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Hans-Michael Trautwein:China’s Economics Will Integrate Different Fields and...

Hans Michael TrautweinChina’s Economics Will Integrate Different Fields and Differ


The theme of this panel is difficulties, challenges and opportunities in contemporary economics. I would try to point out two general difficulties in macroeconomics and international economics. In macroeconomics, the problem is that we do not have a generally accepted relevant framework for explaining endogenous business cycles, financial crisis and other instabilities that are observed in the real world economy. The DSGE framework, the standard model that we have, does not deal well with all this. It is based on intertemporal optimization of representative agents, with rational expectations and all that, and some frictions in the price mechanism. These are rather unsuitable microeconomics foundations for dealing with coordination failures in large financialized economies that have systemic risks of bankruptcies.

This kind of framework did not provide effective explanations for the global financial crisis. And now, the economists in the central banks and in leading universities still stick to that kind of framework and they add more frictions to try to get those financial complications into the picture, but I still don’t think they will get at the core of the problems with this kind of attempts.

In international economics, it is not a question of wrong microeconomic foundations, but the field is too fragmented to capture relevant parts of the globalization process. We do have very different approaches for explaining international trade, foreign direct investment, and other theories that are explaining financial flows, balance of payment, imbalances, labor mobility, migration, and so on. Most of all, there is no proper understanding of a process that is called transnationalization, which means that we have large scale, large transnational cooperations, company networks, and non-state groups, that not only carry out business across borders, but also set new standards of governance. Thereby they define political space in a new way. And in that way, I think the nation state approach that we basically have is no longer fully good to explain what is going on in the world economy. So, these difficulties in macroeconomics and international economics have close connections to the challenge that they pose.

My concern is that we need to take more account of both positive and negative network effects. The Chinese economy is a very good example, probably the best at the moment, because the rapid development of the Chinese economy that we have seen in recent decades is largely due to network effects. China has large economies of scale and scope. China has spillover effects, clustering, and dynamics of outsourcing and offshoring (and onshoring), which mix with that clustering. I think that is very important in the story. China has a lot of positive externalities.

On the other hand, as we have seen with great financial crisis, but also now with what is going on in the Chinese stock exchange, we have negative externalities as well. There are new types of systemic risks that come from the interconnectedness of markets that we haven’t seen before. In the supply chains of industrial production, of services and of finance, we have heard that this is really a big problem. Much of that is well understood in analysis, in the more micro economic perspective, maybe in industrial economics, in finance and all that. But it has not yet really come through to the macroeconomics and international economics level.

So let me go from the challenge to the opportunities. I think in macroeconomics we need to give more room for issues of coordination among heterogenous agents in large financialized markets. Maybe a new type of approach such as agent based modeling will give important insights. It is a sort of bottom up adaptive macroeconomics, where interconnectedness is at the center of the stage. There are simulation models which can show how business cycles, and even financial crisis arise and develop in this system. It is very hard work, but I think it is worthwhile to be done. And it could be done here in China where people are used to work hard.

International economics has already seen some progress. We do see an integration of trade theory with theories of foreign direct investment, maybe even of financial flows and mobility in what we call geographical economics or new economic geography, and in gravity analysis approaches. Although it is still quite rudimentary, it is a field with potential for creative research.

Another field is institutional economics, especially when it comes to transnational governance. There is a literature on varieties of capitalism in different nations, but we may also need more research on varieties of capitalism in large transnational companies. Here, however, we still have a lot of national restrictions of data, legal restrictions and other problems that force us to learn and to think in new ways. And we should understand both the potentials for innovation that come from these transnational networks, and the need for regulation of them.

This brings me to the last point. I think we will not achieve a general fully integrated theory in macroeconomics and international economics very soon, if ever. But we need to make better links between the different approaches. We need to look at the different problems of the world from more perspectives. This national economic forum is a very good opportunity to bring together different fields, different schools of thought, different types of economists, in a country that is so dynamic and very unconventional, at least unconventional when looking at it from the west.


◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation