This chapter explains why a new approach to economic analysis and policy is needed. It sets out the multiple challenges now facing almost all economies and proposes a new set of overarching policy goals: environmental sustainability, a reduction in inequalities, improved wellbeing, and system resilience. Achieving these goals requires policymakers to look ‘beyond growth’. The chapter argues that the dominant approach to economic policymaking over the last forty years, based on an orthodox and subsequently revised model of neoclassical economic theory, is not adequate to address these challenges. It describes the various analytical advances which have been made in economics in recent decades which offer a richer understanding of how economies work. It suggests that overcoming these challenges requires structural rather than incremental reform, and sets out a range of policy approaches, drawn from the new analytical frameworks, which might help achieve these wider economic and social goals.
A Systemic Recovery
5. Beyond Growth
Abstract
Introduction
Critiques of dominant economic analyses intensified sharply in the wake of the 2008 Global Financial Crisis and the protracted recovery that followed. It became clear that conventional economic theories and policies had been found wanting. Many OECD economies were beset by rising inequalities, slower productivity growth, increasing corporate concentration, rising debt levels, environmental degradation, and financial instability. These issues connected to a prevailing narrative based on the primacy of growth that stressed market liberalisation and deregulation together with fiscal discipline, low tax rates and curbing social welfare benefits. That narrative not only abetted the failure to address acute social and environmental challenges, but also failed on its own terms: the growth of productivity and per capita incomes has been increasingly anaemic in recent decades.
This chapter points to a new narrative, based on a broader conception of economic progress, richer frameworks for economic, social and environmental analysis and a wider set of policy objectives. It urges a move away from the traditional emphasis on GDP growth to a multi-dimensional conception of economic progress comprising environmental sustainability, rising human well-being, falling inequality and system resilience. The prioritisation of efficiency objectives may have undermined the resilience of societies by overlooking equity and sustainability objectives. The Covid-19 pandemic exacerbated previous trends, with clear asymmetric impacts among different income groups. Embracing a multidimensional set of objectives would enable assessment of trade-offs and complementarities, as well as identification of unintended consequences, to better guide policy choices and decision making.
We have to move away from simplistic assumptions such as homogeneous, rational, utility-maximising agents interacting in timeless self-equilibrating markets, and move towards further engagement and experimentation with complexity, path-dependence, bounded rationality, economic power, multiple equilibria and non-equilibrium outcomes. We should see modern economies as complex adaptive systems, constantly evolving and reorganising, rather than a series of deviations from a stable equilibrium with the ability to self-stabilise when hit by shocks.
The chapter was largely written before the Covid-19 outbreak, but its key lessons are sharpened and amplified by the pandemic and the economic and social crisis it precipitated. The new growth narrative heralded in this report is useful not only to understand this latest crisis, but also to think about how to emerge from it. The many calls now heard to ‘build back better’ arise partly from problems which the crisis has itself exposed. Despite clear and recent warnings from scientists and public health officials, few countries were ready for a pandemic of this kind (Global Preparedness Monitoring Board, 2019). Our economies proved less resilient than we had assumed. Many countries’ health and social care systems have not been able to cope. Reliance on globalised supply chains based on ‘just-in-time’ efficiencies has been called into question (Financial Times, 2020a). Almost everywhere the crisis has revealed the impact of inequality: Covid-19 and its economic consequences have hit the poor and vulnerable the hardest (Financial Times, 2020b).
But the crisis has also created new opportunities. The emergence of clean air in many cities round the world during lockdowns saved many lives even as others were lost (World Economic Forum, 2020). Nature found new places in which to flourish. The enforced reduction in consumption and commuting led many people to question what kind of lifestyle best contributes to wellbeing. Perhaps most of all, governments found that in a crisis they can intervene in their economies at huge scale and speed. The macroeconomic arguments over government spending and debt are of course not over, but the consensus that a crisis of this magnitude justifies such intervention is notable (Ilzetzki, 2020).
The pandemic arrived after a decade in which western economies have experienced a succession of crises. The aftermath of the financial crash of 2008 is still not over, with stagnant productivity and continued financial risk among the most obvious problems. The financial crisis exacerbated inequalities which contributed in many countries to political conflict and instability. There is a deepening crisis of climate change and wider environmental breakdown.
It is almost certainly no coincidence that so many deep problems have occurred at the same time. At the very least, we should seek to understand not just their individual causes but their inter-relationships. And in doing so, examine the nature of the economic system and economic policies from which these crises have arisen - or at least which have not prevented them.
To do this we have to start from an understanding of the nature of challenges which, even before the Covid-19 crisis, our economies were experiencing. Accelerating environmental crisis is the most urgent. The 2018 report of the Intergovernmental Panel on Climate Change made clear that to hold the average surface temperature rise to 1.5 degrees Celsius, global emissions of greenhouse gases must be approximately halved by 2030, and reach net zero by around 2050 (IPCC, 2018). That is a transformative task of unprecedented proportions, made greater by the need to tackle simultaneously a series of other worsening - and inter-related - global environmental problems, including biodiversity loss, soil degradation, and air and marine pollution (UNEP, 2019).
Rapid technological change is transforming many aspects of our economies. Automation technologies, particularly artificial intelligence, are changing both the numbers and kinds of jobs economies generate and the ways they are organised, leading to concerns about the ‘future of work’. In various sectors, major multinational companies, including digital platforms, have grown to positions of market dominance unrivalled in the modern era, raising questions about both their economic and social impact and the implications for public policy (OECD, 2019a). In many countries there is increasing debate about the impact of new technologies on issues ranging from democracy to mental health (OECD, 2017).
New patterns of globalisation are also emerging. Investment and trade continue to shift to the south and east of the world. The ‘financialisation’ of most advanced economies has continued, with higher levels of private debt than in the past, higher returns to holders of financial assets, and in some cases larger financial sectors relative to the rest of the economy (World Bank and WTO, 2019). National financial regulation is made harder by the combination of a globalised financial system and new financial technologies.
Underpinning each of these trends is demographic change. Many developed societies are significantly ageing, and all are experiencing the pressures as well as the benefits of increased migration. Many developing countries are experiencing rapid population growth.
These challenges would be considerable in any circumstances, but they come after a period in which most OECD economies have performed substantially less well than in the past. For most countries, the recovery after the 2008-9 recession was among the slowest on record. Before the Covid-19 crisis economic growth had been restored, but it was generally fragile, still dependent on the emergency life-support of ultra-low interest rates and hugely expanded central bank balance sheets. Public and private debt levels as a proportion of national income were still high in many countries even before their recent surge. Productivity growth had stalled in some countries and was historically low in many others; innovation at the technological frontier was no longer being diffused to the rest of the economy (OECD, 2019b).
Inequalities have risen in most advanced countries over recent decades, particularly between the incomes of the top 1% of the population and the rest. Wealth inequality has grown, in large part due to the appreciation in the value of assets, itself a cause of financial volatility (OECD, 2019c). In many countries, unemployment remained stubbornly high even before the Covid recession, particularly for young people (Alveredo, 2019). Most developed economies have seen an increase in under-employment and insecure and precarious work of different kinds (OECD, 2019d). In some countries living standards for many households were barely above those of a decade ago, or maintained only via rising household debt (OECD, 2019e). In many the gap between richer regions and those on the periphery has widened (OECD, 2018).
Not all OECD countries have experienced all of these problems, but many have experienced the political consequences of a decade of economic underperformance and accompanying global pressures, alongside other more directly political causes. Popular discontent with politicians and the political system has been rising over a long period in many countries. Trust in institutions, in experts and ‘elites’ has declined (OECD, 2017). Societies which once experienced high levels of social cohesion are now widely felt to be more fragmented, prone to cultural as well as economic divisions. In many countries large numbers of people report a sense that society has become less fair, with a widening gap between the richest and the majority, and that in a more globalised world, national societies have somehow ‘lost control’ of their own destinies (World Bank, 2018).
