Over the last few hundred years, the population on our planet has survived and thrived with a linear economy. We used resources like minerals, fossil fuels and more from the environment and used to make a commodity. The commodity is sold, used and deposited as trash at the end of its life. And this was not „bad“ it created economic wealth, job opportunities and more. In general, it increased OUR lives. The world’s population has grown from one billion people in the early 1800s to nearly 7.4 billion today and we are using natural resources faster than they can regenerate. In particular, fossil fuels – which were created over millions of years – cannot be replaced.
Let’s go on by assuming the climate catastrophe is real and that the primary cause is fossil fuels because those two things are true. The question is how to stop it. What most of us thought we knew about this is now wrong, and that is a very good thing. But what has it to do with a new economic model.
The neoclassical model (or the old model)
In the 1930s, economist John Maynard Keynes spotted the inherent shortcomings of neoclassical economics. The neoclassical model predicted that the free market would keep the economy more or less in equilibrium, and that flexibility in wages and prices would ensure full employment. I used to think that climate change was a classic case of market failure resulting from a negative externality. Polluters got the economic benefit of fossil energy without having to pay the social cost, and would hence use too much of it. This is not entirely true.
Today the way we think about Economic is changing. If that thesis is correct – and there are many reasons to believe it is – then historical experience suggests policy and politics will change as well. Another important part according to Joel Salomon is that around 70 Million families are going to hand over between $30 and $50 trillion to the next generation. Worldwide, the total transfer is closer to $100 trillion. This will play a major part in the new economy. But in general how significant that Economic Thinking change will be is still not sure, cause the impact so far is still small. Only a few politicians are even slightly aware of the changes underway in economics, but these changes are deep and profound, and the implications for policy and politics are potentially transformative.
The rise of so many right-wing nationalist movements around the world—Brexit, Donald Trump, the neo-Nazis in Sachsen, Brandenburg, anti-immigrant protests throughout Europe— have their own distinctive origins and contexts, to be sure. This outcome plays a role but what else we have? In the last few hundred years, we have been conducted in a framework of right versus left or we vs. them. For example market vs. States left party vs. right party, private vs. public and so on. The New Economic Thinking scrambles breaks up and re-forms these old dividing lines and debates.
It is not „third way“ or a matter of a compromise. Rather, the new economic mindset provides something altogether different: a new way of seeing and understanding the economic world. This whole new world view will change how we think about the old us vs. them model. It will look not only incorrect for you, but it will also look irrelevant to you.
But to do so, we have to start new conversations. Asking deeper questions.
It will be an economy for the real world
Many people are using the new economy as a term. But it is not sure what it really meant, so it is quite confusing sometimes. It reminds me a lot to the term Platforms, causes so many Startups and corporates are using it wrong. It is much easier to define what it is not. New Economics will not accept that old orthodox theory that has dominated economics in the past several decades. We (Humans) are not perfectly rational thinkers, markets are not perfectly efficient and economies are self-correcting equilibrium systems that invariably find a state that is maximizing social welfare. If this theory would be true, we would not have all the financial crises in the past.
But defining the new economy is quite challenging. Because there is not a single theory yet and maybe there never will. If we think about how much more complex the world is coming. It will be very hard to define a single true theory about the new economy. So it is gonna be more, it will be a broad range of theories, empirical work, and methods. It is also highly interdisciplinary, involving not only economists, but psychologists, philosophers, anthropologists, sociologists, historians, physicists, biologists, mathematicians, computer scientists, and others across the social and physical sciences.
Now you may be thinking about the new economy, and you realize it is not entirely new. If you are familiar with System Thinking, behavioral economics, institutional economics, evolutionary economics, network theory, and experimental economics you already a few steps ahead. In the last few years, many people have written a lot about that (Hayek, Douglass North, Amartya Sen, Daniel Kahnemann, Thomas Schelling and more).
The flaws of neoclassical economics have long been pointed out, including its belief of the “economy as machine”, where, if policymakers pull a lever they will get an expected result.
New economics seeks as well as explanations of how the economy works that have empirical validity. But will have a look into more different domains. Thus behavioral economists run painstakingly crafted experiments to explain actual human economic behavior. Institutional economists conduct detailed field investigations into the functions and dysfunctions of real institutions. Complexity theorists seek to understand the dynamic behavior of the economy with non-linear or stochastic computer models validated against data. And System Theories seek to understand the interconnection between the elements and Systems we are part of in our daily lives.
But to work and understand this new thinking it requires a new toolkit and methodologies. For Example the work of Janine Benyus tries to understand systems and the economy through biological models. We will not find a single theory to understand the new economy, we have to find new models. It is a mess out there and hard to understand. We have to accept human behavior, imperfect organizations and the complex interactions and dynamics of the economy as they really are rather than what an idealized model says they should be.
Makers in the new world
Traditional economics views the economy in a fairly mechanistic way. If people are rational and we want to change their behaviour then we just need to change their incentives. Unfortunately, this will not work anymore. Just raising a tax for sugar will not make society less obese. Of course, people aren’t immune to such incentives, but often the response is far less than we would like.
My view is that we must take a more deliberately evolutionary view of policy development. Rather than thinking of policy as a fixed set of rules or institutions engineered to address a particular set of issues, we should think of policy as an adapting portfolio of experiments that help shape the evolution of the economy and society over time. We need a few things to do that. Most of my life I spend in Startups and building ventures. One key thing is experimentation. Rather than predict we should experiment as much as we can. Even Startups don´t run many versions of experiments. But we need more experiments to find out what will work in the future. Instead of design a big solution for a problem, we have an alternative approach. We can create a portfolio of small-scale experiments trying a variety of solutions, see which ones work, scale-up the ones that are working, and eliminate the ones that are not. That’s how evolution is working. Going back to the work of Janine Benyus to find out what works best in small experiments.
A portfolio of experiments will lead us to another important point. Strategies or institutions should be as adaptable as possible. Understanding the Systems they are working on will help them to create strategies that can change quickly in the future. Managing this complexity is hard and you may need a good coach for that. Thus the regulations and state-of-the-art building practices co-evolve with each other.
And the last point I think is, instead of social managers or social engineer policymakers should think more about themselves as System Mentors and helping to design the system instead of the outcome. So asking the question to define the desired outcome and then bring the people together who are involved in the system.
Source:
Joel Soleman, Clean Money
Hayek, Individualism and Economic Order
Jamshid Gharajedaghi ,Systems Thinking
Armatya Sen, Collective Choice and Social Welfare
James Foster, On economic inequality
John P. Gould and Roger N. Waud
International Economic Review
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