NAEC-OMI Shock Proof: Building Resilient Systems in the 21st Century

On 23 April 2020 the OECD hosted a roundtable entitled “Shock-Proof: Building Resilient Systems in the 21st Century” jointly with the Open Markets Institute. Gabriela Ramos opened the session with Barry Lynn, Executive Director of the OMI. The Roundtable featured the following speakers: Paul Romer, Professor of Economics, NYU; Rohit Chopra, US Federal Trade Commissioner; Congressman David Cicilline, Head of the Anti-Trust Sub-Committee in the US House of Representatives; Michael Osterholm, Director of the Center for Infectious Disease Research and Policy; Yossi Sheffi, Professor, Engineering Systems, Massachusetts Institute of Technology; Sharan Burrow, General Secretary of the International Trade Union Confederation; Christopher Gopal, Global Supply Chain & Operations Consultant and Educator; Cristina Caffarra, Vice President, Charles Rivers Associates; Paul Tucker, Chair of the Systemic Risk Council and Fellow at the Harvard Kennedy School; Ganesh Sitaraman, Professor of Law, Director, Program in Law and Government, Vanderbilt University, former Senior Advisor to Senator Elizabeth Warren; J. Doyne Farmer, Director of Complexity Economics, Institute for New Economic Thinking, and Santa Fe Institute, and Rebuilding Macroeconomics; Michael Masters, National Director and Chief Executive Officer of the Secure Community Network, Laurence Boone, Chief Economist, OECD; Pascal Lamy, President Emeritus of the Institut Jacques Delors, Former Director-General, World Trade Organization; Paul Tucker, Chair of the Systemic Risk Council and Fellow at the Harvard Kennedy School.

** Remarks as delivered on 23 April 2020 **

Good morning everybody and welcome to this virtual NAEC session. Thank you Barry for your opening remarks.

It is our pleasure to host this event with the Open Markets Institute (OMI), who are examining the influence of monopolies, and how monopolies have made our systems more fragile.

The Covid-19 pandemic shows this in a shocking way, with hospitals lacking the basic equipment that markets dominated by a few suppliers failed to provide.

The pandemic also illustrates more basic features of complex systems. For example, interconnectedness brings benefits, but it also means that a shock to one system can cause cascading failures in others. A health crisis in a Chinese province quickly became a global economic and social crisis.

And contrary to the ideas of traditional economics, complex systems are inherently unstable. They generate shocks themselves, and they don’t return to a previous equilibrium.

These systems are not only complex, they are adaptive. They are constantly reorganizing themselves in reaction to what their own components and other systems are doing. Natural ecosystems for example react to changes in land use, bringing wild animals and their viruses into closer contact with the humans who destroyed their habitats.

NAEC, our New Approaches to Economic Challenges (NAEC) Initiative, champions more accurate ways of analyzing complex, adaptive systems.

We are now in the midst of a systemic upheaval foreshadowed at the NAEC Group meeting in September 2019 on Averting Systemic Collapse which pointed out that “a new crisis could emerge suddenly, from many different sources, and with potentially harmful effects”.

But simply warning about impending catastrophes is not enough: we have to propose approaches to dealing with them. That means first admitting that important systems may fail and preparing to deal with failure. 

Here, another system characteristic is central: resilience, the ability of a system to plan and prepare for, absorb and withstand, recover from, and adapt to adverse events and disruptions.

Nobody would argue against resilience, but one lesson we have learned in NAEC is less welcome. There is a tradeoff between resilience and efficiency. Cutting the number of hospital beds and staff may make the health system more efficient, but at the price of less resilience.

Linked to efficiency is optimization. In NAEC, we call on a range of disciplines, not just economics. Engineers and physicists tell us that when you try to optimize a complex system, you may end up destabilizing it.

For the economic system, Barry has illustrated how the concentration of power in a small number of global corporations may have improved efficiency in specific domains and circumstances, but over-reliance on a few actors has undermined the resilience of the economic system as a whole.

Concentration of wealth and power is a fact of today’s economy with 80% of corporate value housed in 10% of corporations.

This has wide, systemic impacts. Paul Krugman and Larry Summers link growing monopoly power to weak growth, while Jason Furman and Peter Orszag argue that monopoly has contributed to inequality. It also damages entrepreneurship.

Today, we are discussing what happened to production networks, why it happened and what could be done in the future to create shock-proof systems. The answer is not localisation or anti-globalisation, but at least part of the answer must be anti-monopolisation.

For many institutions, including the OECD, which has traditionally emphasized the need for efficiency, it is not easy to accept that we should build slack, buffers, and spare capacities into our systems, especially when countries face fiscal constraints after the current crisis. But as we now see, this is a literally a question of life or death.

So welcome to this seminar, that is contributing to re-thinking our systems to ensure that they are sustainable and deliver for people.

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