Economics is not a static field of study, and the rapid changes of the modern world are inevitably seeping into the academic discipline. As factors like technological change and global warming reshape the economy and how we think about it, future economists must be prepared to understand today’s increasingly complex economy and anticipate its evolution.
The world is changing at an unprecedented speed. Just 19 years ago, at the turn of the millennium, a smartphone would have seemed like something from outer space, Facebook Founder Mark Zuckerberg was just 14 years old, and most people were more worried about the Y2K bug than global warming. Since then, our lives, priorities and the way we interact with others and society have changed significantly. The pace of change continues to accelerate.
These technological and scientific advances have brought with them new economic models. The field of economics has had to keep up by using modern tools and a deeper understanding of human behavior to understand the flows of capital and assets in today’s complex digital world. Already, the 2000s were hit by one of the greatest global financial crises in modern times as most economists failed to wrap their heads around the dangers of the subprime mortgage market in the US. That’s why IE University’s new Bachelor in Economics is teaching future economists how to interpret the economic realities of today, and be ready to comprehend what tomorrow may bring.
Here are four economic trends worth paying attention to as they continue to disrupt traditional economic models:
- Embracing irrationality
The idea of behavioral economics has been a breakthrough. Using tools from psychology and other social sciences, economists are increasingly realizing that people, as economic actors, do not necessarily act rationally. Why did you buy the shirt you are wearing? Was it the result of a careful cost-benefit analysis that concluded that it was the best shirt you could buy for the lowest cost? Most likely, it also involved emotions, social influence and other factors that were previously ignored by economists. “You cannot be a good economist these days without understanding the irrationalities that affect how people make economic decisions,” says Lee Newman, Dean of the IE School of Human Sciences and Technology. Now, this understanding is being applied by economists in many ways, including “nudges,” which are positive reinforcements or indirect suggestions to influence economic behavior and decision-making. For instance, the Behavioural Insights Team in the UK has found that just the way letters demanding tax payments are worded can have a notable effect on how many people actually pay them.
- Navigating the attention economy
In today’s hyper-connected world where companies can reach you as you doze off to sleep at night and the moment you open your eyes in the morning via a smartphone, time has become one of the most precious and accessible commodities. Yet, with only 24 hours in a day, this limited resource has become extremely valuable for companies that profit from advertisements, such as online media and social media organizations. Attention economics is a new approach to the management of information that takes these new realities into account, and helps these companies find new ways to capture a slice of the lucrative attention pie. Facebook, for example, offers users a completely free platform and saw its revenue reach $55.8 billion in 2018. From addictive algorithms to Instagram influencers, new business models are being carefully designed to keep you clicking for their own economic gain.
- The revolutionary concept of ownership over access
Some of the most disruptive companies that have emerged in the last decade could be considered part of the sharing economy. From Uber to Airbnb, these economic models have mostly been facilitated by digital connectivity. Certainly, people have shared their possessions or time with others throughout human history, but the internet has led to the construction of multi-billion-dollar platforms that facilitate individual transactions. China, for instance, has goals for the sharing economy to make up 10 percent of its GDP by 2020, and PricewaterhouseCoopers (PwC) predicts that the value of the sharing economy will reach $335 billion by 2025 – a 22-time increase from its value in 2014. This sector of the economy is skyrocketing and shows no signs of stopping, but is also posing major challenges to regulators and governments around the world. Cities are now racing to cope with the consequences of the sharing economy, like rent increases triggered by Airbnb and protests from the taxi sector when it comes to Uber. At the same time, the sharing economy is increasing its reach far beyond sectors like transport and accommodation. From sharing clothes to renting services like dog walkers or food delivery, the scope of this model is sure to continue disrupting traditional sectors in years to come.
- Environmental sustainability incorporated into economics
While our economic activity has created historically high levels of comfort and prosperity throughout the world, it has also taken a major toll on the environment. From oceans filled with plastic to the greenhouse gases in the air we breathe, we now know that the traditional economic model of constant consumption and even planned obsolescence is simply unsustainable. The circular economy offers a way to better take advantage of resources and reduce waste significantly by designing it into the economic model. While this may sound like a far-out environmental model, its economic repercussions could be massive. According to one study conducted by McKinsey and the Ellen MacArthur Foundation, this approach could even boost Europe’s resource productivity by three percent by 2030, generating cost savings of €600 billion each year along with €1.8 trillion in other economic benefits. This concept is demonstrated by Sea2See, a Spanish company that makes sunglasses from plastic pulled out of the ocean by fishermen. Created in 2016, the company expects its 2019 turnover to reach €2 million, 30 times what it was in 2017 when its first products hit stores.