Far-From-Equilibrium Modeling of the Economy

The belief that real markets are inefficient comes about when economists compare equilibrium models of the economy to the real economy and, noticing a huge difference between the two, conclude there is something wrong with the market. For some reason it doesn't occur to them that their models may be wrong.

One gets an equilibrium in one's model when that model uses negative feedback alone. The benefit of this is that the models are then very simple and unmessy. The negative feedback drives human action and prices to equilibrium. Competition among consumers drives up prices while competition among sellers drives down prices. Increase supply while holding quantity demand steady or decrease demand while holding quantity supply steady, and prices will drop; increase demand while holding quantity supply steady or decrease supply while holding quantity demand steady, and prices will rise. We have the law of diminishing returns -- no clearer summation of negative feedback leading to equilibrium. And more, equilibrium models show that in perfect competition (another problematic idea), negative feedback will drive profit down to zero. Thus, if there is profit, there is a problem with the market.

But what if the market is not a process in which only negative feedback exists? What if there is positive feedback as well? There is certainly a law of diminishing returns at any given time for any given individual, but what happens overtime, and when there are groups of people? What about fads, where the more popular something becomes, the more you want it -- even as the price goes up? A fad resembles a sort of mini-bubble -- as well it should. Bubbles are caused by positive feedback processes. And both bubbles and fads end -- often spectacularly.

But we can only see this if we understand the economy as being the product not of pairs of people in a sort of atemporal pinpoint, but as large groups of individuals over space and time. We thus get both positive and negative feedback at work simultaneously, creating multiple equilibria. This creates entrepreneurial opportunities and thus the opportunity for pure profit.

And this ignores the roles of money/finance and technology, two other spontaneous orders that interact with the catallaxy, keeping it in a constant far-from-equilibrium state.

In the end, the economy is and can be creative if and only if it has bipolar feedback. The economy behaves precisely as it does because it necessarily has these two forces at work, and not merely the one. Such a model of the economy will certainly be much messier than equilibrium models, but they will be more true to life -- and far less misleading. They will certainly demonstrate the utter impossibility of predicting the outcomes of certain rules and regulations.

Now, none of this is to say that there aren't aspects of the economy that aren't dominated by a tendency toward equilibrium. It is likely true that there are aspects of the economy that are dominated by negative feedback. But I don't think we are in a strong position to say what those are until we have models of the economy that make simultaneous use of both negative and positive feedback.

How Property Creates Liberty

For the average libertarian, it borders on cliche to argue that property protects liberty. So why do we need Matt Zwolinski's latest argument?

Consider this part of the argument:

For Locke and Nozick, on the other hand, property rights are only justified if they benefit (or at least do not harm) each and every individual. Now, this probably seems like an extremely tough argumentative hurdle for the defender of property to clear. Could it really be the case that each and every individual is better off under a system of private property rights than he would have been without one? Consider the position of the poorest of working-class Americans today and ask what his situation would be like if nobody had ever appropriated anything. What would his life be like if he enjoyed the full bounty of the state of nature, but none of the results of the past appropriations which (in our world) have actually taken place? He could walk or work or live on any land he chose; he could draw gold or oil from the ground, hunt or harvest all the food he could find from the land, and draw all the fish he wished from the sea.

But how would he get to the oil, or the gold? Without a system of private property in place to protect and provide incentives for creative work, who would have built the tools for him to get it? Who, even, would have built the knife or the spear with which he might hunt or fish? Tools such as these require physical resources, time, and effort to create. And unless people can be relatively sure that others will not seize the fruit of their creative efforts, why should we expect them to invest these scarce goods? No property rights means no industry or trade, even in their crudest and most basic forms. And no industry or trade means, in the famous words used by Thomas Hobbes to describe the state of nature, “no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.”

 But wait -- in this argument, Zwolinski only argues that property creates wealth, not how it creates liberty. But if we understand liberty as the freedom of choice -- of the freedom of choices -- then it is property which has given us increasing liberty. One could argue that this is mere materialist freedom, but this is hardly the case. All of the things Zwolinski identifies create more and more time -- time more and more people can spend doing the things they want, including creating more art and literature, more games and toys, more technology. As a result, property gives us the freedom to do more and to have the time to do it. Those of us who live in countries that more or less have free markets are so wealthy that we can do pretty much what we want when we want. We are incredibly free, and incredibly spoiled by it. We sit around and invent things to worry about, we have it so good.

This would suggest that property not only protect liberty, but creates it. Property makes us more free -- more free over time. So free that, sometimes, we fail to recognize when governments begin (or continue) to infringe on those freedoms.

