Brazilian-Canadian. Professor of Financial Mathematics and Chair of the Mathematics of Statistics Department at McMaster University
1. Why does economics matter?
Economics matter because it affects the lives of everybody, right? So it’s not just an intellectual exercise, it’s something that plays into how you organize work, how you organize relationships between the people who have capital and the people who don’t have capital, how we organize financial interactions. And then as you keep aggregating things more and more, it goes all the way up to how the whole of society interacts with the environment because it affects production, and it affects how production ultimately feeds back into the planet and the resources that we have.
So all the way from individual work relationships, all the way up to the interaction with the planet, it’s all related to how economics is done. So it matters quite a lot.
2. What are the differences between economic science (academic economics) and economic engineering (policymaking)??
Abstract theory, so research in economics and policymaking is a lot more blurred and diffuse, and it should be because economics is not an abstract endeavor, as I answer in the first question is something that relates to real lives and real relationships and interactions and ultimately with the physical constraints that we have around us.
So it’s a little funny for me to say that, I’m a mathematician myself, and mathematics can be defined as an abstract endeavor… Parts of mathematics, which mathematicians like to call pure math, and even there is a distinction between pure math and applied math, is not very rigid and should not be. So we can talk about mathematics, if you want to, but going back strictly to economics is a bit like saying: what is the difference between abstract epidemiology and epidemiology applied to a policymaker. That should not be. The entire subject is dedicated to, and I’m using epidemiology because of course we are still in the middle of a pandemic and everybody became an amateur epidemiologist, and there’s a resurgence of understanding of even things that people would call very abstract mathematical models for disease, contagion and spread. And, it turns out that they are not abstract at all. These are the things that actually happen when we have a virus, the pathogen rises and you need that kind of modeling because you cannot just rely on data and extrapolation of data.
That’s what everybody was seeing at the beginning of the pandemic. That were exponential rates. And if you just extrapolated that, you would find that there would be more people infected than people in the planet. And of course, it doesn’t make sense. So, you know that those things are going to turn around and saturate either by the natural development of the disease or because of policy interventions. But this has all to be understood by models. So what are our models? Are our models are abstract academic research or are they part of policy making?
It doesn’t really matter. They are the ways that you understand what’s happening around you. And with the economics is the same thing. I don’t think there is any role for doing some mathematical style of a theory improving research in economics, if that’s not related to ultimately some type of policymaking, that will have an impact on all of the areas that I mentioned. And, that’s the answer to the first question.
Now, policymaking itself is not the only goal, because that’s part… What is policymaking? It is what the one part of the economic system, namely the government, can do to influence what the other actors, what the other parts of the economy are doing. So, again, using the analogy with the epidemiology: policymaking is just the lockdown and the vaccination and the mask wearing and so on and so forth. But that’s only one part of epidemiology.
Epidemiology is about understanding the entire mechanisms all the way from the biology of the pathogens, all the way to the interactions of people and the behavior of people. So similarly with economics, you know, I don’t need to say that every single paper in the economics needs to have a policy component, because a lot of the work is in understanding how the rest of the system works, even without the participation of a policymaker or a government or something. So it’s understanding at the very fundamental level how firms are organized and workers participation in firms and how individual households interact with both market and nonmarket relationships, and then keep aggregating, keep making it larger and larger and then eventually see what the entire macroeconomic context is about. And of course, governments are part of that because they exist as both an important economic sector that buys and sells a lot of things. So it’s part of what all the other agents, households, banks, firms, etc. need to take into account in their day to day decisions.
But they are also there for extraordinary circumstances where there is a crisis or where there is some crisis - maybe it doesn’t need to be after a crisis occurs, but in anticipation of something that is going to go very wrong and the government can try to go beyond its day to day role in economic relations and try to do something more. So that’s where the attention to what the effects of the policy should be heightened. But I would say that it should be there all the time, there is no economy without a government.
And, so it’s not fruitful, I think, to think of that there is a very strong distinction between abstract idealized economies or economic research. And then, well, OK, now we are coming down from that perfect, rational abstract system and see what the policy should be. It should be entirely integrated, I will re-emphasize this, there is no point of doing abstract epidemiology. You’re not going to deal with real disease.
