• People often ask me to recommend "just three books" in order to study the ideas behind my current thinking.  While this is an impossible task, when forced I usually answer Small is Beautiful, by E.F. Schumacher, For the Common Good, by Herman Daly and John Cobb, and The Great Work, by Thomas Berry, listed in the order that I read their work.  A more complete list of recommended reading can be found in our Resources Section.

    In May of 2008, I wrote a paper titled “The Relevance of E.F. Schumacher in the 21st Century,” at the request of the E.F. Schumacher Society, now called the New Economics Institute, a close partner of both the New Economics Foundation in the UK and Capital Institute.  That essay begins:

    The inevitability of globalization and the dominance of increasingly large and powerful global corporations and financial institutions are accepted facts of contemporary economic life. Competitive forces pushing us further in this direction continue to build. The benefits of scale are real, furthered by accelerating technological advances. A former CEO of JPMorgan once proclaimed, “Size is not a strategy.” He was wrong. In 2001 that American banking dynasty came to a close with its takeover by Chase Manhattan Bank.

    As industries mature, scale becomes more critical out of competitive necessity. The state capitalism of the emerging powers China and Russia raises the stakes further in our competitive global economy. Within this context Fritz Schumacher’s best-selling book, Small Is Beautiful, and his ideas about human scale, decentralization, and appropriate technologies might seem quaint and out of touch. We may believe that “small is beautiful” in our hearts, but our heads are teaching us that “big wins,” and experience has taught us to ignore our logical heads at our peril. Nevertheless, our conscience is telling us, now more than ever, that something is amiss. A new era is struggling to unfold. While the Obama phenomenon may in some ways reflect this change, it does not by any means define it. We need to pause and reflect carefully in light of what we see happening to the health and prosperity of individuals, whole populations, other species, oceans, the soil, rainforests, the atmosphere—indeed the entire planetary system—if we are awake enough to notice.

    Something about our global economic system is broken…

    Since writing that paper, I’ve been working to help “mainstream” some of the ideas of E.F. Schumacher, and am more confident than ever of their relevance in the 21st century.  So it was with keen interest that I read Robert McCrum’s essay, E.F. Schumacher: Cameron’s Choicein the UK’s Guardian on March 27th The timely piece reveals Schumacher's prescience regarding the risks of nuclear power and details how Schumacher’s ideas are enjoying a revival in the UK thanks suprisingly to conservative Prime Minister David Cameron.  While people will debate whether Cameron’s interpretation of Schumacher’s ideals are authentic, the relevance of these ideas to today's multitude of complex and interconnected challenges should not be in doubt.  McCrum closes the essay with a reminder of Schumacher's most foundational principle:

    "Our task is to look at the world and see it whole."

    If only a similar Schumacherian renaissance might appear on the horizon in the United States.  Perhaps from the Tea Party which is in need of a coherent organizing philosophy?



    I returned late last night from the second Institute for New Economic Thinking (INET) Conference which took place at Bretton Woods. This was the site of the historic Bretton Woods Agreement signed in 1944, establishing the IMF and the World Bank, and creating the global world financial order following WW II.  The Soros-backed INET was established to convene the world’s leading economists in order to rethink the discipline in light of the recent financial collapse, and provide an alternate career pathway for economists interested in doing unconventional research.  A visit to INET’s website will not disappoint.

    Given my agenda with INET, which is to put sustainability and the implications for finance on the table in order to shift understanding in this highly influential community, the conference was an unequivocal success.  While the majority of the panels not surprisingly continued to debate the important headline issues of fiscal discipline and structural reform, the Euro zone, macro prudential bank regulation, and political economy, this year there were two panels focused on what I consider truly “new economic thinking.” 

    The first was a panel on Complexity Economics, which convened at 7 am Sunday morning, but which was nonetheless well attended by luminaries including Paul Volcker, Adair Turner, Martin Wolf, Robert Skidelsky and George Soros, to name just a few.  The core idea being discussed was that biology rather than physics must become the organizing framework in understanding the economic system as a complex, non-linear, out of equilibrium, emergent system, just as all living systems, including the human body, are.  Capital Institute followers know of my keen interest in complexity science and natural systems as the model to teach us how to create a resilient and sustainable financial system and economy.  The fractals you see as the background of each of our website pages are a reminder of the importance of complexity science to finance. 

