New Year, Old Arguments

“The universe is made of energy, matter, and information, and while energy and matter are here by default, information needs to find ways to emerge.  This is not always easy”  Cesar Hidalgo, “Why Information Grows — The Evolution of Order, from Atoms to Economies”

Why is it the economics still restricts itself to constructing its narratives around concepts like labor and capital?  Neither are very precise.  Both are amalgams of more fundamental concepts.  And, even in the hands of the very best of economists, no combination of them gives us much confidence that they explain major economic phenomena such as the extraordinary growth seen over the past two hundred years or so.

I regularly lampoon growth theory for its lamentable inability to eliminate its reliance on large, and only vaguely defined, things like “total factor productivity”.  This is after fifty odd years of trying.  Instead we get kluged and botched together substitutes for breakthroughs — endogenous growth theory being a prime example of such a kluge.  Only economists blinkered by their path dependent ways could possibly see the notion that the engine of growth somehow sits within the economy and is not some arbitrary exogenous factor as a breakthrough.  Apparently Schumpeter’s dramatic characterization of gales of destruction didn’t ring a bell loudly enough.

Growth implies change not the status quo.  That’s blindingly obvious I would have thought.  Yet we devote ourselves to the statics imported from other sciences back in the late 1800s.  They all moved on.  Economics didn’t.  So when it tries to delve into economic activities that imply out-of-equilibrium thought it has an unnatural and uncomfortable feel about it.  Economists in such circumstances start to sound out of place.  They begin to use ad hoc models instead of the great big ones they are so proud of when discussing equilibrium.  And they instinctively attempt to change the subject back so it can be re-framed within the boundaries they are familiar with.

But the real world stubbornly resists.  Perhaps instead of insisting on moulding the real world to conform with its out-of-date frameworks, economics ought to try a new framework.

Which gets me back to that Hidalgo book.

I think he tries to provide a new framework.

To me it is clear that an economy also consists of energy, matter, and information.  The interesting part is the process with which these things are combined.  With the emphasis on the concept of a process.  Or, to channel the physicist David Bohm, an economy is in a  constant state of becoming.  It is never still.  Trying to isolate it at a point in time and then examining that static fleeting moment is to ignore the essence of an economy:  it is never still, it is always moving.  New combinations of energy, matter, and information are being created moment to moment.  The computation continues relentlessly.

The interesting part, to me at least, is the information component.  As Hidalgo argues, the energy and matter surround us, they are, in our context, a given.  Information is not.   It has to emerge from combinations of energy and matter and is then inherent in what remains from those combinations.  This is not communication, it is information in a more broad and life-sustaining relevancy.

Information has to be contained and transferred in things.  It depends on the sustainability of its mode of transport.  It is commonplace nowadays to refer to algorithms as if they are some modern discovery.  But all forms of information preservation and transport are algorithms of some sort.  And it is the accumulation of information that allows energy and matter to become ever more useful to us.  Economic growth is inextricably linked with the parallel growth of information.

And since, as Hidalgo argues,  information is produced in out-of-equilibrium processes any scientific enquiry into growth has to include within it an account and application of the growth of information and the changes needed to create it.

Take, for example, the famous capital debates decades ago.  The argument hinged around the definition of capital.  How can we, the argument ran, combine such disparate items as factories, chairs, and staplers into one category without losing analytical precision?  Good point, and one that the mainstream has never truly engaged.  Instead it contented itself with the radically vague concept of capital that sits at the heart of growth theory.  And that vagueness contributed mightily to the consequent imprecision of the theory itself.  One very blunt and vague idea leads, inevitably, to another.

Capital is simply the ossification of older ideas — the embodiment of information that someone found useful and then managed to make concrete enough to be replicated and re-used.  So when we use capital in a production process we are using a pre-existing source of information and applying it to a modern problem.

Now some of you will be falling off your chairs and arguing that capital is properly seen as the embodiment of past labor.

But the concept of labor is as vague as that of capital.  What is labor if not the application of energy in combination with information [or skill] to matter?  Both capital and labor can be decomposed into their basic constituent parts in order to explore the underlying realities of the combinatorial variations that produce growth, or any other economic phenomenon.  This allows us, for example, to get to grips with the demand for labor in processes that depend more on information than on energy.  This is a characteristic of postindustrial economies and helps explain why there is a bias in economies towards the increasing reliance on capital in modern growth.  The politics of it all are, naturally, very different.

The proper starting point for economics is to conform with the other sciences rather than to defy them.  Those other sciences explain the environment within which an economy exists.  Yes, there are phenomena that can be described as uniquely within the realm of economics, but they cannot ignore the environment.  Which means that all economies comprise energy, matter, and information in varying ways, and those various ways employ more or fewer people and different degrees of capital.

Who owns the rights to the accumulated information we call capital is another matter.