Delhi Remarks on New Economics

1. Delhi Remarks on New Economics Roberto Peccei UCLA & Club of Rome

2. In arguing for the need for a New Economics, I often urge economists to follow the example of physicists a century ago Faced with atomic phenomena that did not fit the classical picture, they invented quantum mechanics and the theory of relativity which totally revolutionized our understanding of matter This paradigm shift came fromunderstanding the limitations of the existing theories, and then inventing new concepts appropriate for these new regimes I believe economics is in a similar situation now, but the economists (on the whole) in contrast to the physicists seem to be unaware they are now also in a new regime. Let me expand on this point briefly

3. Physicists viewed new phenomena, like the quantization of energy, as indicating limitations of the existing theories in new regimes, • Then, without overthrowing existing theories, they developed the needed new concepts for these regimes • Classical mechanics and Galilean relativity describe nature very well, except in regimes wherequantum effects become important (h/ W  1) or when relativistic effects become important (v/c  1 ) • The revolution that occurred in physics over the last century produced a theoretical framework that now can describe nature also in these regimes • What about economics? What is the new regime that needs a new economics?

4. A growing number of people believe that neo-classical economic theory, which in many respects works very well, must be re-thought as one enters a regime where we exceed the planet’s biocapacity • Stressed H/B  1 • Ecosystem • Present economic model has GDP growth as central driver (OK in the H/B << 1 regime). When H/B  1 one need a new economics where sustainability of the planet, rather than GDP growth is the driver

6. Important to think through the set of criteria that an economy with H/B  1 should have: • When one attempts to do this, one soon realizes that many of the criteria go well beyond economic criteria • Give three examples: • One needs to replace GDP growth as a criteria for well being of the economy with better societal measures, like decreases in • unemployment and decreases in inequity •  decoupling employment from GDP growth. • Does this run afoul of Okun’s Law? NO • Linkage that arises from Okun’s Law is not dynamical, but comes • from the fact that employment contributes to GDP growth • Thus focus on employment and forget about GDP growth ! • { Technical Aside}

8. Help preserve the commons for future generations thereby reversing the present negative trends This requires a series of coordinated actions, including: - incorporating into the economy the cost of natural capital, which can no longer be considered an externality - implementing regulatory policies to reduce our ecological footprint, thus transitioning from the present regime where H/B > 1 to a regime where H/B < 1( and, hopefully, <<1). Probably most urgentis to reverse the present increasing trend of GHG in the atmosphere, so as to stabilize the world’s climate -Most likely successful path is through local rather than global action

9. Engage in significant reforms of the present corporate and financial system - This is probably the most difficult task because of the incredibly strong vested interests - Modern corporations are structured to grow for the benefits of the shareholders. Since this growth eventually undermines our ecosystem [  < k(R)] they must transition to a new regime where this behavior stops [social responsibility in corporate charters] - Similarly, the financial sector must be transformed to support long-term investment in real economic activities that support human well being, rather that speculative activities driven by greed