Economics: A Gaping Separation Between Theory and Operations

August 30th, 2012
in Op Ed, syndication

Written by Roger Erickson

A recent statement appeared in print, about aversion to abandoning equilibrium as a precept in economics.

equilibrium-loss-bikerSMALL2"to really take Minsky's ideas on board, you have to be willing to surrender some of the precepts of equilibrium economics, which is the sine qua non of most mainstream approaches, ... And this, most economists still are not prepared to do. Minsky is still a bridge too far for most." Gary Dymski, UC—Riverside

That got me thinking about a fundamental failure in the field.  There is complete confusion over the divergent goals of equilibrium vs. navigating unpredictable survival paths.

Follow up:

The confusion and complete error in Dymski's statement may follow the inevitable fusion of economics and politics as political economics, where there's always competition over who's doing what to and for whom, and why.  In our real political economics, we control our collaborator classes closely, and our competitor classes even more closely.  The inevitable results are incidental, even unknowing efforts to underfund and overtax perceived competitor classes.  The only defense against such infighting is shared recognition of even greater group goals, an alliance to pursue shared dreams.

There's an outcome to neglecting this nested competitiveness and the resultant wild fluctuations of trust in and allegiance to individuals, groups and nation.  And there are known ways to get at root solutions to that dilemma.

Oddly, economics doesn't seem to formally acknowledge the well established concept of multi-level selection - which many other professions did long ago (e.g., biology, ecology, statistics, systems theory, electronics, software programming, control engineering, etc, etc).  Multi-level selection simply acknowledges the incredible agility in the adaptive organization of complex systems, and the highly distributed, dynamic methods that allow that agility.

  • System equilibrium? Forget about it!
  • Mapping places to intervene in a system? First building concept.
  • Continually discovering even more graceful methods for continually tuning a changing system? Sanity.
There are an overwhelming number of adaptive changes that can occur simultaneously in all complex, resilient systems.  Any one of them has potentially equal chance of adding dynamic value to our economy, by triggering an increase in adaptive rate.  It is this equality in the sources of adaptive-rate or dynamic-value that multi-level selection acknowledges, and market pricing theories cannot.  Dynamic value constantly emerges at unpredictable rates, and cannot be accurately priced at any one time.  Hence, Selection Markets are still far more complex than overt transaction or capital markets, which retain unbounded uncertainty.

Selecting success out of all that chaos absolutely does NOT depend on the supposed goal of keeping many processes in dynamic equilibrium.  That idea totally misses the point of growth and evolution.
  • Complex systems don't maintain dynamic equilibrium!
  • Rather, complex systems dynamically pursue unpredictable survival paths, by maintaining adequate adaptive rates.
  • We're in an adaptive race, and we practice rapid, onerous self-selection to accelerate navigation through constant, unpredictable change.

There's a visible link between known operations and the limits of orthodox economics.  For instance, long term survival of biological systems is well known to involve highly dynamic, but on average equal weighting of rapid, medium and long term responses to any challenge.  Another corollary is the "3-I's" of contingency management in military circles (instigators, interception, impact - if you don't simultaneously manage all 3, you're more likely to be toast).  In contrast, economics teaching doesn't formally keep itself adequately informed about incomes, banking operations and national policy, not to mention other variables.  The outcome is a failure to fuse short, medium & long term planning in one, dynamic function.

One immediate consequence of adopting an equilibrium vs. a path paradigm is that, in economics jargon, banks don't exist to stabilize arbitrary aspects of the currency system.  Rather, they exist to automatically denominate whatever operations the issuing population decides to use in achieving national goals.  Those two paradigms can diverge wildly and unpredictably.  One paradigm fails, the other allows adaptive survival of the currency issuer.
Success of complex systems tracks nested selection of adjustments in all the previously layered processes which have stacked up in a complex system.  Survival occurs as the adaptive result - not equilibrium - of not just one, but MANY, simultaneous, mind-boggling adjustment cascades.  An obvious corollary is that only highly resilient systems can successfully execute such adjustment cascades reliably.  Highly buffered systems with highly distributed resources are resilient, and can generate any number of distributed adjustments demanded by changing context.  Yet even then, the nested selection cascades occur only with timely invention and adoption of all the distributed sub-methods needed ... for accelerating selection of newly adaptive permutations from the near-infinite number of possible process state combinations.  In an adaptive race, tempo - i.e., kinetics or pace - always counts, across nested levels of any organization.

