Sunday , August 9 2020

Complex ideas

Summary:
From Peter Radford The economy as a sea of information, constantly churning, far from equilibrium, with computation its key activity.  It is complex.  It is inscrutable to any method that fails to accommodate its multitude of layers, interconnections, feedback loops, and constant dynamism.  Since reading Ilya Prigogine ages ago I have never understood how anyone could not view the economy through such a lens.  The interplay between creative forces needed to sustain life and the constant dissipation or disordering that inevitably follows upon such creativity is, to me, the central theme being played out in an economy. Given this, attempts to contain analysis within a neat box simply defy reality.  The instances of an economy that are unstable and out of equilibrium far outnumber,

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from Peter Radford

The economy as a sea of information, constantly churning, far from equilibrium, with computation its key activity.  It is complex.  It is inscrutable to any method that fails to accommodate its multitude of layers, interconnections, feedback loops, and constant dynamism.  Since reading Ilya Prigogine ages ago I have never understood how anyone could not view the economy through such a lens.  The interplay between creative forces needed to sustain life and the constant dissipation or disordering that inevitably follows upon such creativity is, to me, the central theme being played out in an economy.

Given this, attempts to contain analysis within a neat box simply defy reality.  The instances of an economy that are unstable and out of equilibrium far outnumber, enormously, those that are stable or in equilibrium.  Disorder is normal.  Order is rare.  Vanishingly so.  And, given the radical uncertainty that permeates the economy, we can only focus on the short term.

So, an economy can never be “efficient” because we have no way of knowing how to anchor the universal analysis of such efficiency.

Nor can it be “optimal” because we simply don’t have enough information to draw such a conclusion.  Or, rather, an economy may well be in an optimal position, but we could never know if it was.  It is incalculable. This is essentially Hayek’s argument against central planning re-focused on any argument that relies upon complete information.  We just cannot know.

Efficiency and optimality thus become arbitrary points fixed by choosing a slice of reality, attempting to control it, and ignoring all the rest. The much vaunted price system is such a slice.  No one knows whether it contains all relevant information.  No one.  Discussions of both efficiency and optimality lie outside the domain of pure economics once we realize the foolhardiness of any attempt to pin them down.  What is “optimal” is a political decision not an economic one because economics cannot discuss optimality without stepping outside reality.   Likewise efficiency is better discussed in the realm of some place like business where a small space can be carved out and controlled temporarily.  Even then any conclusion about efficiency is dependent entirely upon the space in question and is not scalable to the entire economy.

By the same token the entire heritage of general equilibrium within economics is invalid.  We know this not only because it fails to engage complexity, but also because of it internal admission: it can only appear to be valid by expunging the real world.  It then becomes an interesting intellectual exercise about something other than an economy.  It is a tour de force of art.  Wonderful to behold and of no significance to our understanding of economies.

I am not alone.

The list of famous economists who have broached the issue of complexity is long.  To quote Flavio Comim at length:

“Indeed, Alfred Marshall’s famous appeal for “economic biology” as the “Mecca of the economist”, Maynard Keynes’ emphasis on the instability of equilibrium positions and the role of expectations, Piero Sraffa’s and Nicholas Kaldor’s criticism of the partial equilibrium method due to the existence of increasing returns and non-linearities in economic processes, and Joan Robinson’s argument for the asymmetric consequences of time in economic theory are just a few examples of the importance of themes relating to complexity in the intellectual history of economics.”

He goes on to mention Schumpeter, Shackle, Hayek, and Goodwin also.

Just to pick out one short quote from Marshall:

“Nature’s action is complex: and nothing is gained in the long run by pretending that it is simple, and trying to describe it in a series of elementary propositions.”

Brian Arthur sees it this way:

“To state in another way, formally, we can say that the economy is an ongoing computation — a vast, distributed, massively parallel, stochastic one.  Viewed this way, the economy becomes a system that evolves procedurally in a series of events; it becomes algorithmic.”

Or, more provocatively, in the words of Cesar Hidalgo:

“Emphasizing the ability of products to augment human capacities can help us refine what we understand as the economy.  It helps us see the economy not as the careful management of resources, the wealth of a nation, or a network of financial transactions, but as a system that amplifies the practical uses of knowledge and knowhow through the physical embodiment of information and the context-specific properties that this information helps carry.  This is an interpretation of the economy as a knowledge and knowhow amplifier, or a knowledge and knowhow amplification engine: a complex sociotechnical system able to produce physical packages containing the information needed to augment the humans who participate in it.  Ultimately, the economy is the collective system by which humans make information grow.”

Knowledge amplification seems a very apt description of what an economy does.

It cannot be an accident that the modern rush to prosperity, what some call the “Great Enrichment”, coincides with an explosion of useful knowledge along with the cultural acceptance that deploying such knowledge is, indeed, useful.  It is neither capital nor labor that underlies the rush to prosperity, they are a power relation and are not economic quantities, but it is the application of an ever growing pool of useful knowledge to various sources of energy that produces wealth.

Pure economics, then, is a very narrow discipline.  It is the analysis of a system similar to Hidalgo’s that incorporates knowledge with energy in order to produce wealth.  It has a sort of Schumepterian narrative in that it needs to explain how growth occurs within such a system.  It is the story of how scarcity is overcome by applied knowledge.

Practical economics is much more broad and yet it is far less universal. It is no longer a discussion of the system.  It is a discussion of how various localized decisions have different outcomes.  Its focus is on problems of distribution, allocation, optimality and efficiency subject to the reality mentioned earlier.  It recognizes that those problems are riven through with arbitrary or ideological contingencies.  It takes into account human frailties and behaviors.  Its is intensely pragmatic and real-world.  It is far distant from Friedman’s “positive economics”. As such it is an adjunct to politics.

All this is my attempt to separate two entirely different discussions.  The first is about growth and the battle with scarcity.  The second is about the politics of how the fruits of the victory over scarcity are allocated.   They are two different conversations that need to co-habit rather than co-mingle.  By muddling the two conversations into one modern economics became a handmaiden to a particular political point of view.  It is fine to be an ideologically committed economist.  It is not fine to be obscure about that commitment.

It’s a question of ethics.

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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