The Institute for New Economic Thinking (INET), was founded after the global financial crash by George Soros and a few fellow traveler financier/philanthropists to reframe the economics profession toward more plausible models. They hold the economics profession as at least partially responsible for the global crash, a position I share. Thus INET’s goal is to transform mainstream economic thought and by extension the policy models adopted by governments and central banks. This is clearly an unusual approach to policy and science development, a kind of terraforming from the outside-in. INET has a program of well-funded grants, conferences, and public relations vehicles (here is their YouTube channel). They even have a program for transforming the economics curriculum and another for graduate student participation in INET conferences.
The conference is populated by multiple economic Nobel Prize winners, young mainstream and older heterodox economists, policy economists, and a smattering of other scientists from sociology, political science, psychology, neuroscience, and even physics. Mysteriously, my co-author Ken-Hou Lin and I were invited. Who could resist?
This year’s conference was at the headquarters of the OECD in April in Paris. Participants’ rooms and food are covered for and if you are an INET grantee or conference speaker even your travel is on INET’s tab. The final conference dinner was in the incredibly sumptuous Palais Garnier, Operá National de Paris, included very good food and wine, a speech on the future of Europe by George Soros, and a chamber quartet. The meeting theme was Inequality. Nobel prize winner Joseph Stiglitz and Capital in the Twenty-First Century author Thomas Piketty provided joint keynote addresses. Swirling around the conference is an underlying concern with financial sector fragility and the conceptual shortcomings of mainstream economics. Central bankers, bank regulators, and finance crisis first responders were abundantly represented. Complexity, context, institutions and social networks on the one hand and the complex real motivations of actors on the other were repeatedly juxtaposed in the conference topics to the elegant, ahistorical and unrealistic mathematical representative rational actor models central to neoclassical economic thinking, training, and policy tools.
The low hanging transformational fruit turned out to be the empirical description of rising inequality. There seems to be almost no debate that inequality is rising. Stiglitz asserted that mainstream economists now think of inequality as a fundamental aspect of economic analysis, and the profession now recognizes that inequality undermines both well-being and growth. Piketty was less convinced, characterizing mainstream economists as admitting to the trend, but not the implications, much less budging from a growth ueber alles normative economic model.
Empirical grist for recognizing the centrality of inequality to economic processes
Branko Milanovic, from the CUNY Graduate Center and the World Bank, took a long term perspective identifying malign (e.g. war) and benign (e.g. social insurance) institutional forces that reduce inequality. He predicts that in the US inequality will rise, because these forces are missing and there are an additional five mechanisms in the US driving increased inequality: increasing capital income shares, high concentration of new wealth, a strengthening association between employment and capital income, marriage, and a greater influence of money on politics.
Vamsi Vakulabhararanam, from the heterodox economics department at the University of Massachusetts, Amherst, provided a criticism of focuses on the generic nature of capitalism and inequality found among most economists, including Piketty, arguing in contrast that the rate of return on capital and wealth concentration are the result of local political economic forces. He went on to explain that in Asia before 1980 there were equalizing trends as countries emphasized labor intensive growth. Post 1980s, however, socialism waned, urban capitalist professional elites took advantage of the global economic regime to capture national income flows, and inequality rose. In China and India from 1988 to 2010 practically all relative income gains went to urban elites.
The most radical talk I encountered was by Andrew Sheng, former central banker (Hong Kong) and current Fung Global Institute fellow. His message to economists was that markets of all sorts are increasingly concentrated and dominant actors rule. The five largest central banks control 68% of world central bank assets he asserted and there are only a handful of major accounting firms, rating agencies, and big banks filling out the system. There is as a result no free market, rather the world economy is a concentrated winner-take-all hierarchy, with central banks the agents of concentrated power.
Jerry Epstein, also from the heterodox UMass economics department, explored the effects of the US Federal Reserve quantitative easing practice of buying financial assets from commercial banks in order to stimulate economic growth. His analysis shows that the profits of the biggest banks were propped up, but neither lending to households or firms, nor employment grew. In his model central bank policy serves the interest of finance because they are insulated from political pressures from labor and even industrial capital.
Missing ingredients: Production, the workplace and the 1%
That the increase in inequality in most countries is being produced by changes in firm compensation practices and labor processes was absent from almost all of the panels I attended. One exception was William Lazonick, UMass Lowell, who proclaimed that the most insidious idea that ever came out of economics was the notion of shareholder value. He argued that we must understand productivity, company pay schemes, and capital claims on income to understand inequality. In contrast, I later heard University of Chicago Nobel Prize winner James Heckman opine that the way to limit inequality is to increase skills in children when they are still malleable. No firms there, just a familiar supply side inoculation of the populace.
