Complexity Theory And Economics

The reason for all of the different economic systems that have arisen since the time of industrialization is explained by my complexity theory, as described on the patterns and complexity blog. This is not quite the same thing as in the posting on that blog, "The Complexity Theory Of Production And Economics", which points out that the complexity of the economics must necessarily match that of the production apparatus.

To understand something, we must construct a mental model of it. But this means that we are limited when it comes to understanding ourselves because we would have to be "smarter than ourselves" to be able to contain a complete mental model of ourselves, which is impossible.

This obvious fact that we cannot be "smarter than ourselves" has a number of ramifications that have been described on the patterns and complexity blog. For one thing, we cannot readily quantify complexity itself. I pointed out the tremendous advantages that this would bring us in "The Quantification of Complexity".

For another thing, the limitation that we cannot be "smarter than ourselves" means that while we can break physics down into formulae, we cannot do that with human behavior (behaviour). This does not mean that there are no formulae that describe and predict all that humans do, it is just that we cannot arrive at these formulae because we cannot be "smarter than ourselves" in the way that would be necessary for us to break ourselves down in the same way as with physics.

If this could be done, sports would no longer make sense because the actions of each player could be described in advance by formula and it would be completely unnecessary to hold the sports event to see which team would win. There is a formula for all that each person does, as well as the entire world, but we cannot be "smarter than ourselves" to arrive at it.

The words that we use are complex, but they are not infinitely complex. This means that out there somewhere is a way to express words in the same way as numbers so that we would not need a dictionary to know what a word means any more than we need a dictionary to tell us what a number means. The trouble is that words, with all of their nuances and subjectivity, are a reflection of our complexity, meaning that we cannot break words down into a formula or express them in a logical sequence like numbers because, once again, we cannot be "smarter than ourselves".

Another way that we are up against our own complexity is in studying. We learn more and more as time goes on, so why does studying what we need to know not get easier? It is because we are learning more that studying what is known never gets easy, even though we are learning more that is balanced by the fact that more is being learned.

Now, back to economics. The sum of all economic transactions is much like words in that it is a reflection of our own complexity. When we look at economics, we are looking at ourselves. So to completely build a mental model of all of it's complexity, we would have to be "smarter than ourselves" which is impossible.

Economics is a vast reflection of ourselves, and it is much easier to simplify it by looking at either one side or the other. This is what brings systems such as capitalism and communism into being. These are the two opposite sides of the total economic picture. Both must have valid points or they would not have attracted so many adherents. Yet, both have been shown to have very serious flaws. The flaws in one creates believers in the other so that economic history has tended to zig-zag from one to the other.

Industrial era economics began with capitalism. People had to start the industries which would produce wealth, but could not be expected to do this if they would not then be the owners of that wealth. But capitalism, at least in it's more extreme forms, is unsustainable. Factories will pay their workers as little as possible, in order to maximize profit, but that will leave too few people with enough money to buy the goods and services that are being produced.

Communism began as a reaction to extreme capitalism. Karl Marx, a German Jew in exile in London, put together the theory in the reading room at the British Museum. The theories of Marx were intended for Britain, but communism never gained significant numbers of followers there. The knock against communism is simply that, while it does not have the unsustainable concentration of wealth that capitalism does, it destroys the incentive that is necessary for people to work hard. Why should a business person put forth his best effort to create wealth every day if he is only going to have to share the wealth with everybody else?

Capitalism and communism each represents one side of the complete economic picture. To see the full picture of economics would be to encompass both capitalism and communism into a middle ground to get the best of both and the worst of neither. Both sides did move away from extremes, and toward the economic center, as time went on and experience was gained with industrial-era economics.

I see economics as ultimately coming down to freedom. There are two slants to freedom-"freedom to" and "freedom from". A simple example that I use for illustration is smoking. Should people have "freedom to" smoke, or should they have "freedom from" second-hand smoke?

The truth is that people, being complex, are both competitive and self-interested as well as communal. "Freedom to" represents capitalism, while "freedom from" represents communism. Both are a fundamental part of human nature, and both must be accommodated by an effective economic system. The solution is the middle ground of mild socialism, halfway between capitalism and communism.

There will be maximum economic activity when the available wealth is shared equally between the people. But, on the other hand, equal distribution of wealth will destroy incentive. The purpose of an economic system is to find the best balance of these two facts by seeing the total economic picture, even though it is more complex and thus more difficult, than only seeing either capitalism or communism.