April 18, 2021

Rym Ayadi

Tunisian. Economist, international Expert on Inclusive and Sustainable Socio-economic Models, Financial Architecture and Stability and Sustainable Finance

1. Why does economics matter?

Hi, everybody, thank you very much for this interview. So let me start.

That’s a very important question. If I take the separate term, economics gives one perspective to understand the complex world we are living in. From a planetary perspective, humanity is always facing what we call a fundamental problem, which is scarcity, because the resources overall are finite. They are not infinite. The scarcity of resources, which are natural resources, for example energy, water, air, financial, land, labor, human, nation, knowledge and time, all these resources are very scarce. And then by construction there is a limited supply.

So scarcity means that we all want some goods and services and resources to continue living, and at a given point in time supply is expected to be lower than the demand. And obviously there is a price for everything, but not yet for clean air and water or rain, for example. Now, the importance of economics also lies in the understanding of the problem of the scarcity and how to solve equations, such, for example, how to provide food, housing, health care, pensions, energy, transport, education, jobs for all, and taking also into account all types of vulnerabilities of our societies nowadays, and even before, and the level of development considering the different cycles and societal challenges we are confronted with.

So basically, if we think about it, economics is central to our lives. Now, from this perspective, economics tries to allow us to better understand how people, societies and governments use resources, how to make economic decisions and respond to incentives and to the conditions underlying the whole structures and so on.

But then again, economics is also a social science and of humanities as well. So it’s really within this overall discipline. It’s centered on “human” and on people. But we need to think of something quite important here: it’s that economic agents, stated previously, as I mentioned before, suffer from the asymmetry of information and sometimes also there is the whole concept of adverse selection. So they simply lack the perfect information and knowledge to make the optimal decisions and produce the best outcomes.

So this is part of what we call the bounded rationality principles which limits the rationality of all economic agents in their decision making and so on because of the limitation of this information, as I mentioned before, the lack of knowledge and also the time available to them to make the right decisions, without also forgetting what I call the brain cognitive capacity, because sometimes you are bounded by certain factors, I call them noise factors, which drive you away from optimal decision-making and so on.

So contrary to what the myth of economic models is, that agents are rational and act to maximize their utility. Now, despite the inherent weaknesses of the economics discipline, we cannot deny the fact that as a discipline it really tried to provide information, knowledge, tools to make much more informed decision, much more informed than before, probably, using data evidence, developing specific models and frameworks to make legitimate predictions.

And it allowed us to improve our understanding about trends, to interpret, for example, headlines and provide essential knowledge to make decisions. Sometimes those decisions ended up to be bad, but at least you had some frameworks and you had some models to do that.

Let me say something here: it’s that economics alone as a discipline is not enough to assess the level of complexity we are living in and also under asymmetry of information. And this asymmetry of information is bounding the rationality for decision making. So silos between disciplines like, for example, with political science, sociology, social psychology and other disciplines in hard science and so on, must be overcome to bring to light more information and knowledge innovation necessary to understand the current challenges our societies are facing globally and essential to make better decisions.

So, as I say, yes, it matters, but it’s not enough.

2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?

Very important question again, and I love both. So I’ll try to have this view that economic theory, economic engineering, complement each other, especially when the problems are well defined.

So for me, the economic theory can be seen as the cement for economic engineering, particularly for certain specific economic problems. Now, economic theory - sometimes yes, it’s all owned by economists within the economic discipline - it attempts in a way to simplify the reality as much as possible to be able to understand it.

But then the problem of simplification is that you are completely anchored into that model and you are unable to see the reality. And then when you apply that model to the reality, unfortunately, it is not applicable. Now, for me and most important here is when you define the problem and the model is well designed, logically designed, then some useful insights are generated. But this is not a sufficient condition. There are problems and phenomena that economic theory alone cannot grasp, particularly when the when the human behaviour is uncertain and changing.

In my view, no theoretical model can provide a complete view on the reality. This is because theoretical economics tends to simplify too much the societal situation and challenges. But then, as I mentioned, it can bring the basis for the thinking forward and the application in the real situation.

Now, of course, if we look at our reality, reality is very complex and with the globalization, with all the interaction between phenomenons and so on, it becomes more complicated to find the appropriate solution to everything. And this is why there are those what we call the trade-offs. So when you abstract too much in terms of the theoretical framework, then sometimes you don’t see the complex problem, you simplify it in one equation or maybe two equations. And then the reality is not like this.

