Sunday, January 25, 2015

Complexity models and policies

Here is a famous headline from The Telegraph, 5 Nov, 2008: “The Queen asks why no one saw the credit crunch coming … During a briefing by academics at the London School of Economics on the turmoil on the international markets the Queen asked: ‘Why did nobody notice it?’”

Since then, many others have asked the same question. There are now an uncountable (and counting) number of books and papers that explain it all -- after the fact. This will go on.

David Colander and Rolan Kupers (Complexity and the Art of Public Economy: Solving Society's Problems from the Bottom Up) provide a recent addition.  One Amazon reviewer calls it the "best economics book of 2014." Economists, CK write, are wedded to wrong and inadequate models.

They start off on a bad foot, attacking the straw man notion that most people are wedded to either a "market-can-fix-everything" or a "government-can-fix-everything" view. I dislike binary choices. And clearly, institutions and culture matter.In my view Deirdre McCloskey (Bourgeois Dignity: Why Economics Can't Explain the Modern World) tells that story best. Evolving norms matter a great deal and the phenomenon is absent from formal economic models.

Even those who will not go as far as Pres Obama's "you didn't build that" view understand that markets function best in the context of a credible legal infrastructure and a government that takes care of significant physical infrastructure.  Our challenge is to somehow invent a politics and a government that stops about there.

Colander and Kupers take conventional economics to task for trying to mimic the approach of physics; biology, they say, offers the better model.  Could be.  Their argument is that "complexity economics" is where the hope lies.  They mean that economics has to recognize the possibility of increasing returns, multiple equilibria, endogenous tastes, nonlinear dynamics and positive feedbacks.  CK want the possibility of "lock-in" to be recognized.  But how many of the original 1955 Fortune 500 are still on that list?  Very few.  CK claim that as we recognize the various realities that belong to complexity, we will come up with better policies, e.g. "complexity policies."  Will such policies meet the challenge I mention in the previous paragraph?  I liked the book but I am not convinced that the answer is "yes."

CK write about all the things that "government" "should" or "could" be doing.  They might delete "government" and insert the synonym "politicians" -- the ones we have, the ones I see on the nightly news.