Can Computation Help Solve the Economic Crisis?

Thanks to "Tidal" for pointing out the fascinating essay by a similar title, CAN SCIENCE HELP SOLVE THE ECONOMIC CRISIS? by Brown, Kauffman, Palmrose and Smolin. I mostly agree with their perspective (I have a few quibbles about what "equilibrium" means) enthusiastically, and I appreciate the kick it gave me to express what I have come up with so far myself.

As I admitted in the discussion on a recent thread here, I have come to the conclusion that a workable, resource-aware economic theory is absolutely indispensable in the current circumstances. Unfortunately, we don't really have one, so in our new circumstances, coming up with one is about the most important thing to do.

One thing about complex systems is that you don't ever completely understand them; you just get to know them. The way you get to know things about the economy is exactly the way you go about getting to know things about oceanography, glaciology, geophysics/planetary physics and astrophysics, and to some extent meteorology, among many other disciplines I don't have much of a feel for.

That is, you build a complex artifact that behaves similarly to the complex system in nature that is of interest, and you study it as a proxy for the unique real system, constantly seeking to improve its resemblance to the real system.

In other words, you build a science around computer modeling.

Actually, the best thing to do is to build a whole lot of computer models, and have them compete to give you the best explanation.

Climatological aside: Note that nobody has created an otherwise useful dynamic model of the atmosphere that has the small sensitivity that many people are urging you to bank on. I don't know if this is for want of trying. It seems, actually, like something very much worth trying, so it surprises me that nobody wants to take it on seriously.

So how do you build a useful computer model of economics?

Well, let's consider how you build a useful model of climate.

Is there some code that says "here is the El Nino kicking in every few years?" "here is the PDO" "time to add a cold front"? No, you let the properties emerge from the low level description: here is what a parcel of air will do, in this environment, heated in this way, pushed that. Then you put all the parcels together and watch them behave. Once they settle down and act reasonably, the process couples back, and you start learning things from the modeling process. The 3 degrees C global warming stuff is a byproduct. It is not the main output of the system; the system is the partnership of minds and complex simulations; the output is understanding about the real system.

There are models of the atmosphere with much smaller numbers of parameters, and they can be didactically useful and useful in coming up with hypotheses. The general equilibrium models of conventional economics are similar to those. They are like the undergrad matlab exercises in meteorology classes. Except that they seem carefully designed to be anti-scalable; if I recall correctly, computation cost for economic equilibrium models actually scales exponentially with the number of free variables!

What we want is a huge system where the computational cost of each individual event is very small and the scaling is nearly linear. And we want huge amounts of observational data to calibrate against them. And we want to build lots of models. Lots and lots.

The analogy to a continuum model for economics is an agent model. The simulation thus needs make no assumptions of perfect information, price equilibrium, discount rates, anything. No approximation for the whole system is necessary and it seems likely that none is even possible. What we can model is how individuals make decisions in certain circumstances and see the large scale economic activities that emerge.

I've met a few people who both understand this much and indeed are pursuing it. Yet they are still hypnotized by the idiot passivity of the "neoclassicists" (H/T Erik Conway) and thus, think of economics as a branch of pure science,.

It is anything but. Economics is the most applied of sciences.

Of course, for almost thirty years we have been assured that everything would go just marvelously if we refrained from designing the economic marketplace at all. The result was, well, we'll see. Everyone agrees that the times for hands off is over.

Nowadays, we don't need to just understand economics as a matter of some urgency, we need to apply the understanding that we acquire. Computational science applied diligently and competently is the only tool that is up to the job.

I say this even though, of course, computation was at least an accelerating and exacerbating factor in the current mess.

The purpose of the computations is to represent how humans, acting individually and collectively as economic actors, make decisions, and to design the system to reward benign behaviors and increase the cost of behaviors that might be harmful, even sociopathic. Such experiments performed, appropriate incentives and disincentives can be written into law after they have been written into a particularly appealing model.

The idea of achieving such an option by the sort of deal-cutting and difference-splitting that normally is how laws are put into effect will fail. The entire package has to be designed coherently and implemented both urgently and fastidiously. The response of the real system has to be monitored carefully, and feed back to tune the system.

People need, essentially, the maximum freedom that is consistent with a sustainable totality. That is a hard problem.

It also has to get past the politicians intact. Also hard.

A lot of people want very much for it to be an easy problem, but it ain't.

Economics is about to begin to undergo a transition very much like the one climatology is still struggling with. Suddenly, it is consequential, and as a consequence of its sudden consequence, it is not up to the task. It's a matter that should engage whatever creativity and intelligence that can be mustered.

Computer generated glowing fossil Created by R Neil Marshman in 2003 - using a fractal generating program and then enhancing it with Paintshop to create a glowing fossil image. Released under GNU GFDL 1.2. See Wikipedia for details.

Update: My enthusiasm for the Edge article has waned upon reading the commentary to the article, though I'm still glad of the incentive to state my beliefs about this.

Of course, different people have different ideas of what the "crisis" actually amounts to. They seem to be talking not about what I'd call the economic crisis but merely about the financial crisis that hastened the inevitable economic crisis.

I am looking at a longer term than these people are. In my view the economic crisis is about reconciling the creative power of the marketplace and the desire for prosperity with the constraints of sustaining the planet as a suitable habitat for life indefinitely.

Regarding the short run, I don't know whether a theory of economics can properly regulate the financial sector without substantially diminishing it (my own preference). Anyway I very much doubt that such a theory could emerge in time to help with the present tangle. And in any case, finance is just the froth; I am interested in the cappuccino. The fact that some people like too much froth is neither here nor there. As far as I am concerned, the crisis is reconciling economic policy with sustainability with political viability.

Second, they refer to Eric Weinstein who in his comments and on his website refers to some advance in economic theory involving differential geometry. I don't doubt that a better general model could emerge from some mathematical legerdemeain, but better is not necessarily good. Climatology teaches us the limits of general theories of messy systems. What I'm advocating here is a pragmatic approach that lets go of the idea that economics is a discipline that is subject to a eureka-style generalization at all.

Regarding the ambitions of this posting, I don't really know on whose behalf I'm being ambitious. It's hard for me to see a scenario where I actually end up working on such a project. I'd be willing to participate if I could see how, but I have shown no signs of developing the political skill or political capital to start such a huge ball rolling.

I am hoping someone else reads this who can pull it off. (Youth would be a tremendous advantage here.) This is also a long-term project, and its fruits probably won't emerge for decades.

I have ideas sometimes. Some of them are good sometimes. I am not too fussy about taking credit for them either, so just go for it if you can. A hat tip in my direction along the way would please me but is in no way required.

What I am saying is that, at least in part, this is what a realistic science of economics would look like.