Tuesday, December 4, 2018

Eric Liu and Nick Hanauer — Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails

Traditional economic theory is rooted in a 19th- and 20th-century understanding of science and mathematics. At the simplest level, traditional theory assumes economies are linear systems filled with rational actors who seek to optimize their situation. Outputs reflect a sum of inputs, the system is closed, and if big change comes it comes as an external shock. The system’s default state is equilibrium. The prevailing metaphor is a machine.
But this is not how economies are. It never has been. As anyone can see and feel today, economies behave in ways that are non-linear and irrational, and often violently so. These often-violent changes are not external shocks but emergent properties—the inevitable result—of the way economies behave....
Machine view [physical] : Wealth = individuals accumulating moneyGarden view [biological] : Wealth = society creating solutions
One of the simple and damning limitations of traditional economics is that it can’t really explain how wealth gets generated. It simply assumes wealth. And it treats money as the sole measure of wealth. Complexity economics, by contrast, says that wealth is solutions: knowledge applied to solve problems. Wealth is created when new ideas— inventing a wheel, say, or curing cancer—emerge from a competitive, evolutionary environment. In the same way, the greatness of a garden comes not just in the sheer volume but also in the diversity and usefulness of the plants it contains.
In other words, money accumulation by the rich is not the same as wealth creation by a society. If we are serious about creating wealth, our focus should not be on taking care of the rich so that their money trickles down; it should be on making sure everyone has a fair chance—in education, health, social capital, access to financial capital— to create new information and ideas. Innovation arises from a fertile environment that allows individual genius to bloom and that amplifies individual genius, through cooperation, to benefit society. Extreme concentration of wealth without modern precedent that has undermined equality of opportunity and thus limited our overall economic potential.…
Economist Kenneth E. Boulding joined biologist Ludwig von Bertalanffy in founding the discipline of general systems theory. It was the precursor of evolutionary economics also known as complexity economics. Kenneth Boulding's economics was close to MMT, and MMT economists have recognized him as a precursor. Boulding and his wife Elise were prominent Quaker peace activists. Boulding also worked in conflict studies and emphasized love as a foundation of well-functioning society and economy.

Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails—Markets are a type of ecosystem that is complex, adaptive, and subject to the same evolutionary forces as nature
Eric Liu and Nick Hanauer


Andrew Anderson said...

As anyone can see and feel today, economies behave in ways that are non-linear and irrational, and often violently so.

Not so surprising given the largely sham* nature of bank liabilities toward the non-bank private sector.

*Bank liabilities are for fiat which the non-bank private sector may not even use except for grubby, unsafe, inconvenient physical fiat, aka "cash." This is, of course, extremely convenient for the banking cartel's ability as a whole to safely create deposits/liabilities for fiat since the non-bank private sector may not conveniently and safely redeem those liabilities.

Andrew Anderson said...

Not that laissez-faire is even possible when government insures private liabilities, including the liabilities the banks themselves create.

Ralph Musgrave said...


Strikes me a better argument than trying to pick holes in taxpayer backed deposit insurance is to point to a glaring inconsistency or self–contradiction in conventional policy towards banks. That is that if you deposit money at a bank which it lends on so as to earn interest, taxpayers ensure you don’t lose out, but if you do EXACTLY THE SAME THING at a mutual fund, there is no taxpayer backed protection.

When trying to argue against anyone, if you can point to a SELF-CONTRADICTION in their argument, you’ve got them in check mate.

Put another way, depositors (at banks or mutual funds) who want their money loaned out are into COMMERCE. And it’s a widely accepted principle that it is not the job of taxpayers to bear the loss when someone’s little commercial venture goes wrong. I actually expanded on that point in this article recently: