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e-ISSN: 1647-7251

Vol. 15, N.º 2

November 2024-April 2025

REVISITING THE SECULAR STAGNATION HYPOTHESIS IN THE LIGHT OF THE

COMPLEXITY PARADIGM

HENRIQUE MORAIS

hnmorais@gmail.com

Degree in Economics from Universidade Técnica de Lisboa / Instituto Superior de Economia e

Gestão. Master's degree in International Economics from ISEG. PhD in International Relations:

Geopolitics and Geoeconomics from Universidade Autónoma de Lisboa. He works at Banco de

Portugal (Portugal) where is Head of Innovation and Support Division of Markets Department. He

was a Consultant for the Portuguese Post Office (CTT), Chairman of the Executive Committee and

Director of Invesfer S.A., a company of the REFER Group, and Director / CEO of CP Carga. He

teaches at Universidade Autónoma de Lisboa (in the Departments of Economics and Business

Sciences and International Relations) and on the MBA in Corporate Finance at Universidade do

Algarve. He is also a member of the Foreign Relations Observatory of UAL, where he has been

involved in various research projects, as well as assiduous participation in the various editions of

Janus - International Relations Yearbook.

Abstract

After the disruptions brought, also to the macroeconomic scenario, by phenomena such as

the COVID-19 pandemic and the invasion of Ukraine, it is likely that the theme of secular

stagnation of economic growth, taken up again in 2013 after Alvin Hansen's original

contribution, will once again occupy a central place in geo-economic research and analysis,

not least because of its empirical validation. The dominant paradigm, at least since the

beginning of the 20th century, not only in the so-called exact sciences, but also in other areas

of the social sciences such as economics, has been characterised by determinism, almost

unlimited trust in linear models, their conclusions, and their near infallibility. The lack of

precision of these models has been evident, particularly in what is supposed to be their great

strength, that is, their predictive capacity. Events such as the financial crisis of 2007/2008,

the European sovereign debt crisis, the significant increase in the contribution of emerging

markets to the global wealth, have shown how these linear models are limited and, also for

this reason, are likely to be viewed with some skepticism by decision-makers. Given this

conceptual framework, we intend to revisit the secular stagnation thesis, in its fundamental

theoretical foundations, but also in the empirical evidence with the most recent data and, in

addition, to look at an alternative vision to the mainstream. This vision is embodied by

complexity theory, with its conviction that phenomena don't necessarily behave in a linear

model, so it's difficult to identify one that covers all the characteristics under study, imbalance

is the usual characteristic of systems and, finally, disorder, not order, is typically the situation

in systems. Seieing these approaches as a complement to, rather than a break with, the

mainstream, we ultimately tried to remain faithful to the founding principles of science,

starting with openness to change, to new working methods, to new paradigms.

Keywords

Secular Stagnation, Economic Policy, Complexity, Linear Models.

JANUS.NET, e-journal of International Relations

e-ISSN: 1647-7251

VOL 15 N.º 2

November 2024-April 2025, pp. 55-71

Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

Resumo

Após as disrupções trazidas, também ao cenário macroeconómico, por fenómenos como a

pandemia do COVID 19 e a invasão da Ucrânia, é provável que o tema da estagnação secular

do crescimento económico, retomado em 2013 depois do contributo original de Alvin Hansen,

venha novamente a ocupar, até pela sua verificação empírica, um lugar central na

investigação e na análise geoeconómica. O paradigma dominante, pelo menos desde o início

do século XX, não apenas nas ciências dita exatas, nas também noutras áreas das ciências

sociais, como a economia, tem sido caracterizado pelo determinismo, pela confiança quase

ilimitada nos modelos lineares, nas suas conclusões e na sua quase infalibilidade. Tem sido

evidente a falta de precisão destes modelos, nomeadamente naquilo que supostamente seria

a sua grande força, ou seja, a capacidade preditiva. Acontecimentos como a crise financeira

de 2007/2008, a crise das dívidas soberanas europeias que se lhe seguiu, o aumento

significativo do contributo dos mercados emergentes para a riqueza global, têm mostrado

como estes modelos lineares são limitados na sua capacidade de análise e, também por isso,

suscetíveis de virem a ser olhados com algum ceticismo pelos decisores. Perante este quadro

concetual, pretendemos revisitar a tese de estagnação secular, nos seus alicerces teóricos

fundamentais, mas também na evidência empírica com os dados mais recentes e, para além

disso, olhar para uma visão alternativa à do mainstream. Essa visão é encarnada pela teoria

da complexidade, com a sua convicção de que os fenómenos não têm necessariamente um

comportamento linear, pelo que é difícil identificar um modelo que cubra todas as

características em estudo, o desequilíbrio é a característica habitual dos sistemas e, por fim,

a desordem, e não a ordem, é tipicamente a situação dos sistemas. Vendo nestas abordagens

um complemento, e não uma rutura com o mainstream, tentámos afinal mantermo-nos fiéis

aos princípios fundadores da ciência, desde logo a abertura à mudança, a novos métodos de

trabalho, a novos paradigmas.

