We recently interviewed complexity scientist, professor, and founding president of the New England Complex Systems Institute (NECSI), Yaneer Bar-Yam. Professor Bar-Yam talked with us about a new research paper published by NECSI entitled, Preliminary Steps Toward a Universal Economic Dynamics for Monetary and Fiscal Policy. Bar-Yam, along with researchers, Jean Langlois-Meurinne, Mari Kawakatsu, and Rodolfo Garcia wrote this paper to explore why it took such a long time for our economy to achieve economic growth after the most recent financial crisis in 2008.
They began by asking as series of questions, which would direct their research. Questions like: What are the issues confronting economic activity? Why isn’t growth happening the way we would like it to? What does the economy look like as a whole? What things are most important in regulating the economy?
These questions led them to conduct a deep analysis of historical economic activity which would uncover an important path-dependence pattern. Bar-Yam explained that “every few years the economy runs into the boundary of having too much investment, and then, there is a recession. And, in order to repair the economy, the Federal Reserve reduces interest rates because that’s what it knows how to do”. He then went on to explain that this regulatory method, which has been used about every 10 years since 1980, “cannot fix the underlying dynamics of running into the wall”. He even used a metaphor for the way the government has been regulating the economy, stating it’s “like driving a car with only the accelerator and brakes and not the steering wheel”.
The major concern is we don’t know if this one control method of adjusting interest rates would be effective in the next financial crisis. Bar-Yam said we really need to rebalance economic activity before it’s too late.
But, what does it mean to rebalance economic activity?
Bar-Yam and fellow NECSI researchers, designed a system archetype diagram to analyze how money flows through the economy in two loops, the wages and consumption loop and the investment and returns loop, and they revealed that both investment and purchase power are needed to increase economic activity.
NECSI’s findings revealed there is currently an imbalance in money flows, with too much money in the investment loop and very little demand coming from consumers who have accumulated significant debt. Since Regonomics in 1980, workers have accumulated 13 trillion of dollars in debt while investors have gained trillions in capital. Therefore, more policy to decrease taxes for the wealthy in order to promote investment is a misguided approach for stimulating economic growth. Yaneer and his fellow researchers call for an increase in money flow to the labor consumption loop. This means wealth redistribution, not tax cuts, is needed to improve the US economy.
During our interview, Bar-Yam elaborated further about how to achieve wealth redistribution through actions that would deal with consumer debt directly including: making changes to minimum wage, adjusting entitlement programs, or reevaluating tax programs (all of which affect consumers’ ability to participate in the US economy). This proves that humanitarian concerns, like income inequality, are aligned with the desire to make the economy work better overall.
Many of us would like to see issues like inequality addressed, so if you are wondering how you can make a difference, Bar-Yam suggested that we can rely on others who are knowledgeable and engaged in the political process. We can engage in deeper dialogues with policy makers, economists and the general public to make sure there is clarity about the analysis and the conclusions of this paper. We can also learn more about how the economic system works and how we can make it better, which includes better understanding complex systems science and its applications.
We welcome you to join in the conversation, comment below with questions or email us. Also, help spread the word by sharing this blog, Yaneer’s podcast interview, or NECSI’s research paper with your network.