    I highly recommend listening to all the Complexity Economics panelists, but if I had to select two, they would be Eric Beinhocker’s engaging overview and Tad Homer-Dixon’s talk. Tad’s prior speech by the title The Great Transformation, which you can find in our resource section, is superb.

    The second breakthrough panel at INET was organized by CIGI, which is the inspiration of Jim Balsille, Co-Chair &Co-Ceo of Research In Motion (maker of BlackBerry).  CIGI is now an INET partner with a $25 million commitment.  I am thrilled that GIGI’s focus in their partnership with INET is on sustainability.

    The panel on “Sustainable Economics” also took place on Sunday (video not yet available at this time).  Rob Johnson (Executive Director of INET and on our Board) asked me who the one person I would like to have speak on this topic.  My suggestion was ecologist Bill Rees, who conceived the concept of “Ecological Footprint” with his graduate student Mathis Wackernagel, and is also on our Third Millennium Economy Steering Committee.  Bill’s presentation on the economic system, not as a monetary phenomenon, but as a physical flow system that draws upon the earth's reasources and disposes waste into a closed system governed by the law of thermodynamics which we call the ecosphere, while challenging to many, pretty much rocked the house.  This framework is the foundation of our work at Capital Institute.

    The Keynotes by Larry Summers, Gordon Brown, and Adair Turner did not disappoint.  Although all used the word “sustainability” at least once, more progress is necessary before the profound implications of Bill Rees’ talk are fully reflected in our policy leaders’ understanding of the challenge facing us at this time.  Unfortunately I had to miss the closing conversation between Paul Volcker and George Soros, and the closing remarks from Rob Johnson which probably occurred around 11PM Sunday night.  I will watch with interest when the link comes up at INET’s site.

    Congratulations and my sincere gratitude go out to Rob Johnson and George Soros for hosting another inspirational and important conference.  It was a privilege to be in attendance together with my Capital Institute collaborators Peter Brown, Juliet Schor, and Bill Rees.  Many existing relationships were refreshed and many important new connections were made.  I’m pleased to report strong media interest in our work as well.  Most exciting was to see all the bright and enthusiastic students in attendance this year from as far away as Beijing who represent the future of economic thinking.


  • New Economic Thinking… on reading economic data

    The recent INET meeting at Bretton Woods organized by the Institute for New Economic Thinking (INET) with support from people like George Soros, brought together a large group of leading creative economists and ecological systems scientists, to push the envelope in discussing how to reorganize the world economic system. Choosing the same site for which the world changing Bretton Woods conference after WWII was named was both intentional and seemed quite appropriate. A strong “vision” seemed to be emerging, even if the details of how to advance it were not so clear. All might agree that nature’s economies seem to work better than ours, and we need to change something. The concluding conversation between Paul Volker and George Soros presented some of the broad issues, nicely moderated by Gillian Tett, and was quite interesting.


    I liked the session on “Complexity Economics” particularly. It really is necessary that people begin thinking of the economy as a complex system, and that they learn the lessons of ecology in order to understand how the economy can be transformed to be as stable and healthy as ecologies. The concluding comments were also a very nice lead-in to my own approach, that to meet the challenge of using complex systems modeling, what we need are better conceptual models for reading economic data. A good example of new data needing new concepts was discussed in another session by Duncan Foley and I insert his first graph below.

    Finding how to model emergent behaviors in a complex world is the problem. What model do you use when all you know is the economy is clearly not following your theory? Slightly edited below is my comment on the conference posted to the INET site and at the linked History of Economics Playground blog.


    I thought what was most provocative at the INET-BW conference were the ending comments at the complexity economics session. The panel explained the problem of using the available economic data to develop complex system models as a lack of good conceptual models to use. With the flood of new data sources and emerging changes in system complexity and behavior, what seems to be limiting the development of models is not just hardware, software and data, but also significantly a lack of ideas for what complex relationships to model.

    It interests me particularly in that translating observed behavior into modeling concepts is one way to describe what has been my main subject for some time. How to read complex system behavior from available data involves considering natural systems somewhat like organisms, that behave on their own in open environments, that you study to watch how their organization develops and changes. You might start with provocative data as presented by Prof. Duncan Foley at the conference showing the US economy not following expected behavior during the economic collapse of 2008 (Fig 1).

