A NEW MYTH IS BORN

Kieran D. Kelly, An Experimental Computer Scientist, and Specialist in Complex Nonlinear Systems and Dynamics, posts (October) on Incompressible DynamicsXXX

HERE http://www.kierandkelly.com/complexity-economics/

Incompressible Complexity Economics

“Trade is the dimension that gets the most press, for it is the short-term dimension of GDP numbers and current economic activity; but complexity is far and away the more important dimension for it is the long-term dimension of progress and innovation — the dimension that both, makes an economy more interesting and diverse, and increases the economy’s international competitiveness, all through the work of the “Invisible Hand”…

…Trade is the dimension that gets the most press, for it is the short-term dimension of GDP numbers and current economic activity; but complexity is far and away the more important dimension for it is the long-term dimension of progress and innovation — the dimension that both, makes an economy more interesting and diverse, and increases the economy’s international competitiveness, all through the work of the “Invisible Hand”…

Invisible Hand

Anyone who has studied even a little bit of economics will have learnt early on that free markets are driven by the competitive forces of supply and demand.  In 1776 Scottish Philosopher Adam Smith, the so-called “Father of Economics”, published “An Inquiry into the Nature and Causes of the Wealth of Nations”.   In this classic work Smith told us how the most efficient economies are the one which self-organize themselves; pulled, as if by an “invisible hand”, to the optimal economic equilibrium by the competitive forces of supply and demand.  Despite the brilliance of this inspired work, and the work of many other great economists over the last two and half centuries, economics is still often considered more art than science!…

…Adam Smith and the Invisible Hand of Innovation

In their simplest form, free markets ensure that competition among producers will bring forth the lowest price (at given quantity) for consumers, and similarly competition among the consumers will bring forth the highest price (at given quantity) for producers.  Thus, in its simplest form, a free market will self-organize a balancing equilibrium between supply and demand and, in so doing, thus brings forth the best available price for both buyers and sellers.

But the real juice of free markets is not in its ability to identify “the best equilibrium price” but its motivation towards productivity and innovation.  In free markets, it is the “competition of ideas” that ultimately spurs “innovation” (in both products and production); which, as Adam Smith identified, acts like an “invisible hand” to the benefit of society as a whole! …

…

When Adam Smith described the economy as a naturally self-organizing system, he was essentially talking about the complexity dimension of a Complex Adaptive System.  And when he talked about an invisible hand, what he had essentially identified was that individuals acting in their own self-interest adapt to each other, and, in so doing, the economy as a whole self-organizes itself away from a thermal economic equilibrium to a more structural, more complex economic equilibrium.

In the concept and use of the phase “invisible hand”, Adam Smith had essentially identified how structure and complexity emerges and grows in the “Complex Adaptive Economy” (CAE). …

…The economy is a Complex Adaptive System (CAS) and the “Micro-economics” of this CAS operates in 2 different dimensions, that are normally confused as being one and the same!

In micro-economics, equilibrium is fundamentally a 2-dimensional space.  Trade is one dimension, the economy (or more accurately economic structural complexity) is the other. When Adam Smith talked about the “Invisible Hand”, what he was really talking about was the complexity dimension; how in a CAE some form of “Invisible Hand” guides the “micro-economic structure” of the economy to an ever more complex economic equilibrium…

Economics is often considered the “Dismay Science” because of its enduring focus on the competition for scarce resources.  But the progression away from this most basic of economic equilibriums – to more complex economic equilibrium structures – first occurred, and continues to occur, when innovation “replaces” direct competition…

Complexity Theory shows that the “Invisible Hand” is more about competitive and complementary innovation, than competitive fighting over scarce resources.  A CAE is a driven-damped system; driven by innovation and damped by natural entropic decay.

In this driven-damped system it is the constant “interplay” – of diversification and integration, of upheaval and rejuvenation, repeated over and over, at every level of scale – that acts like “an invisible hand” both driving and fine-tuning Spontaneous Economic Self-Organization and the Emergence of Every Greater Economic Progress and Complexity!

And so it would appear that Complexity Theory applied to the CAE confirms what Adam Smith suggested back in 1776 “Free Markets and Competition lead to Innovation at the Cheapest Possible Price to the Benefit of All”.

But, as serendipitous as all this might seem, this natural unfolding of a bountiful economy still relies heavily on the “efficient” guidance of the invisible hand – but unfortunately efficiency is not always guaranteed!

COMMENT

Kieran Kelly writes an original article, of which my extracts above focus on what I know about that which he writes. I refer to his several references his version of what Adam Smith’s  singular use of “an invisible hand” as a metaphor. 

Kieran Kelly may not know that what is known today as “the invisible hand”, also mistakenly credited to Adam Smith, along with Kieran’s later description of “like an invisible hand” (a simile), and, later still, as a “phase” (‘phrase’?), were not what Adam Smith (a very precise writer) intended or meant.

However, Kieran Kelly’s essay is most interesting, especially the last paragraph which I quoted above.

The clue to my objections is summarised in his first quoted paragraph: “all through the work of the “Invisible Hand”. For Smith it was a metaphor, not an entity. Its use by Smith  was rhetorical, not descriptive of an event. Adam Smith lectured on Rhetoric for a longer time that he lectured on any other subject (1748-63) (See: Adam Smith: Lectures on Rhetoric and Belles Lettres (1762-3) OUP 1983). Rhetorical speech was important for Smith.

I shall return to Kieran Kelly’s essay in due course.

Much as I admire Adam Smith’s Works, the accolade “Father of Economics” is a modern label often used by people who have not read his Works or those by Smith’s predecessors or contemporaries, but who apparently wish to give the impression of how well informed they are. Smith was an outstanding scholar among others and who, like Newton, he stood on their shoulders (a metaphoric statement). 

The modern myths of Smith’s use of the metaphor of an ‘invisible hand’ now dominates in economics and are largely due to Paul Samuelson, an outstanding contributor to mathematical economics, whose prestige as the author of a most successful textbook, Economics, 1948 and 19 editions, that  dominated Economics 101 teaching for over 50 years (including during my undergraduate years 1965-69), and misled the generations with the erroneous assertion that Adam Smith said that ‘selfish’ motivated consumers were “led by an invisible hand to contribute to the public good”. This myth is now firmly embedded in economic theory and worse, in public discourse, despite it being manifestly untrue.

Now that Kieran Kelly has integrated the myth of Adam Smith’s use of the “invisible hand” metaphor into the mathematics of complexity, no doubt the longevity of the myth will continue having being given new credibility from an impressive new application.