Tag Archives: complexity

Alone and together in the economy

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There is an interesting new summary of the work of the Systemic Risk Centre, whose theme is the idea of endogenous risk: risk created by the interaction of participants in a market or economy, and amplified through feedback loops. The pamphlet opens with a statement from Milton Friedman: “The great mistake everyone makes is to confuse what is true for the individual with what is true for society as a whole…. Almost any interesting economic problem has the following characteristic: what is true for the individual is the opposite of what is true for everybody together.”

It also, of course, quotes [amazon_link id=”0415253896″ target=”_blank” ]Hayek[/amazon_link]: “Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nusiance if not a positive danger.”

The centre focuses on finance. The summary is particularly good on the paradoxes: that making each individual market participant behave prudently will destabilise the whole financial system, in a real fallacy of composition; that many regulations amplify pro-cyclical feedback loops; that the Tobin tax on transactions would amplify market volatility; and so on. The work sounds like a terrific addition to the points made in Ian Goldin’s book [amazon_link id=”0691168423″ target=”_blank” ]The Butterfly Defect[/amazon_link], which has a chapter on finance. Adair Turner’s forthcoming [amazon_link id=”0691169640″ target=”_blank” ]Between Debt and the Devil[/amazon_link] also looks at some of these issues.

[amazon_image id=”0691169640″ link=”true” target=”_blank” size=”medium” ]Between Debt and the Devil: Money, Credit, and Fixing Global Finance[/amazon_image]

On Seeing Like A State

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A tweet by @sclopit (Stefano Bertolo), exclaiming that

sclopit
in other news, I recently spent a couple of days with a large group of budding policy makers who had never heard of http://t.co/vX6k4IxxNE
06/09/2015 07:16

sent me to my bookshelf to have a look through [amazon_link id=”0300078153″ target=”_blank” ]Seeing Like A State[/amazon_link] by James Scott again. The subtitle describes at one level the book’s subject: “How Certain Schemes to Improve the Human Condition Have Failed.” It looks in some detail at a range of idealistic state schemes, from the ujamaa villages in Nyerere’s Tanzania and the city planning of Le Corbusier quasi-implemented in Brasilia – as opposed to the organic unplanned living cities celebrated by [amazon_link id=”067974195X” target=”_blank” ]Jane Jacobs[/amazon_link] – to Soviet collectivization.

[amazon_image id=”0300078153″ link=”true” target=”_blank” size=”medium” ]Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (The Institution for Social and Policy Studies)[/amazon_image]

The book then draws together its themes from analysing each specific kind of failure, each an example of the failure of ‘high modernism’ in its over-abstraction from detailed contextual understanding. By high modernism, he means: “A strong, one might even say muscle-bound, version of the self confidence in scientific and technical progress, the expansion of production, the growing satisfaction of human needs, the mastery of nature (including human nature) and above all the rational design of social order commensurate with scientific understanding of natural laws.” Step forward the least attractive, most hubristic version of 20th century economics.

“We have repeatedly observed the natual and social failures of thin, formulaic simplifications imposed through the agency of state power,” Scott writes. To blame: “utilitarian commercial and fiscal logic.” Large-scale social processes are too complicated to plan for. Scott celebrates practical, local knowledge, improvisation.

He does not, however, advocate abandoning the idealism that drove such projects, or leaving everything to “the market”. His advice is summed up in four rules of thumb:

Take small steps

Favour reversibility

Plan on surprises

Rely on human inventiveness

Above all, policymaker, do not think that you are all-knowing while your subjects are know-nothings. Don’t plan for abstract citizens, all uniform. Remember that context is everything.

Since [amazon_link id=”0300078153″ target=”_blank” ]Seeing Like A State[/amazon_link] was published in 1998 there have been a number of other reminders of the messy complexity of reality. One good recent one was Colander and Kupers in [amazon_link id=”B010CLT0OI” target=”_blank” ]Complexity and The Art of Public Policy[/amazon_link]. And of  course the theme is an old on, dating at least to Hayek’s 1945 AER paper The Use of Knowledge in Society, its theme brilliantly dramatized in Francis Spufford’s [amazon_link id=”B00B9ZDDCC” target=”_blank” ]Red Plenty[/amazon_link].

But if you’ve never had chance to read [amazon_link id=”0300078153″ target=”_blank” ]Seeing Like A State[/amazon_link], I, like Stefano, think it is an essential book.

