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Rethinking Economics



Poster for the 2015 conference of the Institute for New Economic Thinking, Paris

Poster for the 2015 conference of the Institute for New Economic Thinking, Paris

A spectre is haunting economics – or maybe several even. Which ones exactly––the field is not quite agreed on, but it seems to have reached the conclusion that, really, it can’t go on like this. New approaches are called for, new ideas are sought after. To this end, the Institute for New Economic Thinking (INET), founded and funded primarily by star investor, philanthropist, and Karl Popper student George Soros, gathered an impressive array of leading economists for a four-day conference with the title “Liberté, Egalité, Fragilité” to debate the future of the field in Paris in early April. Present were, among others, the two Nobel Prize laureates Joseph Stiglitz and James Heckman, rising star Thomas Piketty, neo-classicists (roughly, “right-wing economists”) like Hans-Werner Sinn, erratic Marxists like the Greek Minister of Finance Yanis Varoufakis, and, last but not least, Bard College Berlin’s own Dirk Ehnts, all joined by a range of scholars from outside the field, like neuroscientist Antonio Damasio or Goethe biographer Nicholas Boyle.

Curious to see where the discipline that defines so much of public life is heading today, I went to catch some of the talks. The concerns raised were sometimes timeless–how should economists think about human beings?–and sometimes very timely, for example in discussions of inequality or the current crisis in Greece. Below is a selection of panels to give you a glimpse of some of the problems that economists think about these days when they turn to the very edge – or core, depending on how you see it – of their discipline.

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Attendance to the conference was by invitation only, but a number of spots were reserved for members of the Young Scholars Initiative (YSI) – an associated programme for… well, young scholars. A polite email request returned me a registration form (note well: a Sciences Po email address can get you places in France). I don’t quite remember what I wrote down as “current research interests” and “areas of specialization,” but it must have sounded convincing enough to get me a ticket, along with a personalized conference schedule with the exact time and location of all the panels I pre-selected to attend. When I arrived on Thursday evening at the Espace Pierre Cardin, in the very heart of Paris, right at the Champs-Élysées, the conference started with 30 minutes delay. A buffet was prepared in the lobby of the building to entertain the audience in the meantime. YSI members were, however, not invited for that part, and the crowd split neatly into people with suits eating tiny sandwiches and people without suits enjoying the last rays of sun outside.

The first day saw only one opening panel in the evening with two keynote speakers, Joseph Stiglitz and Thomas Piketty, but six different opening remarks. First of all Robert Johnson, INET President, who made a habit of citing a song at each talk or panel that he chaired (Billie Holiday’s April in Paris, John Lennon, and Joni Mitchell, among others) and also often referenced his past as a sailor in constant search for new metaphors to talk about “discoveries,” “steering into the unknown,” “venturing out in search for new shores,” and “long voyages.” You find some examples of his truly original introduction style on the conference website. Next up was Anatole Kaletsky, INET’s Chairman of the Board, soon to be succeeded in office by his successor in the line of introductions, Sir Adair Turner, former senior executive at McKinsey and Merrill Lynch and member of the Group of 30 (side note: if you thought the Bilderberger Group was scary, I suggest you have a look at those people. I’m quite sure it’s them who actually run the world. But husssh…). Turner then handed it over to George Soros, who after some brief remarks passed the micro to Clive Cowdery, British businessman, philanthropist, and panel chair, who then, finally, handed it over to Angel Gurria, head of the Organisation for Economic Co-operation and Development, OECD, who finally opened the panel.

Piketty spoke first. The young French economist rose to global fame after publishing his book Capital in the 21st Century in 2013, which argues that inequality might rise again to levels unseen since the 19th century. His talk was well rehearsed–in fact, I’m quite sure it was the third time I heard it, or a very similar version of it. Using historical data from income tax records, he argued that before the First World War inequality was higher in Europe than in the US, but nevertheless fairly high in both places. After World War Two, lots of wealth was destroyed and inequality sharply reduced. But since the 70s it has been on the rise again and seems to be headed towards 19th century levels again, with one small difference. As Stiglitz jokingly noted to justify his focus on the US: “America has always lead the way – and it’s now leading the way in inequality, too.”

He and Piketty agreed on many points: the fact that inequality of outcome strongly correlates with inequality of opportunity and that both have to be analysed together hence. That trickle-down economics do not work – “the rising tide of economic growth doesn’t lift all the boats” – and that there is a high price to pay for inequality, both in terms of the democratic legitimacy of a society’s basic institutions, and in more narrow economic terms. Both emphasized that there is nothing inherent to capitalism or globalization that forces a trade-off between growth and inequality (as it was a widely held consensus among economists for some time). Bad institutions and policies being at the root of the problem, good ones can make capitalism work for all.

They proposed two related, but also slightly different, concrete (but of course partial) solutions. Piketty argued that with high income inequality comes the return of high wealth to income ratios. Rather than 2-3 years of income’s worth personal wealth, the well-off tend to have 7 to 8 years of (higher) income saved. Since that money has to be stored in some assets, mainly real estate, access to land will become difficult without wealth, and changes in asset prices will have bigger repercussions on the real economy. A solution to the problem, Piketty argued, would be to raise the top income taxes. Though often decried as socialism, he showed that tax rates of well over 80% were normal for a long time in the US, and in Europe and Japan as long as they were occupied, and seen as part of the “civilization package” that was conferred on the young democracies.

