Right Reason

What is the Point of View of Economics?

 

 

Now anything that has a plurality of parts but is not just the sum of these, like a heap, but exists as a whole beyond its parts invariably has a cause.

-Aristotle, The Metaphysics

 

 

In his review of Gustave de Molinari’s Cours d’économie politique in the Home and Foreign Review 4, Lord Acton gives as good a starting point for the study of economics as I’ve seen elsewhere:

There is… no ground for the pretense that in order to maintain equilibrium between production and demand, we must employ the foresight of an army of administrators and surveyors, whose duty it should be to prescribe what every producer should provide, and consequently how much each consumer should enjoy. Inhabitants of our metropolis see every morning an ample but not excessive provision made for its 3,000,000,000 inhabitants, and this without any previous direction or settled plan; the utmost order and regularity result from the natural law of the supply and demand finding their equilibrium spontaneously; whereas we might look for chaos tenfold more chaotic than that of Balaclava, if the problems were left to the arrangement of administrators or directors of social labour and consumption. 

Here, Lord Acton captures which Lionel Robbins didn’t capture in his often repeated definition in An Essay on the Nature and Significance of Economic Science that economics is "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” In his attempt to conceptualize economics solely from the point of view of the economizing agent, Robbins allowed the emergent properties of society as a whole - those properties which cannot be understood in reference to any one acting agent in particular - to slip through his fingers.

 

‘Spontaneous order,’ and ‘emergence’ are deservedly frequently used words in economics. The market order which Lord Acton is pointing out above is indeed a spontaneous order which has emerged through the intertwined interactions of millions of human beings; in the words of Adam Ferguson, it is “the result of human action, but not the execution of any human design.” Strict adherence to Robbins’ definition of economics blinds our eyes to those properties of the market order because they are the outcome of not just one agent’s economizing behavior, but an entire society of economizing agents all interacting with one another. To understand the market order’s spontaneous and emergent qualities, we have to move beyond the point of view of one of the components of the system to the point of view of a spectator of the whole system. 

Indeed, from the point of view of a single economizing agent, the market order isn’t even really that much of an order. The Oxford American Dictionary’s first definition for ‘Order’ is  “the condition in which every part, unit, ect., is in its right place; tidiness (restored some semblance of order).” When we talk about something as an order, we presuppose the ability to perceive the interacting parts of that order, and choreography between those parts which makes that thing a genuine order. The point of view of a single person cannot capture whether every part of an economy is in its right position, and her eyes therefore cannot capture the greater choreography of the market which Lord Acton remarked on when he pointed out how the 3,000,000,000 inhabitants of London were all provided for. The components of the market order all functioned together to meet the demands of that great metropolis from the wheat fields of the Ukraine to the tea plantations of India. Looking at the market order from the point of view of one agent - as much of macroeconomics does with the device of the representative agent and Truman-Story economics - misses that overarching order.

 

There is a reason why common language tends to refer as the nexus of human economic activity as ‘the economy.’ To truly appreciate the wonder that is the economy, and how human beings have managed to create patterns of cooperation extending across the entire globe, we must go beyond the point of view of just a single component of that order, and to the point of view of a God-like spectator who can behold the entire order as a single functional whole. Robbins’ definition of economics as the study of the relationship between limitless ends and scarce means has no room for that overarching spectator, and therefore has no space for the perception of spontaneous order.  

By reducing all valid economic statements to statements about choosing agents, Robbins definition denies any attempt for there to be economic statements about the emergent properties of the market order which transcend the actions of any one agent.  Overall, it denies economics the ability to make statements about the functional order transcending the actions of a single agent, and thereby leaving the spontaneous and emergent qualities of the market order beyond the grasp of economics. On the other hand, starting from Lord Acton’s observation above ensures that economists will be focusing on what the market order is all about: A choreography without a choreographer extending across the entire world. 

War on Eve Online!

From Polygon's "Even online wages largest war in its 10 year history":

A massive battle involving more than 2,200 players in main battle is underway in CCP's massively multiplayer online game Eve Online, easily the largest battle in the game's decade-long history, according to Alexander "The Mittani" Gianturco, the CEO of Goonswarm Federation.

An exact real-life currency figure of the in-game damage is not currently cemented, but unconfirmed estimates put the amount at more than $200,000. An automated battle report will be generated from server data once the battle concludes. The current battle stems from 'The Halloween War" which instigated multiple warfares betweenunofficial political alliances.

"But today's battle happened literally by accident: system control (sovereignty) was dropped in a key staging system due to a mistake," Gianturco told Polygon about the war underway in B-R5 sector in Immensea, a Nulli Secunda system. "This then escalated into the largest battle in Eve history, which delightfully our forces seem to be winning."

 

A description of the events from the Mittani:

On Monday morning at approximately 7:30 EVE sov dropped in B-R5RB in Immensea, a Nulli Secundasystem which Pandemic Legion has been staging from since Janurary 8th.

