and Mastercard pulling out. And now, more evidence of the regulatory pushback that scared them away: a draft G7 report effectively saying the project must not proceed until Facebook can prove the virtual coin is legal, and that it protects consumers and shuts out money launderers or terrorism financers. BBC

Turkey Sanctions

President Trump is about to levy sanctions on Turkey for the incursion into northern Syria that the U.S. effectively green-lit a week ago. As most observers predicted, Turkey used the abrupt withdrawal of American troops from the area to attack Kurds whom it accuses of being tied to an insurgency within Turkish borders. Now the Kurds have turned to Assad's regime for protection from the Turkish invasion. Reuters

WeWork Financing

SoftBank is reportedly trying to take control of WeWork through a financing package that would keep the office-space firm afloat and seize much of the voting power that's still held by founder Adam Neumann. Wall Street Journal

Vatican Probe

Vatican police are investigating the financing of a London luxury property development project by $200 million in Vatican money. So far, they have seized documents and computers from the Holy See's Secretariat of State and suspended five employees. Financial Times


Brexit Paralysis

As last-minute Brexit negotiations continue with the outcome uncertain, Fortune takes a look at how three years of uncertainty has harmed British businesses. Thanks to a Brexit that hasn't even happened yet, many companies' expansion plans have been put on ice. Meanwhile, large firms have stopped talking about the subject, for fear of alienating customers from one or the other side in the debate. Fortune

Chinese Exports

Chinese imports and exports fell last month by more than was expected. Shipments were down 3.2%, where analysts had expected a 2.8% drop. Imports were down 8.5%, and analysts had thought it would only be 6%. The drop in imports from and exports to the U.S. was of course substantially larger. South China Morning Post

Hunter Biden

Joe Biden's son, Hunter, is quitting as director of a Chinese private-equity firm where President Trump alleged (sans evidence) that he engaged in inappropriate conduct. He also said he will avoid serving on foreign boards if his father becomes president. Wall Street Journal

Catalan Leaders

Spain's Supreme Court has jailed nine Catalan separatist leaders over the banned 2017 referendum and independence declaration. They were found guilty of sedition, rather than the more serious charge of rebellion, and four were also convicted of misusing public funds. Former Catalan deputy leader Orio Junqueras got the harshest sentence of 13 years. Reuters

This edition of CEO Daily was edited by David Meyer. Find previous editions here, and sign up for other Fortune newsletters here.

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