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2014.05.19 - OECD-ECLAC Workshop_Session 1_Alan KIRMAN


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2014.05.19 - OECD-ECLAC Workshop_Session 1_Alan KIRMAN

  1. 1. Economic  Policy  and  Complexity   Alan  Kirman   Aix  Marseille  University  and  EHESS   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  2. 2. Complex  Collapse   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  3. 3. Complex  collapse   •  The  Western  Antarc;c  Ice  Sheet  is  now  subsiding   into  the  sea  more  rapidly  than  previously.   Furthermore,  this  process  is  now  irreversible,   according  to  two  ar;cles  in  Science  (Ian  Joughin   et  al.  2014)  and  Geophysical  Research  LeTers   (Rignot  et  al.  2014).  This  will  lead  to  a  «  short   term  »  rise  in  sea  level  of  over  one  metre  and  a   longer  term  rise  of  much  greater  magnitude.   •  Anthropogenic  causes  are  an  important  part  of   the  explana;on   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  4. 4. Complex  collapse  2   •  Why  is  this  of  interest  to  economists?   •  First,  because  it  is  claimed  that  human  behaviour   has  been,  in  part,  responsible  for  the  changes   that  have  led  to    the  collapse  (already  forecast  by   John  Mercer  Nature  (1978))   •  Secondly,  because  the  nature  of  the  causality  is   not  as  simple  as  might    be  thought.   •  The  obvious  argument  is  that  rising  air   temperatures  caused  by  increasing  CO2  emissions   have  increased  sea  temperatures  and  that  this   has  caused  the  mel;ng.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  5. 5. Complex  collapse  3   •  In  fact  the  mechanism  is  more  indirect.  Stronger  winds   have  pushed  warmer  water  which  rises  naturally   towards  the  Antarc;c  region.  These  are  caused,  it  is   claimed,  by  global  warming.   •  This  coupled  with  the  increased  Ozone  hole,  due  in   part  to  the  emission  of  aerosol  gases  has  led  to  the   change  in  the  ice  sheet’s  stability.   •  «  There  is  no  stabilising  mechanism  »  as  one  of  the   authors  said.   •  Changing  the  things  which  we  can  control  will  not  help   now  to  prevent  the  phenomenon  but  could  slow  it.   •  The  system  has  self  organised  into  an  unstable  state.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  6. 6. Lessons  for  economists   •  We  also  are  faced  with  a  complex  adap;ve   system  over  which  we  have  very  limited   control.   •  Some;mes  it  is  not  always  possible  to  reverse   the  consequences  of  well-­‐inten;oned  but   erroneous  measures.   •  The  way  in  which  the  system  self  organises   creates  its  own  dynamics  and  incen;ves.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  7. 7. Economists  and  Climatologists   •  The  results  men;oned  previously  are,  in  one   paper,  the  result  of  data  analysis  not  of  computer   models   •  Climatologists  have  usually  been  cri;cised  for   their  models  not  for  their  data  analysis   •  Economists  have  rejected  cri;cism  of  their   models  usually  with  the  argument  that  those   who  proffer  the  cri;cism  do  not  understand  the   mathema;cal  analysis.   •  Many  economists  have  expressed  an  unwavering   faith  in  our  models  even  acer  the  crisis.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  8. 8. Two  basic  approaches   The  standard  approach   •  Our  models  must  be  built  on   sound  microfounda;ons   •  Lucas,  one  should  only  make   assump;ons  about  individual   characteris;cs   •  Individuals  should  sa;sfy   economists’  axioms  of  ra;onality   •  They  should  op;mise  in  isola;on   •  They  undertand  the  economy   they  func;on  in.   •  Aggregate  behaviour  is  like  that   of  a  ra;onal  «  representa;ve   agent  »   The  economy  as  a  complex   system   •  Individuals  follow  simple  rules   •  They  adapt  to  their   environment.   •  They  are  not  irra;onal  and  do   not  act  against  their  own   interest   •  They  have  limited  and  largely   local  informa;on   •  Aggregate  behaviour  emerges   from  the  interac;on  between   individuals.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  9. 9. Confidence  in  our  theory    The  “central  problem  of  depression-­‐preven;on  has  been   solved,”  ,    Robert  Lucas  2003  presiden;al  address  to  the   American  Economic  Associa;on.                In  2004,  Ben  Bernanke,  chairman  of  the  Federal  Reserve  Board,   celebrated  the  «  Great  Modera;on  »  in  economic  performance   over  the  previous  two  decades,  which  he  aTributed  in  part  to   improved  economic  policy  making.        Our  models  func;oned  well  during  this  period  but  would  not   any  model  have  done  so?    