Monitoring, modelling and regulating complex systems Economic models can be blind when it comes to providing a comprehensive view of what could happen. We need more interdisciplinary and long-term approaches, better understanding of the complexity of human systems, and serious implementation of surveillance mechanisms to be able to monitor and deal with the negative consequences of global threats. Economic models could be improved by factoring in more stress tests, but that would not be enough. Policymakers, regulators and safety agencies at every level need more staff, more research on systems and more “teeth”. Financial regulators, for instance, need to match the real-time capabilities of the actors they regulate. Affordability should not be the issue, and the cost should be considered as an “insurance premium” society pays to mitigate systemic risks. Models can convey the wrong perception that only they are scientific enough to understand markets, but human or social behaviour and complexity are difficult components for traditional approaches. However, the state of the art will evolve: new knowledge from neurobiology and other fields such as simulation using agent-based models can shed more light on the way markets function. Unfortunately, globalisation and global shocks are not yet fully embedded in the research agenda.
“[The financial market] does know what to do, it knows to go up for three days and go down for three days … we’re probably due a bit of bearishness by about Friday of this week.” Alpesh Patel, Founder of Praefinium Partners
“A new world order is being implemented. Established economies were found to be a very unstable foundation. Rational Wall Street was far more risky than Shanghai.” Lena Bäcker, Chief Economist, Swedish Local Government Debt Office
Judgment and prediction about when a crisis will start remain almost impossible. In the subprime crisis, the bubble was identified but the rate of default of mortgage holders, including in the US, was steadily low until the bubble burst for other reasons. Precursors of the subprime crisis were spotted on time by economists in various organisations. The OECD itself started to flag the risks of a real estate bubble in Spain, the UK and the US in its Economic Outlook at an early stage. What was missing was a better characterisation of the potential consequences, and this is now part of OECD work such as the Future Global Shocks project. Monitoring global threats in a more systematic way is the proper answer, but actors have to listen to the messengers. It is a fact of life that shifts in the scope and mechanisms of governance quite often lag behind the pace of economic, technological or social change. However in times of crisis, democratic processes usually create a window of opportunity for change: do not waste the crisis and the chance it gives to boost standards and improve regulation. Pierre-Alain Schieb is counsellor to the OECD International Futures Programme
“Global standards and regulations are not just impractical; they are undesirable. The democratic legitimacy constraint virtually ensures that global governance will result in the lowest common denominator, a regime of weak and ineffective rules. We then face the big risk of too little governance all around, with national governments giving up on their responsibilities and no one else picking up on the slack.” Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy, W.W. Norton and Company, 2011
Join the debates: www.oecd.org/forum2012
OECD Yearbook 2012 © OECD 2012
2012 OECD Yearbook