PS Speaking of economics in this context, I am itching to write my review of Dani Rodrik’s [amazon_link id=”0393246418″ target=”_blank” ]Economics Rules[/amazon_link], on 21st century economics, and see people have started to comment on it. But the letter with the proof says not before 13 October so I’ll hold out at least a little longer.

The information economy

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I very much enjoyed reading Cesar Hidalgo’s [amazon_link id=”B00R3C1V0Q” target=”_blank” ]Why Information Grows: The evolution of order, from atoms to economies[/amazon_link]. It’s a very original perspective on the process of secular economic growth, bringing together not only several strands of the economics literature – growth theory, institutional economics, social capital etc – but also physics, biology and information theory. So it’s certainly ambitious, and I found it largely persuasive.

[amazon_image id=”B00R3C1V0Q” link=”true” target=”_blank” size=”medium” ]Why Information Grows: The Evolution of Order, from Atoms to Economies[/amazon_image]

Hidalgo’s first point is that we are misled by thinking of the information economy as ‘weightless’ (a term I think I coined, or at least popularised, in my 1996 book The Weightless World) into forgetting that information is nevertheless physical. “Information is not a thing; rather, it is the arrangement of physical things. It is physical order.” He links the order of the economy to the order of the universe that can exist in pockets despite entropy. Economic order comes about through information embodied in things (‘crystallised imagination’) and in the way people organise themselves to apply knowledge and know-how. The first section is rather poetic. Hidalgo describes a tree as a computer powered by sunlight. “A tree processes the information that is available in its environment.” He describes a colleague at MIT who lost both his legs to frostbite while mountaineering, and built his own prosthetics: “He is walking on solidified pieces of his own imagination.”

The book goes on to consider products imported and exported by countries in terms of ‘crystallised imagination’, which requires “an enormous amount of knowledge and know-how.” Knowledge is the set of instructions – a book describing how to play a guitar – and know-how is the practical experience enabling application – the process of learning and practising playing to produce lovely music. Hidalgo introduces the concept of a ‘personbyte’ – the limit to the knowledge and know-how that can be embodied in one individual. For an economy to go beyond that requires collective organisation. He argues against the normal economic argument that economic development is the process of acquiring the ability to consumer more goods and services. “Economic development is based not on the ability of a pocket of the economy to consumer but on the ability of people to turn their dreams into reality.” (This part doesn’t wholly convince me – it’s an appealing case but surely consumption matters too.)

The book then turns to the idea of the economy as a social and technological system for amplifying knowledge and know-how, and looks at institutional economics and the role of social capital in growth in this context. Conveying know-how is difficult, and becoming more so as time goes by and the economy becomes more diverse and complex. The “computational capacity” of the economy needs to grow, but it is constrained by the ability for knowledge and know-how to be embodied in networks of people – hence the value of trust, as it makes that easier.

Hidalgo’s work on the [amazon_link id=”B00OX8YWZE” target=”_blank” ]Atlas of Economic Complexity[/amazon_link] enters here: there is a strong positive correlation between a complexity index and long term growth (over 10 years). The falling cost of communications and the emergence of standards have increased the number of long-distance market links (instead of transactions within single firms), and this know-how transfer is made far easier by high trust, which enables larger networks. Low trust economies are often characterised by more family firms and rely more on the state to spread knowledge and know-how through its support for industries.

There is a very nice analogy of the economy as a jigsaw. “Moving a complex industry is like trying to move a jigsaw puzzle from one table to another. The more pieces in the puzzle, the harder it will be to move it, as the puzzle falls apart when we fail to move all the pieces at the same time.” It is easier to move just a few pieces to another table that already has part of the puzzle in place. Thus economies mostly grow out from their earlier set of products, which embody the know-how they already have – they already have some of the pieces. The description of this process would very much appeal to evolutionary economists.

A final point that very much intrigues me is measuring growth. Hidalgo makes the same point as the final chapter of my [amazon_link id=”0691156794″ target=”_blank” ]GDP[/amazon_link] book, that in adding things up in terms of their monetary value we are not capturing the value of diversity: three spoons are not as valuable as a knife, fork and spoon. He says that using market price denomination to aggregate implicitly assumes there is friction-free trading; but this is often not possible, especially with stock variables. He advocates looking at the disaggregated economy via input-output tables.  “The mix of products exported by a region’s industries represents a fingerprint of its productive capacities that does not suppress the identity of the economic elements involved.”