Palavras-chave

Estagnação Secular, Política Económica, Complexidade, Modelos Lineares.

How to cite this article

Morais, Henrique (2024). Revisiting the Secular Stagnation Hypothesis in The Light of the

Complexity Paradigm. Janus.net, e-journal of international relations. VOL 15 N.º 2, November

2024-April 2025, pp. 55-71. https://doi.org/10.26619/1647-7251.15.2.3.

Article received on 8 July 2024 and accepted for publication on 16 September 2024.

JANUS.NET, e-journal of International Relations

e-ISSN: 1647-7251

VOL 15 N.º 2

November 2024-April 2025, pp. 55-71

Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

REVISITING THE SECULAR STAGNATION HYPOTHESIS IN THE

LIGHT OF THE COMPLEXITY PARADIGM

HENRIQUE MORAIS

Introduction

The break-up of the Bretton-Woods International Monetary System, the currency crises

of the 1990s, the financial crisis of 2007/2008, the Great Recession of 2009, and the

economic and inflationary crisis following the COVID-19 pandemic, all these events

should perhaps prompt a rethink of the paradigms that have guided society and the

economy since the Second World War.

These episodes may be one-off movements of another phenomenon, more structural and

worrying, of stagnating economic growth in a significant part of the world economy,

specifically in the group of countries that the International Monetary Fund calls ‘Advanced

Economies’.

In this article we try to point out the importance of the initial work on the subject by

Alvin Hansen (in the 1930s) and, not ignoring the role that the Keynesians and the

American neo-Marxist school played in keeping the subject ‘alive’ throughout the second

half of the 20th century, that of economists such as Lawrence Summers in reviving the

subject at the end of the first decade of the 21st century.

Having defined our problem, namely the hypothesis of the materialisation of secular

stagnation in economic growth, the argument of this article is that traditional linear

models are not sufficient to explain the phenomenon and even less so to list the policies

needed to combat it.

A complex reality needs to be explained using models that can recognise this complexity

and, therefore, consider all the factors which influence this reality.

We looked for these factors in complexity theory, presenting its assumptions and their

application to the phenomenon under study, starting with the fundamental starting

assumptions that the normal situation of social phenomena is imbalance, self-

organisation, which suggests the spontaneous emergence of new global patterns from

local interactions of subunits and, finally, disorder, rather than order, as the typical

system’ situation.

Perhaps for all these reasons, the technological advances of recent decades, particularly

with the digitisation and robotisation of large segments of our economic activity, have

not been enough to provide us with robust and lasting economic growth.

JANUS.NET, e-journal of International Relations

e-ISSN: 1647-7251

VOL 15 N.º 2

November 2024-April 2025, pp. 55-71

Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

In this article, after a brief presentation of the contributions of Alvin Hansen and Lawrence

Summers, we revisit, albeit briefly and in a very general way, linear models, and the

theory of complexity, to end with a vision, in the light of the theory of complexity, of the

phenomenon of stagnation in world economic growth.

The stagnation of world economic growth: the role of Alvin Hansen

The shadow of what would become the most dramatic and intense economic phenomenon

in centuries (the Great Depression of 1929-30) was still hanging over American society

and the economy when one of the most eminent economists in the United States, Alvin

Hansen, gave the speech that would launch the concept of secular stagnation of economic

growth

It was March 1939, and, at one point, Hansen said about the situation at

the time: "This is the essence of secular stagnation, sick recoveries which

die in their infancy and depressions which feed on themselves and leave a

hard and seemingly immovable core of unemployment" (Hansen, 1939: 4).

While acknowledging the complexity of the period that the United States would be going

through, after times of growth and expansion (westwards) that characterised much of

the 19th century, which is clear when he says

“We are passing, so to speak, over a divide which separates the great era

of growth and expansion of the nineteenth century from an era which no

man, unwilling to embark on pure conjecture, can as yet characterize with

clarity or precison" (ibid.: 1).

Hansen points to three factors that would have been at the origin of the strong

investment flows in the first decades of American economic history, thus guaranteeing

abnormally high levels of gross domestic product growth, compared to the rest of the

world, and which would appear to be running out, or at least decreasing in intensity:

population growth, inventions and the discovery and development of new territories and

resources (ibid.: 3).

