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When analyzing the macro situations of countries or regions, I place more stress than many people do on the following two factors:
1. Human capital: How much active, ambitious talent is there? And how high are the averages and medians?
2. Matching market demands: Are you geared up to produce what the market really wants, export markets or otherwise?
Those may sound trivial, but in relative terms they remain undervalued. They are, for instance, the biggest reasons why I do not buy “the housing theory of everything.”
They are also, in my view, the biggest reasons why the UK currently is in economic trouble. Both #1 (brain drain) and #2 have taken a hit in recent times. The UK continues to deindustrialize, business consulting is not the future, and London as a financial centre was hurt by 2008, Brexit, and superior innovations elsewhere. More and more smart Brits are leaving for the US or Dubai.
You also will notice that #1 and #2, when they are in trouble, are not always easily fixed. That is why reforms, while often a good idea, are by no means an easy or automatic way out of trouble.
These two factors also are consistent with the stylized fact that growth rates from the previous decade are not so predictive of growth rates for the next decades. Human capital often drives levels more than growth rates. And matching market demands often has to do with luck, or with shifting patterns of demand that the supplying country simply cannot match. Once people abandon Toyotas for Chinese electric cars, Japan does not have an easy pivot to make up the loss.
Most other theories of growth rates, for instance those that assign a predominant weight to institutions, predict much more serial correlation of growth rates than we find in the data. That said, institutions do indeed matter, and in addition to their usual effects they will shape both #1 and #2 over the longer run.
Overall, I believe conclusions would be less pat and economic understandings would be more effective if people paid greater attention to these factors #1 and #2. Not putting enough weight on #1 and #2 is one of the biggest mistakes I see smart people — and indeed very smart people — making.
Addendum: You will note the contributions of Fischer Black here. Apart from his contributions to options pricing theory, which are widely known, he remains one of the most underrated modern economists.
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