The two most exciting sessions I attended were organized around social networks and psychology and were direct external challenges to traditional economic models. To make them palatable both were repackaged as uber-scientific, via the labels of econophysics and neuroscience. Here the new economic thinking strategy was to import ideas from other, sufficiently respectable, scientific disciplines.
Tania Singer of the Max Planck Institute for Cognitive and Brain Science, Liepzig undermined the economic behavioral model of fixed preferences, personal utility and rational self-interested, by summarizing lessons from cognitive science. We are not autonomous actors, but rather we monitor other’s motives and emotions and we have multiple malleable motives for action. Multiple motivations – achievement, consumption, power, fear, anger, affiliation, care – are all simultaneously available. Which motivational system is activated depends on the interactional context and is filtered through personal interpretations of that context.
Macro-economist Dennis Snower’s fairly dramatic reaction was that since economist’s assumptions about preferences and motives are wrong, all prior knowledge generated in economics is obsolete. He concluded that what humans are actually good at is dealing with uncertainty not the probabilistic risk in standard economic models. This sounded to me a lot what sociologists have long studied under the label of symbolic interactionism. One economic historian noted in the discussion after the panel that the whole economic model of human behavior as self-interested rational machines was made up, adopted from a 19th century philosophical thought experiment, and never based on a science of human behavior.
The session, built around “econophysics”, focused on network effects in financial markets, before, during and after the 2008 crash. Stefano Battiston, a physicist by training and now a finance professor at the University of Zurich showed that network effects matter for financial stability. He focused on the post-crash regulatory reforms that increase bank reserve capital requirements, but ignore the risk posed by the tight network structure of finance. Given what we know about that network structure his simulations suggest that if just one of the 22 largest systemically important firms failed, 70% of total financial assets in that system would be wiped out by contagion effects. The current “tightened” regulatory framework misses 2/3 of the risk to financial collapse in the system.
Co-Piere George of the University of Capetown and the German Bundesbank, looked at the lending market in Europe following minute-to-minute inter-bank transactions in the days immediately following the collapse of Lehman Brothers and leading up to the bailout of the financial system by the major central banks. What he found was that after Lehman failed, banks continued to lend, but switched from long term to overnight loans. Total lending did not go down. Ironically it was only after central banks provided liquidity that real lending was cut in half. His interpretation was that the banks cried wolf, the central banks took on the risk, and the real economy suffered.
Most importantly for INET’s goal or promoting new economic thinking, both Battiston and George were pessimistic that central banks would actually adopt a network perspective on risk.
So what to make of this terraforming project? The economists with powerful new models and empirical work I encountered all came from the fringes of the economics profession. These economists recognize the importance of power, context, relationships and institutions. The strongest source of challenging new ideas came from outside of economics, particularly from actors with external scientific or central banking-based legitimacy. The high status, insider economists provided less in the way of new ideas – Stiglitz went back to the 19th century preoccupation with land as capital to explain contemporary inequality and Heckman to a supply side strategy of expanding skill (although to be fair he now has a much more complex notion of skill than in conventional human capital models).
Student panels commented on inertia in graduate training and the econophysicists on policy resistance to network models of economic processes. Judging by audience reactions, the implications of cognitive science’s more complex and contextual models of human motivation seemed to have the most appeal to the average economist in the room. So perhaps the rational utility maximizing actor assumption will be the first brick in the wall to crumble?
Since this is a sociology blog some readers might wonder where economic, organizational, and inequality sociologies fit into new economic thinking? None of us are cited or discussed, but both institutional thinking and class perspectives on inequality are clearly present at the heterodox fringes of the discipline. Network models of the economy are present as well.
My prediction is that if INET (or more likely the next financial crash) succeeds in producing a new economics, the ideas that constitute the everyday currency of adjacent sociologies will be incorporated and we will no longer be able to base our models on critiques of economists’ thinking. On the other hand, it looks like these remain challenger ideas, not yet incorporated into graduate training or incumbent imagination, and so our practices may remain ours. One change that would be useful for sociology, however, would be to increase our trade with these newly influential, if not yet central, heterodox economists, cognitive psychologists, and econophysicists. We have much to learn from each other.
The other thing we should be doing is submitting grant proposals to INET.