Greg Fisher — Global Incoherence

I was recently asked to take part in a roundtable co-organised by Nik Gowing and CIMA (the Chartered Institute for Management Accountants). The roundtable was designed to feed in to the Churchill 2015 conference in November, and was on the subject of ‘thinking the unthinkable’ with regard to global leadership. The premise, which I agree with, is that the world is changing rapidly, such that those in positions of authority who are meant to lead us through such problems are being overwhelmed by multiple wicked problems.

These wicked problems include: climate change; ISIS; the Arab Spring (which I see as a generally good thing); the financial crisis of 2008 and the ensuing global recession; and rising tensions between the West and Russia.

I thought I would share my thoughts, some of which I shared at the roundtable, on this (hugely complicated) subject via a blog article.

Ultimately, I see these wicked problems arising from a tension between two broad points: the world looks more like a closed system that is now hitting capacity constraints; and we are employing a ‘simple systems’ mind-set to what are complex system problems.

The World as a Single, Closed System

The first point is that the world is now behaving more like a single, closed system than at any point in human history. It isn’t actually a closed system because it is open to the sun’s energy but, if I were to put it bluntly, there is no longer any ‘outside’ from which we can import solutions and export problems. At the same time, feedback effects have become more pronounced, and the earth’s capacity constraints have begun to be tested by the simultaneous growth of the human population and its average per capita consumption.

These features appear to have arisen from the stunning advances in transportation technology over the past hundred years or so and, more recently, by the advancement of information and communication technology. All of this has cultivated a much more integrated, interacting world.

Prior to this, for several hundred years, the world was organised, both in a real and a legal sense, in to nation states, which operated – broadly speaking – like small open systems. In such a world, you can generally ignore the impact you have on the wider host system. You can also export some types of problem (sending convicts to other shores, for example) and import solutions to other types of problem (invading resource-rich countries, importing slaves etc.).

And, generally speaking, the more powerful countries were more able to seek solutions from their outside than the less powerful, and they could do this without any expectation of a significant detrimental response / feedback. Hence, empires were built.

We have moved away from this world for the reasons cited above: transportation technology, ICT, and increases in population and per capita consumption. Of course, the resulting wicked problems are not only important at the global level for national politicians and diplomats: they are also challenging the senior executives of organisations of varying sizes and types. The environment for many directors has changed, and continues to change, rapidly.

The ‘Simple Systems’ Mind-Set

The second point is that the dominant way of thinking in the world is reductionist, linear and static. Reductionism is the idea that we can break a whole system in to parts to understand it; linearity is the notion that cause is proportional to effect (i.e. small causes create small effects and vice versa); and by static I mean that dynamical effects are either ignored or under-emphasised.

In my opinion, this ‘simple systems’ thinking is demonstrated most clearly in orthodox Western economics. But economics is not merely an exemplar here, it is also important because it has widespread effects on corporations and governments all over the world. It frames decision making concerned with trillions of dollars of resources.

Now, an important point to note here is that the simple systems mind-set is a reasonable approximation for decision-making in the old world of multiple small open systems. Indeed, the relationship between the two is brought in to focus if we make the inverse point: we can imagine this simpler mind-set emerging in this old world as a reasonable approximation of how it works. Our pattern-recognition capabilities are, after all, concerned with reasonably approximate hypotheses.

In my opinion, and this is the core point of this article, the global wicked problems listed above have arisen because we are living in a world for which the simple systems mind-set is no longer a sufficient approximation. Among other things, the world in which we now live has no outsides, it is prone to cascading effects (like global financial crises) and acute feedback effects.

Synthesis
Global Incoherence
Greg Fisher

Alan Kirman & Dirk Helbing — Why mainstream economic models are unreliable

Economics has long had the ambition to become an “exact science”. Indeed, Walras, usually recognised as the father of modern economic theory, said in his Lettre no. 1454 to Hermann Laurent in Jaffe (1965):

“All these results are marvels of the simple application of the language of mathematics to the quantitative notion of need or utility. Refine this application as much as you will but you can be sure that the economic laws that result from it are just as rational, just as precise and just as incontrovertible as were the laws of astronomy at the end of the 17th century.”Furthermore his successors openly declared themselves as having the same goal...

