Nominated essay for our essay contest
As part of the Future Markets Consultation, students and young scholars were invited to participate in an essay contest. This essay was nominated in the category of master students. It was written by Michiel van Veluwen, student at Utrecht University. He can be reached at firstname.lastname@example.org.
We must place current developments in perspective. Rightly pointed out by some, climate change is the much bigger wave that lies behind Covid and that approaches faster than many care to admit. The parallels between dangerous climate change and the above-described flaws in our financial and economic system are plain. In fact, climate change and a flawed economic system might not even be two separate problems.
The word ‘coronavirus’ has dominated the news ad nauseam in 2020. According to the Worldbank, we are dealing with “the deepest global recession since World War II”1. A few months before, the International Monetary Fund (IMF) compared the current crisis with the Great Depression of the 1930s. According to the organization, the virus has disrupted the social and economic order “at the speed of light” and “on a scale we cannot remember.”2 Although history must teach us whether these statements turn out to be truth, we are already observing unprecedented economic circumstances. While on the one hand we see governments and central banks rolling out exorbitant support packages to support ailing economies (counting staggering amounts of €1,850 billion by the ECB and $2,300 billion by the FED for purchase programs)3, at the same time we also see that stock exchanges like the AEX have marked net growth in 20204 and that some large multinationals are reporting record breaking profits5. The current recession clearly has a lot of different faces. But although these times can be quite confusing, there are great lessons to be learned about the dynamics of systems today.
Flaws of the Current Economic System
Of course, every crisis has many roots. The financial crisis of 2008, for example, painfully showed the danger that exists when the financial and real economies become too far apart, when global banks become ‘too big to fail’, or when moral hazard and taking irresponsible risks become the norm (to name just a few lessons). More importantly, the crisis showed that in today’s highly globalized and tightly coupled economy, seemingly innocent malfunctions below the surface can rapidly snowball and cause a cascade of economic disaster that threatens the entire system. In the science of system dynamics, these factors are sometimes referred to as ‘pathogens’, and they are usually present long before a crisis reaches its climax.6
Similarly, the current corona crisis reveals other vulnerabilities and flaws in our system, such as the great interdependence of international supply chains that are now and then disrupted by a resurgence of the virus, vulnerable public care systems that are under constant pressure, disproportionately distributed uncertainty in labor markets, increasing ownership concentration of a small number of tech firms that are dominating increasingly important markets, and not to mention the rising mountain of global debt that amounts 277 trillion dollars now.7
Indeed, the Covid crisis has put a magnifying glass on vulnerabilities that already existed, many would rightly say. For example, the widening dichotomy between people with more and less job and income security accentuates an alarming trend that has been going on for some time in countries around the world. The invisible wall that stands between the haves and the have-nots, the so-called winners and losers of globalization, is therefore expected to thicken even further. Moreover, increasing inequality is to be expected in the long run as the inequality in education opportunities has probably been exacerbated by the closure of many schools during several lockdowns in Europe.8
Furthermore, growing inequality in market power between firms puts another threat to the well-functioning of our economic system, as in today’s economy it is no longer about having a comparative advantage but simply becoming the market leader. Where large high net worth companies are gaining market power and the big fish are able to gobble up the small ones, the adverse effects this has on competition, wealth distribution and fiscal transparency are likely to worsen.9 With these developments in mind, it is no surprise that economists are fearing a ‘K-shaped recovery’ (where some parts of the economy mark growth while others continue to decline) after the Covid crisis, as the first signs already indicate.10 The mechanisms of our current economic system thus contain structural flaws that can lead to unfavourable outcomes on a collective level.
The Black Swan Called Covid
Because the Covid-19 crisis affects all of us, many are speaking of the crisis as the ‘black swan’11 that can bring about a paradigm shift in how we think about our economic system. Some are speaking about the final bankruptcy of trickle-down economics, others about the end of the deeply rooted meritocratic ideal or the demise of neoliberalism.12 But although everyone uses the crisis to see his own right, it is a sign of the times that even the liberal newspaper Financial Times, which could be considered the bible of free-market-globalists, is speaking about the need of ‘a new social contract that benefits everyone’ and advocates a more active role for governments in the economy.13 After all, it might not even be such a radical idea to assume that the current crisis will have a greater economic and social impact than previous crises we have seen in the last few decades.
The Bigger Threat
At the same time, we must place current developments in perspective. Rightly pointed out by some, climate change is the much bigger wave that lies behind Covid and that approaches faster than many care to admit. The parallels between dangerous climate change and the above-described flaws in our financial and economic system are plain. First, both are global scaled problems for which no individual country, municipality or individual is solely responsible, but in which we are all interconnected and interdependent. Second, both are systemic problems that are deeply rooted in our cultural and social norms and in a world view that is primarily based on individualism and self-development. Third, both problems bear catastrophic risks and externalities that are currently insufficiently priced in the markets.
