Political Entrepreneurs

The Economic Engine of Political Change

Complexity Theory, Formal Modeling, and Entrepreneurship in the Production Structure of Ideas

October 31st, 2016 by James Caton

Those who disagree with the reigning paradigm in economics - macro or otherwise - must find alternatives to the system that they challenge or else they may do more harm than good. Those who have strong methodological foundations must find a way to systematically convert their understanding into output: formal mathematical models. To be sure, we cannot do without high theory. Theorizing about economics without formal mathematical models can be a fruitful and invigorating exercise. But research, if it is to be integrated by a broad segment of researchers, must yield something easily interpreted by an audience. Otherwise, it will be received as noise. Last post I juxtaposed Romer’s critique of macroeconomics with the more constructive work of Koppl, Kauffman, Felin, and Longo (2015). I was surprised to see that Romer does not cite any papers with agent-based models. The word “complex(ity)” does not appear in the paper. Again, compare this to Koppl, et al. who cite Beinhocker (2007), among other thinkers within the paradigm of complexity, and who elaborate on the need for complex methods:

As Colander et al. (2004) have chronicled, mainstream economics has been greatly influence by complexity theory (also see Durlauf, 2012). It has become more inductive and open. But mainstream economists still tend to be attached to mathematical methods that are not always well suited to a creative economy, as with DSGE models. (3)

It seems likely that the tools of high theory should continue to evolve in the direction taken by complexity theory. In particular, computability theory seems to give us a set of tools useful for sorting out what is feasible and what is not feasible in both theory and policy. Network theory seems well suited to an economics for a creative world. (27)

 

Models rooted in complexity theory deviate from the assumptions of the dominant paradigm of micro a la Arrow-Debreu and macro a la Lucas. These include Gode and Sunder (1993) and Axtell (2005)In a recent paper (online, forthcoming in print), Santiago Gangotena provides a framework of this that sharply deviates from the old paradigm: Dynamic Coordinating Non-Equilibrium. In addition to providing a framework, he describes precedent from modelers who create agent-based simulations that suggests this potential:

Holland and Miller (1991) present one of the earliest proposals for the adoption of ABM in economics. They stress the need to conceptualize economies as adaptive systems with adaptive agents capable of producing perpetual novelty. More recent arguments for the adoption of ABM in economics can be found in Vriend (2002); Tesfatsion (2002); Tesfatsion (2003); Tesfatsion (2006); Axtell (2007), and Farmer and Foley (2009). Seagren (2011) argues that ABM is wholly consistent with the generally process driven approach of Austrian Economics.

In the same issue, I have presented a model with similar priors. It is a model of a two-good economy that extends Epstein and Axtell (1996) and that employs ecologically rational agents. Agents in this model have knowledge with complex structure that takes the form of rule governed behavior that is ecologically rational. Agents must attain a sufficient flow of two types of goods in order to survive. Each agent chooses a desired quantity of each good that it would like to hold and adjusts the price at which they are willing to buy and sell the goods as their holdings deviate from the desired levels. Some agents move back at forth at a select rate. Other choose what good they wish to produce according to prices that they have observed. Agents are capable of learning from one another by copying successful agents. Others experiment by selecting new values and strategies (akin to mutation in evolutionary biology). Selection by the system ensures that agents act rationally in the sense that their actions promote survival. Model results show that the system selects for agent-strategies in manner that suggests the equimarginal principle. The average rate of return for each strategy converges upon the same value. Individual optimization presented in neoclassical calculus is a tendency promoted by the system and this is most quickly reached when there exists a fair margin of experimentation.

At this point, there is a shortage of competing approaches to formal non-equilibrium modeling. Some authors are using standard neoclassical agents who maximize utility (i.e., Axtell 2005), which is likely a good starting point for earning respect by those who manage the most prestigious journals. They are taking the production structure of ideas at face value. Influence major journals, and you may gain greater influence over ideas used across the field. This is a significant and necessary approach. Behind these attempts their exist a bastion of possibility to be discovered by entrepreneurs of ideas. Major journals will receive novel ideas when they can be efficiently communicated to the rest of the field. Those who contribute to these journals are given the responsibility of communicating clearly and succinctly innovations of which most researchers are ignorant (i.e., Kirzner 1997). The more intense is the competition within the pool of ideas that these researchers draw from, the more that they will have to offer the top journals. Experimentation is a long-term investment that carries with it high risk for the entrepreneur engaged in it. Those who are most respected have the advantage of drawing from these investments when they appear to be successful. We cannot know ahead of time what the correct formulation will be. The market for academic ideas decides this.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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