So a highly recommended read for anyone interested in economic growth and development. The insistence on the embodied-ness of knowledge and know-how is surely correct, and also a useful corrective to overly-abstract accounts of economic development, including quite a lot of the newer institutional literature (as [amazon_link id=”1783601329″ target=”_blank” ]Morten Jerven [/amazon_link]argues, this often amounts to the advice to poorer countries to “be more like Denmark”, ignoring the trajectory from here to there). It’s also a pleasure to read such a well-written economics book; from now on I’ll be envisioning the economy in terms of crystals of imagination.

Information, information, information

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Yesterday my dear husband (@ruskin147) interviewed César Hidalgo (@cesifoti) about his new book [amazon_link id=”0241003555″ target=”_blank” ]Why Information Grows: The Evolution of Order from Atoms to Economies[/amazon_link] for next week’s edition of Tech Tent (19 June) on the BBC World Service. I’m very excited about reading this book. I’ve long been a fan of The Atlas of Complexity, on which Prof Hidalgo has worked. Besides, here is the overlap of information, complexity and spontaneous order, computing and economics – what’s not to like?

Prof Hidalgo in the BBC's New Broadcasting House yesterday

Prof Hidalgo in the BBC’s New Broadcasting House yesterday

Economists will naturally think immediately of Hayek’s famous 1945 article, The Use of Knowledge In Society, which is cited in the introduction here. Although information asymmetries are huge in many areas of economics now, I still don’t think we work out often enough or in sufficient detail the implications of information mattering so much. For years – since the mid-90s – I’ve been saying to colleagues that information technology is a profoundly important deal for economic organisation and even now too often get the reaction, well we know how to handle a transaction cost reduction in our models so what’s the big deal?

Anyway, I’m immensely looking forward to reading this and will report back.

[amazon_image id=”0241003555″ link=”true” target=”_blank” size=”medium” ]Why Information Grows: The Evolution of Order, from Atoms to Economies[/amazon_image]

Grass roots

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There’s an interesting evaluation of Jane Jacobs in The Architectural Review, arguing that her fabulous book [amazon_link id=”067974195X” target=”_blank” ]The Death and Life of Great American Cities[/amazon_link] misses the real target in attacking ‘planners’ instead of developers, and discounting the scope for state involvement. This made conservatives fond of her, essay author Sharon Zukin argues. But it concludes warmly: “Jacobs’s challenge to maintain the authenticity of urban life still confronts the fear of difference and the hubris of modernising ambition. At a time in which local shopping streets are the target of attacks against a broader alienation, we urgently need to connect her concern with economic development and urban design to our unsettled social condition.”

[amazon_image id=”067974195X” link=”true” target=”_blank” size=”medium” ]The Death and Life of Great American Cities (Vintage)[/amazon_image]

The essay cites the famous ‘sidewalk ballet’ in the second chapter in [amazon_link id=”067974195X” target=”_blank” ]The Death and Life[/amazon_link]:

“Under the seeming disorder of the old city, wherever the old city is working successfully, is a marvelous order for maintaining the safety of the streets and the freedom of the city. It is a complex order. Its essence is intricacy of sidewalk use, bringing with it a constant succession of eyes. This order is all composed of movement and change, and although it is life, not art, we may fancifully call it the art form of the city and liken it to the dance — not to a simple-minded precision dance with everyone kicking up at the same time, twirling in unison and bowing off en masse, but to an intricate ballet in which the individual dancers and ensembles all have distinctive parts which miraculously reinforce each other and compose an orderly whole. The ballet of the good city sidewalk never repeats itself from place to place, and in any once place is always replete with new improvisations.”

Echoes of course of that other grassroots philosopher Adam Smith. Not only: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,” from [amazon_link id=”1505577128″ target=”_blank” ]The Wealth of Nations[/amazon_link], but also this from [amazon_link id=”0559612168″ target=”_blank” ]The Theory of Moral Sentiments[/amazon_link]:

“The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”

  [amazon_image id=”0143105922″ link=”true” target=”_blank” size=”medium” ]The Theory of Moral Sentiments (Penguin Classics)[/amazon_image]   [amazon_image id=”B00JVST6CA” link=”true” target=”_blank” size=”medium” ]The Wealth of Nations[/amazon_image]