Institute for New Economic Thinking

The most famous idea in the history of economics appears exactly once in the book it supposedly defines.

The "invisible hand" gets only one in The Wealth of Nations, in a narrow passage about why merchants tend to invest domestically rather than abroad. Smith used it as a passing metaphor, and his contemporaries paid it almost no attention. It took nearly two centuries of reinterpretation to turn it into the theoretical foundation of market self-regulation.

In a new INET working paper, Alessandro Roncaglia, one of the world's most distinguished historians of economic thought, traces how this happened. Smith's actual argument, he shows, was far more concerned with the moral and institutional preconditions for markets than with any claim that markets automatically produce optimal outcomes. A society without sympathy, without functioning legal institutions, without checks on concentrated power, would not, in Smith's view, deliver the results his later interpreters promised. He was also, it bears remembering, deeply suspicious of merchants seeking political influence, writing that their proposals "ought always to be listened to with great precaution."

The paper is drawn from Roncaglia's forthcoming Cambridge University Press history of economic ideas. INET Research Director Thomas Ferguson contributed a preface situating the essay in the current moment: as America marks its 250th anniversary this week, The Wealth of Nations is once again being pressed into service as a founding document, linked to the Declaration of Independence and recruited into celebrations it was never quite written for. It's a good occasion to read what Smith was actually doing. https://www.ineteconomics.org/perspectives/blog/a-preface-to-alessandro-roncaglias-essay-on-adam-smith

According to Harvard economist Jason Furman, AI infrastructure investment accounted for 92% of US GDP growth in the first half of 2025. The St. Louis Fed attributes a much more modest 39% of total GDP growth to AI-related investment in the third quarter of 2025. Either way, the American economy is running almost entirely on a bet that AI delivers on its promises.

Economist Servaas Storm has been tracing this trajectory since October 2025. Across three pieces for INET, he laid out the case that the AI investment boom was built on circular financial logic, that scaling would not deliver the productivity breakthroughs the industry promised, and that the US economy had made itself dangerously dependent on a sector whose revenues remained a fraction of its costs. The pieces are worth reading as a series.

The AI Bubble and the U.S. Economy (Oct 2025): https://www.ineteconomics.org/perspectives/blog/the-ai-bubble-and-the-u-s-economy-how-long-do-hallucinations-last

The U.S. Is Betting the Economy on Scaling AI (Dec 2025): https://www.ineteconomics.org/research/research-papers/the-u-s-is-betting-the-economy-on-scaling-ai-where-is-the-intelligence-when-one-needs-it

Russell's Teapot: Dispatches From the Final Stage of the AI Bubble (Apr 2026): https://www.ineteconomics.org/perspectives/blog/russells-teapot

The AI Bubble and the U.S. Economy: How Long Do “Hallucinations” Last? This paper argues that (i) we have reached “peak GenAI” in terms of current Large Language Models (LLMs); scaling (building more data centers and using more chips) will not take us further to the goal of “Artificial General Intelligence” (AGI); returns are diminishing rapidly; (ii) the AI-LL...

The number at the center of Europe's fiscal framework is one that nobody can measure reliably.

"Potential output," the theoretical ceiling on how much an economy can produce without triggering inflation, sits at the heart of EU spending rules. Governments are required to keep expenditure growing slower than this estimate. The problem, as economists Davide Romaniello and Antonella Stirati argue in a new INET piece, is that the estimate itself tends to move in the same direction as actual output. When austerity slows growth, the model adjusts downward, and calls for further consolidation follow.

The authors draw on a substantial body of research showing that recessions leave lasting damage on economies, not temporary dips that self-correct. Italy's own post-2008 trajectory makes the point clearly: GDP declines from the 2008-09 and 2011-13 recessions had not been recovered by 2019, years later.

As an alternative, Romaniello and Stirati propose anchoring fiscal policy to an unemployment target instead. Their simulations show that an expansion aimed at 4.5% unemployment would, under plausible assumptions, improve Italy's deficit path relative to the Commission's own projections. The case for rethinking the framework has rarely been more timely.

From Potential Output to Full Employment: A Paradigm Shift for Italian Fiscal Policy Europe’s new fiscal rules still bind policy to fragile estimates of potential output. For Italy, targeting lower unemployment could sustain stronger growth, improve deficit outcomes, and expose the self-defeating logic of austerity when debt is measured against a stagnating economy.

The accounting behind central banking is far from being a settled science. Now with the rise of digital currencies, archaic conventions might lead to fundamental structural instability.

When central banks issue money today, whether physical notes, reserves held by commercial banks, or the digital currencies now being designed and debated around the world, they record it as a liability on their balance sheets. That treatment made sense when money was a claim on gold. You could walk into a bank and exchange your notes for something else. That world ended more than 50 years ago.

Economists Biagio Bossone and Massimo Costa argue in a new piece for INET that the accounting never caught up. Under what they call the Accounting View of Money, sovereign money isn't debt in any meaningful sense. It carries no real redemption obligation and thus should be recorded as equity.

The practical stakes are higher than they might seem. The current convention makes central banks look more financially fragile than in reality. It muddies public understanding of how money actually works. And as governments around the world push forward on central bank digital currencies, inheriting a framework built for the gold standard era could introduce serious legal and design problems at the foundation.

Worth a careful read, especially if you're following the digital currency space.

Sovereign Money is not Debt: Why Central bank Accounting Must Change Central bank money is still accounted for as debt, a legacy of an earlier monetary order. Treating sovereign money as equity would clarify central bank balance sheets, strengthen institutional transparency, and better prepare monetary systems for future digital-era design choices.

It is inaugural day of the Research in Action Workshop (27–28 April 2026) on the Science of Critical Minerals and the Realigning Global Order. The discussions examine how critical minerals are reshaping industrial policy and global economic alignments.

Research in Action Workshop 2026 The Institute for New Economic Thinking (INET) and the Cambridge Central Asia Forum, University of Cambridge, in partnership with The Green Industrial Policy in the Age of Rare Metals: A Transregional Comparison of Growth Strategies in Rare Earth Mining Project (Funded by European Research Council (...

Should antitrust laws focus on low prices today? Or protecting fair competition for tomorrow? INET’s latest research breaks down what’s at stake.

The New Merger Guidelines: Consumer Welfare vs. Protecting Competition Standards Should antitrust law focus primarily on measurable performance outcomes such as price and output as indicated by Robert Bork's Consumer Welfare Standard? Or is it more important to concentrate on whether conduct undermines the competitive process itself as per the newly revitalized Protect Competiti...

The struggle over the Federal Reserve is not just a dispute about central bank independence. The authority to create money flows from the people through their legislature. Concentrating that power in the executive branch allows the potential to steer markets for political ends.

The Fed, Congress, and the President: The Constitutional Authority to Make Money The struggle over the Federal Reserve is not just a dispute about central bank independence. It is a constitutional conflict over democratic sovereignty itself: in a representative system, the power to make money belongs first to the legislature, not the executive.

Following a successful inaugural Meeting of Young Minds in 2024 & 2025, the Third annual Meeting of Young Minds on April 9-11 is geared to be an exciting and engaging gathering of future leaders in the field of economics. Young Scholars Initiative https://www.ineteconomics.org/events/3rd-meeting-of-young-minds-in-frontiers-of-economics

Mind-boggling drug prices and limited access are built into how the global pharma system works. INET’s latest research explores how changing incentives could make innovation work better for patients.

Transforming Corporate Governance to Improve Access to Medicines in the Global South Affordable medicines remain out of reach for millions because pharmaceutical innovation is organized around value extraction, not public health. How do shareholder-driven governance and fragmented global health financing reinforce inequity, and what structural reforms are needed to reverse it?