What are the Biggest Challenges for 2016

The World Economic Forum recently published an interesting article priming an important discussion we all need to have.  Four Nobel economists on the biggest challenges for 2016 compiles the thoughts of Robert Shiller (Noble winner 2013), Edmund Phelps (Noble winner 2006), A. Michael Spence (Noble winner 2001), and Alvin Roth (Noble winner 2012) on the biggest economic challenges facing the world today.  It is a nice little read and could help to spark interest for some important problems today.

Shiller, believes that “cyber-physical systems” or the autonomous nature of industry is the biggest issue facing the world today.  Most importantly, he believes that hiding within this Fourth Industrial Revolution is the possibility to exacerbate the inequity the world is currently facing.

Phelps, identified the  main problem to be the ineffectual mechanics modern economics has in place to correctly predict and help the economy as a whole.

“The difficulty is that standard economics-both Neo-classical, Keynesian and supply-side economics – is unsuited to find the cure.  The economy is not a machine that can be cranked up to the best possible performance level: a functioning modern economy is a living organism made up of all the individuals participating in it.  Their initiatives are sparked by imagination, encouraged by values and assisted by their personal knowledge.”

Spence, offered an interesting problem.  he believes that reversing the deteriorating pattern of global growth is imminently important in 2016.  Essentially, we aren’t consuming enough.  The lack of consumption has dire effects on the global economic environment.  We need to find a way to spark aggregate demand, possibility without the help of monetary policy.

Roth explained that the refugee relocation and matching problem we saw develop in 2015 will persist in 2016.  Roth went on to explain that it is important to match the refugees with a place which will allow them to thrive and grow, since they will be an important component to whichever economy they enter.

Personally, I think that the most important economic problem we face in 2016 is the impact global warming is already having across the world.  I’m sure I sound like a broken here by stating this opinion, but we are certainly at an important crossroads (some argue we’ve long since passed the point of helping ourselves) which could set the course for years to come.

A word (or two) on Economic Profit and Accounting Profit

Students often find themselves in the first few days of class understanding the idea of opportunity cost.  Inevitably, this leads to the discussion of implicit costs observed by a firm and how accountants and economics track these costs.

Most often, students have a hard time grasping the real world implications of accounting for these costs using GAAP and theoretical economic ideas.  In 2003, the WSJ published a small article from the eyes of an accountant Robert L Bartley in order to shed some light on how accountants view the differences.

Using GAAP, earnings per share (EPS) are supposed to measure the profit of a company.  As Frank Knight (a very famous economist) wrote, it was the income to the proprietor.  Granted, there are some more subtle nuances identified by economist throughout history, which we acknowledge and teach today but the the identification of economic and accounting profit needn’t be so muddy says Knight.  It is really about perspective.  Economists are concerned about the dynamic nature of production while the accountant is interested in proprietorship.

As the article states, “Knight warned that ‘economic profit cannot be carried to theoretical completeness’ because it is difficult to quantify.”

If you’re new to some of this language, here is a nice breakdown of some the terms and how economists have come to understand them.