 Exciting new venture for me at the OEF, I've been moderating sessions here since 1999 and I don't think I've ever moderated one like this, so I have really no idea how it's going to go. I will start by introducing the contributors to the discussion, then I will go through how we're going to proceed, but the key point is it's going to be very much an exchange with the audience. So we're going to have a couple of questions at the beginning and there will be a 10-minute exchange between the two panelists and then you can ask questions. I don't mind in this case if you make a point, but the point will have to be brief. We've got questions coming from a virtual from an audience out in the world and we want the panelists to have an opportunity to address those questions and that means you can't make long speeches. I also think that one of the fascinating things about this is though the two participants, Christine Lagarde of course, who is currently president of the European Central Bank before that was managing director of the IMF and Michael Sandel, a very distinguished political philosopher would you say, who's professor of government at Harvard University, which point everybody says boo, and the interesting thing about these two people is they are immensely distinguished, incredibly thoughtful and which is what makes this much more interesting. We wouldn't regard them as professional economists in the sense that they haven't done graduate degrees in economics and I, the moderator, have, which is a very interesting situation for me to be in and the very fact that we're doing this shows that the question is not how to trust economics but why the economics so damned untrustworthy that we have to have this discussion in which very distinguished people thinking about economics and its role in the world can explain how to make this untrustworthy subject an untrustworthy system that they have been responsible for grading work better and when we get to the discussion we'll focus on that and then we'll have an exchange with you. Now before that we are going to have some questions and to address those questions you have to get onto Slido and what you have to do is scan this QR code with your smartphone. I'm told you can do it from where you're sitting and you choose the right room at the top of the screen and the room is aula and you use the web hashtag Davos24. I think I've got that more or less if you need to and apparently you have to re-select the room on the Slido app if you use Slido this week if you pass this really complex exam you can answer one of the questions I'll give you let's say 30 seconds for this and then we'll get to the question is everybody well put up your hands when you're on Slido oh there are some really seriously clever people obviously young people uh so uh a few still struggling yep okay okay uh uh oh people are doing well so how much you trust our existing economic system what should take account you might want to look at this these people are at the weft and that might tell you a bit about their attitude to the current economic system and not least for the fact that they're probably doing rather well out of it uh the uh so uh at the moment we've got 48 percent think they rather trust it 23 percent definitely trust and uh uh well we're getting a little more don't trust uh but still the don't trust uh that's a pretty minority fair minority so you're going to have to persuade them that it's us untrustworthy yes you might think it is at least one of you might um okay uh have we got those well enough can we move on to the next question is there another question yes so if you think there's a problem and of course lots of you think it's perfect um what do you think are the problems with it okay that's interesting well we're just starting okay uh are we getting to the end sort of okay um we still it's still sort of lights we're settling down a bit okay global inequalities interesting environmental disaster 15 percent domestic inequalities 13 percent slow growth 12 percent lack of jobs 5 percent now that's a very interesting set of answers and uh it seems to be stabilizing around there so basically they trust the system but to the extent they don't they seem to worry about global inequality most it's it that's actually telling the honest truth it's not what I'd expect it so that's educational now when the end of the discussion we plan to put these questions up again and we will see if you'll change your minds uh we don't strictly have a debating motion so I won't say at the end of this who won but we but maybe the panelists and could work it out for themselves so so what we're now going to do is have a discussion on these questions before we go to the floor for you to make questions and comments I'll tend to take them in groups of two or three by the way um and try to be as brief as you can so um so let me start uh with the following question um uh um what in your opinion is good and bad about economics and the economic system it has created inspired or influenced and then after discussion of that uh we'll have we will have a discussion of what's to be done uh about it so let's start then um with Christine what is good or bad about economics and the economic system that we have well thank you very much Martin I was going to actually preface any comments I make with the fact that I'm not an economist by training and background but you've taken care of that so here goes my disclaimer because I'm a jurist by background and certainly a lawyer by passion but I had to deal with many many economists and for the last 20 years of my life I had to deal with economics so it brings me to you know asking myself what is economics really about and going back to basic definition we could argue that it's the allocation of scarce resources which has been well served question over the last decades by an efficiency aim which fitted a period of time of free markets globalization a good advocate of which is sitting to my left