Stop pretending that an economy can be controlled

NAECAngel Gurría, OECD Secretary-General

The crisis exposed some serious flaws in our economic thinking. It has highlighted the need to look at economic policy with more critical, fresh approaches. It has also revealed the limitations of existing tools for structural analysis in factoring in key linkages, feedbacks and trade-offs – for example between growth, inequality and the environment.

We should seize the opportunity to develop a new understanding of the economy as a highly complex system that, like any complex system, is constantly reconfiguring itself in response to multiple inputs and influences, often with unforeseen or undesirable consequences. This has many implications. It suggests policymakers should be constantly vigilant and more humble about their policy prescriptions, act more like navigators than mechanics, and be open to systemic risks, spillovers, strengths, weaknesses, and human sensitivities. This demands a change in our mind-sets, and in our textbooks. As John Kenneth Galbraith once said, “the conventional view serves to protect us from the painful job of thinking.”

This is why at the OECD we launched an initiative called New Approaches to Economic Challenges (NAEC). With this initiative we want to understand better how the economy works, in all its complexity, and design policies that reflect this understanding. Our aim is to consider and address the unintended consequences of policies, while developing new approaches that foster more sustainable and inclusive growth.

Complexity is a common feature of a growing number of policy issues in an increasingly globalised world employing sophisticated technologies and running against resource constraints.

The report of the OECD Global Science Forum (2009) on Applications of Complexity Science for Public Policy reminds us of the distinction between complicated and complex systems. Traditional science (and technology) excels at the complicated, but is still at an early stage in its understanding of complex phenomena like the climate.

For example, the complicated car can be well understood using normal engineering analyses. An ensemble of cars travelling down a highway, by contrast, is a complex system. Drivers interact and mutually adjust their behaviours based on diverse factors such as perceptions, expectations, habits, even emotions. To understand traffic, and to build better highways, set speed limits, install automatic radar systems, etc., it is helpful to have tools that can accommodate non-linear and collective patterns of behaviour, and varieties of driver types or rules that might be imposed. The tools of complexity science are needed in this case. And we need better rules of the road in a number of areas.

This is not an academic debate. The importance of complexity is not limited to the realm of academia. It has some powerful advocates in the world of policy. Andy Haldane at the Bank of England has thought of the global financial system as a complex system and focused on applying the lessons from other network disciplines – such as ecology, epidemiology, and engineering – to the financial sphere. More generally, it is clear that the language of complexity theory – tipping points, feedback, discontinuities, fat tails – has entered the financial and regulatory lexicon. Haldane has shown the value of adopting a complexity lens, providing insights on structural vulnerabilities that built up in the financial system. This has led to policy suggestions for improving the robustness of the financial system.

Closer to home, Bill White, Chairman of our Economic and Development Review Committee (EDRC) has been an ardent advocate of thinking about the economy as a complex system. He has spoken in numerous OECD meetings – in part as an explanation and in part as a warning – that systems build up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non-linearity. As a result Bill has urged policymakers to accept more uncertainty and be more prudent. He also urged economists to learn some exceedingly simple but important lessons from those that have studied or work with complex systems such as biologists, botanists, anthropologists, traffic controllers, and military strategists.

Perhaps the most important insight of complexity is that policymakers should stop pretending that an economy can be controlled. Systems are prone to surprising, large-scale, seemingly uncontrollable, behaviours. Rather, a greater emphasis should be placed on building resilience, strengthening policy buffers and promoting adaptability by fostering a culture of policy experimentation.

At the OECD, we are starting to embrace complexity. For several years we have been mapping the trade “genome” with our Trade in Value Added (TiVA) database to explain the commercial interconnections between countries.

We have examined the possibilities for coupling economic and other systems models, for example environmental (climate) and societal (inequalities). Our work on the Costs of Inaction and Resource Constraints: Implications for Long-term Growth (CIRCLE) is a key example of linking bio-physical models and economic models to gauge the impact of environmental degradation and climate change on the economy.

We are also looking at governing complex systems in areas as diverse as education and international trade policy. And we are looking at the potential for tapping big data – an indispensable element of complexity modelling approaches. But there remains much to do to fully enrich our work with the perspectives of complexity.

The OECD is delighted to work with strong partners – the Institute for New Economic Thinking (INET) Oxford, and the European Commission to help policy-makers advance the use of complex systems thinking to address some of the most difficult challenges.

An important question remains. How can the insights and methods of complexity science be applied to assist policymakers as they tackle difficult problems in areas such as environmental protection, financial regulation, sustainability or urban development?

At the Workshop on Complexity and Policy on 29-30 September at the OECD, we will help find the answer – stimulate new thinking, new policy approaches and ultimately better policies for better lives.

Useful links

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

Please consult the draft Agenda for more information, and a preliminary background paper “Insights into Complexity and Policy”.

If you are an OECD staff member, please click here to register: Registration

Rio+20: Half full or half empty?

Click to find out more about OECD work of relevance to Rio+20

In today’s post, Simon Upton, head of the OECD Environment Directorate, founder and Chairman of the Round Table on Sustainable Development, and former New Zealand environment minister, gives his personal view of the Rio+20 summit

As with most large UN conferences, there is a “glass half empty and a glass half full” perspective on how the outcome of Rio+20 may be viewed, including the negotiated text, The Future We Want. As someone who left the Rio+10 conference in Johannesburg saying that the world didn’t need another mega-conference, I confess to having some instinctive sympathy with the former camp. 

That’s not to say that tricky issues were ignored. Every conceivable element of the sustainable development agenda was offered space. The environmental side was no exception. Water got six paragraphs, energy five, cities four, mountains three, transport two and so on. Oceans somehow seized 19 paragraphs including the only new commitment: “to take action by 2025 (!) … to achieve significant reductions in marine debris”. Not surprisingly, perhaps, issues that are the subject of negotiations in other fora received cursory attention.  Climate change was awarded three paragraphs which managed to express “profound alarm” and “grave concern” but not much else.

Fossil fuel subsidies, the hottest single issue in the Rio twitter-sphere, were nowhere to be found in relation to climate change or energy but were tucked away in a couple of paragraphs on sustainable production and consumption, including this example of the highly cautious, negotiation-speak of the document as a whole (italics added): “Countries reaffirm the commitments they have made to phase out harmful and inefficient fossil fuel subsidies that encourage wasteful consumption and undermine sustainable development. We invite others to consider rationalizing inefficient fossil fuel subsidies…”

Note the artful choice of verbs. One of our analysts, Andrew Prag did a quick analysis of the frequency with which key verbs were used in The Future We Want. Here is what he found:

In short, the closer the world got to action the shyer it got about agreeing to do anything and Andrew’s analysis of the ‘we will’ category reveals a fondness for process and political declarations rather than concrete implementation.

But what of the glass half full camp? Here the emerging story is that there are plenty of ‘hooks’ in the text on which to construct future engagements. The most significant of these is probably the agreement to develop ‘Sustainable Development Goals’. This was Colombia’s great mission and it is to their credit that they battled suspicion and some outright hostility to build a sufficiently broad coalition to get this initiative adopted. Colombia wanted the subject matter of the goals defined at Rio. This was a step too far, so a smaller, regionally balanced working group will be tasked with reporting the putative subject matter of these goals to the UN General Assembly in 2013.

The question has to be asked whether we needed the conference to secure the agenda. Because the best bits of it are happening anyway. Action by leading businesses far outstrips intergovernmental action. Those of us who attended the ‘Business Day’ events were struck by just how far some businesses have come in the twenty years since the 1992 Rio conference.

Changing Pace: Public policy options to scale and accelerate business action towards Vision 2050 is the World Business Council for Sustainable Development’s incredibly ambitious picture of where the world has to be by 2050: zero waste, near zero net energy buildings, low carbon mobility, doubled food production with much lower inputs, etc. But the big change is not so much in their aspirations as in their target audience. They used to explicitly exclude telling governments what to do. Now, governments are seen to be laggards and they are calling for a much more robust and transparent public policy framework.

They outline a policy accelerator which involves setting goals, communicating and educating, regulating, reforming budgets, investing, monitoring and coordinating. It is, for business, a radical message for governments. It is worth looking at the explanatory section of the document in its entirety, but here is a flavour: “Since the 80s, the notion spread that less government intervention is better for business and economic growth. Yet the resulting deregulated world, with its weak financial and multilateral governance, has a mixed record of progress. It also accumulates economic distress, social tensions and increased environmental risks. It deals badly with the magnitude, depth and urgency of our systemic challenges.”

This language would have been unthinkable at Rio 1992. We are not talking about minor companies here. And they are not without self-interest – large global food companies for instance need access to resources, so it is perhaps not surprising that they oppose subsidies that distort food and energy prices in favour of other businesses. I would be wary of suggesting that governments and businesses should sing in unison – they represent different constituencies and we shouldn’t try to conceal that. But the insistence by some of the biggest companies in the world that they need a coherent regulatory framework that recognizes resource scarcity and the fragility of ecosystem services is surely a milestone.

The references to inequality and social tensions are also significant. A number of business people observed the People’s Forum down the road which drew 35,000 attendees. They were struck by the anger and several made the point that if young people are left unemployed for years on end the anger will spread to political and extra-political action in a way that could be both nasty and unpredictable – and certainly not good for growth and stability.

So the verdict might be that while parts of the conference were seen as  empty, what occurred around it was full of promise. But as the business audience reminded us, whether that promise is fulfilled will depend on the response of governments.

Useful links

OECD’s contribution to Rio+20

Remarks by Angel Gurría, OECD Secretary-General, to the Rio+20 Session on Global Dialogue on Sustainability and Inclusion

OECD Environment Directorate

OECD work on green growth