Polycrisis and Policy Frameworks

Angus Armstrong

Polycrisis refers to a world of multiple overlapping crises, possibly beginning in different domains – think financial, climate, stagnation, Covid and the cost of living crisis. Because these events overlap and have feedback effects, they can challenge traditional methods of economic analysis.

To explore polycrisis and what this might mean for policy frameworks, Rebuilding Macroeconomics held a conference as part of the Institute for Global Prosperity’s 10th anniversary celebrations. We are grateful to Michael Muthukrishna, Clara Mattei and Alan Kirman for their excellent presentations available here.

Same again?

We’re in an unsatisfactory place. Crisis after crisis is leaving us more and more vulnerable. Households’ average real income has stagnated since the financial crisis, the government debt burden has ratcheted-up to its highest ratio in sixty years, and public services are being reduced – just when our needs are rising. The plan seems to be more of the same: efficiency savings and easy money combined with trying to reduce the deficit.

Take the well-meaning research on the productivity, for example. All sorts of new measures of social, organisational and even cultural capital are created as necessary additions to production functions with no real thought of how they interact. We end up with the same obvious conclusion - more investment is needed - without asking why it is absent in the first place. All roads lead to state support.

Our desire to turn the clocks back to more predictable times seems to leave us even more vulnerable. We are in a doom loop of austerity causing fragility which, when exposed, leads to the inevitably of more fiscal support and even greater indebtedness. Clara stressed that at each stage in history, austerity was a political choice based on power dynamics rather than an economic necessity.

If we live in a polycrisis world, how can we see things differently?

Complex living system

In short, the premise has changed and we need to change our understanding. If we see the world as always in equilibrium, then it follows that every crisis must be caused by an exogenous shock. Of course, events may be triggered from outside our model, but they need not necessarily cause a crisis. Whether they do so depend on the stability properties of the system, which in turn reflect our policy frameworks.

Take the Lisbon Earthquake as a famous example. Voltaire wrote a poem asking if God could really be caring and still inflict such heavy losses on the city’s pious citizens. Rousseau replied it was not God who built such tall houses close together or forced its citizens to run back into their homes to retrieve their status goods amidst collapsing buildings.

Alan argued that we should think of the economy as a complex social system populated by people who interact directly in an environment of fundamental (unquantifiable) uncertainty. Rather than ignoring uncertainty, we should consider that we are by far the greatest species of all time at finding possible solutions. Complex systems have non-linear responses and self-organise towards critical states which may or may not be optimal.

Where would this help us when it comes to policy?

Policy frameworks

Describing an economy as a complex social system is not an excuse for ambiguity or complication. It is an argument to take fundamental uncertainty, and how we respond, seriously. And we respond by interacting directly with others. Therefore, the behaviour and performance of the economy is determined by the nature of these interactions, and not by the total quantities of different capitals we might add-up. This requires different models where aggregate outcomes emerge from networks of interactions.

Rather that command more taxpayers’ money to invest, perhaps we should focus first on connections between the elements in our economic system. Michael describes this as concentrating on the software rather than the hardware, which can be upgraded much more easily. We know far more about the origins and conditions for cooperation and creativity than in the past. We need a step-change in our connections through reviewing the design of key institutions, like those in our education system.

In a polycrisis, as there is no realistic way for agents to form consistent expectations to coordinate activities optimally, there is a case for macroeconomic management to change from only enabling private agents to more actively orchestrating activity. Regulations may be necessary not to address so-called market failures, but to steer activity towards desirable and sustainable common goals. Rules frameworks are first best in a predictable world, but in a fragile economy violations could trigger sub-optimal responses. 

Resilience ahead of optimality

Complex systems are prone to periods of failure, as we are now experiencing. The overarching policy lesson is that we cannot know the trigger, but we should have ex ante mechanisms in place to manage crises. We must consider resilience ahead of optimality. This means that the economy must have capacity to transform and adapt in the face of unexpected change, without losing its fundamental identity.

All economies are embedded in social and environmental systems. Our current policy seems to be that once productivity improves, then we can afford to improve our social and environmental systems. But this may be exactly the wrong way around. Only when we start addressing our most egregious social and environmental problems might we start finding some economic answers. Those at the bottom usually suffer most in a crisis, and our social system is only as strong as its weakest members.