Let's start with demographics

The thirties brought a slowdown in population growth to about half of what had been

recorded in the previous decade (in which the US population would have increased by

about sixteen million people) and forecasts pointed to less than a third in the forties

(ibid.: 2). The apparent stagnation of the population implied "serious structural

maladjustments which can be avoided or mitigated only if the economic policies,

appropriate to the changed situation, are applied" (ibid.: 2).

The speech by what many called the "American Keynes" was entitled "Economic Progress and Declining

Population Growth".

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Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

At a glance, the economy's fundamental problem emerged: underemployment, that is,

the inability to achieve full employment (ibid.: 4). Hansen suggested that the main factor

in the genesis of underemployment was weak population growth, insofar as, by

conditioning the increase in demand, it created the potential danger of economic

stagnation and effective underemployment of capital and labour.

Hansen goes further, stating that

"it is accepted by all schools of current economic thought that full employment

and the maximum currently attainable income level cannot be reached in the

modern free enterprise economy without a volume of investment

expenditures adequate to fill the gap between consumption expenditures and

that level of income which could be achieved were all the factors employed

(…) Thus we may postulate a consensus on the thesis that in the absence of

a positive program designed to stimulate consumption, full employment of

the productive resources is essentially a function of the vigor of investment

activity. Less agreement can be claimed for the role played by the rate of

interest on the volume of investment. Yet few there are who believe that in a

period of investment stagnation an abundance of loanable funds at low rates

of interest is alone adequate to produce a vigorous flow of real investment

(…) I venture to assert that the role of the rate of interest as a determinant

of investment has occupied a place larger than it deserves in our thinking. If

this be granted, we are forced to regard the factors which underlie economic

progress as the dominant determinants of investment and employment”

(ibid.:5).

And here comes the second theme, inventions. Hansen states that

“considering the economy as a whole there is no good evidence that the

advance of technique has resulted in recent decades, certainly not in any

significant measure, in any deepening of capital. Apparently, once the

machine technique has been developed in any field, further mechanization is

likely to result in an increase in output at least proportional to and often in

excess of the net additions to real capita. Tough the deepening process is all

the while going on in certain areas, elsewhere capital-saving inventions are

reducing the ratio of capital to output” (ibid.:7).

Perhaps this inability of "further mechanization" to prove itself as a creator of added

value might be an indication that Hansen also saw the possibility that, like the economy,

technology could also work in very long cycles of successive expansion and contraction.

The discovery of new territories and resources is perhaps the most immediate reason

given by Hansen to justify the stagnation of economic growth. In fact, in the last decade

of the 19th century, following the progress of the railway, the westward expansion of the

USA was completed. To quote Hansen,

“it is not possible, I think, to make even an approximate estimate of the

proportion of the new capital created in the nineteenth century which was a

JANUS.NET, e-journal of International Relations

e-ISSN: 1647-7251

VOL 15 N.º 2

November 2024-April 2025, pp. 55-71

Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

direct consequence of the opening up of new territory (…) What proportion of

new capital formation in the United States went each year into the western

frontier we do not know, but it must have been very considerable. Apparently

about one-fourth of the total capital accumulations of England were invested

abroad by 1914, and one-seventh of those of France. These figures, while

only suggestive, point unmistakably to the conclusion that the opening of new

territory and the growth of population were together responsible for a very

large fraction - possibly somewhere near one-half-of the total volume of new

capital formation in the nineteenth century” (ibid.:9).

In conclusion, even knowing how Hansen devalued monetary factors, also because of the

emphasis he placed on demography, it is curious that this great economist considered

that the Great Depression was particularly significant namely because it had at its genesis

broad monetary and technological shocks acting simultaneously.

Ironically, the topic was practically abandoned in the following decades, perhaps because

many of the measures suggested by Hansen to combat the phenomenon of secular

stagnation were part of the New Deal prescription, perhaps also because World War II

changed everything or quite simply because the long prosperity experienced in the post-

war period made the topic launched by Hansen very unappealing, even to science.

The stagnation of world economic growth: the contribution of Lawrence

Summers

The long silence mentioned previously was interrupted by Lawrence Summers in 2014,

when he recalled Hansen and pointed to the liquidity trap and the imbalance between

savings and investment as the deepest causes of the secular stagnation that, according

to him, was very probably returning to the United States.

Summers defines several aspects that characterise the process: the difficulty of economic

policy in achieving multiple objectives, that is, good use of productive capacity and

financial stability, which in turn is closely related to the fall in the equilibrium real interest

rate and the need for different approaches in economic policies (Summers, 2014: 65-

66).

