Complexity economics: New economic thinking

MAINSTREAM neoclassical economics, which has been the dominant economic thinking for over a century, can no longer be an adequate mental model to interpret and shape the socio-economics of the new reality.

Every generation can only progress by creating the new in order to move away from the old which no longer serves their emerging and evolving needs. That is called progress. We have to fundamentally reconsider our old traditions, beliefs and ingrained habits and change them, radically at times, in order to create new results.

A revolution on how we think and how we shape the inter-relationships within our society, be it in politics or economics, is not necessarily a bad thing, but indicates a progressive society which is continually questioning its current reality in order to create better results and a future they imagine.

I continue to argue for the need for Zimbabwe to go through “radical economic structural transformation” (Rest), which is fundamentally transforming our economic structure so that it can produce new results.

Without changing the structural architecture of our economy, we are unlikely to meet the diverse and growing needs of our growing population.

Our Gross Domestic Product, which reflects the totality of the value of economic activity in the country, comprises mainly primary production, these being agriculture and mining.

A fact that we must accept is that no country has ever created sustainable wealth through the production of primary goods alone.

Without a local industrial base which adds value locally to those primary products, we will continue to export potential wealth creation opportunities, jobs and incomes to more developed economies.

We, therefore, have to focus on local manufacturing of goods before we export them and also internalise the manufacture of as many imported finished goods as possible. We must, as far as possible, consume what we produce and produce what we consume.

This is simply because local value addition spurs technological advancement and innovation by entrepreneurs, while creating high-end skilled jobs, resulting in more wealth and incomes for our citizens. In addition, the value of downstream linkages created by localised manufacturing is exponential.

A more aggressive re-industrialisation strategy is, therefore, necessary. Such a strategy must be primarily driven by the private sector entrepreneurship and innovation, while government should provide the necessary policy environment to facilitate the emergence of the necessary industrial infrastructure development.

We, therefore, need an urgent paradigm shift through which Zimbabwe can use its prodigious base of natural resources, a resourceful and resilient population which includes among the most skilled at home and in the diaspora, to create a new economy.

This transformation, in my view, must be underpinned by new economic thinking which rejects the old colonial architecture of our economy and neo-economic classical theory.

We must appreciate that our economy has become a complex, adaptive and dynamic system, where it is inherently difficult to prescribe or predict outcomes and responses to particular economic policy changes.

It is characterised by complex unpredictable interactions among several networks (be they formal or informal, local or foreign) and these interactions are dynamic and are continuously evolving with their own “emerging phenomena” to shape the macro economy.

According to “complexity economics”, well covered in a publication by Institute for Public Policy Research (IPPR) titled; “A Complex New World: Translating new economic thinking into public policy” — in reality, the new economy is a complex ecology rather than a complicated machine whose parts can be analysed and understood.

“Mainstream neoclassical economics, which has been the dominant economic thinking for over a century, is no longer an adequate mental tool to interpret and shape the socio-economics of a new reality.”

This conventional neo-classical theory does not reflect realities because in the real world, economies are not static and geared towards equilibrium, they are dynamic and in constant flux.

This dynamism is endogenous, it originates within the system, not from exogenous shocks. Consumer preferences are not formed by individuals acting solely on their own, but are the result of a complex process that includes observing and interacting with other consumers.

Economic agents do not have a fixed set of preferences based on rational assessment; they are subject to whims and to mimicking the behaviour of other agents.

As a result, the nature of the economic system transforms over time. In reality, the economy is a complex ecology rather than a complicated machine. It does not respond in predictable ways.

It is path-dependent, with each phase building on the previous one. This is a more realistic understanding of the way economic systems develop and change especially in this information age.

Complexity economics, therefore, challenges fundamental orthodox assumptions and seeks to move beyond market transactions, static equilibrium analysis and the perfectly rational, self-interested individuals.

If we accept this thinking, it must raise a lot of unanswered questions on how we have managed or mismanaged our economy.

It also surely exposes why some of our seemingly logical economic policies are failing to result in intended outcomes. This applies to both fiscal and monetary policies.

Why would, for example, prices increase when we introduce a new higher denomination note?

Why would the US dollar exchange rate continue to increase even when diaspora remittances have shot up?

What and who is determining the US dollar parallel market rate? Why is poverty spreading despite projected economic growth?

Why are banks not lending to the productive sector despite holding US$1,7bn in deposits?

Why is fuel more expensive in Zimbabwe than in Zambia? Why do we have to continue importing food when we are spending billions in agriculture? Why is our country so poor yet it has some of the largest mineral reserves in Africa?

There are many more conundrums which need answers. It is simplifying things to blame it all on corruption, it is our thinking that has to change.

In my opinion, there are certainly no straight simple answers to the above questions because of the complexity of the economy which is “non-linear, dynamic and involve continuous adaptation to patterns the economic system itself creates”.

The least we must do is to start to try to answer these questions, but it requires a new paradigm of thinking that seeks to think deeper and try to understand “complex socio-ecosystems” because the thinking tools we are currently using are inadequate in order to unlock our full potential.

It is our duty to continuously think outside the box and challenge the current boundaries set by economic theories which have become moribund and ineffective in meeting the needs of many.