An interesting interview that is highly relevant to our discussions. How do we create the world you want to live in? This guy has some answers:
http://www.youtube.com/watch?v=4_pfDjnbWuQ
Tuesday, February 17, 2009
Monday, February 16, 2009
Complexity Economics and some fundamental questions
How do we increase the well-being of society? What is long term growth and how can it be attained? What is "wealth" anyway? These questions form one of the central threads running through Eric Beinhocker's aptly named The Origin of Wealth.
Wealth is typically measured in terms such as Purchasing Power Parity (PPP) and GDP/capita. It arises from increasing productivity per hour; where production means adding value from one state to another - for example: shaping metal into an auto body or delivery tomatoes from field to supermarket. So wealth is our ability to buy things that we want and on a national scale the total amount of things that we want. The value of each product classically depends both on its rarity (constraints in supply) and human needs or wants (demand). But as Robert Kennedy spoke:
In The Origin of Wealth, business consultant and writer Eric Beinhocker attacks the fundamental assumptions of traditional economics and argues for a new approach he labels "complexity economics" that seeks to understand the evolving dynamic systems of irrational agents that is our real economy. One of the criteria that he lays out in his attack on classical economics is that any new theory must agree up and down with existing theory, including physics, chemistry, and biology.
The equilibrium models employed by economics not only violate the emergent principles of complex systems but are used to justify normative prescriptions for economies that run counter to established principles of physics, chemistry, and biology (particularly the concept of limitless growth propounded by technological optimists given constraints on energy extraction, climate change and biodiversity loss to name but a few). In particular, as 'Sir Arthur Eddington once famously remarked "If your theory is found to be against the second law of Thermodynamics I can give you no hope."' Much more could be said on this topic but I want to focus on the specific bit that leads to a new definition of wealth with new potential for measurement.
Beinhocker argues that rather than being a metaphor in economics, entropy is actual entropy, an idea first suggested by economist Nicholas Georgescu-Roegen. An economy obviously consists of a great many ordered products. In almost all situations, when we say "value added" we really mean increased order - typically achieved by the consumption of a greater amount of energy in the form of food (labor) or fossil fuels. However, value isn't just the result of increasing order but also the result of human valuation: the fitness of an object or service at satisfying human needs or wants.
From this context, Beinhocker suggests a new definition of wealth creation consisting of three criteria, which he calls Georgescu-Roegen criteria:
1. Non-reversability
2. Increasing order, and
3. A fitness function (dependent on the human, material, and social context)
So, for example, an Armani suit might be worth much more than a wool parka on Wall Street, but in the Alaskan wilderness the reverse is true.
But does this definition help with Robert Kennedy's call for a better way of measuring if we are "proud to be Americans?"
I believe it does, if used in concert with measures of well-being, health, and efficacy. Such a definition of wealth would require a different measure of value creation that would better account for the consequences of drawing down natural capital or dissipative pollution that is hard to clean up or recycle, for example.
Wealth is typically measured in terms such as Purchasing Power Parity (PPP) and GDP/capita. It arises from increasing productivity per hour; where production means adding value from one state to another - for example: shaping metal into an auto body or delivery tomatoes from field to supermarket. So wealth is our ability to buy things that we want and on a national scale the total amount of things that we want. The value of each product classically depends both on its rarity (constraints in supply) and human needs or wants (demand). But as Robert Kennedy spoke:
"Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife. And the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans."How can we develop a better measure of the well-being of a people? The UN's 'Human Development Index' and Bhutan's 'Index of Gross National Happiness' are examples of attempts to balance traditional material wealth with personal fulfillment, community strength, and political efficacy in measures of national success. (http://en.wikipedia.org/wiki/Happiness_economics) A potentially critical failing of these models is that they continue to include traditional measures of "wealth" that are then modified by other social factors which in principle adjust for the negative consequences of that wealth generation.
In The Origin of Wealth, business consultant and writer Eric Beinhocker attacks the fundamental assumptions of traditional economics and argues for a new approach he labels "complexity economics" that seeks to understand the evolving dynamic systems of irrational agents that is our real economy. One of the criteria that he lays out in his attack on classical economics is that any new theory must agree up and down with existing theory, including physics, chemistry, and biology.
The equilibrium models employed by economics not only violate the emergent principles of complex systems but are used to justify normative prescriptions for economies that run counter to established principles of physics, chemistry, and biology (particularly the concept of limitless growth propounded by technological optimists given constraints on energy extraction, climate change and biodiversity loss to name but a few). In particular, as 'Sir Arthur Eddington once famously remarked "If your theory is found to be against the second law of Thermodynamics I can give you no hope."' Much more could be said on this topic but I want to focus on the specific bit that leads to a new definition of wealth with new potential for measurement.
Beinhocker argues that rather than being a metaphor in economics, entropy is actual entropy, an idea first suggested by economist Nicholas Georgescu-Roegen. An economy obviously consists of a great many ordered products. In almost all situations, when we say "value added" we really mean increased order - typically achieved by the consumption of a greater amount of energy in the form of food (labor) or fossil fuels. However, value isn't just the result of increasing order but also the result of human valuation: the fitness of an object or service at satisfying human needs or wants.
From this context, Beinhocker suggests a new definition of wealth creation consisting of three criteria, which he calls Georgescu-Roegen criteria:
1. Non-reversability
2. Increasing order, and
3. A fitness function (dependent on the human, material, and social context)
So, for example, an Armani suit might be worth much more than a wool parka on Wall Street, but in the Alaskan wilderness the reverse is true.
But does this definition help with Robert Kennedy's call for a better way of measuring if we are "proud to be Americans?"
I believe it does, if used in concert with measures of well-being, health, and efficacy. Such a definition of wealth would require a different measure of value creation that would better account for the consequences of drawing down natural capital or dissipative pollution that is hard to clean up or recycle, for example.
Subscribe to:
Posts (Atom)