Global Agenda Council on New Economic Thinking 2012-2013
Economics is not a complete science, although it is described with elegant formulas and closed models. The reality of an economy is complex, with dynamic feedback loops. Yet policy-makers often make decisions and design interventions as though in a deterministic vacuum. Capital markets are far from stable and predictable. The recent financial crises have revealed how little is understood about how markets and economic systems work.
New schools of economic thinking, such as neuroeconomics, bounded rationality, behavioural finance and experimental economics, challenge the fundamental assumptions of neoclassical economic approaches. They go beyond the standard policy tools typically employed to analyse, discover, understand, describe and forecast economic issues and systems.
The field of economics is evolving to incorporate the cognitive and psychological influences of individuals in the economy, the impact of sociopolitical decision-making of institutions in interlinked economies as well as the role of complex and dynamic feedback loops in market economies.
The economists of the 21st century should be more engaged in solving the challenges of the real world, focusing on sustainable solutions for a growing number of economic and political challenges. The Global Agenda Council on New Models of Economic Thinking will explore the changing role of economics in creating a world that enables more robust market economies and advances higher quality of life around the world.
- In 2007, Goldman Sachs’s chief financial officer stated: “We were seeing things that were 25-standard-deviation moves, several days in a row.” The likelihood of only one such daily event is less than once in a billion years – showing how inadequate economic models assuming normal distributions are in highly volatile markets.
- A Berkeley academic and industry veteran, David Leinweber, has created an economic model that predicts the S&P500 to 99% accuracy, with the sole predictors being butter production in Bangladesh, cheese production in the United States and the number of sheep in both Bangladesh and the United States.
- Based on historical data, it was assumed impossible that house prices would fall simultaneously across all of the United States before the financial crisis. This faulty assumption underpinned most credit models and caused significant mispricing of risk in the run-up to the crisis.
“Having a banking sector is a long-term implicit liability… We need to include implicit liabilities of nations into the government budgets and to have fiscal watchdogs both to help get the policies best for society implemented and to hold politicians accountable to goals and risks.”
Coen Teulings, Director, CPB Netherlands Bureau for Economic Policy Analysis, The Netherlands
“The lack of good motivational and self-regulation skills (goal persistence, self-discipline, achievement motivation, ability to delay gratification) is an important source of major social problems. It is, therefore, key for a flourishing society to ensure that our children learn these skills at an early age because later remedies are less effective and more costly.”
Ernst Fehr, Professor of Microeconomics and Experimental Economics, University of Zurich, Switzerland
G20 Meetings of Finance Ministers and Central Bank Governors
3-4 November 2012
Mexico City, Mexico
Inaugural Forum for Economic Dialogue: Future of the International Financial System
19 November 2012
Institute for New Economic Thinking Plenary Conference
4-7 April 2013
Hong Kong SAR
The Global Agenda Council on New Models of Economic Thinking brings together leading thinkers across the public and private sectors and academia to address pressing challenges facing individuals and societies in market economies around the world.
To better influence economic policy, it is necessary both to disseminate the new ideas already developed and to create new thinking by identifying the knowledge gaps and influencing the research agendas.
The Council focuses on improving economic policy and enhancing the stability of financial markets. It seeks answers to pressing questions pertaining to the use of economic policy to address the threats posed by rising income inequality, unemployment and other challenges. It explores questions such as whether wide income inequality is a valuable metric for societies’ health and, if so, what causes it. At the same time, it aims to map the dynamic complexity of financial markets by factoring in human behaviour, government interventions and actions of investors.
Some of the questions the Council will take up are:
- How can economic policy be improved to address the threats posed by rising income inequality, unemployment and other challenges?
- How can “nudge” policies be used so citizens make better household financial decisions?
- How should the challenge of unemployment be addressed by combining the policies focusing on business ecosystems and social security?
- How can the level of human capital be improved? What role do factors such as non-cognitive skills (patience, workplace readiness) play? How should public policy reflect and incorporate that?
- Why is the financial system an engine of bubbles and not serving financial systems?
- How can the risk the public sector bears for the responsibility of financial systems be reflected?
- How should monetary policy and financial sector regulation be designed in an environment filled with uncertainty?
Research Analyst: Liana Melchenko, Associate Director, Global Agenda Councils, email@example.com
Council Manager: Abigail Noble, Associate Director, Investors Industries, firstname.lastname@example.org
Forum Lead: Michael Drexler, Senior Director, Head of Investors Industries, email@example.com