It's useful to keep in mind that competitive, political economies survive as a growing, feed-forward loop.
  • Changing methods drive results.
  • Patterns of distributed methods (operations) drive group outcomes.
  • Patterns of distributed outcomes-feedback drive distributed situational awareness.
  • Patterns of distributed situational awareness drive operational demands,... and
  • patterns of operational demands drive changes in distributed methods (thereby closing the loop).

Selecting the required adjustment steps involves sensing local/global potentials, recognizing control points and applying diverse control methods, etc, etc.

This is entirely an operations process, and it evolves rapidly, regardless of how far behind theory gets.  In fact, theory is only a veneer on ongoing operations, and if theory steps too far away, it's useless, regardless of how much esteem it holds for itself.

In practice, theory is only how we prioritize which of our current guesses we will first subject to trial and error.  No theory ever survives contact with unpredictably changing reality, at least not still completely intact.  The role of theory is to suggest, not dictate, things to operations staff.  If theory & operations staff don't work hand in hand, daily, theory rapidly becomes useless and hence harmful to ongoing operations if it isn't ignored, actively suppressed, or rapidly re-recruited (the most adaptive option).

Back to operations. To adequately provision itself, a changing system must first adequately "instrument" its far flung operations, to acquire adequate breadth and pace of feedback.  With more feedback and analysis, a growing system can further de-centralize both feedback and decision-making.  The goal of a growing system is always to further de-centralize decision-making enough to accelerate exploration of its own unpredictable, rapidly scaling & increasingly distributed adjustment options.

To protect resilient growth, we want more, not fewer Automatic Stabilizers, across more processes.  Instead of only automatic unemployment benefits, why not also automatic retraining, re-education and re-employment investments?  And, why not automatically altered education processes for those already coming up the pipeline?

Because we're in an adaptive race, anything less than accelerated tuning of our capabilities is worse than a known risk, it is exposing the farm to rank uncertainty.  For that we need earlier feedback, earlier adjustments, and earlier interventions .. to go after even better emerging options.

Returning to economics jargon, what part of de-centralized management of increasingly distributed, adaptive coordination don't economic theorists understand?

The opening quote is formal recognition that a so-called profession is officially obsolete, or at least functionally irrelevant.
"to really take Minsky's ideas on board, you have to be willing to surrender some of the precepts of equilibrium economics, which is the sine qua non of most mainstream approaches, ... And this, most economists still are not prepared to do. Minsky is still a bridge too far for most." Gary Dymski, UC—Riverside
Why on earth is equilibrium economics considered sacred?  Is there no audacity left in the field?  We already know from countless other examples that equilibrium is a false, inapplicable concept that does NOT serve our practical needs.  Dump it, admit the obvious, and move on.

We're trying to follow an unpredictable survival path, not stand still!

University economics faculty and journals should not be separate from policy, currency and business operations staff and journals.  Those fields are not independent variables in our economy.  They are so highly inter-dependent that they ought to be kept within one, fused department.

Without such coordination, our growing population becomes inevitably less coherent.  Individual hoarding of what our group has is a result of a bored, frustrated group not reaching for more. That dissolving trust only slows our growth loop.

Author's note:
*That's why I think it's absolutely necessary to quite formally rename MMT insights as Monetary Operations (MOPS) or Currency Operations (COPS :) ).  The association with theory is inconsistent with what Warren Mosler et al are attempting, and we already know that broken semantics kills coordination, stalls recruitment and leaves even adaptive causes at the complete mercy of skilled political opponents. If  you're going to tout operations, name yourself operations!  Please bite the bullet now, and just do it, the sooner the better. See The Tyranny Of Words, Stuart Chase, architect of the New Deal.

 

Related Articles

More by Roger Erickson

Analysis and Opinion articles about money

 


roger-erickson

About the Author

Roger Erickson is a systems entrepreneur based in Maryland. He worked for years in neurophysiology system research, at the Humboldt Stiftung, MIT, Yale, and NIMH before becoming more interested in community, business and market systems. Roger's newest interests are being pursued through several startups, as well as pilot agriculture commercialization projects with the USDA.
















Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.






