By Rana Foroohar
I am always surprised by how linear most economic thinking is. Economists take a stand on a particular issue — free trade is either working or it isn’t; regulation is needed or is not — and then refuse to leave their silos, even when the real world turns out again to be a messy and complex place. The profession, sadly, is not as variegated — yet. It’s true that since the 2008 financial crisis we have moved from the neoclassical notion that the invisible hand is always right to a world in which economists also consider human bias, politics and institutional realism when crafting their models. Yet there’s still a general presumption that countries, companies, markets and individuals will eventually reset to “normal”. Linear systems and baseline reversion to equilibrium is generally assumed. And efficiency rather than resiliency is encouraged. It was also the mainstream economics taught in universities and business schools over the past 40 years. It supported the just-in-time business culture in which redundancy in supply chains was considered a waste of time and money and the free flow of capital across borders to create more economic growth was always a good thing, despite any inequality and financial fragility they might create. Covid-19 is ripping the scales from our eyes on such assumptions. It is also driving home an important message that policymakers need to heed. If the economics profession is going to help solve the world’s biggest problems — from pandemics and climate change to deglobalisation and inequality — economists must stop tweaking the edges of their models and think outside the box. Much of the debate about how to reopen countries and cities in the wake of coronavirus has, for example, been incremental: take away X amount of social distancing, and get X amount of growth, and so on. It is as if there is some easy-to-define numerical trade-offs between the two. “These types of phenomenon don’t work like that,” says William Hynes, the head of an OECD unit called New Approaches to Economic Challenges, set up in the wake of the financial crisis to study how to do better policymaking within complex systems. “Pandemics aren’t linear — they are exponential. When things get knocked off track, they don’t always come back to a steady state. We’re talking about complex systems.” The same goes for the environment, populism or the financial system and, of course, the global economy. One the most outside-the-box economic thinkers I know, Bank of England chief economist Andy Haldane, once likened Sars and the Lehman Brothers failure in just this way. “Both events were manifestations of the behaviour under stress of a complex, adaptive network. Complex because these networks were a cat’s cradle of interconnections, financial and non-financial. Adaptive because behaviour in these networks was driven by interactions between optimising, but confused, agents. Seizures in the electricity grid, degradation of ecosystems, the spread of epidemics and the disintegration of the financial system — each is essentially a different branch of the same network family tree.”
Imagining how Covid-19 will play out — and how the corporate debt crisis or unprecedented monetary and fiscal policies may unfold — will require more creative and complex thinking than we see in most mainstream economics today. Efficiency is homogenous. Profit maximisation and shareholder “value” are clear and relatively simple to understand concepts, even if they create myriad hidden risks. “Resiliency, on the other hand, is heterodox,” as former World Trade Organization director-general Pascal Lamy put it last week at a conference on building more shockproof global systems. Building resiliency in economic systems is harder than promoting efficiency, but ultimately it may be more rewarding.
More to Read on : https://www.ft.com/content/e1945718-8b84-11ea-9dcb-fe6871f4145a