I have read many pieces that talk about how property is necessary for liberty, and how it protect liberty -- but I have yet to read how it actually creates liberty. This is perhaps an area that needs more investigation.

Beauty and Theory -- The Example of Spontaneous Orders

Francis Hutcheson, who was a teacher of Adam Smith, defined something as being beautiful if "there is Uniformity amidst Variety" (An Inquiry into the Original of Our Ideas of Beauty and Virtue, 28). He applied this definition not only to objects, including music and the other arts, but to theories as well. He argues that theory (unity) makes observations (variety) beautiful; accumulating observations makes us uneasy, until we can make sense of it all with a unifying theory (37). Darwin's theory of natural selection is such a theory, as he developed it to make sense of the variety of observations he had made.

Further, Hutcheson argues that a theorem is beautiful "When one Theorem contains a vast Multitude of Corollaries equally deducible from it" (38). I would argue that spontaneous order theory is precisely such a kind of theory. Spontaneous order theory posits the same basic rules will give rise to a variety of different orders. Status equality among participants, freedom of entry and exit, freedom of participants to pursue their own goals within the given order, the order being the result of human action but are not of human design, the participants following abstract procedural rules (which themselves emerge in the realization of the order itself). Spontaneous orders coordinate those attempting to realize the same basic kinds of goals -- increase in economic value in the catallaxy, increase in scientific knowledge in science, etc.

Thus, spontaneous order theory is a beautiful theory precisely because it allows us to explain a variety of social orders without having to eliminate their individual characteristics. The theory allows us to understand the commonalities as well as the differences.

And it is extremely important to understand the differences among the orders -- and to understand those orders as pure orders. If we do not try to understand those orders as pure orders, we will not be able to properly understand the interactions among those orders. A holistic-only approach to understanding culture/civil society can lead us very easily into mistaking what can happen in one order for what can happen in another. We can confuse, for example, economic actions for political actions, and vice versa. Only by understanding the parts can we understand how those parts interact to create the whole.

Consider the history of medicine. When the body was considered only as a whole, we had doctors performing things like bleedings, which often killed patients. Phrenology made sense if the body is holistic-only. But unity by itself is unbeautiful. And such a collectivist view does not accurately represent reality. The body is made up of parts. When we began to study the parts of the body, we began to understand their proper relations to each other. While it is certainly true that the next stage of understanding what it means to be healthy requires re-integration, that re-integration will be a unity-in-variety kind of integration. We must understand both. But we must understand how the parts work separately before we understand how they work together. That is the history of the development of knowledge and understanding.

The social sciences are in many ways no different, even if the "parts" are themselves extremely complex. What we think of as the market economy is in fact made up of a variety of spontaneous orders: money/finance, catallaxy, and technology. Many of the failures of economics as a science has come about in no small part because of the failure to understand these divisions -- and that these are the constituent elements of the market economy. Only by understanding first that these divisions exist in the market economy, then understanding how these spontaneous orders work as independent orders, then understanding how they interact to create the market economy will we understand the market economy itself. More, we then need to understand other spontaneous orders/economies in order to understand their natures and how they interact.

One can consider the gift economy in both their individual orders -- the sciences (hard, social, and math), philanthropy, philosophy, and the arts -- and in their interactions. By doing so, not only will we come to understand them in their pure forms -- we might also come to understand phenomena that emerge in their overlaps.

Surely, too, much can be learned from the arguments that will arise in regards to whether philosophy should be properly understood as being in the gift economy or in the divine economy. The same is true of the divisions among the orders I have proposed and developed over the past several months regarding the relations among the orders. And we need to figure out, too, what to do with "outliers" like the moral order and culture (including whether culture is, as Hayek argues, spillover from the spontaneous orders).

But only if we understand each order as a pure order can we understand their relations and interactions. This is a project I would love to undertake, given the time and money.

The German University System, Mandarins, and the Welfare State

"In the United States, the university reform was begun in the late 1870s and 1880s by sojourners importing the model from Germany" (Randall Collins, The Sociology of Philosophies, 645).