    What Foley first saw in the data was evidence of misguided monetary policy, resulting in a rapid recovery in the share of National Income due to finance, failing to result in a recovery for the producing (Value-Added) economy. I might agree with that, while also noting that the popular idea that the collapse was caused by finance was evidently mistaken too. The decline in the productive economy started well before finance collapsed, and was not reversed by rescuing finance either. From a dynamics point of view, the tipping point of the downturn was actually the inflection point in both curves in 2004, and was followed by a major transfer of wealth from the producing economy to finance. It seems likely that was what actually “broke the bank” in the end, that the producing economy was being sapped of earnings. That raises questions about what mysterious force “emerged from nowhere” in 2004, and caused a slide of wealth between two sectors that had previously been in balance.

    The main point here, though, is just showing how making these kinds of critical observations about the directions of accumulative change raises questions about organizational change in the behavior of the system, without any theory for it. That directly gives you lots of very relevant modeling ideas to test.

    That something started depressed the producing economy faster than the financial economy as early as 2005, becomes a leading indicator of the collapse, too, pointing to some sort of natural structural cause. There were the oddly exploding prices for food and fuel resources occurring around the world at that time, for example, that might be connected. The scientific problem is that these kinds of departures from established economic theory show the economy changing in a way that established theory doesn’t allow for, and you don’t know what part or parts of the established framework of theory to discard in looking for the real explanation. What emergent phenomena require is new theory and models for which you have no history.

         National Income, National Value Added and Non-Farm Employment     

    …Figure 1.

    To build models of emergent phenomena we are faced with having to narrow down the vast array of design options that nature deals with, without having her way putting them to the test. I find it very productive to start with learning how to read the systemic behaviors of nature, without a theory, by watching her emerging new forms of organization develop. Sure, people are made very uncomfortable by even the idea of studying emerging systems without any theory thought of as driving them… Natural systems clearly are independently energetic and organized in their behavior, though, somehow. Nature seems to make sense of them, and we need to learn. There are approaches and methods to help getting over the misgivings.

    The discussion in the INET-BW Complexity Economics session was from the usual viewpoint that building theoretical models of the economy was necessary for studying the “non-theoretical” economy. Most of modern science is also centered on the study of theory, rather than nature. The natural economy, however, does itself display organized non-theoretical systemic behaviors, and does successfully work by itself, somehow. I’d offer that “studying both” theory as theory and nature as nature is the better paradigm. One might start from either, and go back and forth, connecting theory with the observed organic behavior of the non-theoretical system, generating better questions for inventing new and more useful theories. It would greatly enhance the use of theoretical models as diagnostic tools for gauging the health of the organic system too.

    If you consider the economy as a complex natural organism, then data taken from it displays how its natural organization is behaving, by itself, so the contest becomes how to identify changing and emerging organization in how the non-theoretical system operates, and devise ways to alter our models. My core method starts with the implication of energy conservation, that new organization for energy using systems requires an accumulative process of development that can be spotted by aggregating data displaying growth curves.

    An excellent and important example using that principle is in the now 10 year phenomenon of global resource demand increasingly exceeding supply. Demand is persistently growing exponentially, and supply is now only growing linearly, and the previous price relationship has now completely broken down. I have a short essay about to appear in New European Economy, discussing it as “A defining moment for investing in sustainability.“ The challenge is that the apparent collective response of world food and fuel markets to excessive demand is essentially to panic, sending the floor price of all food and fuel resources on an exponential path, still unresolved.

    That does call for response, but here it’s presented just as one good example of the difference it makes to have a working systems diagnostic method, informed by both physics and economics. It becomes a kind of forensic study, which serves to expand the subjects of science from mainly a study of theories and models to include the study of complex systems in their native form too.


    Phil Henshaw Bio PhotoPhilip F. Henshaw’s innovative systems science work goes back to 1970’s, evolving into a fairly practical new general method, using physics principles as diagnostic tools, for investigating complex natural systems that develop by growth. Phil has a B.S. in physics from St. Lawrence University, an MFA in environmental design from the University of Pennsylvania, and a substantial accumulated body of original research and publication. He does consulting, research and writing as HDS systems design science. Further information is on his website www.synapse9.com.

