March 2020 | FINANCE & DEVELOPMENT 17
POINT OF VIEW
A FUNDAMENTAL DIFFERENCE
between natural science
theories and social science theories is that natural sci-
ence theories, if valid, hold for all times and places. In
contrast, the relevance of economic theories depends
on context. Malthus’s theory of food availability was
valid for the millennia before he formulated it, but
not after the industrial revolution. Keynes’s ideas
were much more valid during the Great Depression
than during the inﬂationary 1970s.
I am increasingly convinced that current mac-
roeconomic theories, with their premise t hat mon-
etary policy can determine the rate of in ﬂation,
may be unsuited to current economic real ity and so
provide misguided policy prescriptions. ey f ailed
to anticipate Japan’s deﬂationary slowdown that
began in 1990, or the global ﬁnancia l crisis, slow
recovery, and below-target inﬂation during a decade
of recovery, or the sustainability of hig h levels of
government debt with very low real interest rates.
Understanding these developments and cra fting
policies that respond eﬀectively w ill likely require
that economists develop what mig ht be called a
“new old Keynesian economics” based on A lvin
Hansen’s Depression-era idea of secular stagnat ion.
is article sum marizes the case for new approaches
to macroeconomics by highlighting important
structura l changes in the economy of the industrial
world, explains the secul ar stagnation view, and
draws some policy implicat ions.
The investment dearth
Barring a chan ge in current trends, the industrial
world’s working-age population will decli ne over the
next generation, and China’s working-age popula-
tion will decline as wel l. At the same time, trends
toward increased labor force par ticipation of women
have played out with, for example, more women than
men now working in the United States.
ese demographic developments eliminate the
demand for new capital goods to equ ip and house
a growing workforce. is trend is reinforced by
the observation that the a mount of saving required
to purchase a given amount of capital goods has
declined sharply as t he relative price of equipment,
especially in the i nformation technology (IT) space,
has sharply decli ned. A $500 iPhone today has
more computing power than a Cray supercomputer
did a generation ago. In addition to capital goods’
having lower prices, the downward trend in t heir
prices encourages delaying investment.
Moreover the IT revolution has been associated
with a broader demassiﬁcation of the economy.
E-commerce has reduce d the demand for shopping
malls, and the cloud has reduced the demand for
oﬃce space by eliminat ing the need for ﬁling cabi-
nets, allowing oﬃce s to be personalized with a ﬂick
of the switch, down to family photos on the wa lls.
Accepting the Reality of
New approaches are needed to deal with sluggish growth,
low interest rates, and an absence of inﬂation
Lawrence H. Summers
PHOTO: RALPH ALSWANG