He points to the profound change that the financial crisis of 2007-2008 brought to

macroeconomics, given that it went from a time when monetary policy aimed to reduce

the (small) amplitude of fluctuations in relation to the trend, to a scenario in which the

ambition is precisely to have to face the problem of minimising fluctuations around a

satisfactory trend (ibid).

He argues that although the response of economic policy in 2008 was much greater than

during the 1929-30 crisis, the projection of per capita GDP growth is in all respects

identical to that observed between 1929 and 1941 (Summers, 2016: 93 and 96). Our

In fact, the subject was not abandoned altogether thanks to the contributions of the American neo-Marxist

school, in the wake of Alexander Hamilton's legacy, personified by academics such as Paul Sweezy and Paul

Baran.

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Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

interpretation: a non-conventional super-aggressive monetary policy, at least in the 21st

century, has had results far below what is expected and what the monetary authorities

and governments would certainly like.

Summers (2014: 66) concludes that the crises have led to the destruction of jobs that

have not been replaced, with the biggest explanation for the downward trend in potential

gross domestic product being the reduction in capital investment, followed by the

contribution of labour and, to a lesser extent, the behaviour of productivity.

What about the causes of this anemic economic growth? Summers says that structural

changes in the economy have led to profound changes in the natural balance between

savings and investment, causing a fall in the equilibrium real interest rate associated with

full employment (ibid., 69). Later, the main question is what causes savings to rise and

investment to fall, creating this downward pressure, this tendency towards stagnation

(2016: 100).

The increase in savings is associated with changes in income distribution and profit

sharing (more inequality would imply higher savings), the accumulation of reserves or

capital flows and deleveraging and preparation for retirement, in a context where longer

life expectancy would generate more resistance to indebtedness

(ibid.: 100 and 102).

The fall in the propensity to invest (ibid.: 102 and 103) is the result of lower population

and/or technology growth, less massification of the economy and, finally, lower prices

for capital goods.

Rachel and Summers (2019: 46) go even further and conclude that the private sector of

the economy is likely to be captured by an equilibrium of underemployment and low

inflation if real interest rates cannot fall well below zero per cent.

Summers is one of a large group of academics who emphasise the prevalence of demand-

side factors as the main determinants of the phenomenon of secular stagnation.

Other authors consider that secular stagnation is mainly the result of supply-side factors.

For example, Gordon and Crafts say that stagnation is evidence of a sharp decline in

long-term potential growth, while Rogoff, with his so-called "debt supercycle" hypothesis,

links the stagnation of economic growth to the long period of indebtedness of economic

agents, which would have come to an end and given way to a progressive process of

financial deleveraging.

Revisiting linear models and complexity theory

The search for phenomena that show standardised behaviour, with characteristics of

regularity and repetition that allow for a better explanation, is probably one of the most

universal characteristics of the various fields of science. In these characteristics,

scientists find solid bases for prediction, something that in modern times, due to the

Summers points out that household deleveraging and early repayment of debts are forms of saving (ibid.,

102).

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e-ISSN: 1647-7251

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Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

strong media pressure, makes this prediction of phenomena or certain variables a core

objective for the comfort of public opinion

The social sciences, and in particular economics and international relations, are no

exception and have been intensifying the continuous search for models based on strong

quantitative robustness that are supposedly (more) suitable for explaining social

phenomena.

To be fair, the importance of modelling is intrinsic to the very emergence of economics,

if we accept, as the author of these lines does, that this moment occurred with the

classics, namely Adam Smith and David Ricardo, and with the model of comparative

advantages, which through the endowments of productive factors explained under what

conditions countries could have a mutual interest in engaging in exchange, in

international trade, benefiting from the situation of autarky

In fact, the geopolitical importance of these men's work is notable, particularly as they

helped to foster commercial cooperation to the detriment of mercantilism's main

objective, that is, the accumulation of precious metals, which often fostered conflict to

the detriment of international cooperation.

The neoclassicals, in their attempt to explain the mechanisms underlying international

trade, created mathematical general equilibrium models and demonstrated, for example,

how an increase in the relative price of a good leads to an increase in the real income of

the factor most used in the production of that good and, conversely, to a decrease in the

real income of the other factor

. This also highlights the attempt to predict the evolution

of one variable according to the observed behaviour of another variable/factor.

And John M. Keynes revolutionised macroeconomics in the 20th century with his General

Theory, by introducing the concepts and practices of the science in which he was

originally trained, mathematics. The multitude of admirers he garnered from a very

young age and who also contributed with their own research to Keynesianism emerging

as one of the main currents/schools of economics in the 20th century were not unrelated

to the novelty that Keynes brought to academia: the massive use of highly advanced

mathematics, which demonstrated that it was possible to try to explain social phenomena

using the tools of the exact sciences.

Keynes won the admiration of young economics students largely because of the

fascination aroused by his mentor's new linear approaches.

These formulations of the attempt to explain the economic problem are based, among

other things, on two fundamental principles: on the one hand, that equilibrium is by

nature the point towards which economic systems and phenomena must converge and,

on the other, that these can be explained by linear models.

Just to cite recent examples, take the pressure on the Hawaiian authorities for supposedly not being able

to predict the intensity of the fires that caused hundreds of victims in August 2023 or, on another level, the

permanent tension, and millions of dollars of "incentive" for scientists to be able to find regularities in the

behaviour of the SARS-COV 2 virus and thus quickly find a vaccine for the disease.

The model, which was very sophisticated for its time (early 19th century), was important in moving away

from the mercantilist doctrine, which was dominant at the time, but also because it made it possible to

anticipate what the pattern of productive specialisation of the countries involved in trade should be.

A mandatory reference for the Heckscher and Ohlin model and, above all, for the Stolper-Samuelson

theorem.

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e-ISSN: 1647-7251

VOL 15 N.º 2

November 2024-April 2025, pp. 55-71

Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

An exemplary example of the first principle is the balance between supply and demand

one of the foundations of economic theory and a central element in explaining the

essential economic problem: how markets work, how the price of goods and the income

of economic agents are determined.

Some argue that equilibrium is more central to the economic and business sciences than

to many other sciences, which in fact helps to differentiate economics:

“A characteristic feature that distinguishes economics from other scientific

fields is that, for us, the equations of equilibrium constitute the center of our

discipline. Other sciences, such as physics or even ecology, put comparatively

more emphasis on determination of dynamic laws of change...Certainly there

are intuitive dynamic principles...the difficulty is in transforming these

informal principles into precise dynamic laws” (Mas-Colell et al, 1995: 620).

Dynamic principles can easily be found in the law of supply and demand, namely when it

is postulated that the price increases (decreases) if demand is higher (lower) than

supply

. However, although it is widely believed that it is difficult to transform "informal

principles" into "dynamic laws", the truth is that economists' belief in equilibrium models

is "almost blind", both in macroeconomics and microeconomics.

The second principle benefited from the intrinsic "beauty" of linear equations (usually

easily understood by non-literate people and, above all, difficult to refute) and also from

the ease with which linear models can be identified and represented.

Mathematics and its derivatives became a powerful tool for economists, due to their linear

behaviour, for strengthening analysis and, not least, for transmitting to economic agents

their powerful ability to predict economic phenomena

Also very important was economists' realisation of the growing importance of their work,

not only for companies and families, but also for political decision-making. In other

words, economists quickly realised the importance of putting budgetary, fiscal, monetary

and exchange rate policy instruments at the service of political decision-makers in order

to influence the economic cycle.

Ironically, one of the main reasons for the success of linear models among economists

(the simplicity of their formulation and their results) was, in the opposite direction, also

a factor in the success of these approaches among politicians: for them, the mathematical

foundation, based on formulations that are often hermetic and incomprehensible,

becomes, due to the inability to refute them, a kind of "sacred cow"... which further

contributes to the conviction of generations of economists that they are the owners of an

(almost) absolute truth.

Or the IS/LM curves that reflect the relationship between interest rates and income.

In the IS/LM curves, "dynamic principles" can be identified, for example, when explaining the consequences

for IS when the interest rate increases (shift to the right), that is, an increase in income/production.

There is some similarity in phenomena of a very different nature, or rather, a number of these phenomena

are explained using very similar models. One example is the central equation of the Black-Scholes model

for the price of options, which is very similar (or at least highly correlated) to the heat flow equation in

physics.

JANUS.NET, e-journal of International Relations

e-ISSN: 1647-7251

VOL 15 N.º 2

November 2024-April 2025, pp. 55-71

Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

Keynes himself recognised that systems are rarely in equilibrium, but rather tend to

gravitate around the point of equilibrium without reaching it, at least as a steady state

and so the attempt to express the behaviour of these systems through linear equations

and models is often doomed to failure.

In this context, the oil crisis of the 1970s probably represented the first "jolt" to the self-

esteem of economists in terms of their belief in the merits and predictive capacity of their

models. Suddenly, a group of countries considered, in the nomenclature of the time, to

be underdeveloped, had the ability to band together in the Organisation of Petroleum

Exporting Countries and, in a coordinated manner, substantially increase oil prices,

causing disruption in the markets of the so-called "developed" countries and, directly or

indirectly, generating enormous volatility in these markets and a general increase in

inflation.

