A collective approach to dealing with complexity
Andrew Sheng advocates an approach of trial and error to deal with the 'unknown unknowns'
A big puzzle that has remained with the current unfolding crisis is why didn't the brightest minds see it coming? As Albert Einstein famously said: "The problems that exist in the world today cannot be solved by the level of thinking that created them."
After agonising over this problem myself, I concluded that the key lay in the way we thought about global issues. Most economists, including myself, were taught the neoclassical general equilibrium model. This assumed perfect information, a frictionless world and an ideal model (like Humpty Dumpty) that would revert back to stable equilibrium when it is slightly out of kilter.
We now know that this simple model was the foundation of most of the current econometric and asset valuation models in use today for policy formulation, risk management and asset pricing. It also blunted innovative thinking about a world full of unknown unknowns. The result was disaster myopia.
Indeed, mainstream economics training led us to go always for "first best" and therefore most economic advice sought ideal policies that were impractical to implement or nigh impossible in political terms. In this world of specialist knowledge, common sense is not very common.
What we lack are moral and intellectual compasses in dealing with multi-dimensional, complex, simultaneous transformations, such as rising population, disruptive technology, industrial transformation, climate change, terrorism and human conflict, and natural disasters.
How do we deal with unknown unknowns?