Finding the Way Out of the Energy, Environment and Economy Crisis

Our nation’s dependence on foreign energy sources, our impact on the environment, and our economic recession are interrelated problems. No one knows how to solve these problems, so we experiment with trial and error:

“…what you see in FDR that I hope my team can emulate, is not always getting it right, but … a willingness to try things. And experiment in order to get people working again.”
Barack Obama, interview on 60 Minutes, November 16, 2008

Unfortunately the system is not well suited to trial and error. Each experiment costs trillions of dollars, and the outcome may not be known for years. As a result, the nation may end up thrashing through a succession of overlapping experiments with no result except a build up of debt and bad will. At its worst, this can plunge the world into greater chaos, diverting global resources from vital investments in energy and the environment at a critical crossroads, and precipitating unintended new crises.

We propose that trials on a virtual system can help design policies for prosperity and stability before applying them in the real world. We recognize that experimenting on a virtual system – on models – faces a serious drawback, because prevailing models, the ones that helped get us into the crisis and are being used to get us “out” of it, are broken. Current ideas, and the models built from them, do not anticipate the kinds of catastrophes we are now in. They cannot be used either to extract ourselves from the current situation or to avoid the next crisis. These models typically have little microeconomic foundation, not recognizing individual agents, like banks, or omitting pressures on important decision processes representing processes such as the Fed’s creation of money. They often ignore important real constraints, evident in examples such as recent public conversation about Keynesian stimulus which often assumes income and interest rates can exist in equilibrium, independent of stocks of debt and money. These equilibrium theories do not account for evolution and the incentives that drive it, e.g. through the selection and promotion of managers in financial institutions. What we need is a Manhattan Project of economics.

While the unavoidable recovery and stimulus experiments start, we need to launch a serious effort to determine out how our economic, financial, and psychological system really works. Such an effort should include not only economists, but also experts in other complex systems such as physics to apply powerful methods from other fields to help decipher warning signals and indicate actions to maintain stability and efficiency. The goal of the effort would be to determine a theory that matches historical data, including the current situation. The solution must show the best long term solutions to the current crisis and how to prevent future recurrences. The effort will need to take more than one approach in parallel, cross fertilizing each other, to increase the chances of finding a good solution. Ventana proposes to lead a comprehensive approach, aiming to redesign a robust financial system.

A comprehensive system design must incorporate all the crucial drivers and dynamics holistically, in order to simultaneously stabilize world economies, energy supply and the environment. Requirements of the stabilizing system we envision:

  • Elucidate the most effective ways to deal with international crises.
  • Establish effective stability of the credit systems, by
    • defining ‘excessive risk’ in the context of regulations,
    • identifing a ‘bubble’ early enough to prevent it,
    • spotting levels of leverage which should be closely examined,
    • maintain stability in the face of Wall Street creativity, and
    • cope with cross-border flows and multiple jurisdictions.
  • Generate solutions that work at national levels and are also robust versus international instabilities.
  • Adapt to long-term shifts in resource usage and availability.
  • Prevent instabilities driven by climate degradation.

Since 1980, Ventana’s personnel have worked on unusually serious models of the US economy from a different paradigm – control engineering – to examine dynamic behavioral disequilibrium. Examples include post-nuclear-attack recovery models, a national economy modeling project for banking, and fundamental explanations of economic growth. We are starting from a synthesis of existing advanced models. As an integrating platform we are using Ventana’s Energy, Environment, Economy model (E3) developed for the Department of Energy. At the core of E3 is a multi-agent model of the economy, comprising individual firms with attribute profiles partly calibrated to US data. Other existing models used to inform and support the effort include:

  • Economy:  A general disequilibrium model of the economy targeted on feedback mechanisms that caused the current crisis. The model’s purpose is to provide increased understanding of current and future financial conditions for a team of bankers who are engaged in the model’s creation.
  • Environment:  With the Sustainability Institute, Ventana has developed C-Roads, a model of the effect of pollutant emissions on the environment, aimed at rapidly communicating the impact of policies on climate change for real-time use during national and international policy negotiations. C-Roads will supply the climate engine of E3 and the energy transition hurdles for sustainability.
  • Energy:  California / Western Climate Initiative energy environment policy collaborative process – models and data. Ventana facilitation of this vital for the nation energy-GHG policy forming process is generating an understanding that will guide the implementation of energy policy levers on economic results.

Only by understanding the interdependence of our energy system, our environmental impact, and our economic output can we design a regulatory structure that promotes stability and avoids the runaway feedbacks that lead to crisis.

If you are interested in joining the collaborative, we would like to hear from you.