Since the financial crisis of 2008 there have been hundreds of films, documentaries and features on the causes and the possible solutions to the economic malaise that followed. Who is to blame and how did it happen are the questions that have been hotly debated by experts and politicians. The film ‘When Bubbles Burst’, first released under its Norwegian title Når boblene brister in 2012, looks at the fallout from the 2008 crash through the stories of Vik – a small town in Norway that, along with seven other towns in the country, sued the Citigroup banking conglomerate for investment losses, demanding over $200 million in reparations.

The film, aired at this week’s Festival for New Economic Thinking, attempts to link the overarching reasons for systemic market crashes to the intimate tales of a town laid low by reckless speculation and an inherently unstable financial system designed to fail. Through the testimonies of local campaigners, financial experts and academics, we are taken into a network of links and a narrative that show how mortgage lending in the US could impact a tiny town in Scandinavia.

Around 2001 the Vik municipality found a loophole in the Municipality Act, and proceeded to invest borrowed money from Oslo funds and US Citigroup in the stock market. The trick was a law allowing borrowed money to be invested before seeking local or regulatory permission. Despite Vik borrowing 70 million krona, the Norwegian Ministry of Local Government and Regional Development certified the investments because in its view any debt payments would be secured in future income.

Rooting the story in Vik and then branching out to Detroit, the ultimate symbol of American decline, sharpened the focus on the ordinary people affected and the way in which grand technological advances and political decisions impact on our lives. The narrative of the film focuses on three main themes: firstly on the question of debt, second on technological revolution and finally on what needs to happen to the ‘real economy’.

Visitors from Vik to the US are used as useful commentary threading together the two countries and their joint experiences of pain. As viewers, the journey becomes one of learning of the ability of markets to not in fact be free but to be “designed specifically to fail”, as described by economist Erik Reinert. In his words: “If the system you design is destined to fail then there is in effect no risk. For you.” The film dwells on the notion of the separation of risk for investors, managers, elites and ordinary workers, small businesses and homeowners.

Debt may be utterly necessary to the system, and in fact can be good if leveraged in a smart manner. We are taken to ancient civilisations such as Mesopotamia and the Levant where the use of debt was a necessary evil that added value rather than a tool for coercion and short-term gain. Debt jubilees are touted as a solution to financial servitude for the citizen and economic inequality. In short, when debt stifles growth and opportunity for the majority of citizens, it serves no purpose.

Perhaps the most fascinating part of the film is dedicated to the power of technological revolution in financial markets and the modern economy. Bubbles are to be expected, but speculation increases when there is an advance in a new technology. The 2008 crisis is traced back to the 1971 innovation of the microprocessor which kick started a computer revolution in how data was collected, stored and modelled. The market was now truly global, an epic casino which allowed greater scope for leverage. This suggestion flies in the face of the idea that bursting of bubbles or bubbles themselves can be stopped. In fact, the film suggests the only way to do this would be to cease technological advancement and therefore leans closer to Schumpeter’s idea of creative destruction.

What are we left with? The ‘real’ economy according to Nomi Prins, former Goldman Sachs manager, was something “very close to the 1930s”. When the financial economy and the real economy are so decoupled that you realise that lots profit and wealth aren’t real. Her answer? “We need to address the fraud. They got away with it and are still in charge. It was fraud – plain and simple.”

Curiously, given the city’s decades long decline, the film provides a counterpoint of optimism where Detroit is shown to have a possible answer to the crisis. “After every crash there has been a boom but governments have to be bold enough and intelligent enough to create new chances for equity and growth.” Detroit was the site of huge technological growth in the automotive industry following the 1930s due to government action and investment in infrastructure. Petros Christodoulou, Greek economist and Joseph Stiglitz, nobel prize economist, use the FDR years in the 30s as an obvious example of planning and spending which has been overlooked for ideological reasons.

We begin with the economic and end with the political. The political will to imagine a new way of organising labour and capital and a new way to regulate and ensure the real economy is served by technological advancement. The question unanswered by the feature is whether that will exists in a majority of the Western world.

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In recent years China’s growing political and economic relationship with African nations has received much media attention. With significant Chinese investments in industrial infrastructure and energy extraction, it’s easy to see why. However, a quiet revolution has also been gathering pace in terms of trade cooperation between Africa and India. Compared to China, India has chosen to centre its strategy towards Africa in the tradition of South-South cooperation where nations and emerging economies in the global south aid one another to greater levels of growth and self-sufficiency.

In the area of food production, India has been using a combination of educational, technological and economic tools to help improve the situation in Africa. At first this was part of its continued policy of solidarity among developing nations but now it has shifted to a strategy to counter Chinese influence on the continent.

