Universal Darwinism - economic growth - production & protection of stocks - one whole shebang & caboodle of happenings -
happenings, underpinned by -
Moral Sentiments &
and offered an explanatory foundation for the emergence of complex adaptive systems ... living life, economic behaviour & economic institutions ... not in causal detail but as a universal process.
Evolutionary Economics & Adaptive Efficiency
science of choice
Economic Growth & Enabling Environments
Wealth Creation & Cooperative Synergies
price information, market deals, immunity from treachery & the magic of property
Technological Innovation & Survival Know How
discovery & accumulation of 'know how'
Evolutionary Economics -
Economic Growth was not what it seemed to be -
happenings were not - arrogant, plausible, deliberate, rational, purposeful, intentional planning imposed from 'above' - but rather
happenings were - unknowable emergent properties of Complex Adaptive Systems where effects were causes, where patterns we see (hear, feel, smell & taste) were the diminutive few survivors from the massive diversity of random possibilities
facts were - immensely complex, always changing, inevitably conflicting & very scarce
historical context of 'intelligent design' was Cartesian Dualism -
1 oppressive bishops had a go at top down command & control from above then
2 tyrannical princes claimed divine rights but
3 dictatorial generals had guns finally
4 corrupt bureaucrats claimed hierarchical legitimacy
but all failed to balance their books and fund their arrogance -
trust, confidence, empathy and moral sentiments were built bottom up from below and could not be purchased with the money measurement system
Practice - weeding out failures -
1. Start with ignorance then experiment with Darwin's 'natural selection' -
Copy - learning - trial & error, discovery & accumulation, weeding out failures
Vary - diversity - different folk, at different times, in different places, with different social interactions have different ideas
Select - synergies of specialisation & scale
2. Production & Protection of 'know how' - use your imagination -
creative brains of individual folk & social cultures - production units - moral sentiments, creative diversity and logical reason
defensive immune systems of individual folk & social cultures - protection units - empirical science, automatic immunity from treachery
3. Unfinished Business - arms races -
hard work, honesty & thrift confronted by -
cashed in on synergies of specialisation & scale from -
and created 3% pa compound growth of 'know how' ...
but, and it was a big but -
parasites & predators were inevitable - 'as soon as there were stocks there were thieves' -
dictatorial Generals &
Mercantilist 'coin clippers'
Theory - science of choice - 'go left or right but no one can see round the corner' -
Thermodynamics (complexity, change, conflict & scarcity)
Emergent Feedback (hierarchies of evolutionary stable structures)
Non-Linear Maths (computer simulations)
Molecular Biology (neo-Darwinian synthesis copy/vary/natural selection)
Neuroscience (hierarchies of naturally selected neural networks & circuits as survival aids)
Evolutionary Psychology (self-conscious choices as flip flopping emotions of excitement & fear discovered 'know how' and memory & reason accumulated 'know how')
Economic Anthropology ('know how' accumulated across generations in institutions & cultures)
Game Theory (evolution of cooperative synergies)
Biological History (evidence of gene/culture coevolution & social animal synergies)
10 topics with ethics & law thrown in to avoid loose ends?
Evolutionary Economics, the science of sciences?
Strange abstractions, concepts, principles emerged from the mathematics of balanced Balance Sheets -
nature of profit - measurement system - investment signal
safeguard of competition - weeding out failures - bills had to be paid
individuality of reality - all different - all inherited brains & immunities & existing know how
magic of property - compound interest - don't eat the seed corn
Reality was a Complex Adaptive System of systems, a nested set of sets, an ongoing continuum of coevolution.
Amongst all the normal chaos & angst we began to glimpse a sliver of miraculous order as genes them selves did cost benefit analysis & our beer glass appeared to be half full ... reality, like the giraffe's neck, was intensively economic.
Wotever we ended up with the reality of Darwin's entangled bank which included the Boeing 747!
The Blind Watchmaker was immune from treachery otherwise he wouldn't have survived ... natural selection of 'know how' and the liberal order ... and bankruptcy to weed out the failures ... constructed The Case for Competitive Business.
In the same way birds that didn't build nests and short necked giraffes died out.
Way before Darwin's insights in 1859 ... The Bard got the explanatory power of evolution right as usual ...
... 'the paragon of animals' with moral sentiments, an infinite imagination, a conscience, and acting like a god.
Hamlet suggested understanding of man came from man 'as if' acting like a God but in reality ... ‘dust thou art, and unto dust shalt thou return’ ...
The fundamental viewpoint of evolutionary economics was that survival by natural selection was -
intensely economic, discovering & accumulating synergies of specialisation & scale
diversity was the essential feedstock for selection in populations of social species
intelligent design Bishops, Princes, General & Bureaucrats was anathema
an arms race between productive synergies (2+2=5) and parasites & predators (2-2=0).
The Magic Money Tree - throw someone else's money at problems or seize fantastical opportunities for personal hard work -
Lurking & sulking persistently in the background of every survival story was the non existent God behind every tree and the Blind Watchmaker but -
synergies of specialisation & scale had to be discovered & accumulated the 2nd Law saw to that
money cannot be created out of nothing money was just the measurement system
the dice were loaded as
instinctive 'immanent' and 'transcendental' moral
Adam the Smith wrote 'The Theory of Moral Sentiments' long before he wrote 'The Wealth of Nations'
Pacioli Accounting Fundamentals - taxation of commercial businesses must result in higher prices for customers, lower wages for workers & lower returns for investors - lower output and growth for producers and supply chains - Deadweight Burdens
Just a simple process of copy / vary / select ... trial & error, weeding out failures ... there was no discontinuity ... a classification of 40 separate principles was meaningless?
40 Guiding Principles of Evolutionary Economics
Empirical Science of Choices
(observation, theory, hypotheses, experiments, peer review - 'know how')
Trial & Error experiments & vicarious learning - discovery & accumulation of synergies of specialisation & scale
Maths & Emergence, Physics, Chemistry & Thermodynamics, Biology & Biological History, Psychology & Neuroscience, Anthropology & Social Species
Why are some economies rich and some poor?
Wealth creation is not luck, nor providence, but rather a process of natural selection ... the differential survival of inherited variants -
The unleashing of a process of technological & institutional innovation involving generating & testing a diversity of ideas which discover & accumulate more survival value for the costs incurred than competing alternatives.
Adaptive efficiency defines economic efficiency.
key - trust & deals - survival 'know how' is discovered & accumulated from social interactions; cooperative synergies of specialisation & scale under pinned by moral sentiments - 'hard work, honesty & thrift'
Economics is the science of choices ... differences ... alternatives ... opportunity costs ... the natural selection of outcomes results in survival 'know how' ...
Why is evidence important?
Empirical scientific methodology, rather than the often misleading, a priori reasoning, provides the supporting evidence for a process of discovery & accumulation which feeds back on itself ... a compounding process –
observation - evidence of the senses, everything else is 'a woven web of guesses'
mathematical theory - precise imaginative descriptions, verifiable systems of assumptions and rules in the mind which explain in general terms a wide variety of interconnected observations of physical reality
testable hypotheses - potentially convincing predictions, suggested consequences of theory as a basis for verification and further observations without an assumption of truth
experimental validation - repeatable evidence, outcomes which convince the jury
peer review & citation counts - the triumph of science over the whims of Bishops, Princes, Generals and bureaucratic despots
Over generations since take off around 1500 scientific methodology has discovered & accumulated knowledge & understanding of the world by a relentless process of generating & testing ideas in the imagination and in reality.
A double blind randomised control experiment in Scunthorpe which was repeated in the Antipodes 17½ nights later with the same peer reviewed results was meaningful irresistible evidence which could never be ignored ... but the answer depended on the next question.
Science discovers models of reality ever closer to the laws of nature involving both prediction (usefulness) and change (progress).
Stephen Hawkins -
'some individuals are better than others at drawing the ‘right’ conclusions about the world around them & act accordingly. These individuals will be more likely to survive & reproduce & so their pattern of behaviour & thought will become dominant'.
Understanding complex adaptive systems as the differential survival of alternative ideas which can be freely tested without harming others.
key - memory & reason - we observe & inherit the evidence from outcomes of experiments and learn - 'we are ignorant of what it is we do not know'
Natural Selection & Dangerous
(copy/vary/select - differential survival)
Darwin's 'entangled bank' & Miraculous Order - Luke 12:27
- 'consider the lilies how they grow, not even Solomon in all his glory was arrayed like one of these' Intelligent Design was not what it seemed to be - arrogant, plausible, deliberate, rational, purposeful, intentional planning of outcomes
- 'brains & immune systems & Boeing 747s evolved'
Weeding Out Failures
The Watch Maker was Blind
Why is differential survival of inherited variants so counterintuitive & difficult to grasp?
Complex adaptive systems are not the result of 'top down' intelligent design processes -
Bishops, Princes, Generals & bureaucrats with their
arrogant, plausible, deliberate, rational, purposeful, intentional, planning ...
... can change the local environment but cannot determine outcomes ... experiment but not determine.
Reality is not deterministic ... but rather a counterintuitive 'bottom' up process of natural selection ... the differential survival of a diminutive few inherited variants when the vast majority of such variants die out.
The process is simple but the outcomes are bewilderingly complex. The penny has to drop, natural selection involves -
copy = inherited accumulated survivors preexist = there is no blank slate = some parental variations are inherited by offsprings
vary = random mutations produce path dependent diversity = there is no foresight = offsprings within a species are variable
select = survival 'know how' survives that is why it is survival 'know how' = there is no supernatural intervention = many more offsprings are born than competitively survive
Darwin said it was 'an awful stretcher' and was well aware that the penny wouldn't drop easily ... he delayed the publication of 'Origin of Species' for 20 years because of his concern about the adverse reaction to his 'strange inversion of reason' ... his insight confronted the plausible conventional wisdom of intelligent design.
Richard Dawkins -
'it is almost as if the human brain was designed to misunderstand Darwinism, and to find it hard to believe'.
Daniel Dennett of Tufts University, Boston, USA, claimed Darwin's idea was -
'a dangerous universal acid'
and DD came up with one of the most succinct aids to understanding natural selection -
‘the giraffes long neck is undoubtedly caused by some complex chemistry but a more meaningful explanation is that short necked giraffes died out’.
Economics Nobel Laureate Paul Krugman argued that together with Ricardo's 'comparative advantage', Darwin's 'natural selection' was a 'difficult idea' -
'most folk somehow find this particular idea impossible to grasp'
Krugman offered his own reasons for the difficulty -
natural selection is an exclusive alternative to 'intelligent design' which was and still is, an old 'intellectual fashion' ... a plausible 'conventional wisdom' ...
the idea is much harder than it seems for most people because it involves understanding 'a dense web of linked ideas' ...
emotional human beings have an aversion to the 'linear mathematical models' of rational science peddled by 'aliens armed with equations & computers' ...
Infuriatingly scientific progress is all too often counterintuitive ... remember the flat earth, the moving sun, the beautifully ‘designed’ lily, space/time and clocks that slow down ... and the homunculus in the brain … ?
key - uneconomic alternatives die out - not 'top down' human 'intention' but rather 'bottom up' learning by 'weeding out' failures that don't work - 'we fail our way to success'
How can genes do cost/benefit analysis?
