First Elements Towards the Foundations of an Anticipatory Approach in Economics Neantro Saavedra Rivano First International Conference on Anticipation Trento, 5-7 November 2015

The subject and objects of Economics People: agents and groups/organizations The physical environment: land, resources, artifacts (simple and complex) Transformations of the physical environment: the “know-how” (skills, technology); actual actions (such as creation, transformation, consumption) on the environment Exchanges (in particular, markets) The human environment: Institutions Abstract artifacts Belief systems Superstructures (political / social / cultural)

Economics as practiced and taught The human environment is taken for granted and implicitly assumed to be independent of time and space This neglect implies that agents rules of behavior, dependent as they are on the human environment, become also independent of time and space “My impression is that the best and brightest in the profession proceed as if economics is the physics of society. There is a single universally valid model of the world. It only needs to be applied.” (Richard Solow, Economic History and Economics, AER, 1985) Neoclassical long-term economic theories are not really long-term and their “solutions” typically find stationary (steady) states for the economic system “New” growth theories improve somewhat on this situation by incorporating technology more thoroughly and generating endogenous growth

An example: labor Conventional approach Worker’s labor force is sold and bought in labor markets Formal and informal labor (market regulation) Minimum wages and market-clearing wages; unemployment Looking at the historical record Slavery and child labor were common through most of human history In communal societies labor was supplied collectively Envisioning the future Robots will progressively substitute human manpower Telecommuting is bound to have profound impact on labor relations Example illustrates how the human environment affects organization of the economy

A first step towards an anticipatory approach in Economics: Douglass North’s on economic change Uncertainty Risk and uncertainty according to Frank Knight The contribution of Heiner: uncertainty as the origin of predictable behavior Douglass North on uncertainty: five levels (lack of information; limited stock of knowledge; inadequate institutions; inadequate system of beliefs; residual uncertainty) Man and his environment Physical vs human environment A non ergodic world Transformation of man’s environment as a reaction to uncertainty The physical environment North on the “taming” of our physical environment A critique of North

A second step: elements for a theory of crises A crisis as rupture or failure of the process of transformation Two types of failure: Knowledge Failure and Governance Failure The unfolding of crises through time and their outcomes Example I: the environmental crisis (a crisis affecting our physical environment, compounded by failure of global governance) Example II: the financial crisis (a crisis affecting our human environment, compounded by failure of global governance)

Anticipation in Economics and consequences for economic theory From an anticipatory perspective, the most important economic events are transformations in its environment: institutions, rules of the game Previous discussion indicates this transformations can happen in one of two ways change to reduce uncertainty (à la North) change provoked by crises (catastrophic or not) Challenge is to “anticipate” these transformations This anticipation can be passive or active Passive (or positive) anticipation takes the position of an external observer to build scenarios for the expected change two roles for economic theory: adapt the economic system to these changes; develop a theory of institutional dynamics Active (or normative) is involved in the transformation process and advocates a particular solution role for economic theory is to design the new system in order to produce the desired behavior

An example of positive anticipation: human capital formation The paradox of human capital formation: albeit families have the principal role on decisions to invest in human capital (of their offspring) most of the gains derived from this investment accrue to society at large The dilemma posed by this paradox: how to answer to the lack of incentives (to invest in HC) and the inefficiencies of the current system the growing perception by families of the inadequate returns to their investment in HC has undesirable demographic implications the imbalance between family and social motivations, together with existing social and economic inequalities, lead to great inefficiencies in HC investment An obvious solution to socialize investment in human capital formation but, how?

Example continued: implementation The conventional solution: transfers Political issues Economic issues Although interesting, this solution has reduced effects, especially in the case of developing countries A market solution: securitization of human capital investment in human capital loses its dynastic character HC securities spread their risk among an entire generation Mixed solutions: combination of transfers, markets (securitization), and family expenditure

Example continued: pros and cons Advantages Positive effect on equity Positive effect on economic growth (especially in developing countries) Allows for convergence between social benefit and market interest Challenges Bound to increase tensions within families Adjustment of economic system Resistance to change (transformational impact)