6 comments

  1. Derryl Hermanutz says :
    *****

    Rather than MOPS or COPS, The Fed has already come out with the most descriptive title of what MMT is describing: Modern Money Mechanics. I think it was about 2 decades ago that the Fed published their confusing little book about central banking systems; but it has the right title in any event. Mechanics is not theory. It is description. Our money system is not some arcane and incomprehensible feature of the complex natural world whose inexplicable workings can only be 'theorized' about. It is a simple numerical accounting system that is typically described in jargon that JK Galbraith Sr, and I, believe is DELIBERATELY obfuscatory. The mechanics of our money system is so simple, and the simple fact that private bankers have been granted an exclusive monopoly allowing them to create all of our national money as THEIR private property is so politically unacceptable, that nobody in power dare admit the simple truths about money. Irving Fisher told it straight in the 1930s. Kumhof and Benes are telling the same straight truth today, as are Steve Keen and all the other heterodox economists who clearly see and clearly say that private bankers create our money by making loans. Any description beyond that is obfuscation designed to confuse, and it works, because simple though banking is, almost nobody knows where our money ultimately comes from.

  2. Tom Hickey says :
    *****

    Excellent! Shows why mainstream economics is not even wrong. It's absurd other than as an exercise in model-building.

  3. Stanley Tweedle of Lexx says :

    Erickson says: With more feedback and analysis, a growing system can further de-centralize both feedback and decision-making. The goal of a growing system is always to further de-centralize decision-making enough to accelerate exploration of its own unpredictable, rapidly scaling & increasingly distributed adjustment options.

    This is exactly what Kling was trying to describe with his 250 state proposal, as our democracy has grown, the decentralization of powerful government has not scaled with it. He concluded there was no real way to implement this policy because people were not willing to destroy the sacred cow of the USA and her government to rebuild.


    Erickson Says: Without such coordination, our growing population becomes inevitably less coherent. Individual hoarding of what our group has is a result of a bored, frustrated group not reaching for more. That dissolving trust only slows our growth loop.

    I linked a video for you about chris hitchens on youtube saying we are geared for war, that as our populace becomes bored or restless, a good war is actually something they begin to crave to break up the macro monotany.

  4. roger erickson says :

    re: ' feedback and analysis, a growing system can further de-centralize both feedback and decision-making.'

    ST says: "This is exactly what Kling was trying to describe with his 250 state proposal."

    The idea is a start, but as we discussed last winter at Mosler's blog, we can't scale up agility by scaling up policians and congresses alone.

    Think of the example of genes making proteins, and proteins regulating the genes that make them. It doesn't scale.
    Eukaryotes invented siRNA as an order of magnitude more efficient way to regulate genes with tiny slivers of RNA.

    Following that line of reasoning, the % of generals per soldier isn't kept stable in larger armies - efficiency is shrinking or stabilizing the ratio of Generals (policy staff), while letting the ratio of lower officers/troops rise a bit.

    In politics, what seems more attractive is to keep Congress & states as is, and delegate more decision-making to the existing local county councils, city councils and mayors.

    We have more than enough politicians. What we need is more practice & experimentation distributing decision-making throughout existing delegates.

  5. Mr. Magoo says :

    Other people are beginning to ponder about stability and minsky:

    http://www.zerohedge.com/news/can-it-happen-again-again

    Many have talked about it. More have eschewed it. But Minsky's hugely important insight in asking the question "Can 'It' Happen Again?" regarding the Depression remains critical reading for any- and every-one who opines day-in and day-out on how much we need or do not need Central Bank money-printing. As Bill Gross put it: "Minsky, originator of the commonsensical “stability leads to instability” thesis; the economist with naming rights for 2008’s “Minsky Moment”; the exposer of the financial fragility of modern capitalism; probably couldn’t imagine the liquidity trap qualities of zero-based money, because who could have conceived 30 or 40 years ago that interest rates could ever approach zero per cent for an extended period of time? Probably no one. Nor, more importantly I suppose, can Ben Bernanke, Mario Draghi or Mervyn King. In their historical models, credit is as credit does, expanding perpetually after brief periods of recessionary contraction, showering economic activity with liquid fertiliser for productive investment and inevitable growth." For a long-weekend, we present the full 30-year-old must-read paper.

  6. roger erickson says :

    @Mr. Magoo

    Leave it to economists to be a decade late and more than a $Trillion behind.

    They should rename the entire field after Mr. Magoo, and go into comedy blind.

    "Oh Mr. Magooinomics. You've done it again!"







 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved