Building a Resilient Society: Navigating Shocks, Externalities, and the New Normal

The episode features Professor Markus Brunnermeier discussing his book "The Resilient Society," emphasizing the critical distinction between robustness and resilience. Robustness, like an oak, stands firm but breaks permanently if its barrier is crossed, while resilience, like a reed, bends and adapts, always returning. Brunnermeier argues that societies should aim for resilience, not just risk avoidance, by strategically taking risks from which they can bounce back, fostering Schumpeterian growth and innovation. The discussion highlights three levels of resilience: individual, systemic, and societal, with a particular focus on the complex interactions within a society. A core concept introduced is "feedback externalities," where individual reactions to a shock amplify negative consequences through strategic complementarities, creating dangerous spirals. The social contract is presented as a crucial mechanism to mitigate these feedback loops and provide insurance against "externalities from mother nature." Brunnermeier also differentiates between "resilience destroyers" like traps and tipping points, which lead to irreversible decline (e.g., the Gulf Stream stopping), and shocks that can lead to a "new normal" that is potentially better than the old one, fostering innovation and adaptation. The podcast suggests that societies should not shield themselves from all shocks; rather, exposure to smaller crises can build collective learning and adaptive capacity, much like an immune system (e.g., SARS experience for COVID, GFC for central bank responses). Practical policy implications include focusing on reskilling rather than just financial transfers to restore dignity and societal participation for those affected by economic shifts. Addressing collective action problems, such as vaccine distribution and overcoming vaccine hesitancy, requires leveraging behavioral economics, psychology, and rebuilding trust in science, especially among historically marginalized communities. The conversation extends to the paradox of social insurance, noting that while heterogeneous societies offer better diversification for insurance, homogeneous societies exhibit a greater willingness to provide it. This tension necessitates fostering common identity and caring within diverse populations. Furthermore, the concept of "resilience inequality" is introduced, highlighting how disparities in the ability to bounce back exacerbate wealth and income inequality, as those with greater resilience can take on more risks and accrue greater returns. The episode underscores the need for policies that ensure equal opportunity to innovate and mitigate scarring effects from crises, promoting a more equitable and adaptable society.

robustness is a different concept and resilience and what I often use is this um story by the French poet in 17th century who compared robustness as with the oak and is very robust against winds in your stance very very forcefully there doesn't move at all and the sealant is more like a reed which is you know constantly swinging back and forth as the wind blows but there's a big difference between the oak and the reed if the wind becomes very very strong the oak falls over and then can't get back up while the leaders constantly needs to be very volatile all the time but it always comes back so it's much more resilient.

robustness has a robustness barrier once you correct it the robustness barrier you can't come back well resilience is all about coming back.

the french poet de la fontaine 17th century in the poem the read talks to them to their organs as I bow and I bend but I don't break and I think that's a principle of resilience uh in contrast to robustness.

it seems something which is very volatile might not be the most robust thing I might not most uh because it might break it might break the robustness barrier and something which constantly moves and is agile and is changing to the circumstances seems at the end of the day much more resilient and it's a better way to arrange society to have a more stable society.

you have to really distinguish risks from which you can bounce back if you're agile and adjust and other risk from which you get trapped and you can't bounce back and that's I think the distinction between different types of risks is the key to understand.

if you understand this how this whole thing amplifies and then it leads to this feedback effects that's very very important in particular when people interact and that's when the social contact comes in and a good social contract essentially tries to mitigate these feedback loops which are a combination of externalities and if I may use some economic language some strategic complementarity so that's what I call these feedback externalities.

if you have a tipping point you might just at that point might become worse and worse and you can't do anything against it anymore and that's you know what you really have to avoid and you see this a lot in the environmental dimension as well because you mentioned environment so if you think about the gulf stream stopping once the gulf stream stops you cannot start it again very easily so there's a tipping point.

one another message of the book is you might want to expose you know a society to some smaller shocks at least don't kick the can down the road in order to avoid a small shock knowing that actually it will become a much bigger one later on and we will not be able not trained to handle the bigger shock.

insurance in a resilient environment doesn't necessarily mean that if somebody suffers some financial losses I will immediately compensate it with some money it might mean that I help him to get out of the hole and he has to do it on his own and this way he will bounce back.

it's very important to distinguish between income inequality wealth inequality and what I talk is about resilience inequality so that's essentially for some people there are poor in resilience because they can't bounce back and if other people they're very easy for them to bounce back.