The last few years have been difficult ones for many people, including economists, as the COVID-19 pandemic and the war in Ukraine have ravaged economies around the world. But economists' problems started earlier. The failure of the vast majority of economists in government, academia, and the private sector to predict either the post-2008 Great Recession or the degree and length of its severity has raised serious credibility issues for both the political establishment and the economics profession. After all, the Great Recession started from within—it was not caused by exogenous factors such as a new virus strain or military adventurism by an autocrat.

The widely varying opinions of these “experts” on how this recession should be addressed, together with the repeated failures of central banks and other policy makers to meet inflation or growth targets in spite of astronomical levels of monetary accommodation, have left the public rightfully suspicious of the establishment and its economists.

The concept of the pursued economy, together with the author's earlier concept of balance sheet recessions, is an attempt to explain why an economy that was strong and vibrant loses momentum and stagnates for an extended period of time. While the war in Ukraine and post-pandemic supply constraints have recently pushed inflation rates higher, many people have experienced stagnant real incomes for years, if not for decades, prompting a large part of the population to feel left behind and angry.

The author is old enough to remember how vibrant and hopeful people were in the United States in the 1960s, in Japan in the 1980s, and in Taiwan in the 1990s. In those eras, almost everyone was benefiting from economic growth. The air might not have been as clean as it is today, but everything else was moving forward, and people were confident about the future. That is no longer the case in many advanced countries today.

Being personally familiar with these three economies, the author found it remarkable that all of them went through very similar processes of economic development despite having vastly different cultural backgrounds. The cultural or historical differences among these countries may have added or subtracted a few percentage points of GDP growth here and there, but all of them experienced similar stages of economic development and were facing—at least until the onslaught of the COVID-19 pandemic—extended periods of low interest rates and low inflation rates.

Moreover, this low inflation came in spite of vast amounts of monetary easing by most major central banks starting in 2008. And the low interest rates appeared despite massive increases in budget deficits and public debt, first in Japan after 1990, and then in the West after 2008. Bond yields actually turned negative in Japan and in many parts of the Eurozone.

These phenomena are totally inconsistent with the economics still taught in universities, which holds that massive “money printing” will result in pernicious inflation and that large budget deficits will lead to higher interest rates, if not to higher inflation rates. Simply trying to understand what zero or negative interest rates mean in a capitalist system sets the head spinning. One wonders how Karl Marx or Thomas Piketty would explain sub-zero interest rates.

It was twenty-five years ago that the author came up with the concept of balance sheet recessions in Japan to explain why post-bubble economies suffer years of stagnation and why conventional monetary remedies are largely ineffective during such recessions. The key point of departure for this insight was the realization that the private sector is not always maximizing profits, as assumed in textbook economics, but will actually choose to minimize debt when faced with daunting balance sheet challenges, that is, debt overhang.

Once this fundamental assumption of traditional macroeconomics is overturned and the possibility of debt minimization is acknowledged, everything that was built on the original assumption—including many standard policy recommendations—must also be reconsidered. This is because if someone is saving or paying down debt, someone else must borrow and spend those funds to keep the national economy running. If the private sector as a whole is paying down debt even with zero interest rates, the public sector must borrow and spend those funds to keep the economy going.

While the concept of balance sheet recessions was able to explain many of the phenomena observed since 2008 in the West and since 1990 in Japan, it could not explain all of them. This is because some of the changes in these countries predate 2008 or postdate their balance sheet recessions. For example, the slowdown in income growth in the West started long before the balance sheet recession struck in 2008, and sluggish economic growth in Japan continued long after the private sector finished repairing its balance sheet around 2006.

It then occurred to the author that there is another reason for the private sector to be minimizing debt—or simply refraining from borrowing—at a time of very low interest rates. The reason is that businesses cannot find investment opportunities attractive enough to justify borrowing and investing. After all, there is nothing in business or economics that guarantees such opportunities will always be plentiful.

When businesses cannot find investments, they tend to minimize debt—except when tax and return-on-equity considerations argue against it—because the firm's probability of long-term survival increases significantly in the absence of debt. Shortages of investment opportunities, in turn, have two possible causes.

The first is a lack of technological innovation or scientific breakthroughs, which makes it difficult to find viable investment projects. This probably explains the economic stagnation observed for centuries prior to the Industrial Revolution in the 1760s.

The second cause is higher overseas returns on capital, which forces businesses to invest abroad instead of at home. For companies in the advanced countries today, this factor probably plays as big a role as technological breakthroughs in investment decisions. And the rise of Japan in the 1970s and of the emerging economies in the 1990s has changed where Western companies invest. Businesses continue to maximize profits to satisfy shareholder expectations for ever-higher returns on capital, but the bulk of their investment no longer takes place in the home market. This realization that corporate investments are no longer limited to domestic locations led to the concept of pursued economy presented in this book.

The economics profession, however, failed to consider the macroeconomic implications of private-sector balance sheet problems or inferior returns on capital. Even though all the developed countries suffer from both of these issues, economists continue to recommend policies—including monetary easing and balanced budgets—that assume the private sector is still investing at home to maximize profits.

Because the promised economic recoveries took far longer to appear than expected and often did not materialize at all, the public is losing confidence in the competence of established political parties and is starting to vote for outsiders and extremists, a dangerous sign in any society. Although a much improved social safety net means that today's democracies are more resilient to recessions (and policy mistakes) than those in the 1930s, democracy cannot survive if center-left and center-right leaders continue to pursue fundamentally flawed economic policies that lead to suffering for ordinary people.

Once the root cause of stagnation and the failure of conventional economic policies is understood, the remedies turn out to be remarkably straightforward. To get there, however, we must discard conventional notions about monetary and fiscal policy that were developed at a time when the developed economies were not facing balance sheet problems or inferior return on capital problems relative to emerging economies.

Physics and chemistry evolved over the centuries in response to the discovery of new phenomena that defied existing theories. In many of these cases, it was eventually realized that what people thought they knew was not wrong but was in fact a subset of a bigger truth. Similarly, the economics taught in schools is not wrong, but it applies only to situations where the private sector has a clean balance sheet and enjoys an abundance of attractive domestic investment opportunities that are worth borrowing for. When these conditions are not met, we need to look for a new and broader paradigm that can explain what is happening without relying on those two assumptions.

This book was originally intended to be a revised and updated version of my last book, The Other Half of Macroeconomics and the Fate of Globalization, with similar structure and chapter headings. But the time freed up by working from home instead of commuting on Tokyo subway trains or commuting to other financial centers by airplanes allowed me to go far beyond the previous book, hence the new title.

It is the author's hope that this book will help explain why policies that worked so well in the past no longer work today, and why nostalgia for the “good old days” is no solution for the future. There are also right ways and wrong ways to respond to these changes. Once the key drivers of change are identified and understood, individuals and policy makers alike should be able to respond correctly to today's new environment without wasting time on remedies that are no longer relevant.