Stiglitz suggested a land tax rather than an income tax. At the heart of his proposal was a distinction between capital and wealth. For a long time, the two were used synonymously. The output of an economy is generally understood as the product of capital and labour, where capital is just everything that makes labour more productive (machines, factories, etc. — the means of production). If capital and wealth are seen as the same thing, then a rise in wealth would lead one to expect a rise in labour productivity and a rise in overall economic output. However, Stiglitz argued not all wealth is productive capital: it might also be unproductive, like houses at the Riviera. To solve the problem of unproductive wealth, “minor tweaks will not be enough. The underlying problem is the structure of an economy which is increasingly geared towards rising rents, not productivity”. A land tax, he suggested, would incentivize moving capital into more productive assets, fostering inclusive growth.

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Other panels focused on less typical economic questions and searched the dialogue with other disciplines to revisit fundamental assumptions that underlie much of the discipline’s work. A key question that came up was what it means to be human? What are humans like and how can–or should–they be modelled by economists? Almost everyone seemed agreed that the traditional homo economicus model, understanding humans as static, rational, utility maximizing social atoms has to be replaced by something better. Yet there the agreement already ended.

Some looked to the empirical sciences for help, in particular neuroscience, evolutionary biology, psychology, and anthropology. The highly decorated scientist, Antonio Damasio, for example, drew on all of these fields to arrive at a more complete picture of human nature. The notion of homeostasis, he argued, allows one to understand how feelings are crucial for the regulation of human behavior. Cultural values need to be taken into account to explain us. If you expose humans to narratives with and without certain non-negotiable core values, different parts of the brain show activity. That feelings have a role in what we do and that stories might cause excitement did not seem particularly new to me, but apparently it is big news for some neuroscientists, who focus on the cognitive while neglecting the conative.

Tania Singer, Director of the Max Planck Institute in Leipzig, and Dennis Snower, President of the renowned Kiel Institute for the World Economy, argued for replacing in our models the naive idea of given, static “preferences” that humans are somehow supposed to have, with motivational systems (she listed: achievement, power, consumption, anger, fear, affiliation, and care), which depend on social context and our interpretation of it. The immediate second step was of course that, if our brains and motivational systems are plastic and responsive to social conditioning, we can engineer better humans! Meditation practices and good institutions can train altruistic behavior–what else could the good life be about?–and nudge us into ethical decision making beyond the diabolical dialectics of tribal us-versus-them. Buddhist monks in brain scanners prove it!

Some might be skeptical here, especially about that second step. Buddhism proved as little a shield against Japanese fascism as did Kantian morals to the citizens of the Weimar Republic according to thinkers as diverse as Christopher Hitchens and Slavoj Zizek. To say nothing of the political dangers of conflating plasticity with flexibility. Nevertheless, Damasio, Singer, and Snower enjoyed the full attention of many people, and behavioral economics, drawing on neuroscience and evolutionary theory, rightly remains a vibrant and growing field.

Another panel gathered people from the humanities to discuss primarily challenges of inequality, but inevitably also touched on similar issues about human subjectivity and values. Nicholas Boyle, author of a much lauded biography of Goethe, proposed to read Faust’s eponymous hero as an attempt by the author to synthesize two paradigmatic modern middle-class subjectivities: those of the bourgeoisie and those of the state bureaucracy. Whereas the former criticizes the old feudal regime for being unproductive, merely consuming, the second turns against the same regime on rationalist, rather than empiricist grounds, accusing it of building society on superstitions. The character of Faust is depicted as at once taking industrial production and scientific technology to their limits and also consuming everything Mephistopheles serves him, wagering to never find satisfaction. As the subtitle of the play suggests, it has to end in tragedy, of course; Goethe, and Boyle, thus warn against the dangers inherent to modernity.

Journalist and digital entrepreneur Lynn Parramore and Professor of English at NYU, Jeffrey L. Spear, turned to the Victorian polymath and social activist John Ruskin for guidance. Rather than equating wealth with money, as the mercantilists did, or with farming goods, as the physicalists proposed, Ruskin, teaches us to see only life lived in dignity as true wealth, the absence of which he called “illth”. As was pointed out during the Q&A, there is a dark side to Ruskin’s romanticisation of the Middle Ages, similar to the romanticisation of Buddhism. I asked the panel to reflect on the potential of the humanities compared to behavioral economics in proposing a workable alternative to the homo economicus model. None of them held the evolutionary approach in high esteem and all seemed skeptical about equating the good with the altruistic. Nicholas Boyle suggested to read Hegel, which is always a good idea, but seemed to impress the economists, much fewer of which had attended the panel, much less (there might be exceptions though).

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The conference concluded with a festive dinner at the Paris Opera and a speech by George Soros on the future of Europe for the adults in suits, and cold punch at a bar close by for the Young Scholars without suits. While there remains much work to be done on the questions addressed, it seemed to me that some first steps towards a fruitful dialogue were made. Inviting humanities scholars and biologists to an economics conference signals a genuine willingness to listen to eccentric voices. Perhaps Bard College Berlin, with its interdisciplinary economics and humanities degree, might offer just the right platform to debate exactly these kinds of questions, how the humanities and behavioral sciences might complement each other in elaborating a richer account of human existence in the world and their interactions in the marketplace, taking the best of both worlds and helping each other to avoid their respective blind-spots. Next August a new cohort of first-years will discuss what it means to be human in their Language & Thinking Program, and over the coming years, I’m sure, there will be many opportunities to explore what it might mean for economics.


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