particularly in the 80s 90s and that as a result of that economics in and of itself could sort things out and that markets in particular would be perfectly able to achieve that efficiency goal that that we had and in a way politics for instance was a destruction or politics if it was actually acting was promoting particularly in the advanced economies in days when we had the north south dialogue and and difficulties but in advanced economies certainly politics was promoting these principles and I'd like to come to two points one thing that I have observed from my vintage point now at the cb and previously at the imf which is that efficiency aim that was there has been gradually replaced over the course of time and particularly in the last few years by a security aspiration so security replacing efficiency and if I want to take you to three examples of that I would certainly take climate change first and the climate transition necessity which is not driven by efficiency which cannot be sorted out and achieved by market rules and principle only but require other tools and I'll come to the tools in a minute that's the second point I want to make second area where security has prevailed over efficiency in terms of goal is energy and if anything has been learned from the horrible Russian aggression against Ukraine we've learned that energy is not just a matter of efficiency it's not just a matter of supply and demand and setting of prices can be manipulated to the extreme and it's certainly a quest for security the third area which I have and which is again in debate and possibly under threat is supply chains which we had taken for granted were cost reduction and just on time were the key principles and were now the just in case and security of supply and you know safety of the supply chain becomes the aspiration so with that as a background and from my very you know small window in the economic world which is that of a central bank and within mind the first thing that I said at the first town hall that I attended at the ECB which was to the economist in the room that I didn't know very well at the time but informed by my IMF days and I have an IMF colleague in the back of the room who will attest to that I said beware of models and if I bring these two together of you know security of efficiency beware of models what I draw from that is the fact that many of those shocks that are bringing security over efficiency are exogenous shocks are certainly not linear development but our crisis or development or exogenous development that are not in models that have not been in models and that have led us and the ECB the european central bank was the first one to admit that it had got it wrong in a way was not captured in our model and therefore gave us projections and forecast that were out of sync with what we should have actually explored and that leads me to my last point which is that economists not the good ones like you Martin but many economists are actually a tribal clique there have been studies of you know quotations cross fertilization cross references and economists I think together with contig physicists physicists are the most tribal scientists that you can think of they quote each other's yeah men more than women by the way but that's another story but they don't this that's true but they don't go beyond that world because they feel comfortable in that world and maybe models have to something to do with it and what I think we should move towards and are trying to I'm trying to convince my colleagues that we have to is bring in bring in people that are not members of the tribe you know if we had had more consultation with a epidemiologist if we had had and we now have thank goodness climate change scientist inside to help us with what's coming up if we were consulting a bit better with geologist for instance to properly appreciate where some of the rare earth and resources are out there I think we would be in a better position to actually understand the developments project better and be better economist so that's very very interesting I should say that myself never having been an academic economist and having a terrible tendency to to quote political scientists and political philosophers I long since ceased to be a respectable economist in any in fact I think not even really an economist so that I'm I am very comfortable with what you said but I do agree that many of my friends will be pretty shocked so Michael what's good and bad about economics well let me begin with the question of trust which is really the centerpiece of this Davos year if we want really to restore trust in economics but what we have to do is close our eyes and try to forget the follies and the failures of models and of mainstream economic advice over the past four decades if you want to trust economics you have to try to forget the self-assured promise that we were all given by the proponents of the so-called Washington consensus of the 80s and 90s and early 2000s that everyone would be better off if we brought about a frictionless system of global capitalism with the outsourcing of jobs to low-wage countries with low labor protections if we deregulated finance and insisted on the free flow even of short-term capital in and out of countries we were told we were assured that this would increase the stability of the financial system this was before the financial crash of 2008 brought that advice and assurance tumbling down we would try to forget also the naive assurance we were all given by the defenders of this model that the frictionless finance driven version of global capitalism would inexorably bring countries of the world toward liberal democracy that was a part of the model and its claims and one other thing we'd have to forget or forgive Martin and that would be the assurance the conviction that there was no alternative that the particular version of finance driven globalization that was promoted that was an article of faith by mainstream