Global economies have evolved from a network of emergent systems and sub systems over deep time as genes and culture coevolved.
From the simple copy/vary/select process and long long periods of time ... 'miracles' do happen but they are not supernatural ... a whole shebang & caboodle of thermodynamic continuity started from 'the big bang'? ... long long before replicating genes discovered new survival 'know how' which eventually accumulated in human cultures.
Richard Dawkins wrote several books about ‘the long reach of the gene’, 'the extended phenotype' & the mechanisms of change –
genetic drift - random genetic variation can change neutral (non-adaptive) traits (spandrels?)
adaptation - genetic variation + natural selection.
responsive adaptation - adaptation + environmental change that favours natural selection of previously neutral genetic variations or previously differently functional variations (exaptations).
Baldwin Effect - responsive adaptation + behavioural change (niche construction) ...
Something just happens - individuals change their behaviour by trial & error, by empirical failure, and a survival enhancing learned behaviour proliferates – a pre-existing genetic variation helps the new behavioural skill to be learned more easily - this genetic variety is naturally selected - assimilated behaviour can eventually become an instinct.
Richard Dawkins noted in 'The Selfish Gene' in 1976 –
‘genes and memes act ‘as if’ calculating costs/benefits and all the optimistic conclusions about cooperation apply in the world of nature’.
The Selfish Gene (1976), The Extended Phenotype (1982), The Blind Watchmaker (1986), River Out of Eden (1995), Climbing Mount Improbable (1996), The Ancestors Tale (2004), The Greatest Show on Earth (2009) ... all were history books ... biological history books!
key - survival & success - economic behavioural changes survive when survival value is in excess of costs - 'genes do cost/benefit analysis'
Was the Boeing 747 intelligently designed or naturally selected?
The Baldwin Effect explains the move from biological evolution to the reality of an evolving whole shebang & caboodle which includes everything we see in the universe. Baldwin described, a process which directly linked behaviour to the genes. Genes that programme a tendency to acquire certain behavioural traits can be inherited. Such a pre-existing tendency for a behaviour which makes survival easier can be naturally selected and eventually become genetically hard wired deep down in the skull.
This is not Lamark's inheritance of acquired traits where there was no direct change in the genotype based on the experience of the phenotype.
Baldwin's idea is based on the survival of pre-existing genetic variations -
A pre-existing inherited variant with a survival advantage in the local environment will always increase in population frequency as alternative variants die out, this changes the environment which then inevitably feeds back and influences the survival chances of any new variant.
The important point to grasp is that emergent behaviour changes the environment and the environment influences the survival chances of lower level genetic structures.
The old distinctions between top down v. bottom up and nature v. nurture, are a meaningless as a complex adaptive system evolves. The process of evolution itself evolves.
Universal Darwinism is an idea powerful enough to explain everything - understanding ontology comes from the interactive whole shebang & caboodle, layer upon layer of hierarchical interactivity & emergence - energy, matter, physics, chemistry, biology, immune systems, neural networks & circuits, instincts, language, social behaviour and culture - choices at one level are always tested against alternatives at other levels. Self consistency is guaranteed as everything interacts with everything else ... economic behaviour is embedded in an historical trajectory of a nested set of sets.
Economic systems are an evolving complexity of hierarchical, interactive, interconnected sub systems ... whole shebangs & caboodles.
Daniel Dennett -
'Darwin shows us how to climb from absolute ignorance to creative genius without begging any questions. Sky hooks can't save the situation supernaturally, they are impossible. But cranes can do the lifting work from a firm base of existing ground. Gradual accumulation is powerful enough to have done all the design work that is manifest in the world'
... including the Boeing 747 ...
key - feedback & emergence - effects are causes, everything effects everything else without discontinuities; a whole evolving shebang & caboodle - 'self consistency is guaranteed, we only see survivors'
Why endless cycles of death & destruction?
As soon as there are stocks there are parasites and predators. Cheating & theft proved to be a resilient survival strategy. But as fast as predators grew claws, prey ran faster' ... 'arms races' were a zero sum cul-de-sac.
Lotka-Volterra did the maths and funny things happened when everything depended on everything else; cycles emerged, there were no easy solutions to 'non-linear' equations.
But it wasn't all death & destruction, better cooperative strategies with synergies were available to be discovered ... the synergies produced the stocks and immune & defence systems coevolved ... but these were not intelligently designed, they differentially survived as other uneconomic strategies died out. Not intention but rather weeding out the failures.
Something fundamental was going on, John Maynard Smith -
'genes only succeed through their interactions with all the others. Newton's mathematics was adequate only for the description of simple dynamical systems but we now have a mathematical language for describing the change of quantity into quality; a bifurcation' ... non-linear maths.
key - arms races & immunity from treachery - nature red in tooth & claw demanded defence systems - 'as soon as there are stocks there are parasites & predators'
Why are arrogant, plausible, deliberate, rational, purposeful, intentional, plans an illusion?
7 - Self Consciousness. The evolution of evolvability. Path Dependent Diversity.
Biological organisms evolved by the natural selection of inherited variants, it was clear that new random variants had a minimum probability of being beneficial. Random mutations were expected to be mostly detrimental; there were more ways of being dead than alive. However variants may seem to be beneficial more often than randomness dictated? This suggested that the process structures made beneficial changes more likely than they would otherwise be. Evolution created not just fitter organisms, but also populations that were better able to evolve ... vast diversity of prior success.
Path dependency pruned out swathes of randomness and accumulated an increasing diversity of 'likely' candidates ... evolvability increased. Sex, immune systems and brain activity were all examples of adaptive mechanisms generating path dependent diversity.
The inherited brain generates a diversity of ideas and sifts them in the imagination before testing in reality. Flip flopping emotions create diversity and memory & reason accumulate those that work. The brain evolved just like everything else we see there was no discontinuity ... the same old copy/vary/select ... nothing supernatural.
The suggestion that the evolutionary function of the brain was the generation of diversity for further evolution of more basic functions was an affront to the more plausible idea as self consciousness and rational purposeful intentional planning ... but self consciousness appeared very late in the evolution of the brain ... a lot had happened long before people thought about it.
Richard Dawkins, 'The Evolution of Evolvability -
'Evolution has no foresight. But with hindsight those evolutionary changes which look as if they were planned with foresight are the ones that dominate successful forms of life. It is cumulative selection that is evolutionarily interesting for only cumulative selection has the power to build up new progress on the shoulders of earlier generations of progress and hence the power to build formidable complexity of life'.
In this way the imagination both generated a diversity of ideas and pruned out many of the potential failures acting as a lever to speed up natural selection. The choices for testing which eventually emerged from the sifting mill of biological history were always 'good bets'. No longer random mutations but survival ideas ... otherwise they would never have made it up to self conscious choice.
key - pruning out randomness & imaginations - self consciousness is not supernatural, it is a survival aid which emerges from pre-existing activity - 'use your imagination and try'
Why do top-down bureaucracies so often fail to adapt?
Laws of Nature are discoverable by the accumulation of scientific 'know how' and describe a confusing world of statistical uniformities and changing patterns and direction of increasing complexity ... but the one & only scientific theory of change and direction is natural selection.
The maths of models of reality is difficult -
no solutions to equations, no equilibrium, no normal distribution,
exponentials, infinities, power laws, fractals, pie, 'e',
The mutations of the DNA nucleotides follow a 'random pattern', a 'Poisson Distribution', where mutations are independent but strangely interconnected.
Darwin's insight was restated by Daniel Dennett in 'Darwin's Dangerous Idea' in 1995 as a universal acid which ate through everything including alternative theories of economic growth -
A pre-existing inherited variant with a survival advantage in the local environment will always increase in population frequency as alternative variants die out, this changes the environment which then inevitably feeds back and influences the survival chances of any new variant.
From Dennett's description it becomes clear why bureaucracies are agents of stagnation and seldom agents of change and direction -
little variation and
Growth of survival 'know how' tends to be stifled in bureaucracies through propagation of the existing status quo by 'restrictive practices' and 'restraints of trade'.
Joe Schumpeter described the economic process of discovery & accumulation as 'creative destruction' but bureaucrats everywhere tended to focus on the continuity of their methods; the antithesis of 'creative destruction'.
Oxford economist Paul Seabright tested understanding by provocatively suggesting that -
the chances are that our children are slightly less intelligent than ourselves but our grand children are slightly more intelligent than ourselves'
Grasp two points -
there more ways of being dead than alive
only surviving children have babies
John Kay 'got it' in the Financial Times in December 2014 -
'processes of adaptation are the means by which
economies and institutions change over time. They are rarely the outcome of
careful calculation but they are far from irrational in their origins or
their consequences. Evolution can bring about outcomes more complex and
sophisticated than any designer could achieve. That is what makes evolution
one of the most powerful, and paradoxical, of human ideas.
Successful adaptation looks very like rational decision making.
The selfish gene is not literally selfish, and if it were it would actually be less successful in propagating itself because it does not sufficiently know what its best interests are. Evolution is smarter than you, and smarter than rational economic man'.
Successful adaptation looks very like rational decision making. But there is no evidence of any supernatural intelligent design alternative to natural selection.
Giraffes have long necks because pre-existing genetic variants from the past differentially survived and accumulated as short necked giraffes died out. But necks do not get longer indefinitely ... Stein's Law rules - 'if something can't go on for ever it will stop!' ... and the reason is that 'genes do cost / benefit analysis'.
Folk are not daft, lousy products will be rumbled, planned economies will fail ... sooner or later ... the only question is when and how.
key - population dynamics & weeding out - survival value spreads throughout populations by weeding out empirical failures - 'differential survival of inherited variants'
Social Survival Behaviour &
Cooperative Synergies of Specialisation & Scale & Moral
Sentiments (complexity/change/conflict/scarcity - fairness of shares &
resentment of cheats - 'hard work, honesty & thrift' - 2+2=5)
2nd Law of Thermodynamics & Hard Work - 'Murphy's Law' - 'F-all for nowt' - 'no free lunch' - Satisficing
Scottish Enlightenment & Adam the Smith - 'moral sentiments' & 'wealth of nations' - discovery & accumulation of 'know how' - neo-Darwinian synthesis copy/vary/natural selection
How do random mutations create wealth?
Human adaptive behaviour not just a useful biological analogy, it is ontology.
Genes evolve, neural networks evolve, animal behaviour evolves and so too does human behaviour and self-consciousness ... a long long continuity of coevolution in one whole shebang & caboodle ... as survival 'know how' survives.
Geoffrey Hodgson -
'from analogy to ontology, an adequate evolutionary economics must be Darwinian'.
Survival value emerges from the Darwinian process of adaptation to a local environment by natural selection -
copy = innovative change starts by inexact replication of the pre-existing variants of survival 'know how' in a population of behavioural traits that have 'worked'
vary = a random diversity of many different variants are generated 'as if' for testing, a diminutive few will have diminutive survival advantages, but nobody knows which? where? what? who? when? or how?
select = beneficial variants differentially survive & spread in changing populations, winners tend to monopolise localities as fewer survive as second best ... close associates imitate, competitors adopt & newcomers embrace the new 'know how' which spreads throughout the population as the old behaviour dies out
Future outcomes are unknowable in advance, not only because of immense complexity, change, conflict & scarcity but also because -
nobody knows which? where? what? who? when? or how? as mutations must be 'random', even if 'path dependent', for evolution to work
nobody can foresee the emergent novelty of future
outcomes nor the unintended consequences
nobody knows how the flip flopping emotions of other folk will respond to interactions ...
Evolutionary equations modeling non linear complexity have no solutions and have to be 'run' to discover outcomes which makes even the interpretation of the past difficult.
In the face of ignorance Darwinian trial & error is the one and only way to survive.
Nevertheless statistical uniformities or patterns do emerge from diversity & natural selection, evolution is not random. But beware statistical uniformities in Complex Adaptive Systems aren't what they seem to be -
interconnectedness makes it difficult to identify the population of concern
uniformities may be correlations which are not cause & effect
patterns which do emerge
may vary & change
random chance may upset the apple cart.
In this way human intention is not what most people think it is ... rather it is genes that act 'as if' calculating costs & benefits 'as if' they chase profits & cut losses.
Economic efficiency can be defined as adaptive efficiency - a trial & error process of discovering & accumulating survival value from empirical failure.
key - ignorance & know how - makes intelligently designed survival a physical impossibility - 'Bishops, Princes, Generals & bureaucrats have no privileged access to 'know how''
Why the flip flopping excitement & fear of social behaviour?
In 2002 Daniel Kahneman earned a Nobel Prize with his Prospect Theory which suggested 'behavioural economics' was often in conflict with the 'rational expectations' of neoclassical economics.
Although Adam Smith himself was the first behavioural economist? Kahneman added to Smith's notion of innate moral sentiments with other innate 'gut feelings' associated with risk which appeared to be irrational. There were two decision making systems in the brain -
System 1 = gut responses
(hard wired emotions) instantly remembered
emotional survival aids from biological history. The gut was a genetic
inheritance and was heroically good and got
it right most of the time ... otherwise folk wouldn't have survived!
But what was good for the savannah of Africa was perhaps not appropriate for Lombardy Street ... irrational biases were built into emotional behaviour.
System 2 = learning from outcomes (empirical science) rational expectations of economic theory. Learning was a memetic inheritance from slow evaluation of evidence & statistics and remembering from experiences.
The interesting ‘catch’ was that rational System 2 proved that System 1 involved irrational biases -
'It was costly to be risk averse for gains and risk seeking for losses'.
Rational folk must try to put these biases to one side as experience on Lombardy Street suggested chasing profits and cutting losses was the best strategy ... more risky new experiments and learn quickly from failures.
Irrational emotional biases were almost impossible to eradicate, how can you stop yourself falling in love? 88% of brain activity involved emotions which were unconscious and difficult to counter by slow reason which managed only 12% of brain activity.
But help was at hand from education, enlightenment, institutions & cultures ... which suggested biases could be countered by cultural 'rules of thumb' ... chase profits & cut losses.
Neoclassical economics had taken a wrong turn. Folk were not rational maximisers. Human emotions often trumped reason but were sometimes flawed as the biases cost. Philosopher kings thought they knew (arrogance & hubris) and flip flopping into rationality was seldom even tried. But some scientists worked it out slowly, even though the complexity was almost overwhelming.
These cognitive biases were of central importance to economic theory - sunk costs, endowment effects, planning optimism, illusion of control, risk aversion, animal spirits, anchoring, bandwagons, hindsight, confirmation, money illusion, stereotyping ... all irrational biases.
But flip flopping between exciting planning optimism & fearful risk aversion was no bad thing for generating & testing ideas in the imagination ... flip flop and learn from the experiments?
Deeply ingrained universal behavioral traits of folk seemed to justify 'the gut'. Resentment of loss was ingrained as folk did all they could to avoid losing their hard earned stocks and became risk averse and resentful of theft. Furthermore they sought risky options when confronted with losses in the hope of avoiding the alternative, death.
Adam Smith suggested, good gotten gains were 'fair' and ill gotten gains were 'resented'.
Losses of good gotten stocks loomed much larger than accidental gains.
The pleasure that folk experienced from empathising had momentous sociological implications. For sure it was more pleasant, to empathise with the joy of riches than to empathise with the misery of poverty. The joy of success was rare & sweet, enjoy, as the Californians said, discover the dopamine kicks & serotonin surges! Life was precious, so there was a loss aversion bias.
Unfortunately the trial & error of evolution always resulted in more failure than success simply because there were many more ways of being dead than alive. Life's a sod then you die. The misery of failure was the norm, folk had to get used to it.
Kahneman opened a Pandora's Box and delivered a lethal blow to the rational economic man of neo-classical economics. Emotional bias from biological history was confronted by continuous improvement in 'know how' from empirical failures, memory & reason.
key - flip flopping & creativity - flip flopping emotions discover 'know how' and memory & reason accumulate 'know how'
How is it profitable to cooperate?
Cooperative moral order tends to emerge naturally from evolved social systems without intelligent design because synergies are found everywhere from specialisation & scale & trust in exchange.
In 1983 Robert Axelrod explored computer models of the iterated ‘Prisoner’s Dilemma’ game and formalised the risks and payoffs associated with ‘evolutionary tit for tat’ strategy and with William Hamilton published ‘The Evolution of Cooperation’.
There were no expensive prerequisites, the strategy was applied ‘blindly’, everybody participated, long term cooperation became understandable.
The link between biology & economics was synergy. Social behaviour was not a one off zero sum game -
‘The key to doing well lies not in overcoming others but in eliciting their cooperation. Individuals don’t have to be rational; the evolutionary process alone allows successful strategy to thrive, even if the players do not know why or how. No central authority is needed, cooperation is self policing’.
Downward spirals of ‘tit for tat’ were not ‘Evolutionary Stable Strategies’ because -
Genes and memes acted ‘as if’ calculating cost/benefit, the development of the Peacock’s tail and ‘arms races’ always ended as random events always offered alternative options which avoided local cul-de-sacs.
This breakthrough in understanding had important implications for evolutionary economics and illuminated all decision making.
Matt Ridley –
‘Game Theory is an esoteric branch of mathematics but provides the bridge between biology and economics whenever there is an apparent conflict between self interest and the common good’.
Cooperating genes in genomes and cooperating behaviour in social groups tend to survive and proliferate because of the synergies involved. Thus there was evolutionary pressure for the survial of behvioural traits which Adam the Smith identified instinctive propensities for -
truck, barter & exchange
fairness of shares
resentment of cheats
But 'as soon as there were stocks there were thieves' and parasites & predators survived ... however the dice were loaded, only cooperators enjoyed the synergies.
key - mutual benefits & synergies - cooperation discovers synergies & tit for tat punishes cheats, an evolutionary stable strategy - 'it is not a zero sum game'
How is wealth created?
Wealth creation emerges when survival synergies are discovered in complex social interactions associated with -
specialisation - time consuming acquisition of skills with complex cooperation & exchange trade
scale - conflict resolution in large groups of different individuals with trust in strangers and trust in capital accumulation
science - high fixed costs of education & disciplined methodology
imitation - inspired transmission & reliable reception of language
innovation - creative hitherto unconnected connections & uncertain risky change
investment - scarce delayed individual consumption rewards the magic of property & compound interest
Wealth creating productivity, more value for less cost, a 2 + 2 = 5 process.
Peter Corning -
'Synergy is the very stuff of history. Time & energy resources are limited and must be used efficiently ... or else. Survival advantages, including behavioural innovations, define the trajectory of evolution. Natural selection differentially rewards different genes based on the effects they produce in a given environment. It is the economic payoffs that matter; characterised by John Maynard Smith as synergistic selection'.
key - intensify interactions & activity - social synergies from specialisation & scale
Why must surpluses be protected by property rights?
Once it was clear, as Darwin himself suggested, that the evolutionary process applied to human behaviour important behavioural traits began to be explained by scientists.
The 1994 Nobel Prize for economics went to John Nash who suggested a concept of equilibrium where there was an optimal response available to any position adopted by other people. A strategy that always was economically optimal whatever other people did.
John Maynard Smith called the Nash equilibrium an ‘Evolutionary Stable Strategy’, such strategies emerged from the evolutionary process and require no human intelligent design.
An ‘tit for tat’ behavioural strategy evolved in social species 'as if' to exploit the synergies of cooperation over time and protect the species from parasites & predators –
cooperate & trust - discover synergies, be nice, don’t try to win at the expense of others, share benefits
immunity & defence - avoid costly violence but retaliate if attacked to protect benefits from parasites & predators
social communication - respond clearly, simply, timely and emphatically to avoid misunderstandings and develop trust – cooperation is the rule but there will be a proportionate defensive response to all attacks
forgive & recruit – intensify interactions for scale economies and opportunities for cooperation next time round
persevere & learn from outcomes – cooperate with cooperators
Selfish maximising animals 'red in tooth and claw' was not an accurate description of social human beings. Evolution tended to drive decision making towards cooperation whenever 2 + 2 = 5 type synergies exist. But as soon as there were stocks there were parasites & predators. Cooperation was not universal, parasites & predators evolved but always tended to be confronted. Cooperative behaviour tended to differentially survive because of synergies. Cooperative instincts and cooperative institutions exploiting synergy advantages tended to proliferate in populations.
John Maynard Smith had discovered the foundations of -
morality & cooperative synergies and
resentment of cheats & the just war?
key - co-operation & retaliation - stocks are created by synergies but protected by defence systems - 'evil triumphs when good men do nothing'
How do we decide the who, what, which, when, where & how?
14 - Satisficing Behaviour.
Human evolution has happened because we have found ways to
cope with uncertainty and fear. Dither and flip-flop, experiment in the
imagination and learn by trial & error.
Don't plan and think thru consequences, detail leaves us overwhelmed and confused.
1. stay optimistic see opportunities not problems
2. do your own experiments and forget about the rest
3. repeat the positives embrace growth
4. stop the negatives and avoid doom & gloom individuals mood is contagious
5. health no obesity, sloth, sleep deprivation
Adaptive behaviour and adaptive efficiency emerged 'as if' to speed up adaptation from the sifting mill of biological history, so how do we actually, in real life, decide what to do tomorrow?
Herbert Simon’s ‘satisficing’ described the instinctive cultural 'rules of thumb' which became emergent economic behaviour... rather than the arrogant, plausible, deliberate, rational, purposeful, intentional, planning there were actual 'rules of thumb' -
inherit success - build on proven custom & practice; chase profits/cut losses by hard work & mediating moral urgency - imitate
free choice - decide between options available here & now, unhindered by Bishops, Princes, Generals & bureaucratic majorities - tort, trade & technology
experiment - generate diversity & increase the chances of discovering new tricks, unhindered by risk adversity - innovate
cooperate - with others discover better tricks from synergies which are not available to individuals - specialisation, scale & science
retaliate - protect value from inevitable parasites & predators, growing trust & accumulating colonisation benefits - invest
learn - from the emergent outcomes of differential survival & start again - hard work, honesty & thrift
Inheritance with modification now involved a process which generated experimental ideas in the imagination and then tested out promising options in reality ... and folk learned from the outcomes.
In ignorance folk did the best they could ... they coped ... and learned ... planning was a process of pruning in the imagination prior to action.
Herbert Simon -
'Actual business decision making conforms reasonably well with the assumptions of bounded rationality. The failures of science are largely ignorance all the alternatives, uncertainty about relevant exogenous events and inability to calculate consequences. There was needed a more positive and formal characterization of the mechanisms of choice under conditions of bounded rationality. Two concepts are central to the characterization: search and satisficing'.
key - trial & error - continuous improvements via discovery, accumulation & protection of survival 'know how' emerging from empirical failures - 'the best laid plans of mice & men come to naught'
Liberal Democracy & Human
Immunity from Treachery
(torts, trade, technology - parasites & predators)
law of the land - defence, health, education
Worst System apart from all the Others
Why do evolved institutions tend to be immune from treachery?
Economic institutions were not designed to predict an unknowable future, they emerged from an understanding of evolutionary history.
Local economic activity leads to the emergence of immune productive economic institutions.
Economic forecasting is a pipe dream, the only function of economic forecasting is to make astrology look respectable!
The institutions which survive the rigours of reality have been through the sifting mill of biological history.
The necessary knowledge does not exist for the intelligent design of economic activities in an environment rampant with uncertainty & risk and problems of -
Rational calculating economic man of neo-classical equilibrium economics was a myth. But for many it was 'blindingly obvious' that the ingenuity of the human brain was continually creating wealth and designing the most complex of machines like the Boeing 747?
Such intelligent design suggested –
evidence was evaluated, weighed and balanced
future consequences were thought through
appropriate decisions were taken
necessary actions to deliver the desired result were then implemented
Progress seemed to result from a plausible process of logical cause & effect, an imagined outcome was implemented by design.
But if this was so the economic plight of Burundi becomes a stupendous puzzle; why couldn't they design economic efficiency?
The alternative paradigm of universal Darwinism suggested that ideas evolved just like everything else, and intelligent design was just an experiment in the imagination and only a part of a complex dynamic –
evidence was incomplete, dispersed, diverse and complex
future consequences and responses of others were unpredictable and unknowable
decisions were experiments in the imagination and there were always better alternatives
successful outcomes differentially survived
Better behavioural & institutional alternatives emerged from the bottom up social interactions of trial & error, from empirical failures.
Some evidence from English history confirmed the evolution of Tort Law, from Magna Carta to UDHR. A continuous 'golden thread' of survival incentives and sanctions as the rule of law emerged to resolve conflicts which enabled larger and larger groups to specialise and trade unhindered by Bishops, Princes, Generals and bureaucrats by -
identifying property rights
lowering transaction costs and
constraining parasites and predators
Douglass North emphasised the institutional innovations which enabled larger & larger groups to secure the rewards of cooperation while at the same time providing 'free rider' sanctions.
The institutions of property rights, low transaction costs and contracts embedded in Common Law together with enlightened behaviour provided cohesive rewards & sanctions underpinned by instinctive 'fairness of shares' and 'resentment of cheats'.
North described the economic change as 'adaptive efficiency'; a society's effectiveness in creating institutions that were productive, stable, fair, broadly accepted and flexible enough to respond to political, economic and parasitic & predator feedback.
Douglas North -
'adaptive efficiency copes with novel uncertainty in a non-ergodic world, the best recipe is the maintenance of institutions which enable trial & error experiment to occur, and an effective means of eliminating unsuccessful solutions'.
Successful economic institutions emerge as the failures don't survive; bankruptcy becomes the essential part of success.
key - specialisation & scale - emergent institutions must have some immunity from treachery otherwise they wouldn't exist - 'vote with your feet & join a club of your choice'
How can know how be communicated across the generations?
The key to understanding complex economic systems is the differential survival of alternative ideas which are freely tested.
Ideas which harm others will tend to die, cooperative ideas which deliver synergies will tend to survive.
Science progresses when moral sentiments are institutionalised in liberal democracies where free experiments are encouraged and minorities are protected.
Valuable survival synergies are discovered by individual creative interactions but 'know how' is accumulated in larger groups, in institutions by cultural learning.
Herbert Gintis -
'A Nash Equilibrium exists if every player's choice is a best response to the choices of the others. Homo Sapiens is exceptional in that human cooperation extends beyond close genealogical kin to include even total strangers. In the course of our history we created novel social and physical environments exhibiting benefits of cooperation, among them division of labour coordinated by market exchange and property rights, systems of production characterised by increasing returns to scale and warfare'.
The long hard slog from the foothills of Richard Dawkins' 'Mount Improbable' explained why so few economies reached a rising upland of freedom & democracy where social institutions like free & fair trade were found.
But this was evolution ... the pinnacle was not the best, just better than some of the competing alternatives at a particular time and place ... learning was forever ...
Richard Dawkins -
'The astronomic improbability of living wonders is precisely the problem that Darwinism uniquely solves. It solves it by going round the back of Mount Improbable and crawling up the gentle slopes, inch by million-year inch'.
'Why is it so hard for even sophisticated scientists to grasp this simple point'?
There were dwarfs standing on the shoulders of giants from the past!
key - deep time & cultural learning - survival 'know how' is accumulated in cultural institutions - 'we learn from others many of them long dead'
How is the public interest served by private endeavour?
Biology was economics and economics was politics as moral sentiments led to cooperative synergies and on to liberal democracies ... but the evolutionary path was fraught & difficult as parasites & predators coevolved.
Robert Axelrod (1983) suggested how cooperation could evolve and develop immunity from cheats but it was Thorstein Veblen (1898) who had earlier reminded us of the age old problem of the synergies of specialisation & scale being eroded by parasite & predator theft.
Veblen's ceremonial/instrumental dichotomy described how the new 'instrumental' (technological) imperatives for survival value (know how) from social synergies confronted the old 'ceremonial' (hierarchical pecking orders) thieving of the Bishops, Princes, Generals & bureaucratic despots (rent seeking for conspicuous consumption).
New stocks and value from innovative technology created new opportunities for parasitic & predatory elites.
As men became domesticated in social groups interactions intensified and because fighting was so expensive systems of conflict resolution co-evolved to protect the emergent economic benefits. Evolved moral sentiments and natural law pushed the incentive system towards productive positive sum synergies and away from zero sum 'rent seeking'.
Conflict resolution by the rule of law was much cheaper than bloody violence and instinctively attractive.
The long evolution of custom & practice and protection of individual freedoms were embodied in Tort Law and formalsied in the Universal Declaration of Human Rights.
The survival benefits of cooperation always involved a defence cost.
To protect minorities social animals vote with their feet & join clubs of their choice with their friends.
All folk clubs have rules of behaviour involving biological systems -
universal moral sentiments to nurture cooperation and
tit for tat immune systems to reward cooperation & cope with parasites & predators.
A solution to Plato's democratic conundrum of 'mob rule and emasculation of the wise' involved constraints on the mob, and checks & balances on the wise. The 'democratic trap' was avoided by institutional rights & obligations which outlawed 51% majorities voting to impose on 49% minorities.
The rule of law was not the elitist whim of powerful Bishops, Princes, Generals nor bureaucrats ...
The UDHR Article 30 Caveat was unequivocal -
'Nothing in this Declaration may be interpreted as implying for any State, group or person any right to engage in any activity or to perform any act aimed at the destruction of any of the rights and freedoms set forth herein'
The state itself had no right to interfere with the evolved individual freedoms and an obligation to protect minorities.
Behavioural choices were mediated by universal moral sentiments and individual freedoms were checked & balanced by Tort Law. Folk were free but not free to harm others. Synergy is the key to understanding.
Diversity in social animals was mediated by universal biology, innate empathy; Adam Smith's 'moral sentiments' underpinned the vast scale of human productive interactions.
Different folk at different times in different places had different ideas and behaved differently ... diversity was celebrated as the feedstock of evolutionary change.
Global social and economic interactions were so diverse and interactive that it was physically impossible for any demagogic Nation State to control them effectively. Incorporation by command & control regulation stifled competition, spawned interest groups bribery and hindered productive endeavour in the name of unattainable solidarity, security & stability. Such hubris, never achievable, would have stopped evolution in its tracks ... physically impossible.
Insights from biology lead to understanding economics ... not in impossibly complex detail but as a process of change ... 'genes calculate costs & benefits.
key - diverse minorities & inclusion - liberal democracy protects minorities in the UDHR & caveat 30 - '51% cannot thieve from 49%'
Is the urban trek to the cities an inevitable part of economic growth?
Economic interactions are intensified by cooperating folk in cities generating more synergies; more opportunities for specialisation & economies of scale. Social interactions are intensified by natural selection, there is no demand for instructions from Bishops, Princes, Generals or Bureaucrats.
The rule of law, a process of dynamic economic change, emerges spontaneously in regions - not a 'homogeneous society' but a tapestry of different individuals who group together in cooperating families, tribes, religions and states but above all in towns and cities.
The explosion of the industrial revolution was in the cities and such intensification of activity was inconceivable without the rule of law.
The evidence was in the biological history of the urban trekkers as social economic interactions intensified in cities leading to social & economic betterment ... diversity was celebrated -
'empathy' in social animals provided perspective and guidance for interactions with others and nurtured tolerance of differences; moral sentiment was a universal human emotion.
'different' folk in different places at different times had different ideas and behaved differently but the urban trek was a universal global behavioural trait.
'diversity' was essential feedstock for the evolutionary process which generated the synergies of specialisation & scale; the only game in town.
'know how' was the key to specialisation and consequent exchange, nobody knew where the next good idea was coming from and 'know how' was accumulated in different cultures in different ways; there was more than one way to skin a rabbit.
'learning' was discovery mediated by innate emotional empathies and accumulated in specific experience & cultures where differences didn't stop community growth & economies of scale; live and let live.
'parasites & predators' thrived on ignorance, prejudice & violent imposition; immune systems necessarily coevolved.
'our heritage' and 'our experience' are proudly different; celebrate diversity.
'education' was institutionalised, each year invested in human capital produced 8% higher earnings; if you think education is expensive try the alternative.
The biology spawned the institutions and the global cities.
Jane Jacobs described a process of institutional adaptation enabling the intensification of economic interactions in cities -
the economic unit was the city, not the nation-state
cost / benefits analysis of development and the urban trek
competing diverse decentralised city based currencies instead of national currencies
cities were interdependent on trade specialisations
industries grew funded from profits but technology transfer was difficult
five forces of cities - rural supplies, well paid jobs, productivity, factory transplant, capital accumulation.
Economics & Ecology were inseparable
Six regions are usually involved in interconnected economic activity -
innovative heart (high density interactions & immigration) - low tax?
resource supply (food & raw materials) - low prices?
clearance (labour saving investment & emigration) - job mobility?
transplants (low density mature technology & routine) - planning freedom?
obsolete (abandoned technology & the rust belt) - no subsidies?
subsistence (non-participants & bypassed) - skill acquisition?
The delicate dynamic is easily destroyed by 'breaking the rules' of property rights, low transaction costs and parasite/predator constraint, by misunderstanding the integrity of the whole system and separating the political from the economic.