The currency crises of the 1990s, first in Asia in 1997, then in Russia (1998) and Brazil

(1999) were moments that further shook the general belief in the predictive capacity of

economic science through its linear models. These moments, however, were just the tip

of the iceberg for what was to follow, specifically the financial crisis of 2007/2008, the

European sovereign debt crisis between 2009 and 2014 and, finally, the quantitive easing

and non-conventional monetary policies.

We'll come back to this point later. For now, let's focus on the fundamental structuring

aspects of complexity theory.

Determinism as the main characteristic of the dominant paradigm in science, at least

between the 18th century and the first half of the 20th century (in what some authors

call The Newtonian Paradigm - for example Mateo et al. 2002) began to be questioned

at the beginning of the 20th century, in quantum physics, when Nobel Prize winner

Heisenberg postulated what became known as the uncertainty principle: "the more

precise the determination of the position of a particle, the less precise the prediction of

its momentum from the initial conditions".

We don't dare identify a single, universal definition for complexity theory or even for the

idea of complex systems. However, recognising that systems are adaptive and complex,

and can hardly be analysed by linear models alone, would have been the first important

step in the development of this area of science.

Rosser (1999) says that "It is not surprising that there is no consensual definition of a

term as complex as 'complexity'." He goes on to say that

"a dynamical system is complex if it endogenously does not tend

asymptotically to a fixed point, a limit cycle, or an explosion. Such systems

can exhibit discontinuous behaviour and can be described by sets of nonlinear

differential or differential equations, possible with stochastic elements”.

Mason (2001) identifies three fields for complexity, namely "algorithmic complexity", in

which complexity is associated with the difficulty of describing the characteristics of the

system, "deterministic complexity", in which the relationship between "two or three key

Defined in the physics sense of something that doesn't change over time.

JANUS.NET, e-journal of International Relations

e-ISSN: 1647-7251

VOL 15 N.º 2

November 2024-April 2025, pp. 55-71

Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

variables can create systems that are quite stable and prone to sudden discontinuities"

and, finally, "aggregate complexity", related to the way in which individual elements

work in defining the behaviour of complex systems.

Schneider and Somers (2006) state that there are "three interrelated constitutive

elements of CT - non-linear dynamics, chaos theory and adaptation and evolution", the

last of which challenges the dominant Darwinian version that the evolution of species is

dependent on natural selection, suggesting instead that "although selection is important,

species play a role in their evolution and adaptation to external changes". The corollary

for systems in general, and not just living organisms, is that the capacity of systems to

evolve is differentiated and that, in some cases, "small forces can result in disturbances

in systems".

Walby (2007) and Olmedo (2010) say, respectively, that "complexity theory is a body of

work that addresses fundamental questions about the nature of systems and their

changes" and "complexity science seeks to study, describe and explain the behaviour of

complex adaptive systems".

Despite this multiplicity of views, it is possible to find some common ideas between the

authors cited, namely the belief in the non-linear behaviour of many phenomena, which

implies the enormous difficulty in identifying a model that covers all the characteristics

under study (the whole is not just the sum of the parts), disequilibrium as the usual state

of systems and self-organisation (which suggests the spontaneous emergence of new

global patterns from local interactions of subunits) and disorder rather than order as the

typical "situation" of systems - identified, for example, in Lartey (2020) or David Ng

(2013).

There are many recent economic phenomena that seem to incorporate a large part of

the defining characteristics of the complexity paradigm in their behaviour.

The first, and obvious, but perhaps not the most important or impactful, is the fragility

of macroeconomic forecasts, materialised in very frequent errors on the most varied

dimensions

. How is it possible to understand this fragility in the century of

supercomputers and artificial intelligence, unless it is simply a corollary of all the

characteristics that shape and justify complexity theory?

In this sense, it is not surprising that the ECB (2022) recognised that "recent Eurosystem

and ECB staff projections have substantially underestimated the increase in inflation,

largely due to exceptional developments such as unprecedented energy price dynamics

and supply bottlenecks". The IMF (2023) stated that "ex post, the errors in the underlying

inflation forecasts for 2021 are potentially explained by four factors: a stronger-than-

expected output recovery; demand-induced pressure on supply chains; a temporary shift

in demand from services to goods; and a historically tight labour market. Ex ante the

pandemic fiscal stimulus appears to be a significant indicator of subsequent mistakes for

advanced economies." The latter explanation is still based on exactly the same linear

Deterministic complexity has more than just a coincidence of points in common with chaos theory.

This fragility of forecasts is not exclusive to macroeconomics, or even to economics. Two examples, among

many: on the eve of the bankruptcy of the US bank Lehman Brothers, which triggered the crisis of

2007/2008, one of the main rating agencies reiterated its top-quality rating (AAA) for the bank; in the week

of the invasion of Ukraine by Russia, experts were unanimous in admitting that Ukraine would not last more

than a month.