"Prussia had already pioneered in state-mandated elementary schooling; bureaucratic centralization also was moving toward formalizing credential requirements and hierarchizing the competing segments of the older educational system. In 1770 an examination was established for employment in the Prussian bureaucracy, placing a premium on university legal training. Nobles, however, were exempt at first, and university degrees were not absolutely essential. In 1804 this regulation was strengthened to require three years of study at a Prussian university for all higher offices. With the foundation of the University of Berlin in 1810 and an accompanying series of official examinations, university legal study became a rigorous requirement for government employment. Prussia thus became the first society in the West to establish anything like the Chinese imperial examination system." (642)

Megan McArdle, in The Daily Beast, argues that America has a Mandarin class who generally rule. Given the fact that the United States has the German University system structure, which was designed to train exactly such a class, we should not be surprised by this fact. I will also note that the welfare state of Bismarck's Second Reich followed this university reform -- and that progressivism and support for the welfare state arose shortly after the U.S. adopted the German university system.

Institutions matter.

I Love Being Right, But . . .

In my dissertation, I argued that meaningful words in texts follow patterns. A new analysis of Genesis supports my thesis. This is also supported by this work.

Further, my recent post on empathy-creation in fiction receives support from Jonathan Gottshall.

A few years ago, digital analysis discovered author's fingerprints in their works.

I need to get my ideas out there more, before they're all discovered by other people.

Scholars; 1770s and Now

provincial universities were mere shells with few students, places to purchase quick degrees on the cheap.

The publishing market did not encourage intellectuals to pursue autonomous concerns on a high level of abstraction; the attraction was toward partisan polemic, literary style, and topical public issues. The anti-metaphysical and in general anti-philosophical tone which characterized the writings from these secular bases of intellectual production was a result.

...the philosopher (or specialist in abstract ideas) now tended also to become the writer of literary entertainments and the political partisan. 

Does this sound familiar? Does this not sound like our current situation? Does the first not sound like the criticisms we hear of for-profit universities? Is the second and third not what we hear about the influence of the internet on intellectual production? Indeed, do we not see much more polemics and topical public issues?

Yet, what we see above is Randall Collins' description of the situation in France and Germany in the 1770s.

Plus ça change, plus c'est la même chose.

Or, similar social conditions give rise to similar social structures. Those who are appalled at the rise of for-profit online universities ought to familiarize themselves with Adam Smith's arguments about the quality of teaching from for-profit professors vs. those paid by the university. Of course, given the fact that many of these for-profit universities are part of the ever-inflating education bubble, drive by student loans, there's quite another argument one can make against them. When the education bubble pops, assuming we don't use re-inflate it with cheap money, what is left over will be worth having.

Why I Do Not Like Non-Fiction Stories

In his Poetics, Aristotle declared mythos (fiction) to be more philosophical than history because history merely tells you what happened, while fiction tells you what could and should have happened.

This is certainly an element of why it is that I love fiction, but (increasingly) dislike . . . not history, per se, but non-fiction stories. Non-fiction stories are, of course, "history" in the literal sense. They are biographies or autobiographies, the latter sometimes in memoirs, the former often in a variety of "true story" genres, from more formal biographies to things like "48 Hours" on T.V. I will happily watch something "based on a true story," but I have no interest in the "true story" itself. More, I actively dislike it (which doesn't prevent me from sometimes watching such things if they are on -- much as a rubbernecker looks on in morbid fascination, wishing to look away, but somehow unable to do so).

Why is this? To say I prefer fiction because I am a fiction writer is getting cause and effect backwards. Perhaps I write fiction because I prefer fiction. Which only brings us back to square one. Why would anyone prefer fictional stories over nonfictional stories?

Aristotle's answer is actually but part of a larger answer. Fiction takes place in a safe play-space, whereas non-fiction stories are things that really happened to someone. In a work of fiction, it is possible to empathize with every character in the work -- antagonist and protagonist alike. This is an important element of fiction. Further, we know that, being fiction, everyone in the work is safe. We are not left concerned about their well-being once we are finished reading. We had all the benefits of being worried, but we were worried for a character's safety in much the same way we are worried about our own safety when riding a roller coaster. We get to be worried or frightened or even happy in a safe play space that we can leave behind, retaining the benefits of the empathy created in us through the reading and through stepping into the shoes of the various characters while leaving behind the worries, etc. But of course, we don't really leave those emotions behind; rather, we have trained up those emotions and learned how to deal with them better. Fiction helps to put us in control of our emotions by allowing us to play with them, to experience them when there is nothing at stake.