Cities died when they stopped innovating -
complacency? - resistance to change, without innovation and jobs quickly went elsewhere first to other innovative cities then to the council then to competitors in New York in Tokyo and Seoul as industrial cites in 'the rust belt' failed to reinvent themselves.
obsolescence? - it was easy to see that when
semiconductors were discovered thermionic valve production ceased.
But more jobs were created in semiconductor factories than were lost in thermionic valve factories.
comparative advantage? - it was less easy to see that different opportunity costs and specialisation could result in job losses.
stifled by bureaucracy? - Bishops, Princes, Generals & bureaucrats always thought they had better ideas than economists who never agreed, elites always had grandiose schemes, 'infrastructure' schemes.
chaos & anarchy? - every club had coherent rules and elected short term administrators to avoid factional infighting.
blame & hatred? - nobody was to 'blame' for unemployment, congestion, disease, squalor, pollution & poverty.
population explosion? - folk stopped dying before birth rates declined. The urban trek was relentless, poverty exploded with the population explosion but so too the middle class bulge as more and more folk became connected.
feet voting? - the mobility of the enterprising
exclusion? - some cities excluded some folk from some opportunities but each disconnection from the network reduced productivity and innovation as nobody knew where the next good idea was coming from ...
The political evolutionary process was part of the game, but politics does not write the rules of the game, 'know how' was institutionalised.
Darwin’s Natural Selection or the Intelligent Design of Bishops, Princes, Generals & bureaucratic despots? But no one can choose!
key - the urban trek & global cities - intensification of economic activity and social pleasures
Can you specialise without trade or trade without trust?
Economic activity, doing deals, emerges from trading different individual aptitudes & skills, different opportunity costs, different specialisations.
Adam Smith identified the necessary behavioural traits present in human nature -
moral urgency - an innate sense of moral sentiments mediates decisions and nurtures the necessary trust for different social economic interactions, trades in rights & reciprocal obligations, 'The natural effort of every individual to better his own condition. The natural propensity to truck, barter & exchange' - Theory of Moral Sentiments 1759.
markets & division of labour - individual striving to discover & accumulate 'survival tricks'. 'It is not from the benevolence of the butcher that we expect our dinner but from his regard to his own interest' - Wealth of Nations 1776.
Individual freedom to experiment is a vital element in creativity and learning.
The economics of the pecking order and the top down exercise of power is an irrelevance for modern industrialised economies where synergies emerge from social interactions in social institutions.
Adam Smith -
'The division of labour is limited by the extent of the market'.
key - deals & differences - trust & trade in exchange is synergistic otherwise no deal
Why is democracy an idea pregnant with economic significance?
Larger groups involve more differences, more experiments, more specialisation, more interactions and more synergies.
Francis Fukuyama has suggested that the cultural evolution of trust in democratic institutions nurtured by moral sentiments has helped the cohesiveness of larger social groups.
The democratic ideal of free participation is geared by the scale economies from wider participation - the more the merrier. Over deep evolutionary time there is a clear tendency for larger and larger interactive groups exploiting increasing specialisation and scale.
Democratic ideas play an important role in intensifying economic interactions in larger groups ... genes, phenotypes, families, tribes, religions, cities, nation states, democracies, globalisation ...
Economics is the science of decision making in an environment of scarcity, risk and uncertainty. Democratic decision making is self determination by 'we the people', freedom under the law, as minorities experiment.
Democracy widens and deepens participation thus increasing the chances of discovering harmless survival value from synergies. More activity in larger groups!
Some authoritarian decisions which make some people worse off will tend to be resisted by those people, destroying the benefits of co-operation.
In 1789 Jeremy Bentham’s ‘greatest happiness’ principle defined Democracy as maximising the sum total of the happiness of the all individuals who compose society. But what about differences and ignorance.
Plato’s conundrum was debated at the birth of the democratic idea -
'mob rule and emasculation of the wise'.
Economies of scale, require the participation & contribution of both the mob and the wise because nobody knows the who? which? when? where? or how? of the next good idea ... democracy cannot be based on majority voting which outlaws the aspirations of the minorities who voted the other way.
key - globalisation & scale - the more the merrier, division of labour is limited by the size of the market
Markets & Control
(diversity & customer choice & investment choice - opportunity costs)
Diversity & evolved differential survival systems
Who fixes the prices?
Markets tend to balance the prices and quantities of desired goods and services sold and produced at minimum cost -
demand curves sloping down to the right reflect the decreasing marginal utility of consuming increasing quantities and
supply curves sloping up to the right reflect the increasing opportunity costs of producing increasing quantities
producing a market clearing price where gluts and surpluses from high prices and queues and shortages from low prices disappear 'as if' by magic.
Leon Walrus used mathematical models to demonstrate a supply & demand equilibrium. His maths required unrealistic assumptions about rational calculation, static equilibrium, perfect information and perfect competition and a strange method of price fixing my a mythical 'auctioneer', he called it 'tatonnement'? Groping!
key - fairness of shares & opportunity costs - market prices minimise costs of gluts & queues
Can we avoid fighting over the spoils?
Economic efficiency results from synergies which avoid harm to others.
In 1906 Vilfredo Pareto illuminated the issue of liberal democratic progress by defining as Pareto Optimal any decision which results in perceived betterment but does not result in anybody else being worse off, in their own estimation and after compensation where appropriate.
The institutions of civil society which spontaneously emerge in liberal democracies will tend to exploit this optimal – churches, clubs, societies, associations, co-ops, partnerships, public limited companies and cities. Diversity & choice enables the discovery of Pareto Optimal decisions, the successful synergistic institutions will tend to increase in frequency and size provided they are protected from parasites & predators within Tort Law.
For Nigel and Joe the Pareto efficient improvements from initial conditions X are to anywhere on the production possibilities curve from N1 to J1.
The initial conditions X grossly favour Nigel but the economic significance of the idea is that Joe’s position can be dramatically improved without harm to Nigel by pushing the ppf1 to ppf2 through the process technological & organisational innovation.
Pareto's analysis is robustly criticised as –
involving unrealistic assumptions about perfect competition and clear legal property rights
static and tending to protect the status quo and inhibit progress because most economic activity in the real world hurts somebody
dependent on inequitable initial wealth distributions
requiring all markets to be distortion free; ‘The Theory of 2nd Best’ suggests imposed uniform distortions maybe better than some free market distortions
However an evolutionary analysis of Pareto decision making suggests these criticisms have no foundation. Evolution involves a scientific theory of dynamic change and the differential survival of synergy benefits –
a scientific theory of reality (observation, mathematical theory, testable hypotheses, experimental validation, peer review)is the best way to avoid unrealistic assumptions
a dynamic process suggesting decisions will tend statistically to be driven in a Pareto Optimal direction because of synergies of cooperation and retaliation against parasites & predators
current initial conditions are themselves the result of evolution (both cooperative and predatory) and the only starting point for all innovative improvements, there is no 'blank slate' to write on
interactions with all 'harmed' counter parties and ongoing refinements from 'compensation contracts' will tend to drive decisions towards economic efficiency, ‘The Theory of 2nd Best’ is not ‘Evolutionarily Stable’ it harbours inefficiencies, all distortions will tend to be eliminated as niches are filled and opportunities seized to -
make somebody better off without harming others
retaliate against parasites & predators who inhibit Pareto improvements
key - everybody benefits & nobody harmed - it is not a zero sum game
Why pay transport costs to import Barbie dolls from China?
Trade takes place naturally because different people in different places at different times have different opportunity costs ... because of comparative advantage is always an outcome not because of absolute advantage which seldom an outcome.
Nobel Economics Laureate Paul Krugman argued that together with Darwin's 'natural selection', Ricardo's 'comparative advantage', was a 'difficult idea' ... most folk 'somehow find this particular idea impossible to grasp'.
Economic success lay in expertise & innovation, synergies from specialisation & scale.
In 1817 David Ricardo identified the principle of comparative advantage when confronting Mercantilism - theft, price fixing & protectionism - brought to a head by the Peterloo Massacre and evil Corn Laws.
Trade is at the heart of economics so it is well worth while going through the mathematics of a couple of traders –
Nigel, a world beater, is an excellent bricklayer and a very good typist (Absolute Advantage in both trades).
In 8 hours he can lay 100 bricks OR type 1000 words …
NB = 1 brick barters for 10 words.
Joe, an incompetent, is a terrible brick layer and he is a
barely adequate typist (Comparative Advantage in typing over brick laying).
In 8 hours he can lay 20 bricks OR type 400 words …
NB = 1 brick barters for 20 words.
Nigel has an absolute advantage in both activities (his 8 hours is more productive in both activities) but he has a comparative advantage in bricklaying (his brick could barter for 20 of Joe’s words but only 10 of his own)
Joe has a comparative advantage in typing (20 of his words will barter for 2 of Nigel’s bricks but only 1 of his own) specialisation and trade will tend to evolve (unless there is intervention) because of mutual benefits.
Nigel will tend to do more bricklaying and Joe more typing increasing total output.
With no trade both have to be self sufficient in both bricks and words …
Say in 8 hours Nigel lays 50 bricks and types 500 words.
Say in 8 hours Joe lays 10 bricks and types 200 words.
Combined output 60 bricks 700 words.
With specialisation & trade …
Say Nigel lays 60 bricks types 400 words and trades 5 to 10 bricks to Joe for the 100 words he needs (NB = 1 brick barters for 20 words) he has up to 5 bricks EXTRA to share with Joe.
Say Joe lays only 5 bricks but types 300 words and trades 100 words with Nigel for the 5 bricks he needs plus a share of the 5 brick SURPLUS (NB = 1 brick barters for 10 words).
Combined output 65 bricks 700 words = 5 EXTRA bricks.
The counterintuitive conclusions are –
both parties gain from specialisation and trade even though Nigel is better at both activities.
principle explains natural trade benefits at individual or national level, with barter or money.
specialisation and trade will evolve because extra 'value' is created (and the genes do cost/benefit analysis!); specialisation and trade do not require the intervention of a Mercantilist government 'designer'.
everybody has a comparative advantage in something (even inadequates like Joe) and everybody will benefit from trade.
The Open University summary –
'The principles of comparative advantage and gains from trade are the most important results in the whole of economics. They apply at national, and also individual level. It maybe that a doctor is better than a farmer both at practising medicine and growing potatoes. It does not follow that the doctor should do both. If each specialises in the activity in which they have comparative advantage and engage in trade they are both better off than if each tries to be self sufficient'.
Nobel laureate Paul Samuelson –
'Thousands of important and intelligent men have never been able to grasp it or believe it even after it was explained to them'.
Mathematical models can easily be constructed to introduce money, transport costs, wage costs, market prices, exchange rates … confirming this wealth creation principle.
NB understand -
real wages are determined by the value of output
real prices are determined by supply & demand
prices & exchange rates don’t determine trade, they result from trade, they are measurements of opportunity costs ... if everyone specialises on what he does best and everyone is included in for economies of scale then everyone benefits …
everyone benefits, but some benefit more than others because of different opportunity costs ...
innovators benefit most ... redistribution of know how comes from education, education, education ... not fake money nor fixed prices?