  • I’m not following the trial of hedge fund manager Raj (“King”) Rajaratnam very closely, and I have no unique insight into the case other than what I read in the press.  To me, the wiretap evidence incriminating “the king” appears overwhelming.  The defense’s strategy suggesting it was all “public information” is insulting to common sense, much less to market professionals. 

    But I’m interested to explore questions beyond guilt or innocence, questions far more pertinent to the global economy and to society at large at this critical historical juncture when the entire practice of finance is on trial.  Specifically,

    • How should the Simon School of Business Administration at the University of Rochester respond to finance professor Gregg Jarrell’s role as expert witness for the defense in this historic insider trading case in which Jarrell reportedly earned $1million for his troubles?
    • What more radical responses are available for public consideration to materially shift the corrupted Wall Street casino in order that capital can again flow to productive use at a time when it is so desperately needed?

    Regarding the first question, I understand “innocent until proven guilty” and the ideal that our legal system provides all accused a fair trial.  But the good intentions to protect individuals against an all-powerful State have been corrupted by the legal armies and clever consultants available to powerful corporations and billionaires.  “Fair trial” in a democracy does not equate to the “best defense money can buy.”  The burden such battles place on the State and the taxpayers is clearly not in the public interest, but a solution to this problem eludes me. 

    However, the decision to be complicit in this system is one that individuals, firms, and institutions are free to make for themselves.  I’ve always been troubled by lawyers who represent criminals that they know are guilty when there’s enough money involved.  But in fairness to lawyers, even guilty defendants need expert counsel to negotiate fair settlements when facing aggressive prosecuting attorneys in a world rife with stories of abuse. 

    The one I struggle with is the Simon Business School’s finance professor Gregg Jarrell’s willingness to support the defense’s case by conducting “event studies”[1] that seek to validate the defense’s position that the inside information Rajaratnam traded on was not “inside” after all, but already in the public domain.  In my opinion, the analytical complexity of these “event studies” is a disingenuous smoke screen for the basic questions of the case, raising serious ethical questions for the Simon School of Business worse than the unsavory issues raised for the economics profession broadly in the Academy Award winning documentary Inside Job

    Professor Jarrell’s $1 million engagement cynically supporting Rajaratnam’s defense in the most far reaching insider trading case in history that has already seen 20 significant guilty pleas at this moment in time with Wall Street rightfully discredited is wrong.  By association, Jarrell’s engagement demeans the University of Rochester’s reputation.

    I did a little homework on professor Jarrell and discovered he’s no slouch, having set the record at the University of Chicago for shortest time to earn a PhD.  He’s also a former chief economist at the SEC during the Reagan years in what appears to be an ideological appointment early in the deregulation movement. 

    Although he may have rushed through the halls of the University of Chicago, he did pay attention, once saying, “Most regulations hurt more people than they help.”  There is a school of thought that says there is no such thing as “inside information,” and government should take a laissez-faire approach to market surveillance.  Perhaps this helps explain why Professor Jarrell describes himself as “frequently serving as an expert witness on … criminal inside trading cases,” no doubt using his “event studies” as a tool to obfuscate black and white criminal behavior such as what was recorded by multiple wire taps in the Galleon case.

    The University of Rochester’s Simon Business School website boasts its “History of Remarkable Achievement” since its founding in 1958, declaring in part:

    As a result of pioneering work by Meckling and Michael C. Jensen, one of the talented young faculty members he recruited, and groundbreaking work by other faculty members, the School became known for making enormous contributions in the critical areas of finance, accounting and organizational theory. The faculty’s contributions, in turn, helped shape the research agenda of a generation of business scholars around the globe, influencing teaching in graduate business programs and forever changing how many companies and executives in this country and abroad conduct business.

    It would appear that Professor Jarrell’s “event studies” are intended to be part of the “faculty contributions forever changing how executives in this country and abroad conduct business.”

    I wonder if this is the brand of free market capitalism William E. Simon, former Secretary of the Treasury, had in mind when he put his name on the University of Rochester’s business school back in 1986.  No doubt Mr. Simon, Milton Friedman and Ronald Reagan all understood that markets are not free when they are not fair. 

    Maybe speed is not a virtue when it comes to a Finance PhD.


    I will address my second question in a future post.

    [1] Event studies are statistical studies intended to show how stock prices respond to specific events, in contrast with normal market conditions.