We Need a Resilient Society

Princeton economics professor Markus Brunnermeier discusses his recently released book, The Resilient Society, which argues that in crisis-prone situations societal resilience is a crucial component for averting outright disaster and outlines how we might achieve that resilience.


Rob Johnson:

Welcome to Economics and Beyond. I’m Rob Johnson, president of the Institute for New Economic Thinking.

I’m here today with my friend, Professor Markus Brunnermeier, who is at Princeton University, and he’s also the director of the Bendheim Center at Princeton University, which has been a very, very vital, how do you say, contributor to the debate on new economic thinking over the 12 or 13 years that we’ve been involved in trying to excavate new economic thinking.

And Markus has really been at the cutting edge. Markus is here today because he has a new book, which I find very, very inspiring and enticing. It’s called The Resilient Society. It’s by Endeavor Publishers. It came out just recently, and Markus is exploring lots of things that I think you will find to be very germane to the challenges before us, and perhaps open windows as to how we should envision and respond to challenges in a way that economists have not been accustomed to. Markus, thanks for joining me.

Markus Brunnermeier:

Thanks, Rob. It’s a pleasure to be with you and with INET.

Rob Johnson:

Let me ask you just quickly to start, what motivated you? When you sat down to do this book, what was going on inside your mind that brought this to the fore?

Markus Brunnermeier:

So I was thinking about resilience quite a while because I worked a lot on systemic risk measures and tried to capture systemic risk. And then there was the COVID crisis and during the COVID crisis, I organized this webinar series, and I tried to distill the main insights from the webinar series and put it under a common theme, some common thread of resilience.

So that’s the idea of the book, to have a common theme, combining a lot of insights which I got from many, many speakers.

Rob Johnson:

And so that, which marks so-called stimulus from your excellent webinar series, which I attended many, many times over the course of the crisis, gave you, how do I say, a nudge to try to distill, bring forward the insights or crystallize them into a framework. And I noticed at the outset of the book, there’s a very important subtlety about words or phrases, I should say, risk avoidance, robustness, and resilience.

Why don’t we start there and tell us what is the difference? What’s the nuance that opens this?

Markus Brunnermeier:

In order to figure out what something is, it’s probably good to say what it is not or what is it different from as you said. And so I contrast it … I call it resilience and its cousins. And so robustness is a different concept than resilience. What I often use is this story by the French poet in the 17th century who compared robustness as with the oak, and it’s very robust against winds and it stands very, very forcefully there and doesn’t move at all.

And resilient is more like a read, which is constantly swinging back and forth as the wind blows. But there’s a big difference between the oak and the reed. If the wind becomes very, very strong, the oak falls over and then can’t get back up while the reed constantly needs to be very volatile all the time, but it always comes back, so it’s much more resilient.

Robustness has a robustness barrier. Once you break the robustness barrier, it can’t come back, while resilience is all about coming back. And the French poet, de La Fontaine, in the 17th century, in the poem the reed talks to the oak and says, “I bow and I bend but I don’t break.”

And I think that’s the principle or resilience in contrast to robustness, and it’s related what I worked earlier on on the volatility paradox. So it seems something which is very volatile might not be the most robust thing, might not [inaudible 00:04:37] because it might break. It might break the robustness barrier.

And something which constantly moves and is agile and is changing to the circumstances seems, at the end of the day, much more resilient and it’s a better way to arrange society to have a more stable society.

Rob Johnson:

Yeah. Forgive me, to use an analogy from my engineering training at MIT, but they used to talk about the elastic limit of materials. You can stress something and it’ll spring back. But if you go beyond the elastic limit, it breaks and is deformed permanently.

Markus Brunnermeier:

Very nice. Yes.

Rob Johnson:

But we’re now talking social process. Now, how does risk avoidance relate to resilience?

Markus Brunnermeier:

Risk avoidance means you just avoid risks in the first place. You don’t go into risk environments. And while you should actually take certain risks, if you know you can bounce back from it, in particular, if you take on this risk and you have a higher growth path, so for example, if you compare different countries like Thailand in the 1990s and India, so Thailand was growing much more quickly, but was also going for more risky strategy and then the Southeast Asia guys were suffering more.

But it came also back. But the income to per capita income ratio is higher now. And so you have to think about Schumpeterian growth and other things. It might be more risky. You go for R&D risks and other things. But as long as you can bounce back, it’s actually okay, and that’s what Bon has to focus on and has to really distinguish risks from which you can bounce back if you’re agile and adjust, and other risks from which you get trapped and you can’t bounce back. And that’s, I think, a distinction between different types of risks is the key to understand.

