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Complex ideas

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.

  1. July 10, 2020 at 3:04 am

    Peter, a good discussion of complexity, and the predominance of instability rather than fictitious equilibrium. But I stumble (as usual) where you relate to past economists. And your thinking does not seem to have fully extracted itself from past concepts.

    In particular, [pure economics (a strange term)] “is about growth and the battle with scarcity.” That was the eighteenth-century conception. It is long past time to reframe the issue. The Earth is abundant, but we are extracting a super-abundance.

    The problem, long since, is not how to get enough, it is how to stop taking too much.

    And, of course, to ensure the abundance is shared fairly (your “practical economics”?). I agree the distribution is a political issue, but we could, for example, use different ownership structures that ensure a fairer flow of wealth. If we have a realistic conception of the system we are dealing with we can find ways to tweak it so it serves us better.

    We have set up a brilliant extraction machine, called free-market capitalism, that nobody knows how to stop. Well the virus seems to know, but we’re not as smart as the virus.

    If we look at the living world (“nature”), it has sorted this out long since. Organisms compete for resources, but in ways that do not destroy the resources or the system they depend on. We could try some biomimicry. Lots of people are working to move us back *within* nature, instead of dominating and destroying it.

    My initial recipe is to recycle *all* materials and to produce no persistent toxins. It is to maintain boundaries (physical and cultural) in order, in effect, to keep toxins out and to let nutrients in. It is to ensure the health of the parts of our societies (i.e. institutions and us individuals) and the health of the system our societies are part of (i.e. nature).

    As I have tried to demonstrate in the green book in the right-hand column, there *are* things that can be said about the total system, and they can even be modelled instructively, so long as it is done with a little humility, a quality totally lacking in the mainstream profession of course.

  2. July 10, 2020 at 11:38 am

    As a scientist I am much more with biologist Geoff than with ex-banker Peter, who sees computation as the key activity in economics. As an information scientist and father I see feeding the kids as the key activity, and not countable bits of information but processes with slack and the four distinguishable types of feedback as explaining both the general harmony and the recurrent chaos in economics. As in Shannon’s information theory, the harmony is achieved ethically by putting the inefficiencies due to slack to good use repairing failings (qua Keynes), instead of burying them in inflated share prices.

    When I was younger, I marvelled at the millions of bricks in a local railway viaduct. How to count them efficiently? Not one after the other, I discovered, but across and down, then multiplying these and the number of sides and arches. Complex, but not what Peter is getting confused with: overwhelmingly complicated. The same goes with counting meals, the resources of the earth,and which way one needs to go to bring the processing of them into “equilibrium”. We need real mathematicians on this job, not economists who think they are.

  3. Ed Zimmer
    July 10, 2020 at 6:13 pm

    I just don’t see it as that complicated. I see two economies:

    First, a production-and-consumption economy that provides all of society’s livelihood by maintaining a flow of currency (as measured by GDP). I see this economy as self-sustaining so long as government cooperates. IMO, if entrepreneurs perceive this flow as certain, they will find a way around any glitches in the economy, whether demand- or supply-side (so long as human life is possible).

    Second, a FIRE economy, dealing in assets & liabilities, that provides nothing essential to our livelihood, yet is the source of all (IMO) the economic problems we perceive. Going back to Aristotle, the accumulation of money itself was seen as an unnatural activity that dehumanizes those who practice it. I see all forms of rentier income as unnecessary to our livelihood, and elimination (or at least minimization) of it as the best solution to all perceive economic problems.

    This I see this as a straight-forward (if not simple) political problem.

  4. Edward Ross
    July 10, 2020 at 9:52 pm

    To me all of the above is is great thought provoking material on what the economy is and i will pass it on to my friends daughter who is studying economics. What pains me is that the same type of good conversation seems to be avoided in the conversation in the connection between how the patient monopoly system hinders the development of solutions to the covis 19 virus and the realisation that the exclusive political ideology of neo liberalism is driven by the the powerful wealthy elite. Again to me the challenge is to restore economics and politics to a democratic ethical system that benefits all people equally. TED

  5. Ed Zimmer
    July 10, 2020 at 10:57 pm

    Edward Ross

    As I suggested on ineteconomics.org the other day, the law authorizing the patent monopoly could be changed to one authorizing a mandated a royalty on sales of goods/services using the intellectual property. This could adequately reward the property’s creator (maintaining incentives) while allowing others to continue to advance or find new uses for the property as well as preventing financial abuse. In the process, law’s ‘reduction to practice’ provision should be reviewed. Initially, the law was intended to reward the initial creator (the individual inventor/author) – not a corporate development program.

