Triangle Framework

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A Naive Framework For Understanding Change

A few days ago I added a copy of a framework I use to the end of an article. Some of you have asked for a brief discussion of it. So here it is again:

The purpose of this simple framework is to make us consider all the aspects of an economy that affect growth, especially during times of change. It began, like a lot of the things I do, as a checklist to go through whilst building business strategies, but I have also used it in the context of explanations for economic growth.

The central point is that economic potential is limited by certain factors, but is also accelerated by others. The relationships between those inhibiting and those encouraging growth and/or change determine what happens. You cannot build a theory of growth without examining the tension that exists amongst all these factors.

So, for instance, what I call “Locale” is a very broad category that includes access to natural resources, access to lines of communication, geographical size, and other physical phenomenon. This is hardly revolutionary, but it is sometimes overlooked. It also would include access to and uses of sources of energy, which to me is a ‘factor of production’ far more fundamental than any of those used in traditional economics. Call me naive, but absence of energy makes the study various combinations of capital and labor a far less interesting or relevant discussion.

Speaking of factors of production that make sense, by “Knowledge” I mean the base of propositional knowledge that exists within the society whose economy we are looking at. I realize that basic science is oftentimes a laggard behind the use of some form of technology — the steam engine is the iconic example of this, the scientific explanation of steam power lagged well behind the initial use of steam in industry — but the entire corpus of propositional knowledge ultimately is the arbiter of a society’s long term opportunity to create prosperity. With the definition of prosperity being elastic enough to include living standards as well as material standards.

The “Institutional” constraint is well discussed, but is also very often overlooked in standard growth analysis. The concept of an ‘institution’ is a very broad one indeed, and drawing a line between culture and institution can often be arbitrary. Nonetheless I see institutions as the ‘baked in’ version of past decisions on how a society wants to channel behavior. So the legal system, and in the context of growth especially things like property rights, are vital either as constraints or accelerants of growth. So too are other institutions such as the political system, various religious entities, and the whole host of others that fill libraries of analysis. For our purposes we can be naive and accept that in any society there is a prejudice towards or against growth in its institutional arrangements.

Taken together, then, these three categories — Locale, Knowledge, and Institutions — set a limit on the potential a society can open up for itself. Obviously this needs modification because there other significant factors that come into play, such as the aforementioned cultural and technological influences that modify how a society can access its potential.

I identify three such additional factors:

“Culture” is very much a topic of discussion at the moment. There have been a number of books recently talking about the role of cultural shifts as a foundational aspect of modern growth. I would agree with this idea. The most important aspect of culture that we need to take into account is oftentimes overlooked: it is the social acceptance that change is both possible and/or desirable. Attitudes in our modern era stand in stark contrast to the resignation, fatalism, and outright rejection of the possibility or desirability of change in prior eras. Even today in some parts of the world the older cultural opposition to change and growth place severe limits on the practical access of potential in those areas. A culture that accommodates and welcomes change is one more likely to experience a rise in prosperity, so it plays a significant role in our overall framework.

Next, obviously, is “Technology”. It constantly amazes me that it took mainstream economics so long to account for technology as a driver of growth. This despite all that had been written and all the very evident change going on within the economy. I simply treat this prolonged oversight as an example of how the methodological myopia of a discipline can constrain its ability to develop ideas that, to an outsider not so constrained, can appear obvious. In any case: technology  — what we can call ‘prescriptive’ knowledge — is a primary agent in making what is potential a true possibility. By this I mean that technology makes actually possible things that previously were simply theoretically possible.

Finally, in this very brief tour of my naive framework, I have “Networks”. This is also often overlooked. By networks I mean all the various physical, logical, and social ways that information, norms, cultural attitudes, energy, materials and so on can be moved around. Networks place a great limit on the opportunity to access potential: there is no advantage in having great natural resources if they are locked away in some inaccessible location. Nor is there much opportunity for a child who grows up without access to the advantages of a good education or who is precluded form such access by lack of social standing or physical transportation. Under this heading we can also discuss the relative centralization of decentralization of control within an economy, and the relative openness of the power structures of society to novelty.

So this is my framework. I don’t claim it as anything other than a way of articulating my thoughts about growth, its desirability and likelihood.

It is naive. But then again, as I have argued before, so is all economics.

 

 

 

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Tectonics and Growth

My wife is reading Kahneman’s “Thinking Fast and Slow”, somewhere in which he relates his reaction when he first came across the bedrock of mainstream economics: rational microeconomic behavior. I must admit I had a very similar reaction. The description of human behavior that underpins modern economics is so bizarre that my first thought was that it must be some form of Monty Pythonesque satire. Surely, I thought, this is a joke and in a few pages all will be revealed. But no. Economics really is built on a foundation that to outside eyes is not just odd, but what appears to be a deliberate spoof.