Replacement Nulli Secunda Territorial Claim Units were onlining in B-R5 in an attempt to recover the system until approximately 14:00 EVE, when a group of RUS and CFC forces attacked and destroyed them. While the system is unclaimed, the station itself was captured by RAZOR Alliance during the attack.  

At the time of writing both N3/PL and RUS/CFC are mobilizing forces to either defend the system or attempt to exploit this opportunity; we may see a supercapital battle result in early Euro timezone.

If the RUS/CFC want to make a serious play to control the system they will need to guard their onlining TCUs until approximately 23:00 EVE. 

When asked about the sov drop, Manfred Sidious of Pandemic Legion described it as the consequence of a bug, stating that he had enough isk in his holding corp wallet as well as having autopay checked. 

 

The B-R5RB Bloodbath is an example of what can happen when a small event reverbeates through a complex system like the alliances of Eve Online. Massivisely multiplayer online roleplaying games like Eve Online can generate interesting case studies like the B-R5RB bloodbath which can help us understand the concatenation of events in complex human interactions. Picking out case studies from online video games may provide us with insights into the pattern of actions which lead to such catastrophers thanks to the wealth of data which the servers are bound to have. 

 

That video games can be used to study complex phenomena is shown by World of Warcraft's Corrupted Blood Incident becoming a model for epidemic research, as Time's "World of Warcraft: A Pandemic Lab?" is testament to:

Who says video games are a waste of time? World of Warcraft — a virtual online world where millions of players quest for power, wealth and magical items — has got public-health experts considering new ways to track the spread of disease.

That's the message behind a new paper appearing this month in the journal Lancet Infectious Diseases, and also behind a separate, similar paper published in Epidemiology earlier this year. Both papers document the path of an unexpectedly virulent virtual disease called "Corrupted Blood," which swept through World of Warcraft's online characters starting in September 2005. (The game's administrators introduced the disease as a challenge for some high-level players; they didn't expect it to break out of the caves and into the virtual world's cities and towns.) The disease then ravaged the player population — despite administrators' efforts to quarantine the infected — and gave World of Warcraft its first virtual-world pandemic.

In real life, epidemiologists have long used complex mathematical models to predict how an outbreak of, say, pandemic flu might spread around the world. The problem is that testing those models isn't very easy, which makes it hard to judge whether the models are accurate. Scientists can't just release pathogens into cities and see how many people die. So, instead, they base their models on past outbreaks, where information collection was imperfect, or on people's stated (but hypothetical) beliefs about what they would do during a future outbreak. The resulting models can be remarkably sophisticated, but they "lack the variability and unexpected outcomes that arise ... not by the nature of the disease, but by the nature of the hosts it infects," according to Eric Lofgren and Nina Fefferman, authors of the Lancet Infectious Diseases paper. For example, they say, the failure of the World of Warcraft quarantine "could not have been accurately predicted by numerical methods alone, since it was driven by human decisions and behavioral choices." In other words, no model will know whether or not people ignore infection-control rules in the real world.

Smith and Orwell on Language and Coordination

 

From Adam Smith's "Considerations Concerning the First Formation of Languages":

The assignation of particular names to denote particular objects, that is, the institution of nouns substantive, would probably, be one of the first steps towards the formation of language. Two savages who had never been taught to speak, but who had been bred up remote from the societies of men, would naturally begin to form that language by which they would endeavour to make their mutual wants intelligible to each other, by uttering certain sounds, whenever they mean to denote certain objects.

 

Language is obviously very important for the mutual coordination of human activities. Especially within an abstract extended order, there are very few focal points which can be expressed without the use of complex languages with grammars, and subtleties taking lifetimes to master. The intense level of cooperation within modern societies would be impossible if it weren’t for the coordination facilitated by shared linguistic associations of focal points. George Orwell’s outcry against the abuse of language in “Politics and the English Language” thus takes an ever more critical resonance when we read it in terms of the conditions for preserving mutual coordination in society.

 

If a group of people were ever to meet at a nearby location, they would have to be able to agree on where that location is, and would have to therefore be able to communicate between themselves that they intend to meet there. For that to happen, they would have to share a language with shared associations between words, and places so that when Sally says that she intends to go to Northside Social, Sue knows she means that specific coffee shop in Arlington. Without those shared associations in language, they will not be able to coordinate their activities since they lack the capability to communicate where they intend to be. The breakdown of the ease of mutual coordination that language made possible between two people with the loss of shared associations in language would have even more horrific effects on the overall orderliness of society’s extended order. 

 

Orwell’s “Politics and the English Language” deals with the dire topic of the loss of clear association of words with their intended objects within the world. As he writes in the article: “A man may take to drink because he feels himself to be a failure, and then fail all the more completely because he drinks. It is rather the same thing that is happening to the English language. It becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts.” The corruption of the English language, whether that is in the repetition of phrases to the point of them becoming meaningless or the regular use of euphemisms, reduces the association between words and things in the world. Such linguistic deterioration thereby reduces people’s capability of mutual coordination, whether in finding their way to a destination or in political dialogue. 