We  need  models  to  help  us  understand  and  deal  with  crises   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  10. 10. Crises  as  Rare  Events   •  “With  notably  rare  excep;ons  (2008,  for  example),   the  global  “invisible  hand”  has  created  rela;vely   stable  exchange  rates,  interest  rates,  prices  and   wage  rates.”   •  Alan  Greenspan,  Former  Chairman  of  the  Federal   Reserve  Bank   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  11. 11. Crises  as  Rare  Events   •  “With  notably  rare  excep;ons  (2008,  for  example),   the  global  “invisible  hand”  has  created  rela;vely   stable  exchange  rates,  interest  rates,  prices  and   wage  rates.”   •  Alan  Greenspan,  Former  Chairman  of  the  Federal   Reserve  Bank   •  “With  notably  rare  excep;ons,  Germany  remained   largely  at  peace  with  its  neighbours  during  the  20th   century.”   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  12. 12. Crises  as  Rare  Events   •  “With  notably  rare  excep;ons  (2008,  for  example),  the   global  “invisible  hand”  has  created  rela;vely  stable   exchange  rates,  interest  rates,  prices  and  wage  rates.”   •  Alan  Greenspan,  Former  Chairman  of  the  Federal   Reserve  Bank   •  “With  notably  rare  excep;ons,  Germany  remained   largely  at  peace  with  its  neighbours  during  the  20th   century.”   •  “With  notably  rare  excep;ons,  Alan  Greenspan  has   been  right  about  everything.”     •  Comments  on  the  blog  Crooked  Timber   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  13. 13. presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  14. 14. The  view  of  those  responsible  in  the   U.K   •  «  But  there  is  also  a  strong  belief,  which  I   share,  that  bad  or  rather  over-­‐simplis;c   and  overconfident  economics  helped   create  the  crisis.  There  was  a  dominant   conven;onal  wisdom  that  markets  were   always  ra;onal  and  self-­‐equilibra;ng,  that   market  comple;on  by  itself  could  ensure   economic  efficiency  and  stability,  and  that   financial  innova;on  and  increased  trading   ac;vity  were  therefore  axioma;cally   beneficial.  »    Adair  Turner,  Head  of  the  U.K.    Financial   Services  Authority   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  15. 15. So  in  summary  your  majesty,  the  failure  to  foresee  the   ;ming,  extent  and  severity  of  the  crisis  …was  principally   the  failure  of  the  collec;ve  imagina;on  of  many  bright   people  to  understand  the  risks  to  the  systems  as  a   whole.  Reply  to  the  queen  by  the  BriBsh  Academy   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  16. 16. presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  17. 17. Bob  Shiller   •  Of  course,  the  problem  with  economics  is  that   there  are  ocen  as  many  interpreta;ons  of  any   crisis  as  there  are  economists.  An  economy  is  a   remarkably  complex  structure,  and  fathoming  it   depends  on  understanding  its  laws,  regula;ons,   business  prac;ces  and  customs,  and  balance   sheets,  among  many  other  details.       presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  18. 18. Bob  Shiller   •  Yet  it  is  likely  that  one  day  we  will  know  much  more  about   how  economies  work  –  or  fail  to  work  –  by  understanding   beTer  the  physical  structures  that  underlie  brain  func;oning.   Those  structures  –  networks  of  neurons  that  communicate   with  each  other  via  axons  and  dendrites  –  underlie  the   familiar  analogy  of  the  brain  to  a  computer  –  networks  of   transistors  that  communicate  with  each  other  via  electric   wires.  The  economy  is  the  next  analogy:  a  network  of  people   who  communicate  with  each  other  via  electronic  and  other   connec;ons.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  19. 19. Bob  Shiller     The  brain,  the  computer,  and  the  economy:  all  three  are  devices   whose  purpose  is  to  solve  fundamental  informa;on  problems   in  coordina;ng  the  ac;vi;es  of  individual  units  –  the  neurons,   the  transistors,  or  individual  people.  As  we  improve  our   understanding  of  the  problems  that  any  one  of  these  devices   solves  –  and  how  it  overcomes  obstacles  in  doing  so  –  we   learn  something  valuable  about  all  three.     hTp://www.project-­‐­‐ neuroeconomics-­‐revolu;on#01DugqtByVO8W50F.99     presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  20. 20. Mo;va;on   •  There  has  been  a  growing  dissa;sfac;on  with   exis;ng  models  of  the  economy   •  Many  cri;cisms  have  come  from  those  who   have  to  make  policy   •  They  blame  the  unsa;sfactory  nature  of  the   models  which  have  come  to  be  viewed,   wrongly,  as  an  increasingly  sophis;cated   vision  of  how  the  economy  works.     presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  21. 