Time to complicate things

If we stop trying to simplify our economic models, we can improve policy.

According to the increasingly influential school of complexity economics, decisions that at the "micro" level might seem rational, when they become manifest at the "macro" level produce outcomes that are detrimental to all. Several "rights" often combine to produce a "wrong". This can help to explain problems like why there is such an unequal distribution of wealth in many developed economies and why some regions remain depressed for long periods of time.

Neo-classical economics finds it difficult to account for such emergent problems because it is based on a framework of simple, bilateral exchanges between individuals (people and firms). It is forced to regard economy-wide problems as the result of some external disruption to the normal running of free bilateral exchange. As a result, it has failed to develop an adequate theory that makes a connection between individual decisions and developments in the aggregate economy.  

The new fields of complexity theory and network theory help us to understand the economy as a dynamic network, rather than as the static model of bilateral exchange, which underlies orthodox economics. With this new understanding, we can start to develop policy options that might respond more effectively to problems like inequality of wealth.  

Although the school of complexity economics and the idea of emergent phenomena are relatively new, the recognition of system-wide economic problems is clearly not. But, for a long time, most economic thinking has held that many of our fundamental challenges, such as inequality and climate issues, are the result of market failures and can only be solved by using the power of the state to correct any such failures.  

A complexity perspective suggests the state’s top-down bureaucracy cannot, as it currently operates, offer effective and sustainable solutions to emergent economic problems. The state's policy-making incorporates the idea that society acts like a machine that responds automatically to a stimulus (such as a tax cut) in the same way each time, in large part because mainstream economics has taken a very narrow view of human nature and interaction. This has been explored most recently by Paul Ormerod in his book, Positive Linking.

Complexity theory is based on the core observation that social systems are dynamic, evolving networks in which individual and collective behaviour can shift and change rapidly and unexpectedly. The fluidity of this system means attempts to control an economy by gathering data, making forecasts and developing policy will always be subject to a high risk of failure. Mechanistic approaches to policy can be extremely problematic, for at least four broad reasons:  

  1. Idiosyncrasies matter and it is a near impossibility for a centrally determined policy to remain sensitive to local circumstances.
  2. Remotely set targets can be inaccurate proxies for real aims.
  3. Network effects can drown out the very incentives that form the core of most policy responses.
  4. Incentives are often set as if people were selfish maximisers of their own utility - but this is very often untrue.  

The neoclassical approach is comforting in the sense it implies that following simple, easy to devise, mechanical policy rules can solve some problems. But it is misleading because the economy does not work in the way it suggests, which often leads to inappropriate policy ideas. With the complexity approach things are, roughly speaking, the other way around. It suggests policy responses to certain problems will be hard to draw up, and the right answer might be found only after experimentation, simulation, and pilot studies. But the policy formed as a result is more likely to be suited to the policy challenge.  

The new fields of complexity and network theory advocate building up an understanding of the real world from the ground up. In doing so, they paint a picture of the real world that is much more recognisable than the abstractions of neoclassical economics. As such, they have the potential to offer new approaches to seemingly intractable policy problems, and, because these approaches are inherently apolitical, they ought to be of interest to all political parties.

This is an edited extract of a chapter from IPPR’s forthcoming book, Complex New World: translating new economic thinking into public policy. For more see here.

A bifurcation diagram showing a common representation of chaos theory. Photograph: Wikimedia Commons

Adam Lent is the Director of Programmes at the RSA. Greg Fisher is the Managing Director of Synthesis.

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Ken Livingstone says publicly what many are saying privately: tomorrow belongs to John McDonnell

The Shadow Chancellor has emerged as a frontrunner should another Labour leadership election happen. 

“It would be John.” Ken Livingstone, one of Jeremy Corbyn’s most vocal allies in the media, has said publicly what many are saying privately: if something does happen to Corbyn, or should he choose to step down, place your bets on John McDonnell. Livingstone, speaking to Russia Today, said that if Corbyn were "pushed under a bus", John McDonnell, the shadow chancellor, would be the preferred candidate to replace him.

Even among the Labour leader’s allies, speculation is rife as to if the Islington North MP will lead the party into the 2020 election. Corbyn would be 71 in 2020 – the oldest candidate for Prime Minister since Clement Attlee lost the 1955 election aged 72.

While Corbyn is said to be enjoying the role at present, he still resents the intrusion of much of the press and dislikes many of the duties of the party leader. McDonnell, however, has impressed even some critics with his increasingly polished TV performances and has wowed a few sceptical donors. One big donor, who was thinking of pulling their money, confided that a one-on-one chat with the shadow chancellor had left them feeling much happier than a similar chat with Ed Miliband.

The issue of the succession is widely discussed on the left. For many, having waited decades to achieve a position of power, pinning their hopes on the health of one man would be unforgivably foolish. One historically-minded trade union official points out that Hugh Gaitskell, at 56, and John Smith, at 55, were 10 and 11 years younger than Corbyn when they died. In 1994, the right was ready and had two natural successors in the shape of Tony Blair and Gordon Brown in place. In 1963, the right was unprepared and lost the leadership to Harold Wilson, from the party's centre. "If something happens, or he just decides to call it a day, [we have to make sure] it will be '94 not '63," they observed.

While McDonnell is just two years younger than Corbyn, his closest ally in politics and a close personal friend, he is seen by some as considerably more vigorous. His increasingly frequent outings on television have seen him emerge as one of the most adept media performers from the Labour left, and he has won internal plaudits for his recent tussles with George Osborne over the tax bill.

The left’s hopes of securing a non-Corbyn candidate on the ballot have been boosted in recent weeks. The parliamentary Labour party’s successful attempt to boot Steve Rotheram off the party’s ruling NEC, while superficially a victory for the party’s Corbynsceptics, revealed that the numbers are still there for a candidate of the left to make the ballot. 30 MPs voted to keep Rotheram in place, with many MPs from the left of the party, including McDonnell, Corbyn, Diane Abbott and John Trickett, abstaining.

The ballot threshold has risen due to a little-noticed rule change, agreed over the summer, to give members of the European Parliament equal rights with members of the Westminster Parliament. However, Labour’s MEPs are more leftwing, on the whole, than the party in Westminster . In addition, party members vote on the order that Labour MEPs appear on the party list, increasing (or decreasing) their chances of being re-elected, making them more likely to be susceptible to an organised campaign to secure a place for a leftwinger on the ballot.

That makes it – in the views of many key players – incredibly likely that the necessary 51 nominations to secure a place on the ballot are well within reach for the left, particularly if by-election selections in Ogmore, where the sitting MP, is standing down to run for the Welsh Assembly, and Sheffield Brightside, where Harry Harpham has died, return candidates from the party’s left.

McDonnell’s rivals on the left of the party are believed to have fallen short for one reason or another. Clive Lewis, who many party activists believe could provide Corbynism without the historical baggage of the man himself, is unlikely to be able to secure the nominations necessary to make the ballot.

Any left candidate’s route to the ballot paper runs through the 2015 intake, who are on the whole more leftwing than their predecessors. But Lewis has alienated many of his potential allies, with his antics in the 2015 intake’s WhatsApp group a sore point for many. “He has brought too much politics into it,” complained one MP who is also on the left of the party. (The group is usually used for blowing off steam and arranging social events.)

Lisa Nandy, who is from the soft left rather than the left of the party, is widely believed to be in the running also, despite her ruling out any leadership ambitions in a recent interview with the New Statesman.However, she would represent a break from the Corbynite approach, albeit a more leftwing one than Dan Jarvis or Hilary Benn.

Local party chairs in no doubt that the shadow chancellor is profiling should another leadership election arise. One constituency chair noted to the New Statesman that: “you could tell who was going for it [last time], because they were desperate to speak [at events]”. Tom Watson, Caroline Flint, Chuka Umunna, Yvette Cooper, Andy Burnham and Liz Kendall all visited local parties across the country in preparation for their election bids in 2015.

Now, speaking to local party activists, four names are mentioned more than any other: Dan Jarvis, currently on the backbenches, but in whom the hopes – and the donations – of many who are disillusioned by the current leadership are invested, Gloria De Piero, who is touring the country as part of the party’s voter registration drive, her close ally Jon Ashworth, and John McDonnell.

Another close ally of Corbyn and McDonnell, who worked closely on the leadership election, is in no doubt that the shadow chancellor is gearing up for a run should the need arise.  “You remember when that nice Mr Watson went touring the country? Well, pay attention to John’s movements.”

As for his chances of success, McDonnell may well be even more popular among members than Corbyn himself. He is regularly at or near the top of LabourList's shadow cabinet rankings, and is frequently praised by members. Should he be able to secure the nominations to get on the ballot, an even bigger victory than that secured by Corbyn in September is not out of the question.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.