Also, there is one aspect which I mentioned previously in what you asked me, it’s that the asymmetry of information discussed leads to generally poor understanding of what’s going on. Why? Because you look at it from one single perspective and obviously to poor decision making and then to bad public policies generally.

And here comes the role of economic engineering. Now to adapt the learning of the theory: yes, take the theory as a basis and try to adapt it based on what the ground is telling you. Accept also that the model design can be flawed, where information is asymmetric of course, because over time you are trying to get further information from the ground, and then to find the policy recipe that coincides in real-world situations, but you need to monitor this every day. Enhance, at the end, fit to the purpose to solve the problem of the policy and the challenge that you are facing.

Also, as I mentioned before, we need to consult other disciplines. We need to open our minds, we need to exit from our comfort zones and then try to find the policy solution from other disciplines and integrating the overall knowledge to get out the appropriate policy decision to solve a societal problem.

So let me take a simple example. An example where we’re living today is the case of COVID-19. The economics discipline, in my view, might not be or may not have played a chief role to solve the solution in reality. Virologists, medical doctors and other disciplines have been at the forefront of the policy decisions to reduce the incidence of the pandemic and to save lives. So this is why, for example, the economist can team up with those experts and then try to find comprehensive policy solutions which are engineered to the societal challenges that will be facing in the future.

3. What role does economics play in society? Does it serve the common good?

Very important, another very important question, and I took the time to think about it. First I said, what is common good? I mean concept-wise.

I went to dig a bit into the history, and it was actually first introduced by the ancient Greek Aristotle. So the common good is constituted in the good of individuals, human prosperity and fulfillment of purpose. If we go into that logic, philosophical logic of Aristotle. Now, a contemporary usage of this concept rooted in this specific philosophy, which I quote here, refers to a good proper to, and attainable only by the community, yet individually shared by its members.

Very interesting. And the concept is very clear. Sharing of the benefit by the community, yet individually by each member. So each member will benefit.

It is not by a group of members or a category of members, and I think this is quite powerful in my view, if we go back to the root of it. Today, the benefits of global growth, which we have benefited from in a certain way - not everybody, especially if I take, for example, from the Washington Consensus - is shared by a group, not by the planetary community, so not by the planet.

Today, evidence shows and it’s known by all the international organizations and by all the research that has been done is that there is rising inequality, there is higher poverty in some pockets, vulnerabilities, pocket wars of displacement in many parts of the world. So it means that the common good principle at the planetary level, it’s not fulfilled. Why? That’s my big question. I don’t know.

Now the role of economics here, and one branch of it, which is finance, is to serve the society and the community and to pay attention to the new constraints that we living: environment, climate change, for example, it’s a key aspect that economics needs to look at very carefully, to create and sustain common good to be shared by all of us. This did not happen - the contrary, common good became, in a way, private grouping’s good, taking informational, technological, financial and other advantages to their own benefit and interests.

Now, I’m fond of Jean Tirole, who is a Nobel Prize of Economics, who wrote a fantastic book on specifically this topic, on common good. And he believes that markets can and must incorporate morality aspects.

Let me dig a bit into this to better understand the concept, because I think he really went through this (it’s a very interesting book about this specific topic). Now, what he said, he recognized the vast benefits of free market economy, but also warns against the danger of abuse, particularly in sectors like health care, employee incentives and an up to trafficking of humans and organs. Now, I agree with his view that common good, it’s our collective aspiration of the society.

And this is also very close to the historical concept, as it was. Now, economics must do what we want to make out of it. To understand the common good, economics must answer to, and I quote from him again “in what social systems would like to live in and what society would be most beneficial to anyone to pursue these aspirations.” And he continues to argue, and I quote, “the duty of an academic economist, for example, is to advance knowledge, but also must collectively aim to make the world a better place.”

I think this is very important. But the problem here of this specific wish is whether they can, or they have to overcome what I call this bounded rationality. They have to overcome the asymmetry and adverse selection problem and also the incentive structure that we have in our economies and societies that sometimes - not sometimes, mainly, most of the time - are one sided without regards to the cost entailed. So why, for example, when we know that there is a cost for our planet, for example, when we overgrow certain activities and so on, why we just don’t stop it?