  6. Ikonoclast
    July 11, 2020 at 12:45 am

    The essential problem is that heterodox economics needs to develop an agreed ontology and agreed modeling methods, including broad agreements on the likely limits to modeling. Peter Radford has pointed out some of the ways (and reasons why) the economy cannot be modeled accurately in key respects.

    Orthodox economics has an agreed framework. Orthodox economists mostly agree on their framework and they accept their implied economic ontology, without question or discussion for the most part. Of course, the problem is that their framework lacks an empirically supportable ontology and thus is itself entirely un-empirical. Orthodox economists can’t see it. Every scientist and philosopher of the sciences and social sciences can see it. But while political power supports false ontologies, they are sociopolitically unassailable until effective rebellion and/or until the structures and systems built on false ontologies collide with real system obstacles and limits.

    Economics is not a science and it never will be a science in the hard sciences sense. I think it is better to state this up front and as often as necessary. Economics is a prescriptive discipline. The hard sciences are descriptive disciplines: meaning physics, chemistry, biology and the systems sciences which follow on from them like cosmology and ecology.

    Economics, or more properly political economy, is a branch of moral philosophy. Traditionally, this was seen to be the case and value theory or “value philosophy” indicate that this is still the case. Speaking simply, there are two clear categories of values, namely the objective and the subjective. The only values with a claim to objectivity are those measured in the SI base units used by science, which are defined physically and objectively in real dimensions. Here we may take “objective” to mean physically real, dependably measurable and not influenced by human ideas, beliefs or subjective valuations.

    We note immediately that economic values are influenced by human ideas, beliefs and subjective valuations in general. Ipso facto, we can reject any notion that an objective discipline can be raised up on that subjective basis. To repeat, conventional economics is a prescriptive discipline. It is based on axioms, not on fundamental laws of nature. It is an entirely axiomatic system. It has a base set of axioms from which one may logically derive its theorems. The “right to private property” is an example of a base axiom of conventional capitalist economics.

    This axiom based nature of conventional economics is consistent with all human subjective value systems. This is precisely how all such social value systems operate. They set rules which humans must obey. From that point on, such systems generate “axiomatic” or rather automatic, outcomes IFF they are uniformly or generally obeyed by the actors (the human agents) and IFF behaving according to those rules would not violate any fundamental hard laws of the cosmos (what we would term scientific laws).

    A given economic system, as a set of axioms and axiom-guaranteed outcomes (derivable as theorems), is operable socially and objectively provided the human agents are (mostly) obedient to the axioms and provided the fundamental laws of physical reality are not violated, immediately or eventually. This indicates that the axioms of (any) economic system should be subjected to two tests:

    (a) Do the axioms break our moral philosophy values either up front or in the axiom-generated sequelae (downstream effects)?

    (b) Do the axioms operate the system in such a way as to approach an asymptote where further operations of the axioms break, damage or destabilize fundamental, dependable systems of nature upon which we and the real economy depend (for example the benign Holocene climate)?

    If the axioms do not meet either test, it is the axioms which must be abandoned, not our broader ethical values and not the life-sustaining environment which is critical to our survival. Economics must be remolded into a discipline which obeys ethics and the laws of nature. Its invalid circular logic character, whereby it forms its values according to its values, must be abandoned and the discipline re-subjected to (consequentialist) ethical values and to scientific values. Consequentialist ethics, in turn, can be argued to tend to the objective but that is another discussion. Deontologists and consequentialists tend to agree in any case, that we should not wreck the biosphere.