Non-fiction stories, however, really did happen to someone. More often than not we are put in the position of only empathizing with one party in the story. It thus builds up the us-them dichotomy rather than dissolving it through empathy. Further, since we are reading non-fiction, we know that the people in the story are not safe. People may be physically harmed, or even dead, and there is plenty of emotional and psychological suffering to go around that is really going around, reverberating through real people, through real lives, in real neighborhoods. We thus remain concerned about those we read or watched or heard about. Rather than training up our emotions, our emotions get raised, then rubbed raw. The characters are real and thus are not in a safe play space. They are not playing, and it's not safe. A roller coaster heading toward a pole you know you will miss because the track curves is fun; a car heading toward a pole you may or may not miss because you may or may not turn the wheel in time is not. The former trains us to control our fear; the latter makes us more fearful.

In the end, the answer is that fiction makes us better people, whereas nonfiction stories can at best have a neutral effect (much as reading a classroom history book may have), or at worst they can have a harmful effect, perhaps even making us worse people.

This is why non-fiction stories get under my skin. I can feel myself being manipulated by the storyteller to have empathy for one party, and to reject empathy for another party in the story. This is much more obvious in non-fiction than in even polemical fiction. One loses all the philosophical benefits of fiction (e.g., empathy, ambiguity, and balance) that contribute to the growth of a person, but in non-fiction emphasis is put on division and choosing sides and judgmentalism in even the most seemingly benign non-fiction stories. Fiction is full of paradoxical tensions, which drive complexity and growth. Non-fiction is full of Manichean dichotomies, which force one to choose one side or the other (with it being pretty clear what side you're supposed to choose). One is complexifying, the other is simplifying. And the good is that which complexifies (not complicates), while the bad is that which simplifies (often through complication).

Please note that what I described is non-fiction stories -- biographies, autobiographies, memoirs, "true crime" stories such as we see on T.V., etc. -- and not history, philosophy, the sciences, or even intellectual biographies (which in many ways most biographies of famous people really are, the sordid details of their lives being glossed over more often than not). It is the "sordid details" that, in non-fiction stories, are degrading to the soul, whereas these same details, in a fiction story, are what build it up. This is why history (broadly speaking) leaves them out, allowing one to look on disinterestedly.

This, then, is why I feel lifted up and rejuvenated after a work of fiction, but feel more than a little dirty and exhausted after a work of non-fiction. I prefer fiction because I want to reap its philosophical and psychological benefits, to grow in empathy and beauty.

Crowding Out

When governments provide a service or product, others providing that service or product often get crowded out. But how, exactly, does that crowding out take place? There are a variety of ways this can happen.

The first and most obvious is the government can declare itself as having a monopoly on that service or product and make it illegal for others to provide that product or service. The Post Office is -- or, was -- a good example of this.

A second way is for the government to subsidize its products or services with tax money, thus allowing them to undercut the prices of any potential competitors. This is what we can expect to see in the "public option" of Obamacare.

However, a less obvious way is by affecting the psychology of the citizens. If the government starts providing a service -- a philanthropic service, for example -- then in many people's minds that problem is being taken care of. More, it is being taken care of with their tax money. That being the case, there is no real reason to make private donations to private providers of that service. Thus, donations decrease and fewer institutions provide that service. Welfare is a good example of this -- as government poverty relief has increased, charitable donations to those who traditionally provided such relief decreased, and the burden increasingly shifted toward government-provided welfare.

This latter is perhaps the most insidious, as it results in competition going away in such a way as to be less obvious -- and in such a way as to make it possible for the government to argue that if they did not provide the service, it would not get provided.

How Stories Spread

In the paper "Population structure and cultural geography of a folktale in Europe" the authors discover that the rate of cultural transmission of a certain kind of folk tale is slower than the rate of genetic drift. At first glance, it seems surprising that cultural transmission of a folktale is slower than the rate of genetic drift; however, if we consider both the way folktales are transmitted and the way genes are spread in a population, I find this result less surprising.

We must first ask ourselves how it is that folktales spread. In most cases, folktales are spread from mother to children. If we consider the fact that women tend to be more geographically stationary than men, and given the fact that most folktales such as the one you used as a model are spread from mother to children, the relative geographical stability of folktales is what one would expect. On the other hand, men, who are far less likely to spread folktales, are far more likely to range far and wide, spreading their DNA as they go.

It thus seems to me that an interesting comparison would be the spread of mitochondrial DNA vs. Y-chromosomal DNA vs. spread of folktales. I would not be surprised if one were to find the rate of transmission of mitochondrial DNA across geographical space would be very close to that of folktales, while the spread of the Y-chromosomal DNA would be much faster.

I find this kind of work very exciting. If one were in fact to find a gender-specific correlation such as I suggest, one might find the spread of say, folk songs, correlating more with general genetic drift, if not correlating more with Y drift.