Thijs Jochems: Necessary revision – economic policy 2.0
This column was originally written in Dutch. This is an English translation.
Western economies are repeatedly learning that the world is not a spreadsheet. The financial crisis, the pandemic, the energy shock, geopolitical ruptures – each time we are taken by surprise. Why?
By Thijs Jochems, Advisor and Private Investor
Economists use models based on smooth distributions, averages and minor adjustments. A world in which risks move neatly around averages. In reality, however, our world is ruled by extremes: a single war, a single virus, a single bank failure determines more than decades of averages. You simply cannot capture reality sufficiently in statistical models.
Economic models: a good guide for economic policy?
By clinging to statistical variance, economists and politicians systematically underestimate rare but devastating events. Our economy appears strong in the models until an event in the real world reveals its fragility. A supply chain designed for “just in time” is vulnerable. A balance sheet inflated with debt looks optimal – until it explodes. These designs are not efficient but fragile. This fragility remains hidden because economists and policymakers want to see the most likely outcome as reality.
The tyranny of the measurable
The obsession with figures causes a second distortion. Anything that cannot be quantified is dismissed as “soft”. GDP growth, inflation and productivity dominate the debate because they produce figures. Meanwhile, the most important survival factors for a society – trust, institutional strength, social cohesion, adaptability – remain out of the picture.
However, it is precisely these “intangible” factors that determine who breaks and who bends when shocks occur. Why were some countries able to improvise during COVID and emerge stronger from the crisis, while others stumbled? Not because of their GDP per capita, but because of their “invisible” reserve of resilience. This hidden reserve, based on qualitative, unmeasurable variables, is systematically overlooked by economists, investors and politicians. With all the risks that entails.
The contemporary Western dilemma
The West has optimised itself to the point of fragility. Supply chains without any buffer, economies built on debt, governments, companies and investors hypnotised by quarterly figures. At the same time, the unmeasurable foundations are crumbling: declining trust in institutions, polarised politics, fragile social contracts, division in society.
We measure what is easy to measure, not what is important, and confuse statistical precision with knowledge. A model that gives a minimal chance of a systemic crisis provides a dangerous illusion, but no more insight. Nassim Taleb warns against this: the more precise the measurement, the less you should trust it when it claims to contain uncertainty.
From fragile to robust
The alternative is not better models, but letting go of the illusion that complex systems can be controlled with measurements. Systems must contain slack, buffers and optionality. They must be shock-resistant instead of succumbing to them.
For businesses, this means multiple suppliers, a healthy balance sheet and strategies that also offer protection against collapse. For societies, it means investing in “invisible” assets such as trust, legitimacy and adaptability. These are not “soft skills” but necessary components of an infrastructure for survival.
The strategic necessity
Today's greatest risk is not a shortage of capital or slow technology adoption, but the prevailing, naive belief in easily measurable risks. The next shock will again come from an unexpected angle and once again devastate vulnerable systems that have been optimised for efficiency.
Political leaders should not focus primarily on visible figures, but should pay much more attention to the importance of qualitative foundations for society. The robustness of an economy and a society is much more than the numerical outcome of any economic model.