Monday, April 21, 2014
Cooper, Money, Blood and Revolution
Thomas Kuhn’s landmark work, The Structure of Scientific Revolutions (1962), provides the theoretical underpinning to Cooper’s book. In Part I Cooper recaps Kuhn’s hypothesis and illustrates it (as well as the paradigm shift he proposes in economics) with the work of four scientific revolutionaries: Copernicus, Harvey, Darwin, and Wegener. “In all cases, the path to scientific progress required overturning the equilibrium paradigm and moving to a dynamic, usually circulatory, paradigm. Copernicus made the earth circulate around the sun. Harvey made blood circulate around the body. Darwin made species evolve and Wegener made continents move, pushed by circulating currents within the earth’s core.” (p. 76)
Economics, Cooper argues, is not yet a science; instead, it “exhibits all of the symptoms of being in one of Thomas Kuhn’s states of pre-revolutionary scientific crisis.” (p. 81) For instance, it has fractured into too many incompatible schools of thought with incommensurable paradigms. Cooper analyzes—and criticizes—the most widely recognized of these schools: classical, neoclassical, libertarian, monetarist, Keynesian, Austrian, Marxist, institutional, and behavioral. Moreover, although the mathematical models of economics are proliferating and their complexity growing, “their predictive ability is not obviously improving.” (p. 82) Economics, in brief, is ripe for revolution.
The first ingredient of economics, if it is to be truly scientific, must be Darwin’s notion of competition. Unfortunately, if human beings are Darwinian competitors rather than neoclassical optimizers, the basic tenets of neoclassical economics (individualism, maximization, and equilibrium) crumble. People do not make their decisions based on their own self-interest, independently of one another, and these decisions are not always designed to maximize their own welfare. Once the first two principles fall, the principle of equilibrium—that “the result of all of these individual optimizing decisions is a stable system in optimal equilibrium”—falls as well.
As Cooper recapitulates: “If human decision-making is fundamentally a competitive process, then decisions of individuals become dependent upon those of their peers. This implies that behaviour at the aggregate level of the economy cannot be reliably modelled as the sum of individual behaviours. Nor can it be safely assumed that the behaviours of individuals in competition will lead to an equilibrium situation. Indeed it is likely that competitive actors will always seek to disturb any equilibrium.” (p. 133)
The second element in Cooper’s paradigm shift, with a nod to William Harvey, is a circulatory model of economic growth. This model comes from marrying the competitive Darwinian economic system with the democratic political system. Capitalism pushes wealth up the social pyramid while democracy, with its progressive taxation, acts in the opposite direction to push it back down, “causing a vigorous circulatory flow of wealth throughout the economy.” (p. 152) This model, sure to rile people on both sides of the political aisle, suggests that income inequality is essential for economic growth and that taxation and government spending are contributors to economic progress. That is, “economic progress is associated with both income inequality and large government.” (p. 157)
Cooper concludes by using the circulatory growth model to help explain the causes of the financial crisis and “why the policy mix applied after the crisis has failed to restore normal levels of economic growth.” (p. 169) He offers three suggestions for dealing with the current economic stagnation: “1. Stop the policies designed to promote further private-sector debt-accumulation” such as student debt, “2. Shift from monetary to Keynesian stimulus” because quantitative easing “puts the money into the wrong position within the circulatory system,” and “3. Rebalance the burden of taxation between labour and capital—less tax on labour, more tax on capital.” (p. 191)
Cooper may not be the Darwin of economics, but I suspect that he (and the many researchers who are exploring complex adaptive systems) will help point the way.
By way of a footnote, readers who are interested in learning more about complex systems science might want to check out Melanie Mitchell’s course, Introduction to Complexity, part of a project being developed by the Santa Fe Institute and funded by a grant from the John Templeton Foundation.