Ricardo's principle of comparative advantage was an explanatory breakthrough building on Adam Smith's earlier insight in his descriptive account of specialisation and trade in his pin factory.
Adam Smith has an ongoing influence on economics, guiding us from an innate moral sense to the increasing returns of the industrial revolution, as he and his friends in the Scottish Enlightenment explained what was happening in a complex free and individualistic English culture.
Of course self sufficiency & import substitutions are always practised by Mercantilist for 'political' gain but at an 'economic' cost. But long term unnecessary costs will always tend be weeded out as folk prefer the development of local advantage through expertise & innovation rather than expensive 'me too' imitations. Most folk just don't get how everyone can benefit. Most are blinded by lost jobs in sectors with no comparative advantage. Many are unhappy with retraining and education, education, education ... moving into new high value jobs is a pain. Particularly when the benefits are constantly distorted by price fixing. Market prices avoid the costs of gluts & queues and deliver 'fairness of shares'. The powers that be invariably fixed prices and rigged the markets and they were 'resented as cheats' as crowd trouble inevitably brewed.
The usual suspects -
Regulations and non tariff barriers (NTB)
Foreign Exchange (FX) manipulation
Environmental and Health and Safety costs
Intellectual Property theft
Five distortions made a mockery of 'free trade' ...
key - free trade & fair - everybody has different opportunity costs but most folk just don't get it
Why are land, labour & capital red herrings?
Economic growth overwhelmingly results from technological and organisational innovation and not from natural resources, hard labour nor investment capital.
In 1957 Robert Solow used 'growth accounting' mathematics to analyse historical GDP data and identified the importance of a residual, ‘total factor productivity’. Growth tended to be relatively independent of the neo-classical endogenous inputs variables, capital (resources) and labour (effort).
Solow defined ‘total factor productivity’ as technological innovation, 'know how' or understanding & practice.
Paul Romer dramatically extended Solow's insight and integrated economic growth into evolutionary theory with his Endogenous Grow Theory' in 1990.
key - know how & growth - money is just the measurement system for 'resources'
Why was Paul Romer awarded a Nobel Prize?
NB at last in 2018 !!
Productive output growth results from 'know how', not physical factors of production, and 'know how' is -
not 'free' it has to be discovered, therefore risky & uncertain, making government design by picking winners a problem
non-rival, used over & over without depletion to the extent of the market resulting in increasing returns, making entrepreneurial incentives from zero marginal costs a spillover problem
partly appropriable when generated by monopolistic competition in commercial R&D which rewards hard work, honesty & thrift from sustainable surpluses, rewards from patents, first to market, intellectual property, difficult technology transfer, making investment in commercial R&D rewarding
lumpy because discovery involves fixed costs and clusters associated with intensifying synergies of specialisation & scale in universities and cities and start up ventures
temporary and dissipates as people learn
Goods and services are welfare spread by trade (comparative advantage) but 'know how' is spread by cultural learning -
Human Capital -
- Tort Law, Trade, Technology.
- Education, Health, transport/planning interactions.
- Specialisation. Scale. Science. Investment. Imitation. Innovation.
Market Coordination -
- free trade – free capital movement – competition – property rights – free wages & prices – low tax – low intervention – low inflation – trust for investment and saving
underpinned by 'rules', behavioural norms 'fairness of shares' & 'resentment of cheats'
eroded by the corruption trap as 'as soon as there are stocks there are thieves'
The production of 'know how' makes growth endogenous and monopolistic competition keeps growth rolling, a constant stream of innovation is necessary to secure temporary monopoly profits.
Many evolutionary economic principles are threatening to 'the powers that be' as human intention is perceived as impotent. This is erroneous as human intention drives the creative trial & error experiments which discover new survival value from empirical failures.
key - increasing returns & compound interest - 'surpluses not spanners' - profitable projects trump all interest rates, golf clubs and all mythical instruments of control.
Who does the calculations?
Deals are done, decisions are taken by many individual value judgments about the costs & the added value of alternatives.
'Equilibrium' prices are dynamic and are tendencies which emerge from economic activity as inefficient prices are continually adjusted by consumers and suppliers who want to avoid unnecessary waste for their own survival. Gluts & queues cost.
Nothing supernatural just a process of adaptation, inefficient prices don't survive! Same as short necked giraffes!
Richard Dawkins suggested in the 'Selfish Gene' that genes act 'as if' they do cost/benefit analysis. It is 'as if' marginal utility and opportunity costs were calculated ... but it is not a rational process rather a statistical tendency resulting from adaptation - 'no part of his intention'.
Social animals are distinguished from sparrows by a Theory of Mind. Folk can live in a purely imaginary world and ascribe human emotions and intentions to the laws of nature ... but the real world was not like that ... and calculating opportunity cost is impossible; the mind can't cope with the levels of introspection.
Complexity, change, conflict & scarcity in the real world often make reason and experience poor guides to decision making and we fall back on emotional guidance as fear or excitement take over. Normal behaviour involves 'rules of thumb' which tend to produce economic results otherwise they wouldn't have survived to become normal behaviour? Sure we develop a 'Weltanshaguung', a worldview point which has served us well in the past ... but this is a 'box' ... a bias where top down conspiracies replace counterintuitive natural selection ... where losses loom larger than gains ... creative innovation demands thinking outside the box, a 'helicopter' view of Darwin's 'entangled bank'.
key - fatal conceit & Gosplan - ignorance and impossible calculations
Who's in control?
Order to emerges from economic behaviour as markets coordinate activities 'as if' a control loop -
sensors - inherited price information from millions of trades in technological 'know how' are compared to
set points - diverse innovative alternatives generated by competing entrepreneurs by
algorithms - as customers select and test by sifting value & cost resulting in
actuators - responding as some investments differentially survive and change the population frequency of successful 'know how'
Emergent order is an unintended consequence of free market activity.
Adam Smith -
'Led by an invisible hand to promote an end which was no part of intention'.
But be afraid, instability abounds, non linear mathematics indicates there are stable 'attractors' but also 'bifurcations' ...
key - resentment of cheats & choices - not human intention rather competitive natural selection
Why not ban 'animal spirits'?
A cycle of flip flopping human emotions drive the generating & testing, the diversity & choice which feed the evolution of business survival 'know how' - Optimism - Excitement - Thrill - Euphoria - Suspicion - Anxiety - Denial - Fear - Desperation - Panic - Capitulation - Despondency - Depression - Hope - Relief - Optimism ...
Joe Schumpeter described this discovery process as 'creative destruction'. Innovative creativity and bankruptcy.
Hyman Minsky was also on to it 'the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles'.
The bad news - banning the boom & bust business cycle is physically impossible, ultimately it is the 2nd law of thermodynamics.
The good news - the unstoppable trend line for the discovery & accumulation of technological 'know how' is 3% pa compound.
key - creative destruction & cycling - extraordinary popular delusions & the madness of crowds
Planning Problems & Fatal
Conceit - the calculation problem
(fundamental uncertainty & unintended consequences - trial & error learning)
Complex Adaptive Systems & complexity, change, conflict & scarcity & emergence - everything affects everything else - 'effects are causes' - hierarchies of evolutionary stable structures - computer simulation
- 'oppressive Bishops, tyrannical Princes, dictatorial Generals and corrupt Bureaucrats have no privileged access to know how'
Woven Webs of Guesses - Who Guards the Guardians
How can market prices eliminate the costs of gluts & queues?
Adverse Selection - ‘Would you buy a 2nd hand car from this
Asymmetric information results in price fixing & a glut of lemons ...
unless confidence & trust can be established ...
NB Deal transparency increases with advertising quality reputation, convincing innovations, brand loyalty & credible endorsements...
Moral Hazard - ‘If it’s free put me down for two please!’
Tax funding & insurance jobs result in queues for ‘freebies’ ...
unless costs can be aligned to products ...
NB In return for their votes poor folk are bribed with their own taxes into excess debt to pay for a dream of affordable housing ...
key - price fixing & coin clipping - beware of parasites & predators
How can property rights confront the tragedy of the commons?
Externalities, law and the problem of social costs can be understood by economic analysis - social costs secure social benefits and Coasian Bargains involve the price mechanism, supply & demand and the unappreciated value of evolved price mechanisms and legal institutions. Deals minimise the costs of gluts & queues.
Two parties are always involved in troublesome externalities - costs AND benefits; the polluted and the polluters. The polluters can stop polluting OR the polluted can move elsewhere (and benefit!) but there is a cost - who pays? - how much? Coasian Bargains in markets resolve the problem efficiently by deals between the antagonists - the higher cost avoider paying the lower cost avoided market determined 'compensation'.
Transaction costs always exist under all legal institutions ... but they can be reduced.
When transaction costs are low and property rights are defined contracts will be negotiated to satisfy both parties. But transaction costs are the problem not the externalities. Transaction costs make some markets prohibitively expensive.
With zero transaction costs the allocation of resources remains the same whatever the legal position, however, with positive transaction costs, the law plays a crucial role in determining how resources are used ... the marginal productivity of capital.
The usual conventional suspects almost invariably fail -
regulation = reduces incentives for technological innovation. Restricts new competition. Adds administrative and compliance costs which
customers and shareholders pay. Zero sum activity; some win, some lose and regulation
becomes impossible to implement in a democracy.
Pigouvian Taxes = a one-size-fits-all theory does not distinguish between
high and low cost avoiders. Pigouvian taxes are inefficient if they tax the
highest cost avoider. Tax is often used as a revenue raising device in excess of
the 'unknown' social costs.
Coasian solutions -
rights trading = define property rights then freely bargain.
Property rights are required to discover the costs.
Social costs will be paid by the lowest cost avoider. If the legal rule chosen is inefficient, parties will bargain around it. Rights will be acquired by those who value them most highly, which creates an incentive to discover and implement transaction cost minimizing governance forms.
Don't build houses near polluters, build other polluters thus confining cleanup costs to the periphery. Which costs less, you stopping or me moving? Pareto efficient, nobody loses.
Example - the Kyoto objectives were admirable apple pie but Coasian solutions involve technological alternatives driven by the high social costs & high avoidance costs - piecemeal, tentative and adaptive.
1. Throwing filth at other people harms them, it is an illegal nuisance.
2. The polluter must pay the cost but how much? Who is the least cost avoider? Polluters could pay the costs of 'know how' for fuel cells, flood relief or relocation?
Competitive Property rights with tradable permits -
Process A emits 100 tons of obnoxion p.a. costs £100 per ton to reduce
(this process could be new technology in industrialised countries or a high cost of relocation).
Process B emits 100 tons of obnoxion p.a. costs £1 per ton to reduce
(this process could be old technology in developing countries or a low cost of relocation).
Competitive Property rights with tradable permits, reduction in obnoxion costs £2 per ton + transaction costs = £99 cheaper than regulation!
Policy should be targeted on reducing transaction costs ... through institutions & privatisation.
Ronald Coase wrote - The Nature of the Firm (1937) and The Problem of Social Costs (1961)
key - property rights & social costs - no free lunch, deals in clean air involve costs & benefits
How can a poll tax avoid the XS burden of tax on society?