3. What role does economics play in society? Does it serve the common good?
So, OK, it plays a very large role and maybe an oversized role. Now, it’s clear that. Economic relations are pervasive to society. They happen all the time from the moment you wake up, everything that you do in your household, at some point you have to pay something for it, so you have to choose which products to buy in which markets. And then you still have subscriptions and you have a job and that job is part of a job market and so on and so forth.
So there is a very unescapable role of economic relations to our lives. They are there all the time. Now, does that mean that economics as a discipline should similarly be as pervasive? This is what economists would like to say. And the type of logic that applies or dictates the relationships in things that are strictly economic exchanges and the marketplace that should also apply to every other corner of our lives, and then I think it’s an exaggeration going beyond what the natural and expected role of economics as a discipline should be, which is to help understand how economic relations are parts of life. But there are things to like, right? So I just said that you buy things and you have a job and you interact with other agents markets. But that’s not the only purpose of why you wake up in the morning and live your life. So. So there’s other aspects of life that should not have so much of the economic logic and the economic way of organizing relations.
So I think the question was, does it play a positive role? So was that part of the question? And I think it plays a positive role as long as it’s supported by all the disciplines that also help you understand what’s going on in all of these interactions. And so, so obvious other choices are history. Economics should be very much grounded in history because it’s decisions and markets and governments and economic interactions and relationships don’t occur in an historical vacuum, they’re not all the same, they don’t repeat. So this is not like physics where you can set up an experimental control laboratory where, you know, all the conditions are the same and you just repeat the experiment many, many times. That doesn’t exist in economics. The experiments, they happen in historical time and most often they just occur once. And you have to follow the trajectory of the experiments to see what the developments are. So history is important to the whole of social sciences and political sciences, psychology, all sorts of insights from psychology that should be taken into account in economics. Not because they are in conflict with the more abstract, like we’re talking before, the more abstract parts of economics, which when it started to be formalized in the 19th century, was a bit more like an introspective question.
How should I behave in the face of uncertainty or in face of decisions? So it’s decision making, but from the point of view of a highly individualized and introspective decision maker, thinking in ideal circumstances, how would I operate. So Pareto and others that were investigating these questions, they were like that. It was not how do human beings actually make decisions, which is the domain of psychology. And when those two things clash by research and behavioral economics in the 20th century, most economists decided to ignore that and say, no, we’re still going to be operating in an as if situation, as if humans were rational, as if they had full information, as if they didn’t have any biases.
So there should be a bigger role for these other disciplines that also are as pervasive, if not more pervasive than the economics in our lives. I painted the picture that everything that we do throughout the day is related to economic interactions, but even more so, it has to do with the way that our minds are wired. Even before you do an economic interaction, you have a way of of making decisions, a way of evaluating risk and evaluating uncertainty.
And that sort of precedes economics. So you need to understand that as well. So I would say the positive role of economics needs to be understood in conjunction with all of this. Similarly important and pervasive disciplines, and if it’s not, then it becomes a negative, oversized, rigid and too insular way of trying to understand the phenomenon, which is a very complex phenomenon and should not be understood by economics alone.
4. Economics provides answers to problems related to markets, efficiency, profits, consumption and economic growth. Does economics do a good job in addressing the other issues people care about: climate change and the wider environment, the role of technology in society, issues of race and class, pandemics, etc.?
So I would say no, and by extension of my previous answer, you shouldn’t do it alone because all those things involve both expertise and domains of human experience that are beyond economics. So you mentioned, of course, a large array of different problems, but so just picking in no specific order, it would be preposterous to try to understand race relations from the point of view of economics, because it would be a historic, it would be outside the social context in which they happen and it would even be outside of the psychological way in which race is constructed and understood.
So we shouldn’t have been said that, it should complement the insights and focus of the disciplines into race relations, because that is an important economic aspect. We know from the study of history, of slavery and all sorts of other important determinants of race relations, that they had an economic basis, that they were a way of producing exactly profits and health and consumption and an increase in capital and so on, so forth. So in that sense, economics can help so that, again, just by studying race relations alone without any mention of the economic aspects and the economic dimensions itself would be deficient.
So if we were only trying to understand race by the social and historical and psychological aspect, so economics has to provide some part of the context, but not the entire context. Moving on to the other things that you mentioned, and I think we can talk about climate a bit more and the other questions as well. But climate, again, it’s a multi-layered and multifaceted problem that economics alone cannot tackle because it relates to the physical planet.
So you need to understand the climatology. You need to understand the atmospheric science and how carbon enters and disappears from the cycle and how an increase in the carbon concentration would lead to the rise in temperatures and things like that. So this is all science that is largely independent of the economics because you’re now talking at the molecular and in some cases even more fundamental quantum mechanical interactions that are happening there. So you might say, OK, then climate doesn’t have anything to do with economics and we can decouple the two.
But if both climate scientists and economists understand/ understood long ago that that’s not the case, because the reason why carbon concentrations are increasing, is because of industrial production and other aspects of modern life that have an economic component. Again, just like race relations, the economics plays a very important role in determining how much of that production and consumption and so on and so forth is going to be dumping not only carbon, but other types of secondary wasteful products into the environment.
And so that was always somehow understood and then more recently, and this is where the discussion on climate change became much more connected to economics, is the other way around: is that the climate itself, by reaching the limits of how much it can absorb all of this industrial waste and carbon increase, when it gets stretched to the limit that it cannot absorb, absorb it too much more, without changing the physical constraints of the climate itself, and changing by not only increasing the temperature, but then changing all sorts of currency currents and other climate modules and climate components, then that has an impact on the economy.
So the economy has an impact on the climate by, say, simplistically, by increasing emissions, but then the climate will have an impact on the economy by simply decreasing the amount of capital and the amount of production that you can make by actually damaging. And this goes into this very controversial topic of damage functions, how to quantify. It’s very difficult, but it’s undeniable that there is a feedback effect from the climate into the economy.
The most obvious one, it is just damages that are caused by extreme climate events, floods and so on, so forth. But there’s damage in terms of loss of productivity, damage in terms of higher depreciation of capital and all sorts of other ways in which then the climate now can be a substantial drag in the economy. And I’m not talking about the type of marginal changes because there’s another sort of coming back from the abstract studies in economics. Another belief is that there is an equilibrium from which you only deviate in small amounts, those small shocks to the equilibrium and then the system, the economic system itself will bring it back by responding to those shocks in some optimal way.
And typically, this is done, talking mathematically for a moment, this is done in a linear fashion so that you only look at the small effects and then the small responses to those effects. But the issues that in fact, we’re talking about, the changes that happen in the climate and this big integrated systems for the planet as a whole, the changes are not small. They might start small, but then you have very large bifurcation.
So that means that the overall effect of these small changes is a completely different path than you started before. And at that point, then the response of the economic system to this large change in the physical system is not going to be small either. So you’re going to have damages and destruction and loss of output that are not linearly related to what the shocks would be. Much larger than what the original shocks were. At that point, then it becomes very important to understand this relationship.
So these nonlinear feedbacks between the climate and the economics. But I feel that I’ve moved to just like talking about bifurcations, I moved too far away from this part of the question, but I am trying to come back. So does economics do a good job in understanding or helping other disciplines? So I think we’ll go back to something that I said in the previous questions. It does to the extent that it provides the sort of the grounding for some of the questions that need to be asked, because these are not disconnected from issues of production and consumption and profits and capital.
But it’s not all that is, right, so you cannot understand the climate and in particular, you cannot try to force the theoretical framework that is used for economic systems into other disciplines and into the understanding of other types of phenomena. A typical example that I gave in connection to climate is that the so-called dynamic stochastic general equilibrium models that are very much in vogue in macroeconomics, at the core there’s this mechanism for adjusting to deviations from equilibrium and the adjustments are done by adjusting expectations and because of rational agent would see that the deviations from equilibrium can move the system to a very undesirable stage.
And because the undesirably stage is worse than the desirable, to say, no rational person will continue in the path of something that, you know, it’s going to be worse. So you adjust. But the technique was invented for things that had to do with variables that are very much sensitive to those expectations. So the classic example, “the” example, that’s how the technique was invented by people like Sargeant, a famous economist, is inflation expectations and expectations with respect to the interest rates and their relationship to inflation.
So you should see a path where you are either going to have persistent deflation or explosive inflation. What you do is to adjust your expectations so there is an instantaneous adjustment in prices and everything else that depend on future inflation so that will be restored to the equilibrium path. OK, but that just doesn’t work for a climate mechanism because you cannot simply adjust emissions by adjusting your expectations. You can adjust prices, prices are, after all, you know, more or less constructions, people agree to pay or not to pay a given price.
But there’s no issue to agree with the environment or what ever the level of emissions will going to be. It’s there. And once it’s there, it takes its time. And the time is dictated by something that is completely outside the realm of the expectation of economic agents. It’s really now a physical process. And the physical process is an out of equilibrium. It slowly adjusts an physical mechanism. So trying to couple an equilibrium, instantaneously adjusting framework, which is what happens in dynamic stochastic general equilibrium models, which are also the models that are behind many of the climate economic integration models such as DICE and other models.
Trying to shoehorn an equilibrium, instantaneously adjustment framework into a out of equilibrium, slowly adjusting climate framework, just doesn’t work. It’s orthogonal. It’s methodologically impossible to reconcile. So that should not be the way that economics is integrated with other disciplines, in particular requirement. So what do you do in the bushel of what to adjust? You don’t adjust the climate science. You adjust the economics. Then try to see what models that are compatible with this type of output, equilibrium, dynamics and with this type of non clearing, so the conditions are not going to be matched all the time. And if they are not matched, then what type of slowly adjusting dynamics you can have with the possibility of overshooting, with the possibility of cycles, with the possibility of oscillations that just increase and get out of hand and so on and so forth. All of the dynamic phenomena that are not there, in the equilibrium framework of economics that were designed for markets and relationships in which maybe expectations play an oversized role.
But for example, financial markets, it’s clear that expectations play an oversized role there. It’s all that dictates the problem, perhaps not all, but it’s like the first approximation is what dictates the price of financial securities. So maybe that’s appropriate for that, but it’s not appropriate for interaction with the climate, for example.
5. As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?
So this is a little bit loaded because it could easily degenerate into a sort of witch hunt, right. Oh, you know, something something is done there like…
The army developed the atomic bomb and the atomic bomb was only possible because of development in fundamental physics. So let’s make Albert Einstein accountable for it. So we need to be careful in the attribution of responsibility because there is a long journey from Albert Einstein to the launching of the atomic bomb. And a lot of responsibility needs to be taken along that train. But with economists, sometimes it’s somewhat easier to do that because they are not just writing the papers and participating in conferences and giving generic advice. Sometimes economists are directly advising, not only policymakers but companies and other important actors and/ or associations, corporations, sometimes workers associations. So there are economists that advice unions and so on.
So in that case, when I think it’s direct attribution of some decision and some policy then the economist should be held accountable in the same way that any person with authority in an organization could be. You know, the chief financial officer of a bank, all of the decisions were made under the chief financial officer, so the chief financial officer should be held accountable. Banks also have chief economists. And it is the case that they have to answer for the policies and decisions that the banks make.
And I have heard from some chief economist of banks, precisely that they have given advice and the advice was neglected, and if that can be documented, that’s like the medical system acting against medical advice. So if some bank or some corporation or some association acted against the advice of their chief economist or their economic counsel, then no, then you cannot blame the economists for something that they were saying that they should be doing the opposite. But in many cases, it’s not like this.
You can actually pinpoint specific decisions, especially in the realm of regulation and other areas of government, where, it’s easy to identify a kind of revolving door.
Right. So I’m not going to cite names, but people can easily search for economists that went into government, implemented policies and decisions, most often about regulations that affect part of industry, then come out of government and go to work for that specific industry. So in that case, it’s evident that the economist should be responsible for the effects of whatever policy or regulation or deregulation happened. And sometimes it happens again. They can go back from the industry into the next administration once there is a change in government.
And this should not be. I mean, ideally should not be allowed to be so explicit, this kind of influence. But it does exist and then you have some negative consequences. And it could be in the financial industry, but it could be in some other types of industry, car manufacturing or tobacco or where ever, where there are measurable consequences of what’s happening. Not only the economists, in the same way that you would hold executives or corporations and public officers, right, accountable. Then the economists addresses the picture, then that should be acceptable.
But like I said before, this should not be an intellectual witch hunt because intellectual disputes are difficult to arbitrate.
So we still don’t have a final answer for questions like: should the government spend more to make an economy recover or not? I have a particular belief and it’s a belief grounded on my own research and the research that I have read from others. My answer is yes, the government should do it. But I know equally passionate and genuine people who think that the answer is no. The government shouldn’t be spending because some notion of austerity and return of confidence is the right thing to do.
