How Economics Explains the World
As we navigate daily world news, we encounter headlines about wars, global markets, and cities grappling with climate change. How can we make sense of these interconnected topics to guide better decision-making for the future? In How Economics Explains the World: A Short History of Human History, Harvard-trained economist Andrew Leigh argues that economics offers the tools to answer these questions and improve our lives. Leigh highlights the limitations of traditional economic models, which often rely on purely rational assumptions and fail to account for complex and rapidly evolving variables. He points out that standard models frequently overlook critical events like conflicts, pandemics, famines, bankruptcies, defaults, and trade wars. By addressing these gaps, Leigh uncovers the hidden economic forces driving religious movements, social transformations, and wars, offering a more comprehensive understanding of the forces shaping our world.
The book highlights how economic downturns often lead people to seek scapegoats, beginning with their voting behavior. Leigh's research shows that voters are more likely to re-elect governments that deliver strong economic growth. However, they struggle to differentiate between governments benefiting from favorable global conditions and those excelling due to skill. Examples such as the Corn Laws debate, the Smoot-Hawley Tariff Act, Trump-era tariffs, and Brexit illustrate how isolationist policies often win elections, even when openness aligns better with economic principles.
Readers will revisit significant historical events—from the invention of the printing press to the Industrial Revolution, the wealth of nations, World Wars I and II, and the Bretton Woods system—through an economic lens. Leigh also delves into key themes such as inflation, markets, climate change, and the Great Depression, revealing their underlying economic factors. He emphasizes that economists play a vital role in designing international economic frameworks to sustain peace but clarifies that technological progress and global market access alone have not solved all global challenges.
How Economics Explains the World underscores that rising inequality is not the sole economic concern and highlights the critical role of low unemployment in fostering stable societies. Leigh examines the "economics of identity," exploring how people derive societal roles and self-perception from their work. He argues that populist movements often stem from cultural and identity crises triggered by the loss of secure working-class jobs—a poignant reminder in the digital age. Leigh also draws on the ideas of economists like David Ricardo, John Maynard Keynes, and Thomas Friedman to demonstrate how their theories shape our responses to technological advancements and climate change.
Leigh explains that cities and countries tend to achieve greater equality when education keeps pace with technological change, unions remain strong, and taxes are progressive. Equality also improves when economic growth rates match or exceed the return on capital. He highlights how tariffs, once a significant revenue source before the advent of income taxes, funded wars like the Napoleonic Wars and the U.S. Civil War. However, Leigh cautions that poorly implemented tariffs can harm economies, as seen during the Great Depression when reduced immigration and higher tariffs exacerbated economic decline.
How Economics Explains the World traces the emergence of capitalism and market systems, explores the key ideas and figures shaping economics, and examines the influence of economic forces on world history. Leigh advocates that economics can enhance life in areas such as education, entrepreneurship, social interactions, and investing. Crucially, he assures readers that one need not be an economist to grasp how economics permeates daily life. Some of his simple yet powerful suggestions include:
When faced with tough decisions, weigh the costs and benefits.
Consider opportunity costs—what are you giving up?
Think on the margin—determine whether having one more of something is worthwhile.
Acknowledge externalities—recognize how your decisions impact others, positively or negatively.
