Complexity Reading Log #1
Complexity by Alexander Prado
Little less than a year ago I graduated from school; I finished my masters in Economics after doing undergrad work in International Relations / Politics. The last memorable class I took was on Organizational Theory. It was a Public Policy course, taken as an elective for “easy” credit. It turned out to be loaded with quite amazing stuff. Although the case studies were concentrated on non-profit work environments, the theories and data analysis techniques helped me in understanding general organizational structures. Actually what I liked about it most was the combination of practicality with academic theory. We talked about ideas, proposed solutions, ideal settings but at the end of the day you had to apply it to a real life setting. At the end of the semester my teacher recommended me a book called Complexity by Mitchell Waldrop.
I started reading this book about 6 months ago. The first chapter blew me off. I got so excited that I carried the book everywhere, tried to digest every word. It was basically too much for me. I felt like there was a lot I didn’t know but wanted to learn…the book and the numerous characters, ideas and stories in it were starting to eat me up. The more I read the more I realized that I’d never become a scientist; I’d never have the chance to really dwell on an idea as they did in the book. In short I was bound to be a loser and admire the accomplished scientists in this book. So I got really depressed and stopped reading.
It’s the first week of December and I’m back on it. This time I’m determined to finish it and not just finish it but really absorb its content. Then I believe this book will lead me to another and I will have embarked on a journey of knowledge. I will keep this reading log to make my life easier and keep me sane. And before I start I’d like to remind myself and everyone that even though the book is non-fiction, the author has exaggerated events and ideas to make his case stronger. How do I know that? Thank God we still have Paul Krugman:
When Waldrop’s book came out, I wrote him as politely as I could, asking exactly how he had managed to come up with his version of events. He did, to his credit, write back. He explained that while he had become aware of some other people working on increasing returns, trying to put them in would have pulled his story line out of shape… So what we really learn from the legend of Arthur is that some journalists like a good story too much to find out whether it is really true.
Complexity, The Emerging Science at the Edge of Order and Chaos. By M. Mitchell Waldrop. (1992)
Chapter 1: The Irish Idea of a Hero
The chapter introduces the theory of “complexity” and the idea that all systems are inherently unstable, partially due to “increasing returns”. It does it by telling the life story of Brian Arthur, an engineer turned economist who is presented as one of the serious believers and theoreticians of the “increasing returns” principle. Apparently there’s been a lot of controversy over the emphasis on Arthur’s role in bringing up this idea to current day economics, but I think the details of his career explain and touch upon a lot of other interesting issues. While completing his Phd studies in Operations Research Arthur has worked at McKinsey and Company as an advisor.
McKinsey was selling modern American management techniques…Companies in Europe at the time typically had hundreds of subdivisions. They didn’t even know what they owned… McKinsey was genuinely first-rate. They weren’t selling theories and they weren’t selling fads. Their approach was to absolutely revel in the complexity…It didn’t take long for Arthur to realize that, when it came to real world complexities, elegant equations and fancy mathematics were no more than tools. The crucial skill was insight, the ability to see connections. (p 21)
The generation of economists who crafted the mathematical theory in the 1940s and 1950s were the Young Turks of their day, a pack of brash upstarts determined to clean out the stables and make economics into a science as rigorous and as precise as physics. They were Kenneth Arrow of Stanford, Paul Samuelson of MIT, Gerard Debreu of Berkeley, Tjalling Koopmans and Lionel McKenzie of Rochester. (p 24)
Brian Arthur then moved on to working in “Third World population growth.” Here comes a criticism to existing theories of economic development:
The standard at the time tended to place a heacy reliance on economic determinism: to achieve its “optimum” population, all a country had to do was give its people the right economic incentives to control their reproduction, and they would automatically follow their own rational self-interest. In particular many economists were arguing that when and if a country became a modern industrial state…its citizenry would naturally undergo a “demographic transition” (p 25)
The standard theory mentioned above sounds awfully familiar to me. On November 18, 2009 MIT economist Daron Acemoglu published an op-ed on Esquire magazine on World Poverty:
Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments.
Acemoglu’s argument is supportive of institutionalism, which is at odds with the whole idea of complexity. I need to do further research on this; will get back.
This brings us to patterns, Arthur concluded that “everything interlocked and no piece of the puzzle could be considered in isolation from the others.” Which reminds me of World Values Survey, a survey conducted to reveal variations in beliefs and value systems between countries and regions of the world. Another to point to take note of.
However the real question was why we had any kind of order at the first place.
Left to themselves, says the second law of thermodynamics, atoms will mix and randomize themselves as much as possible…However in real world atoms and molecules are almost never left to themselves…they are almost always exposed to a certain amount of energy and material flowing in from the outside…The systems spontaneously organize themselves into complex structures.
Self-organization depends on self enforcement: a tendency for small effects to become magnified when conditions are right, instead of dying away. Negative feedback or in economics terms diminishing returns preys upon the tendency of small effects to die away. It is what underlies the whole neoclassical vision of harmany, stability and equilibrium in the economy.
Arthur concludes in real world systems increasing and decreasing return work together to maintain that stability; it cannot be explained by decreasing returns alone. At the commodity market, standard theory of decreasing return works for bulk commodities such as grain, fertilizer, cement. However it does not apply to high-tech goods. The more you produce of a technological product, the more you minimize the cost and increase revenue. The example of Japan is a significant one, should be further looked upon.
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