Workshops on Global Markets

Two small workshops on global markets and sustainability

 

 

Objects of governance have turned into parts of a globally interconnected system whose sustainability is at risk. This calls for a « global systems science», which could on the one hand support governance and, on the other hand, explicit how power and influence are transmitted in these interconnected systems. The aim of this workshop is to investigate how those two issues materialize in the economic realm: new questions and challenges economic policy addresses to science and new questions and challenges science faces when investigating economic policy and decision making in a globalized market environment.

 

Middle-term issues, whose time-span approximately coincides with the average five years electoral mandate, might possibly be dealt with by neo-classical social science: policy-makers maximize their probability of being reelected by putting in place policies whose efficiency (number of jobs created or quantity of pollution avoided) can be assessed “all other things being equal” using computable general equilibrium models.  Questions about sustainability are of a different kind, they are not asked “ceteris paribus” as they rely on endogenous dynamics and challenge the very existence of the system under investigation.

 

Sustainability mainly refers to the long-term balance between economic development and environmental conservation but also materializes as problems with very short time-horizons such as the 2011 earthquake in Japan, the failure of Lehman brothers, or the sovereign debt crisis in the Eurozone. Both for short and long-term issues, decision-makers turn to science with very specific as well with very general questions, with micro and macro problems. As far as environmental change is concerned, questions range from “How to reproduce locally an industrial symbiosis like this of Kalundborg ?”  to “How to move to a competitive low carbon economy in 2050 ?” Turning to the financial realm, one might wonder whether (or until when) the global financial system was sustainable or if it can today provide the 30 billions euros Greece needs by 2020 to upgrade its energy system[1] ?

 

It is doubtful that a single model might address those issues.  Even if one embeds all existing heterodoxies, very few of the policy-relevant questions of the time can be answered. Among the challenges to be faced in order to overcome this failure are the disaggregation and the extension to non-equilibrium phenomena of economic models and the exploitation of the wealth of data at hands thanks to the IT revolution.

 

The burgeoning mind of economists has managed to develop a wide taxonomy of models (e.g general equilibrium, CAPM, Bertrand or Cournot competition, principal-agent) under the, most often ad-hoc, constraint of only considering equilibrium situations. There is little doubt that this taxonomy can be extended if the economist toolbox is enriched by non-equilibrium models inspired by harder sciences.  How to foster this process ? For example how can econophysics and agent-based models become mainstream within the economic profession ? Which standards can be established to better communicate about models that aren’t always analytically tractable ?

 

New classes of models and new tools are also required to exploit the wealth of data at hands thanks to the IT revolution. Statistical institutes produce a limited and rather immutable class of indicators with a certain lag. Now, most if not all the data collected by statistical institutes during census operations are in fact readily available in some electronic form and circulating at extremely high speed on the internet. What are ethical and methodological issues posed by “big data” ?  Are current models up to the challenge of parsing if not explaining  the material ?

 

 

Finally, as a counterpart to the questions posed by policy, shouldn’t global systems science come with series of interrogations about power and governance in the globalized economy ? With markets’ liberalization and globalization, nation states seem to have lost part of the influence and the power they had on the economy. Where has this power gone ? Can citizens be offered better maps of the corporate governance network, the financial system or the international trade network ?  Aren’t such maps necessary to embed in the democratic process the redrawing of boundaries between the public and the private spheres, the public and the private sectors, communities and cities, membership and governance ?

 

 

 

Two series of questions

 

 

Global Markets I : Thursday, 8th November 2012, 15.15 -16.45

 

– What is unique about our system of globally interconnected markets that  materializes itself in this massive flow of data ? i.e “Big data” is the symptom of what ?

– How can this data be used to better understand the system which generates it?

– How can models parse and/or explain this  “big data” ?

– What is specific to models of the global economic system ?

– For example, does increasing connectivity lead to increasing fragility, what transpires in models as volatile or even chaotic behavior ?

 

 

Global Markets II: Friday, 9th November 2012, 10.30 -12.30:

 

How can  models using « big data » be more useful than existing ones for policy purposes ?

– What kind of models can be used for « emergency » economic and financial  management ?  By who and how ?

-What kind of models can be used for long-term issues such as strategic planning  or scenario generation ?  By who and how ?

– What kind of models do we need to better manage the transition to a green economy ?

-How can models improve public understanding of the dynamics of global systems ?

What would  be the impact of on governance ?

6 thoughts on “Workshops on Global Markets”

  1. %%%%%%%%%%%%%%%%%%%%%%%% GLOBAL MARKETS %%%%%%%%%%%%%%%%%%%%
    1st DAY WORKSHOP – MINUTES

    The discussion of today was only marginally focused on global financial markets. So for today I don’t try to compile a summary but I simply report below the minutes I took during the meeting. If a comment does not make much sense, it’s certainly my fault! ;) So apologies if I missed or misunderstood any of the comments.

