Posts Tagged ‘complexity’

I Pencil and Complexity Theory

Monday, October 14th, 2013

Dear Friends,

 

It seems to me, the most commonly known analogy in economics is, I Pencil. This narrative shows that the capitalist system produces things of such complexity it would be impossible for a central authority to do it. Moreover this story illustrates what can be produced at extremely low cost opening up their availability to the masses of people. What is not well known about I Pencil. is that it also illustrates the complexity theory of economics. This is a very important point that the writer of I Pencil couldn’t have known because complexity theory had not been invented. What makes this important for the average person to understand is that it shows the futility of government control over an economy. If we as a people understood this very important concept, we would stop undermining our own economic prosperity by electing progressives, who only seek power and authority over everything.

 

I Pencil. is a story of how a pencil comes into being. If you or I set out to make a 10 cent pencil the cost to us would be extraordinary. The cedar in a pencil is from the Appalachian mountains, the graphite and glue from where ever they are cheapest made, the paint from China, the eraser from rubber made in south America and the brass ferrule from who knows where. For you or I to gather all these components and assemble them into a pencil would be prohibitively expensive, yet they are produced by the market system so cheaply they can be thrown away, if the eraser is worn. All the inputs are from diverse parts of the world, made by diverse people for diverse reasons. The point is they are all available to the capitalist to produce something that is fundamentally different in kind from the original inputs.

 

All of the advancement of Western society has been through the innovation of the market system. Innovation that is made possible by the diverse products the market provides. As new products are made available by the market more innovations are available to the entrepreneur. If graphite were not available the pencil would not be possible. People, not governments, make innovations. Governments stifle innovation through regulations that, while well meaning, serve to undermine the availability of new products. This is usually done to protect some job or politically favored industry. The result is always lower wages, lower productivity and high unemployment. All add up to a lower standard of living.

 

The various inputs to a pencil are manufactured probably for other reasons than to make pencils. Glue is made for furniture and a myriad of other reasons by the glue industry. These divers industries can also be considered components in the complex system that is the market or an economy. These diverse actors in the economy are interdependent, are able to learn, they communicate, and they respond to their environments, IE, the demand for their products versus the cost to manufacture them. Firms within industries are another example of complex actors that lower the granularity of the approach. Each has an interest in creating new products that can be used in new ways.

 

As new products come onto the market more products can be made or perhaps made cheaper. Like the mechanical loom made it possible for the laborer to have a wool coat, because coats became cheaper, new products allow entrepreneurs to come up with new products and services that further improve the lot of Man. The new products are different in kind from the inputs. Like a pencil is different in kind from rubber sap, graphite or cedar, new products that could have never been predicted emerge from old and newly made available products. No one ever born, let alone a bureaucrat, could have predicted that an innovation devised by Bell Labs, the transistor, coupled with another Bell Lab invention, PCM, would enable the innovations we live with today.

 

Just as the digital computer is different in kind from the transistor the transistor must have been invented before the computer would be possible. The original innovation as well as the emergent innovation could only come about under a system of bottom up emergence into a viable product. Once government eliminates the complex system of the economy, breaking it to the whims of the political elite, innovation will necessarily stop. The standard of living of the people of the world will stagnate and then decline. We see this in every nation that has risen up under capitalism and fallen under socialism. England used to be the world’s super power until it destroyed itself with socialist regulation. Japan rose under laissez fair capitalism and now is grinding to a halt under socialistic friction, Hong Kong has maintained laissez fair market regulations and continues to see a steady increase in the standard of living of it’s inhabitants as well as huge immigration.

 

The best way to understand this fact is by watching human emigration. The mass of people move from places where the markets are limited by regulation for whatever reason, socialist, religious, protectionist or any other, to places where the market system is more free to work. That they often undermine the market in their new homes by calling for protectionist measures, socialist “fairness” or demand religious exceptions, is a tragic consequence of freely moving people. That governments go along with these anti market regulations is a sure sign of the decline of that nation. Soon the people will vote with their feet to leave that weakened magnet and are drawn to the new country that has embraced laissez fair. Let it work, should be the motto of every nation on the planet, because it works.

 

 

Sincerely,

 

John Pepin

Bureaucracy vs Complexity

Thursday, June 21st, 2012

Dear Friends,

It seems to me, the main difference between bureaucratic and complex systems, is that bureaucracies are inefficient and primarily benefit those in charge, while complex systems are extremely efficient and the benefits are more widely distributed. This is a well known truth yet is overlooked by most people. This fact can be applied to many areas of life but is most appropriate in the sphere of economics. Overlooking or disregarding this reality leads to all sorts of negative outcomes, like huge trade deficits, lowered economic outcomes, low or even negative GDP growth, and even outright tyranny.

Bureaucracies are hierarchical in structure. This type of system is characterized by a top down decision making structure. The commanders in such a system can be a single person or a group of people. All governmental structures are built this way. The decisions are made at the top, the middle men enforce them and the people dutifully carry them out. Unfortunately, the natural evolution of this type of system, is for those in charge to become more and more selfish. Feeding both their greed and egos until all the efficiency is wrung out of the system and only the people at the top get any benefits.

This is only one avenue of inefficiency in the bureaucratic system. Perhaps the primary source of inefficiency in a bureaucracy, is that so many decisions need to be made every second of every day in a modern economy, it becomes impossible for any group of people, no matter how smart or benevolent, to keep up. The task is simply too herculean. Just think about how many decisions need to be made when you build a house. The floor plan must be thought out, the type of heating system must be determined, the electrical feed must be decided, the exterior siding and trim must be considered, the color of the home is important to it’s blending into its surroundings, the interior color scheme and trim must also be considered, the roof system and treatment must be thought out, the list goes on and on. This doesn’t even take into account the millions of smaller decisions that need to be made, like figuring the rise and run of the cellar stairs, how long to cut each stud, the rafters must be measured and bird’s mouths cut… etc. Now, magnify this a hundred million times, and we have the decisions that are made in a simple economy in a single second.

Command and control economies, like socialist and communist, are forms of bureaucracies. If we look at the historical examples, of governments that have been socialistic or communistic, we see that this paradigm holds true. Those at the top get the goods while the people get the orders.

Complex systems are distributive in their structure. Decisions are made at the lowest level possible by the people who have the most information regarding them. This distributed decision making structure of the complex system, is the fundamental reason complex systems are so much more efficient… than bureaucratic ones. As the decisions themselves, are made by those most able to amass the necessary information to make them, in the most efficient way possible, the benefits are also distributed to the people… not the bureaucrat. Another reason complex systems are more efficient is that they build in competition. Competition forces efficiency, because those that are less efficient, are surpassed by those who are more efficient. This makes the limited money available more wisely spent and thus achieves the most bang for the buck.

Demand side economics is a form of bureaucratic decision making process, while supply side economics is a form of complex system. Demand side, as expressed by John Maynard Keynes, empowers the bureaucrat to take money from the earners and spend it to drive up demand. Supply side encourages those people who earn money to make their own decisions what to do with it. The one presupposes the individual will make the most of their own money while the other presupposes the government will make the most of someone else’s money.

The upshot is that demand side’s inefficiency’s create incentives to corruption, huge government deficits, general poverty and outright oppression, the other, supply side, leads to economic growth, personal freedom and general prosperity. But demand side has one thing going for it, it empowers those in charge, to misspend money earned by others, to massage their egos, enhance economic outcomes for the rulers and create a perpetual ruling class. As Thrasymachus said, most people just want to be left alone but those great men want power…

So I ask, is it more important that “great” men have power, or that there be general prosperity?

Sincerely,

John Pepin