And then some policy is actually implemented. And then there are things that happen. For example, one might say, you know, cutting hospital budgets led to an increase in the amount of deaths. Well, should the economies that promote those theories should be charged with those deaths? That is very diffuse, right? Because a lot of things happen in between. And this might be a way for just denying responsibility. That level of uncertainty on the effects of policies and actually yet not settling what the right directions are, or not trying to determine with the level of precision that is required for attribution of guilt in a legal way. In the legal system, you have to set out what are the conditions in this to be beyond reasonable doubt? So I think the threshold of beyond reasonable doubt is not reached in those cases.
But in the cases that I mentioned before, where it’s a direct person that made concrete advice for a specific change in regulation and that change in regulation caused some measurable effect, well, no doubt. And I think the legal system has ways of attributing responsibility to that.
6. Does economics explain Capitalism? How would you define Capitalism?
Does economics explain capitalism? Well, economics should explain all types of economic relations, not only capitalism. Right, so in principle, the economic predictions that were in place in the Middle Ages and feudalism should be explained by economics.
It’s like saying, does history explain capitalism? History should explain capitalism. But all other types of systems that were in place and different points. The opposite should not be the case, right. That economics only explain capitalism, is it only applied to capitalism? No, that’s certainly not. And capitalism, I don’t think is the ultimate economic system, that it’s here to stay and cannot be transcended.
But then moving on to the second part of the questions: what is capitalism? So my my answer right now, it’s influenced by Piketty. I just finished reading Piketty’s book on capital. Not Capital in the 21st Century, the follow up: Capital and Ideology. And so I have to say, I’m heavily influenced by the view of that book because I just finished reading it. But in there he makes the argument that capitalism is a special case of something larger, proprietarianism. So, proprietarian ideologies, the ideology of that any individual can hold property, private property. And this is not something that was always true throughout history.
It used to be the case that only certain individuals and in particular a small number of individuals, those in both either and in the religion realm or in the warrior class or the noble class, they could have property and nobody else. So the innovation that in principle everyone can have property, was an important innovation in moving from feudalism into the new proprietarian age. And with it came causally the change in who can dispense justice. So it was also the case that only the nobles, the noble class and the church could dispense this, what he calls regalian powers; the powers of regulating and determine justice between individuals. And so the innovation that came out of this was the birth of societies like from the French Revolution, was that these two things got decoupled. And on the one hand, everyone can have property in principle. And on the other hand, the only actor that can dispense justice is the state. So there’s a centralized state that deals with these regalian powers, and there’s the possibility that everyone has property.
And the two things came together and were very important. They were part of this dissociation and the crumbling of this medieval way of organizing society. But the point is that this was pushed to an extreme. Property became then something that it’s kind of sacralized. It’s a kind of divine right as well. So it is extrapolating from the principles that everyone can have property to the principle that property cannot be touched by the state. It’s separated from the state, but it also cannot be touched. The state only deals with criminal justice and so on, so forth, but can never touch on property. And there’s of course, then a predate capitalism. But it was ideal for the development of capitalism. So then what is capitalism? It is the extrapolation of that logic to this situation where you have organized labor, not organized labor in terms of unions and so on, I’m confused by the terms here, but when you have organized production and large scale production and then international trade and international finance… So what is capitalism? It is the extension of this proprietarian logic where the right to hold property is something that should be absolute and untouched by the other aspects of society to the age of large scale production and financial flows and international trade. Now, is this the only way in which economics can operate? Far from it. So there’s an entire spectrum of. The opposite would be when there is no private property and all of the property is also owned by the state that not only regulates the regalian powers, but also the economic relations.
And that’s the extreme tried under communism for lack of a better word. But are these two extremes the only possibilities? On the one side the sacrosanct right of holding any amount of property without any possibility of a state intervening, and on the other side, nobody having the right to hold any property. And just from a mathematical point of view, if you like, it’s absurd to think that you only have the two extremes on the possible set.
You have everything in between and in a particular system where it’s embedded in the system that, if necessary, there’s going to be a redistribution of property. This is the whole point of progressive taxation and other things. There’s no revolutionary concept in here, it’s just exploring what the middle ground is in between those extremes. And there’s a lot that can be done in that middle ground. For example, like I said, the progressive taxes, but also with different ways of organizing decision power for whoever holds capital.
So this, you know, also kind of a divine principle that shareholders should have absolute control of what happens in a company, is not necessarily the case. So we have examples, for example, in Germany and in the Nordic countries where there’s division of decision power between shareholders and workers in the company. And from a point of view of North American or English persons: so what you’re saying here, the shareholders don’t really own the company here?
Well, yes, they don’t have an absolute power in deciding on wages and where the company is going to be investing just because they have the capital. So there’s a little bit of division. Does that mean that you abolish shareholders altogether and have a commune? Also also not the case, right. So I would say capitalism is one particular possibility but definitely not the only possibility. And more should be explored.
7. No human system to date has so far been able to endure indefinitely - not ancient Egypt or Rome, not Feudal China or Europe, not the USSR. What about global Capitalism: can it survive in its current form?
So by setting up that other traditional systems that endure for many centuries and then eventually disappear, by setting the question up this way, it looks like that the only possible answer is that capitalism in the way that it’s understood today is also going to disappear. And I think that’s more or less obvious because circumstances are going to change and we’re not going to have the same type of organization of labor and companies and taxes and so on forever. It is going to change in a way that leads to a better distribution of capital and resources. Well, frankly, the proceeds of what the system is generating, or is it going to change to something that is even more concentrated, even more inegalitarian?
So in principle, I think, theoretically could also go to this other direction. You know, just because extreme unequal societies disappeared in the past, doesn’t mean that they’re not going to reappear. History is also not linear, that once we understood that something didn’t work, that same thing cannot come back again. Slavery was once abolished and then returned in the antiquity and then eventually got abolished in Europe, only to return to European domains in other parts of the world with different justifications.
So in the same way, the type of even feudal societies with, on the one hand, very highly developed academic learned class… So imagine for a while a situation where you have all these people with highly advanced university degrees trying to maintain their high status in society. Well, that’s a bit like the religious classes in the Middle Ages. And then on the other side, you have people with very prominent practical skills, for example, in manufacturing and in business.
So the CEO class, so to speak, well, they become the equivalent of the nobility or the warriors in the Middle Ages. And then in the middle, you have everybody else who don’t either have access to education, because education is becoming more and more also unequal and stratified, and also don’t have access to what makes you successful in business, which frankly is starting off with capital, to begin with. So you could end up with just our very sort of a highly sophisticated, financialized, globalist, capitalist society devolving back to a sort of feudalism played by different names.
You would still have a learned class that preserves its privileges of advising. And perhaps there’s going to be many economists, and the economists are going to be in the new monasteries, the universities, you know, there carefully copying texts from one economist to another. And then you have this very militarized and rich sort of merchant class holding all of the capital that is there. And so what are the limits for that? Very few theoretical capital that can continue to be concentrated.
Well, I mean, you might say that then there’s going to be a revolution and so on. But those things are difficult, right? In the Middle Ages, survive for several centuries without large scale revolutions, precisely because the sort of a very concentrated, rich warrior class was also powerful and was able to sort of suppress peasant revolutions all over the place. So it’s not guaranteed that system also is not stable, and it’s not going to survive for a long time.
So it might be, pessimistically speaking, we might be heading for a long period of increase inequality. And then thrown into that, the issue of climate change. So that might be the ultimate break to that system, not because of some internal mechanisms of society, but because nature and the planet itself is going to put a stop to it. And, you know, maybe with more pandemics and so on, but that’s very bleak and pessimistic.
Now, what are the alternatives? Well, there are some, just like I was saying. So you could have a situation where capital doesn’t concentrate so extremely in the hands of a few prominent CEOs. But how does that happen? Well, that needs to be a process of very strong deliberation in society where there’s a conscious decision that this is something that is not desirable. And then you take measures such as having high progressive taxes in income and taxes on property and taxes on inheritance, coupled with a very large scale education investment, so that everybody has access not just the high, highly skilled, highly-learned prophets of capitalism. So everybody has access to the benefits of education. But this requires, as I said, it’s not going to be the elites that are going to voluntarily say “okay, we’ll take it away from us”, this requires mobilization and deliberation and democratic decisions. That this is what needs to be done. And it includes, you know, at the core, mobilizing the resources that are available to the general public.
And those resources are the state. So, in terms of large scale investment in education, large scale investment in preventing climate change, making sure that whoever needs employment finds employment, and that it’s not only necessary to find employment in the corporate sector that is then dominated by highly concentrated capital, that they can dictate what the wages are… Making that a competition. In the United States they are debating the future of health care, that’s been mentioned as the public option. So the public option was the option to have health insurance provided by the government in competition with the private sector precisely to see which sector can offer that better. Will, make that competition across the board.
So if the private sector can only offer jobs that are below subsistence level, you know, if the only way for Wal-Mart to exist is to pay below minimum wages to their employees, well, then have better jobs in the public sector. Of course, not doing the same thing. Nobody is advocating that the public sector opens up supermarkets to sell cheap goods. But there are several things that the public sector needs to do, for example, in relation to climate change.
So there’s no shortage of jobs that the public sector could offer in genuine competition so that there is no race to the bottom in terms of wages and working conditions. So all of those things should be on the table. Progressive taxes, large scale public investment… What I just described was akin to a job guarantee that has been mentioned in the United States. A basic income, why not so? So I’m very eclectic in terms of the alternatives, and I think it needs to be tried and experimented just in the way that Germany experimented with a broad participation for workers And it worked!
Nobody will say that German companies are unproductive, right? When was the last time that anybody complained that German companies were unproductive? Maybe Italian companies in Germany? So clearly, there’s room for organizing both the private and the public sector in different ways. That would avoid the sort of bleak, inegalitarian, highly concentrated and ultimately destructive of the environment, the scenario that I described before.
8. Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?
Yes, so I think I just answered that, but maybe trying to summarize. No, definitely it’s not the best way to serve the needs of humanity and the system where there is more participation not only in the decision making, through this type of German style shared boards, but in the actual ownership of capital. And how do you make more people own capital? By giving it to them. And how do you give capital to people that don’t have capital? It’s by taxing high amounts of capital. So this sounds confiscatory and people in the rightwing circles would say socialism. Well, we have elements of socialism, but it doesn’t need to be the only end point where nobody owns property and property is entirely owned by the state. What I’m describing, and again, I am highly influenced by the book I just read by Piketty, but it matches with my previous sort of understanding of what was going on, is that there is room for ownership, for private ownership, but highly concentrated private ownership is not the most efficient way of organizing things. So, you know, progressive taxation is not an abstract, crazy idea.
It existed for a very long time in the United States. It existed in a very long time in the UK. And both countries had extremely high growth rates during the time when they had very high taxes. So so there’s nothing absolutely crazy about that. Now, unfortunately, the Soviet experience with communism was a disaster. And that, in a sense, has tainted the entire discussion about the possibilities of shared ownership and redistribution of capital.
But it should. We should be talking about this in a pragmatic way. And just maybe to conclude. The idea that something is a slippery slope and if you start talking about redistribution, you’ll end up with communism is the weakest possible intellectual argument. The idea that once you open the Pandora’s box, there is no way to know what’s coming out of there. It’s just lazy, is absolutely lazy. It presupposes that people are not capable of finding an intermediate point between two extremes.
And in daily life we do that. We don’t only spend all that we earn or save all that we earn, we find an intermediate point between our spending and our saving that satisfied our needs. So if we are able to do this kind of, you know, it doesn’t have to be a very sophisticated optimization. We do that in daily life, we find intermediate points in daily life, we can find an intermediate point for society as well.
About Matheus Grasselli
He was the Deputy Director of the Fields Institute for Research in Mathematical Sciences in Toronto (2012-2016) and the Director of the Fields Centre for Financial Industries (2017-2020) and is currently a co-leader of the Fields-CQAM lab on Systemic Risk Analytics. He holds a PhD in Mathematical Physics from King’s College London, and has published research papers on information geometry, statistical physics, and several aspects of quantitative finance, including interest rate theory, optimal portfolio, real options, executive compensation, and macroeconomics. He is also the author of an undergraduate textbook on numerical methods. He is a regular speaker in both academic and industrial conferences around the world and has consulted for CIBC, Petrobras, EDF, and Bovespa. He is on the editorial board of numerous journals, including the Journal of Banking and Finance, the International Journal of Theoretical and Applied Finance, and the Journal of Dynamics and Games, and is also the founding managing editor of the book series Springer Briefs on Quantitative Finance. In 2019 he published his first novel, The Venetian Files: the secret of financial crises.
Find Matheus newest book at http://www.mosaic-press.com/product/the-venetian-files/