Rob Johnson:

And in the presentation that I saw in preparing for this, you talked about three levels of resilience, the individual, the systemic and the societal. Help us with those understandings.

Markus Brunnermeier:

It is indeed the case that you can think of individual resilience, which is very important too, and psychology has worked a lot and has given us a lot of hints about that. That’s what is, what I said, is bouncing back as an individual. But then we have also networks and systems which can bounce back, and that’s one way to make something more resilient like global value chains and that can bounce back.

But I think the book really focused on the resilience of a society, and that brings people into the picture and, in particular, interaction of people. That’s what you have to keep in mind, that once you’re hit by a shock, you might react in a way which then causes and externality to somebody else.

And then that somebody else is then reacting because of the shock which you caused to him, and it feeds back to you and you have some feedback loops that makes the situation even worse. If you understand how this whole thing amplifies and then it leads to this feedback effects, that’s very, very important in particular when people interact.

That’s when then the social contact comes in, and a good social contact essentially tries to mitigate these feedback loops which are a combination of externalities. And if I may use some economic language, some strategic complementarity, so that’s what I call this feedback externalities.

Normally, externalities are not really bad. But if they’re combined with the strategic complementarities and develop this feedback externalities, then they’re really dangerous because it’s not only that I cause a negative externality on somebody else. The reaction of the other will cause it back, and then we both end up in a spiral, and that makes the situation really worse.

Rob Johnson:

I’ve heard a number of climate scholars like Jim Boise and Robert [Palen 00:08:38] talking about how the fear, say, in a place like West Virginia, that there won’t be a social contract for adjustment assistance, creates a resistance to addressing climate change, which you might call postpones embracing the challenge until it’s a much deeper, more dangerous challenge.

And so they’re afraid that the social contract does not, how do I say, facilitate the dynamics that we had. As a guy who grew up in Detroit, I saw a globalization and we were all taught make everybody better off and nobody worse off. Except without the adjustment assistance, a whole lot of people got trampled.

And now the people in West Virginia say, “Are you going to do to me what you did to the auto industry?” A different kind of shock, climate as opposed to globalization. But people need to believe there’s a common good in that social design, I would think, in order to … which I might call demobilize their resistance to essential change.

Markus Brunnermeier:

I agree. And if you have this, then you might be much more open to change, which might be worth advancing to everybody. But there are two types of externalities, essentially, that social contact should mitigate. One is externalities from each other. We cause some negative externalities on each other.

And then there is some form of insurance against what I call externalities from other natures. So if you suffer a shock and if it’s a idiosyncratic shock, we can partially insure each other. That’s actually also should be part of the social contract. So these both combinations, that’s what characterizes a stable social contract, and there is the society itself or the social contract should be resilient. That’s the key to figure out.

Rob Johnson:

Yes. But you can see these … For instance, if I am unmindful of how the people in West Virginia are being treated in adjustment assistance, they become resistant and I experienced a negative externality that climate change becomes more dangerous for me and my family.

And so you really have to have a much more systemic, holistic vision. And I liked how you broke it from individual all the way up to system and societal. It was very, very … I’d say it’s very challenging because many of these experiences we’re having right now have to do with what I’ll call the prevalence of widespread externalities. The whole question of masks and the pandemic, I would guess, is something that [crosstalk 00:11:23].

Markus Brunnermeier:

Exactly. It’s the same thing. If you think about hoarding behavior, it’s exactly the same thing. We were all buying toilet paper or whatever it is in the crisis. If 50 others buy toilet paper, my best response is to also buy more toilet paper, and then we actually end up nobody has any essentials anymore because everybody is hoarding things.

And that’s actually a society should be designed in such a way that such behavior that’s just … A trivial example is not behaving this way because we all care about each other and have the institutions in place and incentives in place that even if people behave badly, they don’t have the incentives to do so.

Rob Johnson:

Well, you talked in your presentation that I watched about points of no return, that the … Explain that notion.

Markus Brunnermeier:

I talk about resilience destroyers, and we talk about these feedback loops. That’s one resilience destroyer. Another resilience destroyer are these traps. So you might be caught in a trap, so if you have a negative shock, you might not go back, come back out. So you have to really watch out for this type of traps.

But a very important aspect are this tipping point. That’s a third form of resilience destroyer, so it’s related to the feedback loop. Essentially, you might be working towards a tipping point, and then if you cross the tipping point, you can’t come back anymore.

And even worse, it’s worse than a trap. A trap is just caught there, but if you have a tipping point, at that point, it might become worse and worse and you can’t do anything against it anymore. That’s what you really have to avoid, and you see this a lot in the environmental dimension as well.

