The role of economics in a rapidly changing world: My thoughts as Chair
2024: a year in review

The role of economics in a rapidly changing world: My thoughts as Chair

The 25 years since Frontier Economics was established have been an extraordinary period for economics and the economics profession. 

Untold millions of people have been lifted out of poverty, thanks principally to the economic successes of China and India.

And yet the failure to predict the financial crisis of 2008 continues to cast a long shadow. The turbulence required large scale intervention to shore up the financial system, followed by abnormally low interest rates, ultra-loose monetary policy and big fiscal imbalances. The policy turmoil has led to something of a crisis of confidence among economists.

Surveying the globe today, the US has emerged from the financial crisis and the more recent pandemic in much ruder health than Europe, judging from indicators like growth and unemployment. But electorates on both sides of the Atlantic are feeling disenchanted with their leaders. They are mistrustful of politicians, as globalisation, previously believed to be inexorable, has failed to benefit many communities living with squeezed incomes and precarious jobs.

Populism and protectionism are on the rise around the world. In China there are clear signs of economic slowdown; recent state stimulus has not had a material impact. At the same time, the West’s lodestar model of political governance - liberal democracy advancing hand in hand with free market economics - is under stress. 

The same 25-year period has also witnessed astonishing technological innovation. It is hard to believe the iPhone hit the market only in 2007. Today, there are approximately 7bn smart mobile phones in use by a global population of 8.2bn. Almost 80% of people living in cities have access to broadband fast enough to stream a movie. Recent advances in generative artificial intelligence suggest we might be on the verge of another technological revolution. However, Bill Gates’s quote is worth reprising here: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” 

There is an opportunity for economics - with Frontier at the forefront - to help businesses and governments understand and exploit innovation for the good of customers and the wider public. Even as technology evolves rapidly - and unpredictably - the enduring power of economic thinking provides clear, transparent ways to expose and weigh trade-offs between different courses of action. Economics also yields insights to understand the nature of markets and competition in a world where companies can reach billions of customers instantaneously and Big Tech firms have outgrown some mid-sized countries. 

What stance should regulators take when premature intervention risks stifling innovation and belated action risks stifling competition? The rapid emergence and huge potential of AI show the urgency of striking the right balance. 

Equally, how can economic tools and analysis help businesses - under constant pressure to make fast decisions - grasp the opportunities of innovation to support new services and products? 

The green transition is a case in point. The world is going to have to decarbonise. Many countries, the UK included, have signed up to stretching net zero targets. The upfront costs are, however, substantial at a time when governments have limited fiscal leeway and consumers are struggling with rising prices.

It is a near certainty that further technological innovation will reduce the costs of phasing out fossil fuels. But how quickly and with what precise impact? How is an individual business to decide how much to invest in decarbonisation today when the future benefits are uncertain yet there may be a hit to short run profitability.  Economic tools can help companies navigate between such competing short- and long-term demands. 

Another pressing question is how big a market companies need to make massive investments in innovative technologies such as AI and 5G. Is the pressure of competition the most powerful spur to investment? Or can there be ‘too much’ competition eating away at returns, deterring investment? If so, does allowing companies to merge and so take a larger market share boost investment? Here again, economic tools have a central role to play. 

Frontier has played an important part in helping businesses and policymakers to address exactly these questions across multiple sectors and jurisdictions. In so doing, our clients have been able to harness the benefits of innovation in concrete, tangible ways. 

To take just a few examples: 

  • European Commission: we led a study to determine what actions would best drive the development of green hydrogen, a central plank of the EU’s decarbonisation plans. 
  • Microsoft: we developed a framework to help identify those government policies most critical to the roll-out of AI. 
  • Roche: we estimated the cross-EU benefits of greater sharing of healthcare data for more personalised care and better-targeted research. 
  • Vodafone’s merger with Three: we made the case for consolidation in the UK mobile market to incentivise faster 5G roll-out. 

As we look ahead to 2025 and beyond, Frontier remains well placed to support our clients in tackling these fundamental questions, drawing on our first-class economists, excellent networks and European presence. Importantly, in my role as chair, I will endeavour to ensure that in everything we do we seek to ensure that the benefits of innovation are spread widely across society and not confined to select groups.