Back in the 20th century, the study of economics had a strongly positive role in shaping political decisions. It’s not to say we got everything perfect. But generally, when policy was grounded in economic theory, things worked out pretty well.
Fast forward to the 2020s, and the world of Paul Samuelson’s seminal textbook “Economics: An Introductory Analysis” feels like a galaxy away. Politicians have forgotten (or are ignoring) a lot of the solid economic principles that guided us in the past.
First, there’s the basic building block of economics: supply and demand. Someone has something they’ve built (or grown, or chopped down, or dug out of the ground), and someone else needs it – and a market is created! But in 2025, rather than purchasing those market goods, certain countries are asserting their power and simply threatening to take them. (We’re sending thoughts and prayers, Greenland! And Canada might be next.)
Then there’s monetary theory, notably how the supply of money in the economy influences inflation. Central banks are purposely independent from politicians for this very reason. The control of the money supply, including the adjustment of interest rates, needs to be out of the hands of political influence. Yet President Trump seems to think he can “demand” that interest rates be lowered.
What about international trade? Trade deficits and surpluses need to be understood in the complete context of the international balance of payments. A deficit in the trade of physical goods, for example, doesn’t mean you’re losing. It doesn’t mean you’re subsidizing another country. In fact, it means that your nation has attracted more money and capital inflows (that sounds like a good thing, no?), and your nation therefore has more wealth to purchase what other countries are selling.
Then there’s the concept of comparative advantage. David Ricardo pioneered this work over 200 years ago. He argued that nations should concentrate resources only in industries where they have the greatest efficiency of production relative to their own alternative uses of those resources. That concept eventually became the rationale for global trade liberalization in the mid-20th century. The General Agreement on Tariffs and Trade (which begot the World Trade Organisation) guided nations to work cooperatively, bringing down tariffs and trade barriers. This unleashed a tidal wave of economic prosperity, and lifted hundreds of millions of people out of poverty.
But America (and Britain before that) is moving away from trade, towards protectionism and the naive notion of self-sufficiency. Other nations are also abandoning their former commitment to trade.
Then there’s taxation policy. Economists have long advocated that, when revenue is required by governments, it should be collected in the form of taxation that is the least distortive of consumer or business decisions. Taxation on imported goods, known as tariffs, are terrible because of the distortions they create, as well as ignoring the laws of comparative advantage mentioned above.
Today, tariffs are not economic policies, they’re political weapons. Countries that had previously been solid, trusted trading partners are now using them (or the threat of them) as tools of coercion.
Why is all of this happening? To be sure, some degree of blame can be laid at the feet of the same economic policies that were lauded above. For example, the theory of comparative advantage was used to justify increased global trade. That was good generally – but it wasn’t good for everyone. The speed at which some economic activity, especially manufacturing, shifted across the globe left millions of workers high and dry. They didn’t have a generation or two to adjust. They were doomed, angry and afraid. And then they elected Donald Trump, who convinced them he could bring back the good ol’ days.
It doesn’t seem like we’re going back any time soon to the economic principles of those dusty text books. If we like it or not, the world has shifted on its axis, and now geopolitics is calling all the shots.
R.I.P., economics. It was nice knowing you.