Because you mentioned environment, so if you think about the Gulf Stream stopping, once the Gulf Stream stops, you cannot start it again very easily, so there’s a tipping point. In a sense, there’s shortened risks where there is no resilience at all. There’s anti-resilience. Things get even worse, and these risks, you should really avoid.

So you really have to classify your risks ex ante where you can actually bounce back from them by being agile and adapt to the situation, and others where you can’t even if you’re really agile and adapt to it. And that’s from an ex ante perspective, yes, very, very important to have a distinction across the various forms of risks.

Rob Johnson:

If I’m looking at a graph, a transient disturbance, you go down and you come back up to the baseline, the tipping point, you go down and you trip across the boundary and you keep going down, and the displacement becomes the new base. Wow. That’s very interesting.

Markus Brunnermeier:

Perhaps also coming back doesn’t mean necessarily you come back to the old point. There might be a new normal, and the new normal might actually be better than the previous normal. If I look at the COVID crisis in particular, we might come back to a world where we have way better vaccines, we will know how to produce vaccines within a few months.

We might now be able, with these new technologies, to create malaria vaccines and treat cancer differently. So there’s all the change, working from home, the whole … We were locked in in some certain behavior and a certain shock and also shake us and bring us to new opportunities.

That’s part of it too. So it doesn’t need to go back to the old normal. It can go to a new normal as well and hopefully, it’s a better normal.

Rob Johnson:

For instance, you modernize ventilation systems, you modernize sewage systems in communities, and let’s say the COVID challenge is behind us, but the susceptibility to illness in communities is diminished in a non-transient way by that threshold change in the systems.

Markus Brunnermeier:

Yeah. Exactly. So what you also don’t want, if I may say so, is that you don’t want to protect humans from any shocks. It’s a little bit like if you don’t expose your kids to any risks at all, they never grow up. So they have to have some setbacks, and this way, they’ll know how to handle bigger shocks later on when they’re adults.

Or if you think about the human immune system, it’s also designed … If you make your kids or anybody live in a very sterile environment, you will be knocked off by any little shock later on. But if you’re exposed to some bacteria in a small dose and know how to handle it, you will also be able to handle it differently.

Another message of the book is you might want to expose our society to some smaller shocks. At least don’t kick the can down the road in order to avoid a small shock knowing that actually, it will become a much bigger one later on and we will not be able, not trained to handle the bigger shock.

I think it was very characteristic in the COVID crisis that the countries which had experience with SARS, they were initially way better in handling the COVID outbreak. And so it was, in a sense, a good … I mean, I shouldn’t say a good thing, but it had some positive effects from that.

And the same thing is true if you look at the reaction of the central banks and the government fiscal authorities during the COVID crisis was way more aggressive compared to the global financial crisis. But the central banks have learned how to react from the global financial crisis, and they can just replay the same playbook they have learned from the global financial crisis, and this way, bounce back much quicker this time around.

In this sense, learning from smaller crisis is actually a good thing. It’s a little bit like the reed. Constantly, when there’s winds coming, you try to learn and adapt. And this way, when a bigger storm is coming, you’re also ready to handle it.

Rob Johnson:

Well, I sense myself right now that, like you mentioned, the learning of the great financial crisis, when you look at macro policy now, we have all these games going on in the pharmaceutical industry about dissemination, and then you see the variants, the mutant variants coming back.

The cost of subsidizing pharma companies to get on their horse is in the billions of dollars, the cost of further shutdowns and delays in the trillions of dollars. And it feels like we have a collective action problem, and what you might call score keeping on the balance sheets of companies where we’ve got to unlock things and be much more, particularly in the Global South, pervasive in dissemination of vaccines because we all … And I think we are learning that.

Markus Brunnermeier:

Yes. I think we are learning it.

Rob Johnson:

[crosstalk 00:18:18] and rebuild.

Markus Brunnermeier:

I think the biggest challenge is actually distribution of the vaccines. I think just production is a huge challenge and the distribution across the countries. But within the country, to convince the population in many, many countries to get vaccinated will be the way biggest challenge.

This cannot be obvious from outside. It has to be done within the country, and that will be, by far, the biggest challenge. You see that even in the advanced countries, that there’s a lot of resistance to take the vaccine. I think the resistance is even more pronounced in more emerging economies, and to handle that and develop schemes.

And that’s also behavioral economics can help, and psychology, and there’s a lot of things we have to learn. The other thing is essentially trust in science, that we don’t abuse the trust in science such that there will be a long-lasting trust and you can … If I may say so, there was some not too nice behavior towards minorities some decades ago in southern countries.