This model of “perfect competition” is considered a useful idealization, and features such as the aggregate effects of the direct interaction between individuals are thought of as inconvenient “imperfections”. However, deviations between economic theory and reality may be of crucial importance in practice, and the consideration of the links between individuals and institutions cannot be written off as being of little relevance to the behaviour of the system as a whole. This is a lesson that is clear to all those, who are familiar with the analysis of complex systems.

In a comment on a previous post, Unlearning Economics observed that creating idealized models that are perfect and considering deviations from perfection to be "imperfections," misrepresents the reality of markets, which are not perfect and for a variety of reasons cannot be perfect. So it is incorrect to call these supposed phenomena "imperfections."

This is an important point not only with respect to models as representational but also rhetorical. When a phenomenon is labeled an "imperfection" rather than simply a phenomenon that is a regular feature of such conditions, the implication is that the situation can be improved by removing or reducing the "imperfection." However, this may not be the case, or the whole enterprise may be futile due to its construction.

As Paul Meli has observed, arguing about "imperfections" on the basis of an idealized perfect market is similar to considering friction an "imperfection" in physics and attempting to eliminate it, which is the goal of those who have sought to create a perpetual motion machine. This, of course, is ruled out by the laws of thermodynamics.

So modeling economics on physics must also take the laws of thermodynamics into account, so to speak, which implies that perfect models are necessarily non-representational.

It may be argued that an objective in engineering is to reduce friction in order to improve efficiency and this holds in economics, too, where friction is often called "drag." However, to suggest that this phenomenon can be eliminated  in the actual world is wishful thinking, since idealized models can only be rough approximations of the behavior of a limited number of variables rather than the basis for laws that apply generally.

Moreover, attempting to model what is complex, adaptive, and emergent, that is, determined by system relationships that are flexible rather than fixed, makes social science quite different from physical science, where simple models (however complicated) can be employed in that physical motion is regular across time. While ergodic modeling is appropriate in the natural sciences, it is not in the life and social sciences, where organisms are not simple stimulus-response mechanisms following general laws, as behaviorists had assumed. Reductionism did not work in psychology; it has not worked in social science, and it will not work in economics, and we know precisely why.

Why then do economists persist in their folly? The reason appears to be ideological, especially when buttressed by special interests promoting a status quo that favors these interests. For example, according to neoclassical economics and its offspring, the primary source of market "imperfection" is government "intrusion." Granting that government policy can create drag, it does not follow that reducing government also reduces drag automatically, as often assumed. 

The answer might be, and often is according to heterodox economists, that changing policy to reduce drag or improve performance might involve more government in some cases and less in others, depending on context such as the business cycle and the financial cycle. It is becoming clear from evidence that "expansionary fiscal austerity is not working as projected, just as heterodox economists warned would be the case when applied at the trough of a cycle, where more government is needed rather than less to offset the drag of flagging demand during a period of deleveraging at the culmination of a financial cycle.

Of course, conventional economists also realize the importance of government policy even though they may not admit it. For instance, they call for government to increase activity when and where it benefits ideological interests, such as military and security in protection of private property, to access resources, and to extend market reach through intimidation of weaker parties.  The type of policy recommended or pursued is based on ideological bias, based either on purely ideological considerations or special interests that are promoted by the ideology. 

For example, for the right government support of labor by legislating collective bargaining is an "intrusion," while supporting military Keynesianism is a requirement of national security, even when the military does't want the weaponry being appropriated. The left would take up the opposite position.

These are normative, ideological issues that should be argued as such rather than using the rhetorical sophistry of complicated mathematical (econometric) models to bias the debate on the basis of pseudo-scientific claims that do not pass the smell test.

Lars P. Syll
Why mainstream economic models are unreliable
quoting Alan Kirman & Dirk Helbing