Download Ottawa Remarks on New Economics

Delhi Remarks on New
Economics
Roberto Peccei
UCLA & Club of Rome
• In arguing for the need for a New Economics, I often urge
economists to follow the example of physicists a century ago
• Faced with atomic phenomena that did not fit the classical
picture, they invented quantum mechanics and the theory of
relativity which totally revolutionized our understanding of
matter
• This paradigm shift came from understanding the limitations
of the existing theories, and then inventing new concepts
appropriate for these new regimes
• I believe economics is in a similar situation now, but the
economists (on the whole) in contrast to the physicists seem
to be unaware they are now also in a new regime.
• Let me expand on this point briefly
• Physicists viewed new phenomena, like the
quantization of energy, as indicating limitations of the
existing theories in new regimes,
• Then, without overthrowing existing theories, they
developed the needed new concepts for these regimes
• Classical mechanics and Galilean relativity describe
nature very well, except in regimes where quantum
effects become important (h/ W  1) or when
relativistic effects become important (v/c  1 )
• The revolution that occurred in physics over the last
century produced a theoretical framework that now
can describe nature also in these regimes
• What about economics? What is the new regime that
needs a new economics?
• A growing number of people believe that neoclassical economic theory, which in many respects
works very well, must be re-thought as one enters a
regime where we exceed the planet’s biocapacity
Stressed
Ecosystem
H/B  1
• Present economic model has GDP growth as central
driver (OK in the H/B << 1 regime). When H/B  1
one need a new economics where sustainability of the
planet, rather than GDP growth is the driver
• Important to think through the set of criteria that an economy with
H/B  1 should have:
• When one attempts to do this, one soon realizes that many of the
criteria go well beyond economic criteria
• Give three examples:
i.
One needs to replace GDP growth as a criteria for well being of
the economy with better societal measures, like decreases in
unemployment and decreases in inequity
 decoupling employment from GDP growth.
Does this run afoul of Okun’s Law? NO
Linkage that arises from Okun’s Law is not dynamical, but comes
from the fact that employment contributes to GDP growth
Thus focus on employment and forget about GDP growth !
{ Technical Aside }
ii. Help preserve the commons for future generations
thereby reversing the present negative trends
This requires a series of coordinated actions, including:
- incorporating into the economy the cost of natural capital,
which can no longer be considered an externality
- implementing regulatory policies to reduce our ecological
footprint, thus transitioning from the present regime where
H/B > 1 to a regime where H/B < 1 ( and, hopefully, <<1).
Probably most urgent is to reverse the present increasing
trend of GHG in the atmosphere, so as to stabilize the world’s
climate
- Most likely successful path is through local rather than
global action
iii. Engage in significant reforms of the present
corporate and financial system
- This is probably the most difficult task because of the
incredibly strong vested interests
- Modern corporations are structured to grow for the
benefits of the shareholders. Since this growth
eventually undermines our ecosystem [  < k(R)] they
must transition to a new regime where this behavior
stops [social responsibility in corporate charters]
- Similarly, the financial sector must be transformed to
support long-term investment in real economic
activities that support human well being, rather that
speculative activities driven by greed