Quote[s] Of The Day #2

From Norbert Weiner in his “Cybernetics” published in 1961:

“We are swimming upstream against a great torrent of disorganization, which tends to reduce everything to the heat death of equilibrium and sameness … In this, our main obligation is to establish arbitrary enclaves of order and system … Like the Red Queen, we cannot stay where we are without running as fast as we can.”

From Leon Brillouin in his “Science and Information Theory” published in 1956:

“The earth is not a closed system, and life feeds upon energy and negative entropy leaking into the earth system … The cycle reads: first, creation of unstable equilibriums (rules, food, waterfalls, etc.); then use of these reserves by all living creatures.”

Note the dates. These are old books. The ideas are hardly novel. Nor are they exactly controversial.

Economists have made the study of economies more tractable – some would say they have simplified things – by sealing off all the exits and entrances so as to prevent novelty from disrupting their analysis. Even then they were forced to enforce ever more strict definitions of rationality and access to information on the participants in an economy in order to arrive at their chosen outcome: that market magic exists. This is why, in general terms, an economic equilibrium exists when there are no sources of change within the economy.

As the quotes above illustrate, and presumably there are thousands like them littering the literature outside of economics, the very concept of the economy being a closed system is absurd. The act of closure severs the link with reality, thus rendering conclusions from the subsequent analysis highly suspect if not outright irrelevant. Defending such analysis on the grounds of simplification places a great burden on the assumptions involved and on the ease of transference of whatever is learned back into an open system such as planet earth.

Such simplification may, indeed, prove useful, but of much greater use is any analysis that tackles an economy as it actually exists rather than as it might exist in the imagination of an economist unaware of the progress other sciences have made in tackling the complexity of highly entangled systems where the pull of entropy undoes order relentlessly.

Economists have invented all sorts of ways to cheat reality. Most often they sweep their cheating under the rug, or they justify it as necessary in order to get at some supposed great truth whose value outweighs the cost of cheating. I have always thought of Walras in this vein. His ‘auctioneer’ is the economics equivalent of Maxwell’s demon, except that in physics everyone accepted the demon as being fictional and his existence was used to help clarify the truths attaching to thermodynamics. In economics the Walras auctioneer has been used in exactly the opposite way: to obscure the truths about general equilibrium. Notably that it cannot exist without deploying a cheat in the form of an entity outside the system capable of reaching inside and facilitate order without actually exerting any cost on it. In other words it cannot be. Likewise, as I have said many times before, the great triumph of Arrow-Debreu was to illustrate how absurd the assumptions have to be in order to make general equilibrium work. That ought to have been a pivot point away from, not towards more GE style analysis.

Encouragingly there is a lot of work going on in fields like evolutionary and behavioral economics that might, ultimately, save our blushes and allow us to forget the entire Walras blind alley.

But what a blind alley it was.

Lastly, one more quote, this from Paul Krugman’s New York Times blog a couple of days ago:

“So consider two hypotheses. One — which Cochrane appears to believe — is that being inside the Beltway has rotted Janet’s [Yellen] and Olivier’s [Blanchard] brains, not to mention that of all their researchers, causing them to revert to primitive concepts that “everyone” knows are false. The other — which is what I hear from young economists — is that there is an equilibrium business cycle claque in academic macroeconomics that has in effect blockaded the journals to anyone trying to publish models and evidence that stress the demand side. … Obviously you know which story I believe.”

Really? And this is news? So, Paul Krugman, as a senior and very prominent member of the economics family, what – exactly – are you doing about this?

Speak up. I can’t hear you.