In these circumstances it is not surprising that, even before the Covid-19 crisis, many people were questioning whether current and conventional economic policies were sufficient to address the challenges and problems their countries face. With low interest rates and low growth rates seemingly entrenched - the phenomenon sometimes described as ‘secular stagnation’ - it had become clear that reliance on monetary policy alone leaves policymakers with particularly few options to deal with recession. As a knowledge‑based economy becomes more digitalised, with ‘intangible’ investment increasingly important and a growing divide between firms at the cutting edge of innovation and those falling behind, new approaches will be needed to raise productivity across the economy as a whole and ensure this reduces inequalities rather than exacerbates them (OECD, 2019f; Unger, 2019; Haskel and Westlake, 2017). Normal labour market policies have not been able to sustain demand for lower-skilled jobs in the face of automation and globalisation or counter the growing divide between those in secure jobs and those in precarious ones. Redistributive welfare policies have seen their effectiveness reduced and are not sufficient to counter rising inequalities. Environmental policy has failed to prevent catastrophic risk. Competition policy has not kept pace with the growth of near-monopoly companies with operations across national borders. New approaches will be required if systemic risk is to be eliminated from the financial system.
Of course, national economic policies have differed, but there has been a widespread consensus on what makes for a successful economy. For example, that increasing global trade is a goal in itself, with countries doing better the more integrated they are into international trade and capital flows. Most countries have sought to make their financial and labour markets more ‘efficient’, deregulating and liberalising them where possible to widen the opportunities for financial activity and reduce restrictions on businesses. Central bank independence to conduct monetary policy has been accompanied by constraints on public borrowing. Corporation taxes have been reduced almost everywhere, and in many cases marginal personal income tax rates too. Economic growth has continued to be the dominant goal of economic policy, from which it is assumed other objectives will flow. Material consumption has been taken as a proxy for progress and development. Equity and environmental considerations have largely been dealt with ‘after the event’ rather than as integral to economic policy.
Before the financial crisis, this economic model (often described as the ‘Washington Consensus’) was strongly influenced by a particular form of economic analysis. Based on an orthodox version of ‘neoclassical’ economic theory, this assumed that liberalisation of markets would generally improve their efficiency in allocating resources and would therefore tend to optimise overall economic welfare. Although markets sometimes failed, governments were also seen as prone to failure. They usually had less information than market actors and could be captured by vested interests. Policy rooted in this kind of analysis tended to be sceptical of government intervention, with deregulation of various kinds widely favoured.
Over the last decade policy makers have modified some aspects of this analytical framework. It has been acknowledged that liberalised markets are not always efficient and market failures can be significant (Ostry et al., 2016). Policy makers have recognised the need for greater government intervention, in fields such as labour market, regional and environmental policy, as well as in monetary and financial policy.
These shifts have been important but have not gone far enough. A variety of economic theories, evidence and techniques have been developed which offer richer ways of understanding how economies work, and how they can be made to work better. Analytical methods and models based on the new powers of data collection and computing, for example, have opened up insights not available to previous generations. Taken together, a 21st century economics has begun to come into view which looks more able to help policymakers find solutions to the economic problems they now confront.
It is possible to see how many of these critiques and explorations can be brought together to create a ‘new economic narrative’, broadly consisting of three elements (OECD, 2018):
A new conception of economic and social progress - a deeper understanding of the relationship between growth, human wellbeing, a reduction in inequalities and environmental sustainability, which can inform economic policymaking and politics.
New frameworks of economic theory and analysis - a richer basis of understanding and evidence on how economies work, and new tools and techniques to help policymakers devise policy.
New approaches to economic policy - a wider set of policy and institutional reforms, based on the new frameworks and analysis, to achieve the new social and economic goals.
The goals of economic policy
For over seventy years, economic growth has been the dominant goal of economic policy, and the principal measure of an economy’s success. And with good reason: for much of this period, rising national income signified rising household incomes, and with them average living standards. Economic growth raised employment levels, reduced poverty rates, and provided the tax receipts to finance higher government spending on public services. In most OECD countries, up to the 1980s, economic growth was accompanied by falling inequality and - as higher GDP allowed more resources to go into air and water pollution control - better local environmental quality. So, while governments always had a wider set of economic objectives than rising GDP, economic growth was a pretty good metric for overall economic performance.
Today, economic growth continues to generate the benefits of higher national income, but the dominant patterns of growth in OECD countries over recent decades have also generated significant harms.
First, GDP growth is now associated with rising inequalities. In almost all OECD countries, the last forty years have seen a declining share of national income going to wages and salaries (labour), with a rising share going to the owners of capital (UNCTAD, 2012). With capital ownership increasingly concentrated among those on the highest incomes, the result has been a growth of both income and wealth inequality, particularly between the top 1% and 10% and the rest of the population (Dao et al., 2017). In such circumstances GDP growth no longer translates into rising living standards for those on median and lower incomes. In some countries high rates of poverty remain a persistent blight (World Inequality Database; Alvaredo et al., 2018).
Second, GDP growth is no longer correlated with improvements in wellbeing. People’s sense of a fulfilled and flourishing life comes also from a wide variety of other factors in addition to income: from the security and satisfaction they experience in work; their physical and mental health, social networks and personal and family relationships; and from social goods such as the levels of crime and trust in society, and the quality of public services such as health and education ‘Stiglitz et al., 2009, 2018). None of these are automatically improved simply by higher GDP and can often be harmed by the ways it is generated.
Third, severe environmental degradation has forced a recognition that today’s patterns of economic growth are undermining our capacity to maintain current standards of living. An economic system based on fossil fuels, present forms of intensive and meat-based agriculture and the unlimited exploitation of global natural resources is not sustainable over the long term. Climate change, air and marine pollution and ecological breakdown are already damaging the lives and livelihoods of millions of people; they risk catastrophic damage to our economies and societies within the next few decades unless currently dominant forms of production and consumption are radically changed (UNEP, 2019).
These developments do not mean that economic growth should be abandoned as a goal of economic policy. Rather, they force attention to the form of economic growth a country experiences and aims to achieve. It is not enough for GDP to be rising if the underlying patterns of growth are generating significant harms at the same time. Politicians and policymakers need to go ‘beyond growth’. They need to ensure that, alongside rising GDP - and as a result of it - economic policy is achieving a wider set of objectives and measures of economic and social progress. Four objectives for economic policy-making should be paramount:
Environmental sustainability - understood as a path of rapidly declining greenhouse gas emissions and environmental degradation, consistent with avoiding catastrophic damage and achieving a stable and healthy level of ecosystem services.
Rising wellbeing - understood as an improving level of life satisfaction for individuals, and a rising sense of improvement in the quality of life and condition of society as a whole.
Falling inequality - understood as a reduction in the gap between the incomes and wealth of the richest and poorest groups in society, a reduction in rates of poverty, and a relative improvement in the wellbeing, incomes and opportunities of those experiencing systematic disadvantage, including women, members of ethnic minorities, disabled people, and those in disadvantaged geographic communities.
System resilience - understood as the economy’s ability to withstand financial, environmental or other shocks without catastrophic and system-wide effects.
Countries which seek to achieve these four goals, rather than giving overwhelming priority to growth, will experience a more balanced path of economic and social development, with better outcomes for both current and future generations, meeting the needs of both people and planet.
