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For the last few decades, most of the economies in the western world have had a significant level of unemployment. To some degree we've got used to this, but from the point of view of economics it's hard to see why it should be the case. If employing people in a business is profitable then why don't more people set up businesses and employ those who are out of work? There may not seem to be demand for more products at the moment, but Say's law says that setting up the businesses and employing more people will create that extra demand. The thing is though that Say's law is a part of classical economics, which modern economics has largely superseded. But should we give up on such ideas so easily? In The Wealth of Nations Adam Smith paints a glowing picture of the benefits of the free market. What I'm interested in is not so much whether this is out of date as in whether we can reap more of those benefits.
Why I would opt for a classical economy
The Economic problemEconomics is sometimes called the 'dismal science' because it deals with scarcity. For instance the textbook Economics by David King defines the Economic problem as not having enough resources to produce everything that people want. The job of economics is then presumably one of increasing production, but this doesn't seem right. The trouble is that when there is significant unemployment and when businesses clearly have spare capacity, increasing production doesn't seem like the problem. The problem Maynard Keynes dealt with was more of a 'general glut', which sounds like it ought to the solution to the economic problem, rather than a problem itself. How come we can't use all available resources to give people what they want? That is the problem that economics should really be tackling. Keynes realised that the state could play a part in spending more than it received - running a deficit - which would boost the economy. I'd note here that it's sometimes said that Keynes was not a Keynesian, which I take to mean that he saw it more important to know what resources were available so that they could be put to use, rather than theoretical stuff about multipliers.
MoneyI can't help thinking that money is given too much importance in our society. Not by economists, to whom it is clear that money is simply a medium of exchange. Rather in our own lives, we tend to have too much of a distinction between things that cost money and those that don't. I think that the reason for this is that we can actually produce what we want using very little labour, but not on our own, as the book The Toaster Project shows. We need the resources of the external economy, but accessing these has it's costs. We need to train to be able to do a particular job, then find a job in a suitable organisation, which will have running costs, and likewise there will be transaction costs involved when we spend our earning on what we want. One thing I feel economics should be concerned with is how to minimise the transaction costs in transforming our labour into utility.
Note that I'm not saying we should all strive to get the most stuff possible, rather the opposite, that we should be able to work as much as we need for what we want, and so appreciate the leisure that Keynes promised us 80 years ago .
The rat race and CompetitionSometimes people decide to disconnect themselves from the problems of today's economy, maybe getting together with a collection of like minded people to form a community run on different principles. This may work for a while, but problems are likely to spring up. How strict should they be in avoiding the external economy? Too strict and power tends to get concentrated in the hands of a few people. Not strict enough and people will be seduced by the benefits of the external economy. But supposing a group accepted that they were going to act along free market principles, but try to avoid the distortions today's economy - that might just avoid such problems. I've no idea of how this would work in practice though
We're used to the idea of competition being central to free market economics. The trouble is that we tend to see competition as very inegalitarian. When businesses compete with each other we expect something like a race, where one ends up a winner and the rest lose out. That, however, is not the competition of classical economics. Suppose you're obliged to have you're corn ground at a certain mill. Then the owner is going to benefit from this and is going end up substantially richer than you. But introducing competition by allowing anyone to set up their own mill means the income from being a miller probably won't be so different to that of everyone else. In classical economics competition is an equalising force.
ComplexityIt seems that we tend to think in terms of hierarchies, and that creates inequalities in our society. For instance, classical economics predicts income should follow a lognormal distribution, but what we observe looks like a power law, which is less egalitarian. This is what you'd expect from a hierarchical network. (See Gatti et. al. A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility for more details).
It looks like its the complexity of our economy that moves it away from that predicted by classical economics. There's a discussion of this in the paper From simplistic to complex systems in economics by John Foster. This has four levels of complexity. The first level, which is closest to classical economics, is based on physics, and in particular thermodynamics. As is pointed out in the book More Heat than Light it's debatable whether economics developed this way because it's how economies work or whether it economists were deliberately trying to copy physics. On the second level entities can react to information about the world, corresponding to biological systems. On the third level entities can form mental models of the world, thus being able to pose 'what if?' questions. On the fourth level the mental models can incorporate the mental models of other entities, thus modelling financial markets where predicting the behaviour of other participants tends to be critical. The higher levels tend to correspond to newer ways of creating wealth, as is described in the book Information rules , although I would want to know whether we can see such activities as really creating wealth or simply being parasitical on the true wealth creation.
Agent based computational economicsWhat I want to investigate, then, is whether it's possible to achieve the more egalitarian society that classical economics says we could have, and in particular what individuals can do in order to bring this about. My opinion is that the best way to investigate this is using Agent based computational economics (ACE) in which we model the behaviour of individuals and see what properties emerge for the economy they inhabit. I've started doing something along these lines at econo.me.uk with a simple model of inhabitants trading with each other. It's just a beginning at present, but I think such an approach is likely to succeed better than the more mathematical economics of differential equations, as it lends itself to seeing how changes in individual attitudes and behaviour affect the economy as a whole. For instance one thing I hope to include in the model is variable attitudes to risk which I believe is a critical factor in trying to understand the economics of inequality. I see a model such as this as a first step in trying to understand how we as individuals can help to create a more equal world in which all can benefit from the wealth that we can surely create.
Published on Monday, March 7, 2016