In Chasing the Dragon, I wondered aloud whether we could dampen boom-bust cycles in the financial system with an economic equivalent of a controlled burn. Kevin suggested that “generic countercyclical policies” might work. Underlying both mine and Kevin’s thinking is the idea that you can possibly do better (for the world as a whole) by (a) understanding the entire economic system better and (b) enacting policies which are in line with that understanding. In contrast to these assumptions are a point of view articulated by one of the readers on a different thread:
Like Johan Norberg I believe that government is largely responsible for creating the environment in which this financial crisis could happen (e.g. creating bad laws). It is therefore silly to wonder what government should do to solve the problem. They should stop messing up the system with all kinds of interventions. Just let the problems fade away by themselves.
It’s like management of Yellowstone park, where the biggest forest fires happened *after* government started trying to protect it. The prevented many small fires, and the system got unbalanced. Which resulted in a few massive fires. Then they learned to leave the system alone.
I single this comment out not to pick a fight with the reader, but rather because it is an excellent summary of the contrasting viewpoint, and one which many very smart people ascribe to.
Prophetically enough, I picked up Seed Magazine yesterday and found several articles which question the premises of the laissez-faire viewpoint:
- Ecology of Finance – “A growing cadre of biologists argues that ecosystem analysis of the world economy might help stave off a repeat of 2008’s financial catastrophe.”
- Rethinking Growth – “Herman Daly applies a biophysical lens to the economy and finds that bigger isn’t necessarily better.”
- Is Economics a Science – with commentary from Frederic Mishkin, Robin Hanson, James Galbraith, Steven Levitt, Stephen Dubner, Jim Miller and Nassim Nicholas Taleb.
- Network Dynamics in a Shrinking World – “When shrinking networks are researched, what is discovered is extraordinarily strange.”
- Industrial Ecology and the Rights of Ecosystems
Interestingly, the first article specifically invokes the forest fire metaphor: “‘You can build in what amounts to firebreaks. How you would limit epidemic spread’ — or financial panic — ’depends on the topology of the interactions.'”
The popular trend towards “complexity economics” started with Eric Beinhocker’s, The Origin of Wealth, a book I recommend to anyone who wants an excellent overview of the history of economics and the history of complex systems thinking. Whether we can positively impact system dynamics through better understand and policy, or whether we will just make things worse, we will never actually know for sure. There is no counterfactual universe we can compare to as a control. But one way to get some indication is to simulate, as John Miller and Scott Page convincingly argue in Complex Adaptive Systems.
My own current belief is that while there’s no way even in principle to accurately predict the future in a system as complex as the global economy, using simulation and better models — which I believe complexity economic models to be — we can gain better understanding of the kinds of dynamics we can expect to see in general. More importantly, I believe that we can do better than we have up to this point by using policy (i.e. new rules and incentives) to guide the economic system into dynamics that are favorable to humanity and away from dynamics that are unfavorable. Not perfect, or even close to perfect. But better.
Whether you agree with my stance or not, one thing is for certain: the complexity economics meme is on the rise.