Policy Design and Execution in a Complex World: Can We Learn from the Financial Crisis?

We repeat the mistakes of history because of the neglect of history, the imperfections of memory, and the complexity of social situations. I begin with a discussion of the first two and then turn to the third. After discussing the meaning and significance of complexity, I discuss the causal ambiguity surrounding economic policies and what this implies for the burden of proof in policy espousal and design. I consider the role of social institutions, their function and origins, and how they are able to facilitate human action in an economic environment of accelerating change. Institutions like markets, monetary systems, systems of common law, languages are all networks. So are groups of believers in the efficacy of certain kinds of economic policy. I consider the role of networks in general and in regard to economic cycles in particular. In the concluding section, I suggest that the implications of complexity for the occurrence of cycles, and the adoption of discretionary policies to deal with them, are likely not only to exacerbate the effects of the cycles, but also, more fundamentally, to subvert the fundamental institutional structure of our economy, what we may think of as our embedded constitutions, to the great long-term detriment of our economic health.