economists giving advice during that picture was simply adapting to what was essentially a force of nature Margaret Thatcher declared again and again there is no alternative Bill Clinton said globalization is not something we can hold off or turn off it's like the equivalent the economic equivalent of a force of nature like wind or water and then there was Tony Blair who said that globalization was as unalterable as the seasons I hear people say we have to stop and debate globalization he declared you might as well debate whether autumn should follow summer now that was there was it was smug at the time but in retrospect it seems quaint climate change has reconfigured the seasons summer heat is coming sooner and lasting longer some scientists tell us that absent changes in the way we live by the end of the century summer may last half the year so the bound the line between the necessary and the possible shifts beneath our feet and today we find ourselves having to debate and decide whether autumn should follow summer just as I think we need now to debate and decide by what economic arrangements we want to live okay I think that given my miserable performance as a moderator here and and the fact that it shouldn't just be an exchange between us I'm going to you've got had two very clear statements both are critical but differently so and I would say it's fair to say that the dominant thrust of of Christine Lagarde's comment is the agenda has changed right and it's changed naturally because the world has changed and a big problem associated with this but not the core I think not really at the core is economic economists are arrogant and tribal I think fair and they really believe in models of what things the things that cannot be modeled precisely and they believe they have a knowledge of the world which is actually impossible I agree with all of that by the way and Michael goes in a rather different direction basically says I hope this is fair this was all a terrible mistake the last 40 years was a terrible mistake it produced essentially nothing good or at least you didn't mention anything maybe because you didn't have much time we'll have a question later and we just have to throw this away and have a different way of doing things well is that unfair it's a little bit unfair okay I wouldn't say nothing good but I will say and this is provocative enough that this way of thinking and designing the economy paved the way and bears responsibility for the populist backlash against elites and inequality and social division that we are now facing I would put it that way Martin since I've written the book of about 380 pages which argues the same thing I can't possibly disagree can I so you've had a very good presence of the argument so now I'm going to go to the floor I'd like to take about three or four comments questions be I'd hope to remember them all and say who you are there is going to be a microphone I believe so let's see who wants to ask a question this lady please could some could you stand up perhaps just so that they can easily find you oh it's like yes say who you are if you would and question comment thank you I'm Danai Kirikopoulou I am an economist for my sins currently working at the Bank of England and also a member of the Young Global Leaders of the Forum so the topic question is how to trust economics but also we've talked about how to trust economists and you've touched a little bit on the issue of diversity in economics and the tribalism and I wanted to ask more about solutions for that because yes we've been talking about diversity in central banks in other economic institutions and there's been a lot of progress on gender diversity geographic diversity but if everyone went to the same economic schools that's not diversity really so just wanted to get your thoughts on that both of you thank you so you're suggesting particularly that diversity of intellectual diversity is also important which I strongly agree this gentleman who happened to know a little say who you are Ishwar Prasad from Cornell University and I died in the old economist I feel compelled to defend my tribe but I will instead say that perhaps you're asking too much of my tribe if you think about what economic models deliver the good models really deliver powerful insights they don't really solve all of the world's problems and I take your point Christine that perhaps we take models a little too far when we think that they represent reality now a good economist to be honest does not think that the model represents reality it's an abstraction from reality and I think it's a useful way to make progress the difficulty is that once you deal with the messiness of the real world especially political systems then things become a little more complicated the basic principles of economics sometimes get converted now I don't stand here and blame political scientists for Trump and perhaps you shouldn't blame economists for everything that goes wrong you know in economies but it's really worth thinking about whether we have thought about economics in the wrong way rather than providing these basic insights as instead trying to encompass the failures and political systems and social systems as well okay I'll take one more question you sir yes could you stand up so they see you I'll come to you later I promise my name is Anirudh Jalan I run a company called Recycle where we create a marketplace for plastic waste in India my question is if if Schumpeter were alive today and if he would see AI Schumpeter okay if he were to witness AI and climate change do we think that his theory would be a little different he he would theory would be a little different would be his theory of growth here he produced quite a lot of theories and you want to ask whether he would change his okay okay that's an interesting way to go I'll come to that in the moment um could you explain why just to make clear I understand why Schumpeter might respond to what's going on now by