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So now we come to perhaps the most important of the three elements: interaction. Think back to our hypothetical encounter between Albert Pujols and Carlos Zambrano.
The outcome of this at-bat does not depend solely on their respective individual abilities, or even on the contact between Zambrano's pitch and Pujols' bat. It turns instead on how each of them interprets what they perceive to be the other's thoughts and likely behavior. Likewise with Pujols' expectations of the fielders: what do they think that I'm thinking about what they will do?
The manner in which this interactive dynamic plays itself out becomes ever more complex depending on the situation. With two outs and nobody on base in an early inning, the dynamic is relatively simple. With each addition to the situation, however, the complexity increases and so does the importance of all those myriad interactions: between pitcher and batter, between batter and fielders, between fielders and runners, between runners and base coaches, between the managers, etc.
This is probably pretty elementary to baseball fans, and probably not very surprising to non-fans. How can we use this notion of interaction to think about the economy?
Conventional ways of talking about the economy frequently ignored the effects of interaction. For decades, economists analyzed things almost exclusively in terms of stand-alone individuals with given, even unchanging, abilities and preferences. Yet just as growing research in fields like genetics and neuroscience has demonstrated that interaction can give rise to both personality (nature and nurture) and consciousness (the interactions among neurons), so too has economics recently discovered the importance of interaction.
The magnitude of this realization in economics is well documented in David Warsh's Knowledge and the Wealth of Nations: he chronicles the growing awareness among economists, over a period of twenty years, that things like learning, technological progress, and even economic growth all come down to interaction. Here, for example, is Nobel laureate in economics Robert Lucas, who pioneered the "rational expectations" turn in economic thought: "But we know from ordinary experience that there are group interactions that are central to individual productivity and that involve groups larger than the immediate family and smaller than the human race as a whole. Most of what we know we learn from other people. . . . We know this kind of external effect is common to all the arts and sciences--the 'creative professions.' All of intellectual history is the history of such effects. But, as [Jane] Jacobs has rightly emphasized and illustrated with hundreds of concrete examples, much of economic life is creative in much the same way as is art and science."
In this essay and others, Lucas exemplifies the belated academic recognition of "the influences people have on the productivity of others." Indeed, we've probably intuitively known this for all of human history, except in economic analysis. I would submit that this has stunted everyone else's understanding of economic change.
It's not just interactions among individuals that matter, of course: firms interact with one another and with government regulators, and everyone interacts in one way or another with the rules and the ever-present dark matter (uncertainty). The upshot is that any economic prediction you read that is based on past behavior (which is all of them) bears this fatal flaw: it simply cannot account for the various actions and interactions that determine the dynamic aggregate we call "the economy." Expand that to a global scale and, well, you can see why Alan Greenspan basically thinks the Federal Reserve doesn't matter much anymore.
The manner in which this interactive dynamic plays itself out becomes ever more complex depending on the situation. With two outs and nobody on base in an early inning, the dynamic is relatively simple. With each addition to the situation, however, the complexity increases and so does the importance of all those myriad interactions: between pitcher and batter, between batter and fielders, between fielders and runners, between runners and base coaches, between the managers, etc.
This is probably pretty elementary to baseball fans, and probably not very surprising to non-fans. How can we use this notion of interaction to think about the economy?
Conventional ways of talking about the economy frequently ignored the effects of interaction. For decades, economists analyzed things almost exclusively in terms of stand-alone individuals with given, even unchanging, abilities and preferences. Yet just as growing research in fields like genetics and neuroscience has demonstrated that interaction can give rise to both personality (nature and nurture) and consciousness (the interactions among neurons), so too has economics recently discovered the importance of interaction.
The magnitude of this realization in economics is well documented in David Warsh's Knowledge and the Wealth of Nations: he chronicles the growing awareness among economists, over a period of twenty years, that things like learning, technological progress, and even economic growth all come down to interaction. Here, for example, is Nobel laureate in economics Robert Lucas, who pioneered the "rational expectations" turn in economic thought: "But we know from ordinary experience that there are group interactions that are central to individual productivity and that involve groups larger than the immediate family and smaller than the human race as a whole. Most of what we know we learn from other people. . . . We know this kind of external effect is common to all the arts and sciences--the 'creative professions.' All of intellectual history is the history of such effects. But, as [Jane] Jacobs has rightly emphasized and illustrated with hundreds of concrete examples, much of economic life is creative in much the same way as is art and science."
In this essay and others, Lucas exemplifies the belated academic recognition of "the influences people have on the productivity of others." Indeed, we've probably intuitively known this for all of human history, except in economic analysis. I would submit that this has stunted everyone else's understanding of economic change.
It's not just interactions among individuals that matter, of course: firms interact with one another and with government regulators, and everyone interacts in one way or another with the rules and the ever-present dark matter (uncertainty). The upshot is that any economic prediction you read that is based on past behavior (which is all of them) bears this fatal flaw: it simply cannot account for the various actions and interactions that determine the dynamic aggregate we call "the economy." Expand that to a global scale and, well, you can see why Alan Greenspan basically thinks the Federal Reserve doesn't matter much anymore.
(Last year in the Wall Street Journal there was a very revealing graphic: they compared the GDP growth predictions of economists with actual GDP growth. Guess what? The economists were nowhere close. Read Taleb if you are looking for harsh words on economists.)
Even if you're not a baseball fan, even if you're not a sports fan in general, you've probably heard the aphorism, "That's why they play the games." The team that looks the best "on paper" is not always (and perhaps only sometimes) the champion at the end of a season. The ultimate result turns on interactions and the unpredictable chains of development they initiate.
We could call those, say, complex and perpetually novel outcomes. Hey! That turns out to be the product of our 'formula," the subject of our next post.
Even if you're not a baseball fan, even if you're not a sports fan in general, you've probably heard the aphorism, "That's why they play the games." The team that looks the best "on paper" is not always (and perhaps only sometimes) the champion at the end of a season. The ultimate result turns on interactions and the unpredictable chains of development they initiate.
We could call those, say, complex and perpetually novel outcomes. Hey! That turns out to be the product of our 'formula," the subject of our next post.
1 comment:
Fantastic!
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