And that still hurts today that these minorities, they’re not willing to take vaccines. I think it has long-lasting effects if you don’t treat everybody same and with respect.

Rob Johnson:

And I remember during the time of AIDS, I was working with a famous South African musician, Hugh Masekela. He was very concerned that the prime minister of his country was not using condoms and other forms of insulation from the propagation of AIDS because he thought it was a conspiracy to stop black African people from continuing to thrive and grow and, how do you say, inhabit the earth.

And he thought he had to fight that. And this gentleman that I worked with, Masekela, was quite convinced that this was going to be very painful and very harmful, and he devoted a lot of his concert proceeds and so forth to setting up public charity. And so I think some of those suspicions, which you might call are historically well-founded, but in a certain innovative context, we’ve got to overcome a lot of that.

Now, you talk in your presentation that I watched about the nature of a social contract. And in terms of the structure, the principles, whatever, what’s a healthy social contract look like, and when can you identify that we don’t have one?

Markus Brunnermeier:

I mean, then you have to really go into details of all the various policy measures. But I think there has to be ideally some common identity, some caring, some solidarity around the contract. So as I mentioned, before, there’s two key elements to it. One is you want to mitigate certain form of externalities, really make it understood that this is clearly not allowed.

That’s where you ground freedoms but also limit them. Essentially, whenever you ground some freedoms, you limit somebody else’s freedom not to cause externalities on you. That’s essentially the key, one key element so you limit externalities from others. And the other element is that you have a certain amount of social security in a sense of granting some insurance scheme against, in particular, idiosyncratic shocks.

And that becomes a little bit more tricky. In a sense, ideally, when you look at risks, if you’re from a more heterogeneous society, a more diverse society, then the shocks are more heterogeneous, they’re more diverse, the shocks themselves. And hence, you can diversify it better. You can actually insure better if the society is more heterogeneous.

But we know from our [inaudible 00:22:16] and other research, their willingness to do insurance is actually society’s more homogenous. So there is a trade-off here. On the one-hand, the willingness of people to really ensure each other is higher if they’re more homogenous.

On the other hand, the insurance scheme is actually better if there’s more diversity. And we know in general, more diverse systems are more stable because … and they can help each other much more. And there’s a tension between the two. On the one hand, we want a very, very diverse society because shocks are more idiosyncratic and better to insure.

On the other hand, you also want the willingness of people to do it. Of course, this requires some convincing of heterogeneous society to help each other out and be part, and a common identity helps in this phenomenously. And that’s essentially what’s described in the book, these two different dimensions and this tension between diversity and homogeneity of the society.

Rob Johnson:

It resonates, in my mind. My father’s family was from Sweden. And looking at macro policies and social welfare or design and implementation in Scandinavia is a very different challenge than in the United States.

If we achieve it in America, that diversity might create what I call a crosscurrent imbalance, different sectors, different regions, different types of people, some contributing to insurance in different episodes, people collecting the insurance. But the whole system is not going up and down together all the time.

Markus Brunnermeier:

That’s correct. It’s a little bit of a paradox. When the society is very heterogeneous, very diverse, you can really do a lot in terms of insurance. But they’re not willing to do it. If the society is very homogenous, they’re very willing to insure each other. But all the shocks are the same, everybody is experiencing the same shock, so insurance doesn’t work so well.

And there, there’s a paradox which needs to be solved. Essentially, the only solution is to have a more diverse society which thinks more commonly and is willing to insure each other more.

Rob Johnson:

But as you used, in the outset of this question, the word caring is part of that, how do you say, essential design or … I’m interested into … I’m just trying to improvise around this part of the structure.

Gun control in the United States, the free … I always think of Isaiah Berlin and the different types of freedom in his writings. But the freedom to carry a gun means your neighbor has to worry about being shot by you, and that’s a loss in their freedom in some respects, that they have to be more anxious. So the freedom to and the freedom from are intention at all times.

Markus Brunnermeier:

That’s correct. Yes. But it goes so deeply in this because it doesn’t connect to resilience, but I agree with you. Whenever you ground somebody their freedom, you take it away. But there might be a positive sum game because you give somebody freedoms, you cause an externality and then the reaction to this externality might cause spillbacks essentially, and then it makes situation even worse.

So everybody will actually benefit from having a tighter regulation or whatever their social contact will prescribe, gun control and other things. And ultimately, everybody will benefit from that.

Rob Johnson:

I remember. I think the movie was called Bowling for Columbine by Michael Moore where he talked about the difference between Detroit where I grew up and Windsor and Toronto which were just across the bridge, places where I went and played hockey, and how much safer they were with a different regime regarding what was legal to carry or have in your home as firearms.