    As a warm up the activity of the workshop has started with the talk by L. Pietronero about the complexity of the Country-Product network. Highlights from the presentation include:
    – non monetary measure of fitness
    – some predictive power on future change in gdp
    – country investment index

    Reactions to the talk include:

    Elsman Martin: why such a definition of fitness was chosen?

    Herbert David: At which scale do we want to model things? It is not easy to provide policy recommendations.

    L.P. : You could look at trajectories in the phase space. Vicinity among products suggest where to invest.

    Paul Omerod: There is previous work in economics that explains some of the findings, e.g. the fact that countries are not specialized. A behavioral model would be needed to provide further explanations.

    Silvano Cincotti: It is difficult to use historical data in order to understand where we should go in the future. We need policies that induce society to move in certain directions.

    LP: this work does not say how to make economic planning. But in order to diversify products a country needs to build infrastructure and education etc. Predictability is heterogenous.

    Berdrtha Goswama: we should account for the quantum nature of social systems.

    Ulf Dahlsten: we should be careful about being blind to certain data; journalists pick up data for us. Selection and relevance of data is key. We should look for patterns in data and then feeding this into models. Central bankers try to hide certain situations, bc they know their models are mainly wrong. Thus they do not want to show the results. They don’t want to tell the market what indicators they are following in order to avoid that the market influence those indicators.

    LP: predictions in a system that adapt occurs also in biology where influenza changes every year.
    What we are testing here is inner capabilities of countries to produce. Companies can acquire others and thus their technologies and this introduces noise.

    Antoine Mandel: Is this big data or is it new method on old data?

    LP: Data need lots of cleaning. But one could start breaking down the data, e.g. by distinguishing quality of products (ferrari vs fiat).

    Andrea Roventini: central bank don’ t disclose the data that would allow to characterize the fragility of the system. Example: recent Haldane ea paper on repo data, they can do it because they work at the central bank.

    U.D.: today banks manage expectations more than data. E.g. stress tests: rumors could be even worse than non disclosing data. Trichet said that model are useless

    SB: I would like to bring up the issue of local regulation vs global markets.

    Han Zhangang: data speak. but now we need to select variables. E.g. for the financial crisis we have a lot of data but we still we do no understand. Earthquakes: lots of data but we are not able to understand many things there. We also need to map data into policy. Some related issues are the decision of China not to print money, the recessive policies in greece leading people protesting in the street.

    Herbert David. Urgent need to model expectation. Debt crisis: no one knows how expectation evolve.

    ?? : I want to draw attention to the fact that data need to be purchased. Research depends on funding that allow to buy data. In financial econometrics: if a unit does not have Bloomberg they cannot reproduce the results of another unit. Moreover, we do not know what the agency did with the data before. Crowd wisdom in e.g. epidemic spreading in google. Similar for stock market. When volatility jumps queries volume are a good predictor of volatility.

  2. GC: Moving to the point of Big Data. Is it really complete? Do we need some other sources of information to get a more precise picture? Maybe Europe is in the condition to ask Companies to release sensible information as querylogs

  3. Just a small remark about one sentence of this besides very interesting proposal for our discussion: “Sustainability mainly refers to the long-term balance between economic development and environmental conservation but also materializes as problems with very short time-horizons”. I think that the third pillar of sustainability, that is social cohesion, should not be forgotten since it is the one that very often arrives in contradiction with the other two objectives but also perhaps the one that should be considered a priority over the other two when analysing specific problems or local situations.

    Denise Pumain

  4. FROM QUALITATIVE TO QUANTITATIVE

    Global System Science by its own definition is meant to be scientifically based. On the other hand the word “global” implies the ambition to go beyond the traditional areas of science. The reason for science to be limited to relatively simple problems is due to the strict criteria of reproducibility and systematic test which can be implemented only in simple situations. It is more and more clear that important and challenging problems are at the boundaries between different disciplines or involve many disciplines to ask new type of problems. Addressing these problems brings naturally the question of how much we are going to stick to the traditional scientific criteria and the answer is not simple. The idea of implementing scientific quantitative tools in the socio-economic disciplines is absolutely fascinating. However we should keep in mind two of the values of the scientific approach which, in my opinion, have to be preserved also in this new adventure:
    1. A rational view of the world
    2. A certain credibility of scientists

    In the following I briefly describe a new approach which could represent an example of a reasonable compromise between the two tendencies. The subject is very new and it has developed in the past two years. At the moment the only two groups active are that of Ricardo Hausmann (Harvard economics) and ours in Rome (Institute of Complex Systems). However, many groups have manifested interest in collaborating and it is easy to predict a rapid growth. This situation shows also how dynamic is this entire area is and, for this reason, we should keep the door open to new ideas that will certainly appear in the future. From this perspective a flexible attitude is certainly more appropriate than a rigid planning.