And this is what is very difficult to understand. So let me take again one another example: COVID-19. The COVID-19 pandemic has shocked us, has shocked the planet, and we are still living in it.

And then it shocked our economies, shocked our behaviours. It shocked our even social way of thinking.

And we must ask ourselves: which is the most important common good needed for our societies to prosper and to go over this? If it is health care, why, after one year, there is still a competitive game, competitive race to vaccines to maximize profit? Why there is no clear universal access to vaccines, which is a free-for-all? So this is a reflection, I’m still not finding the answers, sorry.

Very important question and I’m not sure. But let me dig a bit and try to get an answer out of this. Now, if we look at where we are today, we have fundamental challenges and they are all coming simultaneously.

And then if we think broadly, we might believe that we need a collective action. And what is this collective action? At the global level, at the regional level, at the local level?

These are, for example, of course, climate change, how to curb the climate change consequences, how can we stop these consequences, and first of all recognize them? Because some countries and some institutions are not recognizing them. So how to reduce the incidence, for example, of pandemics? We thought our war against pandemics is over. But it’s not. How technology can benefit our societies and not, on the contrary, make us lose all our jobs and so on, how to find jobs to the coming youth and better integrate women in the labor market. These are all very important societal challenges that we need to think of.

Our societal challenges and constraints are becoming harder and harder to deal with. With the level of information we have, the knowledge we have acquired and also, let’s not forget, the power games between the nations and large corporations that had accumulated excessive wealth over the years and do not see the benefit to change or adapt. And sometimes even they go into what I call a denial philosophy to stay where they are because they are comfortable in where they are. That’s the comfort zone.

And it’s very difficult to take institutions, people and so on from their comfort zone. Which is understandable.

This is probably one reason behind the failure to reach global agreements like the Paris Agreement, for example, on climate change, and also maybe that’s why we are failing in certain way to have free vaccines for all.

Without really having this tension between the countries on who is going to do the best vaccine and use it as an influence or diplomacy type of tool for other countries who do not have access to the vaccine anyway. So since the Industrial Revolution, that’s many years ago, economic development and prosperity resulted from progress in technology and natural resources. So we said, very good, let’s grow.

But then growing at the expense of the planet? Ok, we did it for many years and then countries producing coal, oil and gas, they have very much benefited. And for example, I can take the Gulf countries and other countries.

So some countries bought those resources as input to their technologies while polluting and risking the stability of the planet. And then, of course, risking the stability of the planet because of what? Because of the depletion of natural resources and excessive carbon dioxide emissions leading to global warming. The story we know. However, is this era over? I don’t know. Are there the premises for this era to be over? I don’t know. Is there a global action for this era to be over? I don’t know. Nowadays, we are seeing new technologies which are based on clean energy, like hydrogen technologies, for example, leading to probably cutting those emissions and curbing the consequence of climate change by 2050.

Yes, there are pockets of hope. Let me go to economics now. Changing economic models which were based on burning fossil fuels for years is not a very easy decision to make, especially for policymakers who need to get some votes and, you know, to run and so on. Particularly for countries which are in the middle of their development path and that development path is anchored into this type of models. So that’s why it’s very difficult, there’s a tension there.

Economic studies try to quantify the cost of action or inaction and so on. I mean, in terms of based on data scenarios, economic models, predictions and so on. Now, I’m not going to go into all of this. I mean, these are all based on certain assumptions, certain scenarios and so on. But they could do if they are really presenting the evidence in a in a very, I would say, forceful manner. And it can provide an answer, for example.

I mean, these models can provide an answer that obviously is supported by the right evidence and the right assessments, be addressed and solved. Now, if we think that we would like to cut the CO2 emissions using, for example, an incentive system that is specific, like a tax or, for example, this market that has been developed, it has to be enforced. It has to be enforced, and it has to be applied by many actors, by all the economic agents.

And I believe nowadays we need to go a bit further into our thinking to rethink the valuation completely of, for example, the nature-based solutions. I mean, there has been a lot of interesting research coming from different fields and different disciplines - and economics has been also quite a part of it - is to value the nature-based solutions on their capacity to sequester carbon dioxide.

And these are all new and innovative mechanisms that could be further explored and then used as part of the economic models that we have nowadays.

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?

I mean, they go to politics? Probably they have to. Anyway. Let me first of all, temper down this question in the sense that I would suggest opening to other disciplines and start breaking the silence. Economics and economists can do much more if they find complementarities with other disciplines and exit from the, as I mentioned before, that comfort zone and that side of that ivory tower.

So, for example, if we take the field which is a very interesting field of economics: behavioral economics, for example, foresight for economic policies and also understanding better the overall societal transitions which we need. We need to have sociologist to be further learning and knowledge about their fields and so on, it’s very important. Now, we have done some research which in fact is trying to pull certain disciplines and ideas together and the aspiration could be that we need to achieve, I’d say, more transparency, more responsibility, more inclusion (which is already there), and sustainability within the SDGs (Sustainable Development Goals) of the United Nations for economic development. And I frame this as the TRIS economic model that ultimately could provide common goods and prosperity, all without losing certain acquis that we have practically developed over the years, like the acquis of market economy, private ownership and freedom of choice and so on.

So why I am saying this? I’m saying this, that we need to go beyond what I call the frame of specific economics. Then when they give advice - I mean these experts, I call them the experts - when they give advice, they could take into account what I would call very important principles. I want to share with you those principles because they are guiding principles that should drive the thinking of economists and also the new economic development paradigm.

Now, if it is understood and well implemented and developed, then it can also be helping toward the resilience of the systems we are in now. First of all, it’s transparency, it’s transparency to reduce the asymmetry of information, recognize that we are living in not a perfect, transparent world. Just recognize it. We’ve seen it. Why? Because transparency is core to build trust based on greater accountability of past, present and future decisions, actions and intentions.

I think this is extremely key. So if we do not recognize that we need a transparent system with all data and evidence that economists and other disciplines can use and can develop, then it’s very difficult to give accountability or to ask accountability for anybody because the information is bounded.

Now, the second point, to the second principle, is responsibility. So everybody, especially the people who are trying to collect knowledge and to develop knowledge, economists or others, they have to manage the possible intended and unintended consequences in the future and reflect on their ethical acceptability. This is very important and this is what I mentioned before: the morality, which has also been pushed forward by Nobel Prize winner Jean Tirole. Adding morality in the equation, and hence fairness, becomes central to construction. Any constructions.

The third one, and this is we all know, and the fourth one, inclusiveness and sustainability. Inclusiveness is to take into account what is societally desirable for current generations, and sustainability is what is left for the future generations. Now, economists, sociologists, scientists and whoever must work, they all must work together hand in hand in my view, to achieve that future we all want, solving the excesses of what we have lived for many, many years and also recognize and fight basic forms of what capitalism has brought in. Such, for example, I want to be very specific: crony capitalism. Anchored in what? Anchored in very advanced forms of corruption, and they were brought to our societies. And in my view, for example, corruption must be recognized widely as a crime and reprimanded because it contaminates years of progress and advancement in very clean forms of capitalism, or let’s say, positive forms of capitalism.

So I think overall, and I would I would finish my comments here, I think we need to recalibrate certain thinking by recognizing the urgency to make our economic models aligned with those four principles, much more aligned and enforced. Also to recognize what are the aches of the societies and talk freely about them and then let everybody, economists or others, be responsible of his own and her own economic policy recipes. And then again, accountability will come with more transparency and tools to reduce asymmetries of information.

So this is pretty much what I would have to say within this discussion.

6. Does economics explain Capitalism? How would you define Capitalism?

God, that’s like the question of what do we mean by value? If you ever want to confuse a Marxist, just basically set him or her down and say: tell me about value and then come back two weeks later, they’ll still be talking.

Capitalism is considered as an economic system anchored in ownership and control, free market economy, that starts from the start, self-interest that would lead to the best interests of the society. So capitalism’s basic objective also is to make profit, which is a monetary value that serves to continue the process of accumulation of capital. Now, going back to the old modern economics by Adam Smith, I quote him, “it is not from benevolence of the butcher, the brewer and the baker that we expect our dinner, but from their regard to their own specific interest.” That is in fact to produce, to sell and to make profit. I think this is the key. According to the thinking, it is the rational self-interest that can lead to economic prosperity. And this is OK. I mean, it has managed to do such a thing, but then with with certain excesses and of course, leading to many other aspects of that have been corrected over time also to a certain extent.