And so I think there’s a lot of scope for this framework that you’re bringing out, and how do I say it, I think it applies across many different domains. And speed limits in school zones and things like that are also related to this kind of-

Markus Brunnermeier:

This is about externalities caused by others. If I go back to the insurance aspects, there’s, of course, resilience has a slightly different touch to it which I would like to emphasize too. Insurance in a resilient environment doesn’t necessarily mean that if somebody suffers some financial losses, I will immediately compensate it with money.

It might mean that I help him to get out of the hole and he has to do it on his own, and this way, he will bounce back. It’s blocking the shock in the first place, but just helping to bounce back. In a different way, you can say rather than providing unemployment insurance right away, I give some rescaling, I focus more on the rescaling, and then you kind of come back.

And this gives you more dignity in the long run to be part of the workforce, a part of society. Because we talked about globalization and hitting Detroit and all this. Just transferring money is not often doing … It doesn’t give you the same dignity back you had before when you were part of the producing sector and producing cost for the rest of the US and the world.

Rescaling is probably, if it can be done smartly, is probably more satisfying and brings you back in society rather than just getting a transfer. So transfer, often is not the … It might be more simple, but it’s not the ideal solution.

Rob Johnson:

Yeah. You bring up a dilemma also in the presentation that I viewed on innovation and what you call scarring. I can sense when things have been tumultuous like the pandemic, the presidential election, the January 6th episode, all kinds of fears make people anxious about innovation, being disrupted through a different channel just like, “Maybe later guys but not now.”

So I’m trying to get at this. What is scarring and how do we preserve the possibilities, the vitality of innovation in the context of that trade-off?

Markus Brunnermeier:

What the book describes, it describes this … There’s a whole chapter devoted on how COVID and other crises stir up and shake up things, sometimes which are stuck in certain things. So we can’t work from home because it’s perceived as being not working hard, and COVID crisis is really shaking up this social perspective.

That’s essentially changing things or we have certain arrangements which we find useful. But now, it works. Think of teaching, think of telemedicine, think of many things, think of online conferences. A lot of things will be very different, and it was speeding up, it was a trend accelerator.

In this, that’s a … Any crisis comes with huge changes as well and many of them can be positive. But then on the other hand, you have these scarring effects as you mentioned where the long-lasting effects is directly on the health side. You have long COVID, you have psychological implications for people.

And you have breakups from job losses where firms and workers are broken up and they don’t find together again, so you have a higher unemployment rate and even [inaudible 00:30:04] unemployment rate potentially. And so this leads to long-lasting scarring effects, and this one has to mitigate because there, essentially, scarring effects, they’re anti-resilience.

So they don’t allow them to bounce back. It’s actually when you’re scarred, and because of the scarring, be it long COVID, be it anything, you don’t come back. And that’s one thing one has to really look out for and help out in order to make sure. There’s no way to protect from the initial impact of the shock, so you can mitigate this too. But if you have such a shock, help out to make sure that people can bounce back.

Rob Johnson:

I guess the initial conditions, when anything is what we call a disruption, we were talking a little bit earlier about West Virginia and climate change where INET’s running a series of panels on just transition and a transition to justice with relation to climate change, there is a huge fear in this country that with very highly concentrated wealth, whatever we go through, a handful of people, we’ll just call it the 1%, will be able to insulate themselves.

They have the resources, the power, the means and that everybody else will be damaged, which you might call the courage to innovate, relate to the breadth of wealth and income distribution so that … How do I say? More of us are on the side of innovation and less, we say, hunker down in our garage trying to avoid breakage.

Markus Brunnermeier:

I think you need that everybody has a certain equal opportunity to innovate. So having low entry cost to innovate I think is very, very important, that you can have startups. And you have, with new technology actually, some of the entry barriers actually are much lower and some are much higher.

If you want to set up a certain company, and all the IT system and all this is much more easier to set up than it was a decade or two decades ago, on the other hand, there’s some new network externalities where the entry cost increased significantly.

So it’s shifting and you have this winner-takes-it-all societies where only a few will get huge payoffs and the others who don’t make it who just are second, third or fourth-placed don’t get it. That’s something you have to keep in mind in innovation.

In the book, I talk about in one chapter about inequality and social challenges, in particular, inequalities and I know it’s very important a distinction, income inequality, wealth inequality. And what I talk is about resilience inequality. That’s essentially, for some people, they are poor in resilience because they can’t bounce back.

