Understanding the network helps to understand the economy. Supply chains have always been seamless and therefore “boring”. Now, however, geopolitical, environmental, social and political upheavals are bringing supply chains to the fore.
A consequence of this is the emergence of what is called “mesoeconomics”, or the study of the “middle” space between micro- and macro-economics, where supply chain networks exist.
The trigger for this “spiritual” shift is that supply chain shocks have defied inflation forecasts, according to the White House. Another factor is that industrial policy is back in vogue.
Also, an important variable is digital innovation. Big Data enables economists to monitor business networks with unimaginable levels of detail, almost in real time. This means that any set of relationships between entities can be mathematically characterized as a graph, which allows the use of concepts from graph theory.
To put it another way: whereas economists used to act like medieval doctors, making diagnoses by looking at body parts, and inferring how they interact, they are now like doctors with tiny cameras watching how blood circulates to assess health. Networks matter.
New analysis
Today, economists also use mesoeconomics to investigate price pressures and innovation. This shift is still at an early stage. But, in my opinion, it should be applauded loudly, for at least three reasons.
1. Policymakers will get a better sense of how the economy is working and how inflation is developing by using this type of graph analysis.
2. The shift can help broaden the scope of the economics profession. Such a rethinking began 15 years ago, after the financial crash of 2008, when the fields of behavioral finance and behavioral economics began to combine psychology and economics.
Neuroeconomics, which looks at how economic decision-making happens in the brain, is now booming. But this creative interdisciplinary thinking needs to go much further.
Take, for example, the analysis of non-monetary exchanges, such as the bulk exchange of data for services in the consumer technology sector. Twentieth-century macroeconomics and microeconomics struggle to do this.
Fields such as anthropology may help. And this underscores the third reason why the rise of mesoeconomics is welcome: network analysis is critical to many areas of political economy and has long been overlooked. Think about the finances.
After the crisis
After the financial crisis it became clear that one reason for this disaster was that bankers had “sliced and diced” credit risks into complex chains of transactions that were dangerously concentrated in single bottlenecks or hubs.
This concentration had gone unnoticed because few people analyzed this network—instead, they either focused on individual risk or used top-down analysis to examine the entire system.
Today, financiers and regulators are smarter about these trading networks. However, networks matter in other ways as well.
- Example 1, Banks’ use of cloud computing involves so few vendors that it causes congestion and vulnerabilities. BIS shares these fears.
- Example 2, Economists and policymakers often ignore the economic impact of digital supply chains.
Network analysis, he says, is necessary to track “the value-creating ecosystems that have sustained the World Wide Web and how they are being disrupted by large linguistic models (LLMs). So we need not just ‘mesoeconomics’, but more ‘mesotechnology’ and ‘mesofinance’ analysis.
Perhaps the US and other countries could expand their focus from supply chain risks to funding this research.