For example, if we take what has happened in the Great Depression, in the 30s, the advanced capitalist economies suffered widespread unemployment and then this was corrected afterwards by intervention of government via the Keynes model and so on.

And here we are, for example, if we look at what is happening in the pandemic, again, it’s the same recipes. So if eventually we would like to think of a version of capitalism, which, again, of course, we don’t want to have crony capitalism at all, we want to have a capitalist model that is transparent, responsible, inclusive and sustainable (those four principles I mentioned before), which could be compliant and then we could think about it as a TRIS capitalism.

If you ask me what is this TRIS capitalism? It becomes an economic system which is anchored in, again, instead of just one specific ownership structure, diverse ownership, business models and control, market economy, which is compliant with those principles, and then solidarity that would lead to common goods, which is the collective aspiration of societies as what Tirole said before. So this capitalism, compliant with these four principles, should create value, not only profit.

So go beyond profit, and the capital becomes a large concept of capital that includes, for example, but not restricted to, natural capital values via the capacity of the nature to sequester carbon dioxide, so I mentioned that before. Brain capital that capitalizes on healthy brain and skills, and also knowledge capital, knowledge economy and so on. And of course, what we want to have is a way from the extraction, from the nature to consume irrelevant goods and services that might be much more costly to the nature and to the society than the benefit that it would provide.

It only provides benefit for a few. So really rethink this capitalism based on these four principles, but then anchored in the pure version of capitalism that we know all of us, and it has been corrected over the years with different schools of thought in economics.

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?

Yeah, it’s very difficult question. Knowing that everything has a beginning, end and renewal, no system is indefinite and no situation is immutable. The survival of this system is embedded in global solidarity and the rethinking of our economic models toward common goods that do not alter our planetary stability.

So to be short, this is what I have to say on this question.

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?

Now you’ve got a much more difficult question. Now, the current system, in my view, whatever this is, because it’s quite diverse, it is for the moment shocked by the COVID-19 global pandemic, which is, in my view, making everybody and every nation and every economic agent rethink many things. And I think for the moment there is a kind of different forms of this current system competing for control, attempting to gain, for example, some form of influence and so on.

And rethinking also the business models and how to, for example, integrate the digital transition into the business models and so on. So very difficult to know now where we’re going. Of course, the game is not over and we need to continue following the development. Now, my final say about capitalism is it must be in a way rethought from within capitalism to correct its misfortunate excesses and not look for another model that could be eventually, or we imagine it would be better, but rather let’s think inside the model that has greater prosperity, but then the problem is it has also created other inequality, sometimes more poverty in some pockets of the world.

Now what we need probably to think of is to try to find the right balance, to understand what are the societal challenges, the transitions we are in, and try to find the right balance to better understand those transitions and so on, and act as much as possible on the consequences and trying to really understand them, as I said, by more transparency and more information and more multidisciplinarity between the between different disciplines. So what I demonstrated to what I shared with you today and what I exposed, it’s this transparent, responsible, inclusive and sustainable capitalism.

So correcting capitalism with these four principles, not only those, you can have others, too. And the idea is to produce common goods and services, which serves the collective aspirations of our societies toward more prosperity and peace, and to address all the societal transitions that we are in - many societal transitions including a green transition, digital transition, social transition, economic transition and governance transition. And we need to rethink those models in this in this direction.

About Rym Ayadi

Rym Ayadi is Professor at CASS Business School, Member of the Centre for Banking Research (CBR), City University of London, Senior Advisor at the Centre for European Policy Studies (CEPS), Chair of the European Banking Authority – Banking Stakeholders Group (EBA- BSG) and Founder and President of the Euro-Mediterranean Economists Association (EMEA). She is also Associated Scholar at the Centre for Relationship Banking and Economics (CERBE) at LUMSA University in Rome. She is Founder and Director of the Euro-Mediterranean Network for Economic Studies (EMNES). Professor Ayadi’s fields of expertise include inclusive and sustainable economic models, international financial systems, sustainable finance, financial markets and institutions, global financial regulation, governance and consumer protection, and socio-economic development and foresight in economies in transition.

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