    NEW IDEAS IN FUNDAMENTAL ECONOMICS

    Measuring intangible nonmonetary values is a crucial element in economics because its comparison with the monetary performance can reveal new information on the hidden potential of a country which is the fundamental element for future growth. We have considered the COMTRADE dataset which provide the matrix of countries and their exported products. According to the standard economic theory the specialization of countries towards certain specific products should be optimal. The observed data show that this is not the case and that diversification is actually more important. Specialization may be the leading effect in a static situation but the strongly dynamical globalized world market suggests instead that flexibility and adaptability are essential elements of competitiveness as in biosystems. The crucial challenge is then how to turn these qualitative observations into quantitative variables. We introduce a new metrics for the Fitness of countries and the Complexity of products which corresponds to the fixed point of the iteration of two nonlinear coupled equations. The nonlinearity is crucial because it represents the fact that the upper bound on the Complexity of a product is given by the less developed country that can produce it. This and other points make our metric completely different from the one of Hidalgo and Hausmann who first tried to address this question. The information provided by the new metrics can be used in various ways. The direct comparison of the Fitness with the country GDP gives an assessment of the non expressed potential of the country. This can be used as a predictor of GDP or stock index. The global dynamic shows, however, a large degree of heterogeneity which implies that countries which are in a certain zone of the parameter space evolve in a predictable way while others show a chaotic behaviour. This heterogeneous dynamic is also outside the usual economic concepts. It is also possible to evaluate risk and compare it with the standard ratings. Finally this new approach may be interesting for planning of the industrial development of a country.

    BIG DATA AND NEW QUESTIONS

    In this approach the data are crucial because they permit a verification of the previous theories and suggest the new perspective. Then the algorithms to define the metrics use the dataset in a completely different way with respect to the original reason to collect them. Therefore a high degree of accuracy is now required that was less crucial for the original archival purposes because an error can now propagate through the iteration scheme. From the results of the metrics one has then a feedback on which data would be necessary for further developments and clearly this brings easily in the domain of Big Data. In fact the knowledge of the performance of the various sectors, a much more refined specification of the products together with geographic and demographic information represent essential elements for the development of the field.

  5. %%%%%%%%%%%%%%%%%%%%% 2nd DAY WORKSHOP
    Minutes taken by Stefano Battiston. Caveat: this is only meant to provide a roadmap of the conversation that took place in day 2. Apologies if I misunderstood or missed certain comments.

    Paul Omerod presents some thoughts on the interplay between rational choice and social influence. While economists are usually modeling decisions as taken in isolation and according to a rational optimization, evidence is abundant that e.g. consumers and citizens do not behave like that.

    Because policy making is dominated by the economic profession, there is a tendency to give to much attention to incentives on the basis that citizen respond only to incentives.

    The talk stirs up a discussion on the relation between on the one hand social interaction, trust building and social participation and on the other hand policy making.

    At the working group is present also Chris Redmond, who is national expert with the European Commission’s DG Markt currently working on Shadow Banking and interested in some recent works on financial networks developed in the FET Project FOC.

    C.R. Regulators and policy makers do not have direct sight of markets. They are also lobbied by market participants. Therefore there is a need for some scientific approach in the process.

    In particular, I am interested in Shadow Banking, that is the practice that a number of market participants act as banks although they are not regulated as banks are.

    There are chains of collateralized lending that occur in opaque way and there is no infrastructure there to track them. We need to establish a map before we can decide what to do.

    A. Nowak: Lot of profit is made at the interface of sectors. The individual aspect is important: why engaging in risky banking practice? Often because people do not understand how the process works.
    E.g. in the case of mortgage that were resold people made wring decisions because they did not understand how things were working.

    A. Mandel: Question to C.R.: How much enforcing power do you have?

    C.R. : We can require data disclosure if we can argue they are necessary. The process includes to prepare a draft and there is a negotiation. But there have been already cases where data have been required and obtained, e.g. JP Morgan CDS case.

    S.Battiston: We can certainly demonstrate how bad it can be the assessment of potential losses if data are not available. This can be done using synthetic data.

    Ralph Dum: How likely is this data enforcing?

    C.R. : The political landscape is positive. ECB and other institutions are calling fro greater transparency. But is not clear to us is what is the level of detail tab we need in order to be able to exert monitoring.

    A. Nowak: Trust is important. Sentiment. Narratives. There is a financial process and a social process that feeds back into the first one.

