WES 2025: Nobel laureate Michael Spence looks to the future

In a keynote at the Warwick Economics Summit, Michael Spence discussed the future of the global economy.

Currently holding professorial roles at both Stanford University and New York University, Spence won the economics Nobel in 2001, alongside George Akerlof and Joseph Stiglitz. The trio were rewarded for their research on markets with asymmetric information.

Spence began his address by discussing President Trump’s domestic agenda – marked by “radical deregulation”, changing relationships between the US and its global partners, and social conservatism.

He then turned his attention to the global economy. Spence posited that the world is changing in “irreversible ways”. These changes include not just “pandemic shocks”, but structural trends such as technological advancements.

He argued this has significant implications for monetary policy. Spence showed that the Federal Reserve has consistently expected interest rates to slow growth more than has actually occurred. The takeaway from this is that in a world of rapid structural change, economic forecasting is difficult.

Spence suggested that shocks, such as climate events and wars, were becoming both more severe and frequent

Focusing on the “challenges” a changing world presents, Spence suggested that shocks, such as climate events and wars, were becoming both more severe and frequent. This has been accompanied by political polarisation, a Europe facing structural barriers to growth, and a Trump administration that may make the US a less reliable ally.

However, Spence also pointed to the “opportunities” stemming from change. A key one is innovations in science and technology. Developments such as AI, the “revolution” in biomedical and life sciences, and the “green energy transformation” look set to improve the world’s productive capacity.

Beyond the West, he discussed a global expansion in entrepreneurial activity, with the global economy’s “centre of gravity” shifting towards East Asia.

Spence noted these structural changes required three key changes: reforms to economic growth models, a reworking of “frameworks, mindsets, and policies for macroeconomic management”, and shifts in the ways we manage “global interdependence and cooperation”.

Factors such as ageing, geopolitical tensions, and reduced market competition are limiting supply-side expansion

He went on to elaborate on trends that are affecting the global economy’s productive capacity. The last three decades have largely been defined by “demand-constrained growth”. There was an “enormous surge in productive capacity” stemming from the growth of emerging market economies such as China. Alongside the shock to household balance sheets stemming from the global financial crisis, this meant that demand was unable to keep up with supply.

However, we are now in an environment of supply-constrained growth, Spence noted. The “powerful” deflationary effects of economic growth in emerging market economies are “fading”. Moreover, factors such as ageing, geopolitical tensions, and reduced market competition are limiting supply-side expansion.

Spence rounded off his speech by discussing contemporary technological advancements in depth. He highlighted the sharp decline in costs of solar power generation and DNA sequencing, alongside TSMC’s semiconductor chip innovations and the likely prospect of quantum commuting. These technologies present an “upside potential”, Spence suggested, and if we use these technologies wisely, it could “change the trajectory of pretty much everything, including the global economy”.