saying my theory of disruptive growth is wrong I would have thought it's vindicated but sorry I'm not a panelist I'm in the energy transition and you know he says that any new technological innovation would disrupt existing jobs yeah and with AI but but what do we think that in the energy transition or in the climate change transition would that really disrupt existing would it augment it and the same for AI okay disrupt disrupt or or augment is the are the alternatives okay I'll come to that in a moment okay let me if I may go to the panel and then I should probably look at the my time Christine I think the question about how do we solve the problem of diversity and particularly intellectual tribalism is very well addressed to you since you're running one of the world's most important central banks um so what what are you doing to solve it first of all thank you for the question because I think that one one of the um the ways to solve it is to bring it up for debate to be vocal about it and to recognize that if we do not make progress we will continue to have this group thinking that doesn't work you know when you when you surrounded as some of you have been are or as I have been and still am to an extent by the same exact kind of character I will not describe in details who have gone exactly to the same schools who are roughly the same age how do we expect you know new thinking or a real debate um so to talk about it to raise your voice and the voice of young participants like the young leaders but also to have as much as possible this principle of diversity endorsed at the highest level because you have to lead from the top on that one to have quotas in place or at least targets to review them on a regular basis to I mean there are lots of tools that can be used for hiring and selecting and building the pipeline that are used by some but not by many and I think that you know everyone is accountable I'm not going to tell you how many women I've hired it's hard because then you very quickly get the pushback of the white middle-aged man who says I'm at a disadvantage this is ain't fair but as you know RBG would have said to restore parity in the Supreme Court she was asked how many Supreme Court justice should there be and she said all of them should be women and when asked why do you say that she said well to restore parity you have to look back at history and it has been those nine judges always of the same gender and of the same color for many many years at least so it's not retaliation it's rebalancing I'm not going as far as that but we really have to make efforts and and I thank you for your question and I think that each and every one of us wherever located we have to help with that because it's good for the bottom line it's good for yourself and feeling good about it and it's just economic sense and not nonsense can I thank you very much I was just thinking that if that's the goal that you have you've got a quite a long way to go absolutely I know 100 percent female ECB will take a little while I was pushing the envelope on purpose I understand now let me it's what Prasad asked I think quite an important question which is a sort of nasty question economists focus on so you've asked very important and made very important systemic questions but this is a way since we can't debate these for hours within any economy we could imagine it's a very complicated system obviously we have to make policy decisions about how high should the interest rate be now what is a efficient tax system and of course there are other issues there now economists would say that you can't really get at the problems of complex systems without because the reality is simply two companies just methodologically some degree of reliance on simplifying models you do have to understand the simplifications but there's really no way out of this with all the many questions you get asked about what policy should be and isn't that actually inescapable I don't think so in and the reason I don't think so is that if we look at the most creative economists working today they do not rely mainly or in some cases at all on simplifying models what they do there's a shift I think toward more empirical work and work that bears a closer connection to broad questions of social and political philosophy for example I think there are many excellent economists doing creative work in part by not relying on simplified doctrinaire models Darun Asamoglu for example is drawing our attention to whether technology is truly an exogenous autonomous force or whether it can be directed as an open political question Paul Collier is raising the question whether place-based economic development is an essential alternative to a single-minded focus on maximizing aggregate GDP and case and Angus Deaton have written about deaths of despair looking at actual data about the vulnerability of those without university degrees to deaths by suicide and drug addiction and alcohol abuse Raj Chetty has challenged complacent ideas that it's always possible to rise upward mobility from rags to riches by doing detailed empirical work on actual rates of mobility what distinguish these five economists and there I think among the most fertile creative economic thinkers working today is precisely Martin that they do not rely primarily on simplified models they look at the world they do detailed empirical studies animated by a broader social and political set of questions that's where I think the hope for restoring trust in economics lies can I go to the question of diversity it's also a chance for diversity because models have generally attracted male economists if only because math is critically important and it's notorious that young women particularly you know 10 20 years ago were not very much in stems well empirical work research analysis attention to details something that women are bloody good at I would have added Esther Duflo to the list of here so that's another tool that we can use yeah well