Microcosms and the Extended Order: A Coasean Appreciation

 

 

The source of the gain from having a firm is that the organization of a market costs something and that, by forming an organization and allowing the allocation of resources to be determined administratively, these costs are saved.

-Ronald Coase, "Industrial Organization"

 

 

Whenever thinking about Ronald Coase's contributions, especially his theory of the firm, I always tend to associate it with Hayek's distinction between the micro- and macro-cosmos within The Fatal Conceit. For Hayek, even though the extended order, the macro-cosmos, is a complex system which receives its order from cooperation conditioned by abstract signals, that complex system was still constituted by many, often seemingly countless, microcosms of human cooperation.

Rather than receiving the source of their order from impersonal interactions like bidding on a stock market or spot transactions at a convenience store, microcosms receive their order from strategic, repeated interactions between unique individuals, often codified into long-term contracts. The microcosms, which can also be known as organizations, are thus, as Hayek titled a section of a chapter, the “elements of spontaneous orders.” The primary question that Coase tries to tackle in “The Nature of the Firm” is”to discover why a firm emerges at all in a specialized exchange economy” can thus be understood as an analysis as to what makes possible the existence of certain types of microcosms, or if you wish organizations, in society requiring different norms of cooperation than the extended order that nevertheless exist side-by-side to the extended order.¹

 

After all, as Coase explains in the very same article, this is a topic of interest if the impersonal coordination within the macrocosm of Hayek's extended order lead to the most efficient utilization of resources. If this were the case, then why would other forms of social cooperation based on concretely planning the utilization of means of production towards the satisfaction of wants be needed? Have economists not shown that society can function without the need of any omniscient planner simply by the interactions of individuals within the decentralized markets of the extended order. If the extended order truly “works,” then why are there small islands of planning within it that maintain their coherence despite the efficiency of the market process?

Coase explains the emergence and continued existence of these microcosms otherwise known as firms because of the costs of interacting within the extended order. Yes, it can bring about human cooperation across the entire planet, can make possible an intensely specialized division of labor throughout that blue marble, can allocate means of production to satisfying the most urgent wants of consumers, and can bring about peaceful relations among human beings despite nation, race, and creed, but that doesn't mean that the extended order can exist without reference to the microcosms that constitute it. It would be a mistake to think that human cooperation within the extended order, even cooperation restricted to the economic, do-ut-des sphere, is universally atomistic with cooperation being spot transactions between impersonal agents. Instead, the interaction of human beings is also conditioned by other factors within the world that make possible for the emergence and the maintenance of microcosms like a firm.

Among the factors conditioning the evolutionary landscape of economic institutions are the costs Coase identifies with “using the price mechanism.”² Two causes behind these costs include the effort behind searching for the lowest prices available, and the effort that goes into specifying and negotiating a complete contract to dictate the terms of the interaction. The existence of these microcosms within the extended order are thus conditional upon there being costs for a lone individual to simply get by with spot transactions and hammering out contracts with everyone else on their own. Firms are thus a type of social order that has emerged in the course of human beings dealing with a world in which there are costs to participating in the extended order. (One could follow conventional econ jargon and call these “transaction costs,” but I feel myself as it the concept has been drained of all meaning. Transaction costs are used by economists to explain everything and in doing so the concept has become completely amorphous.)

This consideration brings us to Coase's greatest contribution to the study of human society, his analysis that voluntary trades in property rights will result in the optimal allocation of resources for the amelioration of human uneasiness in the world in “The Problem of Social Costs.” Indeed, the Coase Theorem, as those following Stigler tend to call this result, seems to provide an extension of the First Welfare Theorem, which states that a complete market can reach an efficient allocation of resources, to the non-market world as long as there is efficient bargaining. However, there is really no Coase Theorem since “The Problem of Social Costs” is not intended to show that efficient allocations always exist in the world despite the existence of so-called frictions within social interactions. Instead, Coase's purpose was to provide a reason to believe that self interest could, contra Pigou's welfare economics, result in exchanges in property titles that could yield the best state of the world. In addition, Coase's narrative of people bargaining leading to the optimal allocation of resources provides a useful foil to studying real institutions in the real world.

 

Overall, Coase's contributions have helped enlarge our appreciation of how organizations, microcosms within the sea of the greater extended order, have emerged and survived throughout human history. In order to understand the nature of human cooperation, we have to understand it beyond the arena of perfect competition; instead, we must understand its institutional peculiarities in actual societies across the world. To understand how the extended order has grown over the centuries, we have to understand how the organizations that constitute the extended order function, and it is to this study that Ronald Coase has provided us with a monument for the ages in “The Nature of the Firm” and “The Problem of Social Costs” alone.

 

1 Ronald Coase, “The Nature of the Firm” in The Firm, the Market, and the Law (Chicago: Chicago University Press, 1988), 37.

2 Ibid, 38.