The dead weight loss or the XS burden is an irrecoverable loss of welfare to the community. Discriminatory taxes are not Pareto Efficiency; not only inefficient but also unfair. Equity and efficiency are not alternatives. Pareto improvement implies no one loses.
Critics suggest all economic and evolutionary activities involve choices and the rejected failures must be harmful to some?
But there is a
difference between a ‘hard' and a 'harm’. An essential part of
cooperative evolutionary progress, natural selection, requires alternatives ‘not selected’
to die off. That is a 'hard' essential for synergies to grow in the
population and benefit the species. However theft & killing are 'harms', a
zero sum game for parasites & predators.
Morality evolves, thus making the distinction between a normative & an evolutionary criteria meaningless?
The only non discriminatory tax is a poll tax. The UDHR confirms the morality of non discrimination; rights essential if synergies are to be discovered and wealth created.
key - output loss & burdens - tax is a cost reducing output
How can tax rates determine tax revenue?
The Art Laffer Curve – average tax rates v. tax revenue.
Average tax rates. A flat non-discriminatory tax rate leads to higher output and higher real income = more tax revenue. Rich people pay the additional tax.
High marginal tax rates. People won’t pay and never have, they change their behaviour lead to lower output and lower real income = less tax revenue. Hard work, honesty & thrift are discouraged.
key - discrimination & fairness - poll taxes avoid market distortion
Who controls the money supply & interest rates?
The money supply & interest rates are endogenously determined as credit growth and GNP growth are 'matched' by loans & deposits on the Balance Sheets of commercial banks.
Elites have always interfered with the supply and cost of money but the idea of an 'expert', perhaps in the basement of the Bank of England, who controls money is a plausible myth – a myth because the value of money depends on confidence & trust of partners in exchange. Confidence & trust ebbs & flows with economic activity and so does the value of money.
Money is a wonderful tool for lubricating economic activity having value as a -
unit of measurement - money x velocity of circulation = price x output of goods & services
medium of exchange – money avoids the double coincidence of wants in barter but with the ‘costs’ of caveat emptor & moral sentiments
store of value over time – value associated with marginal utility & opportunity cost
In the past Cowry shells, gold, cigarettes, LETS (Local Exchange Trading Systems) and paper IOUs promising to pay 'the bearer' have been generally acceptable as money however in modern economies money is overwhelmingly created through credit and its many innovative variants.
Commercial Banks produce money by creating credit for sale to customers, credit has a price – the interest rate – which is determined by supply & demand in exchange –
supply is determined by the interest rate cost necessary to induce saving after individuals have satisfied their liquidity preferences. Savings are claims on the bank for repayment of deposits in the shorter term.
demand is determined by the opportunities for profitable investment. People and their projects with promises to the bank to repay in the longer term.
These deals, like all co-operative deals, will only take place if there is –
confidence & trust between the co-operative parties (ethics & moral sentiments are involved)
prospects of mutual benefit & synergy without harm to 3rd parties (risk & moral hazard are involved)
Ethical judgments and assessments of risk are unavoidable. Would you buy a second hand car from this man? Would you behead a coin clipping king?
Thus prospective profitable economic activity is funded by banks selling credit and the Balance Sheets of the banks reveal the deals –
A initial liability of a $10,000 deposit becomes an asset of $10,000 cash which (after maintaining a prudent loan/cash ratio of say, 10/1) is put to work to fund other assets – a series of loans – BUT these loans will result in further deposits (where else would the money go?) which will be available to finance further loans ... etc ... etc ...
$10,000 of initial savings generate $90,000 of growth!
However the growth of the system does not come out of thin air it is dependent entirely on a series of profitable economic activities where careful project selection and assessment of risk is essential. Without profit, the interest could not be paid and the loans could not be repaid.
Banks make their own profit by maintaining a loan portfolio whilst minimising bad debts. The 363 interest rule - pay 3% for deposits, receive 6% on loans & be on the golf course at 3pm!
Such earning potential of the commercial banks does not involve divining the future, technology foresight nor any supernatural knowledge but it does require specialised skills in selection and risk –
honesty, as confidence and trust has to be built up over years as reputations for prompt repayment of sound money on demand must be earned – would you buy a second hand car from this man?
hard work, as a diversity of loans increases the chances of discovering the profitable projects – portfolio risk management.
compound interest, as social experience & memory of the people & projects which worked in the past – chasing profits & cutting losses.
Reputation, risk, reward!
Commercial banking practice is an 'Evolutionarily Stable
Strategy' for redistributing funding to those with the ideas from those with
the money for mutual benefit. But the banks are not simply intermediaries,
the system has its own in built control. Economic growth feeds back as real
economic output of goods & services is ‘matched’ by the money supply which
determines the ‘value’ of the $10,000 initial deposit.
The money supply is determined endogenously by interest rates as a function of national income as the balance sheets of profitable commercial banks will ensure the credit base does not increase at a rate faster than GNP and cause inflation.
Unfortunately prudent risks and sound money institutions have proved remarkably difficult to nurture, as parasites and predators abound in all evolved systems cheat detection systems must co-evolve.
Democratic politicos, by definition take popular decision not economic decisions.
Government interference in commercial banking is an irrelevant and inefficient distraction -
'in a market economy where money includes deposits with private sector banks, monetary policy can never be simply a question of the 'authorities' deciding on the quantity of money it will 'allow' to circulate in the economy'. Economic Briefing No 5 August 1993
money cannot be 'created out of nothing' bank balance
sheets always balance, otherwise the go bust. Money has to be purchased from
savers at a price (interest rate) to be lent to borrowers at a price (higher
interest rate) otherwise th bank goes bust. Printing money cannot resolve
the necessity for solvent banks!
NB 1 The commercial banking skills involve borrowing short and lending long so they may need central banks liquidity support. As a lender of last resort the Bank of England can influence interest rates ... but then so too can India, China and America.
NB 2 The mutual benefits from the 2 + 2 = 5 synergies of profitable investments produce a surplus to pay interest to banks and depositors ... usury is not immoral after all.
key - fake money & measurement systems - projects must be profitable for sustainability - 'surpluses not spanners'
Why bother to save for a Rainy Day?
Marx thought the industrial revolution had solved the production problem and the days of plenty had arrived.
The Stalin/Mao interpretation of Five Marx Myths was anathema -
class conspiracies = impoverish the poor by top
down theft = command & control
Command Economies = no natural section reality - no Copy/Vary/Select, no Trial & Error Adaptation = Intelligent Design
imposed revolutionary solutions = elite
evolutionary dictators replaced by revolutionary dictators
Dictators = risks of Parasites & Predators, Tyranny & Oppression = Bribery & Corruption
labour theory of value = labour exchange
minus labour utility value means
declining profit and
collapse without reference to moral sentiments & trade synergies
Price Fixing = risks Cooperative Synergies, Economies of Specialisation & Scale = Gluts & Queues
nation states act in the public interest = no
immunity from predators & parasites, tyranny & oppression, bribery &
Nationalisation = risks of no Diversity, no Innovation, no Bankruptcy = Bailouts & Zombies
justified by a priori top down logic = no
bottom up empirical science
Dialectic Materialism = no Observation, Mathematical Theory, Testable Hypotheses, Experimental Validation, Peer Review = Ignorance
But human intention was not what it seemed to be (Kahneman), total factor productivity measures value (Solow), the state itself is a rent-seeking vested interest (Jefferson), revolution replaces one dictator with another (UDHR), non-linear evolutionary equations don't have solutions (Axelrod).
Marx ignored the relevant & essential instinctive 'moral sentiments' of Adam Smith, which underpinned the evolved wealth creating institutions of capitalism ... the golden rule of social interactions 'do unto others' -
public limited companies
Ignorance of complexity, conflict, change & scarcity make it physically impossible for Intelligent Design to solve the problems of Corruption, Bailouts & Gluts & Queues. There will always be a better mousetrap that some folk prefer to the second best which will die out ... nobody knows where the next good idea will come from and everyone has some friends to deal with ... Adam the Smith had learned that better mousetraps inevitably produced inequality 'cos competitors suffered until they produced better better mouse traps ... such was the basics of innovation and economic growth ... monopoly was the problem.
Inequality was baked in, to all & every -
skill, aptitude, ability, capacity, practice, trade, achievement - mental and/or physical, arithmetic and/or extra cover drives
Wotever the specialisation & scale, alone and in combination, folk will be different, at different times in different places4 for different reasons ... more or less than their mates, always forever, a spectrum of successes and inequality of outcomes ... diversity, the feedstock of evolutionary change, the only game in town ... baked into physics, chemistry & biology of life on earth and on Mars ...
The 2nd Law of Thermodynamics itself delivers the diversity for differential survival ... copy/vary/select ... natural selection.
key - profitable projects & bankruptcy - 'surpluses not spanners' - economic growth from investment, involves risk & insurance
Who controls the debasement of fiat currencies?
Creating money out of nothing is hugely profound.
As the natural cycle of human survival emotions flip flops from -
- economic activity, money supply & tax revenues follow this pattern resulting in inevitable 'financial instability' or what Hyman Minsky called 'Minsky moments'. The business cycle is driven by the exciting discovery of synergies & wealth creation followed inevitably by the fear of failure.
Steins' Law, 'if a thing can't go on for ever it will stop' and 'when you're at the top there is only one way to go'.
Superimposed on the business cycle is a second government cycle -
tax & spend to bribe voters to win elections
borrow to cover inevitable tax shortfalls and
print money and coin clip when you run out of credit.
The cycle is driven by the central bank monopoly of money creation - nationalisation of the central bank, legal tender statutes for tax payments, central bank deals in government debt and the 'creation of money out of nothing' to 'earn' seigniorage and provide 'guarantees' to interest groups in return for votes.
Nationalised Central Banks became the instrument for -
issuing fiat currency as legal tender for tax revenues
managing government debt and
responding to economic recessions by debasing the currency.
In this way the problems of tax & spend and debt leads to the spending of fake money in a recession.
This age old problem has modern justification in the name of a misunderstood Keynes; but Keynes was clear - spending in a recession was to be balanced by saving in the boom.
Central Bank activities -
lender of last resort - providing business liquidity as lending long and borrowing short is required for investment for later revenues. Conventional money market operations keep commercial bank Balance Sheets in kilter.
bailout - providing commercial bank facilities for bailouts when reserves & credit facilities have gone but long term prospects are viable. Similar to the Administration process; buying time to get the commercial bank Balance Sheets in kilter. Of course, if the bank assets are viable & performing and commercial lender would be interested in a commercial loan?
debasement - provision of 'fake money' by money printing to keep insolvent commercial banks & businesses operating as zombies.
Central Bank facilities are used by commercial banks in three ways -
commercial lending to profitable businesses for economic growth.
financial repression as negative real interest rates boost the money supply and erode savings & debt.
arbitrage & the carry trade; buying appreciating assets with borrowings at negative real interest rates. Commodities, gold & oil; emerging market assets; appreciating currencies. Fundamentals suggest supply & demand prices adjust to real imbalances as too much money chases too few goods & services.