In fact, climate change and a flawed economic system might not even be two separate problems. Although climate change will in the not-so-distant future cause more and more successive external shocks (if this has not already started), essentially it remains- an endogenous crisis to which our current economic system is harmfully contributing. As taking appropriate measures against climate change is a big challenge for almost every sector of the economy and requires drastic action to avoid disaster, the financial sector including banks, insurers, and shareholders is in fact taking enormous risks by continuing financing carbon emissions.14 The Economist Intelligence Unit estimates that climate risk could lead to value losses of tens of trillions of dollars worldwide.15 By not taking sufficient action to structurally reform our economic and financial system, we are essentially digging our own grave.
How to Proceed?
So, it is clear that we need systemic change if we want to rebuild an economy that serves the common good and creates social and ecological justice for all. But what is needed to continue working on systemic and fundamental change in 2021 and beyond? Again, we can learn lessons from the comparison with climate change and from what we know is needed to effectively combat it. One of the authoritative reports of the IPCC, the Intergovernmental Panel on Climate Change, may provide clarity. In the ‘Special Report on Global Warming of 1.5°C’, the IPCC identifies six conditions that together “enable” the acceleration of a system transition.16
- Behavioral change, public support for and social acceptance of broad action.
- The strengthening of human skills and capacities around the world to support the transition.
- Governments that take sufficiently strict measures.
- A financial system that enables sustainable investments and internalizes climate risks.
- Direction and cooperation at different policy levels and by different actors.
- Technological innovation to scale up new technologies and reduce costs.
It is beyond doubt that systemic change requires a systemic view. We must learn to see the dynamics between different parts of our social order as a whole in order to speed up much-needed economic transitions. Of course, this also makes things complicated. How can we assure that change takes place if all six conditions are interdependent and feed each other at the same time? What if one of the necessary preconditions lacks behind and hinders the grand ambitions of benevolent governments and individuals? When is public support sufficiently large to enforce governments to take strict measures and vice versa, when does effective government policy successfully set public opinion and behavior in motion? To say the least, it will not be easy to answer these questions. This applies to the climate, but also to the economy. Besides, circumstances are slightly different in each economic sector. The pension sector faces different obstacles than the insurance sector, and the labor market is characterized by different problems than the housing market.
These intricacies make clear that systems are quite rigid. At the same time, they might not be as rigid as we tend to think, as the current Covid crisis shows. This is one of the insights we can learn from the body of knowledge of system dynamics. Entire economic and social systems can change if the action of a certain actor provokes an effective reaction in the same direction by another. Although change is therefore also obviously hard to direct, if the right steps that elicit the right responses are taken, things can go rather quickly. Companies that incorporate social responsibility into their core business models can then lead to more conscious consuming behavior, which in turn can lead to major financial players like pension funds feeling safer by investing in projects and businesses that promote economic justice and as a consequence produce a fairer distribution of incomes, and so on.
As a twenty-three-year-old it feels like my duty to be hopeful about the future of our economic and social system. Although reshaping our markets will be an extremely difficult job in the light of all uncertainties that lie ahead, we can feel strengthened by hopeful signs and examples that are already being put into practice. To begin with, there is increasing academic attention within economic science for topics such as inequality and creating fair taxation regimes, witness the rise of economic ‘superstars’ like Piketty, Zucman or Mazzucato or initiatives like Rethinking Economics.17
Second, it says a lot that not only familiar think-tanks are making efforts to think about structural interventions, but also a widely read newspaper like the Financial Times launches a campaign to ‘reset capitalism’ and actively organizes dialogues about ‘the new social contract’.18 To continue, in the Netherlands almost all large banks have shown significant progress in implementing sustainable finance policies and transparently reporting them.19 Furthermore, in the head of the current crisis, Europe has managed to reach ‘ground-breaking’ political agreement on jointly fighting these tough economic times, marking a potentially ‘giant leap’ in economic cooperation and integration”.20 Meanwhile on the other side of the ocean, a majority of people including Republicans now supports proposals to raise taxes on the wealthiest Americans to create a fairer distribution of wealth21, and on top of that, even the wealthiest themselves argue for higher taxes22. All of these are signs that the economic tide seems to be turning. The question is: will it be enough, and will it be on time? In the end, it remains up to all of us.
Moving Forward and Finding Balance
How we make use of the dynamics and opportunities for an accelerated system transition will be one of the biggest challenges for the coming years. This challenge will require collective efforts at all levels and demand active cooperation between governments, businesses, financial stakeholders, consumers, and civil society. Although we are faced with uncertain times and a lot of economic pain to come, the momentum for an active government, a solidarity tax system, and sustainable investments seems to be there. According to the Dutch economist Dirk Bezemer who wrote about this theme, opportunities are there for the taking. In his recently published book ‘A Land of Small Buffers’ he states that concrete ideas for a more balanced economy are already there; we only need to implement them.23
Therefore, he advocates setting a higher tax burden on capital and a lower burden on income to bring balance back in our tax regimes, phasing out existing subsidies on fossil industries and extensive private borrowing, providing equal working conditions and insurances for flex workers and employees, making large national investments in public sectors like health and education, and finally subsidizing investments in the sustainable sector as employment will only continue to grow there. These ideas might seem ambitious, unclassical, or too expensive, but if the right dynamics are set in motion, they will be able to bring balance back in our economy. As Bezemer rightly acknowledges, our economies have more than enough money, it is just about how we are using it.
Our current economic model is reaching its limits and contains systematic flaws which have created economic uncertainty for large groups of people. Unfortunately, the problems within our global economy are fundamental. But while morality seems to have gradually disappeared from our economy in recent decades, the debate about our socioeconomic future is now cranking all over the world. The Covid crisis and the incredible social disruption it entails make this debate more relevant than ever, while at the same time making us aware of the importance of system dynamics. Let us now collectively join forces in an active dialogue to make moral markets the norm again. We will then be part of a centuries-old tradition in economics, as even the founder of modern economic science, Adam Smith, teaches us that economics has in fact always been a moral science. On top of that, let us also use the body of knowledge from system dynamics when we work on reshaping our economy, as we can learn from the IPCC and previous crises. Let us make attempts to understand which measures and policies set in motion desired reactions and initiate self-reinforcing circles that bring balance back in our economy. Whenever policies can have that effect, they deserve our priority. As said, this challenge will require collective efforts from governments, businesses, financial stakeholders, consumers, and civil society, but the stakes are high. Cause in the end, only systematic effort can bring about systemic change.
- The World Bank (2020, June 8). COVID-19 to Plunge Global Economy into Worst Recession since World War II.
- Georgieva, K. (2020, April 9). Confronting the Crisis: Priorities for the Global Economy. Speech by IMF Managing Director Kristalina Georgieva.
- a) ECB (2020). Our response to the coronavirus pandemic, b) The Federal Reserve (2020, April 9). Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy. Press release.
- FD (2020, December 31). Hysterisch beursjaar AEX valt nagenoeg weg in 30-jarige historie.
- CBC News (2020, October 29). Big Tech companies, fully recovered from pandemic, report record earnings.
- Boin, A., Stern, E., & Sundelius, B. (2016). The politics of crisis management: Public leadership under pressure. Cambridge University Press.
- Institute of International Finance (2020). Global Debt Monitor. Attack of the Debt Tsunami.
- European Commission (2020). Educational Inequalities in Europe and Physical School Closures During COVID-19. Fairness Policy Brief Series 04/2020.
- Amico, A. (2020, Jan 3). How Ownership Concentration Is Happening, and Why It Matters.
- Financial Times (2020, December 28). Corporate America experiences ‘K-shaped’ recovery.
- “An unpredictable or unforeseen event, typically one with extreme consequences.” – Oxford Dictionary
- Stiglitz, J. (2020, November 26). The end of neoliberalism and the rebirth of history.
- Financial Times (2020, April 3). Virus lays bare the frailty of the social contract.
- Green, A., Gelzinis, G. & Thornton, A. (2020, June 29). Financial Markets and Regulators Are Still in the Dark on Climate Change.
- The Economist Intelligence Unit (2015). The cost of inaction: Recognising the value at risk from climate change.
- IPCC (2020). Global Warming of 1.5 ºC. Special report.
- See their website: Rethinking Economics
- Financial Times (2020). The New Agenda & Financial Times (2020). The New Social Contract. FT Series.
- Fair Finance (2020, October 27) Progress on Dutch bank sustainability policies but improvements still needed & Eerlijke Bankwijzer (2020). Beoordeling van het krediet- en beleggingsbeleid van acht Nederlandse bankgroepen. 18e actualisering.
- Politico (2020, July 21). EU leaders agree on €1.82T budget and coronavirus recovery package.
- The New York Times (2019, February 19). Democrats Want to Tax the Wealthy. Many Voters Agree.
- The Times (2020, January 23). Davos: Make us pay higher taxes — we can afford it, demand billionaires.
- Bezemer, D. (2020). Een Land van Kleine Buffers.