What everyone needs to know about economics today

DO YOUR eyes glaze over and does your brain start to turn to mush when you hear the word economics? You are not alone. As someone who has written about economics for years in the pages of a magazine actually called The Economist, I am all too familiar with feeling that some economist or another is trying to bamboozle me with jargon or use mind-boggling math to persuade me of something totally incomprehensible or even contrary to common sense.

And yet, I believe, it has never been more important that everyone has a basic grasp of economics and the debates taking place among economists. In 2017, these debates will effect all our lives in big ways, especially since the election of Donald Trump means that some economic ideas that have been neglected for decades will likely become influential again, whilst other ideas that have long been rejected as foolish by the mainstream of the economics profession seem to be deeply held by the incoming US president - above all his hostility to free trade.

To help people who are turned off by economics to understand its important insights was my motivation for writing "Economics: An A- Z Guide". A new edition of it has just been published, which is fully updated to take on board all that has been going on since the financial crash of 2008, which I think was a game-changing moment for economics and which economic ideas are likely to work in the real world. (You can read an interview I did about the book here and buy a copy here.)

Most of the book is a collection of plain English descriptions and explanations of some of the most important economic terms and ideas. Where it is useful, I also include some explanation of why the idea matters, how it has changed over time, and, if it is still controversial, what are the main rival arguments.

There are entries on several hot new issues, including what is the Sharing Economy; whether we will all soon be working in a Gig Economy; the rise of Impact Investing, that tries simultaneously to make money and improve society; Quantitative Easing; the world's new Global Goals; and a new area of study based on looking at what happens inside the brain when making economic decisions, called Neuroeconomics.

As President Trump takes office, you may find especially helpful the entries on Infrastructure; the Laffer Curve; the Gini Coefficient; Zero Sum Game; and Protectionism ("opposition to free trade. Although intended to protect a country's economy from foreign competitors, it usually makes the protected country worse off than if it allowed international trade to proceed without hindrance from trade barriers such as quotas and tariffs).

"Economics: An A-Z Guide" begins with an article in which I explain "Why economics matters more than ever" and highlight three important changes taking place in economic policy-making.

First, since the 2008 financial crash, and the Great Recession that followed it, there is a lot more debate taking place about how to manage the economy as a whole: what economists call "macroeconomics". In the decade or so before the crash, there had been growing confidence among macro policymakers that they had cracked the old economic challenge of how to grow the economy fast enough to create full employment but not so fast that inflation took off. Economists called this happy time for the economy the Great Moderation and hoped it would carry on forever. Since it came to an abrupt end, a lot of new policies were used (such as quantitative easing) and some old policies were revived, but there is little consensus about how well those policies have worked or what will need to be done in future to get or keep the economy on track.

Second, many of the assumptions made in economic theory about how people and organisations make economic decisions are being challenged and changed. One reason is the vast increase in data being generated, which is allowing all sorts of new things to be discovered. This has inspired some fascinating experiments, ranging from making loans based on who a person has as friends, and how many, on Facebook to predicting the likelihood that a particular person will commit a crime. The second is a now thriving newish branch of economics that incorporates the findings of human psychology into decision-making models, to better reflect actual real world human behaviour.

Economists used to assume that people essentially acted rationally in pursuing the goals most in their self-interest. The new behavioural economists are taking into account psychological biases that seem irrational. People are persistently over-confident, for example; yet often take decisions in ways that suggest they care far more about the risk of making a loss than the likelihood of achieving a benefit.

Behavioural economists are also inspiring a new style of policy making called "nudges", which focus on finding ways to present choices differently, so that they make decisions that are more in-sync with their long-term self-interest than the decisions they make when choices are presented in the traditional way. For instance, people are likelier to save more for retirement or to be part of an organ donor program if the choice they are given has doing so as the default option and they are asked if they want to opt out, than if the default is not to take part and they are asked to opt in.

Third, there is a widespread challenge to the idea that economic growth is all that matters when it comes to economic policy making. In the years before the 2008 crash, GDP grew strongly, lulling everyone into a false sense of well-being. Since the crash, there has been a growing demand for alternative measures that more reliably tell us whether the economy and society are headed in the right direction. I have been involved in creating one of those new measures, the Social Progress Index, which you can read about here.

Similarly, just because a company earns growing profits, or a retirement fund keeps growing, that does not necessarily mean that all is well. Sometimes these gains are being achieved by imposing a cost on society, for example, which is why economists are increasingly involved in trying to devise new ways of measuring the social and environmental performance of firms and investments, in addition to their financial returns.

Hopefully, these three big trends will lead to much better economic decision making and policies in future. I am keeping my fingers crossed!

I hope this article didn't make your eyes glaze over or turn your brain to mush. Whether you are new to economics, or once studied it and now want to get up to date, I hope you will find "Economics: An A-Z Guide" extremely useful and dip into it often for insight about the economy. All the more so if you happen to be Donald Trump!

And let me know what you think.