The Geology of Economics?

by
Peter Radford
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from Peter Radford 

This is something I need to get off my desktop.  It’s just for fun …

Asymmetry is the very beginning and end of an economy.  It’s the bumps that matter.  Explain them and you explain the economy.  After all the very notion of exchange presumes differences between those involved, and difference is just another way off saying asymmetry.  Sweep the bumps away with a broad brush of supposedly superb logic and you eliminate the very object of your study.  That is if your intent is to study economies rather than economics.

Meanwhile ….

I love geology.  I am the first to admit that I am merely an enthusiastic amateur, but I love geology.  It explains what I see round me here in the mountains of southern Vermont.  I recently discovered, for instance, that a continental collision and the movement of vast slabs of the earth’s crust are the probable cause — albeit at a very long distance — of the series of fissures in the local rock from which water flows in the form of natural springs.  Some of that water ends up in my basement.  Continental collisions can have very unfortunate long term consequences.

Economists don’t think like geologists.  They are far more abstract.  They love building models and simplifying everything.  For instance, economists would not think in terms of plate tectonics, they would start with a hypothetical earth bereft of all variation.  A smooth earth.  They would give this earth all sorts of attributes.  They would model it in fine detail.  They would produce endless studies of its smoothness.  They would prove its smoothness.  They would delve ever deeper into the bountiful nature of smoothness.  They would assure us all that the earth is, indeed, smooth.

Despite what we see.

Mountains, to economists, would then be referred to as ‘smoothness failures’.  When some heretic points out that smoothness seems not to exist anywhere, an enormous effort would be given to explaining why the smoothness is there if only we look at the mountains the right way.  And, in any case, the mountains are a ‘failure’ to be dismissed and handed over to lesser theoreticians.  Like geologists — people who deal with the grubby material of reality and not the rarified beauty of abstraction and models.

In a triumph of logic over observation economists would then press on with their theories of smoothness.  They would ignore valleys.  They would ignore continents.  They would ignore oceans.  They would ignore everything right in front of them and persist in living in their abstraction.

Alternatively, they might observe the lumpiness of the earth and then argue that it tends towards smoothness which is its optimal state.  The only reason that it isn’t smooth, they might argue, is that artificial obstructions and man-made error prevent it from gliding effortlessly and instantly into its preferred smooth state.  This would be more plausible if only because of the tug of entropy.  It might, though, require thought about why we still see roughness in reality.  What is the power that maintains its structure despite that tug of entropy?

In any case, their models of this effortless movement would, no doubt, be based upon the activity of a ‘representative mountain’ and its partner in crime a ‘representative ocean’.

And so on.

You get the picture.

The oddity of being trapped in the sort of perfect world that so entrances economists is that when stuff happens they get both confused and indignant.  Confused because their models didn’t accurately predict the bumps and lumps of reality.  Indignant because the world ought to behave better and obey the rules economists have identified as being perfect for the maximization of something or other.  Surely the world would be much better place if only it obeyed the laws of economic models.  If only, or rather, ‘as if’.  Two words that crop up a lot in economics.

You get snippets of such an attitude every so often from luminaries in the trade.  An example is Mohamed El-Erian who opined in the Financial Times a few months back about the annual shindig in Jackson Hole organized by the Kansas Federal Reserve Bank [why does Kansas need such a thing?].

It is at this annual meeting that the great and good of central banking gather to socialize, chat about important things, pose for photos, and listen to very clever presentations on models of smoothness.   They also, periodically, ponder recent events and the errors of those very clever models.  In this vein, why, El-Erian asked, did the various Feds and their army of PhDs not get the recent trajectory of inflation and unemployment right?

Of course it’s always easy to ask such difficult questions when you’re not the one doing the hard work.  No doubt there were lots of conversations over splendid dinners in order to tease out exactly why the forecasts seem so inaccurate in hindsight.  And, equally, I imagine the armies of PhDs will promise to do better in future.  They will fine tune.  They will think more deeply.  They will dig into their math.  They will replace the bad bits.  And they will end up with new models of smoothness ready to take on the world with their usual confidence and good humor.