Abenomics; the stated purpose was 'to get inflation going again'. The Yen devalues by 25% and debt is 2x tax receipts ... and the third arrow of structural reforms was 'too difficult'! ... what on earth is going on?
Carry Trade; buy high yielding Italian Sovereign Bonds with an ECB guarantee - use them as collateral to borrow cash at the discount window at negative real interest rates - use the cash to buy high yielding Italian Sovereign Bonds with an ECB guarantee.
Basle 3 classifies sovereign debt as risk free tier 1 capital with no restriction on quantity held. Commercial Balance Sheets are repaired but sovereign debt balloons ... and the central bank returns the sovereign debt interest to the government! ... what?
The Conspiracy Theory - Karl Marx proclaimed the 'power' of the central bank monopoly in The Communist Manifesto, 'centralization of credit in the hands of the State, by means of a central bank with State capital and an exclusive monopoly'.
Bad Consequences Hidden in the Dust of Ancient Controversies - Walter Bagehot proclaimed the deception of creating money out of nothing in Lombardy Street -
'free banking, the natural system, which would have sprung up if Government had let banking alone. As in all other trades competition would bring the traders to a rough approximate equality where no single bank would permanently obtain an unquestioned predominance. I shall have failed in my purpose if I have not proved that the system of entrusting all our reserves to a single board, like that of the Central Bank directors, is very anomalous; that it is very dangerous; that its bad consequences, though much felt, have not been fully seen; that they have been obscured by traditional arguments and hidden in the dust of ancient controversies'.
Sovereign manipulation of prices result in imbalances, gluts & queues, which are exploited for gain as prices readjust to market reality.
key - fiat currency & gold standards - money can't be created out of nothing, manipulating mind games always flip the flop
Why one damned cycle after another?
Kondratiev started it all in 1925 with 'Kondratiev waves' ... Irving Fisher 'debt deflation cycles' ... Joe Schumpeter 'creative destruction' ... Hyman Minsky 'Minsky moments' ...
Cycles were discovered everywhere it seemed to be the way the world worked, everything depended on everything else, cycles on cycles within cycles as all the cycles were -
and novel emergent cycles were also ... dynamic, contemporaneous & interconnected & interactive & interdependent & emergent!
Complex Adaptive Systems are the focus of Evolutionary Economics.
In 1938 Nikolai Kondratiev, who was shot by Stalin's firing squad, died for his beliefs. His work confirmed that -
capitalist systems did not collapse as a result of great depressions
command & control of economies was an illusion.
key - arrogance & delusion - Bishops, Princes, Generals & Bureaucratic Despots and Complex Adaptive Systems
8 Innovation &
(flip flopping emotions discover 'know how' - memory & reason accumulate 'know how')
- hierarchies of networks & circuits as survival aids - 'know how' accumulates across the generations in DNA, institutions & cultures
Personal Responsibility & Wot's Your Trade? - 'you can't pass the buck up to conflicted Nation States'
Biological History evidence in gene/culture coevolution & social animal synergies
Compound Interest & Euler's 'e' = 2.718182 - invariable universal exponential growth constant - 'diverse, dispersed, tacit & incomplete' - 'compound interest & exponential growth from prices, trade, total factor productivity
Who's in charge?
Perceptions of value and perceptions of money to keep Balance Sheets in kilter.
In 2015 Paul Krugman pointed out that in 1933 Irving Fisher had written -
'Deflation caused by debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over indebtedness with which we started was great enough, the liquidation of the debts cannot keep up with the the fall in prices which it causes. In that case, the liquidation defeats itself, while it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depression: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing'.
and in 1950 Milton Friedman weighed in -
'If internal prices were as flexible as exchange
rates, it would make little economic difference whether adjustments were
brought about by changes in exchange rates or by equivalent changes in
internal prices. But this condition is clearly not fulfilled. The exchange
rate is potentially flexible in the absence of administrative action to
freeze it. At least in the modern world, internal prices are highly
inflexible. They are more flexible upward than downward, but even on the
upswing all prices are not equally flexible. The inflexibility of prices, or
different degrees of flexibility, means a distortion of adjustments in
response to changes in external conditions. The adjustment takes the form
primarily of prices changes in some sectors, primarily of output changes in
Wage rates tend to be among the less flexible prices. In consequence, an incipient deficit that is countered by a policy of permitting or forcing prices to decline is likely to produce unemployment rather than, or in addition to, wage decreases. The consequent decline in real income reduces the domestic demand for foreign goods and thus the demand for foreign currency with which to purchase these goods. In this way, it offsets the incipient deficit. But this is clearly a highly inefficient method of adjusting to external changes. If the external changes are deep seated and persistent, the unemployment produces a steady downward pressure on prices and wages, and the adjustment will not have been completed until the deflation has run its sorry course'.
Money supply = public debt + private debt ... What happens if they don't increase public spending to compensate for decreasing private spending? ... er? ... prices go down to increase spending ... wot?
key - Balance Sheets & double entry - perceptions of reality flip the flop
Who designed Darwin's Entangled Bank?
Non-linear maths of Complex Adaptive Systems, Hazops and Compound Interest ...
Known Knowns = evidence - big data gathering ...
including the colour of the operator's sox!
Build the Knowledge Base - physically wiggle intentional experiments of Empirical Science and learn ... Boeing 747s evolved thru a series of trial & error experiments & remembering the experiments which 'worked'
john p - 'a double blind randomised control experiment in Scunthorpe which was repeated in the Antipodes 17½ nights later with the same peer reviewed results was meaningful irresistible evidence which could never be ignored ... but the answer depended on the next question'.
Known Unknowns = observation - inspired guesses,
risk assessment, statistical analysis of sense perceptions, experimental
outcomes of the laws of nature ... more know how, more questions, there was
a snag all knowledge was diverse, dispersed, incomplete & tacit
Use Your Imagination - experience, including vicarious experience, for research & development to pin down known unknowns ...
Trevor Kletz - 'pearls of wisdom - what you don’t have, can’t leak, can't
explode, can't burn down & can't be thieved … don't process hazards & don't
hoard cash ... change the hardware, not the people … blaming human error was
akin to blaming gravity for a fall down stairs ... history rhymed most new
discoveries were made regularly ... organisations had no memory … don’t
bother to write an accident blame report, I’ll send you one from my stories
Stephen Hawking - 'Some individuals are better able than others to draw the right conclusions about the world about them and act accordingly. These individuals will be more likely to survive and reproduce so their pattern of behaviour and thought will become dominant'.
Unknown Unknowns = emergent properties - by
definition all other happenings were unknown unknowns and transcended the
Laws of Nature which 'caused' change
Discovery by Hard Work, Honesty & Thrift - run the equations & run the machines - with others to discover & accumulate new synergies of specialisation & scale
Designer - 'Vote with Your Feet and Join a Club of Your Choice'
James Alison - 'give me an example of an unknown unknown'
Xenophenes - 'all a woven web of guesses'
Harold MacMillan - 'events dear boy events'
George Shackle - 'we are ignorant of what it is we do not know'
Unknown Knowns = moral sentiments - 'things you
know that you don't know you know' - conscience, inner lights, worms
in your head, gut instincts
The Golden Rule - do unto others - evolved good behaviour ... where did that come from!?
George Shackle - 'we are ignorant of what it is we do not know even though
we know more than we can ever say'
Richard Dawkins - 'Blind Watchmaker', an evolutionary arms race, we have the generalised tool for survival in the face of ignorance ... but not the detailed know how ...
Soothsayers & messiahs were full of rules of thumb which seemed to work occasionally but random flip flops in the brains of you and others made the unintended consequence of complexity, change, conflict & scarcity unknowable in advance ... Baldwin Effect was different from the anthropic principle ... the future path dependent course of knowledge itself was unknowable but evolution 'designed' brains to cope with the unknowable by trial & error ... ?
key - Fundamental uncertainty & Frank Knight - risk is not uncertainty
How do genes do cost benefit analysis?
Tit for tat & satisficing with continuous iterative interactions so being nice and resentment of cheats become hard wired in social species and essential survival aids
creative left brains work on innovation & discovery - flip flops of excitement & fear and hitherto unconnected connections
logical right brains work on memory & accumulation - remember what works!
key - cooperation evolves & Robert Axelrod - counterintuitive synergies lead to +ve sum behaviour and become hard wired survival aids
No evidence exists for any alternative explanation of happenings, natural selection was intensely competitively economic and universal.
Ignorance & Xenophanes - oppressive Bishops, tyrannical Princes, dictatorial Generals and corrupt Bureaucrats have no privileged access to know how - 'woven webs of guesses' - 'who guards the guardians'
Hard Work & 2nd Law of Thermodynamics - complexity, change, conflict & scarcity - 'Murphy's Law' - 'F-all for nowt' -
Compound Interest & Euler's 'e' = 2.718182 - invariable universal exponential growth constant - 'diverse, dispersed, tacit & incomplete'
Diversity & Evolved Survival Systems - brains & immune systems - 'blind watch makers' - 'trial & error learning' - 'hard work, honesty & thrift'
Cooperation & Social Species - Scottish Enlightenment - 'moral sentiments' - 'wealth of nations'
Darwin's 'entangled bank' & Miraculous Order - Luke 12:27 - 'consider the lilies'
Complex Adaptive Systems - everything affects everything else - 'effects are causes' - 'one whole shebang & caboodle'
Evolutionary Economics - trial & error experiments & vicarious learning - 'satisficing'
Empirical Science of Choices - discovery & accumulation of synergies of specialisation & scale - 'weeding out failures'
Liberal Democracy - defence, human rights, law of the land - defence, health, education? - 'worst system apart from all the others'
Personal Responsibility - global vicarious learning - 'you can't pass the buck up to conflicted Nation States'
Why is the joint stock company the growth miracle of capitalism?
Economic growth is measured in The Balance Sheets of joint stock companies.
It is usual to be in awe of the great individual achievements of Charles Darwin and Isaac Newton but the overwhelming success of wealth creating cooperative institutions is less easily grasped and often denied.
Definition - the jsc is an economic institution, a complex adaptive system built by evolutionary processes 'as if' to cope with the age old problems of scarcity, conflict, complexity & change.
Evolutionary Success - a neat survival trick evolved, an incentive system for rewarding individuals who satisfy customers. A self-policing system based on private property where competing alternatives to vie for customer sales, encouraging the preservation and enhancement of assets and contracts for employment and supplies. Evolution inevitably produces a diversity of competing institutions, some of which differentially survive.
Innovations are not 'a best way' which is known in advance, but more simply those institutions which produce more survival value for the cost incurred than competing alternatives survive ... the discovery and accumulation of synergies of specialisation and scale.
key - Wealth Creation & institutions - understand the jsc as a wealth creating institution it has proved remarkably successful. The jsc has cemented the survival of western civilisation, the international jsc is the driving force of the global economy, this success is exposing the inability of national governments to control their own economies and robustness, immunity from internal and external treachery ... and responsive, adaptive, able to learn from past outcomes and exploit future innovations.
The Wager - work hard @ 3% pa compound growth of 'know how' .
Amongst all the chaos & angst we began to glimpse a sliver of order as our beer glass appeared to be half full -
Don't forget to send me your comments, corrections and critique ... here
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