11 May 2015

Rethinking Economic Growth

In this article, the first in a series on Science and Development, scientist Stuart Kauffman discusses his concept of the "prestatable" and its relationship to economics and development:

The standard theory of economic growth is deeply inadequate. It treats the economy as if it were producing a single good, hence a single sector and then considers inputs such as labour, capital, human knowledge,  as well as savings and investment, and sometimes models of "spill over" of knowledge into neighbouring sectors. The Washington Consensus of good government, stable money, good infrastructure has been a pinion of policy. 

But the real economy is vastly different. It is an interwoven web of goods and services and production capacities which are complements and substitutes for one another.  Furthermore, new goods and production capacities sprout in UNPRESTATEALE ways. Thus the Turing machine enabled the main frame computer, then with the chip, the personal computer, which enabled, or made possible what I will call an Adjacent Possible whose possibilities we cannot list, but containing word processing. Word processing created an adjacent possible that included file sharing, which created the opportunity to invent the World Wide Web. The web did not cause, but enabled, selling on the web, thence content on the web, then browsers such as Google and Yahoo. These are largely complements of one another, sometimes substitutes. No one, at the time the Turing machine was invented, could have foreseen Google or Facebook. That means that we not only cannot know what WILL HAPPEN,  we often do not know even what CAN HAPPEN. Then reason fails us and we cannot write detailed "laws of motion" for the growth in diversity of the economy, for we do not know the relevant variables before hand. Because of this, the famous Arrow Debreu Theory of Competitive General Equilibrium cannot be adequate, for it demands that we prestate all "dated contingent goods", but cannot prestate new economically valuable uses for word processing, let alone the emergence of the web.

The economy is rather like what I call a collectively autocatalytic set in theories about the origin of life. Gonen Ashkenasy at Ben Gurion University has a set of nine small proteins, called peptides, each of which catalyzes, or speeds up, the formation of the next peptide by  &ldquoligating&rdquo two fragments that together form the second copy of the next peptide, around a circle of the nine peptides. No peptide catalyzes its own formation. The Set as a whole is collectively autocatalytic.  The real economy, and perhaps the financial economy,  are analogues of collectively autocatalytic sets. Two boards and a nail are the analogue of input substrate molecules,  the product, two boards nailed together are analogues of the chemical products of a reaction, and the production function, a hand and a hammer, are the analogues of the reaction converting substrates to products, with the hammer, not used up in the production function, the analogue of a catalyst. But the hammer itself is a product of the economy. The real economy is thus the analogue of a collectively autocatalytic set.

The very diversity of the economy is correlated with its growth in further diversity,  a point first made by Jane Jacobs in The Growth of Cities, long ago.

Further compare a massive economy such as the U.S. economy which largely produces and consumes a wide variety of goods and serves internally, and thereby pays those who work the wages needed to buy the goods produced,  to a purely export economy. The latter is tied to the fluctuations of the global market.  If few goods are exported, large fluctuations in income occur. Alberta, Canada is such an export economy, creating beef, wheat, oil, and timber. Fluctuations in oil prices rattle even this very rich province. 

The above considerations suggest that we rethink economic growth in terms of those factors which may unleash an economic web that can grow  in diversity of goods and production capacities, enabling even unprestatable new opportunities. The IT revolution did just this, and Silicon Valley is the hallmark of it. 

An over simple theory of this is in my book At Home in the Universe. On the X axis is the diversity of renewable goods. On the Y axis is the diversity of production capacities that can produce new goods from old goods. There is a curve, hyperbolic, that divides a region below it, near  the origin of the X Y coordinate system, iwhich is subcritical and does not create an increasing diversity of goods, and above which the diversity of goods can increase  supracritically up to any given &lsquobudget constraint&rdquo given a utility to a single consumer. The theory is limited in lack of real markets, and in the prestated set of goods and production capacities, when reality is not prestatable. But the supracritical growth of an economy can be seen in the explosion of goods and production capacities in the past 50,000 from perhaps 10,000 globally to billions today.  

Potential Policy Implications

The first policy implication is that our attempts to aid economic growth must be at least partially aimed at building webs of complements that mutually enable one another to exist and make a living. In this regard, our theory, based on Ricardo, of no trade barriers might deserve reconsideration. The U.S. economy grew during colonial times behind trade barriers that allowed the colonists to learn to copy imported English goods. While often free trade helps all, it may sometimes hinder what used to be called economic take off, for example, in very poor areas, condemning them to compete on a global market when they have neither the skills, raw or complex goods, nor production capacities and surely no internal rich web that can grow in diversity and abundance. Thus, the Washington Consensus is inadequate as is a single sector model of the economy. Further, aid to a failing mine in a country that is an export economy is useful but does not enable growth of its own local or regional economic web.  

The above comments are not an adequate theory. Nor may such a mathematized theory for the detailed growth of an economy be possible because the new opportunities cannot be prestated. However, one can conceive of an ENSEMBLE of  theories, each with a different distribution of the numbers of new opportunities for new goods and production capacities and how these may be complements and substitutes, and how typical members of each such ensemble may grow or fail.  Into such web models one can imaging adding standard economic growth theory about capital, labour, wages, savings, investment, and capacities via wages to purchase the goods produced, as well as barriers to entry to trained labour and other factors including regulatory. We have no such theory, let alone an idea of when something like short term tariff barriers might be useful in at least some sectors while avoiding such barriers in others to allow the local economy to join the wider world economic web.

By Stuart Kauffman FRSC