Report on the Institute for New Economic Thinking Annual Plenary Conference “ Changing of the Guard?” in Hong Kong, April 4-­‐6, 2013 by Luciano Pietronero, Matthieu Cristelli and Andrea Tacchella http://pilhd.phys.uniroma1.it/PILgroup_Economic_Complexity/Home.html The Institute of New Economic Thinking (INET) http://ineteconomics.org/ is a non-­‐profit economic research organization based in New York, Oxford, Cambridge, Copenhagen and other locations worldwide. After the 2007 crisis it has become clear that standard economic theory is not suitable to meet the challenges of the present, strongly globalized world. The goal of INET is to build a global community of new economic thinkers to engage in the crucially important task of creating new ideas to guide our economic future. INET was founded in 2009 under the stimulus and support of George Soros and others to stimulate innovation and debate in economics, support visionary interdisciplinary research, and to redefine the education of the next generation of economists, academics, corporate executives, and government leaders. Many of the great challenges today – from rekindling economic growth to addressing poverty, inequality, financial instability, and sustainability – require new economic thinking. From the point of view of policy making the idea is to move from the deregulatory logic of the Washington consensus toward a system of financial governance that restores the financial sector to its purpose of serving the society. Speakers at the conference included global business leaders like George Soros (founder of INET), Victor Fung, Lord David Sainsbury, Sir James Mirrless and Ronnie Chan, Nobel laureates like Michael Spence and James Heckman and major international economic figures like Hiroshi Watanabe, Yu Yongding, Simon Johnson, Adair Lord Turner, Niall Ferguson Sanjay Reddy and many more. Conceptual framework The effectiveness of mainstream economic theories has shown all its weakness after the recent financial crisis, which occurred almost unpredicted and the following economic stagnancy, often magnified by the economic policy acted by many western countries. The failure of standard theories is calling for a paradigm change in Economics or, quoting the evocative title of the INET Plenary conference 2013, for a changing of the guard of the economic thinking. INET Plenary 2013 conference in Hong Kong, in three dense days of on going discussions, has traced new (and sometimes old but forgotten) paths towards a new economic thinking. The starting point of this re-­‐foundation of Economics must be found in the simple but at the same time cutting edge observation that Economic systems are first of all Social systems. In this respect Renè Girard has often been cited: mimetic desire not only makes the actions of economic agents correlated but also amplifies selfish tendencies and border-­‐line behaviours. This may sound trivial and obvious to non-­‐practitioners but this feature has been often neglected in the last decades by mainstream in Economics. Nevertheless, as many have pointed out during the conference, words of wisdom may be found in the works which founded economic thinking, starting from Smith and passing through less known but resurging authors, such as the often quoted Minsky whose model would have clearly indicated the edge of the cliff in 2007. Using the words of INET’s Rob Johnson markets should serve society, not vice-versa. In this
sense, the driving point for the re-birth of Economic thinking must be the fact that economic growth is a mean not an end and is only a tool of policy making for the wealth and the well-­‐
being of the society. As a second key point of this re-­‐foundation of economic theory, in Hong Kong it strongly emerged that Economics and in particular macroeconomics must address the issue of the increasing complexity and the interconnectedness of economic systems which cannot be anymore neglected. Complexity and interconnectedness must be therefore fundamental basis for economic policy advising and policy-­‐making. On one hand macroeconomics must really incorporate the fact that economy is a complex system in an effective way. On the other hand, after the 2007 crisis policy modelling desperately needs new methods, new paradigms, new analytical tools for economic and policy advice as reported by OECD representatives as well as Fung Global Institute President, Andrew Sheng. Paraphrasing Sheng’s words we need an adaptive regulatory design and we need to abandon the misconception that “one rule can fit all”, with reference to intricate policies such as Basel 3. Actually, in our opinion, this idea of adaptive concepts in the analysis and control of economy should acquire a much broader role. In fact the various economic theories that have been introduced over the years are now considered as global paradigms which compete one against the other with the idea that each of them could be good in any situation. We conjecture that a more scientific foundation of economic thinking will lead to a scenario in which the various theories can be more or less suitable depending on the particular situation of the economy. This analysis should be scientific and empirically based; only ideologies and religions are considered good in all cases. The general idea is that new generation tools cannot be any more only focused on income measure but a broader view, social, education, perspectives, and better analysis of long trend are required. OECD is currently making a real effort to incorporate this new economic thinking within its framework of policy advisers for OECD member countries. The path traced towards these goals pointed out the need of a shift from intangibles to tangibles. In other words a key element to make this new thinking effective is to make the qualitative features of economic and the intangibles, quantitative. Growth and technological Change in Complex Systems This section was organized by Eric Beinhocker, director of INET Oxford to address, from a novel point of view, the fundamental problem of how economic growth develops in a complex, strongly interconnected world. Our contribution referred to the concept of Economic Complexity which portrays economic growth as a process of evolution of ecosystems of technologies and industrial capabilities. According to the standard economic theory the specialization of countries towards certain specific products should be optimal. The observed data show that this is not the case and that diversification is actually more important. Specialization may be the leading effect in a static situation but the strongly dynamical globalized world market suggests