It used to be thought that inequality was the inevitable price of growth, but in fact reducing economic inequalities can benefit growth (OECD, 2015; Berg and Ostry, 2011). Inequalities of income and opportunity prevent some people from achieving their full economic potential. Low educational attainment and skills, discrimination in the labour market, and the difficulties of working in the absence of adequate child and social care, all tend to constrain the productive resources of the economy. Addressing slow productivity growth in lagging firms and regions will drive growth and reduce inequality (OECD, 2018). At the same time, people on low incomes tend to spend a higher proportion of their income than the wealthy, who are more likely to save. So improving the earnings of poorer people have a much larger impact on consumption and aggregate demand, and therefore growth, than raising the income and wealth of the relatively well-off (Dabla-Norris, et al., 2015).
Inequality also tends to make economies more unstable, as the higher savings of the rich are channelled into financial and real estate assets prone to volatility. More unequal economies tend statistically to have shorter periods of growth (Berg A. et al., 2018). And politically, rising inequality has tended to result in policies skewed towards the wealthy, including (for example) pressures to reduce tax rates. These in turn tend to reduce spending on public goods such as education, health and childcare which can improve the economy’s productive potential (Boushey, 2019; Case and Deaton, 2020).
The empirical evidence does not show that unequal societies are poorer than more equal ones. There are rich countries with high levels of inequality, and others which are more egalitarian. But the evidence does show that more unequal economies do less well than they would if they were more equal (Berg et al., 2018). In this sense it can be said that fairness and prosperity go hand in hand.
Reducing inequality also has an impact on social and individual wellbeing. Studies across developed countries show strong correlations between inequality and a variety of social harms, including higher rates of mental and physical ill-health, obesity and crime; and lower levels of social trust, educational attainment and social mobility (Wilkinson and Pickett, 2009, 2018). This is true not just for those on low incomes, but across the population as a whole. Surveys of wellbeing consistently show that more equal societies are also those where life satisfaction and happiness are highest (Helliwell et al., 2017, 2019).
The trade-offs between economic growth and environmental sustainability are deeper. By changing what is produced in the economy and how, it is possible to reduce environmental damage significantly even while output increases (World Bank, 2012). Rapidly cutting greenhouse gas emissions, for example, will require significant investments in energy efficiency, renewable energy and sustainable transport technologies. These investments can act as a form of short-term economic stimulus, generating both jobs and incomes (Bowen and Kuralbayeva, 2015). In the longer term, technological and social innovation will need to drive very different patterns of production and consumption from those we see today, with much lower levels of energy and material use, and much higher levels of waste re-use and recycling. We do not know what impact this will have on long-term growth rates in developed countries. But there is little reason to doubt that a highly productive, environmentally sustainable economy of this kind can generate a high standard of living, and one more fairly shared (Jackson, 2016). Indeed, it is evident that the alternative - an environmentally unsustainable economy - will cause very serious damage to wellbeing and resilience in the medium and long term.
Going ‘beyond growth’ means neither abandoning growth as an objective nor relying upon it: it means changing the composition and structure of economic activity to achieve the multiple goals of a more rounded vision of economic and social progress. Policy making always involves difficult choices, particularly in the distribution of resources between groups and generations. But we are not compelled to make the same choices as those we made in the past.
The terms ‘inclusive growth’ and ‘green growth’ have been used to describe national economic pathways aimed at meeting wider objectives of the kinds suggested here. But these terms can be used with a range of meanings and have sometimes been accompanied by minimal policy changes in practice. The dynamics generating today’s economic crises are deeply embedded in the structure of our economies. So, giving serious priority to improving wellbeing, reducing inequalities, and achieving sustainability and resilience will demand more than a minor adjustment to current economic policies. The goals set out here need to be built in to the design of policy.
There are three crucial dimensions to this process in practice. The first is the adoption of a wider set of primary economic indicators to guide policy-making. GDP is not a good measure of overall economic performance. It does not take account of the distribution of income and wealth; it captures only flows of income not the stocks of capital that generate them; it undervalues unpriced and intangible services; it ignores unpaid work; it fails to measure environmental degradation; it is not a good proxy for wellbeing (Stiglitz et al., 2009; Coyle, 2014). Over the last decade, the OECD has pioneered the development of economic indicators which better capture the multiple dimensions of economic and social progress, and a number of countries have begun to adopt them. This involves use of a ‘dashboard’ of key indicators, including measurements of economic security, subjective wellbeing, environmental quality and public goods (OECD BLI, 2019). A particularly important new field is the development of ‘distributional national accounts’, which show not just the aggregate growth in GDP, but how it is distributed across income and population groups (Alvaredo et al., 2018).
But adopting a set of indicators is not sufficient. For new indicators to be effective they must be communicated: politicians and policy makers (particularly in finance and economic ministries) must make clear in their public pronouncements that this is how they want economic performance to be judged, and media debate needs to reflect this. Going ‘beyond growth’ needs to be an explicit political aim, reflected in a new public narrative and discourse on the nature of economic and social progress (Government of New Zealand, 2019).
Last, and most critically, the new economic indicators need to be attached to policies designed to improve them. It is no use adopting a new measure of performance without having the mechanisms to influence it. This requires both an understanding of the causal factors which determine the level of the indicator; and the design of policies which can have an impact on it. This is why policy makers need a deeper framework of understanding of how modern economies work, and the kinds of policies which can make them work more successfully. Multidimensional indicators require a more sophisticated menu of policies.
Most economic policy is made by national governments, but in a globalised economy of complex supply chains and trading relationships, production, and consumption patterns in one country have powerful impacts on others, and many economic outcomes cannot be determined solely through national action. There is a vital need to achieve new international agreements and co-ordination mechanisms in areas such as environmental degradation, labour standards and tax policy which can ensure that economic goals in one country are not met at the expense of others, and national policy is enhanced by international co-operation (Hay et al., 2019).
New frameworks of economic analysis
Over a period of about thirty years up to the financial crisis of 2008, the dominant model of economic growth in developed countries rested to a considerable extent on a form of neoclassical economic theory. This made relatively simple assumptions about how economic actors behave, and the implications of this for the functioning of the economy as a whole. In turn these led to a variety of standard prescriptions for economic policy which were widely adopted worldwide.
Within academic economics, this simple version of neoclassical theory was largely superseded by more complex approaches, but it remains the standard framework for the teaching of economics at school and early undergraduate level and continues to dominate public discourse and commentary about economic policy (Bowles and Carlin, 2020; Basu et al., 2018). And as an analytical framework, it had a disproportionate influence on economic policy making in many countries for a long period.
At the heart of this theory was an assumption of ‘rational’ economic behaviour. Individuals maximised their utility, based on preferences formed outside of the economic process. Businesses sought to maximise their profits. The ‘optimal’ level of output and consumption (and wages and profits) would then be achieved in markets that were as competitive as possible. Where they were not, it should be the objective of policy to make them so. In fields as varied as labour market policy, financial markets and international trade (and in some countries in the provision of public services too) the dominant policy view was that markets should be liberalised if possible, thereby improving their efficiency and achieving the highest overall gain in output and welfare.
Orthodox neoclassical theory acknowledged the existence of ‘market failure’, where competitive markets do not produce optimal outcomes due to the existence of externalities (such as environmental degradation) or public goods (such as science or defence). Market failure justified a range of government interventions, from environmental taxes to the public provision of services such as education, policing and research and development. But the neoclassical framework also noted that governments can fail: States may be captured by the interests of their officials or politicians, or simply lack the knowledge or capacity to improve market behaviour. As a result, economic prescription based on simple neoclassical analysis tended to be sceptical about the role of government in trying to steer the economy towards ends other than those determined by existing markets and well-defined externalities.
