Wednesday, May 30, 2018

Diane Coyle — Finance, the state and innovation

Yesterday brought the launch of a new and revised edition of Doing Capitalism in the Innovation Economy by William Janeway. Anybody who read the first (2012) edition will recall the theme of the ‘three player game’ – market innovators, speculators and the state – informed by Keynes and Minsky as well as Janeway’s own experience combining an economics PhD with his experience shaping the world of venture capital investment.
The term refers to how the complicated interactions between government, providers of finance and capitalists drive technological innovation and economic growth. The overlapping institutions create an inherently fragile system, the book argues – and also a contingent one. Things can easily turn out differently.... 

The fundamental assumption of a free enterprise system ("capitalism") is that entrepreneurship drives innovation, which accelerates growth and overall prosperity.

Looking at the historical record, this is obviously true. But it is more complicated than that, and a lot things can go wrong if all the gears in the machine are not always in sync. History also shows that they are not as evidence by cycles, where all cycles are a combination of business (economic) and financial factors that are influenced by a number of contingencies in a dynamic environment, including policy and its application.

The Enlightened Economist
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation


The problem I have with this type of reasoning is that assumes away contingency. Technological innovation land the creation of a consumer society through marketing and advertising lead to the creation of mass markets, which changed the dynamic in a way that models did not anticipate and likely could not have because the new technology that made this possible was emergent and foreseeable in advance.

I don't think that this vitiates Marx and Engels' approach, but rather strengthens the argument for the need for conceptual models that are based on "fuzzy logic" to complement formal modeling based on technically defined analytical concepts and precise measurement to delimit the boundaries of sets.

Contingency implies uncertainty. Uncertainty implies the need to use fuzzy logic rather than the strict formalization that conventional economics as "science" demands. Both are necessary tools, especially as scale increases — which is what the fallacy of composition is about. Macro is not and cannot be scaled up micro analysis.

Of course, what can be formalized usefully should be used. But not everything is capable of being modeled formally in a dynamic way when contingency is involved, and static models are mostly gadgets when cet. par. is assumed.

Michael Roberts Blog
The fallacy of composition and the law of profitability
Michael Roberts


Clint Ballinger said...

On the contingency bit...
Contingency is just so

Andrew Anderson said...

The finance system is fragile from at least three perspectives:

1) It is not ethical in that it is (heavily) privileged by government.

2) The accounting is a sham wrt bank liabilities toward the non-bank private sector.

3) The negative feedback that genuine bank liabilities toward the non-bank private sector would provide is missing. But negative feedback is an essential feature of a system's stability.

But somehow it is assumed that ethics, honest accounting, and control system theory does not apply to finance?

Tom Hickey said...

@ Clint

Thinks for posting a link to the paper, Clint. I just perused it quickly and will get back to later. I agree that "contingency" needs to be defined as an analytic concept when used in formal modeling, e.g, mathematically based theory like physics, or semi-formal modeling, e.g, conceptually based theory that may include mathematics, like economics and economic sociology, as well as political theory and other life and social sciences. The concept will likely be defined different depending on methodological choices that are contingent on context and choice of objectives.

An analytic concept as a key term in a framework that can generate different theories must be carefully specified so that it can be checked whether it is being used consistently.

For example, in economics, does Keynesian notion of uncertainty involve a particular meaning of "contingency" that differs from the conventional econometric theory of "external shock" that the theory cannot anticipate, and if so, how so, and what different does it make.

Clint Ballinger said...

Hey Tom, sure. BTW there is a link to a PDF version that I think makes the footnotes a little easier to follow

Contingency is just so PDF


Tom Hickey said...

Thanks, Clint. Downloaded.