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. 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. 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. 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. 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. 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. 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. 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. 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. 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
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. 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
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. 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. 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-‐syndicate.org/commentary/the-‐
neuroeconomics-‐revolu;on#01DugqtByVO8W50F.99
presenta;on
at
the
ECLA
OECD
workshop
May
2014
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. 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. 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. 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
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. 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. 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
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. 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
32. Income
and
Wealth
Distribu;on
presenta;on
at
the
ECLA
OECD
workshop
May
2014
33. Income
v
Wealth
Inequality
presenta;on
at
the
ECLA
OECD
workshop
May
2014
34. What
people
want
and
think
presenta;on
at
the
ECLA
OECD
workshop
May
2014
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. • «
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. 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. 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. 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. 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. 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
