Bjorn Döhing, the "crushing power" of economic models

The "crushing power" of economic models Post-Growth 2018 Conference European Parliament Brussels, 18th September 2018 Bjรถrn Dรถhring European Commission DG ECFIN

Outline 1. What's wrong with economic models?

2. Model use in DG ECFIN 3. Recent trends in macroeconomic modelling 4. Conclusion

What's wrong with economic models?

• Did not help foresee the crisis ("Queen's question") • Anthropological povery of 'homo oeconomicus' https:// www.youtube.com/watch?v=Sx13E8-zUtA&feature=youtu.be

• Too narrow focus on GDP

Prosperity and GDP Well-being Disposable income Wealth Consumption

• • • •

Material living standard Personal activities Education Health

• • • •

Political voice Relationships Security Environment

inequality

Economic Activity •

Market-based

= GDP

•

Sustainability De-coupling?

•

Stocks of resources (environmental, social, human capital, …)

•

Non-linearities (e.g. climate change, ecosystem breakdown)

De-growth?

Non-market

Visualisation loosely based on Stiglitz, Sen and Fitoussi (2010)

GDP growth as overarching objective?

1. Economics is the science of efficiently managing scarce resources • In scope: material well-being, sustainability • Not in scope: Political/societal choices on distribution • Not in scope: How to flourish / live the 'good life'

2. Growth instrumental to: • Reduce unemployment (cyclical) • Lift people out of poverty, reduce inequality (convergence)

3. Future of growth • • •

Demographics Technological progress and human capital as growth drivers Sustainability: Relative and absolute decoupling

(2) Model use in DG ECFIN

• Some examples: - forecast model suite, - QUEST, - sectoral models • More sophisticated does not mean "better" • Expert judgement remains crucial

(3) Recent trends in macroeconomic modelling (-> Oxford Review of Economic Policy special issue 1-2; 2018) •

Extensions to standard New-Keynesian DSGE (e.g. finance; agent heterogeneity, bounded rationality, behavioral/information economics for microfoundations?)

•

Cover new dimensions (sustainability, distributional aspects)

•

Experiment with new approaches (Big Data, AI)

(4) Conclusion • Economic models are far from perfect.

• Nonetheless they are useful, e.g. for forecasting and scenario analysis.

• Efforts to incorporate relevant real-world features are under way.

• Models should never be used without economic judgement.

Reserve slides

Source: Haldane and Turrell (2018)