HONG KONG – A recent trip to Berlin brought back memories of an earlier visit in the summer of 1967, when I was a poor student who marveled at the Wall that would divide and devastate an entire society for another two decades. Berlin today is vibrant and rejuvenated, rebuilt by the German peoples' hard work and sacrifice to unify the country, and an apt setting for the conference of the Institute for New Economic Thinking (INET), which I was there to attend.
The conference’s theme was “Paradigm Lost,” with more than 300 economists, political scientists, systems analysts, and ecologists gathering to rethink economic and political theory for the challenges and uncertainty posed by growing inequality, rising unemployment, global financial disarray, and climate change. Almost everyone agreed that the old paradigm of neoclassical economics was broken, but there was no agreement on what can replace it.
Nobel laureate Amartya Sen attributed the European crisis to four failures – political, economic, social, and intellectual. The global financial crisis, which began in 2007 as a crisis of US subprime lending and has broadened into a European sovereign-debt (and banking) crisis, has raised questions that we cannot answer, owing to over-specialization and fragmentation of knowledge. And yet there is no denying that the world has become too intricate for any simple, overarching theory to explain complex economic, technological, demographic, and environmental shifts.
In particular, the rise of emerging markets has challenged traditional Western deductive and inductive logic. Deductive inference enables us to predict effects if we know the principles (the rule) and the cause. By inductive reasoning, if we know the cause and effects, we can infer the principles.