Process

I want to pick up on something David Ruccio argued a couple of days ago. If I understand him correctly he suggests that the concept of comparative advantage, a staple of orthodox economics since Ricardo, doesn’t work as advertised because it is based on the notion that exchange takes place between individuals and not between individuals and corporations. He argues that since corporations intercede, and therefore act as agents apart from the end users, they distort the outcome.

I think he has a case, at least in part.

But I want to expand on it.

If the existence of corporations muddies the workings of orthodox theory in one case, do they not gum up the works throughout the entire theory?

Yes, of course they do.

No, I am not going to go off into one of my Coasian tirades. I want to focus on something else: process. One of the gaping holes in orthodox economics is its complete blind spot with respect to how things get done. By wandering off into the market mechanism desert, orthodoxy rendered itself incapable of tolerating the existence of process. Instead it flattens, or compresses, things into non-spatial and non-temporal dimensionless dots on a very empty conceptual map. In my rudimentary and naive conception of economics such a dot would represent a single location in the state space of all possible configurations of an economy. Each location in that state space being a fully configured economy. But in orthodoxy such a location is not conceived this way. It exists to eliminate the need to deal with the time and space dimensions of reality. it is thus not a full configuration of an economy, it is a highly stylized model of one. To the extent that time/space is accounted for they are squashed into the dimensionless world by the sleight of hand of future’s markets and costless transacting. Thus moving a machine from Toledo to New York costs nothing, and has no impact on the basic barter system that still provides the core conception of exchange in orthodoxy. The machine, if demanded, appears instantly where and when it is needed. As if by magic. Its production is analyzed via the preposterous notion of a function, which while a fun analytical tool is hardly a thorough representation or investigation of actual production. Orthodox economists have long avoided this aspect of reality by waving it away as uninteresting, and as something that lesser folks like industrial engineers might want to look into.

How things get produced, shipped, and sold is of no interest to orthodox economists.

Which is why Ruccio is correct.

The problem being that all those activities, production, shipping and selling, are intensely economic in nature and involve whole sequences of transactions, any one of which could distort the pristine outcomes of the orthodox models were they ever included.

Which is, of course, why they are not included.

Thus orthodoxy can exist in its timeless, weightless, non-spatial, and frictionless dot, and assume away the cares of the real world. It is also why, periodically – some might even say always – orthodoxy makes bizarre statements.

This gets to be a bigger problem when we examine the mania orthodoxy has for insisting that the examination of whole economies, the “macro” view, has to be consistent with the examination of the individual exchange or the “micro” view. The idea being that microeconomics is so well thought through that it should provide a basis for theorizing at the accumulated level. In other words the economy as a whole is no more, and no less than the sum of what goes on at the individual level.

There is no room in this construction for the idea that the web of interrelationships between individuals that eventually comprises an entire economy can have outcomes not predicated solely on the sum of what goes on at the basic level. There are no “emergent” properties that appear only at the higher level and which are not thus predicated.

Set aside for a moment that a market – even as described by the orthodox folks – seems suspiciously like an emergent property of interrelationships, the simplistic division of economic activity into just two layers omits all and any intermediate steps. Such as a production process.

Which is why I think we need to think of a third “meso” layer where stuff gets done other than in barter one-on-one exchange. This is not original, but I think it gets to the heart of Ruccio’s point. The very obvious real world existence of mediation, the translation of base level activity into top level activity, opens up all sorts of opportunities for the link between micro and macro to be disconnected and distorted. Thus basing any macro analysis on micro roots is invalid. Conclusions cannot be drawn from such a simple link. The complexity of that middle layer rules out any such straightforward connection.

OK. Let me go off the deep end here.

Let’s re-conceive the economy as a computational device. Don’t scream: this is simply to allow us to get back to the real world. The objective of this device at the highest – hitherto known as macro – level is to solve the allocation of resources subject to a number of constraints. We can all agree that those constraints are far more numerous than those of orthodoxy because they include a laundry list of geographical, social, cultural, and institutional stuff that orthodoxy ignores. And we can all agree that scarcity is an issue but that we can get around it through innovation and creativity. So the resource constraint is fluid to put it mildly. Be that as it may, we must move on.

At the very bottom of this computational device, where the rubber meets the road, we have actual people buying stuff and expressing their needs, desires or what have you. Again let’s keep this simple for illustrative purposes. This level has long been known as the micro level.

What is missing is the transformative level. We have a computational device in name only. We have specified its strategy or goal. We have specified its manifestation in the physical world amongst real people. But we have no idea how to relate the two. We have no way of specifying the way in which input, output, and transformation do the relating.

In other words we lack an algorithm through which the translation takes place.

Worse we have tried to eliminate the need for an algorithm by assuming the relationship has no contribution to play in our understanding of an economy. We have a computational device that produces answers without having to compute. It, presumably, uses magic.

My belief is that orthodox economics did this in order to restrict the choice of algorithm. A priori, they assumed markets do everything. Thus there was no need to investigate alternatives or to set up a more generalized theoretical structure where the meso level of analysis focused our attention exactly on the choice of algorithm or even the need for its existence.

Input in. Output out. But no operation in the middle. No process. No time. No space. Just a dimensionless dot into which the world was compressed.

Of course when you expand that dot all hell breaks lose so they don’t. But they continue to claim it does something it doesn’t.

Phew. Enough of that. Hopefully you understand why I think process matters. Process is where computing takes place. We need to define what that computation looks like and how it links the stated goal of an economy with its manifestation within households. That middle bit really matters, because it is a layer of complication that can explain why things like comparative advantage are not so clear cut as traditional economics says they are.

Addenda:

1. I use as my guide in all this the work of David Marr the computational neuroscientist who, before his untimely death, blazed a trail still followed in computational theory. His book: “Vision” is notable for its advocacy of the three layer approach to information processing. My adaptation above is both loose and incomplete, but gets the message across I hope.
2. For those of you who care about these things, I am one of those oddball people who think that time is not a property of reality, but is, rather, a construct of the human mind to account for the incessant physical change around us. I realize that sounds a little odd and I admit I probably misunderstand the physics that drives the notion. Please all go read “The End Of Time” by Julian Barbour to see if you agree with me.