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Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

models as decades ago and is incapable of incorporating the possibility that price

behaviour is simply a non-linear phenomenon, capable of being conditioned, and

conditioning, a set of other variables, in a context of general market disorder.

Linked to the issue of inflation is another interesting dimension, that of monetary policy.

We have spent most of the 21st century worrying about the absence of economic growth

and almost no inflation. Monetary policy in Europe, but also in North America and a large

part of Asia, exhausted its traditional mechanisms when interest rates pushed us into the

"liquidity trap" and, as a last resort, resorted to unconventional monetary policies,

shattering the convictions of most economists, not only because we started to live with

negative interest rates but also because of the massive purchase programs by central

banks of public debt on the secondary market.

When many were doubting the effectiveness of the "atomic bomb of monetary policy",

precisely those unconventional policies that stubbornly failed to show results, here comes

the COVID-19 pandemic and the invasion of Ukraine and ... suddenly, inflation too!

But perhaps the most important sign of the complexity of economic phenomena is the

behaviour of gross domestic product (GDP) and the resurgence of the secular stagnation

thesis, to which we will return in a moment.

The stagnation of world economic growth in the light of complexity

theory

As we mentioned earlier, in recent decades and especially in the so-called advanced

economies, there has been a reduced GDP`s growth, especially given the long post-World

War II trend.

The behaviour of GDP was so unsatisfactory that it led to the revival of an approach that

had been almost forgotten since the Great Depression, the Secular Stagnation, and

renowned economists such as Lawrence Summers and Paul Krugman, among many

others, resurrecting the topic in 2013/2014, convinced that it was a threat, especially in

some advanced economies, namely the US and European economies.

Let's look at the empirical evidence, focusing only on the size of the wealth generated

(GDP) and the utilisation of productive capacity

Table 1 presents information on the average annual growth rate of gross domestic

product observed in a group of countries/economic zones, as well as forecasts of this

growth until 2029.

The authorities' main, and in some cases only, monetary policy objective is to stabilize the general price

level.

Strictly speaking, secular stagnation can be empirically proven by three strands of analysis/dimensions. The

first dimension corresponds to the wealth generated by a country or economic zone, in the case of the euro

area, and can be measured by gross domestic product (GDP) or the rate of capacity utilization, in this case

as an advanced indicator of what might happen. The second dimension, which is more financial, is related

to the balance of full employment and the possible need for interest rates in real terms (nominal rate minus

inflation) to be very low (or even negative) to ensure fundamental equality between savings and investment.

The third dimension has to do with demographics, or if we like the demographic transition that is affecting

the advanced economies.

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Henrique Morais

Table 1. Gross Domestic Product (constant prices) – annual average growth rate,

percentage

Source: International Monetary Fund, World Economic Outlook, April 2024, data worked up by

the author. Data from 2024 onwards is from IMF forecasts.

Two conclusions seem clear to us in this very long horizon of information: economic

growth in the world as a whole remains relatively high, taking into account long-term

historical patterns, and in a narrow range between 3% and 4% and, secondly, there is

an undeniable and progressive slowdown in the pace of growth in the advanced

economies, which are now growing at around 1.5% rather than the 3% they averaged in

the last two decades of the 20th century.

A more detailed analysis will find equally interesting micro-trends, for example the recent

behaviour of China's GDP, which now seems to be showing signs of a sharp slowdown in

its growth.

However, compared to 1999, when the GDPs of the USA, the Euro Area and China

accounted for around 29%, 22% and 3% of the world total respectively, by 2023 these

weights were 26%, 15% and 17%. We don't need to say much more about who the

winners and losers have been in this new century, just add that in the same years, the

advanced economies have gone from 80% to 59% of world GDP and, symmetrically, the

emerging markets from 20% to 41%.

Let's now look at the evolution of capacity utilisation in the US and the euro area, as

shown in the figure below.

As a curiosity, although in nominal terms the world's largest GDP is still prominently the US, in purchasing

power parity since 2016 the world's largest economy has been China and the gap between it and the US

has been widening.