    ……

    C.R. Reestablishing trust is important

    G. Caldarelli: I guess policy makers need clarity in order to inject trust.

    A.M. Question to C.R.: We can provide input. But where is the boundary? Would you take seriously the issue of modeling trust?

    C.R. The holistic view is not common among policy makers. First I would like you to help me solving a technical issue and thus build trust from them towards you.

    S.B. There are two time horizons. In the short run one has to do something useful for the plumbing of the system. On a longer term one can try to engage in a broader discussion about trust etc.

    P.O. I agree. Example of this is the case of London Olympics, where the major made announcements in the metro to avoid overcrowding.

    Ralph Dum to C.R. : Why do you have problems to enforce data disclosure?

    C.R. It is a consensual process.

    I. Mozetic: Why not going for transaction taxes, because having taxes imply that transaction must be recorded.

    C.R. There is a problem with opacity of ownership. We need to see real time data.

    I.M. We have been cooperating with a bank to build a reputation index. In order to see the propagation of trust we would need that regulators impose that other banks adopt it too.

    Miha Grcar: Social aspect: how much do you care to track/see how public or stakeholders/interest groups react to policies?

    C.R. No interest. People do not understand financial markets infrastructures. For interest groups it may be different. Member states need to work on evidence and not on sentiment.

    Filippo Addari: There are also consumer’s organizations and NGO’s. Consumers trust them more than EC. Getting these actors on board would give power to convince governments and even banks. E.g. Greenpeace managed to force Exon to shut down a plant.

    R. Dum: There are 2 levels:
    1) getting the data to make informed decisions
    2) decide what to do. for this you need trust and support from citizens

    S.B. yes, but that support may help also in the phase of enforcing data disclosure

    C.R. In two words my message is “know you audience”.

  6. As a participant in the workshop I have a number of observations and ideas to share, from the perspective of “initiatives in society” related to EU-policy processes, given the context of “Global markets….”:

    1.”systemic risk” may well be a concept to apply “to further raise the stakes” with the “community of policy makers” globally: the financial crisis has shown what the actual and future cost to society is/may be. The risks inherent in the global sustainability challenges may well be of a much broader and disruptive nature in case of relative in-action in the area of global sustainability issues. In-action may also imply the risk of risk transfers from the private domain to the public domain as is occurring with the financial crisis: the reinsurance business is the first to recognise the issue and the first to act if need be, given the interest in business opportunities that play out over the long term. “Society” and citizens have a firm interest to avoid such risk tranfers.

    2. Once a broad and consistent agenda setting is underway at the political level, a debate in society as part of the democratic process could ensue, opening the door to public sustainability accountability, to enable citizens and consumers to make “considered choices”, and to defining a vision of desired future developments.

    3. raising the issue of systemic risk and its management with EU-policy makers is an option to get the issue on the agenda, e.g. with ministers of Finance. Elimination of environmentally harmful subsidies on the one hand and the use for competing public purposes of the proceeds of public auctioning of GHG-emissions rights, are examples of issues that could be tabled. A potentially “transformative target” of raising the EU-2020 target to 30% instead of the current ineffective 20% target and its positive impact on auctioning proceeds could be another issue.

    4. recognition of the consequences of having to deal with global issues at the level of the EU and seeking best answers to deal with a given issue will underpin the interest in “collective action”: “ocean acidification’ and the diminishing capacity of oceans to absorb CO2 and the subsequent need to consider alternative absorption sources is maybe a relevant example when looking at the mitigation potential of “REDD+” and/or the promotion of sustainable agriculture in developing countries, the latter to be financially supported by EU-public funding.

    5. initiatives taken in society that relate to the issues above are numerous and increasing. They have maybe in common the virtue to exist: action by governments remains an indispensable ingredient in order to address the systemic risks and to promote the best solutions in society as a public interest/ public goods issue.

    Initiiatives to be mentioned are:
    – a trend towards “sustainability accountability” as promoted by e.g. UN Global Compact and the Global Reporting Initiative, supported and complemented by initiatives such as the Carbon Disclosure Project (addressing water as well now), ISO26000, and the linkages to the actors in the global economy. Integrated reporting is the next step, for 2013. Stock exhanges taking “sustainability” on board, financial information services.
    Changes in international accounting standards and rules can be seen in conjunction (e.g. UNSEEA), reinforcing the trend and requiring action by policy makers.
    – sustainability ratings by private companies to help other private companies and countries on strategies and action.

    In a number of areas initiatives mentioned above relate to ongoing work in a “multistakeholders” ‘ setting in Brussels.

    Gertjan STORM,
    honorary advisor to:
    – ICIS, university of Maastricht: science, policy and sustainability,
    http://www.icis.unimaas.info
    – “European Partners for the Environment”, Brussels: http://www.epe.be.

    November 13, 2012.

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