And for other people, they are very easy for them to bounce back. And once you have this, this interacts with income and wealth and equality because I know I can easily bounce back because I have some support system or something, I can take on more risk, and then I get higher returns from going for more risky projects. I become more wealthy down the road.

And this way, having this resilience and equality is interacting with wealth and income inequality in a sophisticated way. But if you have more resilience, that allows you to take on more risk and then subsequently, you become more wealthy down the road. And it feeds into wealth and equality.

So we have to make sure that all people have roughly same resilience and equality, and are not resilience-poor, because that’s what you want to ground them initially, and then that can take the opportunities. And many people can’t take the opportunities because they are really afraid that once they face a shock, that they can’t come back.

In many developing economies, that’s the case, that you’re a farmer and suddenly, you have a bad crop this year and you can’t send your kids anymore to school. That not only hurts yourself, you can’t bounce back, but even your kids they can’t bounce back and be part of a flourishing society.

That’s, I think, what the resilience interacts very dramatically and importantly with other inequality measures.

Rob Johnson:

Well, you know our research director at INET, Tom Ferguson, who looks at the feedback of wealth concentration onto the design and enforcement implementation of social policy, and how that, which you might call that system which promotes excessively perhaps policies for the few is quite dangerous in many people’s mind now because the many despair, and they become subject, if you will, attracted to authoritarian rule, that when they don’t think that democracy works right … I know Martin Wolf is writing a book about this at The Financial Times right now.

When they don’t think the system is protective of all of us, they start looking for someone, in this case, Donald Trump, who say, “The system is rigged. We got to change it.” And they say, “Oh, I haven’t heard that in a long time. Both parties were playing with the narrow.”

So I think there’s a lot about what you might call the interaction between politics and the economics that has to do with the design and implementation of a resilient system, which then fosters more innovation, less fear and less susceptibility to authoritarian rule. I think you’re really playing in … How do I say? You’re exploring very important dimensions of the quality of life in this realm.

Markus Brunnermeier:

Yeah, I agree that these are important points. For me, your wealth and equality, it depends very much what the wealthy do with their wealth. If somebody’s very wealthy but he invests it and pushes really the frontier and that has positive spillover effects to rest of society, so be it.

If he is a very good decision maker and he’s innovating and develops new industries or pushes whole industries forward, and then this has benefits to most of us, then it’s fine. If he’s just spending it on luxury goods and it’s not really beneficial for the rest of society, then it’s a totally different thing.

So we might want to consider discriminating between the two things, so which one benefit and what activities don’t benefit and treat it from a text perspective accordingly.

Rob Johnson:

Well, there’s a gentleman that I know quite well named Morris Pearl who leads a group called The Patriotic Millionaires. Their thought is how do you redirect this money? And you mentioned luxury goods, but his big concern is they use that money in lobbying to take what used to be called tax evasion and turn it into tax avoidance.

And then state and local governments can say, “We can’t afford it because we don’t have the budget anymore because large concentrations of wealth are kept offshore and not considered accessible for rebuilding the infrastructure, and particularly in a period of transition.”

So I think you’ve got a lot of … I would say a lot of dimensions to this. But I love what you said, that there are people with money who are brilliant, who are doing good as well as doing well. Don’t throw that baby out with the bathwater, because that puts us into a stagnant place, and in the world of climate change, perhaps a much more dangerous place.

Markus Brunnermeier:

Yes. So in a sense, we need an open-minded system where mavericks can also thrive. Sometimes it is some maverick who is really innovating a huge thing, and then helps us to overcome, let’s say, climate change or is coming and pushing certain technologies much more efficiently than many others could do.

That’s, I think, the big advantage of a democratic, open society where it allows for people to think differently and is open to it. And if we an autocratic society, it’s a little bit more like the oak. It’s very rigid, it’s not moving. It seems very stable but when the wind is too strong, it will fall while a democracy might look much more like the reed.

And it allows for constant debate and back and forth, and seems less stable. But ultimately, I think the transition of power is smooth and it actually makes a whole society much, much more a stable framework to live in. I think what’s really important is that people who think differently should be allowed to think, should be allowed to explore things and push the frontier essentially.

That’s what we can see in the US and in other societies who allow for that, so going new directions and helping, this way, the whole society, and for us to acknowledge that. And if somebody’s very wealthy because of that and is still pushing the frontiers, so be it. Don’t stop him. That’s my philosophy.

If somebody’s not doing things which will help and is taking risks, is not taking risks or somebody who takes risk and does a lot of R&D, that, I think, it will ultimately benefit everybody.

