Popper

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Brenner’s Satisfactory

“Mathematics is the art of the perfect.  Physics is the art of the optimal.  Biology, because of evolution, is the art of the satisfactory”.  

That’s Sydney Brenner speaking.  He should know a thing or two.  He won a Nobel Prize.

It’s a shame, is it not?  Economies are always changing.  Not just in terms of innovation and all the normal things we think of as change, but also in more simple terms: in the people making up an economy change.  They are born and they die.  And they change their minds along the way.  Whether you think that evolution is the best description of all that change, you cannot deny the existence of change.  Indeed we applaud change.  It is the very essence of improvement.  It is the heart and soul of all the Great Enrichment that has bestowed our current prosperity upon us.

And yet.

And yet economists prefer to imitate physics and not biology.  They pursue the mythical optimal instead of studying the satisfactory.  And, as a result, they have failed to understand much of real economies.

Apparently no amount off mockery, cajoling, or elegant persuasion can shift economics from its obsession with things that don’t exist.  No matter how many times we observe the nonsense of equilibrium, or maximization, or that mythical optimal, economists set off in hapless pursuit once again.

In what must be one of the greatest examples of intellectual misdirection economists urge each other on in developing ever more refined examples of the non-existent.  Only to end up with ever less relevance.  The path-dependence is absurdly entrenched and equally difficult to ignore.  No, the sun does not rotate around the earth.  Sorry.  It just doesn’t.

And economies are never in equilibrium.  They just aren’t.

They are changing.  All the time.

And rebranding something as ‘dynamic’ does not alter the fundamental error.  It just adds another circle to the already overburdened set of circles that attempt to explain how the sun rotates around the earth.

How is it that a bunch of such clever people can stay so ignorant so stubbornly and for so long?

One the one hand they describe the amazing properties of equilibrium, and on the other they try to describe the helter-skelter turmoil of growth.  The two don’t fit together.  One, to borrow Brenner’s words, is a search for an optimal.  The other is merely satisfactory.  They are incompatible.

Which is why economists have failed so lamentably and for so long to explain growth from within their core method — the method itself defies the possibility of sufficient change.

This failure has become a major obstacle to progress.  The financial and business press is full of articles bemoaning the current apparent slowdown in growth rates around the world.  That slowdown needs both explanation and remedy we are told.  It would be great if economists could wade in with a coherent and successful theory of how growth began and  how it might continue.  I stress coherent.  The occasional heuristic or ’educated’ opinion is insufficient.  

It isn’t just me.

Here’s a few paragraphs from David Susskind’s article in the Financial Times a month or so ago — he makes a similar statement in his recent book “Growth: A History and A Reckoning”:  

Yet despite all that intellectual firepower, we still lack definitive answers to the question of what causes growth. “The subject has proved elusive”, wrote the economist Elhanan Helpman in 2004, “and many mysteries remain.”

There is an old-fashioned view of productive activity that pictures the economy as purely a material thing. From this perspective, growth is driven by building impressive things that we can all see and touch — faster trains, wider roads, more houses.

However, the little we do know suggests that it does not actually come from the world of tangible things, but rather from the world of intangible ideas; not from guzzling up ever more finite resources — land, people, machines, and so on — but from discovering new ideas that make ever more productive use of those resources. Or, more simply, sustained economic growth comes from relentless technological progress.

He gets straight to the heart of the matter.

Economists, most anyway, will heartily endorse the notion that technological progress is important.  Our more argumentative historians will argue endlessly over what came before the beginning of that ‘relentless technological progress’ — was it a cultural change? A scientific revolution? Something to do with religion? The possibilities to split hairs are endless and a lot of fun.  

But technology seems to be important,.

So where is it in all those iconic growth models?  

And the two words ‘relentless’ and ‘progress’ both speak to disequilibrium.  They speak to an economy that appears to have more in common with an evolutionary perspective rather than an optimizing perspective.  How can we locate an optimum in something that is always changing?  How do we have any idea of its potential  to settle in an equilibrium, if it isn’t ever static?

There’s no point in repeating all that.  It is well rehearsed stuff.  Economists prefer to bury their collective heads in the sand and carry on as if no one has noticed their futility.

And, you all know my favorite criticism.

For a discipline that so prides itself on rigor and elegance, the confused jumbles that are ‘labor’ or ‘capital’ are beyond embarrassing.  No one know what they are precisely.  So embedding them in all that rigor and elegance merely invites the inevitable failure.  It invites the production of a measure of our ignorance.  

Economies are built upon the evolution of useful knowledge and the application of energy to the information we have acquired along the way.  The combination of information and energy with the physical resources surrounding us it what produces economic activity.  Yes, ‘knowledge’ is also a vague term.  But less vague than ‘labor’ or ‘capital’ both of which stretch across too far a distance and get conflated at times.  Besides, viewing growth as the steady acquisition and application of information is, however difficult an idea, a more accurate starting point. 

Moreover, learning cannot be described as optimal.  It simply is.  We are never quite sure  whether it is the ‘best’.    We can never know that.  But we can examine and deploy its usefulness.  We can solve problems.

Karl Popper once said that ‘All life is problem solving’ and that, ultimately, is all we are trying to do when we engage in economic activity.  Solving problems.  It is not a search for the perfect.  It is not a search for the optimal.  It is a search for the useful.  Brenner would call it the search for the satisfactory.

He knew a thing or two.