At the level of the whole economy, most macroeconomic models before 2008 were constructed using the tools of neoclassical economics (Oxford Review, 2018). Such models typically assumed that households and businesses behave in homogeneous ways, so could be modelled as ‘representative agents’. Though individual markets might involve frictions of various kinds, the long-run tendency of the economy was towards equilibrium, generally assumed to be at full employment. Instabilities were regarded as exogenous, coming from outside the system, rather than from within. In macroeconomic policy, the neoclassical framework encouraged a view that high levels of government debt ‘crowd out’ private investment, so fiscal deficits should be limited, and monetary policy (adjustments to interest rates) should play the primary role in controlling inflation and managing overall demand (Goodfriend and King, 1997).
Since the financial crisis, the orthodox analysis underpinning economic policy has changed. Economists have had to acknowledge that the orthodox analytical framework has done a poor job of anticipating or explaining key developments and have begun searching for more helpful approaches (Skidelsky, 2016). It has been widely accepted, for example, that the crisis undermined the ‘efficient markets hypothesis’ which had informed financial deregulation (Wolf, 2014). It became clear that the behaviour of the financial sector needs more sophisticated analysis (BIS, 2014; Dagher, 2018). Indeed, in a variety of areas, from the understanding of fragmented labour markets to the analysis of productivity differences between different kinds of firms, policy makers have had to acknowledge that actually existing markets are not efficient, but beset by ‘imperfections’ and ‘frictions’ for example information asymmetries between market actors in different kinds of economic transaction which require different kinds of policy solutions (Lofgren et al., 2002). Macroeconomic models have been modified to include different kinds of financial institutions and behaviour, and rigidities and shocks of various kinds (Oxford Review, 2018).
Many economic policy institutions have acknowledged the limitations and failures of the more simplistic free market prescriptions of the pre-crisis period. It has been generally accepted, for example, that financial regulation needs to go beyond individual firms to the systemic risks which the financial sector as a whole can generate. As a consequence, various forms of ‘macroprudential regulation’ are now being considered and implemented (BIS, 2018). Similarly, it is accepted that free trade and deeper integration into global markets can have adverse consequences on particular groups of workers, sectors and geographical communities, and that counter-balancing policies are needed (Rodrik, 2017). In employment policy, minimum wages and active labour market policies to assist the unemployed into work have been supported for some time, while other kinds of government intervention, such as to redress gender inequalities in work opportunities and pay, are also advocated (OECD, 2018).
These developments are welcome but insufficient. Economics has been changing in more profound ways over recent decades. Economists working in both mainstream and non-orthodox traditions have developed new theories and analytical frameworks which can better explain the way in which modern economies work, and why they often don’t. Many of these frameworks, some of them reformulations of older theories, have good claims to provide a better fit with the evidence, and in turn greater explanatory power, than those which continue to dominate mainstream policy making and public discourse. We list a few of the main developments below (Fischer et al., 2018; Mearman et al., 2019).
Economic behaviour: Few economists now think that the idea of rational ‘homo economicus’ is a useful way of explaining how people behave in real economic life, despite its widespread continuing use. Behavioural economics, informed by experimental evidence in economic psychology, offers a more sophisticated way of understanding, and is increasingly being adopted in mainstream economic analysis.1 People do not constantly calculate and optimise their welfare: they use various forms of ‘bounded rationality’. To save the time and effort of calculation, many economic decisions are made using ‘heuristics’ and ‘rules of thumb’. At the same time, human reasoning is subject to many forms of bias. For example, people tend to operate within particular ‘frames’ of thought, rather than seeking a full range of information sources, and tend to draw general (and often mistaken) inferences from small samples of experience. ‘Herd behaviour’ (when people follow others’ example, as happens, for example, in financial markets) can be common.
Economic psychologists and sociologists emphasise the role of social influences on the formation of economic tastes and preferences.2 People do not act solely in their own self-interest: they have strong attachments and moral views which lead to various forms of caring, co-operative and altruistic behaviour, as well as conformity to social norms. Such behaviours suggest a ‘social’ human being as an important economic agent (McGregor and Pouw, 2017). Economic action in this sense is powerfully ‘embedded’ in societal structures, institutions and relationships. Tastes and preferences are not exogenous to the economic system - they can be actively shaped by forces such as advertising, new technologies and new kinds of social networks and institutions. The common narratives about how the economy works and how people behave in it also influence behaviour (Shiller, 2019).
Markets, institutions and power: The neoclassical idea of the competitive market was intended to be a formalisation of what in the real world is obviously a wide range of different kinds of market arrangements. Over recent decades, institutional and political economists have pointed out that markets are brought into being by institutions and the social rules they embody: By law, custom, social norms, the structure and ownership of businesses, by public policy.3 All of these can change the ways in which different kinds of market operate, and the outcomes they generate. The idea of ‘market competition’ is simply too narrow a frame to understand this. For example, the different systems of corporate governance and financing in different countries lead businesses to behave in different ways; the relationship between corporations and governments is a vital element in understanding how markets work in practice; and the development of digital information has fundamentally altered the nature of economic production. Comparative political economists have sought to understand how markets are co-ordinated through different institutional arrangements in different countries, giving rise to distinctive ‘varieties’ of modern capitalism.
Understanding markets as the outcome of the inter-relationships of institutions raises the issue of the role of power in the economy. The way in which today’s labour markets work, for example, is made more explicable by analysing the relative power of employers, individual workers and groups of workers (Bivens and Shierholz, 2018; Weil, 2019). The growing concentration of many product markets in the hands of a small number of large corporations requires not just traditional analysis of monopoly and oligopoly, but of the impact of corporate lobbying on regulatory policy making. To understand the effect of rising inequality on economic outcomes requires an examination of the influence of the very wealthy on public policies such as taxation and public spending (Boushey, 2019). Overall, attention must be paid to the interaction of the economy and economic policy with politics and systems of democracy.
Understanding markets as the outcome of the inter-relationships of institutions raises the issue of the role of power in the economy. The way in which today’s labour markets work, for example, is made more explicable by analysing the relative power of employers, individual workers and groups of workers (Bivens and Shierholz, 2018; Weil, 2019). The growing concentration of many product markets in the hands of a small number of large corporations requires not just traditional analysis of monopoly and oligopoly, but of the impact of corporate lobbying on regulatory policy making. To understand the effect of rising inequality on economic outcomes requires an examination of the influence of the very wealthy on public policies such as taxation and public spending (Boushey, 2019). Overall, attention must be paid to the interaction of the economy and economic policy with politics and systems of democracy.
Evolution and complexity: The standard neoclassical idea of macroeconomics has an essentially timeless frame of reference: the economy is analysed with little reference to its own history or to the processes of change. This makes it difficult to comprehend why and how economies develop over time. Evolutionary economists have sought to fill this gap.4 They have shown how economies change in ways which mirror those of biological evolution, where differences in corporate behaviour and technological innovation generate advantages in markets and therefore get reproduced. They have analysed how change is ‘path dependent’, constrained by previous conditions and inertial forces. Many evolutionary economists and economic historians have focused on trying to understand innovation - the process of 'creative destruction’ - as the key driving force of economic growth over time (Freeman, 2008). They have explained innovation as an institutional process influenced not just by the processes of technological ‘invention’ within firms, but the wider system of ‘innovation networks’ and financial markets, and the often powerful role of public funding at various points in the innovation process (Mazzucato, 2013).