Rob Johnson:

Yeah. There’s a group that affiliates with INET quite closely, the Centre for International Governance Innovation in Canada, in the suburbs of Toronto. And Rohinton Medhora who’s their CEO and part of the INET board, and Jim Balsillie who’s the founder have often talked to me about feeling that in the realm of technology, we need something akin to the Food and Drug Administration.

In other words, where we don’t let it, unbridled, go and affect society, we run tests and we assess its social goodness relative to what you might call power or private accumulation. And their thought is that having a system like that that has credibility and expertise, and those are necessary conditions, may improve the confidence of society as a whole and diminish the resistance to tolerating innovation.

Because it’s filtered by a vision of social, what you might call, accountability, social good and this is what they do with the pharmaceutical drugs to some [crosstalk 00:41:22].

Markus Brunnermeier:

Yeah. The only problem is what is good and what is bad. There might be huge agreement now.

Rob Johnson:

That’s right.

Markus Brunnermeier:

And if there’s one committee deciding what’s good or bad, that’s a little bit … You might go the wrong direction because committee decided the wrong way. I like it more pluralistic that everybody can push for things. If it’s really bad, like for trucks, you have to be really careful because once you die, there’s no bounce back from that, there’s no resilience.

So for this, you need the FDA and Food and Drug Administration and things. But if somebody wants to just experiment with a new way of setting up companies or doing things differently, or go to Mars, or things like that, then I would be more open-minded. I would allow people’s freedom to select that as long as there are risks and in particular, the non-bouncing back risks or where you fall into a tipping point or some trap and all this.

These are the risks one has to look out for. If people want to take different risks and potentially discover accidentally something, I think that’s good. If you just have one committee deciding about all the risk taking, that might be too interventionistic in a sense.

Rob Johnson:

Well, and to go back to Tom Ferguson’s notion of capture, people know how to protect their intellectual property rights. So people who are making a profit see a new innovation that may make mankind better off but displace them, can perhaps influence these committees and stifle an innovation that would benefit us all.

Markus Brunnermeier:

For this committee, there will be huge lobbying efforts to get the-

Rob Johnson:

That’s right. [inaudible 00:43:08].

Markus Brunnermeier:

So that will be done … At the end of the day, everybody will try to lobby this committee. But if I come back to the vaccines, we have developed, the mRNA vaccines and other vaccines, if you think about it, of course, as you mentioned, they cost billions and the companies will make billions of dollars, but the benefits to human mankind are in the trillions and even more so.

So there are still huge spillovers from innovations more generally, and I think one has to, well, take these innovations fully into account and promote it. So putting this in a bigger picture, there’s too little innovation because of the benefits. Given the benefits which accrue to everybody, we should actually innovate more and push the frontier more.

Rob Johnson:

Let’s, how do you say, leave the frontier of Schumpeter and go back to where you and I met, which is the question of resilience and the operation of the financial system. You mentioned earlier the great financial crisis and now the pandemic. But talk to me about the resilience of a financial society and what role central banks play. What role does regulation play in that sector?

Markus Brunnermeier:

So central banks are very crucial for resilience. Essentially, whenever there’s a liquidity run or some run in the system, central banks can make a very big difference. And you could see it in March 2020 where the whole global financial system was about to implode. Nobody wanted to hold even US treasuries.

And then the feds stepped in, cut the interest rate and really stabilized all capital flows at the global scale. Without this intervention, there were huge outflows, much bigger outflows than in taper tantrum or the global financial crisis. So the emerging economies would have been collapsed without the intervention of the fed in March 2020.

This was really crucial to stabilize the global financial system. But more generally, I mean, the fed used the same playbook they used for the global financial crisis and were stabilizing this. But what one has to take into account, that there might be … You buy some resilience at the very immediate front in order to stop that.

But you might build up some other risks for the long run, so it might make the system less resilient in the very long run. And [inaudible 00:45:37], it’s a delicate balancing act to really keep this term structure of resilience in a sense in check. That’s something one has to keep in mind as well as one intervenes where it might hurt resilience in the long run.

But more generally, financial resilience, you could say one way to get more resilience is to have more buffers, having more equity requirement. That’s a little bit like a robustness approach. Once equity is gone, you have to break. What you also need is you need some good debt restructuring mechanism.

So when the buffer is used up, what you do then, and then you restructure debt. And if you can do this restructuring in a way which does not cause huge spillovers or does not cause huge bankruptcy costs, so if you have a very well-oiled bankruptcy procedure or a debt restructuring procedure, this way, you create much more resilience to the society.