I cited all of these people in my book and I'm not going to talk about I'm not here to defend economics thank heavens um there was a question our differences seem to be vanishing by the moment about the minute well anyway I'm not going to go into that because I've only got 11 minutes the uh I knew this will be very very problematic and something that we all agree will have the question on it's either of you wish to comment on or feel that they would like to comment on whether we should take for granted that the innovations we're seeing at the moment are essentially disruptive in the uh in the Schumpeterian sense or should we have is he another moribund economist or actually so outside the current conventional wisdom of economists that we can take his views seriously what do you think is Schumpeter somebody whom you would put despite his very questionable views on democracy which you will remember uh in capitalism socialism and democracy the first political science book I political philosophy and I've read anyway is he okay is he in your little panthen of economists are they okay yes yes in the following respect I disagree with his particular conception of democracy it's too narrow it lacks uh adequate sense of participation and civic engagement but he like the classical economists of the past from adam smith to to carl marx to john stewart mill despite their ideological differences schumpeter was working in a tradition that did not conceive economics as a value neutral science of human behavior and social choice he conceived economics in the classical tradition is a branch is a subfield even of moral and political philosophy so that's the kind of economics I think we need if we're to begin to trust economics again okay I will move on to further questions I'm going to take one from the floor and then I'm going to go to slido since we asked people to comment to see if I can answer wonderful questions here thank you hi I'm Ludovic suan and I'm the chief economist of alliance and the ygl you mentioned I mean trust and economics have a form of weird correlation you know causality goes in different ways but trust and trade openness trust and friction so my question is it's for Michael but also for Christine Lagarde do you think that the new models that everybody is preaching these days diriges interventionism legalism all these cold war toolbox do you think he will deliver better trust outcomes or do you think he's going to be for a short time we're going to be like okay it's going to be better and then it's going to be really bad okay very good question and and please go ahead well thank you very much just say who you are he's otake naka yeah professor of economics yeah and other things and from a policy maker indeed for economic policy uh based upon my own experience well economics is very useful or policymaking without economics and economic evidence or economic policy at this moment will be much more helpful in that sense uh what's uh most important is economic evidence is enough or not well if this is based upon the very simple model as you mentioned sandel sun it's not useful but currently the economy models are not so simple but are much more complicated and well organized and so well economic evidence enough or not and and another problem is so well policymaker makers is well understand this kind of economic evidence we often use the term of evidence based policymaking so my question is very simple what do you think of the evidence based policymaking it is well done or not okay and i'm going to ask a third question which comes from slider and i'm going to combine two because they are essentially the same question um i can't deal with all of them one said um martin the president me lay you all who know who he is i presume has just uh completed his weft speech and he said that what we need is proper libertarianism and that's related to the second question given where we are now is it obvious that we need much more government or more market or something else all together um so there are three questions um and i think they are actually quite related let's um so let's start with michael obviously you feel that the economics we pursued in the last 40 years has been a catastrophe no you didn't say that you're exaggerating my exaggerating simplify i'm a journalist for god's sake that's what we do the uh so the question really is and really we have very little time how do we change this and is the answer is a core part of the answer and i think it fits with these last questions a much expanded role for government or for some other entities within society to fix the sorts of problems you've mentioned i hope that's not too crude a question to know it's i would say what we need and what we're experiencing really is the return of the political now politics it's a dangerous activity but it's also an indispensable activity and the scope for democratic politics was unduly constrained even delegitimated when we were taught and assured that the model of a frictionless finance driven global uh hyper global neoliberal model would deliver uh benefits for everyone the return of the political makes those questions contestable at least now in practice is that more government or or more market i think what the return of the political to economic debate can do is to emphasize the importance of the role of government particularly as we've seen recently reviving antitrust legislation to deal with the economic concentration of power especially in tech and finance that's government the return of the political and also to open debates about public investment back to the question of whether the direction of technological innovation is fixed as if by nature that's only if you assume it must be governed by the purposes of silicon valley but if democratic citizens want to have a say in directing the future let's say if ai what will make for good ai that will actually enhance life rather than simply destroy jobs we have to have a political debate and