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More Complexity

Summary:
From Peter Radford Economists have been talking about complexity for a very long time.  This may surprise many of you given the state of mainstream economics, but it is true.  A good place to discover a preliminary history of complexity in economics would be the short volume edited by David Colander published in 2000.  The papers it contains were all presented at a History of Economics Society Conference in 1998.  Colander provides a good introduction and tries to put complexity into the context of economics since its inception.  There are times when, in my opinion, he errs a little too much in favor of the older methodologies as if he finds it difficult to shed old habits himself.  Nonetheless the papers in the volume cover a wide and interesting territory, including the similarities

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from Peter Radford

Economists have been talking about complexity for a very long time.  This may surprise many of you given the state of mainstream economics, but it is true.  A good place to discover a preliminary history of complexity in economics would be the short volume edited by David Colander published in 2000.  The papers it contains were all presented at a History of Economics Society Conference in 1998.  Colander provides a good introduction and tries to put complexity into the context of economics since its inception.  There are times when, in my opinion, he errs a little too much in favor of the older methodologies as if he finds it difficult to shed old habits himself.  Nonetheless the papers in the volume cover a wide and interesting territory, including the similarities between biology and economics.

There is no point in presenting a summary of the various papers here, but perhaps it is worth mentioning that in Colander’s own contribution he evaluates some of the more well-known names in the history of economics and determines whether they would be more or less important were their standing simply built upon their understanding of the role of complexity.  The people coming under his scrutiny are a who’s-who of economic thought: Smith, Malthus, Ricardo, Mill, Marx, Walras, Marshall, Hayek, and Keynes all get a going over.  Happily for those us unconvinced by the dead-end that is called general equilibrium Walras gets a solid demotion, as does Ricardo.

In my last note I mentioned that economics has, traditionally, been heavily interested in what I called “a battle with scarcity”.  This seems to have confused people.  It is not exactly a novel idea on my part! Robbins put it this way in 1932:

“The economist studies the disposal of scarce means. He is interested in the way different degrees of scarcity of different goods give rise to different ratios of valuation between them, and he is interested in the way in which changes in conditions of scarcity, whether coming from changes in ends or changes in means—from the demand side or the supply side—affect these ratios. Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

This quote is familiar to you all I am sure.  So quite why my suggestion that economics has been interested in the battle with scarcity befuddles me.

Perhaps it is because we now live in an era of relative abundance and can spend more of our time concerning ourselves with the distribution of that abundance.  Perhaps, also, it is because we take for granted the enormous accumulation of practical knowledge over the past two centuries that have made this abundance possible.  There is a difference between thinking of the earth has being an abundant home for us all, and thinking about just how tractable that abundance is to us.  Obviously that part of the potential natural resources available in a practical sense is a function our ability to get at them.  This is why many of the narratives describing imminent depletion of resources have fallen foul of technological advance.  This is also why Malthus fell from grace despite having a very sophisticated view of the dynamism of an economy.  Indeed it is arguable that Malthus had a more sophisticated view of the complexity of reality than his famous rival, Ricardo.  What neither took into account was the consequence of constant learning and its impact on our ability to generate accessible wealth.  In other words our ability to overcome scarcity.

An added wrinkle, while I praise Malthus for his understanding of the dynamics of social change, is that his influence on Darwin remains controversial.  Economists took somewhat of a wrong turn when they put all their emphasis on competition as a driver of change, clearly reality includes cooperation as well, but they are not alone.  Altruism remains a tough subject for  evolutionary biologists to deal with — is it just a subtle form of selfishness?  In any case these words by Darwin could easily have been written by Malthus twenty years or so before him:

“all nature is at war, one organism with another, or with eternal nature.  Seeing the contented face of nature, this may at first be doubted; but reflection will inevitably prove it is true.”

Yes there are theoretical upper limits on how much we can take from the earth, but a more useful discussion is about our technological capability to approach that limit in anything remotely like a cost effective manner.  Theoretical and practical abundance are two separate things and the battle with scarcity is the battle to expand the space of the practical within the space of the theoretical.

This in no way diminishes concerns about ecological damage, it is simply a statement that economics has a historic concern with scarcity, which is an uncontroversial fact of history and not a shocking invention on my part.

Decision makers in an economy are constantly bumping into the reality of complexity, and since getting at a single “solution” or arriving at a single “equilibrium” is not reliably possible in a complex system they have a tendency to conflate it with a higher order of complicatedness.  I don’t blame them for this.  Indeed the essence of business strategy is to carve off a piece of reality and attempt to control it in order to make decision-making both possible and relevant.  So decision makers substitute a complicated system for a complex one and hope that the former is a good enough approximation to the latter such that their decisions yield the desired results.  Economists have gone down this path.  Rather than shift entirely into a complex mode of thought, they continue to model as if the economy is just extremely complicated.  Apparently Murray Gell-Mann’s saying that “the only model of a complex system is the system itself” has failed to penetrate far enough into economic thinking.

There are numerous features of a complex system that set it apart from a merely complicated one.  From my perspective the most important is that complicated systems rely on exogenous effects to induce change, whereas a complex system has within itself the ability to adapt and learn.  This is the single most appealing reason to think of an economy as a complex system.  Economies constantly learn.  Each iteration of an economy — each computation — allows it to build experience and allows it to include novelty in the next iteration.

This is why I split economic knowledge into two categories: primary and secondary.  Business activity centers on taking novelty and making it routine.  Routine knowledge, what I refer to as primary knowledge, is the grist of all business activity.  It is easily replicable, scalable, and controllable.  It is easily codified into business processes that can be managed towards a specified goal.  It is how we, to use Hidalgo’s term, embody knowledge into the products and services that form the core of economic transacting.  But primary knowledge has a great flaw: it depends on a static context.  By this I mean that the code assumes an unchanging environment in order to retain its efficacy.  There is no use in having the best buggy whip code when the future of transport is the internal combustion engine.  Secondary knowledge is that which allows us to adapt to such changes in context.  It is more heuristic and expensive to maintain.  It relies on experimentation and superior cognitive abilities.  It is the source of our ability to try new things in the face of the changed environment.

This simple division of knowledge is my adaptation of the work of people like the evolutionary psychologists Plotkin, Tooby, and Cosmides.

By the way I am not entirely sure that Gell-Mann meant that quote I gave above.  In his own description of algorithmic information content [AIC] he allows complex systems to be tractable to algorithms shorter than a description of the system itself.  He reserves the one-to-one description for chaotic systems.  In any case, the continuous rise of practical knowledge that underlies our rising prosperity can be looked at through the lens of AIC.  Early discoveries were in a space occupied by lower information content products and services.  They were easy to code, replicate, and produce.  Newer technologies gave us the ability to penetrate the space occupied by more complex systems with longer algorithms.  Each wave of discovery has allowed us to push further from the early simple systems.   But the ongoing goal of business is to find routines that make what appears to be complex into something more simple.  Inevitably that increases the interdependencies of the production process and moves us from a world of self-sufficiency into one of communal group dependency.

Which brings us back to Adam Smith and the division of labor, and the historic interest of economists in complexity.

Whatever that is.

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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