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Uncertain Causes

When you throw a feather out of a tenth story window it eventually hits the ground, but only after fluttering about for a while and following an often circuitous route downwards. Throw a ten ton lump of lead out and the route tends to be a lot more direct. Gravity wins the day in both cases. It’s just that in one other forces and environmental effects play a much larger role.

In economics the role of gravity is played by uncertainty. It is the dominant force underlying all action. Most often its presence is best detected by the reaction of people to it: they make plans and seek other ways to offset it. Our institutions, for example, are a way to channel activity along more predictable lines and thus keep uncertainty at bay as long as possible.

Eventually uncertainty wins. It undoes our plans by throwing up an event entirely unexpected. We then have a choice: do we repeat one of our tried and true actions on the basis that it has worked – at least sort of – in the past? Or do we invent a brand new action and see if it works in these new circumstances. Whichever we choose we learn something: either we learn that our old trick has new application, or we learn a new trick.

So uncertainty is a driver of learning. Pushing back the boundaries of the unknown, wherein uncertainty lurks the most, is how we make progress.

I look at scarcity as a form of uncertainty. It is uncertain because we cannot be sure how we can counter it. Say we need a scarce resource, what will we do if, or when, it runs out? That’s a major uncertainty. It’s one that hovers over us today as we worry about our supplies of oil. How do we react? By trying to find alternatives to the scare resource? Or by being better at using what limited supplies we have?

We learn in the face of uncertainty.

Then there’s a more problematic form of uncertainty: things we have no clue about until they arrive to confront us. In these cases our learning is always retrospective. We figure out what we would have done had we known about the event ahead of time. We then add that new piece of learning to our bag of tricks and it becomes something we can use in future were a similar event to show up.

Like gravity, uncertainty is always in the background, but other forces may mitigate its presence such that we ignore it and focus on them instead. It never goes away, however.

Another way of looking at it is to compare order with disorder.

Our economy is a process that endlessly cycles disorderly stuff into orderly, and thus useful things, and then back into disorder via consumption, depreciation, depletion and other quasi-entropic channels. A totally disordered environment is full of uncertainty. A totally ordered environment is, on the contrary, full of certainty. Our experience of life is between the two because life itself is a form of order. This is the meaning behind Karl Popper’s comment that ‘all life is problem solving’. Not only does he mean that all life is a solution to a problem, he also means that when we observe problem solving we are observing life.

In our economy we establish order by using our creativity. We carve away an almost infinite number of possibilities and focus on one. A pile of iron ore has enormously many possible uses. It can take an enormously large number of forms, shapes and so on. But we force into just one. We establish a  particular order. One that has specific use to us. And through use we gradually erode that order: we depreciate the object, we expend it, we allow it to rust and gradually deform. Ultimately we abandon or recycle it. Either way we undo our creativity through consumption. The iron isn’t lost – it still exists – but it is now disordered and of no immediate value. Although it might be if we learn how to recapture it for future use.

All this means that our economy is a human response to the uncertainty we are faced with in our surroundings. It is a particular response to our need to supply ourselves with what we need to survive and thrive.

But our environment is not static. It is altered by our activity. That is to say our past creativity acts to shape the environment we now face. And our current creativity helps shape the environment we will face in future. The endless feedback loops between what we do and what we find around us provide another layer to our uncertainty. As do the feedback loops that connects what we each do with what our fellow economic actors do.

As actors we react to uncertainty. We invent projections of the future so we can create an appropriate order to match that future. Uncertainty, of course, means that our projection and the actual revealed future rarely match exactly, but we manage as long as the two don’t diverge radically.

Our economy is intentional. It is not simply the playing out of some preordained or clockwork-like response to an event or situation. It is more nuanced than that. Those feedback loops mean that there are causes for subsequent events that exist at various layers of activity and not just at the base layer of individual action. Those causes emerge from our interaction and our consequent constant exchange of ideas, thoughts, emotions and so on. This is why orthodox economics founders so easily. It dismisses or underutilizes those higher levels of causation and allows only the base layer to enter into its analytical process.

This is also the main source of unreality in orthodoxy: it disavows human intentionality inasmuch as it restricts our behavior to a highly limited and entirely  predictable set of actions. It assumes one set of reactions – an extreme form of rigorous rationality – to events, and, by so doing, it eliminates the possibility of change in the face of interaction. This is easy to do if you want to invent an entirely logical and internally consistent system. But it is not a reflection of reality, so it has no applicability in the real world.

An economy conceived as a reaction to uncertainty cannot be understood, or even modeled, axiomatically. For its very nature is to evolve and mutate through time. It is not necessarily internally consistent or even logical. It is idiosyncratic, path dependent, and liable to lurch occasionally in different directions. Its choice of solutions to uncertainty may not be optimal: all that it needs is viability. It may get locked into paths of activity that prove, longer term, be to highly suboptimal. All it needs to do is to provide for survival. It needs to subsist and persist.

Uncertainty prevents it, ever except by luck, from arriving at the sort of pristine optimal equilibrium that orthodox economists set as the desired consequence of the economic systems they study. Indeed, the notion of such a system actually existing is so bizarre that it seems pointless – to me – to bother with it at all. I suppose that within the entire set of all possible configurations of the economy, one such pristine example must exist, but the likelihood of it being the one we are living in is infinitesimally small.

So, I repeat, why bother studying it? Especially when we appear to know so little about the one we are living in.

But, that’s uncertainty for yo.