Random Thoughts on the Future

In recent weeks I have used this space to think out loud about the state of economics. In particular I have talked about the primary version of economic theory – what I call orthodoxy – as being stuck in a time warp. This is because it was developed to explicate economic relationships as they were a hundred plus years ago. The techniques have been refined enormously, especially the translation into sophisticated math, but underneath the surface most of the edifice would be recognizable to anyone working in the field in the late 1800’s. Obviously things like dynamic stochastic general equilibrium were not yet in place, but Walrasian auctions were. The latter was the foundation of the former.

I have also tried, perhaps not convincingly, to explain why I think Coase’s simple question, posed back in 1937, is really an all out attack on the classical/new classical system. He asked: “why do firms exist?”. This beguiling little question is actually an atomic bomb. Why? Because if the constructs of orthodoxy are correct then firms cannot exist. Not in the very obvious and real form that we see around us. It isn’t that they might not exist. It is that they cannot exist. Orthodox theory, due to it authoritarian and utopian tenets, does not allow alternatives to the market. The moment something pops up that is not a market, we can assume that orthodoxy has a problem. In basic terms: the very existence of firms seems to deny the validity of orthodoxy. Obviously there is a lot of economic stuff that markets cannot handle well. Otherwise why have firms? The efficiency of a market should, in orthodox theory, crush a firm. But it doesn’t. Perhaps because that efficiency is a figment of the fervor of orthodoxy rather than a property of real economies. This is, I believe, what Coase was driving at.

Lastly, and perhaps least successfully, I took a shot at the godfather himself: I suggested Smith had cursed us all with his metaphorical hidden hand. Not that Smith is to blame. His strength was his moral philosophy. He knew a metaphor from reality. He saw an orderly looking economy and told us it looked organized as if by a hidden hand. Not that it was so organized. Those little words “as if” meant a lot to him. Unfortunately for us those who followed him mistook the metaphor for a literal description. They spent the next hundred years plus trying to create a theory that proved Smith correct. Instead of accepting the messiness of reality they sought to elicit the mysterious forces that they knew were hidden beneath the surface. One of the most detestable traits of those of faith is their utter certainty. They always seem to know don’t they? Whereas the rest of us wallow in the cross currents of uncertainty and limited knowledge, the faithful have no such problems. They just know. So as economists beavered away to discover the magical potion that made markets act literally like a hidden hand, they were forced successively to cast aside more and more of the reality that mucked things up for them. This is why orthodox economics is more a utopian alternative universe than a description of our real world economics. It isn’t meant to be real. It is meant to be a faithful replication of the mysteries Smith mentioned, and meant only metaphorically.

Why am I repeating all this?

Simply to allow me to organize my thoughts as to why I think any new economics must eliminate all the problems just mentioned.

We must not obsess about utopian dream worlds. They don’t help. No matter how elegant the math. Treating the entire real world as an exception, as a negation of the purity of markets rather than as a positive affirmation of real properties, is, to me at least, a sign that theory went off track. It may be useful to have a model that helps analyze flaws in the real world, but to me the real world can have no flaws as such. For something to be a “flaw” is to presuppose an alternative purity. There is no alternative real world. Until we engineer one. Until then the real world has features in need of description and analysis. But to posit those features as “weaknesses” or “failures” simply opens the door to ideological explanations. Thus government intervention becomes a point of failure, even if every single economy has government intervention.

We must accept the existence of structure. The real world is “lumpy”. It is not a smooth, perfectly symmetrical plane of costless information. It is chunky. Indeed I believe that life itself is a result of this chunkiness: asymmetrical distribution of resources was the impulse behind evolution. The need for search, the need for information processing, the need for sensory perception, the need for mobility all are rooted in this asymmetry. Likewise the need to control, organize and protect resources. Life is at stake in a chunky world. We develop techniques to overcome it. Cultural techniques like exchange and cooperation. From a long perspective markets are simply a derivation of our need to overcome the asymmetries of life. they are an attempt to overcome scarcity.