At the Festival for New Economic Thinking, Malancha Chakrabarty, an economist and research fellow at the Observer Research Foundation (ORF), gave a workshop on China, India and African Development. In her presentation Chakrabarty discussed India’s more balanced approach to international development based on anti-colonial principles when helping to improve African yields and food production.

Chakrabarty pointed to India’s green revolution where it has seen agricultural production rise and become far more sustainable since the 1960s. As a result of the legacy of empire, debates over population growth and rapid industrialisation, India has had to come to terms with its own issues of hunger, undernutrition, and low productivity. This is why India-Africa collaboration on food security is seen by both groups as the key not only to the development of African agriculture but also to India’s desire to compete with China.

Chakrabarty argued that India will prove that huge injections of capital and industrial investment – the traditional path of development – is not necessarily the future. Different nations will have different concerns, and food security will determine Africa’s development. India also helps Africa’s food output by offering low-cost technology solutions, building storage capacity, developing micro loan policies and providing improved seeds and agricultural machinery.

African agriculture suffers from a range of problems such as low productivity and limited use of modern technology. Although there has been a marginal improvement in Africa’s agricultural performance in the last decade, African farm yields are the lowest in the world with the average farmer in sub-Saharan Africa producing only 1,433 kg of cereals per hectare, less than half of what an Indian farmer produces.

Another reason for growing collaboration between India and African countries is that, although India has made great strides since the sixties, it still falls short on food security. India’s economic philosophy may be self-sufficiency, but in practice it copes barely better than Africa as a whole.

The reasons behind food insecurity in Africa and India are different. Africa’s challenges relate to increasing the production of cereals by improving agricultural productivity and adopting modern agricultural practices. For a continent that holds 65 percent of the world’s arable land it still relies heavily on food imports. According to a 2014 Africa Progress Report, Africa’s food import bill amounted to $35 billion each year. In West Africa, almost 40 percent of the demand for rice is met by imports. This is explained by economists such as Sam Moyo who blame Africa’s food insecurity on nation’s historical over-emphasis on exporting coffee and cocoa instead of production of food crops for self-sufficiency.

The historical significance of this has seen Africa go from a net food exporter during the 1960s to a net food importer in today’s global economy. As a result, many African nations have become extremely dependent on food aid since the 1980s and under the “structural adjustment programme” imposed by the International Monetary Fund (IMF) in that decade, many African countries were also forced to withdraw agriculture state subsidies leading to a drop in agricultural productivity.

In contrast, India’s achievement of self-sufficiency in food production was a constant focus of politicians and economists from the mid-1960s. India’s five-year plan between 1961 and 1966 prioritised self-sufficiency in food grains and increasing agricultural production to meet the needs of industry. This is effectively the opposite of African states today with rapid scrambles to industrialisation and energy extraction with low grain yields.

Chakrabarty argues that India can help African states achieve food security goals with technology and an African green revolution. Firstly, India is attempting to address the research and technology gap in African agriculture. International institutions such as the International Crop Research Institute for the Semi-Arid Tropics (ICRISAT) and International Livestock Research Institute (ILRI) are platforms for Indian-African cooperation in biotechnology. ICRISAT has established agribusiness incubators in five African nations, Angola, Cameroon, Ghana, Mali and Uganda, with India agri-bodies partnering with local bodies.

Supporting academic fundamentals of the agricultural economy India has opened a number of scholarships for African students in India with African scientists trained in the Department of Agriculture Research and Education (DARE) and the Indian Council of Agriculture Research (ICAR). ICAR has for the past few years provided month long customised training in water conservation and utilisation; production of seed, sapling and planting material; livestock production; farm mechanisation and post-harvest processing.

India has also extended credit lines worth $1,1 million towards agricultural development and food security in African countries. An example is a series of loans for projects funded by the Sudanese Agricultural Bank. In turn this funds technical and laboratory equipment at Higher Educational Institutions, scientific equipment for the Sudanese Ministry of Science and Technology, local rural solar electrification and the expansion of Sudan Railways.

Burkina Faso has allowed a 100-percent foreign investment deal with Indian companies being able to repatriation of profits, and new companies benefit from a tax holiday for the first few years. Although seen as controversial by some economists, the expertise of Indian technology is already evident in the improvement of African yields. The result has been a jump in foreign direct investment with around 80 Indian firms investing $2.3 billion in Ethiopia, Kenya, Madagascar, Senegal, and Mozambique. There are plans to invest a further $2.5 billion on millions of hectares in East Africa, to grow products such as maize, palm oil and rice.

Some African countries have gone as far offering land on lease to Indian farmers and a number of farmers from Punjab and Andhra Pradesh have taken up the chance to migrate to these countries. For example, the Andhra Pradesh government sent 500 farmers to cultivate 50,000 acres of land in Kenya and 20,000 acres of land in Uganda.