The dynamics of innovation are hard to reconcile with the neoclassical view of the economy as an essentially equilibrating system: in reality it is always in turbulent flux. The school of complexity economics has sought to combine this insight with those of behavioural and institutional economics to understand the economy as a complex adaptive system.5 Drawing on theory developed to analyse complex systems in biology and engineering, complexity economics seeks to understand the ways in which the multiple and nonlinear relationships between heterogeneous actors in a modern economy generate aggregate outcomes which are not simply the sum or average of their constituent parts. Complex systems result in new, ‘emergent’ outcomes which cannot be predicted through a mechanistic approach based simply on their micro-foundations. Understanding this has particular value to elucidate complex systems such as finance and global value chains. Complexity economists have developed new kinds of ‘agent-based’ models which abandon the assumptions of rationality, representative agents, optimising behaviour and equilibrium of the standard neoclassical model. Utilising big data and modern computing power, such models are able to represent the economy in more complex ways, offering the potential of better explanation and prediction (Hamill and Gilbert, 2016).
Finance and macroeconomics: The failure of most macroeconomists to predict the financial crash of 2008, and the continued weakness of many developed economies despite the very low interest rates of the last decade, have led to a fundamental reassessment of neoclassically-based theory. A crucial dimension has been the role of the financial sector. Prior to the crash financial regulation was largely based on the neoclassical ‘efficient markets hypothesis’, which assumed that, with near-perfect information, liberalised financial markets would generate an optimal allocation of resources (Wolf, 2014). The evident failure of this theory has renewed interest in ‘post-Keynesian’ analysis which explains how financial markets shift between stability and fragility, and their tendency to create asset bubbles and subsequent crises (Minsky, 1986, 1992).
Keynesian and post-Keynesian economists have challenged the neoclassical orthodoxy around fiscal and monetary policy, emphasising the importance of effective aggregate demand in determining productivity and output growth, and the central role played by uncertainty in economic behaviour.6 They have focused on the role of fiscal policy in stimulating growth (in part through its effect on business expectations), and the limitations (and inequitable impacts) of monetary policy. Such insights are now partially accepted in ‘mainstream’ economic analysis, for example, that a more active fiscal policy is both necessary and desirable in conditions when interest rates are very low and monetary policy has largely run out of options (Summers, 2016). Contrary to neoclassical orthodoxy, it has been shown how high levels of public borrowing and debt can be sustained so long as the growth rate of the economy (which can itself be stimulated by public investment) exceeds the rate of interest paid (Blanchard, 2019). Public investment can ‘crowd in’, rather than ‘crowd out’, private finance (Griffith-Jones and Cozzi, 2016).
A key field has been the development of new kinds of macroeconomic models. The unrealistic assumptions and poor predictive performance of standard ‘dynamic stochastic general equilibrium’ (DSGE) models used by many central banks and finance ministries has led to a questioning of their neoclassical ‘microfoundations’, such as rational expectations and representative agents (Stiglitz, 2018; Wren-Lewis, 2018). The new models incorporate financial assets of various kinds; can better account for the impact of stocks as well as flows; and allow for more realistic behavioural and institutional assumptions, including the critical role of information asymmetries and uncertainty; and the possibility of endogenous shocks and structural breaks in economic evolution, such as financial crises (Hendry and Muellbauer, 2018; Muellbauer, 2018).
The natural environment: Neoclassical economics understands environmental degradation as a form of market failure, where environmental goods are unpriced. It therefore seeks to find a monetary value for environmental resources or the damage caused to them, and to use environmental taxes or other incentive mechanisms (such as tradable permit systems) to ‘internalise’ the external cost and so correct the market failure (Tietenberg and Lewis, 2018). But this approach cannot fully explain or address the prevalence of environmental degradation. Ecological economists have offered a more fundamental explanation.7 They have shown how the economy is in reality a subset of the earth’s biophysical systems: it depends on the natural environment to provide it with resources, assimilate its wastes, and to provide various life support services such as nutrient recycling and climatic regulation. These processes are governed by the laws of thermodynamics, which means that all resources are turned back into wastes, in a more ‘entropic’, or disordered (and therefore often polluting) state. Natural systems do not behave in linear ways but exhibit a range of thresholds and ‘tipping points’ which, when exceeded, risk catastrophic change, sometimes to local environments, sometimes (as with climate change) to the global one.
For these reasons, ecological economics seeks to bring the economy back within the earth’s ‘sustainability limits’ or ‘planetary boundaries’, where environmental systems can naturally regenerate (Steffen et al., 2015). This will involve, not the marginal changes assumed by the notion of market failure, but transformation in the environmental structures of modern economies. A range of policy instruments will be required to stimulate this, including, but going well beyond, environmental taxes. This will have powerful implications for macroeconomic policy: the notion of economic growth itself will need re-evaluating.
Inequality: As inequality has increased, a growing number of economists have sought to map its extent, and understand its causes and effects.8 In doing so they have challenged some of the fundamental tenets of the standard neoclassical approach. For example, increasing liberalisation of international trade does not have the widespread economic benefits formerly assumed, particularly for already open economies. Although greater trade may raise GDP, it frequently results in a highly uneven distribution of the benefits, with significant net economic costs being borne by particular industrial sectors and the geographic communities dependent on them (Rodrik, 2017). Experience in a variety of countries suggests that a non-liberalised, more government-directed approach to trade and industrial policy may have a much stronger impact on growth and its distribution (Chang, 2010).
As already noted, one of the key trends of the last forty years in many developed countries has been the declining proportion of national income which has gone to wages and salaries and the rising share going to the owners of land and capital. This has been explained in terms of the rising returns to capital relative to the growth rate of the economy as a whole, and of the increasing ability of higher income groups to capture the unearned ‘rents’ or surpluses from economic activity.9 The relative power of employers and workers in the labour markets for different kinds of work has then magnified the difference in earnings between workers in different occupations. Rising inequality has negative impacts on the wider economy, including on productivity and economic growth and on many indicators of individual and social wellbeing (Stiglitz, 2012).
Gender: One of the persistent dimensions of inequality has been by gender. Women in all countries are systematically under-represented in high-status and high-earnings occupations, and over-represented in low-status, low-income ones (SIGI, 2019). Research in labour market economics has sought to understand the interaction of gender, family and labour supply (Blau et al., 2014; Goldin, 2014). Feminist economists have gone further, seeking to locate such gender stratification in the deeper structures in society which entrench the relative roles and power of men and women.10 Comparable analyses have examined how ethnic minorities also experience systematic discrimination and under-representation in higher-status and higher-income occupations; the basis of this in the colonial and slavery histories of western economies; and the ways in which inequalities of gender, race and class intersect.11 Analysis of economic and public policy outcomes without understanding their gender and racial dimensions is simply incomplete.
A critical feature of feminist economics has been an expansion of the boundaries of the economy and of economic analysis. It has emphasised the critical role which the unpaid work of raising children, very largely done by women, plays in maintaining the processes and structures of society, and the way this is systematically ignored in mainstream economic accounting and analysis. This is also true of other forms of unpaid work, such as caring for elderly and disabled people and voluntary and community work of various kinds. Only by understanding the economic value produced by these activities, it is argued, can the functioning of the economy, and its embeddedness in social structures and relations, be properly understood.12
Ethics and the role of the state: Inequality forces a questioning of the ethical basis of economic analysis. Proponents of the standard neoclassical framework widely assume it to be ethically neutral, since it seeks to maximise welfare given the existing tastes and preferences of consumers; it does not judge these (Wight, 2015). But in practice people’s tastes and preferences change as they move along the income scale, therefore a different distribution would generate a different pattern of economic activity. This is even before we consider the moral claims of future generations (Nolt, 2017). Regarding the maximisation of welfare under current conditions as ethically ‘neutral’ is in practice to accept the current distribution of income (including between generations). This is why economic philosophers and political economists have argued for a more honest understanding of the inescapably ethical character of economic analysis. In turn this would lead to a more sophisticated public debate about the justice of different economic arrangements and policies.13
It also suggests a re-examination of the role of the state in economic policy. The neoclassical framework presupposes that well-functioning markets optimise overall welfare, and government policy is justified to correct market failures. But if public policy is to aim at different ethical outcomes, the state will have to play a larger role in guiding the overall patterns of economic activity to achieve them. Through public service and welfare provision it can also support a fairer and more productive form of economic development. ‘Correcting market failures’ will not be sufficient; markets can also be ‘shaped’ in pursuit of publicly determined goals.
These developments have generated new understandings of how modern economies work, and the advent of new data sources has enabled economics to become a much more empirical social science. It is notable that some of the key insights have arisen both within mainstream economic traditions - by relaxing simplistic assumptions and introducing ‘frictions’ or new explanatory variables of various kinds - and in more explicitly ‘heterodox’ ones (Zucman et al., 2019). The result is that economic analysis and policy making are now able to draw upon a much richer and more empirically based menu of academic economics and political economy than has generally been used or featured in public discourse over the last thirty years or so.
No single synthetic theory has emerged from these different approaches to economic thought. But this is not because they offer fundamentally competing analyses. Indeed, in many cases there are strong synergies between them, and powerful ways in which they can be combined. Many economists working in the complexity field have been explicit in making these links and incorporating insights from a wide range of economic analyses to understand in a more sophisticated way how economic agents behave and the outcomes which emerge from their interactions (Wilson and Kirman, 2016). Political economy likewise encompasses a range of interdisciplinary approaches, drawing on critical insights from history, sociology, anthropology and other fields.
Over the last decade much economic policy-making and advice has moved away from the simple ‘orthodox’ approach which was dominant before the financial crisis. But the persistence of serious economic problems, and the rise of new challenges, suggests that this movement has not gone far enough. Similarly, the new frameworks of economic thought are in some cases blurring the lines between the mainstream and the heterodox, but again, not enough. These two shifts need to be harnessed to one another. The new modes of economic analysis can provide a much broader approach to economic policy making than the simple neoclassical framework. They can help explain why conventional policies have not been working well. And in turn they can help point the way to alternatives that might more successfully do so.
New approaches to economic policy
As the multiple problems and challenges facing developed economies have emerged over the last decade, many new approaches to economic policy have been developed in response. These approaches reflect two key insights. The first is that today’s deep challenges will not be addressed simply by incremental changes to existing policies. Environmental unsustainability, low levels of investment and slow productivity growth, rising inequality, the power of monopoly corporations, growing financialisation, and accelerating automation all arise from structural features of modern economies. So, they will require a more profound shift in the kinds of policy which governments use to address them.
For much of the last forty years, the dominant approach to economic policy making in most OECD countries has been to focus on the ‘supply side’ of the economy. Macroeconomic policy aimed to control of inflation. Some adverse impacts of growth have been ameliorated ‘after the fact’ by redistributing income through the tax and benefit system, and social and environmental policy. Meanwhile the central engine of the economy - the patterns of investment and forms of production that generate its shape, direction and scale - have been largely left to be determined by private sector businesses and finance.
Though both supply side and ameliorative policies are still important, they are no longer sufficient. We need to pay attention to the way the engine itself works. For it is in the patterns of investment and forms of production themselves that the major problems and challenges arise. Environmental sustainability, improved wellbeing, a reduction in inequality, and greater resilience need to be built into the structures of the economy from the outset, not simply hoped for as a by-product, or added after the event.
It is vital that policy is made in an integrated way. This starts from the adoption of economic performance and wellbeing indicators which capture the full breadth of economic and social objectives. These indicators must then be attached to policies which can change how they perform - not just individually, but together. Multiple objectives can only be achieved if economic and social policy making moves out of its traditional silos and seeks the synergies as well as the trade-offs between different policy areas (Tett, 2015). For example, reform of the financial system to reduce systemic risk must also distribute wealth more broadly. Macroeconomic policy must be bounded by environmental sustainability limits. Overall public spending must be audited for its impact on each of the multiple dimensions of wellbeing. Policy must take account of international as well as domestic impacts. Institutional innovation in government will therefore be required.
Sustainability and decarbonisation policy poses perhaps the most acute and urgent challenge in these respects. In the past, environmental policy aimed at improving the impacts of specific products and production activities through regulatory measures such as energy efficiency and pollution standards and protection of natural areas. But these have not been enough to reduce environmental degradation to sustainable levels. So policy makers must now consider how long-term decarbonisation and sustainability targets can be given greater legal and economic force, and used to drive investment and production into more sustainable and resilient forms (Jacobs, 2018). This will involve detailed examination not just of the technological options which can achieve radically lower environmental impact in different sectors, but of the patterns of consumption and modes of living which will be associated with them. Some activities - the subsidy of fossil fuels, for example - will need to cease, while ‘just transition’ strategies will be required to ensure an equitable restructuring of carbon-intensive sectors and enable workers to retrain for new jobs (ITUC, 2018; ILO, 2018). To make choices of these kinds, governments will need to engage in much deeper forms of sectoral planning, social partnership and public consultation than in the recent past.
Innovation and industrial policy will have a crucial role. Over the last few years a number of governments and public institutions have taken up the idea of ‘mission-oriented’ innovation and industrial policy (Mazzucato, 2017, 2018). This starts from the insight that economic development has a direction as well as a rate. So public policy can help drive innovation into meeting the major environmental and social challenges our societies face. Using a combination of policy targets, public procurement, innovation spending and ‘patient’ public investment, a more active industrial policy can help steer the economy, not just to support stronger industrial performance, but social and environmental goals as well. In most countries a strongly devolved regional policy will be necessary to ensure more equitable geographical outcomes.
There is a strong case for a more active industrial policy to be supported by a more active macroeconomic policy. With real interest rates still very low and quantitative easing still in place, fiscal policy will be needed to ensure sufficient aggregate demand to create new jobs, particularly in the face of a global downturn (Boone, 2019). Although public debt levels remain high in many countries, public borrowing for investment which supports economic growth can be sustainable, paying for itself over time (Blanchard, 2019). It is notable that many public investments which support growth and job creation will also contribute to improved individual wellbeing, and social cohesion and solidarity.
Improving the resilience of the economy through stronger financial regulation remains a priority. Though the period since the financial crash has seen stricter regulation of individual financial institutions, many analysts warn that the financial system as a whole remains fragile (Buiter, 2018; Tucker, 2019). While policy makers have been developing new forms of macro-prudential regulation aimed at preventing excessive credit growth, it is not clear that these are yet strong enough to prevent another crisis, with the growth of the largely unregulated shadow banking system a particular concern (Aikman et al., 2018; Lysandrou. and Nesvetailova, 2015). There are strong grounds for exploring stricter regulation of the types of assets which financial institutions can hold, penalising (through regulation or taxation) high carbon, speculative and ‘non-productive’ financial activity, and incentivising long-term investment in productive sectors of the economy .152 In some countries this might include reforms to the ‘shareholder value’ model of corporate governance and executive pay, which has encouraged an excessive focus on short-term returns and a decline in long-term investment (Lazonick and O'Sullivan, 2000; Lawrence, 2017).
More widely, there is increasing interest in the role which competition policy might play in regulating the growth of companies with powerful monopoly positions, particularly in key digital markets. The orthodox approach of judging competition and market power largely through their impact on consumer prices has come under increasing challenge (Kahn, 2016; Lynn, 2017). With expanding influence on many aspects of life, the structure and regulation of digital platform companies is a particular focus of policy concern. This will clearly have to be done on an international as well as national basis. There is also increasing scrutiny of the ways in which multinational corporations govern their global supply chains, particularly in relation to labour and environmental standards. Raising such standards through new forms of international trade agreements offers a potentially powerful approach. Co-ordinating corporate taxation regimes on an international basis to ensure that multinational corporations pay fair levels of taxation in the countries in which they operate will also be important.
