A new Economics for a new World

Economists are struggling to find solutions for simultaneously solving global economic problems of slackened growth, rising inflation, precarious employment, and increasing inequality. 20th century economic theory does not provide an answer. In fact, 20th century economic solutions have contributed to grave problems outside economics--such as uncontrollable climate change. Economic problems are caused by social, political, and environmental problems, and economic solutions are causes of these problems too. Therefore?a paradigm shift is necessary in the "science" of economics for it to become fit for?21st century purposes and to provide solutions that are "out of the box" of the prevalent paradigm.

The misfit of narrow economic theories with complex realities has been glaringly evident since the global financial crisis of 2008. Some economists have ventured out to look for new paradigms in "systems" sciences, and concepts of "complex self-adaptive systems" are providing insights into behaviours of multi-disciplinary evolutionary systems, that can provide a new lens for policy-makers to comprehend complex realities and nudge change in the behaviour of the system appropriately.

The Indian economy is struggling to create more equitable growth with more social security and sustainable incomes for the majority of its citizens. In The Hindu today I nudge Indian economists to break out of their internal debates and look into the science of complex self-adaptive systems to create a new economics for a new world. A link to The Hindu follows. The article is also reproduced below for your convenience.

https://www.thehindu.com/opinion/lead/a-new-economics-for-a-new-world/article66699614.ece

For those who would like to dip into the conversations about the new systems science in economics, I am sending a link to a video--a discussion in the Royal Society of Arts earlier this year, between Dennis Snower, President of the Global Solutions Initiative, and David Sloan-Wilson, the eminent evolutionary biologist. The link is within my critique of their discussion which I wrote at their request.??

Please join the evolution of a new paradigm.

https://arunmaira.com/reading-ideas/f/how-will-we-move-into-a-new-paradigm-of-socio-economic-policy?blogcategory=Complex+Systems%2C+Social+Change

A NEW ECONOMICS FOR A NEW WORLD

?The Indian government is grappling with three economic challenges at the same time. One is management of inflation, interest rates, and exchange rates, for which the Reserve Bank of India is expected to find a solution. The second is negotiating bilateral and multi-lateral trade agreements that protect the interests of India’s farmers and workers, for which coordination is required amongst ministries of commerce, industry, and agriculture. The third problem, affecting all citizens, is secure employment with adequate incomes, which involves all ministries and all state governments. The third one is linked with the other two: it has become a principal cause of social tensions and political conflicts in the country.

?Economists do not have a systemic solution for this “poly-crisis”. Consensus amongst them has broken down even about solutions to its separate parts. They are divided on whether central bankers should operate independently of governments; whether inflation should take precedence over employment; whether imports should be made less costly for consumers or protection of workers’ incomes should take precedence to increase their purchasing power; and who is hurt by the depreciation of the rupee.?

Economists agree that more investments will boost growth. Therefore, there are lessons in China’s history. China and India opened their economies to global trade around the same time, some thirty-five years ago. Both countries had similar levels of per capita incomes then and similar levels of industrial technologies. Since then, China attracted many times more foreign investment than India and the incomes of its citizens increased five times faster. Moreover, China became an industry and technology powerhouse, who the US is now threatened by.?

?The West wants to encircle and contain China. Since wages in China have become much higher India seems well-placed to attract global investors. To attract investors India must compete with other countries. Vietnam is often cited as a country proving more attractive than India to Western and Japanese investors. Therefore, after China, economists are turning towards Vietnam also to understand why.

?Western neo-liberal economists have attributed China’s remarkable economic growth to its adoption of free trade policies, and they seem to see only this as a cause for Vietnam’s recent spurt too. However, when looking into Vietnam, they rediscover what was learned from China. When both countries opened to foreign investors—China before Vietnam, they had already attained high levels of human development with universal education and good public health systems. Whereas even ten years ago in India, trade-and-growth economists like Jagdish Bhagwati were dismissive of economists like Amartya Sen who advocated the human development theory of growth. The former said the size of the economic pie must be increased before it can be redistributed. They had the order wrong. Basic human development must precede growth because it is the means for growth. Moreover, incomes must be increased simultaneously to enable more consumption and attract more investments.

?The clock cannot be turned back. India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits at the same time. The current paradigm of economics cannot provide solutions. It is too linear, too mathematical, too mechanical. Economists have also separated themselves from other disciplines into their own self-referential silo. They should break out of it and examine the emerging science of complex self-adaptive systems. It provides a way for economists and policymakers to comprehend complex socio-economic systems in which many forces of different sorts interact with each other—some not easy to quantify.

?There are some fundamental flaws in the current paradigm of economics. Economists often cite Tinbergen’s theory, which states that the number of policy instruments must equal the number of policy goals. This justifies the necessity of independent monetary institutions for managing inflation, separate trade and industry specialists, and separate policies for environment management and agriculture. This is a mechanical and linear view of how a complex system works. In complex organic systems, which all natural and socio-economic systems are, root causes contribute to many outcomes. Moreover, outcomes circle back to feed the roots too. Therefore, the behavior of the system cannot be explained by linear causes and effects. The causes interact with each other, and effects also become causes.

?All complex adaptive systems (which all biological, natural, and socio-economic systems are) take different shapes in different places and at different times, even if they have the same constituents. Though every human body has the same organs, every human being is different. Good doctors know this; good doctors listen to understand their patients’ problems every time before prescribing treatments.

?Macro-economists search for global solutions. Trade and monetary policies that fit the US, China, Vietnam, or India will not fit others’ needs. Their needs have emerged from their own histories. Economists arrive at solutions by comparing data trends of different countries. They run their equations on computers. In their models, people are numbers. Economists do not listen to real people, whereas politicians at least try to. Indian economists complain that bad politics is coming in the way of good economics. Whereas bad economics could be coming in the way of harmonious progress of the country.

?Einstein said that working harder to solve systemic problems with the same thinking that caused them is madness. Global solutions and economic theories invented in the West have caused problems for which new solutions are essential. The inadequacy of the current paradigm was revealed by several crises in this millennium: the 2008 global financial crisis; inequitable management of the global Covid pandemic; and the looming global climate crisis (in which clearly one solution cannot fit all).

?Vasudhaiva Kutumbakan (One Earth, One Family, One Future) is the theme of the G20 which India is leading this year. A new economics is required. A movement to change the paradigm of economics’ science to bring perspectives from the sciences of complex self-adaptive systems has begun even in the West. India’s economists must step forward, and not just follow these developments. They must lead them too.

?Arun Maira

Author of?Transforming Systems: Why the World Needs a New Ethical Toolkit

March 25, 2023