instead that flexibility and adaptability are essential elements of competitiveness as in bio-­‐systems. The crucial challenge is then how to turn these qualitative observations into quantitative variables. We have introduced a new metrics for the Fitness of countries and the Complexity of products which corresponds to the fixed point of the iteration of two nonlinear coupled equations. The information provided by the new metrics can be used in various ways. The direct comparison of the Fitness with the country GDP gives an assessment of the non-­‐expressed potential of the country. This can be used as a predictor of GDP or stock index. The global dynamics shows, however, a large degree of heterogeneity which implies that countries which are in a certain zone of the parameter space evolve in a predictable way while others show a chaotic behaviour. This heterogeneous dynamics is also outside the usual economic concepts. Making reliable predictions of growth in the context of economic complexity will then require a paradigm shift in order to catch the information contained in the complex dynamic patterns observed. Doyne Farmer argued that Economics has traditionally studied technological progress in a highly aggregated manner, treating technology as an exogenous phenomenon or “black box”, mathematically represented by the leading term, or pre-­‐factor, in a production function equation. To the extent technology has been endogenized, it has been done in a simplified aggregate manner that does not look at the specific technologies involved or at their inter-­‐
relationships. His new vision is that the development of a new approach that looks at technological ecosystems in their entirety, and then examines a given technology in the context of its position within this ecosystem, is required. In summary, a natural consequence of this interconnected and complex system vision is that economic systems appear to be similar to biological systems competing in a changing environment. New paradigms and concepts derived from ecology such as out of equilibrium dynamics and evolvability must be explored to fully understand the complex dynamics of economic growth. In this new scenario of an interconnected and complex world economy, national choices must be embedded in world market to properly address the impact of such changes. In the present economic systems Macroeconomics must address with new tools the complex and intrinsically international externalities of country economic and growth policy. Instead of comparative advantage, measures of innovative advantage, economies and countries must be the playground of a national system of innovation The Euro Zone The general idea is that Europe is better off than one year ago but still necessary of urgent measures. Less concern now due to BCE than one year ago. BCE at the moment is the only institution for a fast reaction. Other changes of treaties are very slow. But BCE cannot be a permanent solution, it is necessary a transition to a fiscal solution and banking union. The objectives are to restore faith in the Eurozone and to care of the unemployment together with a revitalization of economic growth. The analysis is that the Eurozone had basic flaws in its design: -­‐ National fiscal policy but common monetary policy -­‐ No crisis resolution mechanisms for banking crisis -­‐ Debt loop between sovereign debt and banks -­‐ Bank union and recapitalization of banks -­‐ Finance debt if more than 60% of GDP -­‐ Minimal fiscal union or more -­‐ Cyprus: legacy issue but signs of steady state Erick Berglof proposes a minimum package of three quick measures: -­‐ Fiscal: Constrain fiscal rules; long term ratio of debt/GDP limited to 60%; define speed of convergence for each country -­‐ Monetary: Banking union is a top necessity but moral hazard for the phenomenon of “too big to fail”. Debt of systemically relevant institutions convertible to equity. Stock dilution would be a naturally incentive to limit risk. -­‐ Structural: Stimulate the economy in a crisis period but do the opposite when booming. Long term plan for countries to limit the debt transferred to next generations. -­‐ How to stimulate growth, human capital and physical, EU structural funds. Political comments: Italian elections, problem not yet solved. German constitutional constraints. German government is willing to care of legacy but with suitable safeguards. Crisis is not only monetary, legacy problems are not really addressed. China perspectives Daniel Bell presents a provoking argument in which the economic success of China has been linked to the non democratic social situation. In his opinion the idea of one person – one vote is not the best for efficient economic growth. One of his proposals would be to weight the vote with the level of education. Others have contrasted this point of view by arguing that, among the most competitive countries, only two out of 15 (Chine and Singapore) are not democratic. Many consider democracy as the best situation for real innovation. The success of China up to now is interpreted in the sense that it has replicated known products and its challenge for the future will be in the capabilities to real innovation. Asia and especially China is to become an innovation oriented society within 2020. Old and New Economic Thinking A final question is where the source of this new Economic thinking may be found? On one hand Economics must enlarge its border and accept and incorporate interdisciplinary contribution to the development of this discipline. Economics must aim at becoming as much as possible closer to a real Science even if some unavoidable non-­‐scientific features will always exist. On the other hand, paradoxically, a precious source for the new Economic thinking can be found in the history of the economic thinking. Often the long view and wisdom of the Fathers of Economics are still actual and can a fruitful source of inspiration for the new guard. A careful read of the father of economics would have revealed the limit of applications of many theories applied in the last decades, often ideologically, and would prevent many instabilities and economic distress occurred in the last forty years. For instance concerning the rational expectations and fundamental solution for financial markets paradigm, as discussed by Cars Hommes, the limits of the theory are clearly stated in Muth’s original paper but the following mainstream developed from this approach has completely forgotten them! Also Soros arguments have been inspired by the concept of reflexivity which is inherently linked to human behaviour and is beyond the standard economic thinking.