Complexity: A new approach to economic challenges

William Hynes, OECD New Approaches to Economic Challenges (NAEC) initiative

The OECD launched its “New Approaches to Economic Challenges” (NAEC) initiative in 2012 to reflect on the lessons for economic analysis and policymaking from the financial crisis and Great Recession. European Central Bank Governor Jean-Claude Trichet said that: “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 conventional tools”. But even before the crisis Greg Mankiw from Harvard University lamented thatmacroeconomic research of the past three decades has had only minor impact on the practical analysis of monetary or fiscal policy”.

NAEC examined the shortcomings of analytical models, and it promotes new policy tools and data. It questions traditional ideas and methods and challenges group-think and silo approaches by inviting comment and criticism from outside the Organisation, and by soliciting input from social sciences such as sociology, psychology, and history to enrich the policy discussions.

While the financial crisis struck at the core of traditional economic theory and models, it became apparent in 2016 that the failure of economic thinking and acting was far deeper and more destabilising than we thought, so part of NAEC’s mandate is to develop an agenda for inclusive and sustainable growth.

This is all the more urgent given the backlash against globalisation, increased inequalities of income and opportunities, and the negative impact of growth on the environment. We need to develop what Eric Beinhocker calls a “new narrative of growth”, one that puts people at the centre of economic policy. Therefore NAEC is helping to focus on redistribution, a concept neglected in economic analysis for many years, and helping to ensure that policy decisions improve the lives of those at the bottom of the income distribution.

It is also helping to consider the well-being of people as a multidimensional concept, which implies reconsidering important elements of the economic narrative, such as justice and social cohesion. NAEC does so by thinking “out of the box”, emphasizing the need to empower people, regions and firms to fulfil their full potential. This is at the core of the Productivity-Inclusiveness Nexus that considers how to expand the productive assets of an economy by investing in the skills of its people; and that provides a level playing field for firms to compete, including in lagging regions.

However, the challenges are too complex and interconnected for conventional models and analyses. As Andy Haldane argues, the global economy is increasingly characterised by discontinuities, tipping points, multiple equilibria, radical uncertainties and the other characteristics of complex systems. This is why a key theme of NAEC has been the complexity and interconnectedness of the economy, exemplified by the Productivity-Inclusiveness Nexus.

The contributors to this series argue that complexity and systems thinking can improve understanding of issues such as financial crises, sustainability of growth, competitiveness, innovation, and urban planning. Recognising the complexity of the economy implies that greater attention should be paid to interactions, unintended consequences, stability, resilience, policy buffers and safeguards.

Working with the European Commission and the Institute for New Economic Thinking (INET) Oxford, the NAEC initiative demonstrated in a number of workshops that complexity economics is a promising approach for delivering new insights into major public policy challenges and an exciting research agenda going forward.

The workshops offered a timely opportunity for policy-makers, academics and researchers to discuss the policy applications emerging from the study of complexity. The NAEC Roundtable in December 2016 discussed whether economics was close to a tipping point – a transition to a new behavioural complexity paradigm. There is wide agreement among economists on the limitations and the shortcomings of the rational expectations paradigm and much discussion on how to move forward.

The first phase of NAEC’s complexity work has made the case for further and deeper examination of complexity. Going forward, it will be important to demonstrate the value of complexity, systems thinking and agent-based models in a number of areas including financial networks, urban systems and the other issues highlighted in this series. The challenge is to demonstrate the value of the approach.

Complexity offers an opportunity for addressing long-held concerns about economic assumptions, theories and models. For the OECD, it also holds out the potential for creating better policies for better lives.

Useful links

The OECD organised a Workshop on Complexity and Policy, 29-30 September 2016, at OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

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  1. Charles Kovacs - 03/03/2017 Reply

    The main economic challenge for the world has been lower growth, increasing international tension, and a fairly general lack of business and credit confidence, especially in the First World countries. It is not clear to me how a “new narrative of growth” will change any of this, although it may create a rationale and a positive view of these problems. However, it will not make them better, and without growth, politicians will be faced with an increasingly challenging environment (to put it politely).
    It was not clear to me what was meant by the Productivity-Inclusiveness Nexus, but it seemed to me that this was another transfer payment exercise, again, not likely to do much for global growth, let alone for those whose money is to be transferred.
    I am very much a layman, and as such I was pleased to see that the article concluded on the note that “The challenge is to demonstrate the value of the approach.`’ I am looking forward to reading about the outcome of this demonstration.

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