an openness to public investment to back up the results of that debate so what i'm calling for really is is an alternative to the fixed doctrine there is empowering and even technocratic idea that economic models if only we get them right can absolve democratic citizens of the responsibility to exercise their civic agency in debating and directing the course of technology and for that matter the economy because of time this is a last question and i will address it for to christine from professor stakanaka who played of course a huge role in trying to deal with the crisis in japan you will all remember this very distinguished record and he was talking it seems to be very very importantly that part of the answer if we're looking at it from a professional point of view is that policy has to be properly evidence-based rather than purely theoretical do you agree with that strongly and how well do you feel when you look around the world we're getting there i would indeed agree with this point that policies have to be evidence-based and this is what we have been arguing as a central bank arguing that we have to be data dependent that we have to be very attentive to developments and i think to the point that esward was making about you know don't don't accuse us of too much and don't expect too much of us i'm not i'm not saying that models should be discounted completely and should be set aside and forgotten about and that we should move exclusively to empirical data and judgment calls and and discretion i think that number one we should work on those models to improve them number two we should appreciate and understand that they will inevitably given the way they're constructed they will have an element of wrong about them therefore we should not assume that they will give us the answer but they will be good in helping us reach the judgment that should be either contradicted or corroborated by data by empirical data by observation by judgment and and and that it's a way to probably mitigate the sort of blind faith that we had for too many years i think in what models could deliver but i'm not i'm not you know throwing them away i'm saying yes they can be improved yes they have to be supplemented they there are lots of things that you can use sensitivity analysis scenario analysis and all the rest of it to improve on them i just want to to respond to what very very briefly because otherwise i was just concerned about his point which is the return of politics because what will be the return of politics if we do not have the return of citizens yeah if people don't go to the ballot box because they're uninterested and disenfranchised what is the return of politics i'm concerned about that do we have still have time for asking the two questions again is that permitted okay and then i will conclude i'm sorry that this is the getting to the end i i think yes correct so could you put them the two questions and i would just be interested to see whether your views have radically changed so how much you trust our existing economic system after you've heard this erudite discussion oh no no that that that's not a question that was permitted okay no not quite not quite look 42 47 no this is 48 well i would say that michael has made a dent in this audience uh given that it's in the weft uh and and uh yeah so that congratulations uh it's because i wasn't allowed to debate you at the uh and uh let's move to the next one can we do the other question i'm sorry i could i've asked one question from uh what is the biggest problem um yeah still global inequalities environmental disasters i think have gone up if i or maybe not uh domestic yeah that's but we had it we had a missing option here and the missing option was is the the current economic system uh does it help or hurt the prospects of democracy and of democratic that's perfectly true uh next year can we include that i i please god i'm not going to be doing this next year the i think this has been a very very rich discussion i wouldn't even dream of going into this i've made two points and only because and i know i shouldn't one of them is i think a lot of what michael says about the past is true but and it's a very big but for me the big argument for globalization we had a whole book about it was on uh what it would do for development and i don't think anybody can deny it had some sensational development results and among them incomparably the biggest decline in extreme poverty in world history and to me as a globalist sorry uh i think we should care about other people global inequality that's quite important and i don't want to throw it away in the protection is uh in the protection is flood we're now getting the other point i would make which gets to the real methodological heart of it is of course models must be data-based the difficulty is data believe it or not come from the past the amount of data we have on the future is quite small and it comes in the form of expectations and they're always wrong and that means we do need data we need to understand these data but they have profound and fundamental limits in telling you about what's going to happen and i think that has come out very clearly in the debate on the inflation that we've just had because it was out of sample it was out of sample and the point i make this is all these points about citizenship or all the rest of it are deep and important i've i'm deeply invested in this democracy idea but we do want to manage our society to some way and economics is a big part of it and the the tragic problem which is inescapable is that it's a problem that we fundamentally cannot solve because the economy and the decision-making the economy is about the future and we don't know much about the future and if economists are clear about that that might be very very helpful so it is a subject in this respect doomed to fail and with that with that let me conclude and thank the panelists we're wonderful discussion and i've been very bad on time