But scarcity doesn’t just impel exchange. It also impels innovation. Creation of new things is a way to compensate for the scarcity of existing things. Time saving inventions allow us to deploy our time differently and away from simple survival. The production of new things is also a way of limiting the constraints of scarcity: it is a simple way of making more of something available. Improving the production process allows even more of this to happen. So defining new processes and new technologies drive economies. So of course technology is endogenous to an economy. That is no mystery it is a form of adaptation.

Which brings me to a conclusion: I see the economy as an extended relationship between creativity and entropy.

Creativity being the attempt to bring order to the world around us and thus to offset asymmetry. We gather resources; we use them; we construct things from them; we use those constructs to do work; and, ultimately, we consume those constructs. All of this is what I call ordering. We take disordered things scattered about us, and impose order. It is through such order that we extract the vital stuff of survival and, beyond that, the stuff of enjoyment.

But not even an economy can withstand the second law of thermodynamics. Entropy is perpetually disordering things. This is because the infinite state space encompassing all the potential configurations of the stuff around us has many more disordered states than ordered states. Thus it is probabilistically inevitable that stuff decays into disorder. We thrive off of this translation of order into disorder. Indeed that is what we mean by consumption, depreciation, depletion, or use of our environment. We don’t need to invent concepts to describe the processes of a sustainable economics: entropy already provides us with the framework. It allows us to combine consumption and depletion under one meta concept.

So production becomes creativity or the ordering of things in defiance of entropy. And consumption becomes the re-assertion of entropy as our products inevitably decay as they are consumed, used, depreciated, or otherwise put to work.

Which brings me to the role of information: when we order something we are specifying it. We are eliminating, logically, all alternative configurations of the energy and materials we are using. This is how we defy entropy in the production process. Specification is the discarding of information. It is the elimination of noise from the system. The chunk of marble has within it an infinite set of forms. Michelangelo chose just one. The others are forever lost. But entropy will destroy that one too. In the end the marble returns to an unspecified state. When it does the creation-entropy cycle has been completed. Value lies in the specification. In the loss of information. In the choice of a specific form of work. The use of the object eventually generalizes the specific. Even the use of a car follows this cycle: we each use our cars uniquely. We follow our own routes. We drive at variable speeds, and in different styles. Each car then, even though they all start very much alike before use, are taken further from that similarity through use. Their original specification is lost through use. So too with the energy and material deployed in their construction. As the car was carved from an heap of undifferentiated resources and energy, it was made more specific. That door is more precise than the heap of iron ore from which the steel was cast. But entropy pops up later on. The rust that forms along the door sill is simply the loss of precision. The iron is not gone. It’s form has. It gradually slips from a specified form that we can extract work from, towards an unspecified form, of no workable use.

And so on.

An economy is simply the tussle between creativity and entropy, within which the flow of information, as we specify and as we consume, as we order and disorder things, plays the central role.

Within this swirl, structure, uncertainty, and complexity dominate. Structures have properties, they are more than the sum of their parts. The cycle does not move deterministically, it is subject to sudden shifts and unexplained emergence. Change is endemic as order is continually lost. On the surface order appears to dominate. But that is an illusion. Within the system the entire edifice is depends on the destruction of order. It is how life exists. Specification is fragile and temporary. It can defy entropy for only so long. The constant translation of disorder into order and back into disorder is the very stuff of life.

Life, and thus economies, are solutions to a problem. How do we sustain life in the face of asymmetry and disorder? Life is improbable. So then is order. Ironically what we call – life the cycle of growth and decline, is the solution. Life is the carving out of specification. It is then the replication of the plan that allows that specification. This is an economy at work. Specification, replication, and competition for the resources to allow both.

Karl Popper wrote that “all life is problem solving”. By which he meant that wherever we see a problem being solved we have identified life. Alfred Marshall suggested that economics would be revealed to be a biological science and not a physical science. Kenneth Boulding wrote about “evolutionary economics”. Nicholas Georgecsu-Roegen taught us about economics and entropy. Hodgson, Nelson, and Winter have all added to the theme. Sam Bowles has given us a microeconomics based upon complexity and evolution. Many others are involved. Economics is complex, uncertain, structural, and intensely context dependent.

None of this is metaphorical. None is beholden to nineteenth century visions of utopia. It is new. It exists.

And I think Smith would see the truths it will reveal.

It’s how we throw off his curse.