That’s, on the domestic side also, if somebody is overly indebted, he can get rid of it instead or can come back and grow out of his hole, but it also means for sovereign debt. So you would like to have some debt restructuring possibilities which are not too costly if a country is overly indebted, that it can actually grow out of its debt.

And you don’t want to be suffering from debt overhang problems, which will be tremendously costly for the growth rate of an individual but also for a whole country. That’s part of the resilience, so debt restructuring, efficient debt restructuring which makes it less costly is a big component of financial resilience.

Rob Johnson:

Well, I think particularly now, in a world where, if you will, some of the downturns that occurred since 2020 were not caused by errors in policy in the Global South, but they experienced the slowdown. And now we’re coming out of that, their debt has run up to cope with those circumstances and we’re asking them to embrace climate change as part of a global partnership.

How do we handle what you might call the risk premier with sovereign debt overhangs and the need at the margin in many places, in Africa, India, Global South to contribute to the, I would say, transformation of the energy structure.

Markus Brunnermeier:

There are two things. So as you pointed rightly out, so the Global South was suffering from the COVID crisis much more. For the global financial crisis actually, the advanced economies were suffering more than … and the emerging economies actually did fairly well. They handled this fairly well. So it is now the other way around this time, so it’s not clear when it goes this way, when it goes the other way.

But with respect to climate change, I think my view is we have to take some certain risks, so we have to develop new technologies. And it is the task of the advanced economies to develop these technologies and show a model, a provider role model how to transition with these new technologies to a more environmentally friendly world.

And then they can approach to once the technology is out there, can approach the emerging economies to say, “Okay. There is a way … I don’t want you that you don’t have any heating in India or somewhere where you live and you’re freezing anyway.” So it’s very hard to argue. You can’t burn your coal because we have a global climate change and you’re suffering from the basics, what we consider as basics in the advanced economies.

So the way, the duty for the advanced economies to develop some technology is … which make it much more environmentally friendly to get the services we just enjoy. And we can’t tell them not to enjoy the same things we’re enjoying.

Rob Johnson:

Well, Markus, I don’t know if you have other chapters or other thoughts you’d like to share with the audience. Are there other issues that you’d like to excavate? [crosstalk 00:49:59]-

Markus Brunnermeier:

I think we covered it pretty much. I just want to say at the end of the book, I go a little bit … So the book is very much focused what can we learn from the COVID crisis for other shocks. And of course, pandemic shocks is one particular shocks. But then you can imagine many, many different shocks as well.

There could be cyber attacks. We will have a lot of changes coming up on the technology side. We will probably produce in labs some organ where you can transplant organs much more easily. It will be huge advancements. But there might be certain things which go wrong. So we have to be ready for these shocks, and you cannot think of all shocks which might happen.

So we have to be able to be flexible enough so that we can actually adjust and modify our behavior accordingly. I think this is flexibility that gives us a resilience, and many, many potential shocks we might be facing in the near future, and we should be confident that we have everything in place in order to react to that.

One good example is like the global value chains where we have seen all the supply chains. Everything is now growing in difficulties. And the answer is probably not to just say, “We reassure everything, we do everything in the US,” because this will hurt emerging economies tremendously, and they will suffer from that.

It’s probably saying we might multi-source, we provide it from … and we flexibly can then switch from one country to another country if there’s some outbreak or some health crisis or something. We can still source from another country. And certain things, we’re putting back into some reassuring, but many things, we can be more resilient and have a global vision and work together.

The final point I wanted to make, so the COVID crisis was a big global crisis, and we didn’t react really as a global society. So a lot of nationalistic aspects came back. And in order to have a resilient society, we really have to work together also for global challenges at a global scale. And there’s a lot of institutional buildings necessary in order to have this framework to react at a global scale efficiently.

Rob Johnson:

Yes. Well, Markus, I’m going to use the analogy of your book here in conclusion. You experienced a shock and you innovated, and you’ve created a vision, you created a way of seeing, which is accessible to economists. But it takes it into a much more dynamic place, it takes it into a place which I might call elevates the role of externalities in public goods.

And I think this, for policymakers, scholars, particularly young scholars, will be an extraordinary learning experience. It’s digestible but it’s different. That’s exactly what the doctor ordered right now, so thank you for writing the book and thank you for being my guest here today, and let me work with you to illuminate it. Because I think you’re doing good and doing well at the same time.

Markus Brunnermeier:

Thanks, Robert. It was a pleasure to be with you as always, and we keep talking.

Rob Johnson:

[crosstalk 00:53:27]. Yes, to be continued.

Markus Brunnermeier:


Rob Johnson:

Bye-bye. And check out more from the Institute for New Economic Thinking at ineteconomics.org.

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