What is even more strange, and those of you who listen to economists and take them seriously  please suspend your sense of humor at this point, is that this total perversion of humanity is then taken as the essential starting point for all subsequent theorizing. Economists are all brought up nowadays to repeat the mantra that all “good” theorizing about the economy at higher levels — what economists call macroeconomic theory — has to be based on a foundation of theorizing at a lower level — what economists call microeconomics. So in the literature and in conversation it is common to come across the phrase that some higher level idea is based upon “micro foundations”.

Except that foundation is exactly what Kahneman and others laugh at.

You would too if you spent any time at all thinking about it.

Which brings me to another point: economics is full of these oddities that anyone outside the profession would dismiss a priori as some form of ludicrous joke.

Take general equilibrium. You may have heard of it. Economists love to talk about equilibrium. It’s one of those early importations from 19th century physics that economists took on board so as to make their work look more scientific. And it fits neatly with Adam Smith’s casual observation that an economy appears to exhibit a mysterious sort of order. My interpretation of Smith is that he was simply saying that stuff seems to get done, and isn’t that wonderful. Unfortunately subsequent economists turned his almost flippant comment into a sort of holy grail and started looking for ways to prove the existence of such a general equilibrium. Their final triumph came with what is known as the Arrow-Debreu work not long after World War II, with that work proving the existence of a configuration of the economy that is indeed a general equilibrium. For those of you whose eyes are glazing over at this moment: economics has two sorts of equilibrium, one is “partial” in which stuff still is in motion in a general sense, but a small isolated sliver of the economy appears to have reached a nice balance; the other is “general” in which the entire economy has arrived at such a nice balance. Whilst partial equilibrium is sort of sensible because it is easy to understand that a small sliver of an economy could be in a balance, the idea that entire economy could end up in such a magical place is, well, magical.

Anyway, and here’s the satire, the so-called proof of general equilibrium is so ridiculous and other-worldly that no one in their right mind could ever take the concept of general equilibrium seriously. Even Ken Arrow, of Arrow-Debreu fame, said as much. But economists do. Yes they actually study it. Perhaps they study unicorns too.

One consequence of economics being packed full of all this self-satirical nonsense is that it has great difficulty in explaining real world situations. The entire body of thought of economics includes useful tidbits that anyone can pick up and play with because they are common-sensical. But when we rely on economics to explain big important questions it begins to stutter and creak under the weight of all that absurdity.

Which is why it fails to explain long term, or what I call tectonic, shifts.

Remember that economics only as recently as the late 1980’s bothered to contemplate technology as a factor explaining growth. You and I, steeped as we are in real world experience may have taken on board the idea that maybe, just maybe, technology was vaguely related to growth. Indeed we probably took it for granted. But economists arrived at that particular idea a full century and a half into the technological explosion we grandly call the Industrial Revolution. Up until the late 1980’s economists simply looked at technological change as something that sort of happened outside an economy.

Let me give you another example: economics had a hard time explaining economic growth at all until Robert Solow invented something called “Growth Theory” in the 1950’s. And even his breakthrough, which is treated, properly in the context, with awe and monumental respect inside the profession, left giant chunks of growth unexplained. Naturally economists came up with jargon to describe this unexplained chunk — they called it “Total Factor Productivity” — which is another of those spoofs I mentioned above. For all their subsequent efforts, including the aforementioned sudden realization that technology might have something to do with it, economists are still at sea when asked to explain growth, why it suddenly took off in the late 1800’s, and why it might be slowing down now.

This is all very relevant because we are now in a moment when growth rates in economies are very much a political topic. Here in the US, Trump made a big deal of it in the election. Worldwide there is much hand wringing over the possibility that we have fallen into stagnation and that all that fast growth since 1870 is now over. The socio-economic and socio-political consequences of stagnation as a longer term reality are enormous, and it would be nice if economics could say something other than wallow around in its self-satirical references to equilibrium and rationality.

So, in the spirit of helping you frame your own thoughts about growth, and to help you ponder the tectonic shifts underway down beneath the froth of the surface phenomena of economics, here is the diagram I keep in front of me to remind where to look for problems and solutions. It is not a theory, it is a framework:

I apologize for the poor presentation, I haven’t reduced that file size for years. But this is the way I have been looking at growth since that late 1990’s. I will devote more time to it in future.

Meanwhile: chin up. This too shall pass.