Thursday, May 24, 2012

The Origin of Wealth

I've been enjoying Eric Beinhocker's The Origin of Wealth. If I quoted everything important in it, I would have to cite the whole thing, so far. The section I just finished reading was on the work done by Joshua Epstein and Robert Axtell on Sugarscape, where they did agent-based modeling that led to bottom-up creation of a power law distribution of wealth and even the natural emergence of banks. Most notably, trade led to a power law distribution of wealth, but resulted in everyone becoming wealthier. Which one would predict from the theory of scale-free networks.

Beinhocker's book is about how complexity economics is different from traditional economics, the latter of which he argues went down the wrong path by focusing on equilibrium (an argument I have made repeatedly). However, complexity economics is not quite as new as we might think, even if it is being more mathematized now due to the existence of fast computers. He argues that complexity economics also has

a long and rich intellectual history. That history includes figures such as John von Neuman, the inventor of game theory and cellular automata; members of the "Austrian school" such as Friedrich Hayek; behavioral economists such as Herbert Simon and Daniel Kahneman; institutional economists such as Douglass North; evolutionary economists such as Richard Nelson and Sidney Winter; political scientists such as Robert Axelrod and Thomas Sshelling; and computer scientists such as John Holland and Christopher Langton. (96)
I have seen a lot of convergence in these approaches, which is perhaps not surprising. There is still some talk of equilibrium in all of these fields, even though open, dynamic, nonlinear processes such as they describe cannot possibly lead to equilibrium, but rather lead to far-from-equlibrium states, but we can't expect the way things have typically been done to become abandoned all at once. In a recent post, I talked about price theory -- traditional economics tells us to expect an equilibrium price; complexity economics tells us to expect movement around a strange attractor, resulting in a range of prices in which arbitrage is possible. Which sounds more like what happens in the real world? My theory of prices, because it has bipolar feedback and therefore leads to complex dynamics, results in a strange attractor.

I have also complained about how macroeconomics is nonsense. Complexity economics makes "No distinction between micro- and macroeconomics; macro patterns are emergent result of micro-level behaviors and interactions" (97, Table 4-1). This sounds like Steve Horwitz's work on deriving macroeconomics from microfoundations.

Finally, complexity economics is founded on methodological individualism, where the agents have incomplete information, learn and adapt, use induction, and are prone to bias and errors. The Austrian economists have been doing this for a very long time now.

I came to Austrian economics through my interest in complexity, particularly self-organization. It was the school of economics whose understanding of the economy most closely matched how I understood the universe to work. Beinhocker's book -- and his recognition of the Austrian school as a founder of complexity economics, as well as the fact that the current Austrians are integrating much of the work of the other threads mentioned in the above quote -- only confirms my initial instincts about which way of doing economics is the right one.

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