Globalization, innovation, and an aging society are driving economic change. The rise of China and digitization are changing the world of work. What are the new challenges for economic policy? How can politics improve the conditions for sustainable growth in a rapidly changing economy? Who are the winners and losers? What can politics do so that not just a few but as many as possible benefit from the economic change?

Science is not an end in itself. The gain in knowledge should generate benefits. In medicine and pharmaceuticals, for example, there are new therapies and drugs being discovered all the time. Mathematics and physics lay the foundations for designing spectacular buildings and developing powerful computers.

The practical use of economics is to help families, businesses, and the government find better choices that enable greater welfare. That needs theory and empirical foundations. Economic policy without theory lacks a goal and plan, as well as knowledge of the underlying mechanisms of action. A policy detached from empirical foundations is speculative. Thorough studies can systematically show how effective previous measures and reforms have been. They inform decision-makers about which instruments are promising and which are not.

How can economic policy use these research results? Decision-makers often lack the specialised knowledge to follow developments in economics journals. They have competent employees who can incorporate knowledge from research into the decision-making process. Ideally, however, you should form your own independent, informed judgment. The general public should also develop a basic understanding of the economic context in order to be able to better evaluate economic policies.

One difficulty in dealing with empirical research is that many studies often only provide partial or incomplete results. Depending on the policy change or reform examined, empirical research delivers a wide range of results. Nevertheless, a broad consensus can be derived in many cases.

If the economy changes significantly, policies must also change accordingly. Policies should create the conditions for economic change to lead to sustainable growth and greater prosperity. This requires investment in education and research, as well as flexible labor and capital markets so that workers and capital move from shrinking to expanding industries.

Economic policy should ensure that as many as possible can participate in the opportunities presented by change. It must adequately compensate the losers and also offer the disadvantaged a perspective of social advancement so that inequality remains moderate, and growth remains inclusive.

Most innovations, such as new technologies and products, use knowledge from basic research. At the same time, innovative companies need a well-trained workforce. That is why a well-functioning education system is a prerequisite for innovation.

In addition to investments in training and research, the state supports private research and development in companies. This improves their competitiveness in the world market and increases innovation and growth in the economy. The process intensifies as companies benefit from the insights of their competitors.

Society can gain a lot if it supports companies in research and development. One possibility is tax incentives for research-based companies. These mainly help young, innovative companies to overcome funding bottlenecks and stimulate start-up activities. The empirical evidence shows that regions with tax incentives have more start-ups than others. These accelerate innovation-driven growth and strengthen international competitiveness.

Innovative growth brings with it constant structural change. This requires that labor and capital can move flexibly from shrinking to growing industries and companies where the prospects are good. In reality, many frictions make this change more difficult. If resources are blocked, this reduces productivity. That is why banks and venture capitalists are very important.

They finance structural change by withdrawing capital from less productive companies and directing it to where it is used productively and contributes to growth. Not only financial stability but also structural change requires a strong banking sector with robust capital resources. However, equity is expensive. Hence, banks have an incentive to take on more debt. This not only makes them more vulnerable to crises but also helps ensure that they do not call bad loans because their equity cannot make up for the losses.

By collecting more information about their customers and optimizing their selection and monitoring processes, banks are better able to identify the most promising companies. This allows them to focus lending primarily on companies with high growth potential. When it comes to financing growth, banks are not the only thing that counts. Because, especially with startups, they are usually cautious. In this case, venture capitalists are especially important. They are better able than others to judge the chances of success and are more willing to get involved. Other lenders can also rely on their expertise.

Venture capital helps twice. The venture financiers provide capital themselves and give other investors the confidence they need to participate. Therefore, an active market for venture capital is so important in an innovative economy. Nevertheless, the risk remains high, because not all startups have the same potential. Even for venture capitalists, the chance of success is often difficult to assess.

Economic research provides valuable foundations for an evidence-based economic policy. It provides information about interdependencies and the quantitative effects of various reforms and programs. Admittedly, it cannot offer absolute security either. After all, relationships that have once been determined must be constantly re-examined and better understood under changing conditions. Only one thing is certain: evidence-based policy is impossible without empirical research. All that remains is speculation about the possible effects of economic policy measures.

The effectiveness of politics cannot be left to chance. Likewise, the knowledge of economics should help voters to form an independent and informed opinion about the economic context and the consequences of economic policy measures. It is therefore important that complex findings are simplified to the essentials and communicated in a generally understandable manner. That is the important contribution made by the students in the “next generation.” With this second anthology, which offers a small but hopefully important selection of new research results, young economists can share their knowledge from their studies with the interested public.