Chakrabarty’s conclusions may present a puzzle for UK policymakers and civil servants in charge of aid and trade policy with the African continent. The UK’s legacy of colonialism and current debates over the amount and commitment to aid leaves little room to reform the relationship between Western governments and African economic and agricultural development. If smarter agriculture that can strengthen grain yields and account for climate change is the foundation of lasting economic development, than India and China look set to be the main drivers of investment in Africa. This South-South collaboration may not be as turbo charged as the potential gains of Western financial booms but it is tailored to the fundamental needs to African economies.

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Last week openDemocracy attended the first ever Festival for New Economic Thinking which brought together people and organisations who are committed to advancing economic thought and inspiring change.

As part of the ‘Help the OECD write the new Narrative’ workshop, OECD official Patrick Love presented the organisation’s draft report ‘Towards a New Narrative’ in which 20 experts explain what was wrong with the OECD’s methods and advice from 2003 to 2008 and beyond.

The OECD (Organisation for Economic Co-operation and Development) has come in for rough criticism since the 2008 crisis in the way in which it has measured economic progress, market movements and growth. One example of the body rooting its research in flawed assumptions was a 2008 report that said that “a consensus had been secured that financial deregulation was an optimal contribution for economic development”, a comment that passed without further analysis.

Love suggested that both the tools economists used and way in which data was used has led to crisis the faith that institutions such as the OECD can effectively track economic behaviour. One particular macroeconomic tool for research used by treasury department’s, central banks, think tanks and academic institutions are DSGE models.

What are they?

For those of us who are not macroeconomists, DSGE stands for dynamic stochastic general equilibrium.

“General” indicates that the model includes all markets in the economy. “Equilibrium” points to the assumptions that supply and demand balance out rapidly and unfailingly, and that competition reigns in markets that are undisturbed by shortages, surpluses, or involuntary unemployment.

“Dynamic” means that the model looks at an economy over a period of time rather than in a single moment. “Stochastic” refers to a specific type of “manageable randomness” built into the model that allows for unexpected events, such as oil shocks or technological changes, but assumes that the model’s agents can assign a correct mathematical probability to such events.

The models attempt to explain economic growth, business cycles, and the effects of monetary and fiscal policy. They’re rooted in three ideas of how strategic choices in an economy are made:

First of all, they observe the behaviours and habits of “agents” be they consumers, companies, and financial institutions like banks or hedge funds. Secondly, the model takes into account the underlying economic environment of whether it is a competitive economy, how much monopoly power exists or any lack of information and transparency in what we may know. Finally, the model is estimated as a system, rather than equation by equation in the previous generations of macroeconomic models.

So what’s the problem?

Critics say that DSGE assessing an economy’s growth rate or how stable financial markets are based on unrealistic assumptions. They argue that it is fundamentally incorrect to model from individual actors because humans are first not rational and humans are not simply individual actors. The economics will always be flawed because such behaviour can only be understood in context of social interactions. Other suggest the opposite is true: there is too little individuality rather than too much.

Other problems cited is the idea of “general equilibrium.” This is an assumption that in an economy interaction of demand and supply will also level out. In the words of Patrick Love who authored a draft on reforming the OECD’s methods for economic measurements, “I think we need to come up with models that model behaviour, not models that assume that the system will always end at a stable equilibrium.”

Additionally DSGE models fail to look at labour costs, or details such as the relationship between profits and labour costs in order to predict the direction of the economy. In the run up to the 2008 financial crisis, the OECD models failed to take seriously the issue of lower wages combined with rampant household debt. Economists such as Love state that lower wages effectively kill jobs which runs contrary to mainstream assumptions of competition.

The issue of communication is also considered a major factor with communications networks and social media able to spread fear globally. The modelling tools economists used are  as Andrew Haldane Chief Economist and Executive Director, Financial Stability, Bank of England said “incapable of capturing today’s networked world, in which social media shape expectations, shape behaviour and thus shape outcomes.”

Finally economic models face the danger of perpetual obsoleteness because of the failures in understanding accumulative affects of human behaviour. Where this evident is looking at the issue of emergence. Emergent phenomena occur when the overall effect of human individual behaviour is qualitatively different to what each separate human is doing. You can not anticipate the outcome for the whole system of an economy or predict what will happen based on a few individual agents because the large system may add properties that individuals do not have.

These models used to inform policy and analyse the economy are vast and complex with very few outside the world of economists knowing about or understanding them. Love questions whether it is necessary to have such complex tools if they fail to anticipate disasters or point to macro solutions.

The OECD is currently working on developing new models to analyse economic behaviour and as a result win back the trust and sense of accountability in itself as an institution. It wants to educate the public about economic models and the tools that economists and bodies use to predict, anticipate and fix an economy which has seen drastic mutation and left millions feeling increasing insecure. As Patrick Love said during yesterday’s session: “New economics requires new tools and narratives.”

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