A postcard from Bretton Woods (updated)

I’ve been spending the weekend at the Mount Washington Hotel in Bretton Woods, New Hampshire – the scene of the conference that produced the IMF, the World Bank and the global monetary order that followed World War 2. This time, it’s been playing host to the 2nd annual conference of the Institute of New Economic Thinking, the think tank set up by George Soros after the first wave of the financial crisis in 2008.

He’s pulled together an all-star cast of speakers – Gordon Brown, Joe Stiglitz, Paul Volcker, Martin Wolf, Niall Ferguson, Adair Turner and more – who carry with them much rockstar economist allure, to the extent that I spotted two hotel staff members demanding to have their photos taken with Stiglitz .

But what it doesn’t feel like is a gathering of masters of the universe (though Fox News thinks the whole show is an evil conspiracy, which is nice – maybe we’ll be offered membership of the Bilderberg Group). On the contrary, there’s a lot of uncertainty in the air here, on what’s happening, where things are heading, and what should be done. About the only point of consensus seems to be that we’re not out of the woods yet, and that countries are failing to look beyond their narrow self-interest. 

Martin Wolf, for instance, observed that what’s happening in the eurozone is that “Germany is serially bankrupting all its partners – it’s only just beginning”, a process that will only end when the eurozone is a surplus economy like China, with everyone else cast out or in permanent recession.

Gordon Brown, too, was emphatic about the need for collective action to deal with shared challenges – but pretty gloomy about the prospects for it. Will Hutton’s Observer despatch from the conference is a good summary of reasons to be downcast (“I said to one top British official that I thought that not only was there a real chance of British growth being subdued for years, but that the whole economy risked sliding towards Japanese-style stagnation. He indicated that others in government thought so too.”)

But if there’s a silver lining to all this, it’s that there’s an opening here to rethink basic beliefs from first principles.

This was especially in evidence at an outstanding breakfast session this morning on complexity economics, chaired by McKinsey’s Eric Beinhocker (update: the video of the session has now been posted, and can be viewed here).

Beinhocker and the 3 speakers who followed him – Thomas Homer-Dixon, the Santa Fe Institute’s Brian Arthur, and Ian Goldin from Oxford – all stressed that the economy is emphatically not the equilibrium that conventional economics describes.

As Brian Arthur put it, we’re not in the “pristine, timeless, pure and optimal” equilibrium economy that neoclassical economics tells us about; rather, we’re in a complex economy which is “organic, self-constructing, roiling with change, history-contingent, imperfect and messy”.

For a fuller discussion of this, an absolute must-read is this paper (pdf, 41 pages) by Andy Haldane, the executive director for financial stability at the Bank of England (and another of this weekend’s speakers). Haldane’s approach is to apply network theory to the financial sector, and the result is a highly readable discussion that will change your view of what happened during the financial crisis – using parallels drawn from epidemiology, ecology, movies and who knows what else. A taster:

Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. Connectivity engenders robustness. Risk-sharing – diversification – prevails.

But beyond a certain range, the system can flip the wrong side of the knife-edge. Interconnections serve as shock-amplifiers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device. Risks-spreading – fragility – prevails. The extent of the systemic dislocation is often disproportionate  to the size of the initial shock. Even a modest piece of news might be sufficient to take the system beyond its tipping point.

The other panel where some willingness to rethink things from first principles was the one in which I spoke, on sustainable economics (you can download my presentation here).

All three of us put the question of limits to growth on the table, and in truth we expected a much more hostile reaction from the audience than the one we got – which I think is in large part testament to the outstanding presentation given by Bill Rees, the inventor of ecological footprinting, who blew a lot of people’s minds with a full-on discussion of thermodynamics, entropy and unsustainability (video not available yet; I’ll link to his talk as soon as it is).

All up, the best conference I’ve been to in a long time – and certainly no shortage of new economic thinking in evidence.