The German philosopher G.W.F. Hegel famously wrote that “the Owl of Minerva spreads its wings only with the falling of the dusk”, meaning that the wisdom of things can come after the historical preconditions have been realized – after the things actually happened. As our global economy is changing, following Hegel’s idea, our economic understanding must adapt to these new circumstances as well. Three outlines of a paradigm for the economics of global economics.
Observations
- Accelerating globalization, digitalization, and informationalization force us to rethink geopolitics.
- Problems in the global economy – like climate change – are hard to quantify and model, and it is more difficult to designate isolated and definitive causes for outcomes (like the cause of the Syrian civil war).
- In a world of international trade and transnational value chains, soft transaction costs become an important source of comparative advantage.
- We have noted the importance of hubs, whether in the digital economy, trade routes, or e-commerce, and how small countries can have a large impact through strategical positioning.
Analysis
The observations show that the global economy is changing, and its characteristics are challenging ‘traditional economic paradigms’. A new paradigm for the ‘economics of global economics’ has three dimensions.
First, there’s a shift in economic productivity in the global context. Trade in the global economy mostly concerns data, people, financial capital, services, and information, instead of tangible goods or physical production processes. This ‘global productivity’ is conceived as flows – continuous streams of economic value – rather than tangible goods and physical production chains processes. That’s not to say these no longer matter – products are produced in various parts of the world and shipped to all corners of the world – but they play a smaller role in the context of global economics. Furthermore, these global flows create unprecedented degrees of integration between centers of economic activity, in value chains and whole economies.
A new paradigm for the ‘economics of global economics’ has three dimensions
That leads to the second dimension: problems and problem-solving methods. Whereas the problems of traditional economics are characterized as ‘puzzles’, solved by ‘game theory’ and mathematical optimization of the given variables and constraints, the problems of global economics are considered ‘wicked problems’. High interdependencies and intimate interconnectedness between economic activity and centers, accelerate crossover and spillover effects of events, and thereby amplify causal chains and multiply the number of potential effects. That means these problems are difficult to solve because of incomplete, changing, or even outright contradictory requirements, which are also hard to recognize. As a result, the outcomes of global economics’ problems have a high degree of uncertainty: their probability distribution and the effects of outcomes cannot be known or calculated in advance. Multi-causality makes these problems hard to model and hard to quantify since their effects are unknown. A fitting analogy is the methodological difference between quantum mechanics (global economics) and Newtonian mechanics (traditional economics).
Both dimensions bring us to the last one: the logic of global economics. Traditional economics is focused on the production of physical goods, and the leading imperative is the concept of ‘decreasing marginal costs’: as companies produce more of the same thing, it gets cheaper. But because global trade is about highly interconnected and continuous flows, the leading concept to understand this form of production is ‘increasing marginal benefits’: the more something is used, the more valuable it gets. As a consequence of this paradigm of ‘network economics’, some places become disproportionally important. Economic activity no longer scatters throughout the global economy or follows a normal probability distribution like the ‘traditional’ Hotelling’s location model. Instead, economic activity concentrates in ‘hubs’ at the crossroads of important flow streams, which are specialized in handling, improving and accelerating specific flows. This “logic of the web” implies that hubs should provide “specialized totality services”: specialization creates network effects, while creating resilient networks (such as access to further networks, multiple data-centers for good cyber security and backups to cope with shocks and volatility in the network) and reduces soft and hard transaction costs.