Naturally it is unlikely that they will just simply admit the rather obvious explanation for their modeling failure.  The earth isn’t smooth.  There are actual mountains, oceans, valleys and so on.  It is far too complex to reduce down into easily formulated models.  Its past echoes in its present.  It dictates its future.  But not too predictably in detail.  Only in broad strokes can the future be foreseen.  That confounded asymmetry is a real thing.  Those lumps and bumps are not ‘failures’.  They are facts.  They are the central facts to explain.

Over simplifying is a fool’s errand if your objective is have relevance to the complexity of reality.  There may, indeed, be exciting theories with broad explanatory power — plate tectonics explains a whole lot after all — but they must explain the observed world, not some alternative far removed from earth.  Relevance is at a premium when you are dealing with something like an economy comprised of millions of people.  Policy makers like those who gather at those fancy get-togethers the Fed arranges base their actions on the underlying theories of economics.  It would be nice for those affected to know that those theories are rooted in reality and not subverted by ideology or excessive abstraction.

In economics the central question is growth.  What is the equivalent of plate tectonics?  Is growth due to cultural shifts — those liberal ideas so admired why our libertarian friends?  Is it due to technological progress?  Is it due to a puritanical work ethic?  Is it some combination of the above?  How do institutions fit in?  What an endless muddle.  We still don’t have the answer.  Instead we have models based on vague and anachronistic quantities known as ‘labor’ and ‘capital’.  With a whole lot of foggy fudging thrown in for good measure.  Economies are aggregates of work, and work requires energy and information.  Perhaps we need to start there.

This leads us to: the problem with artificial worlds, no matter how clever, logical, and brilliantly exposited, is that they reflect the initial biases of those creating them.  In economics that bias has become a burden and distraction.  In our modern era the intrusion of ‘markets-are-perfect’ thinking into every nook and cranny prevents the subsequent artificial worlds containing much, if any, non-market activity.  The real world is littered with such activity.  And let’s not even comment on the pseudo psychology of rationality so beloved in certain quarters.  So it’s not surprising that economists have difficulty connecting back from their abstractions and into the real world.

I can understand why economics became distorted by market ideology in the 1950s.  It was dominated by the American determination to ‘prove’ the superiority of decentralized planning versus the more centralized version offered up by the Soviet Union.  Plus there was a lot of cash behind the professors and university departments who developed that point of view too.  Their theories were expensively bought.  The biases that crept in have left an indelible imprint on what is now accepted as mainstream.

Taking those purchased and biased initial assumptions to their logical end has given economics blindspots that hamper is usefulness.  It has no credible theory of production — at its extreme there are even those who challenge the existence of ‘supply’ as an economic phenomenon.  They claim, instead, that everything is demand and prices are simply set by competing sets of demand preferences.  This absurdity is an embarrassment to all concerned.  Do such people seriously claim that Ford Motor Company only manufactures vehicles because it likes cars?  And it only sells them when someone makes an offer greater than Ford’s own valuation of its cars?  The logic is impeccable.  The credibility is zero.  Economists like those making such claims are a laughingstock.  They can only exist within the most impenetrable safe and protected zones imaginable.  Yet they do exist.

So cue the laughing.

Back to geology.  The greatness of Hutton was his ability to observe the real world and then build ideas about reality directly from his observations.  He began with reality in order to explain it.  The importance of metamorphic and igneous intrusions into layers of sedimentary rocks is easy to see when you are open to discovery.  Extrapolating from that to the understanding of the processes and time involved was an extraordinary triumph of scientific logic — the kind of logic that economists prize highly.  Bold logic too in its context.  He demonstrated clearly that you don’t need to start from an artificial world and work backwards to reality.  You can start from reality and work forwards to prodigious insight.  Theories are fun when they explain something real.  They are simply mental exercises when they explain only themselves.

Hutton’s achievement was to use reality and explanations for how it came into being to defeat the ideological/religious explanations dominant at the time.  Cleansing theory of ideological bias is a necessary step.  It is one that economics keeps failing to take.

So the more astute question El-Erian and his ilk should be asking of those PhDs is why they bother in the first place.  Of course their models don’t predict well.  They aren’t built on planet earth.  They aren’t meant to explain or predict anything here.  They are meant to bolster the thing called economics.

He won’t ask that,  of course.

Meanwhile at least I have a better understanding about why my basement collects water every so often.  Goodness!  There are mountains and valleys out there!

Who knew?