1980-1989 1990-1999 2000-2009 2010-2019 2020-2027

World 3,2 3,1 3,8 3,7 2,9

Advanced Economies 3,1 2,8 1,8 2,1 1,6

European Union 2,1 2,1 1,7 1,7 1,4

Eurozone - 2,0 1,4 1,4 1,1

Emerging Markets 3,3 3,7 6,0 5,0 3,8

USA 3,1 3,2 1,9 2,4 2,1

China 9,8 10,0 10,3 7,7 4,2

Japan 4,3 1,5 0,5 1,2 0,6

Germany 1,9 2,2 0,8 2,0 0,6

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Henrique Morais

Figure 1: Capacity utilisation rate - USA and euro area, percentage

Source: FED St. Louis e ECB

The information shows that capacity utilisation remains at low levels and, since 2021,

has even been on a downward trajectory in both economies and is now below 80%,

reflecting excess installed capacity. The under-utilisation of productive capacity makes

significant increases in investment unlikely in the coming years, so supply is not expected

to make a significant contribution to any acceleration in economic growth.

Given this less than encouraging situation for the advanced economies and, especially,

for the euro area and the US, what conclusions can be drawn about the

scenarios/forecasts for the near future?

One perspective is, in the light of the current mainstream, to resort to the usual answers:

the centre of the world is changing, the emerging markets and, in particular, the Asian

economies are more competitive and are also taking advantage of the effects of increased

globalisation following the fall of the Berlin Wall, the advanced economies, on the other

hand, have structural problems and need reforms that are slow to be implemented,

demographics are also contributing to the slowdown in economic growth in the "richer"

economies, the poor industrialisation process in the West is beginning to show its effects,

among many other explanations.

The author has used these and other explanations several times. He won't refute them

now.

However, it may be worth considering whether all these imbalances, which are also

beginning to be felt in some emerging economies (the significant slowdown in economic

growth in China is a good example) are not a sign that we must assume the non-linear

100

Eurozone USA

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Revisiting the Secular Stagnation Hypothesis in The Light of the Complexity Paradigm

Henrique Morais

behaviour of multiple phenomena, so it will be difficult to find a valid model capable of

covering all the characteristics of this phenomenon, in this case the secular stagnation of

economic growth.

On the other hand, the last few decades have also reinforced that the situation of

disequilibrium will be the predominant characteristic of systems, rather than equilibrium,

as well as self-organisation, which suggests the spontaneous emergence of new global

patterns from local interactions of subunits and, finally, disorder, rather than order, as

the typical situation of systems.

Accepting these characteristics of the systems does not mean giving up the fight for what

seems to us to be the fundamental structuring element of economic policy: its anti-

cyclical nature, being able to help ensure that cycles of expansion above potential are

not perpetuated, otherwise they will inevitably result in high levels of inflation and being

prepared to combat cycles of economic contraction with effective measures.

Nor do they make it necessary to disregard most of the essential fundamentals of

economic science.

They only advise us to have the intellectual humility to accept new formulations, to look

closely at phenomena without prejudice and, above all, without fear of change.

Conclusions

The 21st century has seen a revival in academia of the hypothesis of secular stagnation

in economic growth, which was launched by Alvin Hansen in 1930.

In these lines, we have tried to demonstrate, firstly, the common features of the initial

approach and the more contemporary currents, namely those which, like Summers, who

was the one who revived the subject in 2013, are based above all on demand-side

factors.

These common approaches can be found both in the assumption that there is a risk of

this secular stagnation materialising in the more advanced economies, notably the US,

and also in the identification of many of its causes, namely demographics and

technological cycles.

We have tried to show the empirical evidence of this stagnation in economic growth,

limiting ourselves only, due to the nature of this publication, to the issue of gross

domestic product, thus leaving aside financial and demographic issues.

In this context, we have opened, or tried to open, the door to new approaches to the

phenomenon, also because we are convinced that the traditional responses of economic

policy have proved ineffective, in this as in other phenomena in economic systems: the

mainstream of economics is in danger of being emptied of what it is supposed to do,

which is to help make the best decisions so that the wealth and satisfaction of economic

agents can be maximised.

These decisions are based on linear models, the search for balance and the conviction of

an order that doesn't seem to characterise current phenomena, as crises follow one

another without us being able to predict them in time to avoid or minimise their impact,

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Henrique Morais

economic growth in advanced economies remains anemic and inflation, which was

supposed to be far from the medium and long-term horizon, has suddenly emerged with

high intensity.

All this calls for a humble and flexible outlook, attentive to new approaches, new ways of

looking at economic phenomena.

Complexity theory will certainly not be the answer to all of science's challenges. It can,

and should, be seen as a complementary approach to the mainstream and one that can

therefore enhance the models used in economics.

By presenting the thoughts of some of the authors of complexity theory in this article,

by trying to look at secular stagnation from another perspective, we have perhaps

remained faithful to the revolutionary or, if you prefer, liberal origins of economic science,

in the sense that it is characterised by openness to changes in working methods, to new

paradigms, to the intelligence to evolve by taking on new ways of looking at reality.

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