Foreword

by Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20

The OECD has prided itself on its essential role in reconciling the economy with nature and society. At present, the global community is failing to fully grasp and advance this fundamental agenda. To do so we need to improve our analytical frameworks, policy tools and models.

The Financial Crisis, almost ten years ago, was a wake-up call on the inadequacies of our policy approaches. But a number of other important trends were also moving in the wrong direction. Perhaps the most serious indictment of our economic approaches has been the emergence and failure of the international community to take serious action on climate change. A related problem is the unsustainable consumption of the Earth’s resources, currently running at 1.6 planets, i.e. it takes the Earth 1 year and 7 months to regenerate what we use in a year.

Inequality in many OECD countries has also been rising steadily and has now reached critical levels, weakening social cohesion and trust while undermining growth and well-being. The boundless pursuit of increased growth and consumption, the traditional treatment of environmental degradation and income inequality as externalities or marginal market failures and the contention that individuals left to their own devices will self-organise into a socially desirable state have been part of the problem. Simply improving the way markets operate will not solve our pressing problems. Alan Kirman argues that the current “paradigm is neither validated by empirical evidence nor does it have sound theoretical foundations”.

Economists and policy makers have failed to appreciate the complexity of human behaviour and the systems in which we live. A complexity approach allows us to look at systems of systems consisting of vast numbers of individual elements that interact in complicated ways, such as ecosystems, financial markets, and energy networks, or societal phenomena such as urbanisation and migration.

It also challenges mainstream thinking on key issues. For example, according to the Kuznets’ curve, income inequality should first rise and then fall as countries’ income moves from low to high. The empirical evidence however does not seem to bear this out. In this volume, an approach based on economic complexity by César Hidalgo and others suggests that inequality depends not only on a country’s rate or stage of growth, but also on its type of growth and institutions.

In economics, we still talk about flows, masses, equilibrium and so on (a gravity model of trade, for example). But these terms are rooted in “classical” physics, developed before relativity and quantum theory. The new sciences of complexity can provide insights into how groups of people actually behave when they (re)act together to form economic and socio-political systems. These systems do not operate simply as a series of actions and reactions, but with feedback, non-linearity, tipping points, singularities, emergence, and all the other characteristics of complex systems.

Inspired by the OECD’s New Approaches to Economic Challenges (NAEC) initiative, this book Debate the Issues: Complexity and policy making provides details of new frameworks that better capture the complexities of modern economies and societies. Our economies are not closed general equilibrium systems; they are complex and adaptive, embedded in specific societies with their own history, culture, and values, as well as in natural environments governed by biophysical laws.

A number of prominent economists have joined this call for a new approach to policy making. Andy Haldane, Chief Economist of the Bank of England writes that NAEC and OECD’s willingness to consider a complexity approach “puts the Organisation at the forefront of bringing economic analysis and policy-making into the 21^st century”. While Eric Beinhocker from the Institute for New Economic Thinking expresses the hope that “the OECD will continue to play a leadership role, through NAEC and its other initiatives, on new economic thinking, not just in a narrow technical sense, but in the broad sense of helping forge a new vision that puts people back at the centre of our economy”.

Having led the NAEC and Inclusive Growth initiatives, I have been pushing the idea at the OECD, in member Countries and Key Partner countries, as well as the G20, that economic growth is a means to an end – not an end in itself. This Insights book argues that our efforts to understand economic growth as a means to improve well-being could benefit from an approach that sees inclusive growth as the outcome of complex interactions among economics, politics, psychology, culture, history, environment, and ambition.

If we want growth to be inclusive, our way of thinking about it has to be inclusive too.