    By taking the above ontological and empirical approach certain things become clear. Firstly, basic axioms of conventional economics are just that, namely axioms which are simply base rules created by humans. They are not inviolable laws of nature nor even of deontological law. There are no stone tablets handed down from on high (as opposed to paper based texts handed down by fallible human thinkers) which decree the immutability of the current economic axioms. When an axiom decrees something, it can be, and it should be, tested against empirical reality. In that spirit, how much private property (for example) is enough and how much is too much? Too much is when others don’t have enough AND when the natural environment can’t support it. Empirically, the answer is patently obvious.

    With the base ontology correct, and working with the “axiom heap” and “empirical putcomes” heap clearly delineated from each other, we can tweak the axioms surely? Especially if it is a matter of existential survival.

  7. Ken Zimmerman
    July 21, 2020 at 2:09 pm

    “I suspected economics was irredeemable as a policy tool for citizens groups. I saw economics lead its practitioners and citizens alike into a form of brain-damaging indoctrination.” (Hazel Henderson) This could happen because economists, like all humans we have ever studied use framing. And this in turn helps us see that Peter’s comments are off the mark. Framing demarcates, regarding the network of relationships, those which are considered and those which are ignored. Constructing the economics Henderson labels “irredeemable” required specific framing on the part of communities of economists over many years. Some of this framing was quite intentional and deliberate. Other framing involved doing what was expected, normal, usual, or just convenient. Much of this was quite unintentional, based on notions and perceptions of which often the economists were unaware consciously. For the framing of the first sort, economists are more specific than most other humans. They give this framing a name, externalities. For the second sort, only the people effected by it know it. Luck (bad and good), Karma, fate, etc. Specifically, in the case of modern economics a clear and precise boundary must be drawn between the relations which the agents in the economy will take into account and which will serve in their calculations and those which will be thrown out of the calculation as such.

    Peter, you begin by laying out the basics of the frame you have chosen. “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.” Since you chose the frame for the work, the results you specify must follow from it.

    However, choosing another frame creates different results. For example, you write, “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.” Yet, if we examine history, we see there many examples of economies that remained stable for hundreds or in a few instances even thousands of years. Perhaps not totally symmetric, but durable and stable. The Mesopotamian economy fit within a “neat box” for nearly 1,000 years. And Ancient Rome’s for almost 600 years. Even modern capitalism remained relatively stable for over 400 years. Until its recent destabilization by American casinoism.

    So, within a frame that allows it, an economy can be efficient and optimal. Within another frame these may not be possible. This also shows up clearly the shortcomings of Hayek’s conclusions. In the kind of economic frame Hayek supported and wanted economic planning was difficult if not impossible, and in his frame it was also irrelevant. The other economists, scientists, etc. you cite share a common cultural heritage and a common time. If you want to investigate other possible economic frames, I suggest you check out Al-Biruni and Ibn Khaldun for early Islam. Asad Zaman does an excellent job of describing many aspects of current Islamic economics and other social sciences.

    Chinese social science history is a lot more difficult to grasp. Here are several references you can consider.
    William G. Boltz, Early Chinese Writing, World Archaeology, Vol. 17, No. 3, Early Writing Systems. (Feb., 1986), pp. 420–436.
    David N. Keightley, “Art, Ancestors, and the Origins of Writing in China”, Representations, No. 56, Special Issue: The New Erudition. (Autumn, 1996), pp.68–95.
    “History of the Five Dynasties”. World Digital Library. 1280–1368.
    Laurence A. Schneider, Ku Chieh-Kang and China’s New History; Nationalism and the Quest for Alternative Traditions (Berkeley: University of California Press, 1971).
    Mary Gale Mazur, Wu Han, Historian: Son of China’s Times (Lanham: Lexington Books, 2009)
    James P. Harrison. The Communists and Chinese Peasant Rebellions; a Study in the Rewriting of Chinese History. New York: Atheneum, 1969.
    Paul Cohen, Discovering History in China: American Historical Writing on the Recent Chinese Past (New York, London: Columbia University Press, 1984), Ch. 1 “The Problem with ‘China’s Response to the West,’ pp. 1–56, and Ch. 4, “Toward a China-Centered History of China,” pp. 149–198.

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