The wilfully ignorant?
from Robert Locke and David Taylor
People who cling to the idea that the world is flat, that it was created in 2004BC, that the sun revolves around the earth or that neoclassical economics is true are the wilfully ignorant. Among them, the last are of particular interest to the bloggers here. The argument the neoclassical economists use to justify remaining in business (that their critics have not come up with a replacement to their science) is spurious but also curious. It is curious because neoclassical economists wilfully ignore those who have tried to do something about it. I offer as proof the curious case of the overlooked Swedish economists.
I ran across them in the 1990s when considering the revolution in Information Technology (IT). The IT revolution in a few decades transformed every aspect of our economic and business – indeed every aspect of our daily life.
Gunnar Eliasson , one of the Swedish economists who sought to make economics relevant as a discipline to the new world, noted in a comment about the transformation the IR had on organizational life, that he had conducted a series of interviews of managers carried out in 50 firms between 1965 and 1975, wherein the predominant characteristics of management behaviour for them “were short-term and long-range planning and a strong belief in repetitive environments, forecasting and centralized leadership of standardized production.” But when he interviewed managers in 50 firms between 1985 and 1995, 15 of them being in Information Technology, he noted that “out had gone reliance on detached analytical thinking in executive quarters, in had come experimental behaviour…the distinction between uncertainty and risk.”
He called the second environment, “the Experimentally Organized Economy.” It is experimental because entrepreneurs with several possible options “never know them all; even though they have stumbled upon the absolute best solution, they will never know it because the knowledge base is always insufficient. The business manager will never feel safe, and will always have to recognize the possibility of coming out a loser.” In this EOE failure need not be attributed to managerial ineptitude, as it would in a “full information economy,” but can come from unavoidable risk of the situation changing. Failure and correction to avoid it consequently have to be considered to be a normal business experience – one from which entrepreneurs learn, as in any experiment.
In an EOE, management behavior has changed from that encountered by Eliasson in firms during the first interview period. Managers not only moved from a “full information economy” to one of “information uncertainty,” but the kinds of knowledge used in entrepreneurial decisions is obtained differently. In the “full information economy” it is gained formally. In the EOE, it is more tacitly acquired skills and innate ability that count. Understanding, observation and judgement replace knowledge. (These quotes taken from Eliasson’s work are given pp. 2-3 in RR Locke & K. Schoene (2004) The Entrepreneurial Shift. CambridgeUniversity Press.
Many people have developed ideas that economists should have found useful to a reassessment of economic thought – Dominique Turcq’s group at the Boostzone Institute in Paris, for an instance, and Dave Taylor’s information system interpretations of the economy offered here.
Neoeconomists might (although they shouldn’t) feel justified in overlooking these “noneconomists”. The Swedish group behind the development of the idea about EOE, however, are economists. Moreover, they have specifically addressed economists because of what they perceive to be the urgent need for neoclassical economics to adapt its thinking to economic reality.
Specifically in 1998 the Swedish group made a determined effort to convince economists to adapt. They invited scores of economists all expenses paid to a three day conference in Stockholm to examine the state of economics. Lots of Americans came, the food was excellent, conference organizers leased a special train in which special tables for meeting were set-up, for a trip of all participants to visit, the oldest joint-stock company in the world, and the event closed with a gala dinner-dance in the beautiful museum that housed the “Vasa,” the 17th century ship reclaimed from the deep (like the Mary Rose).
The hosts, I suspect, did not get much of a return from the economists for their investment. The American economists I spoke with there, acknowledged, almost without exception, that neoclassical economic analysis could not deal with the new realities of the EOE. But they equally did not suggest how economics could be reformed for it to be relevant. Nothing, moreover, is heard about Eliasson and his colleagues in this blog concerning their suggestions. People I ask have never heard of them.
Why? This seems to be a case for neuroscientists or for the psychiatrists’ couch. Or do bloggers think otherwise? I asked analyst blogger Dave Taylor for his reactions.
My reaction is that neoclassical economics is not about the economy but about finance: costs or prices linking supply and demand. The experimental skills discussed by Eliasson are simply assumed to exist to be bought by investors or chief executives, leaving economists seeing CEO’s as the managers and skills in matching “just in time” physical supply and demand as irrelevant. We linguistically ignorant Anglophones, of course, are also notorious for thinking we know better than “foreigners”.
Eliasson’s position is somewhat closer to my cybernetic (navigational) model. His entrepreneur is sailing in a sea where he can only imagine the port, can only see what’s coming a short way ahead and can only determine errors in his expected position retrospectively (after drift has had time to happen). This wasn’t obvious in the earlier period. Neoclassical economists who have never been to sea in a small boat still think owners decide the captain’s schedule and all the captain has to do is plot the course accurately. Their model makes no provision for going off course. What we are seeing now are Titanic corporations going full steam ahead for golden ports, oblivious to the effect of this on the crew, the fuel supply and small boats in the same seas, and to drifting into dangerous waters where there is a good chance of being sunk by an iceberg.
Read Eliasson’s paper at Industrial Dynamics and Endogenous Growth to see what he meant by experimentally organized economy and competence blocs. A few sentences linking this perspective with Smith’s specialisation, Marshall’s industrialisation, the early Schumpeter’s creative destruction and their exclusion by the “closure” of Walras’s model increased my insight more quickly than anything for years. In terms of my steering model I have to agree with him: the place to find competent captains. steersmen, navigators and lookouts is not in the colleges but among the sailors of small boats.
For reasons too deep to go into here, I don’t agree with Elaisson’s theoretical starting point of “state spaces”: the economy is about flows, not states, and it is the legal shapes of its spaces rather than the size of them which influence behaviour. Law is information, and information science is not about the meaning of words but about reliable ways of looking up meaning in a dictionary, or locating a book in a library. Traditional library classifications based on subdivisions of content tend to be ambiguous, but Ranganathan’s classification based on abstracting whole dimensions of content enables meanings to be uniquely encoded as positions in space-time (much as a three-dimensional house can be detailed on three two-dimensional drawings). The point of this is that economic theory doesn’t have to look like neo-Classical equations; it can be encoded as iconic images in diagrams and as Eliasson is rightly implying, encoded as skills and capabilities in the structure of brains and technology. Nor need the economy look like it does now.
My term ‘iconic’ incidentally came from K E Boulding’s The Image, he being the economist who brought the concept “Spaceship Earth” into economics, though I gather he didn’t invent that. My point about diagrams (making the structure iconic rather than inferred) is that one can hang analogous interpretations (theories) on it and learn from them all, much like perfecting and adding harmonic content to a musical melody. I must point out, though, that Eliasson himself hasn’t made structure iconic, obscuring any reference he may have made to the purpose of the economy from the point of view of its different participants. But good stuff; he has made explicit his own purpose of accounting for growth in a phase of the economic process distinct from the neoclassical fixation on production and sales.