21. Mo;va;on   •  My  basic  claim  is  that  the  basic  problem  lies  with   the  passage  from  the  microeconomic  analysis   which  we  purvey,  to  the  aggregate  behaviour  of   the  economy.   •  Aggregate  behaviour  is  not  the  sum  of  nor  the   average  of  individual’s  behaviour.   •  As  is  widely  recognised  in  other  disciplines  such   as  physics,  biology  and  sociology  the  behaviour  of   a  complex  system  of  interac;ng  agents  is   intrinsically  different  from  that  of  its  individual   components.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  22. 22. Mo;va;on   •  What  we  have  to  be  able  to  reproduce  is  the   sudden,  endogenous  changes  that  occur  at  the   aggregate  level  without  having  recourse  to   exogenous  shocks.   •  Our  models  of  ra;onal  individuals  do  not  allow  us   to  achieve  this.   •  Op;misa;on  at  both  the  individual  and  collec;ve   level  is  illusory,  what  should  concern  us  is  not  so   much  efficiency  but  rather  coordina;on.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  23. 23. Economists  and  Models    “And  the  first  thing  that  came  to  mind  was  something  that  people   said  many  years  ago  and  then  stopped  saying  it:  The  euro  is  like  a   bumblebee.  This  is  a  mystery  of  nature  because  it  shouldn’t  fly  but   instead  it  does.  So  the  euro  was  a  bumblebee  that  flew  very  well   for  several  years.  And  now  –  and  I  think  people  ask  “how  come?”  –   probably  there  was  something  in  the  atmosphere,  in  the  air,  that   made  the  bumblebee  fly.  Now  something  must  have  changed  in  the   air,  and  we  know  what  acer  the  financial  crisis.  The  bumblebee   would  have  to  graduate  to  a  real  bee.  And  that’s  what  it’s  doing”.          Speech  by  Mario  Draghi,  President  of  the  European  Central  Bank  at   the  Global  Investment  Conference  in  London  26  July  2012   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  24. 24. presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  25. 25. Economists  and  Models   •  We  are  so  wedded  to  our  models  that  when   they  do  not  correspond  to  empirical  reality,   we  wonder  what  the  problem  with  the   evidence  is   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  26. 26. The  Ex  Governor  of  the     European  Central  Bank   •  When  the  crisis  came,  the  serious  limita;ons  of  exis;ng   economic  and  financial  models  immediately  became  apparent.   Arbitrage  broke  down  in  many  market  segments,  as  markets   froze  and  market  par;cipants  were  gripped  by  panic.  Macro   models  failed  to  predict  the  crisis  and  seemed  incapable  of   explaining  what  was  happening  to  the  economy  in  a  convincing   manner.  As  a  policy-­‐maker  during  the  crisis,  I  found  the   available  models  of  limited  help.  In  fact,  I  would  go  further:  in   the  face  of  the  crisis,  we  felt  abandoned  by  conven;onal  tools.   In  the  absence  of  clear  guidance  from  exis;ng  analy;cal   frameworks,  policy-­‐makers  had  to  place  par;cular  reliance  on   our  experience.  Judgement  and  experience  inevitably  played  a   key  role.      Trichet  (2010)   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  27. 27. Economists’  Recommenda;ons   •  Undertake  structural  reforms  (a.k.a  reduce   unit  wage  costs  and  make  labour  market  more   flexible)   •  All  of  this  is  on  the  basis  of  what  theory?   •  We  are  faced  with  a  combina;on  of  policy   measures  based  on  ideology  rather  than  on   analysis     presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  28. 28. Tough  Medicine   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  29. 29. Alterna;ves   •  Macro  modellers  have  added  imperfec;ons  and   fric;ons  to  their  models  to  beTer  account  for   observed  data  but  these  are  as  ad  hoc  as  the   alterna;ves  they  cri;cise.   •  Alterna;ves  have  been  proposed  from  ABM  to   more  Behaviourally  oriented  models,  to  sta;s;cal   physical  models,  to  more  inclusion  of  networks.   None  of  these  is  a  complete  and  comprehensive   answer  but  almost  any  would  seem  to  be   preferable  to  the  current  models.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  30. 30. Analysis?   •  Two  things  have  awakened  public  scep;cism  about  the  value  of   economists’  analysis   •  The  IMF’s  mistake  on  the  fiscal  mul;plier   •  The  famous  Reinhart  Rogoff  90%  threshold   •  Both  mistakes  have  been  used  to  jus;fy  austerity  measures.     •  We  should  use  some  of  the  army  of  economists  employed  by  the   central  banks,  the  EU  and  the  OECD  for  example  to  check  on  the   theore;cal  validity  or  the  empirical  accuracy  of  the  analysis   •  Our  basic  problem  is  that  our  recommenda;ons  are  s;ll  predicated   on  the  idea  that  the  current  economic  system  is  s;ll  essen;ally  self-­‐ organising  and  achieves  efficiency  with  the  minimum  of   interference.   •  We  need  models  which  explicitly  produce  endogenous  crises     presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  31. 31. Quiet  Withdrawal   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  32. 32. Income  and  Wealth  Distribu;on   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  33. 33. Income  v  Wealth  Inequality   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  34. 34. What  people  want  and  think   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  35. 35. What  we  should  do   •  We  should  use  surveys  and  «  Big  Data  »  to   find  out  what  people  think  rather  than  insist   on  «  ra;onal  expecta;ons  »   •  Compare  the  facts  and  opinions  about   immigra;on.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  36. 36. •  «  A  very  natural  next  step  for  economics  is  to   maintain  expecta;ons  in  the  strategic  posi;on   they  have  come  to  occupy,  but  to  build  an   empirically  validated  theory  of  how  aTen;on  is  in   fact  directed  within  a  social  system,  and  how   expecta;ons  are,  in  fact,  formed.  Taking  that   next  step,  requires  that  empirical  work  in   economics  take  a  new  direc;on,  the  direc;on  of   micro-­‐level  inves;ga;on  proposed  by   Behavioralism.  »   •  Herb  Simon  (1984)   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  37. 37. Our  basic  assump;ons:  Trichet  again   •   First,  we  have  to  think  about  how  to  characterise  the  homo   economicus  at  the  heart  of  any  model.  The  atomis;c,   op;mising  agents  underlying  exis;ng  models  do  not  capture   behaviour  during  a  crisis  period.  We  need  to  deal  beTer  with   heterogeneity  across  agents  and  the  interac;on  among  those   heterogeneous  agents.  We  need  to  entertain  alterna;ve   mo;va;ons  for  economic  choices.  Behavioural  economics   draws  on  psychology  to  explain  decisions  made  in  crisis   circumstances.  Agent-­‐based  modelling  dispenses  with  the   op;misa;on  assump;on  and  allows  for  more  complex   interac;ons  between  agents.    Such  approaches  are  worthy  of   our  aTen;on.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  38. 38. Conven;onal  Recommenda;ons   •  What  have  been  the  recommenda;ons  to  get  out   of  the  crisis?   •  Austerity   •  We  must  reduce  our  debts  and  deficits   •  You  know  the  numbers  but  Europe  has  to  get   back  to  3%   •  A  meaningless  number.  Why  not Π or  e???   •  Wri;ng  numbers  into  trea;es  does  not  make   sense.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  39. 39. The  perversity  of  austerity   •  Austerity  diminishes  growth   •  But  if  growth  slows  the  debt  becomes  even  more  important   •  Why  worry  about  the  debt?   •  Because  the  markets  will  not  lend  to  countries  with  high  debt.   •  France  has  never  borrowed  at  such  low  rates.   •  Markets  self  organise  but  when  they  do  so  we  only  look  at  them  if   they  comfort  our  beliefs.   •  Why  not  look  at  the  facts  rather  than  speculate  on  the  basis  of  our   theories  and  our  ideology?   •  There  is  some  no;on  of  morality  here  which  is  inappropriate.   presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  40. 40. How  should  we  stabilise  the  system?   •  The  view  that  we  can  set  up  a  new  more   sophis;cated  set  of  rules  and  then  everything  will  be   under  control  is  illusory.   •  It  is  based  on  the  idea  that  there  is  a  «  correct  »   model  and  that,    and  if  only  we  can  find  it  we  can   establish  the  right  rules  and  leave  markets  to  sort   things  out.   •  But,  in  reality  there  is  no  reason  to  believe  that  self   organisa;on  is  a  stable  process  and  furthermore  the   economy  is  constantly  evolving  and  and  therefore  so   must  the  rules.     presenta;on  at  the  ECLA  OECD  workshop     May  2014  
  41. 41. Overall  Conclusions     •  We  have  to  accept  that  unlike  in  our  models,  in  markets,   informa;on  is  dispersed  across  individuals  and  is  not  transmiTed   through  some  central  signals   •  How  things  come  to  be  coordinated  is  what  we  need  to  explain   •  We  should  treat  macro  phenomena  as  emerging  from  the  intricate   interac;ons  between  individuals.   •  We  will  never  become  a  “science”  in  the  sense  that  Walras  wanted.   •  We  have  to  spend  more  ;me  observing  the  real  evolu;on  of  the   economy  and  less  ;me”improving”  our  exis;ng  models.   •  Policy  should  be  concentrated  on  influencing  the  evolu;on  of  the   economy  not  on  determining  it   presenta;on  at  the  ECLA  OECD  workshop     May  2014