Building dynamics to reduce inequality into the structures and institutions of the economy poses a challenge. Redistributive measures through the fiscal and welfare systems remain vital, but it also requires ‘predistributive’ measures that address inequality’s complex drivers (Boushey, 2019; Lustig, 2018). One of these lies in the ownership of wealth, which in many countries has become more concentrated over the last decade (Alvaredo et al., 2018). A variety of approaches to spreading wealth more widely are now under discussion in many places, including mechanisms to broaden the ownership of companies, reforms to land ownership and housing markets and the design of ‘citizen’s wealth funds’. It is also argued that wealth, and income from wealth, need to be taxed more (IPPR, 2018; Saez and Zucman, 2019). Reducing inequality will require particular attention to labour market policies. The falling share of national income going into wages and salaries (relative to capital) over recent decades has reflected a decline in the effective bargaining power of workers, particularly in lower-skilled jobs. Reversing this would require a range of measures: raising minimum wages; improving the access of trade unions to workers, particularly in smaller firms and under-unionised sectors; improving the regulation of working conditions and contracts, particularly in the so-called ‘gig economy’ of precarious work; employee profit-sharing schemes; improving the provision of childcare; and increasing the role of collective bargaining, particularly at a sectoral level.
Collective bargaining will be particularly important to steer and manage the processes of automation, ensuring that the benefits of higher productivity do not accrue simply to the owners of capital (Korinek, 2019). As automation and decarbonisation redistribute employment opportunities, there is increasing interest in the role of government ‘job guarantees’ to smooth the transition (Tcherneva, 2018). ‘Flexicurity’ welfare policies which combine flexibility for employers with income security for workers may also be important (Wilthagen and Tros, 2004). There is growing interest in the idea of a ‘universal basic income’ for the same reason (Standing, 2017; Vanderborght, 2017). Others propose a system of ‘universal basic services’, including education, healthcare, housing and transport (Social Prosperity Network, 2017; Gough, 2019). Systematic measures will be needed to end discrimination against women, ethnic minorities and other minority groups in many countries, and to increase investment in childcare and early years provision. Investment in lifelong education and skills training will become increasingly vital. Perhaps more radically, there is increasing interest in the potential of reducing working hours to capture the gains of higher productivity in improved wellbeing, rather than simply higher consumption (Coote and Franklin, 2013).
The aim of these policy approaches is to help shift the structure of economies so that their internal dynamics work towards environmental sustainability, improved wellbeing, declining inequality and greater resilience. Rather than bolting on policies which have to act against the dominant dynamics of the economic system, the aim should be to change the way the engine of the economy works, so that these goals are its primary outcomes.
This must extend to the international sphere. It is not possible for individual countries to achieve economic and social progress in isolation. Global, multilateral rules are needed to prevent financial crises, tackle tax evasion and money laundering, address climate change and environmental degradation, regulate labour standards in international supply chains, and shift the distribution of global resources towards the poorest countries and people. A new global governance regime is required (Hay et al., 2019).
We are under no illusions as to how easy or quick policy changes of these kinds will be. They will require significant institutional reform. Many vested interests will stand in the way - the resistance of those with incumbent economic power is of course a major reason why more equitable and sustainable policies have not been followed previously. We recognise that this is as much a political as an economic policy making challenge. In some countries it may require innovations in democratic practice and the ways in which policy is made, for example to open it up to wider consultation and participation.14
It may also require a new role for the state. A number of practitioners and commentators have explored how modern governments can offer more than safety nets for their citizens, providing them with assets and skills that do not simply remove barriers to opportunities, but furnish people with the capacity to seize them.15 States must become more entrepreneurial, seeking to shape markets and steer the process of economic change, not simply correct market failures. An empowering and entrepreneurial state would allow the development of a new kind of social contract - a new relationship between the state, business, civil society and citizens (Snower, 2019). These processes will take a different form in every country - despite the processes of globalisation, every country retains its own history, cultures and institutions. But everywhere it will need political imagination and courage.
Conclusion: Towards a paradigm shift
A decade ago the financial crisis rocked not just the world’s economic system, but the confidence that policy makers knew how to manage it. Since then, important changes have been made. Economic analysis has become more sophisticated, and new approaches have been adopted in policy making and advice - many of them led by the OECD. But the depth of the issues we now face makes clear that these processes have not yet gone far enough. Though modified and improved, policy makers are essentially still operating with the pre-crisis economic framework and its accompanying forms of policy. We believe that more radical rethinking is required.
In this chapter we have set out how this can be done, with a new set of goals and measures of economic and social progress; new frameworks of economic analysis; and new kinds of policies. These are not new in the sense of ‘original’: on the contrary, a critical part of our argument is that what we are doing is bringing together well-established ideas which have many authors and important intellectual histories. But we do claim that it offers an alternative to the approach to economic policy making which has been dominant in OECD countries over the last forty or so years. If the new goals we propose are to be achieved, a new model of economic and social development is needed.
The critical idea - the common thread - that runs through our argument is that economics and economic policy need to understand the sociality of human life. People are not the individual utility maximisers of orthodox economic myth: they have multi-dimensional preferences and ethics formed in social and cultural settings. There is a reflexive interaction between individual economic decisions and societal forces, working itself out in social institutions and through political processes. This means that our conception of economic progress needs to extend beyond individual, material prosperity to include indicators of social wellbeing, cohesion and empowerment, and the environmental boundaries of human activity. Our frameworks of economic analysis need to acknowledge the social, historical, political and environmental context of economic behaviour, and the feedback loops between individual decisions and societal dynamics which characterise economic systems. Our approach to policy must go beyond the traditional instruments of economic policy to encompass reform of institutions, social policy and political narratives.
We do not claim to have presented a fully-fledged and coherent model of economic and social development which can simply be taken off the shelf and implemented. Much more work needs to be done. Yet it is evident too, that many of these ideas have already begun to enter mainstream economic and political debate, even if their full implications have not yet been acknowledged. The task now is to move from debate to practice.
It is daunting for economic policy makers to contemplate a fundamental shift in the way they make policy. But this kind of change has happened twice before in the last century. In the 1940s, in the aftermath of the Wall Street Crash and the Great Depression, the economic orthodoxy of laissez faire, which had dominated analysis and policy making in the preceding period, was replaced. Keynesian economic theory provided a better way of understanding how economies could be revived, and the economic policies of full employment and the welfare state won broad support across the political spectrum. But the ‘post-war consensus’ itself broke down amid the economic crises of the 1970s, and it too was replaced. The free market or ‘neoliberal’ model developed by economists such as Milton Friedman and Friedrich Hayek appeared to offer a better economic analysis, and a more dynamic policy prescription. Adopted originally (and most fully) by the US and UK under the governments of Ronald Reagan and Margaret Thatcher, the market-oriented model in various forms came to be applied widely across the OECD in the subsequent decades.
Social scientists describe these moments of economic change as ‘paradigm shifts’ - periods when old orthodoxies are unable either to explain or to provide policy solutions to conditions of crisis, and new approaches take their place (Laybourn-Langton and Jacobs, 2018). More than a decade after the financial crash, with the global economy and many individual OECD countries facing multiple crises, our argument is that the time is ripe for another such paradigm shift. The frameworks and prescriptions which have dominated policy making in recent decades are no longer able to generate the solutions to the problems and challenges we face today. We need a less incremental, more profound form of change.
