Oh Kay!

By Greg Fisher

Yesterday INET published a valuable essay written by John Kay entitled “The Map is Not the Territory: An Essay on the State of Economics”.  In this blog I would like to discuss how John’s essay is a useful and fair critique of the state of economics and use his framing to demonstrate a viable alternative approach to economics, namely Complexity theory.  This is the study of complex systems, which contain a number of potentially unique agents that interact with – and adapt to – each other over time.  I have always thought John’s writings to be highly compatible with a complexity approach and his recent essay is no different.

With Complexity theory in mind, the fundamental problem with orthodox economics seems to be that it takes a reductionist approach to making sense of a complex system.  Put another way, economics tries to dissect something that is highly interconnected and constantly evolving in to discrete tractable chunks.  The only way to resolve this paradox is for economists to re-frame their field as ‘Complex’.  Without doing this, they will continue to make a framing error.  Moreover, what we mean by “an economy” ought to be viewed as an irreducible part of the biosphere.

Rigour, Consistency, and Universality

Albert Einstein

The core of John’s essay is to explain that economics orientates itself around rigourconsistency, and universality.  This is in the best traditions of classical physics, which was (in effect) smashed to smithereens by the relativity and quantum revolutions of about a century ago, and also (in my view) by the chaos / complexity revolutions of the 1970s and beyond.  So, as Eric Beinhocker described in ‘The Origin of Wealth’, orthodox economics is a bit like Cuban cars – lost in time due to the embargo – while the rest of the world has moved on.

As John emphasised, rigour lends itself to a mathematical approach and consistency lends itself to ideology.  These result in economics being based on axioms, deduction, and ‘analytical solutions’.  Through a complexity lens, we can see that the value of the axioms-and-deduction approach is limited by the concept of emergence.  Notably, what Stuart Kauffman refers to as ‘ontological emergence’ means that we cannot necessarily move deductively from the ‘micro’ to the ‘macro’.  Some properties will emerge at the macro level from the interaction of the (micro) constituents of the system, which cannot be deduced from those constituents.  This can be the case with a large society or even a conversation between two people.  Emergence is probably the most powerful concept to have, well, emerged from Complexity theory because it contextualises the value of deduction.

In John’s words, consistency “means that any statement about the world must be made in the light of a comprehensive descriptive theory of the world”.  And universality requires “a description of the world that is independent of time, place, context, or the observer.”

The primary problem with consistency and universality is that complex systems are continuously evolving, whereas orthodox economics frames the economy as a static system in which all of the ‘rules’ or ‘laws’ never change i.e. they are independent of time.  In technical-speak, economics views its terrain as ergodic, meaning ‘sameness’ over time.  By contrast, complex systems are non-ergodic – they are in a constant state of flux (but this is not to say they lack structure, or patterns).  The distinction is enormously important for understanding any type of complex system, including social systems.  Non-ergodicity means that universality is problematic because any description of the world cannot be independent of time – change is inherent in the system.

Moreover, economics is orientated around systems that are in equilibrium, and in such systems inconsistencies will eventually be ironed out (such as opportunities for arbitrage in financial markets).  However, complex systems can exist in a perpetual state of disequilibrium, with apparent inconsistencies.  This statement is the Complexity analogue to Keynes’ famous dictum that “in the long run we are all dead”: in the shorter term the economy can remain in a state of disequilibrium.  So complex systems can and do contain inconsistencies – this may result in inelegant and intractable views of the world but that is the nature of (real) life, not a flaw of Complexity theory.

Universalism also runs up against another key feature of complex systems: the prevalence of idiosyncrasies.  The importance of idiosyncrasies is in fact due to emergence: the combined characteristics in one place, or set of circumstances, may lead to emergent properties in that one place.  Another – similar – place, or set of circumstances, may give rise to different emergent properties.  These properties may make the two ‘places’ completely different even though they have very similar constituents.  For example, one housing estate in the UK may have worklessness rates of 70% whereas another – otherwise identical – estate may have a 10% workless rate.  The difference may be due to emergent properties, such as human values, which are impossible to predict ahead of time.  This is a problem for universality, which in John’s definition requires independence of place and context.

Inductive Reasoning, Pattern Recognition, and Cognition

The non-ergodic view of the world leads to a very different understanding of complex social systems.  Importantly, the contrast between human cognition and how the world works becomes even starker and the intractable nature of reality becomes more obvious.  Herb Simon and Friedrich Hayek both emphasised the insufficiency of human cognition relative to the real world: Complexity theory asserts this point further.

Continuous change also contextualises inductive reasoning, which John also referred to.  Induction is typically thought of in the same way that Popper referred to it: making general statements out of the singular.  It is preferable, I think, to talk about pattern recognition rather than induction because its definition is clearer.  To paraphrase Popper, it is obviously silly to infer a general rule from a single instance.  But it is possible to observe general (not necessarily universal) patterns from one’s own experiences, including empirical research.  Hypothesis formation can be viewed as a form of pattern recognition, which Popper overtly chose to ignore in his “Logic of Scientific Discovery” because he accepted he did not understand it.  With a Complexity perspective on the world, we can understand it much better.

Conclusion

John Kay’s critique of orthodox economics was entirely fair.  But it is one thing to criticise and something entirely different to offer a replacement.  The most obvious counterpart framework to offer in place of orthodox economics is one based on complex systems.  That is the paradigm change orthodox economists have to accept: rigour, consistency, and universality were hallmarks of classical physics, which physicists moved past a hundred years ago.  It is about time economists moved on too.

 

Share this Article:

2 Responses to “Oh Kay!”

  1. john smith - herrod says:

    As an undergraduate student studying philosophy with a keen interest in economics, I’m excited to see that some people are working very hard to improve economics. While I don’t have a sound enough grasp of economic theory at present to determine how your framework might work in practice, it nevertheless appears to be a step in the right direction. Good luck!

  2. Rotkapchen says:

    One of the biggest challenges is that people use the terms ‘economists’, “economy’ and ‘economics’ thinking that they’re talking about the same things. The problem is that there are entirely different sorts of ‘realms’ of these terms that can be true and false at the same time.

    Kay is railing against what we most often see practiced — not only neo-classic economics, but the macro portion of same.

    The real value of teaching students to embrace an economic way of thinking is embodied in classical economics, which is not taught in most universities. Indeed, as noted in the “A Tribute to Paul Heyne” in the foreward of “The Economic Way of Thinking” [http://econfaculty.gmu.edu/pboettke/pubs/1%20Books%20and%20Monographs/EWOT/ewot.html], Paul Heyne specifically left a fully-tenured position SMU so that he could teach economics his own way. Says the former Dean of Economics at the University of Washington (who was himself awarded the Nobel Memorial Prize for Economics in 1993), “The Economic Way of Thinking embodies Paul’s approach to economics and to a liberal education. It was a radical change from the textbooks of the time. Its focus on the problems of a society and the way in which economic reasoning could shed light on those problems made economics interesting to the students. More than that, the book recognized that the strength of economics was precisely described in the title of the book – as a way of thinking. Comprehending that way of thinking was, and continues to be, the revolutionary contribution of economics to the social sciences and to a better understanding of the world around us.”

    Additionally, we have a lot of people posing as economists who are financial analysts. Economics don’t really care about money at all — only those who created the field of macro-economics did so to make it appear as if economics was about money. It’s not. Macro-economics is an artifact of neo-economics which is just large scale financing disguised as economics.

Leave a Reply