Wednesday, January 6, 2016

Orgel's Rules and The Micawber Principle...

Something will turn up.

     ~ Mr Micaeber's endearing self-deceiving refrain in David Copperfield

Orgel's Rules:

 Rule #1 - "Whenever a spontaneous process is too slow or too inefficient, a protein will evolve  to speed it up or make it more efficient"

Rule #2 - "Evolution is cleverer than you are"

"One condition, however, must be satisfied to "turn up" new solutions, whether for stabilizing financial markets and managing the economy or for eliminating global pollutants and curing diseases: Capitalism and democracy must themselves survive. That is why sacrifices to protect democracy and private enterprise against the military challenges of communism, fascism, and religious fundamentalism are rational and morally admirable, while sacrifices on behalf of our grand children's purely economic prosperity are not ( at least at the level of society as a whole).

But capitalism's survival depends on more than military protection. Modern capitalism is a complex social system that has been incredibly successful in expanding the wealth, technologies, and the life span of every generation since the late eighteenth century, but like every complex system, it is delicate. Many self-organizing complex systems operate on what evolutionary biologists and mathematicians call the "edge of chaos." a constantly shifting line of balance between potentially disruptive forces that the system itself creates. Karl Marx was right that capitalism, by its very nature, creates internal contradictions that inevitably lead to crises threatening its survival. What Karl Marx and his followers missed, however, was the capacity of politics, especially democratic politics, to resolve these contradictions, overcome the crisis, and enable capitalism to survive.

     What, then, does democratic capitalism require for its survival? The lesson from history, evolutionary biology, and everyday common sense is one condition has to be satisfied for any complex system to survive in an unpredictable and constantly changing world: The system itself must be adaptable, that is, it must have internal mechanisms allowing it to undergo radical change.

     The crisis of 2007 - 09 marked the fourth time in the history of democratic capitalism that the system faced the challenge of comprehensive change. The question is whether it will again adapt, as it did at the turn of the nineteenth century, the 1930's and the 1970's. Experience suggests that it will - and that the main mechanism for this survival will be the Micawber Principle: the seemly improvident assumption that a problem postponed long enough is, effectively, a problem solved.

Hoping that " something will turn up" may sound like deluded wishful thinking, but it is really just an extension into politics and macroeconomics of Adam Smith's arguments about the self-organizing dynamics of the capitalist economy. Smith showed how the "invisible hand" of competitive markets automatically coordinates the actions of millions of individuals pursuing their own self-interest so that they satisfy each other's needs, despite the fact that no one is thinking consciously about the common good.

     This same invisible hand steers individual initiative and creativity toward solutions of society's collective problems, provided two conditions are satisfied. First, the process of spontaneous self- organization must be given enough time to produce new adaptations after each of capitalism's periodic crisis. Second, the right incentives must exist for business competition and human creativity to address society's common problems, as well as meeting individual material desires. as Joseph Stiglitz, the Nobel Laureate economist, has repeatedly argued, private markets cannot be relied on "to align private incentives with social returns" - and this is particularly true during dramatic technological or political change."

Hat tip ~ Anatole Kaletsky, CAPITALISM 4.0

From Astrology to Astronomy ???

It would be too flattering to economics to compare the paradigm shift that lies ahead to the one that occurred in physics a century ago. Economics is closer today to astronomy in 1543, when Copernicus realized that the earth revolved around the sun. The academic economics of the past twenty years has been comparable to pre-Copernican astronomy, with its mysterious heavenly cogs, epicycles, and wheels within wheels.Today's economists will fight for their irrational rationality as fiercely as the pre-Copernican astrologers defended their epicycles and star signs.

   Max Planck observed, in the context of the revolution in physics that occurred one hundred years ago with the discovery of relativity and quantum mechanics, that "science progresses one funeral at a time." The achievements of modern economics are too meager - and its ideological importance is too great - to allow such slow progress. Either economics will reform itself quickly or the funeral will be for the discipline as a whole.

Hat tip ~ Anatole Kaletsky, CAPITALISM 4.0

The Next Level

New ways of thinking about economics will have to be developed, in parallel with the evolution of a new capitalist system. For this to happen, however, the dominant research programs of the 1979 - 2009 era will have to be acknowledged as failures, or at least to be discarded as no longer relevant. Instead of using oversimplified assumptions to create mathematical models that bear no relation to real events, economists will have to reopen their subject to a much wider diversity of analytical approaches. They will have to draw insights from political science ( i.e. The Origins of Political Order ), Sociology, and Anthropology. And they will have to apply the methods of historians, management theorists ( Stakeholder Theory, Modularity ) and psychologists, as well as mathematicians and statisticians. As economists do this, the institutional structures ( institutions) and intellectual outlines (thinking) of Capitalism 4.0 will gradually take shape.

If Capitalism is to Survive...

In short, the economy of the future will be explicitly a mixed economy, in the sense that both the private and public sectors will play an important role. And it will be an adaptive economy, where the rules of economic engagement, including the relationships between the government and private markets, will be subject to change.

Monday, January 4, 2016

The Future of Economics

"Economics today is a discipline that must either die or undergo a paradigm shift - to make itself both more broadminded and more modest. It must broaden its horizons to recognize the insights of other social sciences and historical studies and it must return to its roots. Smith, Keynes, Hayek, Schumpeter, and all the other truly great economists were interested in economic reality. They studied real human behavior in markets that actually existed, rather than making assumptions about disembodied representative agents and desocialized perfect markets of a kind that could not possibly approximate the real world."  (185)

Hat Tip ~ Capitalism 4.0 , Anatole Kaletsky