In a world of complexity and radical uncertainty, only the foolish would argue that the solutions are simple. But this does not mean that it is beyond us to find them. No single prescription will fit all circumstances. Each country will wish to find its own way. But we are struck by the wealth of insight and understanding which now exists across the field of academic economics and economic policy making, from which solutions can be drawn. We applaud the OECD for its vital work in this field, and strongly recommend it continues to engage its member states and the wider global economic and political community to discuss and shape these new approaches further, and to support their implementation. The prize could not be greater.
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Notes
← 1. See for example Simon, H. A. (1955). A Behavioral Model of Rational Choice. The Quarterly Journal of Economics 69 (1), 99-118. Kahneman, D. (2011). Thinking: Fast and Slow. Allen Lane. Camerer, C., Loewenstein, G. and Rabin, M. (eds.) (2004). Advances in Behavioral Economics. Princeton University Press. Thaler, R. (2015). Misbehaving: How Economics Became Behavioral. Allen Lane. Thaler, R. and Sunstein, C. (2008). Nudge: Improving Decisions About Health, Wealth and Happiness. Penguin
← 2. See for example Ariely, D (2008), Predictably Irrational: The Hidden Forces That Shape Our Decisions. Harper Collins. Bowles, S. and Gintis, H. (2013). A Cooperative Species: Human Reciprocity and Its Evolution. Princeton University Press. Sandel, M. J. (2013). Market reasoning as moral reasoning: why economists should re-engage with political philosophy. Journal of Economic Perspectives, 27 (4), 121-40. Granovetter, J. (1997) Society and Economy: The Social Construction of Economic Institutions. Harvard University Press
← 3. See for example Furubotn, E. G. and Richter, R. (1997), Institutions in Economic Theory: The Contribution of the New Institutional Economics, University of Michigan Press. Hodgson, G. (2015). Conceptualizing Capitalism: Institutions, Evolution, Future. University of Chicago Press. Acemoglu, D. and Robinson, J. A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Business. North, D. C. (1990). Institutions, Institutional Design and Economic Performance. Cambridge University Press. Tirole, J. (1988). The Theory of Industrial Organization. MIT Press
← 4. See for example Richard R. Nelson, R. R. and Winter, S. G. (1982). An Evolutionary Theory of Economic Change. Harvard University Press. Metcalfe, J. S. (1994). Evolutionary economics and technology policy. The Economic Journal, 104 (425), 931-944. Dopfer, K. and Potts, J. (2007),The General Theory of Economic Evolution. Routledge. Hodgson, G. A. (1993) Economics and Evolution: Bringing Life Back Into Economics, Cambridge University Press
← 5. See for example Beinhocker, E. D. (2006). The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Harvard Business Press. Arthur, W. B. (2015). Complexity and the Economy. Oxford University Press. Wilson, D. S. and Kirman, A. (2016), Complexity and Evolution: Toward a New Synthesis for Economics. MIT Press. OECD, (2017) Debate the Issues: Complexity and Policymaking. OECD Insights. OECD Publishing. https://www.oecd.org/naec/complexity and policvmaking.pdf
← 6. See for example Carlin, W. and Soskice, D. (2006). Macroeconomics: Imperfections, Institutions and Policies, Oxford University Press. Lavoie, M. (2014). Post-Keynesian Economics: New Foundations, Edward Elgar. King, J. (2003). The Elgar Companion to Post-Keynesian Economics. Edward Elgar
← 7. See for example Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process, Harvard University Press. Martinez-Alier, J. Ecological Economics: Energy, Environment and Society, Blackwell. Daly, H. and Farley, J. (2003), Ecological Economics: Principles and Applications, Island Press. Spash, C. L. (ed) (2017). Routledge Handbook of Ecological Economics. Routledge
← 8. See for example Piketty, T. (2013). Capital in the Twenty-First Century. Harvard University Press, Atkinson. A. B. (2015). Inequality: What Can Be Done? Harvard University Press. Milanovic, B. (2018). Global Inequality: A New Approach for the Age of Globalization. Belknap Press. Piketty, T. and Zucman, G. (2014). Capital is back: wealth-income ratios in rich countries, 1700-2010, The Quarterly Journal of Economics 129 (3): 1255-310. Atkinson, A. B., Piketty, T. and Saez, E. (2011). Top incomes in the long run of history. Journal of Economic Literature, 49 (1), 3-71. Stiglitz, J. (2012) The Price of Inequality, Penguin. Bowles, S. (2013). The New Economics of Inequality and Redistribution. Cambridge University Press. Chetty, R. et al. (2016). The fading American dream: trends in absolute income mobility since 1940. NBER Working Paper 22910. http://www.equalitv-of- opportunity.org/papers/abs mobility paper.pdf
← 9. See Piketty, T. (2013). Capital in the Twenty-First Century. Harvard University Press. Stiglitz, J. (2016). Inequality and economic growth. In Jacobs, M. and Mazzucato, M. (eds.) Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth. Wiley Blackwell. Standing, G. (2016). The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay. Biteback
← 10. See Waring, M. (1988). If Women Counted: A New Feminist Economics. Harper & Row. Ferber, M. A. and Nelson, J. A. (eds.) (1993). Beyond Economic Man: Feminist Theory and Economics. University of Chicago Press. Nelson, J. A. (1995). Feminism and economics. The Journal of Economic Perspectives 9 (2), 131-148. Power, M. (2004). Social provisioning as a starting point for feminist economics. Feminist Economics 10 (3), 3-19. Kuiper, E. & Sap, J. (eds.) (1995), Out of the Margin: Feminist Perspectives on Economics. Routledge
← 11. See OECD Employment Outlook 2008. Chapter 3: The price of prejudice: labour market discrimination on the grounds of gender and ethnicity. OECD Publishing. Akee, R., Jones, M. R. and Porter, S. R. (2017). Race matters: income shares, income inequality, and income mobility for all U.S. races. NBER Working Paper No. 23733. Acemoglu, D, Johnson, S. and Robinson, J. A. (2001) The colonial origins of comparative development: an empirical investigation. American Economic Review, 91, 1369-1401. Collins, P. H. and Bilge, S. (2016). Intersectionality. Wiley
← 12. See Folbre, N. (2008). Valuing children: rethinking the economics of the family. Harvard University Press. Folbre, N. and Bittman, M. (2004). Family Time: The Social Organization of Care. Routledge. Himmelweit, S. (2002), Making visible the hidden economy: the case for gender-impact analysis of economic policy. Feminist Economics, 8 (1), 49-70
← 13. See Sandel, M. J. (2013). Market reasoning as moral reasoning: why economists should re-engage with political philosophy. Journal of Economic Perspectives, 27 (4), 121-40. Sandel, M. J. (2012). What Money Can't Buy: The Moral Limits of Markets. Farrar, Straus and Giroux. Bowles, S. (2016). The Moral Economy. Yale University Press. Komlos, J. (2019). Foundations of Real-World Economics. Routledge, 2nd edn
← 14. See for example Tam, H. (ed.) (2019). Whose Government Is It? The Renewal of State-Citizen Cooperation. Bristol University Press. Smith, G. (2009). Democratic Innovations: Designing Institutions for Citizen Participation. Cambridge University Press. Fishkin, J. S. (2011). When the People Speak: Deliberative Democracy and Public Consultation. Oxford University Press. See also https://citizensassembly.co.uk/
← 15. See OECD (2017). New Approaches to Economic Challenges: Towards a New Narrative. Chapter 4: Towards an empowering state. OECD Publishing. Cottam, H. (2018). Radical Help: How We Can Remake the Relationships Between Us and Revolutionise the Welfare State. Virago