On designing a new overall economic paradigm

During our IX New Paradigm Workshop, we spoke to Diane Coyle and Michael Jacobs about why economics needs to change and what it takes to design an overarching economic paradigm.

 

At the outset of this panel, DIANE COYLE provided evidence on the “applied turn”, i.e. steady overtaking of microeconomics as a field in economics measured in the number of academic publications. The lack of diversity at economic university departments leads to an unconscious bias in economic modelling and in the application of statistical methods, which indirectly promotes data bias in artificial intelligence. The core assumptions on society and markets, including but not limited to the “homo oeconomicus” assumptions, are distorting the reality and resulting in a tendency towards relying on markets for solving economic and social problems. In her book “Cogs and Monsters: What Economics Is, and What It Should Be” she recommends working more closely with other disciplines and other methods, returning to the political economy and rebooting welfare economics.

MICHAEL JACOBS presented the different aspects of a politico-economic paradigm. Every paradigm needs concrete political goals, supporting economic theories and successful ways of shaping the public discourse. In his view, we are in the historical equivalent to the 1930s Great Depression – a time in which the policy prescriptions of the prevailing paradigm have failed but a new economic thinking has not yet taken hold. Among those obstacles are the insufficient communication between so-called mainstream and heterodox economic schools of thought and the general lack of translation of economic ideas into the broader public debate. He suggests replacing economic growth as the main objective of policymaking by a new set of goals including environmental sustainability, improving wellbeing, reducing inequality and financial system resilience.

A lively discussion ensued on the central assumptions in economic models and the extent to which they should be rethought. MICHAEL JACOBS and DIANE COYLE both stressed that the core problem of the baseline model is the assumption of an “ideal world” in the baseline model when so-called externalities are actually fundamental factors in the economy. MAJA GÖPEL highlighted the need for a reckoning why decoupling has failed so far, including by taking a closer look at rebound effects. She also underlined the importance of better quality of data and indicators (e.g. for biodiversity) in gearing the systems change in economics towards better accounting for complexity.

JAKOB VON WEIZSÄCKER agreed that trying to solve the economic problems of the 21th century with 20th century economic reflexes will simply fail. Thus, economist should be more curious and self-critical, avoid ad hominem arguments within the profession and focus on offering new solutions. In his view, we are still in a “pre-paradigm phase” and are not yet in the position to present a viable alternative. According to JENS SÜDEKUM, the baseline economic growth model has been quite flexible, e.g., in embedding the financial sector. On this point, ANTONELLA STIRATI expressed more caution, highlighting some of the inconsistencies in economic models. She raised the question whether the current paradigm shift would last, and to which extend the “old” thinking (e.g., as manifested as EU fiscal rules) would change, particularly in case of a reversal of the low-interest rate trend.

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