6 Wicked problems and Homo Economicus
It is hard enough to map and understand the DNA of a single organism, but the challenge assumes an entirely different magnitude when we try to do the same with a system of global scale.
The economy is a complex system, as is the financial services sector. A complex system is a system that behaves in ways that cannot be explained by studying its component parts. A complex system is a wicked system, because the actions of a complex system are inherently unpredictable, beyond a very limited period of time, and almost impossible to replicate exactly. Allow me to illustrate. A combustion engine can be taken apart, analysed, understood and put together again-and, if all the parts are re-assembled correctly, it will work. A combustion engine is a complicated system, having many parts, but it is not complex. Any competent mechanic or engineer could deduce the function of such an engine and how it works by reference to a few components only. Also, what a combustion engine does is predictable and amenable to precise replication.
On the other hand, one cannot take a human being apart and then re-construct the body and bring it back to life. We cannot even do it with a mouse or a worm, because these are complex systems. A complex system has meaning beyond the mere sum of its parts and understanding any complex system is a wicked problem indeed. Mapping the human genome is not the same as taking an engine apart. Having the map of an organism’s DNA does not enable us to replicate it. Nor does it enable us to predict precisely what it would do if we were able to. Remember Dr Frankenstein and his monster? Or what about Dolly, the first cloned sheep? Scientists were stunned when it died so young, as if its ageing process had been greatly accelerated. Whether the cloning process caused Dolly to die earlier than average or not is in doubt, but the fact is that those who cloned her did not expect it.
It is hard enough to map and understand the DNA of a single organism. The challenge assumes an entirely different magnitude when we try to map and understand a system of global scale, such as the weather. Even more difficult it is to understand climate, because that term encompasses the temperature, humidity, rainfall and other meteorological factors in a given region over long periods of time. Whereas the weather is merely what is going on now in a particular locality. The climate itself is a manifestation of a larger complex system, the Earth’s biosphere, which, according to Wikipedia, is "the global ecological system integrating all living beings and their relationships, including their interaction with the elements of the lithosphere, hydrosphere, and atmosphere… postulated to have evolved, beginning through a process of biogenesis or biopoesis, at least some 3.5 billion years ago".
The financial system and the economy, despite the best efforts of economists to persuade us otherwise, are also complex entities, not amenable to disassembly and re-assembly-and hard to predict or replicate. This is why economics is not a science; it is a craft, practiced by social scientists who pretend they are physicists, making extensive use of mathematical incantations to cover up their lack of understanding of what is actually going on and why. This is because they assume that the economy is governed by something called "economic laws". Wrong. The economy is a specialised application of the same rules that govern the rest of human society and their laws, insofar as there are any such things, derive from sociology, psychology, biology and physics. There is nothing fundamental in economics that cannot be explained by reference to one or more of those disciplines.
I should say here that I am not comfortable using the term "law", because a law is a set of rules made and enforced by institutions-law is normative. In science, a law is at best descriptive-it is never normative. The laws of physics, for example, are generalisations based on empirical observations-they are reliable hypotheses of how the universe is thought to work. In economics not even this level of reliability is possible, which is why economists have resorted to using the term "natural laws". By using the adjective natural, they are implying that their so-called laws are like gravity, an intrinsic characteristic of the physical world. Again, wrong! The natural laws of economics are unproven and usually unprovable assumptions about how the world works; they are an act of faith, not a product of science.
Let us consider two of these laws, two laws that are fundamental to the whole edifice of economics: the law of economising and the law of economic rationality. Taken together, these state that people tend to economise, maximising gains for a given cost, and minimising costs for a given gain, and that human action is economically rational if one’s preferences are consistent and if one economises. In simpler terms, this means that people are rational beings, who always make the optimum economic choice. Do you know anyone who is like that? I don’t and I think there are none. People are not rational beings and that is not an assertion, it is a generalisation based on empirical observations, it is science.
To their credit, some economists recognise this fallacy at the core of their discipline. Paul Ormerod, for example, has stated in plain terms that the idea that economics is based on Rational (Wo)man or Homo economicus is not based in reality and has observed that most of the Nobel prizes for economics in the 21st century have gone to economists working beyond rationality. The seminal thinker on this issue in economics is Herbert Simon, who developed a behavioural theory based on "bounded rationality". The theory is simple. People face uncertainty about the future and costs in acquiring information in the present (I would add that information is also imperfect and often not available). This limits the extent to which people can make rational decisions. What we do, according to Simon, is to exercise "bounded rationality", setting an aspiration level which, if achieved, will be enough to "satisfice" us, which will be probably short of the theoretical optimum towards which Homo economicus is supposed to strive. Of course, a first year student in psychology could tell you that, as could any parent or manager or, indeed, anyone at all out there in the real world.
Patrick Callioni is a former senior public servant, with the Queensland and Australian Governments, and is now the Managing Director of consulting company, Enterprise Intelligence Pty Ltd, which specialises in helping business to do business with government and vice-versa. www.enterpriseintelligence.net.au His book Compliance Regulation and Financial Services is available at Amazon
trgh
June 18, 2009 at 4:24 pm
Complexity
JEQP
July 1, 2009 at 5:20 pm
The Dolly Thing
"Or what about Dolly, the first cloned sheep? Scientists were stunned when it died so young, as if its ageing process had been greatly accelerated. Whether the cloning process caused Dolly to die earlier than average or not is in doubt, but the fact is that those who cloned her did not expect it."
I can't comment on the particular researchers, but I find it hard to believe that Dolly aging faster came as a surprise to anyone that studied biology. Dolly was clone from a skin cell — and it was well known that skin cells slowly age and die. Pretty much every cell in the body does, the only exceptions being true stem cells. When Dolly was cloned her DNA already included the fact that it was x number of years old, her aging quicker is a logical outcome. The big advance was reversing the specialisation of the skin cell.
TRGH — how does tax fit in with Douglas' theories? Welfare payments? Performers? The sum total of my knowledge of his theories comes from Wikipedia; these are not rhetorical questions.
I disagree that the system creates scarcity — if anything, the economic house-of-cards is built on the illusion of the abundance of money. The economy is based on billions of people juggling together and hoping that not too many drop the ball…the current crisis is the result of people throwing balls to people who had little juggling ability.